SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-K/A


(Amendment No. 2)





ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)


OF THE SECURITIES EXCHANGE ACT OF 1934





For the fiscal year ended December 31, 2009
Commission file number: 000-24002





CENTRAL VIRGINIA BANKSHARES, INC.


(Name of registrant as specified in its charter)





Virginia

(State or other jurisdiction of

incorporation or organization)
54-1467806

(I.R.S. Employer

Identification No.)2036 New Dorset Road, Post Office Box 39

Powhatan, Virginia

(Address of principal executive offices)
23139-0039

(Zip Code)Registrant’s telephone number, including area code: (804) 403-2000Securities registered under Section 12(b) of the Exchange Act:Title of Each Class
Name of Each Exchange

on Which RegisteredCommon Stock, par value $1.25 per share
The Nasdaq Stock MarketSecurities registered under Section 12(g) of the Exchange Act:None





Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.YesoNox





Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YesoNox





Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YesxNoo





Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YesoNoo





Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):





Large accelerated filero
Accelerated fileroNon-accelerated filero(Do not check if a smaller reporting company)
Smaller reporting companyx





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




The aggregate market value of the Common Stock held by non-affiliates, computed by reference to the closing sale price of the Common Stock as reported on The Nasdaq Global Market on June 30, 2009, the last business day of the registrant’s most recently completed second fiscal quarter, was $10,532,250.





At April 8, 2010 there were 2,620,437 shares of the registrant’s Common Stock outstanding.








DOCUMENTS INCORPORATED BY REFERENCE





Portions of the definitive proxy statement for the 2010 Annual Meeting of Shareholders are incorporated by reference into Part III of this report.







EXPLANATORY NOTE
  Central Virginia Bankshares, Inc. (the “Company”) hereby amends its Annual Report on Form 10-K for the fiscal year ended December 31, 2009 (originally filed with the Securities and Exchange Commission on April 15, 2010 and amended on April 30, 2010) as set forth in this Annual Report on Form 10-K/A (Amendment No. 2) (the “Amendment No. 2”).  Subsequent to December 31, 2009 and in connection with an examination by our primary regulator, management completed a loan by loan impairment analysis of adversely classified loans.  This analysis resulted in an increase of impaired loans and related valuation allowance at December 31, 2009 to $53,084,640 and $6,629,570, respectively, from previously reported amounts of $12,495,516 and $3,136,230, respectively.  The total of these loans was appropriately included in the calculation of our loan loss allowance in our consolidated balance sheet at December 31, 2009 and in our provision for loan losses in our consolidated statement of income for the year ended December 31, 2009.  However, we inadvertently failed to adjust our footnote disclosure for these subsequently identified impaired loans.  Accordingly, we have adjusted the impaired loan tables in Notes 3 and 20 to our financial statements to properly reflect the correct impaired loan balance at December 31, 2009.  In addition, we have revised Note 22 to our financial statements to identify these adjustments as a subsequent event.  No adjustments were required to our financial statements or loss per share calculation.  We also have concluded that the controls in place relating to the footnote disclosure were not properly designed to provide reasonable assurance that these impaired loans would be properly disclosed in the footnotes to the financial statements, and that this was a material weakness in internal control over financial reporting.  Accordingly, we have revised “Item 9A – Controls and Procedures” to reflect this material weakness in internal control over financial reporting.
  No other information in the Form 10-K for the fiscal year ended December 31, 2009, is being amended by this Amendment No. 2, and this amendment continues to speak as of the period ending date in the original filing of the Form 10-K.  For convenience, the entire Annual Report on Form 10-K for the fiscal year ended December 31, 2009 has been re-filed in this Amendment No. 2.  Pursuant to SEC Rule 12b-15, in connection with this filing, we have filed updated Exhibits 31.1, 31.2, and 32.1.





TABLE OF CONTENTS








PART IITEM 1.
BUSINESS
1ITEM 1A.
RISK FACTORS
8ITEM 1B.
UNRESOLVED STAFF COMMENTS
13ITEM 2.
PROPERTIES
13ITEM 3.
LEGAL PROCEEDINGS
13ITEM 4.
(REMOVED AND RESERVED)
13PART IIITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATEDSTOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITYSECURITIES
14ITEM 6.
SELECTED FINANCIAL DATA
15ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIALCONDITION AND RESULTS OF OPERATIONS
15ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUTMARKET RISK
32ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
35ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ONACCOUNTING AND FINANCIAL DISCLOSURE
35ITEM 9A.
CONTROLS AND PROCEDURES
36ITEM 9B.
OTHER INFORMATION
36PART IIIITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
37ITEM 11.
EXECUTIVE COMPENSATION
40ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
45ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,AND DIRECTOR INDEPENDENCE
46ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
47PART IVITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
47








PART I





ITEM 1.
BUSINESS





General





The Company and the Bank. Central Virginia Bankshares, Inc. (the “Company”) was incorporated as a Virginia corporation on March 7, 1986, solely to acquire all of the issued and outstanding shares of Central Virginia Bank (the “Bank”). The Bank was incorporated on June 1, 1972 under the laws of the Commonwealth of Virginia and, since opening for business on September 17, 1973, its main and administrative office had been located on U.S. Route 60 at Flat Rock, in Powhatan County, Virginia. In May 1996, the administrative offices were relocated to the Corporate Center in the Powhatan Commercial Center on New Dorset Road located off Route 60 less than one mile from the main office. In June 2005, the original main office was closed and relocated nine-tenths of a mile east, to the then just completed new main office building.





The Company maintains an internet website at www.centralvabank.com, which contains information relating to it and its business. The Company makes available free of charge through its website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these documents as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission. Copies of the Company’s Audit Committee Charter, Nominating Committee Charter, Compensation Committee Charter and Code of Conduct are included on the Company’s website and are therefore available to the public.





Principal Market Area. The Bank’s primary service areas are Powhatan and Cumberland Counties, eastern Goochland County and western Chesterfield and western Henrico Counties. The table below reflects the 2000 population of our market, growth rates from the 1990 census to the 2000 census and the estimated 2009 population growth rates from the U.S. Census Bureau.  Similar growth rates are expected for the foreseeable future.


2000 Census Data
% of Total Market
Population Growth Rate from 1990 to 2000
Estimated 2009 Population Growth Rate from April 1, 2000  to July 1, 2009Powhatan County
22,377
3.9%
46.0%
25.0%Cumberland County
9,017
1.6%
15.2%
8.2%Eastern Goochland County
16,823
2.9%
19.1%
26.4%Western Chesterfield County
259,903
45.5%
24.2%
18.0%Western Henrico County
262,300
46.1%
20.4%
13.0%Total Market Served
570,420
100.0%





The table below reflects the Bank’s various operating properties:





Property
Property Location
Operating PurposeMain Office
Flat Rock, Powhatan County
Main Office and BranchVillage Marketplace
Village of Midlothian, Chesterfield County
BranchMarket Square Shopping Center
Brandermill, Chesterfield County
BranchBellgrade Shopping Center
Chesterfield County
BranchCumberland County Courthouse
Cumberland County
BranchCartersville
Cumberland County
BranchWellesley
Short Pump, Henrico County
Branch





The Bank’s present intention is to continue its activities in its current market area which it considers to be an attractive and desirable area in which to operate.





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


1


Bank’s lending policies, deposit products and related services are intended to meet the needs of individuals and businesses in its market area.





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





Recent Regulatory Developments





As a result of a recently concluded examination by the Virginia Bureau of Financial Institutions and the Federal Reserve Bank of Richmond, we expect to enter into a written agreement with the Bureau of Financial Institutions and the Federal Reserve by the end of the second quarter of 2010.  We do not know the exact contents of the written agreement at this time, but we expect that it will require us to establish and submit the following to the Federal Reserve:





·
a written plan to maintain sufficient capital at Central Virginia Bank;


·
a written plan to strengthen oversight of our management and operations by our board of directors;


·
a written assessment of our board of directors’ ability to oversee senior management and govern the affairs of the bank;


·
a written assessment of our management and staffing needs and the qualifications of our senior management to ensure that we are adequately staffed by adequate personnel;


·
an independent audit of certain credit relationships;


·
a written plan to ensure the accuracy of reports provided to the board of directors and to improve oversight of our risks and risk management practices;


·
a written program to reevaluate allowance for loan loss methodologies and calculations and to improve our methodology for identifying, rating, assigning, monitoring and reviewing credit risks;


·
a written plan to strengthen our credit risk management practices, particularly in our commercial real estate, construction and development and home equity line of credit portfolio; and


·
a written plan to strengthen our management of commercial real estate concentrations, including steps to reduce or mitigate the risk of concentrations in light of current market conditions.





Lending Activities





Loan Portfolio. The Company is an active residential mortgage and residential construction lender and also extends consumer loans to individuals and commercial loans to small and medium sized businesses within its primary service area. The Company’s commercial lending activity extends across its primary service area of Powhatan, Cumberland, Goochland, western Chesterfield and western Henrico Counties. Consistent with its focus on providing community-based financial services, the Company does not attempt to diversify its loan portfolio geographically by making significant amounts of loans to borrowers outside of its primary service area; however, a number of loans have been made to borrowers located outside of the primary service area. The principal risk associated with each of the categories of loans in the Company’s portfolio is the creditworthiness of borrowers, followed closely by the local economic environment. In an effort to manage this risk, the Bank’s policy gives loan approval limits to individual loan officers based on their level of experience. Loans where the total borrower exposure to the Bank is less than $2,500,000 may be approved by the Bank’s Senior Loan Committee. The Board of Directors of the Bank must approve loans where the total borrower exposure is in excess of $2,500,000. The risk associated with real estate mortgage loans and installment loans to individuals varies based upon employment levels, consumer confidence, fluctuations in value of residential real estate and other conditions that affect the ability of consumers to repay indebtedness. The risk associated with commercial, financial and agricultural loans varies based upon the strength and activity of the local economies of the Company’s primary market areas. The risk associated with real estate construction loans varies based upon the supply of and demand for the type of real estate under construction, the mortgage loan interest rate environment, and the number of speculative properties under construction. The Bank manages that risk by focusing on pre-sold or contract homes, and limiting the number of “speculative” construction loans in its portfolio.





2


Residential Mortgage Loans. Residential mortgage loans are made in amounts generally up to 80.0% of the appraised value of the property pledged as security for the loan. Most residential mortgage loans are underwritten using specific qualification guidelines that are intended to assure that such loans may be eligible for sale into the secondary mortgage market at a later point in time. The Bank generally requires an appraisal by a licensed outside appraiser for all loans secured by real estate. The Bank requires that the borrower obtain title, fire and casualty insurance coverage in an amount equal to the loan amount and in a form acceptable to the Bank. The Bank originates residential mortgage loans that are sold in the secondary market, or are carried in the Bank’s loan portfolio. These loans are generally either three-year, or five-year adjustable rate mortgages (“ARMs”) or fifteen to thirty year fixed rate mortgages. As a general rule, the majority of all permanent owner occupied residential mortgages made for the Bank’s own portfolio are made as three-year and five-year ARMs where the interest rate resets based on an index every three or five years as the case may be. The Bank does not offer ARM loans with “teaser” interest rates. The remainder of loans are traditional fifteen and thirty year amortized mortgages.





The Bank’s ARMs generally are subject to interest rate adjustment limitations of 2.0% per each three or five year period and 6.0% over the life of the loan. All changes in the interest rate are based on the movement of an external index contractually agreed to by the Bank and the borrower at the time the loan is originated.





There are risks to the Bank resulting from increased costs to a borrower as a result of the periodic repricing mechanisms of these loans. Despite the benefits of ARMs to an institution’s asset/liability management, they may pose additional risks, primarily because as interest rates rise, the underlying payments by the borrower rise, increasing the potential for default. At the same time, the marketability of the underlying property may be adversely affected by higher interest rates.





The Bank charges origination fees on its residential mortgage loans. These fees vary among loan products and with market conditions. Generally such fees are from 0.25% to 2.0% of the loan principal amount. In addition, the Bank charges fees to its borrowers to cover the cost of appraisals, credit reports and certain expenses related to the documentation and closing of loans.





Commercial Mortgage Loans.The Bank does not actively seek permanent commercial mortgage loans on income-producing properties such as apartments, shopping centers, hotels and office buildings. However, any such requests from Bank customers concerning properties in the Bank’s established trade area may be considered.





Real Estate Construction Lending.In general, the Bank does not actively solicit construction loans on income-producing properties such as apartments, shopping centers, hotels and office buildings. However, any such requests from Bank customers concerning properties in the Bank’s established trade area may be considered.





In order to promote its permanent mortgage lending business and because of the attractive adjustable interest rates available, the Bank makes construction and small development loans for residential housing purposes. The large majority of the Bank’s construction loans are to experienced builders. Such loans normally carry an interest rate of 0% to 1.5% over the prime bank lending rate, adjusted daily with a floor (minimum) rate established at loan inception. Construction lending entails significant risk as compared with residential mortgage lending. Construction loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Construction loans involve additional risks attributable to the fact that loan funds are advanced upon the security of the home under construction. To minimize risks associated with construction lending, the Bank, as a general rule, limits loan amounts to 80.0% of appraised value on homes, and performs or causes to be performed, periodic inspections of the construction to ensure there are sufficient undisbursed loan proceeds in order to complete the building, in addition to its usual credit analysis of its borrowers. The Bank always obtains a first lien on the property as security for its construction loans.





Consumer Lending. The Bank currently offers most types of consumer demand, time and installment loans for a variety of purposes, including automobile loans, home equity lines of credit, and credit cards.





Commercial Business Lending. As a full-service community bank, the Bank makes commercial loans to qualified businesses in the Bank’s market area. At December 31, 2009, commercial business loans were $67.8 million or 23.2% of the Bank’s total loan portfolio. Commercial business loans generally have a higher degree of risk than residential mortgage loans, but have commensurately higher yields. To manage these risks, the Bank secures appropriate collateral and monitors the financial condition of its business borrowers and the concentration of such loans in the Bank’s portfolio. Commercial business loans typically are made on the basis of the borrower’s ability to make repayment from the cash flow of its business and are generally secured by business assets, such as accounts receivable, equipment, inventory, and/or real estate. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself; in addition, the collateral for secured commercial business loans may depreciate over time.


3


Competition





Based on FDIC deposit statistics as of June 30, 2009, the Bank has a dominant position in both Powhatan and Cumberland Counties with greater than 53% and 74% of the deposits, respectively, in each locality. However, in both Chesterfield and Henrico Counties, the Bank encounters stronger competition for its banking services from large banks and other community banks located in the Richmond metropolitan area. In addition, financial companies, mortgage companies, credit unions and savings and loan associations also compete with the Bank for loans and deposits. The Bank must also compete for deposits with money market mutual funds that are marketed nationally. Many of the Bank’s competitors have substantially greater resources than the Bank. The internet is also providing an increasing amount of price-oriented competition, which the Bank anticipates to become more intense. The success of the Bank in the past and its plans for success in the future is dependent upon providing superior customer service and convenience.





Employees





The Company and the Bank had 87 full-time and 17 part-time employees at December 31, 2009.  Employee relations have been and continue to be good. The Bank sponsors a qualified discretionary Profit Sharing/Retirement Plan combined with a qualified 401(k) Plan, for its employees.  In addition, the Company subsidizes a short-term disability plan, group term life insurance, and group medical, dental, and vision insurance.





Regulation and Supervision





General. As a bank holding company, the Company is subject to regulation under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and the examination and reporting requirements of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”). Under the BHCA, a bank holding company may not directly or indirectly acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve Board. The BHCA also generally limits the activities of a bank holding company to that of banking, managing or controlling banks, or any other activity, which is determined to be so closely related to banking or to managing or controlling banks that an exception is allowed for those activities.





As a state-chartered commercial bank, the Bank is subject to regulation, supervision and examination by the Virginia State Corporation Commission’s Bureau of Financial Institutions. It also is subject to regulation, supervision and examination by the Federal Reserve Board. State and federal law also governs the activities in which the Bank engages the investments that it makes and the aggregate amount of loans that may be granted to one borrower. Various consumer and compliance laws and regulations also affect the Bank’s operations.





The earnings of the Company’s subsidiaries, and therefore the earnings of the Company, are affected by general economic conditions, management policies, changes in state and federal legislation and actions of various regulatory authorities, including those referred to above. The following description summarizes the significant state and federal laws to which the Company and the Bank are subject. To the extent that statutory or regulatory provisions or proposals are described, the description is qualified in its entirety by reference to the particular statutory or regulatory provisions or proposals.





Payment of Dividends. The Company is a legal entity separate and distinct from our subsidiary Bank. The Company is organized under the Virginia Stock Corporation Act, which has restrictions prohibiting the payment of dividends if after giving effect to the dividend payment, the Company would not be able to pay its debts as they become due in the usual course of business, or if the Company’s total assets would be less than the sum of its total liabilities plus the amount that would be required, if the Company were to be dissolved, to satisfy the preferential rights upon dissolution of any preferred shareholders.





The majority of the Company’s revenue results from dividends paid to the Company by the Bank. The Bank is subject to laws and regulations that limit the amount of dividends that it can pay without permission from its primary regulator, the Federal Reserve. In addition, both the Company and the Bank are subject to various regulatory restrictions relating to the payment of dividends, including requirements to maintain capital at or above regulatory minimums. Banking regulators have indicated that banking organizations should generally pay dividends only if the organization’s net income available to common shareholders over the past year has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition. During the year ended December 31, 2009, the Bank declared and paid no dividends to the Company.





In connection with our participation in the Capital Purchase Program established by the U.S. Department of the Treasury (the "Treasury") under the Emergency Economic Stabilization Act of 2008 ("EESA"), we issued preferred stock to the Treasury on January


4


30, 2009. The Preferred Stock is in a superior ownership position compared to common stock. Dividends must be paid to the preferred stockholder before they can be paid to the common stockholders. In addition, prior to January 30, 2012, unless the Company has redeemed the Preferred Stock or the Treasury has transferred the Preferred Stock to a third party, the consent of the Treasury will be required for the Company to increase its common stock dividend or repurchase its common stock or other equity or capital securities, other than in certain circumstances specified in the Purchase Agreement. If the dividends on the Preferred Stock have not been paid for an aggregate of six (6) quarterly dividend periods or more, whether or not consecutive, the Company's authorized number of directors will be automatically increased by two (2) and the holders of the Preferred Stock will have the right to elect those directors at the Company's next annual meeting or at a special meeting called for that purpose; these two directors will be elected annually and will serve until all accrued and unpaid dividends for all past dividend periods have been declared and paid in full.





The company anticipates entering into a written agreement with the Virginia Bureau of Financial Institutions and the Federal Reserve and as a result is not able to make any distributions on its Preferred Stock, any interest payments on its trust preferred securities or declare any common dividends without prior approval from the Federal Reserve.





Insurance of Accounts and Regulation by the FDIC.The deposits of the Bank are insured by the Federal Deposit Insurance Corporation (the “FDIC”) up to the limits set forth under applicable law. The deposits of the Bank are subject to the deposit insurance assessments of the Bank Insurance Fund (“BIF”) of the FDIC.





The FDIC is authorized to prohibit any BIF-insured institution from engaging in any activity that the FDIC determines by regulation or order to pose a serious threat to the respective insurance fund. Also, the FDIC may initiate enforcement actions against banks, after first giving the institution’s primary regulatory authority an opportunity to take such action. The FDIC may terminate the deposit insurance of any depository institution if it determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed in writing by the FDIC. It also may suspend deposit insurance during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If deposit insurance is terminated, the deposits at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period from six months to two years, as determined by the FDIC. Management is not aware of any existing circumstances that could result in termination of any Bank’s deposit insurance. Pursuant to the EESA, the maximum deposit insurance amount per depositor has been increased from $100,000 to $250,000 until December 31, 2013. Additionally, on October 14, 2008, after receiving a recommendation from the boards of the FDIC and the Federal Reserve, and consulting with the President, the Secretary of the Treasury signed the systemic risk exception to the FDIC Act, enabling the FDIC to establish its Temporary Liquidity Guarantee Program ("TLGP"). Under the transaction account guarantee program of the TLGP, the FDIC will fully guarantee, until June 30, 2010, all non-interest-bearing transaction accounts, including NOW accounts with interest rates of 0.5 percent or less and IOLTAs (lawyer trust accounts). The TLGP also guarantees all senior unsecured debt of insured depository institutions or their qualified holding companies issued between October 14, 2008 and June 30, 2009 with a stated maturity greater than 30 days until the earlier of its maturity or June 30, 2012. All eligible institutions were permitted to participate in both of the components of the TLGP without cost for the first 30 days of the program. Following the initial 30 day grace period, institutions were assessed at the rate of ten basis points for transaction account balances in excess of $250,000 for the transaction account guarantee program and at the rate of either 50, 75, or 100 basis points of the amount of debt issued, depending on the maturity date of the guaranteed debt, for the debt guarantee program. Institutions were required to opt-out of the TLGP if they did not wish to participate. The Company and its applicable subsidiaries elected to participate in this program.





Capital. The Federal Reserve Board has issued risk-based and leverage capital guidelines applicable to banking organizations that it supervises. Under the risk-based capital requirements, the Company and the Bank are each generally required to maintain a minimum ratio of total capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total capital must be composed of common equity, retained earnings, qualifying perpetual preferred stock and minority interests in common equity accounts of consolidated subsidiaries, less certain intangibles (“Tier 1 capital”). The remainder may consist of specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock and a limited amount of loan loss allowance and pre-tax net unrealized holding gains on certain equity securities (“Tier 2 capital,” which, together with Tier 1 capital, composes “total capital”).





In addition, each of the federal banking regulatory agencies has established minimum leverage capital requirements for banking organizations. Under these requirements, banking organizations must maintain a minimum ratio of Tier 1 capital to adjusted average quarterly assets equal to 3% to 5%, subject to federal bank regulatory evaluation of an organization’s overall safety and soundness.





The risk-based capital standards of the Federal Reserve Board explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution’s ability to manage these risks, as important factors to be taken into account by the


5


agency in assessing an institution’s overall capital adequacy. The capital guidelines also provide that an institution’s exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a banking organization’s capital adequacy.





On December 17, 2003, Central Virginia Bankshares, Inc. issued a $5 million debenture to its single purpose capital trust subsidiary, which in turn issued $5 million in trust-preferred securities. With the proceeds of this issuance, the Company then made a $5 million capital injection to its principal subsidiary, Central Virginia Bank.





The Company, on January 30, 2009, as part of the Capital Purchase Program, entered into a Letter Agreement and Securities Purchase Agreement—Standard Terms (collectively, the “Purchase Agreement”) with the Treasury, pursuant to which the Company sold (i) 11,385 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, par value $1.25 per share, having a liquidation preference of $1,000 per share (the “Preferred Stock”) and (ii) a warrant (the “Warrant”) to purchase 263,542 shares of the Company’s common stock, par value $1.25 per share (the “Common Stock”), at an initial exercise price of $6.48 per share, subject to certain anti-dilution and other adjustments, for an aggregate purchase price of $11,385,000 in cash.





Emergency Economic Stabilization Act of 2008. In response to the financial crises affecting the banking system and financial markets and going concern threats to investment banks and other financial institutions, the EESA was signed into law on October 3, 2008. Pursuant to the EESA, the U.S. Treasury was given the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets.





On October 14, 2008, Treasury Secretary Paulson, after consulting with the Federal Reserve and the FDIC, announced that the Department of the Treasury will purchase equity stakes in certain banks and thrifts. Under this program, known as the Capital Purchase Program, the Treasury will make $250 billion of capital available to U.S. financial institutions in the form of preferred stock (from the $700 billion authorized by the EESA). In conjunction with the purchase of preferred stock, the Treasury received warrants to purchase common stock with an aggregate market price equal to 15% of its preferred investment. Participating financial institutions are required to adopt the Treasury’s standards for executive compensation and corporate governance for the period during which the Treasury holds equity issued under the Capital Purchase Program.  The standards with respect to executive compensation and corporate governance for institutions that have participated or will participate in the Capital Purchase Program were enacted as part of ARRA, described below.





American Recovery and Reinvestment Act of 2009.The ARRA was enacted on February 17, 2009. The ARRA includes a wide variety of programs intended to stimulate the economy and provide for extensive infrastructure, energy, health, and education needs. In addition, the ARRA imposed certain executive compensation and corporate governance obligations on all current and future Capital Purchase Program recipients, including the Company, until the institution has redeemed the preferred stock, which Capital Purchase Program recipients are permitted to do subject to approval of its primary federal regulator.





The ARRA amends Section 111 of the EESA to require the Secretary of the Treasury (the “Secretary”) to adopt standards with respect to executive compensation and corporate governance for Capital Purchase Program recipients. The standards required include, in part, (1) prohibitions on making golden parachute payments to senior executive officers and the next five most highly-compensated employees during such time as any obligation arising from financial assistance provided under the Capital Purchase Program remains outstanding (the “Restricted Period”), (2) prohibitions on paying or accruing bonuses or other incentive awards for certain senior executive officers and employees, except for awards of long-term restricted stock with a value equal to no greater than 1/3 of the subject employee’s annual compensation that do not fully vest during the Restricted Period or unless such compensation is pursuant to a valid written employment contract prior to February 11, 2009, (3) requirements that Capital Purchase Program participants provide for the recovery of any bonus or incentive compensation paid to senior executive officers and the next 20 most highly-compensated employees based on statements of earnings, revenues, gains or other criteria later found to be materially inaccurate, and (4) a review by the Secretary of all bonuses and other compensation paid by Capital Purchase Program participants to senior executive employees and the next 20 most highly-compensated employees before the date of enactment of the ARRA to determine whether such payments were inconsistent with the purposes of the Act with the Secretary having authority to negotiate for reimbursement.





The ARRA also sets forth additional corporate governance obligations for Capital Purchase Program recipients, including standards that provide for semi-annual meetings of compensation committees of the board of directors to discuss and evaluate employee compensation plans in light of an assessment of any risk posed from such compensation plans. Capital Purchase Program recipients are further required by the ARRA to have in place company-wide policies regarding excessive or luxury expenditures, permit non-binding shareholder “say-on-pay” proposals to be included in proxy materials, as well as require written certifications by the chief executive officer and chief financial officer with respect to compliance.


6





Other Safety and Soundness Regulations. There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the FDIC insurance funds in the event that the depository institution is insolvent or is in danger of becoming insolvent. For example, under the requirements of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources to support such institutions in circumstances where it might not do so otherwise. In addition, the “cross-guarantee” provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result of the insolvency of commonly controlled insured depository institutions or for any assistance provided by the FDIC to commonly controlled insured depository institutions in danger of failure. The FDIC may decline to enforce the cross-guarantee provision if it determines that a waiver is in the best interests of the deposit insurance funds. The FDIC’s claim for reimbursement under the cross guarantee provisions is superior to claims of shareholders of the insured depository institution or its holding company but is subordinate to claims of depositors, secured creditors and nonaffiliated holders of subordinated debt of the commonly controlled insured depository institutions.





The federal banking agencies also have broad powers under current federal law to take prompt corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether the institution in question is well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized or critically undercapitalized, as defined by the law. As of December 31, 2009, the Company and the Bank were classified as adequately capitalized.





State banking regulators also have broad enforcement powers over the Bank, including the power to impose fines and other civil and criminal penalties, and to appoint a conservator.





The Bank Secrecy Act.  Under the Bank Secrecy Act (“BSA”), a financial institution is required to have systems in place to detect certain transactions, based on the size and nature of the transaction.  Financial institutions are generally required to report cash transactions involving more than $10,000 to the United States Treasury.  In addition, financial institutions are required to file suspicious activity reports for transactions that involve more than $5,000 for known suspects, $25,000 for unknown suspects when the financial institution knows, suspects or has reason to suspect, involves illegal funds, is designed to evade the requirements of the BSA or has no lawful purpose.  The USA PATRIOT Act of 2001, enacted in response to the September 11, 2001 terrorist attacks, requires bank regulators to consider a financial institution’s compliance with the BSA when reviewing applications from a financial institution.  As part of its BSA program, the USA PATRIOT Act also requires a financial institution to implement customer identification procedures when opening accounts for new customers and to review lists of individuals and entities that are prohibited from opening accounts at financial institutions.





Interstate Banking and Branching. Current federal law authorizes interstate acquisitions of banks and bank holding companies without geographic limitation. Effective June 1, 1997, a bank headquartered in one state was authorized to merge with a bank headquartered in another state, as long as neither of the states had opted out of such interstate merger authority prior to such date. After a bank has acquired a branch in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under applicable federal or state law.





Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of 1999 (the “Act”) covers a broad range of issues, including a repeal of most of the restrictions on affiliations among depository institutions, securities firms and insurance companies. The following description summarizes some of its significant provisions.





The Act permits unrestricted affiliations between banks and securities firms. The Act also permits bank holding companies to elect to become financial holding companies. A financial holding company may engage in or acquire companies that engage in a broad range of financial services, including securities activities such as underwriting, dealing, brokerage, investment and merchant banking; and insurance underwriting, sales and brokerage activities. In order to become a financial holding company, the bank holding company and all of its affiliated depository institutions must be well-capitalized, well-managed, and have at least a satisfactory Community Reinvestment Act rating.





The Act provides that the states continue to have the authority to regulate insurance activities, but prohibits the states in most instances from preventing or significantly interfering with the ability of a bank, directly or through an affiliate, to engage in insurance sales, solicitations or cross-marketing activities. Although the states generally must regulate bank insurance activities in a nondiscriminatory manner, the states may continue to adopt and enforce rules that specifically regulate bank insurance activities in certain


7


areas identified in the Act. The Act directs the federal bank regulatory agencies to adopt insurance consumer protection regulations that apply to sales practices, solicitations, advertising and disclosures.





The Act adopts a system of functional regulation under which the Federal Reserve Board is confirmed as the umbrella regulator for financial holding companies, but financial holding company affiliates are to be principally regulated by functional regulators such as the FDIC for state nonmember bank affiliates, the Securities and Exchange Commission for securities affiliates and state insurance regulators for insurance affiliates. The Act repeals the broad exemption of banks from the definitions of “broker” and “dealer” for purposes of the Securities Exchange Act of 1934, as amended, but identifies a set of specific activities, including traditional bank trust and fiduciary activities, in which a bank may engage without being deemed a “broker”, and a set of activities in which a bank may engage without being deemed a “dealer”. The Act also 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.





The Act contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. The Act provides that, except for certain limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. An institution may not disclose to a non-affiliated third party, other than to a consumer reporting agency, customer account numbers or other similar account identifiers for marketing purposes. The Act also provides that the states may adopt customer privacy protections that are stricter than those contained in the Act. The Act also makes a criminal offense, except in limited circumstances, obtaining or attempting to obtain customer information of a financial nature by fraudulent or deceptive means.





ITEM 1A.
RISK FACTORS





We are subject to various risks, including the risks described below.  Our business, results of operations and financial condition could be materially and adversely affected by any of these risks or additional risks not presently known or that we currently deem immaterial.





General economic conditions in our market area could adversely affect us.





We are affected by the general economic conditions in the local markets in which we operate. Our market has experienced a significant downturn in which we have seen falling home prices, rising foreclosures and an increased level of commercial and consumer delinquencies.  If economic conditions in our market do not improve, we could experience any of the following consequences, each of which could further adversely affect our business:





·  demand for our products and services could decline;


·  loan losses may increase; and


·  problem assets and foreclosures may increase.





We could experience further adverse consequences in the event of a prolonged economic downturn, which could impact collateral values or cash flows of the borrowing businesses and, as a result, our primary source of repayment could be insufficient to service their debt. Future economic conditions in our market will depend on factors outside of our control such as political and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government, military and fiscal policies and inflation.





Our concentration in loans secured by real estate could, as a result of adverse market conditions, increase credit losses which could adversely impact earnings.





We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Many of our loans are secured by real estate (both residential and commercial) in our market area, which could result in adverse consequences to us in the event of a prolonged economic downturn in our market. As of December 31, 2009, approximately 73.9% of our loans had real estate as a primary or secondary component of collateral.  A further significant decline in real estate values in our market would mean that the collateral for many of our loans would provide less security. As a result, we would be more likely to suffer losses on defaulted loans because our ability to fully recover on defaulted loans by selling the real estate collateral would be diminished. In addition, a number of our loans are dependent on successful completion of real estate projects and demand for homes, both of which could be affected adversely by a decline in the real estate markets.  We could experience credit losses that adversely affect our earnings.


8





Should our allowance for loan losses become inadequate, our results of operations may be adversely affected.





Our earnings are significantly affected by our ability to properly originate, underwrite and service loans.  In addition, we maintain an allowance for loan losses that we believe is a reasonable estimate of known and inherent losses within our loan portfolio. We could sustain losses if we incorrectly assess the creditworthiness of our borrowers or fail to detect or respond to deterioration in asset quality in a timely manner.  At December 31, 2009, our non-performing loans were $23.8 million, an increase of $12.2 million from $11.6 million at December 31, 2008.  Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio, the collateral supporting the loans and performance of customers relative to their financial obligations with us.  During fiscal 2009, our provision for loan losses was $9.5 million and our loan loss allowance to total loans was 3.70% at December 31, 2009.





The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and these losses may exceed current estimates. Rapidly growing loan portfolios are, by their nature, unseasoned. As a result, estimating loan loss allowances is more difficult, and may be more susceptible to changes in estimates, and to losses exceeding estimates, than more seasoned portfolios. Although we believe the allowance for loan losses is a reasonable estimate of known and inherent losses in the loan portfolio, it cannot fully predict such losses or that the loss allowance will be adequate in the future. Additional problems with asset quality could cause our interest income and net interest margin to decrease and our provisions for loan losses to increase further, which could adversely affect our results of operations and financial condition.





Federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of management. Any increase in the amount of the provision or loans charged-off as required by these regulatory agencies could have a negative effect on our operating results.





We expect to enter into a written agreement with the Virginia Bureau of Financial Institutions and the Federal Reserve Bank of Richmond, which will require us to dedicate a significant amount of resources to complying with the agreement.





We expect that we will enter a written agreement with the Virginia Bureau of Financial Institutions and the Federal Reserve by the end of the second quarter of 2010. While we do not know the exact contents of the written agreement at this time, it could, among other things, inhibit our ability to grow our assets or open new branch offices.





In addition, we expect that the written agreement will require us to implement plans to improve our risk management and compliance systems, oversight functions, operating and financial management and capital plans. While subject to the written agreement, we expect that our management and board of directors will be required to focus considerable time and attention on taking corrective actions to comply with its terms. We also expect that we will be required to hire third party consultants and advisors to assist us in complying with the written agreement, which could increase our non-interest expense and reduce our earnings.





There also is no guarantee that we will successfully address the Virginia Bureau of Financial Institutions’ and the Federal Reserve’s concerns in the anticipated written agreement or that we will be able to comply with it. If we do not comply with the anticipated written agreement, we could be subject to the assessment of civil monetary penalties, further regulatory sanctions and/or other regulatory enforcement actions.





For more information regarding our anticipated written agreement with the Virginia Bureau of Financial Institutions and the Federal Reserve, see “Recent Regulatory Developments” In Item 1 above.





An inability to improve our regulatory capital position could adversely affect our operations.





At December 31, 2009, we were classified as “adequately capitalized” for regulatory capital purposes.  Until we become “well capitalized” for regulatory capital purposes, we cannot renew or accept brokered deposits without prior regulatory approval and we may not offer interest rates on our deposit accounts that are significantly higher than the average rates in our market area. As a result, it may be more difficult for us to attract new deposits as our existing brokered deposits mature and do not rollover and to retain or increase non-brokered deposits. If we are not able to attract new deposits, our ability to fund our loan portfolio may be adversely affected. In addition, we will pay higher insurance premiums to the FDIC, which will reduce our earnings.





9


We may need to raise additional capital.


We expect that our anticipated written agreement with the Virginia Bureau of Financial Institutions and the Federal Reserve will require us to develop a written plan to maintain sufficient capital, and we may have to sell additional securities in order to generate additional capital.  We may seek to raise capital through offerings of our common stock, preferred stock, securities convertible into common stock, or rights to acquire such securities or our common stock. Under our articles of incorporation, we have additional authorized shares of common stock and preferred stock that we can issue from time to time at the discretion of our board of directors, without further action by the shareholders, except where shareholder approval is required by law or the Nasdaq Stock Market. The issuance of any additional shares of common stock, preferred stock or convertible securities could be substantially dilutive to shareholders of our common stock, and the market price of our common stock could decline as a result of any such sales.  Thus, our shareholders bear the risk of our future offerings reducing the market price of our common stock and diluting their stock holdings.





Difficult market conditions have adversely affected our industry.





Dramatic declines in the housing market, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of real estate related loans and resulted in significant write-downs of asset values by financial institutions. These write-downs, initially of asset-backed securities but spreading to other securities and loans, have caused many financial institutions to seek additional capital, to reduce or eliminate dividends, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets has adversely affected our business and results of operations. Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which may impact our charge-offs and provision for credit losses. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry.





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





We target our commercial development and marketing strategy primarily to serve the banking and financial services needs of small and medium sized businesses. These businesses generally have less capital or borrowing capacity than larger entities. If general economic conditions negatively impact this major economic sector in the markets in which we operate, our results of operations and financial condition may be adversely affected.





Changes in market interest rates could affect our cash flows and our ability to successfully manage our interest rate risk.





Our profitability and financial condition depend to a great extent on our ability to manage the net interest margin, which is the difference between the interest income earned on loans and investments and the interest expense paid for deposits and borrowings. The amounts of interest income and interest expense are principally driven by two factors; the market levels of interest rates, and the volumes of earning assets or interest bearing liabilities. The management of the net interest margin is accomplished by our Asset Liability Management Committee. Short term interest rates are highly sensitive to factors beyond our control and are effectively set and managed by the Federal Reserve, while longer term rates are generally determined by the market based on investors’ inflationary expectations. Thus, changes in monetary and or fiscal policy will affect both short term and long term interest rates which in turn will influence the origination of loans, the prepayment speed of loans, the purchase of investments, the generation of deposits and the rates received on loans and investment securities and paid on deposits or other sources of funding. The impact of these changes may be magnified if we do not effectively manage the relative sensitivity of our earning assets and interest bearing liabilities to changes in market interest rates. We generally attempt to maintain a neutral position in terms of the volume of earning assets and interest bearing liabilities that mature or can re-price within a one year period in order that we may maintain the maximum net interest margin; however, interest rate fluctuations, loan prepayments, loan production and deposit flows are constantly changing and greatly influence this ability to maintain a neutral position.





Generally, our earnings will be more sensitive to fluctuations in interest rates the greater the difference between the volume of earning assets and interest bearing liabilities that mature or are subject to re-pricing in any period. The extent and duration of this sensitivity will depend on the cumulative difference over time, the velocity and direction of interest rate changes, and whether we are more asset sensitive or liability sensitive. Additionally, the Asset Liability Management Committee may desire to move our position to more asset sensitive or more liability sensitive depending upon their expectation of the direction and velocity of future changes in interest rates in an effort to maximize the net interest margin. Should we not be successful in maintaining the desired position, or should interest rates not move as anticipated, our net interest margin may be negatively impacted.


10





Significant market declines and/or the absence of normal orderly purchases and sales may adversely affect the “market” valuations of our investment portfolio securities.





The capital and credit markets have been experiencing volatility and disruption for more than 12 months. Recently, the volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. We could be subject to further significant and material depreciation of our investment portfolio securities if we utilize only previous market sales prices in a disorderly or nonfunctioning market, where the only transactions have been distressed or forced sales. We will rely on alternative valuation methods in accordance with guidance from the FASB and other regulatory agencies such as the Federal Reserve and the Securities and Exchange Commission. This market valuation process could significantly reduce our capital and/or profitability. If current levels of market disruption and volatility continue or worsen, there can be no assurance that the declines in market value associated with these disruptions will not result in other-than-temporary impairments of these assets, which could have a material adverse effect on our net income and capital levels.





Our future success is dependent on our ability to effectively compete in the face of substantial competition from other financial institutions in our primary markets.





We encounter significant competition for deposits, loans and other financial services from banks and other financial institutions, including savings and loan associations, savings banks, finance companies, and credit unions in our market area. A number of these banks and other financial institutions are significantly larger than us and have substantially greater access to capital and other resources, larger lending limits, more extensive branch systems, and may offer a wider array of banking services. To a limited extent, we compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, insurance companies and governmental organizations any of which may offer more favorable financing rates and terms than us. Most of these non-bank competitors are not subject to the same extensive regulations that govern us. As a result, these non-bank competitors may have advantages in providing certain services. This competition may reduce or limit our margins and our market share and may adversely affect our results of operations and financial condition.





The soundness of other financial institutions could adversely affect us.





Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. There is no assurance that any such losses would not materially and adversely affect our results of operations.





Our continued success is largely dependent on key management team members.





We are a customer-focused and relationship-driven organization. Future growth is expected to be driven by a large part in the relationships maintained with customers. While we have assembled an experienced and talented senior management team, maintaining this team, while at the same time developing other managers in order that management succession can be achieved, is not assured. The unexpected loss of key employees could have a material adverse effect on our business and may result in lower revenues or reduced earnings.





Our inability to successfully implement our strategic plans could adversely impact earnings as well as our overall financial condition.





A key aspect of our long-term business strategy is our continued growth and expansion.  However, we expect to curtail asset growth and focus on improving our profitability until our capital levels are restored to acceptable levels.  It is uncertain when, or if, we will be able to successfully increase our capital levels and resume our long-term growth strategy.





Even if we are able to restore our capital levels, we may not be able to successfully implement our strategic plans and manage its growth if we are unable to identify attractive markets, locations or opportunities for expansion in the future. Successful management of


11


increased growth is contingent upon whether we can maintain appropriate levels of capital to support our growth, maintain control over growth in expenses, maintain adequate asset quality, and successfully integrate into the organization, any businesses acquired.  In the event that we do open new branches or acquire existing branches or banks, we expect to incur increased personnel, occupancy and other operating expenses. In the case of branch franchise expansion, we must absorb these higher expenses as we begin to generate new deposits. There is a further time lag involved in redeploying the new deposits into attractively priced loans and other higher yielding earning assets. Thus, we may not be able to implement our long-term growth strategy, and our plans to branch could depress earnings in the short run, even if we are able to efficiently execute our branching strategy.





Changes in accounting standards could impact reported earnings.





The accounting, disclosure, and reporting standards set by the Financial Accounting Standards Board, Securities and Exchange Commission and other regulatory bodies, periodically change the financial accounting and reporting standards that govern the preparation and presentation of the our consolidated financial statements. These changes can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.





Significant changes in legislation and or regulations could adversely impact us.





We are subject to extensive supervision, regulation, and legislation by both state and federal banking authorities. Many of the regulations we are governed by are intended to protect depositors, the public, or the insurance funds maintained by the Federal Deposit Insurance Corporation, not shareholders. Banking regulations affect our lending practices, capital structure, investment practices, dividend policy and many other aspects of our business. These requirements may constrain our rate of growth, and changes in regulations could adversely affect it. The burden imposed by federal and state regulations may place banks in at competitive disadvantage compared to less regulated competitors. In addition, the cost of compliance with regulatory requirements could adversely affect our ability to operate profitably.





Increases in FDIC insurance premiums may cause our earnings to decrease.





The limit on FDIC coverage has been temporarily increased to $250,000 for all accounts through December 31, 2013. As a result, the FDIC almost doubled its assessment rate on well-capitalized institutions by raising the assessment rate 7 basis points at the beginning of 2009. The FDIC has adopted another final rule effective April 1, 2009, to change the way that the FDIC’s assessment system differentiates for risk, make corresponding changes to assessment rates beginning with the second quarter of 2009, as well as other changes to the deposit insurance assessment rules. On September 30, 2009, the FDIC collected a special assessment of five basis points on an FDIC-insured depository institution’s assets, minus Tier 1 capital. These actions significantly increased our noninterest expense in 2009 and could do so for the foreseeable future.





Regulation of the financial services industry is undergoing major changes, and future legislation could increase our cost of doing business or harm our competitive position.





In 2009, many emergency government programs enacted in 2008 in response to the financial crisis and the recession slowed or wound down, and global regulatory and legislative focus has generally moved to a second phase of broader reform and a restructuring of financial institution regulation. Legislators and regulators in the United States are currently considering a wide range of proposals that, if enacted, could result in major changes to the way banking operations are regulated. Some of these major changes may take effect as early as 2010, and could materially impact the profitability of our business, the value of assets we hold or the collateral available for our loans, require changes to business practices or force us to discontinue businesses and expose us to additional costs, taxes, liabilities, enforcement actions and reputational risk.





Certain reform proposals under consideration could result in our becoming subject to stricter capital requirements and leverage limits, and could also affect the scope, coverage, or calculation of capital, all of which could require us to reduce business levels or to raise capital, including in ways that may adversely impact our shareholders or creditors. In addition, we anticipate the enactment of certain reform proposals under consideration that would introduce stricter substantive standards, oversight and enforcement of rules governing consumer financial products and services, with particular emphasis on retail extensions of credit and other consumer-directed financial products or services. We cannot predict whether new legislation will be enacted and, if enacted, the effect that it, or any regulations, would have on our business, financial condition, or results of operations.


12




The trading volume in our common stock is lower than that of other financial services companies.


Although our common stock is traded on the Nasdaq Global Market, the trading volume in our common stock is lower than that of other financial services companies. A public trading market having the desired characteristics of depth, liquidity and orderliness depends on the presence in the marketplace of willing buyers and sellers of our common stock at any given time. This presence depends on the individual decisions of investors and general economic and market conditions over which we have no control. Given the lower trading volume of our common stock, significant sales of our common stock, or the expectation of these sales, could cause our stock price to fall.





Our ability to pay dividends is limited and we suspended payment of dividends during the first quarter of 2010. As a result, capital appreciation, if any, of our common stock may be your sole opportunity for gains on your investment for the foreseeable future.





Our ability to pay dividends is limited by regulatory restrictions and the need to maintain sufficient capital, and by contractual restrictions under the agreement with the U.S. Treasury in connection with the issuance of our Series A Preferred Stock under the TARP Capital Purchase Program. The ability of our banking subsidiary to pay dividends to us is limited by its obligations to maintain sufficient capital and by other general restrictions on its dividends that are applicable to our banking subsidiary. If we do not satisfy these regulatory requirements, we are unable to pay dividends on our common stock. Holders of our common stock are only entitled to receive such dividends as our board of directors may declare out of funds legally available for such payments. In the first quarter of 2010, we suspended payment of dividends on our common stock. In addition, we are subject to regulatory restrictions that do not permit us to declare or pay any dividend without the prior written approval of our banking regulators. Although we can seek to obtain a waiver of this prohibition, banking regulators may choose not to grant such a waiver, and we would not expect to be granted a waiver or be released from this obligation until our financial performance improves significantly. Therefore, we may not be able to resume payments of dividends in the future.





ITEM 1B.
UNRESOLVED STAFF COMMENTS





None.





ITEM 2.
PROPERTIES





The current corporate center office of the Company and the Bank is a two-story brick building with a fully finished basement, built in 1994 with approximately 15,000 square feet of office space. It houses deposit and loan operations, information technology and data center, accounting and finance, human resources and training, and general facilities services, and some executive offices. It is located at 2036 New Dorset Road in Powhatan County. The current main office was constructed in 2004 and occupied in June 2005. It is a two story brick building with 16,000 square feet of office space located on a 6.95 acre tract of land at the intersection of New Dorset Road and Route 60 in Powhatan County. The main office building houses a branch, some executive offices, several retail and most all commercial, mortgage and construction loan personnel. The present new main office replaced the original main office and an adjacent branch facility at Flatrock, both of which were closed in 2005. The original main office building and land were sold in June 2006.





The Cartersville location, in Cumberland County, which originally opened in 1985, was replaced in mid-1994 with a one-story brick building with approximately 1,600 square feet. The Midlothian branch is located in Chesterfield County at the Village Marketplace shopping center and was built in 1988 and opened in May of that year. It is a one and one-half story building with approximately 3,000 square feet. The Flatrock branch was acquired in 1992 from the Resolution Trust Corporation with the bank assuming approximately $9.0 million in deposit liabilities of the former CorEast Federal Savings Bank. The Flatrock branch facility is located in the Village of Flat Rock across Route 60 from the Bank’s original main office, and was closed in June 2005 and is currently used for offsite record storage. In April 1993, the Bank acquired the branch facility of the former Investors Federal Savings Bank located in the Market Square Shopping Center in Brandermill in Chesterfield County, through the Resolution Trust Corporation. This one-story building contains approximately 1,600 square feet and opened for business on November 1, 1993.





In June 1998, the Bank completed construction of and opened a 4,800 square foot branch located on U. S. Route 60 (Anderson Highway) near the courthouse in Cumberland County, Virginia. In July 2001, the Bank acquired a one-story, 2,800 square foot, two-year old branch facility from another financial institution located on Lauderdale Drive in Wellesley in Henrico County. In December 2004, the Bank purchased a 2,800 square foot, seven-year old branch bank building from another financial institution. This branch is located at 2500 Promenade Parkway in the Bellgrade shopping center located in the Midlothian area of Chesterfield County.





ITEM 3.
LEGAL PROCEEDINGS





There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or the Bank is a party or of which the property of the Company or the Bank is subject.





ITEM 4.
REMOVED AND RESERVED








13


PART II





ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES





Common Stock and Dividends





Central Virginia Bankshares, Inc. Common Stock trades on The Nasdaq Global Market (“Nasdaq”) under the symbol “CVBK”. As of April 8, 2010 the Company had approximately 744 shareholders of record.





The following table sets forth the high and low trade prices of the Company’s Common Stock on Nasdaq, based on published financial sources, and the dividends paid on the Common Stock for each calendar quarter indicated. Prior period trade prices and dividends per share have been adjusted to reflect the 5% stock dividend paid June 13, 2008 to shareholders of record May 31, 2008.





2009

2008
2007High Trade


Low Trade


Dividends Paid


High Trade


Low Trade


Dividends Paid


High Trade


LowTrade


Dividends PaidFirst Quarter

$
5.62


$
3.76


$
.0525


$
19.04


$
16.68


$
.18


$
26.18


$
24.24


$
.18Second Quarter


4.50



3.45



.0525



18.50



15.01



.18



24.90



20.72



.18Third Quarter


4.50



3.04



.0525



16.25



7.50



.18



21.95



17.14



.18Fourth Quarter


4.10



2.99



.01



10.51



3.50



.105



19.40



16.19



.18





In the first quarter of 2010, we suspended payment of dividends on our common stock.  We currently are subject to regulatory restrictions that do not permit us to make any distributions on our Preferred Stock, any interest payments on our trust preferred securities or declare any common dividends without prior approval from our banking regulators.  We expect that we will not be permitted to declare or pay any dividends until our financial performance improves significantly.





In January 2009, we issued preferred stock to the U.S. Treasury pursuant to the TARP Capital Purchase Program.  Under the terms of the preferred stock, we are required to pay dividends on the preferred stock before they can be paid on our common stock.  We also suspended payment of dividends on our preferred stock in the first quarter of 2010, so we will be required to pay all accrued and unpaid dividends on our preferred stock before we will be able to resume payment of dividends on our common stock.





As a result of these regulatory and contractual restrictions on our ability to pay dividends on our common stock, we are unable to predict when we may be able to resume payment of dividends on our common stock.





When we are able to resume dividend payments, our future dividend policy will be subject to the discretion of the board of directors and will depend upon a number of factors, including future consolidated earnings, financial condition, liquidity and capital requirements of the Company and the Bank, applicable governmental regulations and policies and other factors deemed relevant by the board of directors.  Our ability to distribute cash dividends will depend primarily on the amount of cash and liquid assets held as well as the ability of the Bank to declare and pay dividends to the Company. As a state member bank, the Bank is subject to certain restrictions imposed by the reserve and capital requirements of federal and Virginia banking statutes and regulations. Furthermore, neither the Company nor the Bank may declare or pay a cash dividend on any capital stock if it is insolvent or if the payment of the dividend would render it insolvent or unable to pay its obligations as they become due in the ordinary course of business.





For additional information on these limitations, see “Regulation and Supervision – Payment of Dividends” in Item 1 above.





14





ITEM 6.
SELECTED FINANCIAL DATA





(Dollars in Thousands Except for Per Share Data)

2009


2008


2007


2006


2005Balance Sheet DataTotal Assets

$
473,224


$
486,268


$
485,221


$
437,535


$
397,373Total Deposits


385,526



347,963



358,761



357,993



322,229Loans Receivable, net


281,490



289,609



262,937



205,618



194,641Stockholders' Equity


26,219



20,308



36,864



37,086



32,909Income Statement DataNet Interest Income

$
12,992


$
14,283


$
14,811


$
15,070


$
14,402Provision for Loan Losses


9,512



1,250



180



-



203Net Interest Income AfterProvision for Loan Losses


3,480



13,033



14,631



15,070



14,199Non-interest Income


3,180



3,537



3,542



4,376



3,116Non-interest Expense


20,019



31,943



13,138



12,657



10,955(Loss) Income Before Income Taxes


(13,358
)


(15,372
)


5,035



6,789



6,360Income Taxes (Benefit) Expense


(4,192
)


(5,748
)


1,046



1,639



1,405Net (Loss) Income


(9,166
)


(9,625
)


3,989



5,150



4,955Per  Common Share Data (1)Net (Loss) Income - Basic

$
(3.74
)

$
(3.73
)

$
1.56


$
2.03


$
1.98- Diluted


(3.74
)


(3.73
)


1.54



2.01



1.94Cash Dividends Per Common Share


.1675



.645



.72



.71



.625Book Value Per Common Share


5.64



7.82



14.35



14.60



13.06RatiosReturn on Average Assets


(1.85
%)


(1.95
%)


.87
%


1.26
%


1.26
%Return on Average Equity


(30.18
%)


(32.45
%)


10.60
%


15.10
%


15.26
%Average Equity to Assets


6.12
%


6.02
%


8.18
%


8.32
%


8.29
%Dividend Payout


4.76
%


17.04
%


43.90
%


32.71
%


29.16
%(1) Adjusted for 5% stock dividends paid in June 2008 and June 2006.








ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS





Results of Operations





For the year ended December 31, 2009, the Company reported a net loss of $9.2 million.  After the effective dividend of $.6 million to the Treasury on preferred stock, the net loss to common shareholders was $9.8 million.  On a per share basis, the net loss was $3.74 per common share while the return on average assets and return on average equity was negative 1.85% and 30.18% respectively.  The loss in 2009 was primarily due to the addition of $9.5 million in provisions for future loan losses given the level of non-performing loans and charges totaling $6.7 million in impairment losses on securities. Also impacting the loss in 2009 was a decrease of $4.1 million in interest income due to increasing non-performing loans, decreasing interest rates and the loss of over $1.0 million in income from FNMA and FHLMC preferred stock dividends which were suspended after they were placed in conservatorship in 2008.





Total assets declined $13.0 million at December 31, 2009 to $473.2 million from $486.2 million at December 31, 2008.  Total cash and cash equivalents increased $5.9 million to $12.5 million as total deposits increased $37.6 million, total loans decreased $1.1 million, securities available for sale decreased $17.9 million, and total borrowings decreased $57.1 million from $115.0 million in 2008 to


15


$57.9 million in 2009.  Much of the increase in deposits is attributable to the popularity of the Company’s “Dream Checking” product which offered an above market interest rate for accounts which met certain monthly benchmarks for automated transactions such as debit card usage and automatic deposits.  The increase in interest-bearing demand deposits of $21.6 million accounted for 57.4% of the total increase in deposits.  These funds, as well as the funds received from the sale, maturity, and calls of investment securities allowed the Company to pay down its borrowings and better position the balance sheet for the future.  At December 31, 2009, the book value of a share of common stock was $5.64 compared to $7.82 at December 31, 2008.





For the year ended December 31, 2008 the Company reported a net loss of $9.6 million compared to net income of $4.0 million reported for the year ended December 31, 2007, a decline of $13.6 million or 341.3 %. The loss is attributed to the Company’s recordation of an $18.9 million non-cash charge related to perpetual preferred stock issued by Fannie Mae and Freddie Mac (collectively, “the GSE”) and the effect of the write-off of a $1 million debt security resulting from the bankruptcy filing of Lehman Brothers Holding, Inc. during the third and fourth quarters of 2008.





At December 31, 2008 total assets were $486.3 million, growth of $1.05 million or 0.22 % from $485.2 million at year end 2007. Comparing the major components of the Company’s balance sheet at year end 2008 and 2007 finds cash and funds sold were $6.6 versus $10.4 million, investment securities were $145.9 versus $177.6 million, loans were $293.4 versus $265.9 million, other assets were $43.1 versus $31.9 million, deposits were $348.0 versus $358.8 million, borrowings were $115.0 versus $86.7 million and total shareholder’s equity was $20.3 versus $36.9 million. At December 31, 2008, the book value of a share of common stock was $7.82 versus $14.35 in 2007.





The Company’s return on average equity was negative 30.18% and 32.45% in 2009 and 2008 respectively and 10.60% in 2007.  The return on average assets amounted to negative 1.85% and 1.95% in 2009 and 2008 respectively and 0.87% in 2007.





Net Interest Income.In 2009, the Company’s net interest income was $13.0 million compared to $14.3 million in 2008 and $14.8 million in 2007.   Interest and fees on loans decreased 8.08% in 2009 from 2008 as the amount of non-accrual loans rose from $10.4 million at December 31, 2008 to $21.7 million at December 31, 2009.  The amount of interest income “lost” on these loans was approximately $912,000 in 2009.  The yield on loans fell to 6.01% in 2009 from 6.81% in 2008 as variable rate loans which priced downward several times in 2008 went lower in 2009 and remained at that low rate for the rest of the year.  Interest income on securities decreased $2.5 million from $10.0 million in 2008 to $7.5 million in 2009.  This is the result of the calls on many higher yielding agency securities during 2009 as well as the previously mentioned loss of the GSE dividends.  As the yields on loans and investments were decreasing, so too were the rates paid on deposits and other borrowings.  Interest expense on deposits decreased $1.7 million or 14.2% in 2009 compared to 2008.  Interest expense on borrowings decreased $1.1 million from $3.4 million in 2008 to $2.3 million in 2009 while the cost of these funds dropped from 3.07% in 2008 to 2.61% in 2009.





In 2008, the Company’s net interest income was $14.3 million, compared to $14.8 million in 2007.  The principal reasons for the decline in the net interest margin in 2008 from 2007 was margin compression, the write-off of GSE investments, costs for retail deposits and interest rate cuts by the Federal Reserve Bank. The lower net interest income for 2008 was anticipated, and is reflected in the 44 basis point decline in the net interest margin due to the Company’s asset sensitivity and the prevailing interest rate environment. Following a period of stable rates throughout the early part of 2007, the Federal Reserve made three cuts in the fourth quarter of 2007 and continued reducing rates with seven cuts totaling 400 basis points during 2008, causing interest income to decline by a higher percentage than in our interest expense and resulting in compression of our net interest margin. This compression is further impacted by the Company’s asset sensitivity, as there are more earning assets tied to variable interest rates than there are variable rate deposits or borrowings. For example, the cost of interest paid on certificates of deposit, the Company’s most significant funding source, does not immediately decline when interest rates are cut; whereas the income on loans tied to prime or other variable indices does. Some of the margin compression effect was mitigated by the increases in the volume of earning assets, principally loans. Earning assets for 2008 averaged $469.6 million, an increase of $39.5 million or 9.2% compared to $430.2 million in 2007. The decrease in net interest income for 2008 versus 2007 of $528,155 or 3.6% resulted from the decrease of $1.1 million or 3.6% in interest income which totaled $29.5 million versus $30,613,371 in 2007, this decline exceeded the reduction of $568,001 or 3.6% in interest expense which totaled $15,231,036 versus $15.8 million in 2007. In spite of the $39.5 million increase in the average volume of earning assets, due to the interest rate cuts throughout the first, second and fourth quarters of 2008, the yield on earning assets declined by 87 basis points to 6.41% from the prior year’s 7.28%, while over the same period, the expense yield on interest bearing liabilities decreased by 57 basis points to 3.63% from 4.20% in 2007. This situation where yields fall on interest bearing liabilities at a slower pace than they did on earning assets results from interest rate cuts that are not fully reflected in retail deposit pricing due to a competitive environment where the costs of deposits were at artificially high levels not reflective of the current cost environment and older certificates of deposit renewing at these higher market rates which negatively impacts the net interest margin of an asset sensitive financial institution.





16


The table below, sets forth the Company’s average interest earning assets (on a tax-equivalent basis) and average interest bearing liabilities, the average yields earned on such assets and rates paid on such liabilities, and the net interest margin, all for the periods indicated.




Year Ended December 31,2009


2008


2007Average





Yield/


Average





Yield/


Average





Yield/Balance


Interest


Rate


Balance


Interest


Rate


Balance


Interest


Rate(Dollars in Thousands)AssetsFederal funds sold

$
9,244


$
21



.23
%

$
126


$
2



1.74
%

$
9,734


$
513



5.27
%Securities: (1)U. S. Treasury and other U. S. governmentagency and corporations


92,671



4,390



4.74
%


98,066



5,301



5.41
%


106,138



5,741



5.41
%States and political subdivisions (2)


15,266



1,023



6.70
%


17,673



1,137



6.43
%


19,674



1,267



6.44
%Other securities (2)


49,790



2,402



4.82
%


67,254



4,135



6.15
%


61,603



4,260



6.92
%Total securities (2)


157,727



7,815



4.95
%


182,993



10,573



5.78
%


187,415



11,268



6.01
%Loans (2)(3)(4)(5)(6)


298,328



17,939



6.01
%


286,513



19,517



6.81
%


233,012



19,526



8.38
%Total interest-earning assets (2)


465,299


$
25,775



5.54
%


469,632


$
30,092



6.41
%


430,161


$
31,307



7.28
%Allowance for loan losses


(4,344
)










(3,308
)










(2,848
)Total non-earning assets


34,960











26,374











32,812Total assets

$
495,915










$
492,698










$
460,125Liabilities and Stockholders’ Equity:Deposits:Interest bearing demand

$
73,131


$
997



1.36
%

$
62,813


$
1,145



1.82
%

$
59,092


$
1,306



2.21
%Savings


32,937



396



1.20
%


31,729



479



1.51
%


34,121



512



1.50
%Other time


231,373



8,735



3.78
%


225,112



10,185



4.52
%


233,312



11,570



4.96
%Total deposits


337,441



10,128



3.00
%


319,654



11,809



3.69
%


326,525



13,388



4.10
%Federal funds purchased and securitiessold under repurchase agreements


26,239



213



.81
%


35,948



831



2.31
%


8,362



405



4.84
%FHLB advances - Overnight


11,019



51



.46
%


12,544



280



2.23
%


39



2



5.13
%FHLB advances - Term


41,713



1,741



4.17
%


45,000



1,875



4.17
%


36178



1,593



4.40
%Short-term borrowings


1,688



116



6.87
%


1,779



113



6.35
%


-



-



-Trust preferred obligation


5,155



189



3.67
%


5,155



324



6.29
%


5,155



414



8.03
%Total borrowings


85,814



2,310



2.69
%


100,426



3,423



3.41
%


49,734



2,414



4.85
%Total interest-bearing liabilities


423,255



12,438



2.94
%


420,080



15,232



3.63
%


376,253



15,802



4.20
%Demand deposits


39,168











39,839











43,592Other liabilities


3,119











3,122











2,942Total liabilities


465,542











463,041











422,493Stockholder’ equity


30,373











29,657











37,632Total liabilities and stockholders’ equity

$
495,915










$
492,698










$
460,125Net interest spread





$
13,337



2.60
%





$
14,860



2.78
%





$
15,505



3.08
%Net interest margin










2.87
%










3.16
%










3.60
%


____________________


(1)
Includes securities available for sale and securities held to maturity.(2)
Tax-exempt income has been adjusted to a tax-equivalent basis using an incremental rate of 34% and totaled $345 thousand in 2009 and $579 in 2008.(3)
Installment loans are stated net of unearned income.(4)
Average loan balances include non-accrual loans.(5)
Interest income on loans includes the earned portion of net deferred loan fees in accordance with FASB 91 of $550,597 in 2009, $547,204 in 2008, and $532,306 in 2007.(6)
Includes mortgage loans held for sale and SBA loans held for resale..





Net interest income when adjusted for the effect of non-taxable income is referred to as fully tax equivalent (“FTE”) net interest income.  On a fully tax equivalent basis, net interest income for 2009 was $13.3 million, a decline of $1.5 million or 10.2% compared to 2008.  The 2009 FTE net interest margin was 2.87% compared to 3.16% in 2008 and 3.60% in 2007.  The yield on securities decreased to 4.95% from 5.78% in 2008 as higher-yielding bonds, particularly agencies, were called during the year and any bond purchased as a replacement would have a lower yield.  The yield on loans decreased to 6.01% from 6.81% in 2008 as non-accrual loans increased 107.7% from $10.4 million at December 31, 2008 to $21.7 million at December 31, 2009.  In addition, loans tied to the prime rate were at historic low rates for most of the year.  The cost of deposits decreased from 3.69% in 2008 to 3.00% in 2009 mainly reflecting a reduction of .74% in certificates of deposit.  The tax-equivalent net interest margin is a measure of net interest income performance. It represents the difference between interest income with any non-taxable interest adjusted to a fully tax-equivalent basis, including net deferred loan fees earned, and interest expense, on both deposits, and borrowings reflected as a percentage of average interest earning assets.





Net interest income on a fully tax equivalent basis for 2008 was $14.9 million a decline of $644,986 or 4.2% versus $15.5 million in 2007. The full year 2008 FTE net interest margin was 3.16% compared to 3.60% for the full year of 2007.


17





When comparing 2008 with 2007, the FTE net interest income contracted by $644,986, and the FTE net interest margin declined to 3.16% from 3.60%, primarily due to margin compression. The yield on total earning assets declined by 87 basis points, to 6.41% from 7.28% on $39.5 million more in average earning assets, and resulted largely from the decline in the yield on loans: 6.81% versus 8.38%, on an increase in loan volume of $53.5 million: $286.5 million from $233.0 million; while the yield on securities declined to 5.78% versus 6.01% on a decrease of $4.4 million in volume: $183.0 million from $187.4 million. Correspondingly, the cost of total interest bearing liabilities declined by 57 basis points: 3.63% from 4.20%, on an increase in interest bearing liabilities volume of $43.8 million: $420.1 from $376.3 million, and resulted from the decrease in the cost of interest bearing deposits of 41 basis points 3.69% from 4.10%, as volume declined by $6.9 million: $319.7 million from $326.5 million; while borrowings cost declined by 144 basis points: 3.41% from 4.85%, on $50.7 million higher volume: $100.4 million from $49.7 million.





Net interest income is affected by changes in both average interest rates and average volumes of interest-earning assets and interest-bearing liabilities. The following table sets forth the amounts of the total change in interest income that can be attributed to rate (change in rate multiplied by old volume) and volume (change in volume multiplied by old rate) for the periods indicated. The amount of change not solely due to rate or volume changes was allocated between the change due to rate and the change due to volume based on the relative size of the rate and volume changes.





(Dollars in Thousands)

2009 Compared to 2008


2008 Compared to 2007Volume


Rate


Net


Volume


Rate


NetInterest incomeFederal funds sold

$
20


$
-


$
20


$
(289
)

$
(222
)

$
(511
)Securities: (1)U. S. Treasury and other U.S. governmentagencies and corporations


(285
)


(626
)


(911
)


(434
)


(6
)


(440
)States and political subdivisions (2)


(164
)


50



(114
)


(129
)


(1
)


(130
)Other securities


(946
)


(788
)


(1,734
)


594



(718
)


(124
)Total securities


(1,395
)


(1,364
)


(2,759
)


31



(725
)


(694
)Loans (2)


857



(2,435
)


(1,578
)


(49
)


40



(9
)Total interest income

$
(518
)

$
(3,799
)

$
(4,317
)

$
(307
)

$
(907
)

$
(1,214
)Interest expense:Deposits:Interest bearing demand

$
275


$
(423
)

$
(148
)

$
90


$
(251
)

$
(161
)Savings


19



(102
)


(83
)


(36
)


3



(33
)Other time


292



(1,741
)


(1,449
)


(397
)


(989
)


(1,386
)Total deposits


586



(2,266
)


(1,680
)


(343
)


(1,237
)


(1,580
)Federal funds purchased and securitiessold under repurchase agreements


(181
)


(437
)


(618
)


506



(80
)


426FHLB advancesOvernight


(30
)


(199
)


(229
)


278



-



278Term


(137
)


3



(134
)


362



(80
)


282Short-term note payable


(6
)


9



3



113



-



113Trust preferred obligation


-



(135
)


(135
)


-



(90
)


(90
)Total interest expense

$
232


$
(3,025
)

$
(2,793
)

$
916


$
(1,487
)

$
571Increase (decrease) in net interest income

$
(750
)

$
(774
)

$
(1,524
)

$
(1,223
)

$
580


$
(643
)


____________________


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


(2) Fully taxable equivalent basis using an incremental tax rate of 34%.





Non-Interest Income.





At December 31, 2009, non-interest income decreased $356,747 or 10.1% primarily due to a 265.8% decline in realized gain (loss) on sale of securities available for sale.  For 2009, the Company recorded a loss of $268,400 primarily due to selling two securities and recognizing actual tax-deductible losses rather than recording OTTI compared to a gain of $161,929 in 2008.  Investment and insurance commissions generated by the non-deposit investment product sales program were $162,739 in 2009 compared to $252,094 in 2008 as investors made fewer investment changes due to the economy.  Secondary mortgage market fees increased 114.81% to $230,696


18


due to the Company strategically deciding to not keep fixed-rate loans generated in 2009 in its portfolio as it had in 2008.  Deposit fees and charges declined slightly by 2.25% in 2009 as the number of overdrafts declined.  Bank card fees increased 3.44% to $530,659 as the fees received from debit card usage increased as the usage of debit cards increased.  The increase in cash surrender value of bank owned life insurance totaled $434,693 versus $388,696 an increase of $45,997 or 11.8% as a result of higher net crediting rates paid by the insurance companies.  Other income increased $18,419 or 7.98% as the Company began a new agreement with its check vendor whereby commissions are directly received rather than receiving credits.  This offset a decline in the earnings from the title insurance subsidiary.




Non-interest income for 2008 was relatively unchanged as it decreased $4,876 or 0.14%, totaling $3.5 million compared to $3.5 million in 2007. Deposit fees and charges were $1.88 million compared to $1.85 million, an increase of 1.6% due to a higher volume of overdraft fees as there were no modifications to deposit service charges during 2008. Bank card fees were $513,000 a 8.9% increase over the prior year’s $471,160. The higher revenue was due to an increase in fee based income from debit card usage and point of sale transaction fees that offset a decline in interchange credits. The increase in cash surrender value of bank owned life insurance totaled $388,696 versus $360,385 an increase of $28,311 or 7.9% as a result of higher net crediting rates paid by the insurance companies. Mortgage loan secondary market fees declined from $128,451 to $107,393 in 2008 due to the continued strategy of recording on the bank’s books a percentage of mortgages underwritten rather than selling all of them in the secondary market; coupled with the continued decline in the mortgage origination business to the economic factors. Investment and insurance commissions generated by the non-deposit investment product sales program totaled $252,094 versus $380,025, a decrease of $127,931 or 33.7%, due to a significantly lower volume of transactions in the third and fourth quarters as a direct result of the economic events beginning in September 2008. Realized gains on securities available for sale totaled $161,929 compared to $109,548 in 2007, an increase of $52,381 or 47.8% as a result of active portfolio management, gains on securities purchased at a discount being called at par, or in the case of municipals a premium call price, and sales generating liquidity to partially fund loan growth. Other miscellaneous income was $230,922 compared to $239,529 a decline of $8,607 or 3.6% due principally to lower earnings from the title insurance subsidiary, and during the prior year, 2007, interest of $33,778 from a swap agreement associated with the Bank’s Capital Trust Preferred that was unwound prior to the end of 2007.





Non-Interest Expenses.





Non-interest expense totaled $20.0 million in 2009 compared to $31.9 million, a decrease of $11.9 million or 37.3%.  The largest portion of this expense in each year was the loss on OTTI write-down of securities which totaled $6.7 million in 2009 compared to $18.9 million in 2008.  Excluding OTTI, non-interest expense increased $230,392 or 1.8% in 2009.  Federal Insurance Premiums (FDIC) increased $933,324 or 424.4% in 2009 to $1.2 million.  This is primarily due to a special assessment of $226,000 expensed in the second quarter as well as premium rate increases in 2009.  In addition, data processing is a new expense category in 2009, which represents the Company’s change in late 2008 to an outsourced arrangement for data processing, replacing an in-house system.  Previously, comparable expenses would have been in salaries and wages, pensions and benefits, equipment depreciation, and equipment repairs and maintenance.  Each of these categories decreased in 2009, partially due to this new arrangement.  Advertising and public relations costs decreased $110,545 or 32.3%; consulting fees decreased $104,344 or 29.6%; and other operating expenses decreased $118,053 or 5.5% as the Company successfully sought to reduce costs where reasonable and practical.





Total non-interest expense was $31.9 million in 2008 versus $13.1 million in the prior year, an increase of $18.8 million or 143.1% from 2007. The increase was the result of the $18.9 million loss on the OTTI write-down of the GSE securities previously presented. Excluding this write-down total non-interest expenses decreased $95,478 or 0.73% to $13.0 million from $13.1 million in 2007. The categories with the most significant increases or decreases were: salaries and wages, which decreased by $101,749 or 1.8%, totaling $5.4 million compared to $5.5 million in 2007 primarily due to significant reductions in bonuses; pensions and other employee benefits, which decreased by $207,282 or 10.5%, totaling $1.8 million compared to $2.0 million due to a reduction in contributions to employee retirement plans; advertising and public relations, which decreased $109,973 or 24.3% totaling $342,012 compared to $451,986; FDIC premiums increased $177,608 or 419.8% to $219,919 from $42,311 in 2007 as the Company used the one-time credits provided by the FDIC beginning in 2005 and assessment revenue rose as the credits were used through the first quarter of 2008; legal and professional fees, which decreased by $89,004 or 22.9% totaling $300,494 versus $389,498 principally due to the costs directly related to implement Section 404 of the Sarbanes-Oxley Act in 2007.





Income Taxes.  The Company reported an income tax benefit of $4.2 million in 2009 and $5.7 million in 2008, and income tax expense of $1.0 million in 2007. These amounts yielded effective tax rates (benefits) of (31.4%), (37.4%), and 20.8%, for 2009, 2008, and 2007 respectively. The 2009 effective tax rate benefit is the result of the write-down of other than temporary impairment on securities, increased FDIC premiums, and lower net interest income.  The 2008 effective tax rate benefit is the result of the loss suffered due to the write-off of the Company’s GSE and Lehman investments during 2008. The 2007 effective tax rate declined versus 2006 due to lower


19


overall income before taxes, increased loan charge offs, the increase in non-taxable growth of the cash value of bank owned life insurance resulting from the additional investment in early 2007.








Financial Condition





Loan Portfolio. The Company is an active residential mortgage and residential construction lender and generally extends commercial loans to small and medium sized businesses within its primary service area. The Company’s commercial lending activity extends across its primary service area of Powhatan, Cumberland, eastern Goochland County, western Chesterfield, and western Henrico Counties. Consistent with its focus on providing community-based financial services, the Company generally does not attempt to diversify its loan portfolio geographically by making significant amounts of loans to borrowers outside of its primary service area.





The principal economic risk associated with each of the categories of loans in the Company’s portfolio is the creditworthiness of its borrowers. Within each category, such risk is increased or decreased depending on prevailing economic conditions. The risk associated with the real estate mortgage loans and installment loans to individuals varies based upon employment levels, consumer confidence, fluctuations in value of residential real estate and other conditions that affect the ability of consumers to repay indebtedness. The risk associated with commercial, financial and agricultural loans varies based upon the strength and activity of the local economies of the Company’s market areas. The risk associated with real estate construction loans varies based upon the supply of and demand for the type of real estate under construction. Many of the Company’s real estate construction loans are for pre-sold or contract homes. Builders are limited as to the number and dollar amount of loans for speculative home construction based on the financial strength of the borrower and the prevailing market conditions.





Total loans outstanding at December 31, 2009 decreased by $1.1 million or 0.38% from 2008, ending the year at $292.3 million. In 2008 loan growth was $27.5 million or 10.4% ending the year at $293.4 million. In 2007 loan growth was $57.3 million or 27.9% ending the year at $265.9 million; and in 2006, loans grew by $11.0 million or 5.6% ending 2006 at $208.5 million. The loan to deposit ratio was 75.8% at December 31, 2009, 84.3% at December 31, 2008, 74.1% at December 31, 2007, and 58.2% at December 31, 2006.  The targeted range for the loan to deposit ratio is 70% - 85%.  The Company anticipates that the loan portfolio will continue to decline in 2010.





The following table summarizes the Company’s loan portfolio, net of unearned income:


At December 31,(Dollars in Thousands)2009


2008


2007


2006


2005Commercial

$
67,780


$
59,327


$
48,255


$
40,683


$
36,150Real Estate:Mortgage


126,868



124,053



106,394



78,986



81,077Home equity


21,308



18,828



13,863



10,796



8,872Construction


67,962



81,762



87,127



68,204



60,005Total real estate


216,138



224,644



207,384



157,986



149,954Bank cards


1,018



951



911



894



946Installment


7,392



8,512



9,350



9,000



10,598Total loans


292,328



293,434



265,900



208,563



197,648Less unearned income


(24
)


(28
)


(51
)


(56
)


(89
)Loans net of unearned


292,304



293,406



265,849



208,507



197,559Allowance for loan losses


(10,814
)


(3,797
)


(2,912
)


(2,889
)


(2,918
)Loans, net

$
281,490


$
289,609


$
262,937


$
205,618


$
194,641




As the table above indicates, the total amount of commercial and industrial loans have increased by $8.5 million, $11.1 million, $7.5 million, and $4.5 million, or 14.2%, 22.9%, 18.6%, and 12.5%, in 2009, 2008, 2007, and 2006 respectively. The Company has focused much of its efforts on increasing its commercial and industrial loans for several years, as a desirable alternative to real estate related construction lending. Total real estate related loans outstanding decreased by $8.5 million or 3.8% in 2009, increased by $17.3 million or 8.3% in 2008, $49.4 million or 31.3% in 2007, and $8.0 million or 5.4% in 2006. Of the real estate related loans in 2009, mortgage loans increased $2.8 million or 2.2%, home equity loans increased by $2.5 million or 13.2%, and construction loans decreased by $13.8 million or 16.9%.  In 2008, mortgage loans increased the most at $17.7 million or 16.6%, followed by home equity at $5.0 million or 35.8%, and construction loans declined $5.4 million or 6.2%. In 2007, mortgage loans increased the most at $27.4 million or


20


34.7% followed by construction at $18.9 million or 27.7%, and home equity loans at $3.1 million or 28.4%. In 2006, construction loans exhibited the greatest growth, having increased by $8.2 million or 13.7%, mortgage loans declined $2.1 million or 2.6%, and home equity loans grew by $1.9 million or 21.7%.  Mortgage loans have comprised between 50% to 60% of the total real estate loans for the past five years. Mortgage loans to total real estate loans were 58.7% in 2009, 55.4% in 2008, 51.3% in 2007, 50.0% in 2006, and 54.1% in 2005. Home equity loans have grown steadily over the past five years from $8.9 million in 2005 to $21.3 million in 2009.  Home Equity loans to total real estate loans were 9.9% in 2009, 8.4% in 2008, 6.7% in 2007, 6.8% in 2006, and 5.9% in 2005. Bankcard loan balances outstanding were $1.0 million in 2009, and have remained relatively level over the period from 2009 through 2005 ranging from a high of $1.0 million in 2009 to a low of $894 thousand in 2006.





The shift from construction to mortgage loan growth was accomplished in part by the decision in early 2007 not to sell as many mortgage loans in the secondary market. Instead those loans which met the bank’s underwriting criteria were recorded on the bank’s books as mortgage loans. In addition, most of these loans were 30 and 15 year fixed rate loans, which given the composition of bank’s portfolio of mortgage loans being mostly 3/3 and 5/5 year adjustable rate loans, the addition of fixed rate loans was desirable from an asset liability standpoint at a time when interest rates were flat and expected to trend down in the future. As a percentage of total real estate loans, construction loans comprised 31.4 % in 2009, 36.4% in 2008, 42.0% in 2007, 42.0% in 2006, and 40.0% in 2005. Considering the current state of the real estate market for new home sales, the Company anticipates that its construction loan portfolio will remain at approximately the same volume or will decline in the future. Substantially all construction loans are for residential construction in the principal markets served by the Company.





Installment loans decreased by $1.1 million or 13.2% in 2009, decreased by $838 thousand or 9.0% in 2008, declined by $350 thousand or 3.9% in 2007,  and declined by $1.6 million or 15.1% in 2006. The balances of traditional installment loans declined primarily due to reduced demand resulting from the current economic environment. Installment loans increased in 2007 due to the Company’s emphasis on loan growth, however over the past several years, the balances have dropped principally due to the Company’s unwillingness to effectively compete on an interest rate basis with the captive and other finance arms of the major automobile manufacturers, coupled with the tendency of consumers to utilize equity credit lines for purposes that in the past would have been financed with traditional installment loans. The Company anticipates this atmosphere surrounding installment lending to continue in the future as long as the automobile manufacturers effectively subsidize the sale of vehicles through offering below market financing.





All concentrations of loans exceeding 10.0% of total loans at December 31, 2009 were disclosed as a separate category of loans. The following table shows the contractual maturity distribution of loan balances outstanding as of December 31, 2009. Also provided are the amounts due classified according to the sensitivity to changes in interest rates.





MaturingWithin 1 Year


1-5 Years


After

5 Years


Total(Dollars in Thousands)Commercial

$
32,094


$
21,155


$
14,531


$
67,780Real Estate:Mortgage


1,208



6,655



119,005



126,868Home equity


51



158



21,099



21,308Construction


59,172



7,492



1,298



67,962Total real estate


60,431



14,305



141,402



216,138Bank cards


-



-



1,018



1,018Installment


1,219



4,727



1,446



7,392Total Loans

$
93,744


$
40,187


$
158,397


$
292,328





Loans maturing withinOne Year

1 – 5 Years

After 5 Years

TotalWith fixed interest rates

$   6,325

$ 22,411

$ 60,588

$89,324With variable interest rates

87,419

17,776

97,809

203,004$ 93,744

$40,187

$ 158,397

$292,328





21


Loans Held for Resale.The Bank originates mortgage loans that are presold in the secondary market and carried as loans held for resale at the agreed upon purchase price. The Bank also provides short term financing as part of an arrangement, begun in October 2007, with Community Bankers Securities, a registered broker-dealer and SBA pool assembler for US Small Business Administration Guaranteed Loan Certificates prior to their aggregation into an SBA loan pool security. As the certificates represent the guaranteed portion of SBA loans, and have not yet been pooled into a security, they are carried at their fair market value as a component of the total loans held for resale. As of December 31, 2009, 2008, and 2007 the total of SBA loans held for sale was $351,238, $358,181, and $338,000 respectively. The total mortgage loans held for sale at December 31, 2009, 2008, and 2007 were $1.8 million, $743,950, and $338,000 respectively.





Asset Quality. Non-performing loans include non-accrual loans, loans 90 days or more past due and restructured loans. Non-accrual loans are loans on which interest accruals have been discontinued. Loans which reach non-accrual status, per Company policy, may not be restored to accrual status until all delinquent principal and interest has been paid, or the loan becomes both well secured and in the process of collection. Restructured loans are loans with respect to which a borrower has been granted a concession on the interest rate or the original repayment terms because of financial difficulties.





Non-performing loans totaled $23.8 million at December 31, 2009, versus $11.6 million at December 31, 2008, $4.1 million at December 31, 2007, $1.0 million at December 31, 2006, and $967,075 at December 31, 2005.  Non-performing loans increased by $9.2 million in 2009 from 2008 as the current economic downturn continued to affect the ability of some of our borrowers to repay their loans.





Management forecloses on delinquent real estate loans when all other repayment possibilities have been exhausted. During 2009 the company acquired real estate through foreclosure (OREO) in the amount of  $3.3 million and in 2008 acquired OREO in the amount of $1.2 million. There was no OREO at December 31, 2007, 2006, or 2005. The Bank had net OREO related expenses totaling in 2009 of $92,941 and in 2008, $14,870 of the same expense. As the Bank had no OREO during 2007, 2006, or 2005,  the Bank had no period expenses related to OREO. The Bank’s practice is to value real estate acquired through foreclosure at the lower of (i) an independent current appraisal or market analysis less anticipated costs of disposal, or (ii) the existing loan balance.





Management is diligently monitoring the increase in non-performing assets; however, it does not believe that the level of non-performing loans in 2009 is reflective of any significant systemic problem within the Company’s loan portfolio and rather is a reflection of the current depressed real estate markets and the generally weak economic environment. At December 31, 2009, there were $21.7 in non-accrual loans compared to $10.4 in non-accrual loans at December 31, 2008 and $2.3 million at December 31, 2007, $736,509 at December 31, 2006, and $719,915 at December 31, 2005. Based on our present knowledge of the status of individual and corporate borrowers and the overall state of the local economy, management reasonably anticipates that the level of non-performing assets is likely to increase from its current level, however not by the same degree of increase experienced in 2009 over 2008. Management will move to foreclose on borrowers whose loans are placed on a non-accrual status in order to resolve the credit therefore it is reasonable to anticipate an increase in OREO.





The following table summarizes non-performing assets:





At December 31,2009


2008


2007


2006


2005(Dollars in Thousands)Loans accounted for on a non-accrual basis

$
21,655


$
10,422


$
2,361


$
736


$
720Loans contractually past due 90 days or more as to interest or

principal payments (not included in non-accrual loans above)


2,177



1,175



1,757



264



247Loans restructured and in compliance with modified terms (not

included in non-accrual loans or loans contractually past due

90 days or more above)


-



-



-



-



-Total non-performing loans

$
23,832


$
11,597


$
4,118


$
1,000


$
967Other real estate owned


3,575



1,173



-



-



-Other non-performing assets


2,165



312



-



-



111Total non-performing assets

$
29,572


$
13,082


$
4,118


$
1,000


$
1,078





Loans 90 days or more past due generally, are placed on non-accrual status unless well secured and in the process of collection.





22


The Company’s policy with respect to past due interest on nonaccrual loans requires that any interest accrued in the current year and unpaid should be reversed from the receivable and current year’s income. With regard to interest accrued in the prior year, and yet unpaid, such accrued interest should be reversed from the receivable and reserve for loan losses. In 2009, $621,055 of interest income was reversed when loans were placed in non-accrual status; in 2008, $231,528 of interest income was reversed; in 2007, $69,338 was reversed; in 2006, $10,480 was reversed; and in 2005, $911 was reversed. The impact of both the reversal of previously accrued but unpaid interest plus the absence of subsequent accruals on loans in non-accrual status had the effect of reducing net income by $912,405 in 2009, $354,834 in 2008, and $119,031 in 2007. Since the Company operates in a rural to suburban area, it has generally been well acquainted with its principal borrowers and has not had such a large number of problem credits that management has not been able to stay well informed about, and in contact with, troubled borrowers. Management is not aware of any other material loans at December 31, 2009, which involve significant doubts as to the ability of the borrowers to comply with their existing payment terms.





The following table sets forth the amounts of contracted interest income and interest income reflected in income on loans accounted for on a non-accrual basis and loans restructured and in compliance with modified terms:





For the Year Ended December 31,2009


2008


2007(Dollars in Thousands)Gross interest income that would have been recorded if the loans

had been current and in accordance with their original terms

$
912


$
355


$
119Interest income included in income on the loans

$
387


$
123



-





Management has analyzed the potential risk of loss within the Company’s loan portfolio, given the loan balances, quality trends, value of the underlying collateral, and current local market economic and business conditions and has recognized losses where appropriate. Loans, including non-performing loans are monitored on an ongoing basis as part of the Company’s periodic loan review process. Management reviews the adequacy of its loan loss allowance at the end of each month. Based primarily on the Company’s loan risk classification system, which classifies all commercial loans, including problem credits as substandard, doubtful, or loss, according to a scale of 1-8 with 8 being a loss, additional provisions for losses may be made monthly. In addition, the Company evaluates the general market credit risks inherent in lending, as well as any systemic issues, as part of its enhanced loan loss adequacy analysis. The ratio of the allowance for loan losses to total loans was 3.70% at December 31, 2009, 1.28% at December 31, 2008, 1.10% at December 31, 2007, 1.39% at December 31, 2006 and 1.48% at December 31, 2005. Management believes that the allowance for loan losses, while not increasing at the same rate as the loan portfolio grows, is nevertheless adequate to provide for future losses. At December 31, 2009, the ratio of the allowance for loan losses to total non-performing loans was 45.4%; at December 31, 2008 the ratio was 29.7%; at December 31, 2007 the ratio was 70.7%; at December 31, 2006 the ratio was 288.9%; and at December 31, 2005 the ratio stood at 301.7%. Management evaluates non-performing loans relative to their collateral value and makes appropriate reductions in the carrying value of those loans based on that review.





23


The following table summarizes changes in the allowance for loan losses:





2009


2008


2007


2006


2005(Dollars in Thousands)Balance at beginning of period

$
3,796


$
2,912


$
2,889


$
2,918


$
2,698Charge-offs:Commercial


77



88



36



-



24Real estate:Mortgage


772



-



-



-



-Home equity


199



-



-



-



-Construction


1,368



202



-



-



-Bank cards


42



27



14



11



18Installment


23



39



172



96



51Overdrafts


50



72



-



-



-Total charge-offs


2,531



428



222



107



93Recoveries:Commercial


2



1



-



2



-Real estate:Mortgage


-



1



-



-



-Home equity


-



-



-



16



-Construction


-



6



-



-



-Bank cards


6



9



12



9



3Installment


12



8



53



51



107Overdrafts


17



37



-



-



-Total


37



62



65



78



110Net (charge-offs) recoveries


(2,494
)


(366
)


(157
)


(29
)


17Provision charged to operations


9,512



1,250



180



-



203Balance at end of period

$
10,814


$
3,796


$
2,912


$
2,889


$
2,918Ratio of net loan losses to average net loans

outstanding:Net charge-offs (recoveries)

$
2,494


$
366


$
157


$
29


$
(17
)Average net loans


292,437



281,764



229,744



204,738



183,3800.85
%


0.13
%


0.07
%


0.01
%


(0.01
)%Ratio of allowance for loan losses to total loans

net of unearned income:Allowance for loan losses

$
10,814


$
3,796


$
2,912


$
2,889


$
2,918Total loans at period end


292,304



293,406



265,849



208,507



197,5583.70
%


1.28
%


1.10
%


1.39
%


1.48
%Ratio of allowance for loan losses to total

non-performing loans:Allowance for loan losses

$
10,814


$
3,796


$
2,912


$
2,889


$
2,918Non-performing loans


23,832



13,082



4,118



1,000



96745.38
%


29.02
%


70.71
%


288.90
%


301.76
%





For each period presented, the provision for loan losses charged to operations is based on management’s judgment after taking into consideration all factors connected with the collectability of the existing portfolio. Management evaluates the loan portfolio in light of local business and economic conditions, changes in the nature and value of the portfolio, industry standards and other relevant factors. Assumptions and factors considered by management in determining the amounts charged to operations include internally generated loan review reports, previous loan loss experience with the borrower, the status of past due interest and principal payments on the loan, the quality of financial information supplied by the borrower and the general financial condition of the borrower. Despite management’s best efforts, the reserve may be adjusted in future periods if there are significant changes in the assumptions or factors utilized when making valuations, or conditions differ materially from the assumptions originally utilized. Any such adjustments are made in the reporting period when the relevant factor(s) become known and when applied as part of the analysis indicate a change in the level of potential loss is warranted.





For the year ended December 31, 2009, the provision for loan losses was $9,511,808 and in 2008 the provision for loan losses was $1,250,000. There was a $180,000 provision for loan losses for the year ended December 31, 2007, while in 2006 there was no loan provision, and in 2005 the provision was $203,000.  In management’s opinion, the provision charged to operations has been sufficient to absorb the current year’s net loan losses and generally provide a reserve for potential future loan losses considering the financial condition of borrowers and collateral values in view of the uncertainties in our local economy.





24


The following table shows the balance and percentage of the Company’s allowance for loan losses allocated to each category of loans:





At December 31,2009


2008


2007Reserve

for Loan

Losses


Percentage

of Reserve

for Loan

Losses


Percentage

of Loans

Category

to Total

Loans


Reserve

for Loan

Losses


Percentage

of Reserve

for Loan

Losses


Percentage

of Loans

Category

of Total

Loans


Reserve

for Loan

Losses


Percentage

of Reserve

for Loan

Losses


Percentage

of Loans

Category

of Total

Loans(Dollars in Thousands)Commercial

$
1,604



15
%


23
%

$
695



18
%


14
%

$
214



7
%


13
%Real estate-construction


5,196



48
%


23
%


2,185



58
%


28
%


2,059



71
%


34
%Real estate-mortgage (1)


3,698



34
%


51
%


843



22
%


55
%


519



18
%


49
%Consumer (2)


316



3
%


3
%


73



2
%


3
%


120



4
%


4
%$
10,814



100
%


100
%

$
3.796



100
%


100
%

$
2,912



100
%


100
%





At December 31,2006


2005Reserve

for Loan

Losses


Percentage

of Reserve

for Loan

Losses


Percentage

of Loans

Category

to Total

Loans


Reserve

for Loan

Losses


Percentage

of Reserve

for Loan

Losses


Percentage

of Loans

Category

of Total

Loans(Dollars in Thousands)Commercial

$
609



21
%


20
%

$
819



28
%


18
%Real estate-construction


1,115



39
%


32
%


1,016



35
%


30
%Real estate-mortgage (1)


1,005



35
%


43
%


965



33
%


46
%Consumer (2)


160



5
%


5
%


118



4
%


6
%$
2,889



100
%


100
%

$
2,918



100
%


100
%(1) Includes home-equity loans.

(2) Includes bank cards.





The Company has allocated the allowance according to the amount deemed to be reasonably necessary to provide for the possibility of losses being incurred within each of the above categories of loans. The allocation of the allowance as shown in the table above should not be interpreted as an indication that loan losses in future years will occur in the same proportions or that the allocation indicates future loss trends. Furthermore, the portion allocated to each loan category may vary from period to period due to changes in the financial ability of borrowers to service their debt and repay principal; changes in the estimated value of collateral, in particular real estate. These allocations are not necessarily the total amount available for future losses that might occur within such categories, since a portion of the total allowance is a general allowance applicable to the entire portfolio.





Securities





The Company’s investment securities portfolio serves several purposes, primarily, liquidity, safety and yield. Certain of the securities are pledged to secure public deposits and others are specifically identified as collateral for borrowing from the Federal Home Loan Bank of Atlanta, and others for repurchase agreements with correspondent banks and commercial customers. The remaining portion of the portfolio is held for investment yield, availability for sale in the event liquidity is needed, and for general asset liability management purposes.





At December 31, 2009, investment securities totaled $127.4 million representing 26.9% of total assets and a decrease of $18.5 million or 12.7% compared to $145.9 million in 2008.  The majority of this decrease occurred in the government agencies category as over $47.0 million of these securities were called during 2009 while the net of purchases and sales was a positive $34.4 million as the Company sought to replace the yield on the securities called.  For the total portfolio in 2009, $49.5 million in securities were called, net purchases and sales were a positive $33.5 million, paydowns and maturities were $2.6 million, and $6.7 million was written down as OTTI.


25


At year end December 31, 2008, total investment securities were $145.9 million representing 30.0% of total assets, and a decrease of $31.6 million or 17.8% versus the year ended December 31, 2007 balance of $177.6 million. This is largely due to the $18.9 million write-off of GSE and Lehman investments and the adjustment to market value from book value of the securities by its associated FASB 115 unrealized losses. Total investment securities at year end 2007 were $177.6 million or 36.6% of total assets, as compared to the prior year’s December 31, 2006 balance of $165.5 million. During 2008, deposits declined significantly ending 2008 decreasing by $10.8 million, an increase in federal funds sold of $21.1 million were combined with $7.2 million increase in borrowings to fund loan growth of $27.5 million, with the balance split between other assets and other liabilities. During the year 2008 purchases of securities totaled $80.2 million as securities were called due to declining rates throughout the year, calls totaled $57.0 million, sales were $19.8 million, maturities were $5.0 million, paydowns were $2.8 million.





As previously mentioned, the impairment write-downs of the GSE preferred stock and the Lehman bond had a significant impact on earnings. However, in addition, the loss of over $19 million in earning assets has placed further stress on the company’s net interest income and net interest margin as there was no immediate corresponding reduction in funding for the $19 million decline in securities.





The Company reviews and evaluates all securities quarterly or more frequently as necessary for possible impairment. If, in the judgment of management, there is serious doubt as to the probability of collecting substantially all the Company’s basis in a security within a reasonable period of time, an impairment write down will be recognized. The Company presently holds the following securities with credit ratings that, subsequent to purchase, have declined below minimum investment grade: $175 thousand GMAC Perpetual Preferred Stock, $1 million MBIA Global Funding 5.07% maturing 6/15/2015, $2 million Citigroup 6.95% maturing 9/15/2031, $2 million Bank Boston Capital 1.007$ maturing 1/15/2027, $2.0 million Bank of America Capital .8213% maturing 1/15/2027, $2 million Sallie Mae senior debt 5.3% maturing 6/15/2013 and $2 million in Sallie Mae preferred stock. Following the quarterly evaluation of these securities, management has concluded that, as of December 31, 2009 the impairment is considered temporary.





Additionally, the Company holds ten CDO securities totaling approximately $7.4 million book value at December 31, 2009 where the underlying pooled collateral is various bank and insurance company trust preferred debt. Other than temporary impairment (“OTTI”) in the amount of $6.7 million has been recognized on six of these securities in 2009. Subsequent to purchase, three of these securities have revised ratings that are below minimum investment grade (refer to Note 2 of the financial statements for further discussion). The total estimated market value of these securities at December 31, 2009 was approximately $3.8 million. Four of these securities have had 100% impairment recognized, another four of these securities are performing as designed and are current with all cash flows. When impairment reviews were conducted quarterly for all CDO securities, if the bond was performing and current with its cash flows, and the analysis indicated that substantially all principal would be recovered by maturity, the impairment was considered to be due to market conditions and therefore temporary. They represent 5.8% and 3.0% of the total investment portfolio book value and market value respectively at December 31, 2009.





The following table summarizes the book value of the Company’s securities held to maturity at the dates indicated:





Book Value at December 31,2009
2008
2007(Dollars in Thousands)States and political subdivisions
$4,441
$5,087
$6,011





The table below summarizes the book value of the Company’s securities available for sale at the dates indicated.





Book Value at December 31,2009


2008


2007(Dollars in Thousands)U.S. Treasury securities and U. S. government agencies and corporations

$
81,476


$
90,103


$
93,960Bank eligible preferred and equities


2,577



2,604



20,678Mortgage-backed securities


15,086



8,129



8,479Corporate and other debt


23,684



45,358



42,783States and political subdivisions


8,719



10,101



12,667$
131,542


$
156,295


$
178,567





26


The book value and average yield of the Company’s securities, including securities available for sale, at December 31, 2009 by contractual maturity are reflected in the following table. Actual maturities, and the resulting cash flows, can differ significantly from contractual maturities because certain issuers may have the right to call or prepay debt obligations with or without call or prepayment penalties. The table below categorizes securities according to their contractual maturity, without regard for certain issuers having unilateral optional call provisions prior to the bond’s contractual maturity, which they may or may not exercise depending on the overall market level of interest rates at the call date. The Company’s investment in bank eligible government sponsored entities consists of FNMA, FHLMC, and SLMA fixed coupon exchange traded preferred stocks. During 2008 FNMA and FHLMC preferred stocks were written-down by $18.9 million. These securities carry no book value. As these securities have no fixed maturity date they are separately identified. Mortgage-backed securities are also reported according to the contractual final maturity, without regard for the pre-payment characteristics of the underlying mortgages.





The table below summarizes the maturity distribution of the Company’s securities at December 31, 2009.





States and Political

Subdivisions(1)


Mortgage-Backed

Securities


U. S. Treasury and

other U. S. Agencies

and CorporationsAmount


Weighted

Average Yield


Amount


Weighted

Average Yield


Amount


Weighted

Average YieldDue in one year or less

$
-



0.00
%

$
-



0.00
%

$
-



0.00
%Due one year through five years


1,674



4.41
%


-



0.00
%


2,000



5.30
%Due five years through ten years


2,957



5.55
%


1,247



4.57
%


18,988



3.28
%Due after ten years


8,529



5.22
%


13,839



4.66
%


60,488



4.77
%Bank eligible preferred and equities


-



-



-



-



-



-Total

$
13,160



5.19
%

$
15,086



4.66
%

$
81,476



4.44
%





Corporate Debt


TotalsAmount


Weighted

Average

Yield


Amount


Weighted

Average

Yield(Dollars in thousands)Due in one year or less

$
-



0.00
%

$
-



-
%Due  one year through five years


3,049



7.21
%


6,723



5.94
%Due  five years through ten years


2,970



4.25
%


26,162



3.71
%Due after ten years


17,665



4.67
%


100,521



4.78
%Bank eligible preferred and equities


-



-



2,577



6.63
%Total

$
23,684



4.94
%

$
135,983



4.67
%


____________________


(1)
Yield on tax-exempt obligations have been computed on a tax-equivalent basis.





As shown in the table above, nothing in the total portfolio will mature in one year or less while $6.7 million, or 4.9%, will mature after one year but within five years. The fully taxable equivalent average yield on the entire portfolio was 4.95% for 2009, compared to 5.78% for 2008, and 6.01% for 2007. The book value of the entire portfolio exceeded its market value by approximately $8.5 million at December 31, 2009, compared to $15.4 million at December 31, 2008, and $6.9 million at December 31, 2007.





Deposits and Short-Term Borrowings





The Company’s predominate source of funds has been retail deposit accounts. The Company’s deposit base is comprised of demand deposits, savings and money market accounts and other time deposits. The Company’s deposits are provided by individuals and businesses generally located within the principal markets served. More recently, as the Company has grown its earning assets, it has found it to be financially advantageous to rely to a greater extent on wholesale borrowings than retail deposits. Wholesale funding tends to be much easier to obtain, more reliable, and quite often cheaper than retail deposits. Since deposits are, for our purposes, functionally similar to other forms of borrowing, there is not a significant difference between retail deposits and wholesale borrowings in so far as funding


27


sources for earning assets are concerned. Management will emphasize one or the other depending on the costs of each and its outlook as to the future direction of interest rates.





As shown in the following table, average total deposits increased by 4.8% in 2009, compared to a 2.9% decline in 2008 and an 11.7% increase in 2007. The average aggregate interest rate paid on deposits was 2.69% in 2009, versus 3.28% in 2008, and 3.62% in 2007. The majority (61%) of the Company’s deposits are higher yielding time deposits because many of its customers are individuals who seek higher yields than those offered on savings and demand accounts.





The following table is a summary of average deposits and average rates paid:


2009


2008


2007Average

Balance


Interest

Paid


Average

Rate


Average

Balance


Interest

Paid


Average

Rate


Average

Balance


Interest

Paid


Average

RateNon-interest bearing demand

$
39,168


$
0



0
%

$
39,839


$
0



0
%

$
43,592


$
0



0
%Interest bearing demand


73,131



997



1.36
%


62,813



1,145







59,092



1,306



2.21
%Savings


32,937



396



1.20
%


31,729



479



1.51
%


34,121



512



1.50
%Certificates of deposit


231,373



8,735



3.78
%


225,112



10,185



4.52
%


233,312



11,570



4.96
%Total

$
376,609


$
10,128



2.69
%

$
359,493


$
11,809



3.28
%

$
370,117


$
13,388



3.62
%





The Company does not solicit nor does it have any brokered deposits. Due to its “adequately capitalized” status, the Company is not permitted to accept brokered deposits without prior regulatory approval or offer interest rates on deposits that are significantly higher than the average rates in its market area.  The following table is a summary of time deposits of $100,000 or more by remaining maturities at December 31, 2009:





Time Deposits > $100,000(Dollars in Thousands)Three months or less

$
14,619Three to six months


16,094Six to twelve months


17,281Over twelve months


26,236$
74,230





Capital Resources





The assessment of capital adequacy depends on a number of factors such as asset quality, liquidity, earnings performance and changing competitive conditions and economic forces. The Company seeks to maintain a strong capital base to support its growth and expansion activities, to provide stability to current operations and to promote public confidence.





The Bank was considered “adequately capitalized” for regulatory purposes as of December 31, 2009. The primary indicators relied on by the Federal Reserve Board and other bank regulators in measuring strength of capital position are the Tier 1 Capital, Total Capital, and Leverage ratios. Tier 1 Capital consists of common and qualifying preferred stockholders’ equity and minority interests in common equity accounts of consolidated subsidiaries, less goodwill. Total Capital consists of Tier 1 Capital, qualifying subordinated debt, some hybrid capital instruments and other qualifying preferred stock and a limited amount of the allowance for loan losses and pre-tax net unrealized holding gains on certain equity securities. Risk-based capital ratios are calculated with reference to risk-weighted assets, which consist of both on and off-balance sheet risks.





The Bank’s Tier 1 Capital ratio was 7.8% as of December 31, 2009, compared to 9.6% as of December 31, 2008, 12.4% as of December 31, 2007, and 14.1% at December 31, 2006. The Total Capital ratio was 9.0% at December 31, 2009, compared to 10.6% at December 31, 2008, 13.2% at December 31, 2007, and 15.1% at December 31, 2006. These ratios are in excess of the mandated minimum requirements of 4% for Tier 1, and 8% for Total. The Leverage ratio consists of Tier 1 capital divided by quarterly average assets. At December 31, 2009 the Bank’s Leverage ratio was 5.6% compared to 7.7% at December 31, 2008, 9.5% at December 31, 2007 and 10.0% at December 31, 2006. Each of these exceeds the required minimum leverage ratio of 4%. Due to the impact on the Bank’s capital ratios of the write-down of the GSE investments during 2009 and 2008 as well as the increase in provision for loan losses in 2009 the Company may raise additional capital in the future.  At this time, the Company does not know what the nature of any capital raise will be, but expects that it could be substantially dilutive to current shareholders


.


28


The following tables show risk based capital ratios and stockholders’ equity to total assets for the Company and its principal subsidiary, Central Virginia Bank:





December 31,Regulatory Minimum
2009
2008
2007
2006Consolidated
For Capital Adequacy PurposesTotal risk-based capital
8.0%
9.2%
9.2%
13.5%
15.3%Tier 1 risk-based capital
4.0%
8.0%
8.2%
12.7%
14.4%Leverage ratio
4.0%
5.8%
6.6%
9.7%
10.7%Stockholders’ equity to total assets
N/A
5.5%
4.2%
7.6%
8.5%Central Virginia Bank
Adequately Capitalized
Well CapitalizedTotal risk-based capital
8.0%
10.0%
8.8%
10.6%
13.2%
15.1%Tier 1 risk-based capital
4.0%
6.0%
7.6%
9.6%
12.4%
14.1%Leverage ratio
4.0%
5.0%
5.5%
7.7%
9.5%
10.0%





The capital management function is an ongoing process. Central to this process is internal equity generation accomplished by retaining earnings. The losses incurred in 2009 and 2008 have reduced the capital such that it is now considered “adequately capitalized”.  At December 31, 2009, total stockholders’ equity increased $5.9 million principally due to the issuance of preferred shares in January 2009.  Total stockholders’ equity decreased by $16.6 million to $20.3 million in 2008 from $36.9 million in 2007 principally due to write-down, net of tax, of the GSE and Lehman Brothers securities and an increase in the unrealized securities losses, net of tax, reflected in accumulated other comprehensive income. Total stockholders’ equity decreased by $0.2 million to $36.9 million in 2007 from $37.1 million 2006 principally due to an increase in the unrealized securities losses, net of tax, reflected in accumulated other comprehensive income. By contrast, shareholders equity increased by $4.18 million in 2006 as a result of earnings retention and a decrease in the unrealized securities losses, net of tax, reflected in accumulated other comprehensive income.





In January 2009, the Company elected to participate in the TARP Capital Purchase Program and issued $11,385,000 of 5% Cumulative Senior Preferred Stock to the U.S. Treasury. This additional capital partially replaced the reduction in capital as a result of the $19 million impairment write downs in 2008. The cost of the Senior Preferred dividend is approximately $570,000 annually.





Total cash dividends on common stock of $435,982 were paid in 2009, compared $1,640,509 in 2008, $1,751,165 paid in 2007 and $1,689,562 in 2006.  Book value per common share was $5.63 at December 31, 2009 compared to $7.82 at December 31, 2008, $14.35 at December 31, 2007, and $14.60 at December 31, 2006.





The Company’s principal source of cash income is dividend payments from the Bank. Certain limitations exist under applicable law and regulation by regulatory agencies regarding dividend payments to a parent by its subsidiaries. As a result of the losses reported for 2009 and 2008, as of December 31, 2009, without prior regulatory approval, the Bank would not have had sufficient retained earnings available for distribution to the Company as dividends.





Liquidity and Interest Rate Sensitivity





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





Additional sources of liquidity available to the Company include, but are not limited to, loan repayments, the ability to obtain deposits through the adjustment of interest rates, borrowing from the Federal Home Loan Bank, purchasing of federal funds from correspondent banks, and selling securities under repurchase agreements to correspondent banks as well as commercial customers. To further meet its liquidity needs, the Company also has access to the Federal Reserve System. In the past, growth in deposits and proceeds from the maturity of investment securities has been sufficient to fund the net increase in assets. More recently, the Bank has relied on


29


wholesale borrowings as they are a much more effective and less expensive form of funding. The Bank, over the past five years, has experienced 18.2% growth in average year to date deposits – from $318.7 million in 2005 to $376.6 million in 2009. During the same period, the Bank has increased its borrowings 120.6% from an average of $38.9 million for 2005 to an average of $85.8 million for 2009. Finally over the same five year period the Bank increased its assets by 26.6% from an average of $391.7 million for 2005 to an average of $495.9 million for 2009.





Interest Rate Sensitivity. In conjunction with maintaining a satisfactory level of liquidity, management must also control the degree of interest rate risk assumed on the balance sheet. Managing this risk involves regular monitoring of the interest sensitive assets relative to interest sensitive liabilities over specific time intervals.





At December 31, 2009, the Company had a positive 3 month and a negative12-month period gap position, the cumulative gap to the one year point was negative. Since the largest amount of interest sensitive assets and liabilities mature or reprice within 12 months, the Company monitors this area closely. The Company does not emphasize interest sensitivity analysis beyond this time frame because it believes various unpredictable factors could result in erroneous interpretations. Early withdrawal of deposits, prepayments of loans and loan delinquencies are some of the factors that could have such an effect. In addition, changes in rates on interest sensitive assets and liabilities may not be equal, which could result in a change in net interest margin. While the Company does not match each of its interest sensitive assets against specific interest sensitive liabilities, it does seek to enhance the net interest margin while minimizing exposure to interest rate fluctuations.





Effects of Inflation





Inflation significantly affects industries having high proportions of fixed assets or high levels of inventories. Although the Company is not significantly affected in these areas, inflation does have an impact on the growth of assets. As assets grow rapidly, it becomes necessary to increase equity capital at proportionate levels to maintain the appropriate equity to asset ratios. Traditionally, the Company’s earnings and high capital retention levels have enabled the Company to meet these needs.





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





30


The following table summarizes the Company’s interest earning assets and interest bearing liabilities with respect to the earlier of their contractual repayment date or nearest repricing date at December 31, 2009:





(Dollars in thousands)

Within

3 Months


4-12

Months


1-5

Years


Over 5 Years or

Non-sensitive


TotalEARNING ASSETS:Federal funds sold

$
4,493


$
-


$
-


$
-


$
4,493Securities available for sale


43,402



4,391



36,350



38,823



122,966Securities held to maturity


2,442



-



1,999



-



4,441Loans(1)


134,430



11,177



78,239



70,625



294,471Total interest-earning assets

$
184,767


$
15,568


$
116,588


$
109,448


$
440,478FUNDING SOURCESDeposits:Interest bearing demand

$
-


$
8,446


$
8,446


$
67,572


$
84,464Savings


-



26,741



3,342



3,342



33,425Time deposits, $100,000 and over


14,619



33,375



26,236



-



74,230Other time deposits


39,135



68,733



48,079



-



155,947Federal funds purchased and securitiessold under repurchase agreements


2,207



-



-



-



2,707FHLB borrowings


30,000



-



20,000



-



50,000Capital Trust preferred securities


-



5,155



-



-



5,155Total interest-bearing liabilities

$
86,461


$
142,450


$
106,103


$
70,914


$
405,928Period gap

$
98,306


$
(126,882
)

$
10,485


$
38,534


$
20,443Cumulative gap

$
98,306


$
(28,576
)

$
(18,091
)

$
20,443Ratio of cumulative gap to total earning assets


23.06
%


-6.70
%


-4.24
%


4.79
%


_________________


(1)  Of the amount of loans due after 12 months, $114.3 million had floating or adjustable rates of interest and $84.3 million had fixed rates of interest.




Off-Balance Sheet Arrangements





The Company enters into certain off-balance sheet arrangements in the normal course of business to meet the financing needs of its customers. These off-balance sheet arrangements include unfunded commitments to extend credit and standby letters of credit which would impact the Company’s liquidity and capital resources to the extent customer’s accept and or use these commitments. These instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. See Note 12 to the Consolidated Financial Statements for further discussion of the nature, business purpose and elements of risk involved with these off-balance sheet arrangements. The Company has no other off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources, that is material to investors.





Contractual Obligations





The following table presents the Company’s contractual obligations at December 31, 2009 and the scheduled payment amounts due at various intervals over the next five years and beyond.





Payment due by periodTotal


Less than 1 year


1-3

years


3-5

years


More than 5 years(Dollars in Thousands)Capital Trust Preferred Securities

$
5,155


$
-


$
-


$
5,155


$
-FHLB borrowings(1)


50,000



10,000



20,000



5,000



15,000Total

$
55,155


$
10,000


$
20,000


$
10,155


$
15,000





(1)
Federal Home Loan Bank advances generally all callable prior to the maturity date indicated above. If the advance is called, the advance can be, at the option of the Bank, converted to another advance with a different interest structure, while maintaining the same maturity date. See Note 7 in Notes to Consolidated Financial Statements.





31


Forward-Looking Statements





Certain information contained in this discussion and elsewhere in this filing may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes,” “it is anticipated,” or words of similar import. Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest rate fluctuations, competition within and from outside the banking industry, new products and services in the banking industry, risk inherent in making loans such as repayment risks and fluctuating collateral values, problems with technology utilized by the Company, changing trends in customer profiles and changes in laws and regulations applicable to the Company. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.





Critical Accounting Policies





General. The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. For example, we may use historical loss factors as one of the many factors and estimates utilized in determining the inherent losses that may be present in our loan portfolio. Actual losses could differ substantially from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change. A summary of the significant accounting policies of the Company is set forth in Note 1 to the Company’s consolidated financial statements.





Allowance for Loan Losses: We establish the allowance for loan losses through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance when we believe that the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. The allowance represents an amount that, in our judgment, will be appropriate to absorb any losses on existing loans that may become uncollectible. Our judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available.





Impairment of Loans: We measure impaired loans based on the present value of expected future cash flows discounted at the effective interest rate of the loan (or, as a practical expedient, at the loan’s observable market price) or the fair value of the collateral if the loan is collateral dependent. We consider a loan impaired when it is probable that the Corporation will be unable to collect all interest and principal payments as scheduled in the loan agreement. We do not consider a loan impaired during a period of delay in payment if we expect the ultimate collection of all amounts due. We maintain a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment.





Impairment of Securities: Impairment of investment securities results in a write-down that must be included in net income when a market decline below cost is other-than-temporary. We regularly review each investment security for impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer and our ability and intention with regard to holding the security to maturity.





ITEM 7A.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





General





An important element of both earnings performance and liquidity is the management of our interest-sensitive assets and our interest-sensitive liabilities maturing or repricing within specific time intervals and the risks involved with them. Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments in response to changes in interest rates, exchange rates and equity prices. Our market risk is composed primarily of interest rate risk. The asset-liability


32


management committee at the Bank is comprised of the CEO, CFO, Senior Credit Officer and an independent director, and is responsible for reviewing the interest rate sensitivity position and establishing policies to monitor and limit exposures to this risk. Our board of directors reviews the guidelines established by the committee.  Interest rate risk is monitored through the use of four complimentary modeling tools: static gap analysis, dynamic gap simulation modeling, earnings simulation modeling and economic value simulation (net present value estimation). Each of the three simulation models measure changes under a variety of interest rate scenarios. While each of the interest rate risk measures has limitations, taken together they represent a reasonably comprehensive view of the magnitude of our interest rate risk, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships. Static gap, which measures aggregate repricing values, is less utilized or relied upon, since it does not effectively capture or measure the optionality characteristics of earning assets and funding sources nor does it effectively measure the earnings impact of changes in volumes and mix of these components on us. Earnings simulation and economic value models, however, which more effectively reflect the earnings impact, are utilized by management on a regular basis.





Earnings Simulation Analysis





We use simulation analysis to measure the sensitivity of net interest income to changes in interest rates. The model utilized by the Company calculates estimated earnings based on projected balances and rates. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a more realistic analysis of the sensitivity of earnings to changes in interest rates than other analysis such as the static gap analysis.





Assumptions used in the model, including loan and deposit growth rates, are derived from seasonal trends and management’s outlook, as are the assumptions used to project the yields and rates for new loans and deposits. All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loans and mortgage backed securities prepayment assumptions are based on industry estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Different interest rate scenarios and yield curves are used to measure the sensitivity of earnings to changing interest rates. Interest rates on different asset and liability accounts move differently when the prime rate changes and are accounted for in the different rate scenarios.





The following table represents the interest rate sensitivity of our net interest income (net interest income at risk) on a 12-month horizon using different rate scenarios as of December 31, 2009. There have been no material changes in quantitative and qualitative disclosures about market risk since this information was developed using December 31, 2009 data.





Change in Yield Curve

Cumulative Percentage Change in Net Interest Income from Base

Cumulative Dollar Change in Net Interest Income from Base(Dollars in Thousands)+300 basis points

7.6%

$1,030+200 basis points

4.5%

611+100 basis points

2.0%

269Base          $13,480

-

--100 basis points

4.1%

551-200 basis points

5.8%

785-300 basis points

7.0%

939





Economic Value Simulation





We use economic value simulation to calculate the estimated fair value of assets and liabilities under different interest rate environments. Economic values are calculated based on discounted cash flow analysis. The economic value of equity is the economic value of all assets minus the economic value of all liabilities. The change in economic value of equity over different rate environments is an indication of the longer term repricing risk in the balance sheet. The same assumptions are used in the economic value simulation as in the earnings simulation.


33





The following chart reflects the change in net market value of equity, (economic value of equity at risk), by using December 31, 2009 data, over different rate environments with a one-year horizon.





Change in Yield Curve (Dollars in Thousands)

Cumulative Percentage Change in Economic Value of Equity

Cumulative Dollar Change in Economic Value of Equity (Dollars in Thousands)+300 basis points

-31.5%

-8,558+200 basis points

-20.1%

-5,458+100 basis points

-6.5%

-1,764Base   $27,169

-

--100 basis points

26.9%

7,298-200 basis points

33.3%

9,061-300 basis points

41.2%

11,205





Management of the Interest Sensitivity Gap





The interest sensitivity gap is the difference between interest-sensitive assets and interest-sensitive liabilities maturing or repricing within a specific time interval. The gap can be managed by repricing assets or liabilities, selling investment securities, replacing an earning asset or funding liability prior to maturity, or by adjusting the interest rate during the life of an asset or liability. Matching the amounts of assets and liabilities repricing in the same time interval helps to hedge the risk and minimize the impact on net income due to changes in market interest rates. We evaluate interest rate risk and then formulate guidelines regarding asset generation and pricing, funding sources and pricing, and off-balance sheet commitments in order to modify sensitivity risk. These guidelines are based upon management’s outlook regarding future interest rate movements, the state of the regional and national economy, and other financial and business risk factors.





Our asset-liability management committee reviews deposit pricing, changes in borrowed money, investment and trading activity, loan sale activities, liquidity levels and the Company’s overall interest sensitivity. The minutes of the committee are reported to the board of directors regularly. The periodic monitoring of interest rate risk, investment and trading activity, deposit pricing, funding and liquidity, along with any other significant transactions are managed by the Chief Financial Officer of the Bank with input from other committee members.





The following table summarizes the Company’s dynamic gap model. The dynamic gap model attempts to forecast the cumulative difference between the maturity and repricing characteristics of interest sensitive assets and interest sensitive liabilities measured at various time intervals as well as under various interest rate scenarios








Cumulative Dynamic Gap as a Percentage of AssetsChange in Yield Curve
Time Horizon

0 – 30 Days
Time Horizon

0 – 180 Days
Time Horizon       0 – 365 Days+300 basis points
22.5%
13.2%
5.6%+200 basis points
22.6%
13.5%
6.1%+100 basis points
22.6%
15.9%
8.9%Base
23.1%
17.4%
10.8%-100 basis points
24.2%
19.6%
13.7%-200 basis points
24.2%
20.9%
15.5%-300 basis points
24.2%
21.0%
15.5%





34


The table below lists the Company’s performance for the years ended December 31, 2009 and 2008 on a quarterly basis.





Summary of Financial Results by Quarter2009Dec. 31


Sept. 30


June 30


March 31(Dollars in Thousands)Interest income

$
5,687


$
6,718


$
6,558


$
6,466Interest expense


2,841



3,000



3,184



3,447Net interest income


2,846



3,718



3,374



3,019Provision for loan losses


7,619



968



550



375Non-interest income


183



655



1,394



948Non-interest expense


7,144



5,277



4,331



3,233(Loss) income before applicable income taxes


(11,734
)


(1,872
)


(112
)


359Applicable income taxes (benefit)


(3,453
)


(821
)


(17
)


98Net (Loss) Income

$
(8,281
)

$
(1,051
)

$
(95
)

$
261(Loss) Earnings per share, basic

$
(3.25
)

$
(0.46
)

$
(0.10
)

$
0.06(Loss) Earnings per share, diluted

$
(3.25
)

$
(0.46
)

$
(0.10
)

$
0.06





2008Dec. 31


Sept. 30


June 30


March 31(Dollars in Thousands)Interest income

$
6,837


$
7,306


$
7,588


$
7,784Interest expense


3,627



3,742



3,833



4,030Net interest income


3,210



3,564



3,755



3,754Provision for loan losses


370



300



300



280Non-interest income


852



890



863



932Non-interest expense


4,254



21,244



3,158



3,287(Loss) income before applicable income taxes


(562
)


(17,090
)


1,160



1,119Applicable income taxes (benefit)


(6,026
)


(196
)


251



224Net (Loss) Income

$
5,464


$
(16,894
)

$
909


$
895(Loss) Earnings per share, basic

$
2.11


$
(6.56
)

$
0.35


$
0.35(Loss) Earnings per share, diluted

$
2.11


$
(6.56
)

$
0.35


$
0.34








ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA





The following consolidated financial statements and independent auditors’ reports thereon are filed as a part of this report following Item 15:





Report of Independent Registered Public Accounting FirmConsolidated Balance Sheets as of December 31, 2009 and 2008Consolidated Statements of Operations for the Years Ended December 31, 2009, 2008 and 2007Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2009, 2008 and 2007Consolidated Statements of Cash Flows for the Years Ended Dec ember 31, 2009, 2008 and 2007Notes to Consolidated Financial Statements





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





None.





35





ITEM 9A.
CONTROLS AND PROCEDURES





Evaluation of Controls and Procedures
 
 We carried out an evaluation, as required by Exchange Act Rule 13a-15(b), under the supervision of and the participation with our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this annual report, which included consideration of the filing of our Form 10-K on April 15, 2010. Our evaluation concluded that a portion of loans that were classified by our primary regulator in the preliminary report of their examination received in January 2010 were impaired in accordance with ASC Topic 310 Receivables.  We properly made the necessary adjustments to our allowance for loan loss and our provision expense.  Our consolidated balance sheets, consolidated statements of income, consolidated statements of stockholders’ equity and consolidated statements of cash flow are stated correctly as of December 31, 2009.  However, we concluded that we made an error in Footnote 3 –Loans and allowance for loan losses and Footnote 20 – Fair Value involving the disclosure of impaired loans.  We inadvertently did not update the December 31, 2009 amounts for the subsequently identified impaired loans.  Management has concluded that the controls in place relating to the footnote disclosure were not properly designed to provide reasonable assurance that these impaired loans would be properly disclosed in the footnotes to the financial statements, and that this is a material weakness in internal control over financial reporting. Solely as a result of this material weakness, management, including the Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures were not effective as of December 31, 2009.
 
 We have subsequently reviewed and evaluated our internal control procedures and the design of those control procedures relating to the disclosure of impaired loans and have made changes to the processes for gathering information for footnote disclosure.  Our remediation changes include additional review procedures over the determination of impaired loans.  In addition, we have changed the workflow of the procedures between our lending department and accounting department to properly identify and disclose impaired loans.  We have implemented these changes.
 
 Management’s Report on Internal Control over Financial Reporting
 
 Our management is responsible for establishing and maintaining adequate internal control over financial reporting.  Internal control over financial reporting is a process designed by, or under the supervision of, the chief executive officer and chief financial officer and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
 
 Our evaluation of internal control over financial reporting includes using the COSO framework, an integrated framework for the evaluation of internal controls issued by the Committee of Sponsoring Organizations of the Treadway Commission, to identify the risks and control objectives related to the evaluation of our control environment.
 
 As of December 31, 2009, the Company did not maintain effective controls over footnote disclosure of impaired loans. This resulted in the correction of an error in our footnote disclosure to our Form 10-K filed April 15, 2010. Accordingly, management has concluded that the ineffective control over the disclosure of impaired loans constitutes a material weakness as of December 31, 2009.
 
 This annual report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation requirements by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
 
 Based on this assessment, management has concluded that the Company’s internal control over financial reporting was not effective as of December 31, 2009 because of the effect of the material weakness described above.
 
 Changes in Internal Control over Financial Reporting
 
 There were no changes in the Company’s internal control over financial reporting during the fourth quarter of the year ended December 31, 2009, that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.  However, as described above, subsequent to the original filing, management identified a material weakness as of December 31, 2009 and implemented remedial measures to the Company’s processes for gathering information for footnote disclosure.




ITEM 9B.
OTHER INFORMATION





None.







36








PART III
 
 ITEM 10.           Directors, Executive Officers and Corporate Governance.
 
 
 The Board of Directors
 
 Our Articles of Incorporation and Bylaws provide that the Board shall fix the number of directors of the Company and that such directors shall be divided into three classes as nearly equal in number as possible. Currently, the number of directors is fixed at nine.
 
 The members of each class are to be elected for a term of three years and until their successors are elected and qualified.  One class of directors is to be elected annually. The following table sets forth the names of the current directors, the class to which they belong and the years in which their terms of office will expire:
 
 
 Class C

2010
Class B

2011
Class A

2012Kemper W. Baker
Ralph Larry Lyons
Elwood C. MayJohn B. Larus
Roseleen P. Rick
Clarke C. JonesJames T. Napier
William C. Sprouse, Jr.
Phoebe P. Zarnegar
 
 Certain information, including age and principal occupation, regarding each director is set forth below.  The year shown for initial election as a director represents the year in which the nominee or continuing director was first elected to the Board or previously to the Board of Directors of Central Virginia Bank, our wholly-owned subsidiary (the “Bank”).  Unless otherwise indicated, the business experience and principal occupations shown for each nominee or continuing director has extended five or more years.In addition, the following information presents the particular experience, qualifications, attributes or skills that led the board to conclude that the person should serve as a director for the Bank.
 
 Kemper W. Baker, 65, was appointed as a director in June 2006.
 Mr. Baker, an economist, currently teaches economics and finance classes at Virginia Commonwealth University and Longwood University; he formerly served as Vice President of the Federal Reserve Bank of Richmond until his retirement in June 2004. Mr. Baker, at the time of his retirement, oversaw government, media, bank, community and public relations throughout the Fifth Federal Reserve District as Special Assistant to the President of the Federal Reserve Bank of Richmond. Mr. Baker’s banking and regulatory experience with the Federal Reserve Bank of Richmond, as well as his knowledge of economics makes him well qualified to serve as a director of the Company.
 
 Clarke C. Jones, 61, was appointed as a director in May 2008.
 Mr. Jones, a retired executive, is currently freelance professional writer. Mr. Jones was President, until 2007, of Scaffolding Solutions, LLC of Richmond Virginia. Prior to then, he had a thirty-one year career with Saunders Oil Company in Richmond Virginia culminating in 2001 as its Executive Vice President. Mr. Jones’ background as an executive of an Oil company and his management experience and leadership abilities provide him the qualifications to serve as a director of the Company.
 
 
 37
 
 John B. Larus, 81, has been a director since 1973.
 Mr. Larus serves as Chairman Emeritus of the Board and the Board of Directors of the Bank. He is the retired managing partner of Stony Point Estates, a land development company. Mr. Larus’ experience as one of the original organizing directors coupled with his extensive tenure as a director of the Company make him well suited to continue as a member of the board of directors.
 
 Ralph Larry Lyons, 61, has been a director since 1983.
 Mr. Lyons is President and Chief Executive Officer of the Company and the Bank and Vice Chairman of the Board. Mr. Lyons’ long service as President and CEO of the bank make him qualified to serve as a director of the Company.
 
 Elwood C. May, 69, has been a director since 1973.
 Mr. May serves as Secretary of the Board of Directors of the Company. He is the retired owner/operator of Flatrock Hardware, Inc., a hardware retailer located in Powhatan, Virginia. Mr. May’s experience as one of the original organizing directors, his experience as a small business owner, and his service as a community leader provide the qualifications to serve as an effective director of the Company.
 
 James T. Napier, 57, has been a director since 1997.
 Mr. Napier serves as the Chairman of the Board. He is President of Napier, Realtors ERA which has its main office in Chesterfield County and has branch offices serving Powhatan, Hanover and Henrico Counties and the City of Richmond.  Mr. Napier has been President of the firm since 1991 and has been involved in the real estate business since 1976. Mr. Napier’s experience in real estate sales, his knowledge of real estate in general and his experience as the President of a real estate company provide him the leadership skills and attributes desired to serve as a director of the Company.
 
 Roseleen P. Rick, 68, has been a director since May 2005.
 Ms. Rick is an attorney and retired partner at Troutman Sanders, LLP, a law firm in Richmond, Virginia, where she served as the leader of the Multifamily Housing Practice Group. Ms. Rick, with her experience as a practicing attorney dealing with multi-family housing transactions and real estate generally, make her uniquely qualified to serve as a director of the Company.
 
 William C. Sprouse, Jr., 56, has been a director since May 2005.
 Mr. Sprouse is President of E. B. Sprouse Co. and Cumberland Building Supply, Inc., one of the largest private businesses in Cumberland County, Virginia. Mr. Sprouse is an experienced President and CEO of a small business and who is well known as a leader in his community, and therefore well qualified to serve as a director of the Company.
 
 Phoebe P. Zarnegar, 63, has been a director since May 2005.
 Ms. Zarnegar is a CPA and the principal of the firm Farrell & Zarnegar, Certified Public Accountants. Mrs. Zarnegar, as an active CPA, has an extensive background in accounting and tax. This experience makes her very well qualified to serve as a director of the Company.
 
  38
  
 Executive Officers Who Are Not Directors
 
 Charles F. Catlett, III, 61, is Senior Vice President and Chief Financial Officer.  Prior to joining the Company in December 1999, he was President of Franklin Financial Associates, L.L.C. for two years. Prior to establishing Franklin Financial Associates, he was Senior Vice President and Group Manager of Wachovia Bank, the successor by merger in 1997 to Central Fidelity National Bank, where he served in several senior management capacities in the Investments, Management Accounting, Corporate Accounting and Internal Audit departments since 1973. Mr. Catlett has over 36 years of banking experience.
 
 Leslie S. Cundiff, 61, is Senior Vice President and Senior Credit Officer. Prior to joining us in March 2004, she was Senior Vice President and Statewide Site Manager for the Business Lending Group of Wachovia Bank, the successor by merger in 2001 to First Union.  Mrs. Cundiff has over 23 years experience in the commercial lending areas of portfolio risk management, credit underwriting, loan approval, client marketing, and relationship management.
 
 Section 16(a) Beneficial Ownership Reporting Compliance
 
 Section 16(a) of the Securities Exchange Act of 1934, as amended, requires our directors and executive officers, and any persons who own more than 10% of the outstanding shares of Common Stock, to file with the Securities and Exchange Commission (“SEC”) reports of ownership and changes in ownership of Common Stock.  Directors and executive officers are required by SEC regulations to furnish us with copies of all Section 16(a) reports that they file.  Based solely on review of the copies of such reports furnished to us or written representation that no other reports were required, we believe that, during the 2009 year, all directors, executive officers and beneficial owners of more than 10% of the Common Stock have filed with the SEC on a timely basis all reports required to be filed under Section 16(a), except Phoebe P. Zarnegar inadvertently filed a late report on Form 4 covering the acquisition of Common Stock in February 2009 and Clarke C. Jones inadvertently filed a late report on Form 4 covering the disposal of Common Stock in December 2009.
 
 Code of Business Conduct and Ethics
 The Executive Committee of the Board has approved a Code of Business Conduct and Ethics for directors, officers and all employees of the Company and its subsidiaries.  The Code addresses such topics as compliance with applicable laws and regulations, accuracy and preservation of records, accounting and financial reporting and conflicts of interest.  A copy of the Code is posted on our website atwww.centralvabank.com.  Printed copies of the Code are available to any shareholder upon written request to the Secretary, P.O. Box 39, Powhatan, Virginia 23139-0039.
 
 Audit Committee
 
 The Board has a standing Audit Committee.  The Audit Committee is chaired by Ms. Zarnegar and includes Messrs.May, Sprouse, andNapier. The Board has not currently designated an “audit committee financial expert.” However, the current members of the Audit Committee have the ability to understand financial statements and generally accepted accounting principles, the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves, an understanding of internal controls and procedures for financial reporting and an understanding of audit committee functions. The Board, therefore, believes that the members of the Audit Committee have the skills and experience needed to ensure that the Committee properly fulfills its duties and responsibilities.
  39
  ITEM 11.           Executive Compensation.
 
 Annual Compensation of Executive Officers
 
 In the tables and discussion below, we summarize the compensation earned during 2009 by (1) our chief executive officer and (2) our two most highly compensated executive officers other than our chief executive officer, collectively referred to as the “named executive officers.”
 
 Summary Compensation Table
 
 Name and

Principal Position
Year
Salary(1)

($)
Bonus(2)

($)
All Other Compensation(3)

($)
Total

($)Ralph Larry Lyons
2009
224,744
0
35,888
260,632President & Chief
2008
224,744
0
53,381
278,125Executive OfficerCharles F. Catlett, III
2009
143,000
0
9,284
152,284Senior Vice President &
2008
143,000
0
18,469
161,469Chief Financial OfficerLeslie S. Cundiff
2009
137,800
0
9,988
147,788Senior Vice President &
2008
137,800
4,000
12,046
153,846Senior Credit Officer
 
 (1)
Salary is the base regular pay.
 (2)
Reflects the bonus in the year earned, and paid.
 (3)
Represents all other types of cash, non-cash, or imputed income not includable in the other columns above for the years 2009 and 2008 respectively for:
 
 Mr. Lyons: directors fees of $17,500 and $18,125; value of a Company provided automobile $4,100 and $4,100; taxable fringe benefits associated with group insurance and split dollar insurance arrangements of $5,048 and $12,549; our match of $8,990 and $8,960 on contributions to the 401K plan; profit sharing contribution of $0 and $7,866 by us based on 0% and 3.5% of eligible wages; and supplemental pay for ATM response, weekend work and other after-hour availability of $250 and $1,781.
 
 Mr. Catlett: taxable fringe benefits associated with group insurance and split dollar insurance arrangements of $2,314 and $2,338; our match of $5,720 and $5,720 on contributions to the 401K plan; profit sharing contribution of $0 and $5,005 by us based on 0% and 3.5% of eligible wages; and supplemental pay for ATM response, weekend work and other after-hour availability of $1,250 and $5,406.
 
 Ms Cundiff: taxable fringe benefits associated with group insurance and split dollar insurance arrangements of $4,900 and $4,392; our match of $5,088 and $4,082 on contributions to the 401K plan; profit sharing contribution of $0 and $4,823 by us based on 0% and 3.5% of eligible wages.
 
 Our executive compensation program consists of base salaries and annual cash incentive payments in the form of annual bonuses.  In 2006, our shareholders approved the 2006 Stock Incentive Plan, which permits the grant of stock options, stock appreciation rights, stock awards, performance stock awards, incentive awards and stock units.  No grants were made under the 2006 Stock Incentive Plan in 2009 or 2008.
  40
 Employment Agreement
 
 On February 17, 2009, we entered into an Employment Agreement with Mr. Lyons.  The term of the Agreement will continue until February 17, 2012, unless it is terminated earlier in accordance with its provisions. Beginning on February 17, 2012 and each February 17 thereafter, the term of the Agreement will automatically extend for successive one-year terms, unless 90 days notice of non-renewal is provided or employment otherwise terminates under the Agreement. The Agreement provides for an initial base salary of $224,744 per year. Mr. Lyons also is eligible to participate in any of the Company’s long-term or short-term incentive plans, pursuant to the annual bonus metrics set by the Company’s Compensation Committee and employee benefit plans and programs for which he is or will be eligible.
 The Agreement provides for the termination of Mr. Lyons’s employment by the Company without “cause” and termination by him for “good reason” (as those terms are defined in the Agreement). Termination under either of these circumstances will entitle Mr. Lyons to receive the following: his salary earned through the date of termination to the extent not theretofore paid; continuation of his salary for a period of eighteen months from the date of termination; his then current benefits under group health and dental plans for eighteen months from the date of termination; and any earned long-term or short-term incentive payments to the extent not theretofore paid.
 
 Mr. Lyons will not be entitled to any such compensation or benefits if he breaches any of the covenants in the Agreement relating to the protection of confidential information, non-disclosure, non-competition and non-solicitation. The non-competition and non-solicitation covenants continue generally for a period of eighteen months following the last day of Mr. Lyons’s employment. He will also not be entitled to any compensation or other benefits under the Agreement, other than unpaid salary, if his employment is terminated for cause or for other than good reason.
 
 If Mr. Lyons is terminated without cause or resigns for good reason within three years following a “change of control” (as defined in the Agreement), he will be entitled to the following: annual salary at the rate in effect immediately prior to termination; any earned and unpaid incentive or bonus compensation; the product of his annual bonus for the most recently completed year and a fraction, the numerator of which is the number of days in the current year through the date of termination, and the denominator of which is 365; any benefits or awards which pursuant to any plans, policies or programs have been earned or become payable, but which have not yet been paid; an amount equal to 2.0 times the sum of Mr. Lyons’s salary at the rate in effect immediately prior to termination and his average bonus for the two most recently completed years; and his then current benefits under group health and dental plans for eighteen months from the date of termination.
 
 The severance and change in control payments disclosed above are limited by the statutes and regulations that apply to the Company as a consequence of the Company’s participation in TARP. These limitations will only apply so long as the Treasury’s investment in our preferred stock remains outstanding. For further discussion, see “TARP Executive Compensation Standards.”
 
 Change of Control Agreements
 
 On April 21, 2009, we entered into Change of Control Agreements with Charles F. Catlett, III and Leslie S. Cundiff.  The agreements provide that within three years following a “change of control” (as defined in the agreements), the employee’s position, authority, duties and responsibilities will be at least commensurate with those held prior to the change of control and will be performed at the location where the employee was employed immediately preceding the control of control or the Company’s headquarters if within 35 miles of such location. The agreements also provide that, within three years following a change of control, the employee’s annual base salary will be at least equal to his or her salary prior to the change of control, and the employee will have the opportunity to earn annual and other incentives generally applicable to peer employees of the Company, but in no event less favorable than such opportunity prior to the change of control.
 
 41
 If the employee is terminated without cause or resigns for good reason within three years following a “change of control,” he or she will be entitled to the following:
 
 ●
annual salary at the rate in effect immediately prior to termination;
 ●
any earned and unpaid incentive or bonus compensation;
 ●
the product of his annual bonus for the most recently completed year and a fraction, the numerator of which is the number of days in the current year through the date of termination, and the denominator of which is 365;
 ●
any benefits or awards which pursuant to any plans, policies or programs have been earned or become payable, but which have not yet been paid;
 ●
an amount equal to 2.0 times the sum of the Employee’s salary at the rate in effect immediately prior to termination and his average bonus for the two most recently completed years; and
 ●
continuation of their then current benefits under group health and dental plans for thirty six months from the date of termination.
 
 The change of control payments disclosed above are limited by the statutes and regulations that apply to the Company as a consequence of the Company’s participation in TARP. These limitations will only apply so long as the Treasury’s investment in our preferred stock remains outstanding. For further discussion, see “TARP Executive Compensation Standards.”
 
 Outstanding Equity Awards at Fiscal Year-End 2009
 
 In the table below, we list information on the holdingsof unexercised stock options as of December 31, 2009 for each of the named executive officers.
 
 Option AwardsName(1)
Number of Securities

Underlying Unexercised

Options

Exercisable  (#)
Option

Exercise

Price ($)
Option Expiration

DateRalph Larry Lyons
1,276
11.53
7/16/2012868
15.21
4/29/2013579
15.21
4/29/20131,103
24.81
7/1/2014Charles F. Catlett, III
1,216
7.52
1/11/2010730
11.53
7/16/2012522
15.21
4/29/2013348
15.21
4/29/2013827
24.81
7/1/2014
 ___________
 (1) Ms. Cundiff had no outstanding equity awards at fiscal year-end 2009.
  42
  
 Defined Contribution and Supplemental Retirement Plans
 
 We provide additional compensation to our executive officers through various plans which are also available to all or some of our employees.  The Compensation Committee oversees these plans, which are described below.
 
 Defined Contribution Plans.  We have a qualified Defined Contribution Plan that provides benefits to all employees meeting the criteria of the ERISA laws, which is the majority of our employees.  The Plan has two major components: profit sharing and 401(K). The employee participants are 100% vested upon entrance into the Plan.
 
 ●
Profit Sharing - Under the profit sharing segment, which is determined based on annual profits, all eligible employees receive a percentage of their base compensation. This amount is directly deposited to the employees’ individual retirement account.  For 2009, the Board of Directors did not award a contribution to the profit sharing segment and thus, no contributions were made to the segment.
 
 ●
401(k) Plan - We have a 401(K) Plan where we will match 100% of the first 3% and 50% of the next 2% of every participant’s pre-tax contributions. Over 86% of our employees contribute to the 401(k) Plan. The Company’s matching contribution was $160,194 in 2009 for all participating employees.
 
 Supplemental Executive Retirement Agreement.  We have a non-qualified Supplemental Executive Retirement Agreement with each of the named executive officers as well as five other senior officers. Participation is only through selection by and approval of the Board. There are no contributions by the participants. The participants vest in their accrued benefit over an eight year period unless there is a change in control, at which time all participants, if not already 100% vested, become 100% vested in the amount then accrued by us. The agreements provide for an annual benefit upon retirement at age 65, equal to 25% of the participant’s final compensation, to be paid over a fifteen year period. Early retirement is permitted at age 60 or 62 with a reduction in the amount paid based on the number of years preceding age 65 the participant retires.
 
 Potential Payments Upon Termination or Change of Control
 
 We have no agreements, plans or arrangements, except as set forth in “Employment Agreements,” “Change of Control Agreements” and “Defined Contribution and Supplemental Retirement Plans”above, that provide for payments to a named executive officer at, following, or in connection with the termination of that named executive officer or a change of control of the Company or the Bank.
 
 TARP Executive Compensation Standards
 
 In January 2009, the Company elected to participate in the United States Department of the Treasury’s Capital Purchase Program, commonly known as “TARP”.  The Company issued 11,385 shares of preferred stock and a warrant to purchase 263,542 shares of our common stock at a price of $6.48 per share to the Treasury in return for $11,385,000.
 
 As a result of participating in the program, the Companyis subject to certain executive compensation and corporate governance requirements under section 111 of the Emergency Economic Stabilization Act of 2008, as implemented by Treasury regulations. Those requirements apply to certain of our executive officers and employees, including Ralph Larry Lyons, Charles F. Catlett, III and Leslie S. Cundiff (the “SEOs”).  Those requirements include:
 
 43
 ·
Prohibiting the payment of any severance payments to our SEOs and next five most highly compensated employees;
 ·
Prohibiting the payment or accrual of any bonus payment to Mr. Lyons, our most highly compensated employee, except for (i) an award of long-term restricted stock with a value not exceeding one-third of his annual compensation and (ii) a payment contractually required to be paid and to which he had a legally binding right as of February 11, 2009;
 ·
Subjecting our SEOs and our next twenty most highly compensated officers to recovery of any bonus or incentive compensation paid to them where the payment was later found to have been based on statements of earnings, gains, or other criteria which prove to be materially inaccurate; and
 ·
Limiting the Company’s tax deduction for compensation paid to any SEO of $500,000 annually.
 
 In addition, the regulations generally require the Compensation Committee to meet at least every six months with the Company’s senior risk officers to evaluate compensation plans to ensure that these plans do not encourage unnecessary and excessive risk taking that threaten the value of the Company, to consider ways to limit those risks, and to evaluate these plans to ensure that they do not encourage the manipulation of reported earnings.
 
 Subject to consultation with the appropriate federal banking agency, we are permitted to repay any assistance previously provided to us under TARP at any time.  If we choose to repay our TARP assistance, we would no longer be subject to these executive compensation restrictions.
 
 Director Compensation in 2009
 
 As compensation for his or her service to us, each member of the Board receives a monthly retainer fee of $1,250. Fees for attendance at various committee meetings are $1,050 for the Audit Committee and $350 for the Nominating & Corporate Governance Committee and the Compensation Committee.
 
 The following table shows the compensation earned by each of the non-employee directors during 2009.
 
 Name
Fees Earned or

Paid in Cash

($)
Total

($)James T. Napier
22,750
22,750John B. Larus
16,250
16,250Kemper W. Baker, Jr.
19,250
19,250Clarke C. Jones
16,250
16,250Elwood C. May
22,750
22,750Roseleen P. Rick
18,550
18,550W.C. Sprouse, Jr.
22,750
22,750Phoebe P. Zarnegar
22,750
22,750
 
 
 
  44
  ITEM 12.           Security Ownership of Certain Beneficial Owners and Management and Related
 Stockholder Matters.
 
 Equity Compensation Plan Information
 
 The following table sets forth information as of December 31, 2009, with respect to compensation plans under which shares of our Common Stock are authorized for issuance.
 
 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 Shareholders1998  Stock Incentive Plan
21,789
$17.23
--2006 Stock Incentive Plan
--
--
185,389Equity Compensation Plans Not

Approved by Shareholders(2)
--
--
--
 ___________________________
 (1)
Amounts exclude any securities to be issued upon exercise of outstanding options, warrants and rights.
 (2)
All of our equity compensation plans have been approved by our shareholders.
 
 Security Ownership of Management
 
 The following table sets forth information as of April 25, 2010, regarding the beneficial ownership of Common Stock by all directors and nominees, each of the named executive officers and by all directors and executive officers as a group.  For the purposes of this table, beneficial ownership has been determined in accordance with the provisions of Rule 13d-3 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), under which, in general, a person is deemed to be a beneficial owner of a security if he has or shares the power to vote or direct the voting of the security or the power to dispose or direct the disposition of the security or if he has the right to acquire beneficial ownership of the security within 60 days.
 
 Name
Amount and Nature of

Beneficial Ownership(1)
Percent of

Class(2)Kemper W. Baker  (6)
933
*Charles F. Catlett, III
12,061
*Leslie S. Cundiff
1,195
*Clarke C. Jones
6,291
*John B. Larus (3)
52,272
2.00%Ralph Larry Lyons (4)
45,894
1.75%Elwood C. May (5)
19,979
*James T. Napier
2,550
*Roseleen P. Rick
1,388
*William C. Sprouse, Jr.
2,276
*Phoebe P. Zarnegar
2,094
*All present executive officers and

directors as a group (11 persons)
146,933
5.59%
 
 *Less than one percent (1%)
 ____________________
 
 (1)Amounts include the following shares of Common Stock issuable upon the exercise of stock options exercisable within 60 days of April 25, 2010:  Mr. Catlett —2,427; Mr. Lyons —3,826.
 (2)Based on 2,620,437 shares of Common Stock issued and outstanding on April 25, 2010.
 (3)Includes 14,585 shares owned by Mr. Larus’ wife.
 (4)Includes 7,150 shares owned by Mr. Lyons and his wife as joint tenants, and 5,500 shares owned by his wife. Includes 5,629 shares owned by Mr. May and his wife as joint tenants.
 (6) Includes 548 shares owned by Mr. Baker's wife.
 
 45


Security Ownership of Certain Beneficial Owners
 
 Management of the Company is not aware of any person or group, as that term is used in Section 13(d)(3) of the Exchange Act, known by us to be the beneficial owner of more than 5% of our outstanding common stock as of April 25, 2010.
 
 
 ITEM 13.           Certain Relationships and Related Transactions, and Director Independence.
 
 Certain Relationships and Related Transactions
 
 The Board has a procedure for review and approval of transactions involving us and “related persons” (directors, director nominees, executive officers, shareholders owning five percent or more of our outstanding common stock or the immediate family members of any of these persons).  The procedure covers any related person transaction that meets the minimum threshold for disclosure in the proxy statement under the relevant Securities and Exchange Commission’s rules (generally, transactions involving amounts exceeding $120,000 in which a related person has a direct or indirect material interest).  The procedure generally requires that related person transactions be approved by the Board or by a committee of the Board consisting solely of independent directors, who will approve the transaction only if they determine that it is in our best interest. In considering the transaction, the Board or committee will consider all relevant factors, including as applicable, our business rationale for entering into the transaction and the fairness of the transaction to us.  In instances where the transaction is subject to renewal or if we have the right to terminate the relationship, the Board or relevant committee will periodically monitor the transaction to ensure that there are no changed circumstances that would render it advisable for us to amend or terminate the transaction.
 
 Some of our directors and officers, and some of the corporations and firms with which these individuals are associated, are customers of the Bank in the ordinary course of business and may be indebted to the Bank with respect to loans.  It is also anticipated that some of the persons, corporations and firms will continue to be customers of, and indebted to, the Bank on a similar basis in the future.  All loans extended to such persons, corporations and firms were made in the ordinary course of business, did not involve more than normal collection risk or present other unfavorable features, and were made on substantially the same terms, including interest rates and collateral as those prevailing at the same time for comparable Bank transactions with unaffiliated persons.  No such loan at December 31, 2009 was non-accruing, past due or restructured.  At December 31, 2009, the aggregate amount of loans outstanding to all directors and officers of the Bank and members of their immediate families, and corporations and firms with which these individuals are associated, was approximately $4,609,418.
 
 During fiscal year 2009, we did not have any other transactions with related persons within the meaning of Item 404(a) of Regulation S-K.
 
 Independence of the Directors
 
 The Board has determined that the following eight individuals of its nine current members are independent as defined by the listing standards of The Nasdaq Stock Market, Inc.: Messrs. Baker, Jones, Larus, May, Napier, and Sprouse and Mmes. Rick and Zarnegar. In reaching this conclusion, the Board considered that the Company and the Bank conduct business with companies of which certain members of the Board or members of their immediate families are or were directors or officers.  See “Certain Relationships and Related Transactions.”
 
  46
  ITEM 14.           Principal Accounting Fees and Services.
 
 Yount, Hyde & Barbour, P.C. audited our consolidated financial statements for the fiscal years ended December 31, 2009 and 2008.  The following information is furnished with respect to fees billed for professional services rendered to us by Yount, Hyde & Barbour, P.C. for the fiscal years ended December 31, 2008 and 2007.
 
 Fees of Independent Public Accountants
 
 Audit Fees
 
 The aggregate fees for professional services rendered for the audit of our annual financial statements for the fiscal years ended December 31, 2009 and 2008, billed by Yount, Hyde & Barbour, P.C., and for their review of the financial statements included in our Quarterly Reports on Form 10-Q, and services that are normally provided in connection with statutory and regulatory filings and engagements, for those fiscal years were $133,900 for 2009 and $79,285 for 2008.
 
 Audit Related Fees
 
 The aggregate fees billed for professional services for assurance and related services that are reasonably related to the performance of the audit or review of our financial statements and not reported under the heading “Audit Fees” above by Yount, Hyde & Barbour, P.C. for the fiscal years ended December 31, 2009 and 2008 were $27,564 and $17,500, respectively.  During 2009 and 2008, such services included the audit of the Bank’s defined contribution plan, as well as the automated clearing house functions (EastPay) of the Bank, research and consultation concerning financial accounting and reporting standards, and consultation related to other than temporary impairment securities.
 
 Tax Fees
 
 There were no tax fees billed to us by Yount, Hyde & Barbour, P.C. for the fiscal years ended December 31, 2009 or 2008.
 
 All Other Fees
 
 There were no other fees billed to us by Yount, Hyde & Barbour, P.C. for the fiscal years ended December 31, 2009 or 2008.
 
 Pre-Approved Services
 
 All audit related services, tax services and other services, as described above, were pre-approved by the Audit Committee, which concluded that the provision of such services by Yount, Hyde & Barbour, P.C. was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions.





PART IV





ITEM 15.
EXHIBITS AND FINANCIAL STATEMENT SCHEDULES





(a)(1)
The response to this portion of Item 15 is included in Item 8 above.





(a)(2)
The response to this portion of Item 15 is included in Item 8 above.





(a)(3)
Exhibits





The following documents are filed herewith or incorporated herein by reference as Exhibits:


Item No.
Description3.1
Amended and Restated Articles of Incorporation, as amended January 27, 2009 (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).3.2
Articles of Amendment to the Amended and Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 4, 2009).3.3
Bylaws as Amended and Restated (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on December 21, 2004.1
Specimen of Registrant’s Common Stock Certificate (incorporated herein by reference to Exhibit 1 to the Registrant’s Form 8-A filed with the SEC on May 2, 1994).   47
  4.2
Specimen of Registrant’s Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 4, 2009).4.3
Warrant to Purchase Shares of Common Stock, dated January 30, 2009 (incorporated herein by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 4, 2009).10.1
Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005).10.2
Letter Agreement, dated as of January 30, 2009, by and between Central Virginia Bankshares, Inc. and the United States Department of the Treasury (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 4, 2009).10.3
Form of Waiver agreement between the Senior Executive Officers and Central Virginia Bankshares, Inc. (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 4, 2009).10.4
Form of Consent agreement between the Senior Executive Officers and Central Virginia Bankshares, Inc. (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 4, 2009).10.5
Employment Agreement, dated as of February 17, 2009, by and between Central Virginia Bankshares, Inc. and Ralph Larry Lyons (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on March 31, 2009).10.6
Change of Control Agreement dated as of April 21, 2009, by and between Central Virginia Bankshares, Inc. and Charles F. Catlett, III (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 24, 2009).10.7
Change of Control Agreement dated as of April 21, 2009, by and between Central Virginia Bankshares, Inc. and Leslie S. Cundiff (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 24, 2009).21.1
Subsidiaries of the Registrant (incorporated herein by reference to Exhibit 21.1 to the Registrant’s Form 10-K filed with the SEC on April 15, 2010).23.1
Consent of Yount, Hyde & Barbour, P.C. (filed herewith).31.1
Rule 13a-14(a) Certification of Chief Executive Officer (filed herewith).31.2
Rule 13a-14(a) Certification of Chief Financial Officer (filed herewith).32.1
Statement of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (filed herewith).99.1
TARP Certification of Chief Executive Officer (incorporated herein by reference to Exhibit 99.1 to the Registrant’s Form 10-K filed with the SEC on April 15, 2010).99.2
TARP Certification of Chief Financial Officer (incorporated herein by reference to Exhibit 99.2 to the Registrant’s Form 10-K filed with the SEC on April 15, 2010).


(b)
See Item 15(a)(3) above.





(c)
See Item 15(a)(2) above.





























48


CENTRAL VIRGINIA BANKSHARES, INC.





CONSOLIDATED FINANCIAL REPORT





DECEMBER 31, 2009















































































































































49
















REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM








To the Board of Directors and Shareholders
 Central Virginia Bankshares, Inc.
 Powhatan, Virginia
 
 We have audited the accompanying consolidated balance sheets of Central Virginia Bankshares, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in stockholders’ equity and cash flows for the years ended December 31, 2009, 2008 and 2007.  These financial statements are the responsibility of the Company's management.  Our responsibility is to express an opinion on these financial statements based on our audits.
 
 We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.
 
 In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Central Virginia Bankshares, Inc. and subsidiaries as of December 31, 2009 and 2008, and the results of their operations and their cash flows for the years ended December 31, 2009, 2008 and 2007, in conformity with U.S. generally accepted accounting principles.
 
 As discussed in Note 22 to the consolidated financial statements, impaired loans, disclosed in Note 3 and Note 20, have been revised to include the results of management’s loan by loan impairment analysis subsequent to December 31, 2009.  Amounts previously reported have accordingly been restated.
 
 We were not engaged to examine management's assessment of the effectiveness of Central Virginia Bankshares, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2009, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.





Winchester, Virginia
 April 15, 2010, except for Note 22 to
 which the date is May 17, 2010








50





CENTRAL VIRGINIA BANKSHARES, INCConsolidated Balance SheetsDecember 31,

2009


2008ASSETSCash and due from banks

$
8,010,014


$
6,565,019Federal funds sold


4,493,000



-Total cash and cash equivalents


12,503,014



6,565,019Securities available for sale, at fair value


122,965,676



140,854,918Securities held to maturity, at amortized cost

(fair value 2009 - $4,525,551; 2008 - $5,114,177)


4,440,959



5,086,919Total securities


127,406,635



145,941,837Mortgage loans held for sale


1,792,114



743,950SBA loans held for sale


351,238



358,181Total loans held for sale


2,143,352



1,102,131Loans:Commercial


67,779,853



59,327,260Real Estate: Mortgage


126,867,601



124,053,357Home equity


21,308,525



18,828,294Construction


67,962,316



81,761,966Bank cards


1,017,540



951,063Installment


7,391,710



8,512,028Less unearned income


(23,753
)


(28,232
)Loans, net of unearned income


292,303,792



293,405,736Allowance for loan losses


(10,813,608
)


(3,796,458
)Loans, net


281,490,184



289,609,278Bank premises and equipment, net


9,230,391



9,856,774Accrued interest receivable


2,415,210



2,808,345Deferred income taxes


12,587,598



12,745,878Other real estate owned


3,574,864



1,172,972Other assets


21,872,255



16,466,042Total other assets


49,680,318



43,050,011Total Assets

$
473,223,503


$
486,268,276





See Notes to Consolidated Financial Statements.














51





CENTRAL VIRGINIA BANKSHARES, INCConsolidated Balance Sheets





December 31,

2009


2008LIABILITIES AND STOCKHOLDERS’ EQUITYLiabilitiesDeposits:Non-interest bearing demand deposits

$
37,459,826


$
33,784,800Interest bearing demand deposits, MMDA, and NOW accounts


84,464,499



62,896,702Savings deposits


33,425,259



29,739,277Certificates of deposit under $100,000


155,946,874



158,223,402Certificates of deposit $100,000 and over


74,229,813



63,318,955Total deposits


385,526,271



347,963,136Federal funds purchased and securities sold under repurchase agreements


2,706,967



43,302,142Other short-term borrowings


-



7,000,000FHLB overnight borrowings


10,000,000



14,500,000Total short-term borrowings


12,706,967



64,802,141FHLB term borrowings


40,000,000



45,000,000Capital trust preferred securities


5,155,000



5,155,000Total long-term borrowings


45,155,000



50,155,000Total borrowings


57,861,967



114,957,142Accrued interest payable


574,479



646,054Other liabilities


3,041,735



2,393,782Total liabilities


447,004,452



465,960,114Commitments and Contingencies


-



-Stockholders’ EquityPreferred stock, Series A, cummulative $1.25 par value; $1,000 liquidation value;

1,000,000 authorized shares; 11,385 and 0 shares issued

and outstanding in 2009 and 2008, respectively


11,385,000



-Common stock, $1.25 par value; 6,000,000 shares authorized,2,618,346 and 2,596,220 shares issued and outstanding in

2009 and 2008, respectively


3,272,932



3,245,275Surplus


16,893,243



16,870,988Retained earnings


261,269



10,380,523Common stock warrant


411,947



-Discount on preferred stock


(344,939
)


-Accumulated other comprehensive (loss), net


(5,660,401
)


(10,188,624
)Total stockholders’ equity


26,219,051



20,308,162Total Liabilities and Stockholders’ Equity

$
473,223,503


$
486,268,276


See Notes to Consolidated Financial Statements.




52


CENTRAL VIRGINIA BANKSHARES, INCConsolidated Statements of OperationsYears Ended December 31,

2009


2008


2007Interest income:Interest and fees on loans

$
17,909,005


$
19,483,893


$
19,505,965Interest on securities and federal funds sold:U.S. Treasury securities


5,047



-



-U.S. government agencies and corporations


4,384,935



5,301,067



5,741,243States and political subdivisions


767,880



878,779



965,663Corporate and other


2,342,402



3,848,290



3,887,347Federal funds sold


20,503



2,186



513,162Total interest on securities and federal funds sold


7,520,767



10,030,322



11,107,406Total interest income


25,429,772



29,514,215



30,613,371Interest expense:Interest on deposits


10,127,641



11,807,972



13,387,997Interest on borrowings:Federal funds purchased and securities soldunder repurchase agreements


213,007



830,597



404,818FHLB borrowings


1,791,865



2,155,739



1,594,808Other short-term borrowings


115,792



112,875



-Capital trust preferred securities


189,377



323,853



414,414Total interest on borrowings


2,310,041



3,423,064



2,414,040Total interest expense


12,437,682



15,231,036



15,802,037Net interest income


12,992,090



14,283,179



14,811,334Provision for loan losses


9,511,808



1,250,000



180,000Net interest income after provision for loan losses


3,480,282



13,033,179



14,631,334Non-interest incomeDeposit fees and charges


1,840,703



1,833,144



1,852,956Bank card fees


530,659



513,000



471,160Increase in cash surrender value of life insurance


434,693



388,696



360,385Secondary mortgage market loan fees


230,696



107,393



128,451Investment and insurance commissions


162,739



252,094



380,025Realized gains (losses) on sales/calls of securities available for sale


(268,400
)


161,929



109,548Other


249,341



230,922



239,524Total non-interest income


3,180,431



3,537,178



3,542,054





See Notes to Consolidated Financial Statements.





53





CENTRAL VIRGINIA BANKSHARES, INCConsolidated Statements of Operations





Years Ended December 31,

2009


2008


2007Non-interest expenses:Salaries and wages


5,242,274



5,411,947



5,513,696Pensions and other employee benefits


1,470,583



1,765,902



1,973,184Occupancy expense


660,197



642,326



649,689Equipment depreciation


545,420



646,152



643,395Equipment repairs and maintenance


218,314



370,213



408,127Advertising and public relations


231,467



342,012



451,986FDIC premiums


1,153,244



219,920



42,312Office supplies, telephone, and postage


505,296



516,649



525,702Taxes and licenses


265,439



318,765



295,035Legal and professional fees


338,675



300,494



389,498Consulting fees


248,236



352,580



297,961Loss on write-down of securities (1)


6,745,563



18,899,900



-Outsourced data processing


356,260



-



-Other operating expenses


2,037,868



2,155,921



1,947,771Total non-interest expenses


20,018,836



31,942,781



13,138,359(Loss) income before income taxes


(13,358,123
)


(15,372,424
)


5,035,029Income tax (benefit) expense


(4,192,516
)


(5,747,710
)


1,046,318Net (loss) income

$
(9,165,607
)

$
(9,624,714
)

$
3,988,711Effective dividend on preferred stock


590,402



-



-Net (loss) income available to common shareholders

$
(9,756,009
)

$
(9,624,714
)

$
3,988,711Basic (loss) earnings per common share

$
(3.74
)

$
(3.73
)

$
1.56Diluted (loss) earnings per common share

$
(3.74
)

$
(3.73
)

$
1.54


(1)
Loss on write-down of securities consists of other-than-temporary impairment losses of $9,059,921 of which $2,314,358 is recognized in other comprehensive income and a net impairment loss of $6,745,563 is recognized in earnings for 2009.





See Notes to Consolidated Financial Statements.

















54





CENTRAL VIRGINIA BANKSHARES, INCConsolidated Statements of Stockholders EquityYears Ended December 31, 2009, 2008 and 2007

Preferred

Stock


Common

Stock


Surplus


Retained

Earnings


Common

Stock

Warrant


Discount on

Preferred Stock


Accumulated

Other

Comprehensive

(Loss)


Comprehensive

Income (Loss)


TotalBalance, December 31, 2006

$
-


$
3,024,117


$
14,329,239


$
21,396,176


$
-


$
-


$
(1,663,586
)

$
-


$
37,085,946Comprehensive income:Net income


-



-



-



3,988,711



-



-







3,988,711



3,988,711Other comprehensive income, net of tax:


































-Unrealized holding losses on securities available for sale arising during the period, net of deferred income taxes of $1,490,693


-



-



-



-



-



-



(2,885,785
)


(2,885,785
)


(2,885,785
)Reclassification adjustment for gains on securities available for sale included in net income, net of deferred income taxes of $37,389


-



-



-



-



-



-



(72,159
)


(72,159
)


(72,159
)Total comprehensive income





























$
1,030,767Issuance of common stock:


































-14,512 shares pursuant to exercise of

stock options


-



18,140



147,526



-



-



-











165,666Income tax benefit of deduction for tax purposes attributable to exercise of stock  options


-



-



52,588



-



-



-











52,58813,311 shares pursuant to dividend reinvestment plan


-



16,638



263,644























280,282Cash dividends declared, $.72 per share


-



-



-



(1,751,165
)


-



-



-







(1,751,165
)Balance, December 31, 2007


-



3,058,895



14,792,997



23,633,722



-



-



(4,621,530
)






36,864,084Comprehensive loss:Net  (loss)


-



-



-



(9,624,714
)


-



-







(9,624,714
)


(9,624,714
)Other comprehensive loss, net of tax:


































-Unrealized holding losses on securities available for sale arising during the period, net of deferred income taxes of $9,246,584


-



-



-



-



-



-



(17,949,251
)


(17,949,251
)


(17,949,251
)Reclassification adjustment for loss on write-down of securities, net of deferred income taxes of $6,410,870


























12,489,030



12,489,030



12,489,030reclassification adjustment for gains on securities available for sale included in net income net of deferred income taxes of $55,056


-



-



-



-



-



-



(106,873
)


(106,873
)


(106,873
)Total comprehensive (loss)





























$
(15,191,808
)Issuance of common stock:


































-3,682 shares pursuant to exercise of

stock options


-



4,603



38,367



-



-



-



-







42,970Income tax benefit of deduction for tax purposes attributable to exercise of stock options


-



-



7,436



-



-



-



-







7,436122,425 shares pursuant to a 5% stock

dividend


-



153,031



1,830,254



(1,983,285
)


-



-



-







-22,997 shares pursuant to dividend

reinvestment plan


-



28,746



201,934



-



-



-



-







230,680Payment for 290 fractional shares of common stock


-



-



-



(4,691
)


-



-



-







(4,691
)Cash dividends declared, $.645 per share


-



-



-



(1,640,509
)


-



-



-







(1,640,509
)Balance, December 31, 2008


-



3,245,275



16,870,988



10,380,523



-



-



(10,188,624
)






20,308,162Comprehensive (loss):Net (loss)


-



-



-



(9,165,607
)


-











(9,165,607
)


(9,165,607
)Other comprehensive loss, net of tax:Unrealized holding losses on securities available for sale arising during the period, net of deferred income taxes of $52,027


-



-



-



-



-







(100,993
)


(100,993
)


(100,993
)Reclassification adjustment for loss on write-down of securities, net of deferred income taxes of $2,293,491


























4,452,072



4,452,072



4,452,072Reclassification adjustment for losses on securities available for sale included in net income, net of deferred income taxes of $91,256


-



-



-



-



-







177,144



177,144



177,144Total comprehensive (loss)





























$
(4,637,384
)Issuance of 11,385 shares of preferred stock


11,385,000



-



(36,811
)






411,947



(411,947
)










11,348,189Accretion of preferred stock dividend


-







-



(67,008
)


-



67,008



-







-Dividends paid on preferred stock


-



-



-



(450,657
)


-



-



-







(450,657
)Issuance of 22,126 shares of common stock pursuant to dividend reinvestment plan


-



27,657



59,066



-



-



-



-







86,723Cash dividends declared, $.1675 per share


-



-



-



(435,982
)


-



-



-







(435,982
)Balance, December 31, 2009

$
11,385,000


$
3,272,932


$
16,893,243


$
261,269


$
411,947


$
(344,939
)

$
(5,660,401
)





$
26,219,051





See Notes to Consolidated Financial Statements.








55


CENTRAL VIRGINIA BANKSHARES, INC.


Consolidated Statements of Cash Flows








Years Ended December 31,

2009


2008


2007Cash Flows from Operating ActivitiesNet (loss) income

$
(9,165,607
)

$
(9,624,714
)

$
3,988,711Adjustments to reconcile net (loss) income to net cash provided by operating activities:Depreciation


759,430



858,733



849,185Amortization


14,678



35,303



37,178Deferred income taxes


(2,147,099
)


(6,801,320
)


(158,392
)Provision for loan losses


9,511,808



1,250,000



180,0000Amortization and accretion on securities, net


330,438



97,792



24,848Loss on valuation of swap agreement


-



-



29,379Realized loss (gain) on sales/calls of securities available for sale


268,400



(161,929
)


(109,548
)Loss on write-down of securities


6,745,563



18,899,900



-Increase in cash value of life insurance


(434,693
)


(388,696
)


(360,385
)Change in operating assets and liabilities:(Increase) decrease in assets:Mortgage loans held for sale


(1,048,164
)


(405,950
)


(2,139,217
)SBA loans held for sale


6,943



1,781,036



(145,600
)Accrued interest receivable


393,135



226,012



(348,469
)Other assets


(2,810,914
)


(1,495,304
)


257,229Increase (decrease) in liabilities:Accrued interest payable


(71,575
)


(79,971
)


97,084Other liabilities


(1,421,730
)


270,181



554,888Net cash provided by operating activities


930,613



4,461,073



2,756,891Cash Flows From Investing ActivitiesProceeds from calls and maturities of securities held to maturity


640,000



925,413



2,259,500Proceeds from calls and maturities of securities available for sale


51,716,190



63,851,374



15,191,940Proceeds from sales of securities available for sale


56,030,380



19,805,505



7,202,636Purchase of securities available for sale


(90,332,009
)


(80,221,745
)


(41,103,925
)Net increase in loans made to customers


(4,470,269
)


(27,922,723
)


(57,498,855
)Proceeds from sales of other real estate owned


915,504



-



-Net purchases of premises and equipment


(133,047
)


(363,207
)


(609,742
)Purchase of bank owned life insurance


-



-



(2,578,163
)Acquisition of restricted securities and other investments


(105,600
)


(379,286
)


(1,047,580
)Net cash provided by (used in) investing activities


13,991,149



(24,304,669
)


(78,184,189
)





See Notes to Consolidated Financial Statements.





(Continued)








56





CENTRAL VIRGINIA BANKSHARES, INC.
 Consolidated Statements of Cash Flows
 
 Years Ended December 31,


2009

2008

2007Cash Flows From Financing ActivitiesNet increase (decrease) in demand deposits, MMDA, NOW,

and savings accounts
28,928,805

(5,765,371)

(6,692,343)Net increase (decrease) in time deposits

8,634,330

(5,032,020)

7,459,391Net increase (decrease) in federal funds purchased andsecurities sold under repurchase agreements

(40,595,175)

21,064,612

22,173,030Net (payment) proceeds on FHLB borrowings

(9,500,000)

150,000

24,350,000Net (payment) proceeds from short-term loan
(7,000,000)

7,000,000

-Net proceeds from issuance of preferred stock
11,348,189

-

-Net proceeds from issuance of common stock
86,723

273,650

445,948Payment for fractional shares of common stock
-

(4,691)

-Dividends paid on preferred stock

(450,657)

-

-Dividends paid on common stock

(435,982)

(1,640,509)

(1,751,165)Net cash (used in) provided by financing activities

(8,983,767)

16,045,671

45,984,861Increase (decrease) in cash and cash equivalents

5,937,995

(3,797,925)

(29,442,437)Cash and cash equivalents, beginning

6,565,019

10,362,944

39,805,381Cash and cash equivalents, ending
$ 12,503,014

$ 6,565,019

$ 10,362,944Supplemental Disclosures of Cash Flow InformationInterest paid

$ 12,509,257

$ 15,311,007

$ 15,704,953Income taxes paid

382,164

991,507

1,064,138Supplemental Disclosures of Noncash Investing and Financing ActivitiesUnrealized gain (loss) on securities available for sale
$ 6,860,943

$ (8,434,991)

$(4,486,026)Loans transferred to other real estate owned
3,341,003

1,244,946

-
   See Notes to Consolidated Financial Statements.
  57


CENTRAL VIRGINIA BANKSHARES, INC.





NOTES TO CONSOLIDATED FINANCIAL STATEMENTS





Note 1. Significant Accounting Policies





Principles of consolidation: The accompanying consolidated financial statements include the accounts of Central Virginia Bankshares, Inc., and its subsidiaries, Central Virginia Bank, including its subsidiary, CVB Title Services, Inc. and Central Virginia Bankshares Statutory Trust I. All significant intercompany transactions and balances have been eliminated in consolidation. ASC Topic 810 Consolidations requires that the Company no longer eliminate through consolidation the equity investment in Central Virginia Bankshares Statutory Trust I by the parent company, Central Virginia Bankshares, Inc., which equaled $155,000 at December 31, 2009. The subordinated debt of the Trust is reflected as a liability on the Company’s balance sheet.





The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles.





Nature of operations: Central Virginia Bankshares, Inc. (the “Company”) is a one-bank holding company headquartered in Powhatan County, Virginia. The Company’s subsidiary, Central Virginia Bank, (the “Bank”) provides a variety of financial services to individuals and corporate customers through its seven branches located in the Virginia counties of Powhatan, Chesterfield, Henrico, and Cumberland. The Bank’s primary deposit products are checking accounts, savings accounts, and certificates of deposit. Its primary lending products are residential mortgage, construction, installment, and commercial business loans.





Central Virginia Bank’s subsidiary, CVB Title Services, Inc., is a corporation organized under the laws of the Commonwealth of Virginia. CVB Title Services’ primary purpose is to own membership interests in two insurance-related limited liability companies.





Use of estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.





Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate, the valuation of securities, deferred tax assets and liabilities and fair value measurements.





A majority of the Bank’s loan portfolio consists of single-family residential loans in the Virginia counties of Powhatan, Chesterfield, Henrico, and Cumberland. There is also a significant concentration of loans to builders and developers in the region. Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio and the recovery of a substantial portion of the carrying amount of foreclosed real estate are susceptible to changes in local market conditions.





While management uses available information to recognize losses on loans and foreclosed real estate, future additions to the allowance may be necessary based on changes in local economic conditions. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Bank’s allowance for loan losses and foreclosed real estate. Such agencies may require the Bank to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. Because of these factors, it is reasonably possible that the allowance for loan losses and foreclosed real estate may change materially in the near term.





Cash and cash equivalents: For purposes of reporting the consolidated statements of cash flows, the Company includes cash on hand, amounts due from banks, federal funds sold and all highly liquid debt instruments purchased with a maturity of three months or less as cash and cash equivalents on the accompanying consolidated balance sheets. Cash flows from deposits and loans are reported net.





The Bank maintains cash accounts with other commercial banks. The amount of these deposits at December 31, 2009 exceeded the insurance limit of the FDIC by $2.4 million. The Bank has not experienced any losses in such accounts. The Bank is required to maintain average reserve and clearing balances in cash or on deposit with the Federal Reserve Bank. The total of these balances was approximately $116 thousand and $227 thousand at December 31, 2009 and 2008, respectively.





Securities:  Investments in debt and equity securities with readily determinable fair values are classified as either held to maturity, available for sale, or trading, based on management’s intent.  Currently all of the Company’s investment securities are classified as either held to maturity or available for sale.  Securities are classified as held to maturity when management has the intent and the Company has


58


the ability at the time of purchase to hold them until maturity or on a long-term basis. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the interest method over their contractual lives. Sales of these securities are generally not permitted, however if a sale occurs, gains and losses on the sale of such securities are determined by the specific identification method.  Available for sale securities are carried at estimated fair value with the corresponding unrealized gains and losses excluded from earnings and reported in other comprehensive income.  Gains or losses are recognized in earnings on the trade date using the amortized cost of the specific security sold.  Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities.





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





Mortgage loans held for sale: Mortgage loans originated and held for sale in the secondary market are reported at the lower of cost or market determined on an aggregate basis. The Bank does not retain mortgage servicing rights on loans held for sale. Substantially all mortgage loans held for sale are pre-sold to the Bank's mortgage correspondents. All sales are made without recourse.





United States SBA Loan Certificates held for sale:The Company, through a business arrangement with Community Bankers Securities (“CBS”), provides temporary short-term financing for United States Government Small Business Administration Guaranteed Interest Certificates (“Certificates”) until such times as the Certificates can be aggregated into a U.S. Small Business Administration Guaranteed Loan Pool (“Pool”) by CBS. Upon assembling the requisite number of Certificates that aggregate the desired principal amount and yield, CBS repurchases the Certificates from the Bank, transferring them to the exclusive Fiscal and Transfer Agent (“FTA”) receiving in exchange, a security backed by the pool of Certificates, which is then sold by CBS to the end investor. As the Certificates represent the guaranteed portion of SBA loans, they are reported as loans held for sale. SBA loans held for sale were $351 thousand and $358 thousand as of December 31, 2009 and 2008, respectively.





Rate lock commitments: The Company enters into commitments to originate residential mortgage loans whereby the interest rate on the loan is determined prior to funding (i.e., rate lock commitments). The period of time between issuance of a loan commitment and closing and sale of the loan generally ranges from 15 to 90 days. The Company protects itself from changes in interest rates by simultaneously entering into loan purchase agreements with third party investors that provide for the investor to purchase loans at the same terms (including interest rate) as committed to the borrower. Under the contractual relationship with purchaser of each loan, the Company is obligated to sell the loan to the purchaser only if the loan closes. No other obligation exists. As a result of these contractual relationships with purchasers of loans, the Company is not exposed to losses nor will it realize gains related to its rate lock commitments due to changes in interest rates.





Loans: Loans are stated at the amount of unpaid principal, reduced by unearned discount and an allowance for loan losses.





Unearned interest on discounted loans is amortized to income over the life of the loans, using the interest method. For all other loans, interest is accrued daily on the outstanding balances.





Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs and the allowance for loan losses. Interest income is accrued on the unpaid principal balance.





Loan origination and commitment fees and certain direct loan origination costs are being deferred and the net amount amortized as an adjustment of the related yield. The Bank is amortizing these amounts over the life of the loan.





59


The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Credit card loans and other personal loans are typically charged off no later than 180 days past due. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.





All current year interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.





Allowance for loan losses: The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the collectability of a loan balance is doubtful. Subsequent recoveries, if any, are credited to the allowance.





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





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





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





Bank premises and equipment: Land is carried at cost. Bank premises and equipment are stated at cost less accumulated depreciation. Expenditures for improvements and major renewals are capitalized and ordinary maintenance and repairs are charged to operations as incurred. Depreciation is not recognized on branches or banking facilities purchased or constructed until the facility is occupied and open for business. Depreciation is computed using the straight-line method over the following estimated useful lives:





YearsBuildings and improvements
5 - 39





Furniture and equipment
3 - 10





Other real estate owned: Other real estate owned represents properties acquired through foreclosure or other proceedings. Other real estate is recorded at the lower of the carrying amount or fair value less estimated costs to sell and any deficiency is recorded through the provision for loan losses. Foreclosed real estate is evaluated periodically to ensure the carrying amount is supported by its current fair value. At December 31, 2009 the Bank held other real estate owned totaling $3.6   million and held $1.2 million at December 31, 2008.  Revenue and expenses from operations and changes in the valuation are included in net expenses from foreclosed assets.





Public relations and marketing costs: Public relations and marketing costs are generally expensed as incurred.





Intangible assets: Intangible assets, which for the Bank are the cost of acquired customer accounts, are amortized on a straight-line basis over the expected periods of benefit.





60


Income taxes: The provision for income taxes relates to items of revenue and expenses recognized for financial accounting purposes. The actual current liability may be more or less than the charge against earnings due to the effect of deferred income taxes.





Deferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.





When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.




Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statement of operations.





Stock Compensation Plans: The compensation cost relating to share-based payment transactions is recognized in the financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. The Company measures the cost of employee services received in exchange for stock options based on the grant-date fair value of the award, and recognizes the cost over the period the employee is required to provide services for the award.





(Loss) earnings Per Common Share: Basic (loss) earnings per common share represents income available to common stockholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate solely to outstanding stock options, and are determined using the treasury stock method.  The number of shares has been adjusted to reflect the 5% stock dividend issued in 2008.  See Note 18.





Comprehensive Income (Loss):  Comprehensive income (loss) consists of net income (loss) and other comprehensive income.  Other comprehensive income (loss) includes unrealized gains on securities available for sale, and unrealized losses related to factors other than credit on debt securities, recognized as separate components of equity.





Fair Value of Financial Instruments:  Fair values of financial instruments are estimated using relevant market information and other assumptions, as more fully disclosed in Note 20.  Fair value estimates involve uncertainties and matters of significant judgment.  Changes in assumptions or in market conditions could significantly affect the estimates.





Recent accounting pronouncements:





In June 2009, the Financial Accounting Standards Board (FASB) issued FASB ASC 105-10, Generally Accepted Accounting Principles(Financial Accounting Standards No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162), which established the Codificationas the source of authoritative GAAP for companies to use in the preparation of financial statements. Securities andExchange Commission (SEC) rules and interpretive releases are also authoritative GAAP for SEC registrants. The guidance contained in the Codification supersedes all existing non-SEC accounting and reporting standards. We adopted the Codification, as required, in third quarter 2009. As a result, references to accounting literature contained in our financial statement disclosures have been updated to reflect the new FASB Accounting StandardsCodification (ASC) structure.





In April 2009, the FASB issued new guidance impacting FASB Topic 820: Fair Value Measurements and Disclosures. This interpretation provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This also includes guidance on identifying circumstances that indicate a transaction is not orderly and requires additional disclosures of valuation inputs and techniques in interim periods and defines the major security types that are required to be disclosed.


61


This guidance was effective for interim and annual periods ending after June 15, 2009, and should be applied prospectively. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.





In April 2009, the FASB issued new guidance impacting FASB Topic 320-10: Investments – Debt and Equity Securities. This guidance amends generally accepted accounting principles for debt securities tomake the guidance more operational and to improve the presentation and disclosure of other-than temporaryimpairments on debt and equity securities in the financial statements. This guidance waseffective for interim and annual periods ending after June 15, 2009, with earlier adoption permitted forperiods ending after March 15, 2009. The additional disclosures required are included in the Consolidated Statements of Operations and in Note 2 to the consolidated financial statements.





In May 2009, the FASB issued new guidance impacting FASB Topic 855: Subsequent Events. This update provides guidance on management’s assessment of subsequent events that occur after the balance sheet date through the date that the financial statements are issued. This guidance is generally consistent with current accounting practice. In addition, it requires certain additional disclosures. This guidance was effective for periods ending after June 15, 2009 and had no impact on the Company’s consolidated financial statements. For the Company, this is the date of financial statement issuance.





In June 2009, the FASB issued new guidance relating to the accounting for transfers of financial assets. The new guidance, which was issued as SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140, was adopted into Codification in December 2009 through the issuance of Accounting Standards Update (“ASU”) 2009-16. The new standard provides guidance to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. The Company will adopt the new guidance in 2010 and is evaluating the impact it will have, if any, on its consolidated financial statements.





In June 2009, the FASB issued new guidance relating to the variable interest entities. The new guidance, which was issued as SFAS No. 167, Amendments to FASB Interpretation No. 46(R), was adopted into Codification in December 2009. The objective of the guidance is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to


users of financial statements. SFAS No. 167 is effective as of January 1, 2010. The Company does not expect the adoption of the new guidance to have a material impact on its consolidated financial statements.





In September 2009, the FASB issued new guidance impacting Topic 820. This update creates a practical expedient to measure the fair value of an alternative investment that does not have a readily determinable fair value. This guidance also requires certain additional disclosures. This guidance is effective for interim and annual periods ending after December 15, 2009. The Company does not expect the adoption


of the new guidance to have a material impact on its consolidated financial statements.





In January 2010, the FASB issued ASU 2010-04, Accounting for Various Topics – Technical Corrections to SEC Paragraphs(“ASU 2010-04”). This update makes technical corrections to existing SEC guidanceincluding the following topics: accounting for subsequent investments, termination of an interest rateswap, issuance of financial statements - subsequent events, use of residential method to value acquiredassets other than goodwill, adjustments in assets and liabilities for holding gains and losses, and selectionsof discount rate used for measuring defined benefit obligation. The Company does not expect the adoptionof ASU 2010-04 to have a material impact on its consolidated financial statements.





In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (“ASU 2010-06”).ASU 2010-06 amendsSubtopic 820-10 to clarify existing disclosures, requires new disclosures, and includes conformingamendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-58-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosuresabout purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair valuemeasurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and forinterim periods within those fiscal years. The Company does not expect the adoption of ASU 2010-06 tohave a material impact on its consolidated financial statements.





In February 2010, the FASB issued ASU 2010-08, Technical Corrections to Various Topics(“ASU 2010-08’). ASU 2010-08 clarifies guidance on embedded derivatives and hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15, 2009. The Company does not expect the adoption of ASU 2010-08 to have a material impact on its consolidated financial statements.





Note 2. Securities





62


The amortized cost, gross unrealized gains and losses and approximate fair value of securities available for


sale at December 31, 2009 and 2008 are summarized as follows:





2009Amortized

Cost


Gross

Unrealized

Gains


Gross

Unrealized

Losses


Approximate

Fair

ValueU.S. Treasury securities

$
242,057


$
-


$
(10,221
)

$
231,836U.S. government agencies and corporations


81,234,195



133,539



(2,468,840
)


78,898,894Bank eligible preferred and equities


2,576,505



212,370



(549,982
)


2,238,893Mortgage-backed securities


15,086,253



221,622



(95,682
)


15,212,193Corporate and other debt


23,684,163



55,524



(6,066,039
)


17,673,648States and political subdivisions


8,718,869



146,869



(155,526
)


8,710,212$
131,542,042


$
769,924


$
(9,346,290
)

$
122,965,6762008Amortized

Cost


Gross

Unrealized

Gains


Gross

Unrealized

Losses


Approximate

Fair

ValueU. S. government agencies and corporations

$
90,103,520


$
875,648


$
(1,293,728
)

$
89,685,440Bank eligible preferred and equities


2,603,657



6,010



(1,200,602
)


1,409,065Mortgage-backed securities


8,128,778



137,777



(739,275
)


7,527,280Corporate and other debt


45,357,621



330,127



(13,266,471
)


32,421,277States and political subdivisions


10,101,542



109,985



(399,671
)


9,811,856$
156,295,118


$
1,459,547


$
(16,899,747
)

$
140,854,918








The following table presents the amortized cost and approximate fair value of securities available for sale as of December 31, 2009, by contractual maturity (dollars in thousands). Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.





Amortized

Cost


Approximate

Fair

ValueDue after one year through five years

$
5,408,745


$
5,034,142Due after five years through ten years


23,303,340



22,329,773Due after ten years


85,167,199



78,150,675Bank eligible preferred and equities


2,576,505



2,238,893Mortgage-backed securities


15,086,253



15,212,193$
131,542,042


$
122,965,676








The gross realized gains, losses and tax effect of such sales and redemptions of securities available for sale in 2009, 2008 and 2007, respectively, are shown below.





2009


2008


2007Gross realized gains

$
1,891,760


$
363,116


$
200,654Gross realized losses


2,160,160



201,187



91,106Net realized gain (loss)


(268,400
)


161,929



109,548Tax effect of net realized gain (loss)

$
(91,256
)

$
55,056


$
37,389








63


The primary purpose of the investment portfolio is to generate income and meet liquidity needs of the Company through readily saleable financial instruments. The portfolio includes fixed rate bonds, whose prices move inversely with rates. At the end of any accounting period, the investment portfolio has unrealized gains and losses. The Company monitors the portfolio, which is subject to liquidity needs, market rate changes and credit risk changes, to see if adjustments are needed. The primary cause of temporary impairments was the increase in spreads over comparable Treasury bonds. As of December 31, 2009, there were $30.0 million of individual securities that had been in a continuous loss position for more than 12 months. Additionally, these securities had an unrealized loss of $6.6 million and consisted primarily of corporate and other debt. In the second quarter of 2009, the Company adopted ASC 320-10-65 Transition Related to FSP FAS 115-2 and FAS 124-2,Recognition and Presentation of Other-Than-Temporary Impairmentsthat amended other-than-temporary impairment (“OTTI”) guidance for debt securities regarding recognition and disclosure. The major change in the guidance was that an impairment is other-than-temporary if any of the following conditions exists: the entity intends to sell the security; it is more likely than not that the entity will be required to sell the security before recovery of its amortized cost basis; or the entity does not expect to recover the security’s entire amortized cost basis (even if the entity does not intend to sell). If a credit loss exists, but an entity does not intend to sell the impaired debt security and is not more likely than not to be required to sell before recovery, the impairment is other-than-temporary and should be separated into a credit portion to be recognized in earnings and the remaining amount relating to all other factors recognized as other comprehensive loss.





During each quarter and at year-end, the Company conducts an assessment of the securities portfolio for OTTI consideration. The assessment considers factors such as external credit ratings, delinquency coverage ratios, market price, management’s judgment, expectations of future performance and relevant industry research and analysis.





The following tables present the gross unrealized losses and fair values as of December 31, 2009 and 2008, aggregated by investment category and length of time that the individual securities have been in a continuous unrealized loss position:





December 31, 2009Less than Twelve Months


Twelve Months or Longer


TotalSecurities Available for Sale

Approximate

Fair Value


Unrealized

Losses


Approximate

Fair Value


Unrealized

Losses


Approximate

Fair Value


Unrealized

LossesU.S. Treasury securities

$
231,836


$
(10,221
)

$
-


$
-


$
231,836


$
(10,221
)U. S. government agenciesand corporations


54,834,953



(1,758,439
)


12,662,378



(710,401
)


67,497,331



(2,468,840
)Bank eligible preferred andequities


129,275



(20,975
)


1,847,498



(529,007
)


1,976,773



(549,982
)Mortgage-backed securities


5,653,993



(95,682
)


-



-



5,653,993



(95,682
)Corporate and other debt


3,331,196



(868,141
)


12,044,818



(5,197,898
)


15,376,014



(6,066,039
)States and politicalsubdivisions


-



-



3,423,321



(155,526
)


3,423,321



(155,526
)$
64,181,253


$
(2,753,458
)

$
29,978,015


$
(6,592,832
)

$
94,159,268


$
(9,346,290
)





64





December 31, 2008Less than Twelve Months


Twelve Months or Longer


TotalSecurities Available for Sale

Approximate

Market Value


Unrealized

Losses


Approximate

Market

Value


Unrealized

Losses


Approximate

Market Value


Unrealized

LossesU. S. government agenciesand corporations

$
26,484,762


$
(579,388
)

$
1,285,660


$
(714,340
)

$
27,770,422


$
(1,293,728
)Bank eligible preferred andequities


199,750



(29,045
)


2,253,657



(1,171,557
)


2,453,407



(1,200,602
)Mortgage-backed securities


1,147,765



(7,724
)


255,550



(731,551
)


1,403,315



(739,275
)Corporate and other debt


8,954,463



(2,499,377
)


13,904,955



(10,767,094
)


22,859,418



(13,266,471
)States and politicalsubdivisions


4,911,159



(355,928
)


213,861



(43,743
)


5,125,020



(399,671
)$
41,697,899


$
(3,471,462
)

$
17,913,683


$
(13,428,285
)

$
59,611,582


$
(16,899,747
)




As of December 31, 2009, the Company had seven pooled trust preferred securities that were deemed to be OTTI based on a present value analysis of expected future cash flows. These securities had a fair value of $1.4 million and an other-than-temporary impairment loss of $9.1 million, of which $2.3 million was recognized in other comprehensive loss and $6.7 million which was recognized in earnings. The following table provides further information on these seven securities as of December 31, 2009 (in thousands):





Security

Class

Current

Moody’s

Ratings

(Lowest

Assigned

Rating)

Par

Value

Book

Value/

Fair

Value

Unrealized

Loss

Current

Defaults

and

Deferrals

% of Current

Defaults and

Deferrals to

Current

Collateral


Excess

Sub (1)


Estimated

Incremental

Defaults

Required to

Break Yield

(2)

Cumulative Other

Comprehensive

(Gain)/Loss (3)

Amount of

OTTI

Related to

Credit

Loss (3)PreTSL II

Mez

Ca

$
2,290

$
725

$
1,565

$
96,500

31.1
%

-27.4
%

BROKEN

$
209

$
1,376PreTSL XII

B-3

Ca


2,000


595


1,405


197,100

25.5
%

-25.5
%

BROKEN


637


780PreTSL XVI

D

NR


1,553


-


1,553


182,700

31.7
%

-38.8
%

BROKEN


-


1,553PreTSL XXIII

D-1

NR


1,000


-


1,000


270,500

19.5
%

-17.5
%

BROKEN


-


1,000ALESC 6A

D-1

Ca


1,035


-


1,035


114,251

17.8
%

-24.9
%

BROKEN


-


1,035SLOSO 2007

A3F

C


1,000


-


1,000


140,000

26.6
%

-15.7
%

BROKEN


-


1,000Reg Div Fund

Senior

Ca


1,535


33


1,502


30,500

13.3
%

-6.0
%

BROKEN


1,469


1Total





$
10,413

$
1,353

$
9,060












$
2,315

$
6,745




As of December 31, 2009, the Company had three pooled trust preferred securities that were deemed to be temporarily impaired based on a present value analysis of expected future cash flows. The securities had a fair value of $1.7 million. The following table provides further information on these securities as of December 31, 2009 (in thousands):


Security

Class

Current

Moody’s

Ratings

(Lowest

Assigned

Rating)

Par

Value

Book

Value/

Fair

Value

Unrealized

Loss

Current

Defaults

and

Deferrals

% of Current

Defaults and

Deferrals to

Current

Collateral


Excess

Sub (1)


Estimated

Incremental

Defaults

Required to

Break Yield

(2)

Cumulative Other

Comprehensive

Loss (3)

Amount of

OTTI

Related to

Credit

Loss (3)PreTSL XXIII

C-2

NR

$
513

$
137

$
376

$
-

--
%

-
%

$-


$
376

-I-PreTSL III

B-3

B2


1,500


925


575


38,400

11.2
%

9.1
%

29,315



575I-PreTSL IV

B-2

Ba2


1,000


632


368


13,000

4.2
%

8.3
%

24,889



368$3,013


$1,694

$
1,319













$
1,319


(1)
Excess subordination is the difference between the remaining performing collateral and the amount of bonds outstanding that are otherwise the same and senior to the class the Company owns. Negative excess subordination indicates there is not enough performing collateral in the pool to cover the outstanding balance of all classes senior to those the Company owns.


(2)
A break in yield for a given class means that defaults/deferrals have reached such a level that the class would not receive all of its contractual cash flows (principal and interest) by maturity (so that it is not just a temporary interest shortfall, but an actual loss in yield on the investment). This represents additional defaults beyond those assumed in our cash flow modeling.


(3)
Pre-tax.








65


During 2008, the Company recorded OTTI related to its investments in preferred stock issuances in the Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) and the Federal National Mortgage Association (FNMA or Fannie Mae) of $17.9 million. In addition, an OTTI charge to completely write-off a Lehman Brothers bond in the amount of $1.0 million due to the bankruptcy of the company was recorded in 2008.





The Company’s investment in Federal Home Loan Bank (FHLB) stock totaled $3.6 million at December 31, 2009.  FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost, because there is no market for the stock, other than the FHLBs or member institutions.  Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.  Despite the FHLB’s temporary suspension of repurchases of excess capital stock in 2009, the Company does not consider this investment to be other-than-temporarily impaired at December 31, 2009 and no impairment has been recognized.  FHLB stock is included with other assets on the balance sheet and is not a part of the available for sale securities portfolio.





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





Year-ended

December 31, 2009Balance, beginning of period

$
18,899,900Additions:Initial credit impairments


6,745,563Subsequent credit impairments


—Balance, end of period

$
25,645,463





The amortized cost, gross unrealized gains and losses and estimated fair value of securities being held to maturity at December 31, 2009 and 2008 are summarized as follows:





December 31, 2009Amortized

Cost


Gross

Unrealized

Gains


Gross

Unrealized

Losses


Approximate

Fair

ValueStates and political subdivisions

$
4,440,959


$
84,610


$
(18
)

$
4,525,551December 31, 2008Amortized

Cost


Gross

Unrealized

Gains


Gross

Unrealized

Losses


Approximate

Fair

ValueStates and political subdivisions

$
5,086,919


$
44,623


$
(17,365
)

$
5,114,177








66


The amortized cost and approximate fair value of securities being held to maturity at December 31, 2009, by contractual maturity, are shown below.





Amortized

Cost


Approximate

Market ValueDue after one year through five years

$
1,314,423


$
1,346,418Due after five years through ten years


1,612,264



1,619,951Due after ten years


1,514,272



1,559,182$
4,440,959


$
4,525,551





Available for Sale Securities with an amortized cost of $6.1 million and $44.1 million and a market value of $6.0 million and $44.0 million and Held to Maturity Securities with an amortized cost of $2.6 million and $1.8 million and a market value of $2.6 million and $1.8 million at December 31, 2009 and 2008, respectively, were pledged as collateral for repurchase agreement borrowings with correspondent banks and public deposits and for other purposes as required or permitted by law.





Note 3. Loans





Major classification of gross loans, unearned discount and allowance for loan losses at December 31, 2009 and 2008 are as follows:





December 31,2009


2008Commercial

$
67,779,853


$
59,327,260Real estate:Mortgage


126,867,601



124,053,357Home equity


21,308,525



18,828,294Construction


67,962,316



81,761,966Bank cards


1,017,540



951,063Installment


7,391,710



8,512,028292,327,545



293,433,968Less unearned income


(23,753
)


(28,232
)292,303,792



293,405,736Allowance for loan losses


(10,813,608
)


(3,796,458
)Loans, net

$
281,490,184


$
289,609,278





At December 31, 2009 and 2008, overdraft demand deposit accounts totaling $135 thousand and $142 thousand, respectively, were reclassified as loans within the Installment loan category.





Changes in the allowance for loan losses for the years ended December 31, 2009, 2008 and 2007 were as follows:





2009


2008


2007Balance, beginning

$
3,796,458


$
2,912,082


$
2,889,496Provision charged to operations


9,511,808



1,250,000



180,000Loans charged off


(2,530,910
)


(428,110
)


(222,527
)Recoveries


36,252



62,486



65,113Balance, ending

$
10,813,608


$
3,796,458


$
2,912,082





67


The following is a summary of information pertaining to impaired and nonaccrual loans at December 31, 2009 and 2008:





2009


2008Impaired loans without a valuation allowance

$
21,978,565


$
4,649,709Impaired loans with a valuation allowance


31,106,075



4,121,208Total impaired loans

$
53,084,640


$
8,770,917Valuation allowance related to impaired loans

$
6,629,570


$
1,133,374Total nonaccrual loans (including impaired loans)

$
21,654,603


$
10,422,032Total loans past-due ninety days or more and still accruing

$
2,176,797


$
1,175,189





The following is a summary of average investment in impaired loans and interest income recognized on impaired loans for the years ended December 31, 2009 and 2008:


2009


2008Average investment in impaired loans

$
8,307,103


$
4,118,690Interest income recognized on a cash basis on impaired loans

$
387,463


$
122,504





No additional funds are committed to be advanced in connection with impaired loans.





Note 4. Other Real Estate Owned





Other real estate owned represents properties acquired through foreclosure or other proceedings. Other real estate owned is recorded at the lower of the carrying amount or fair value less estimated costs to sell. Other real estate owned is evaluated periodically to ensure the carrying amount is supported by its current fair value. At December 31, 2009 the Bank held other real estate owned totaling $3.6 million and $1.2 million at December 31, 2008.  No valuation was recognized in 2009 or 2008.





Note 5. Bank Premises and Equipment





Major classifications of bank premises and equipment and the total accumulated depreciation at December 31, 2009 and 2008 are as follows:





2009


2008Land

$
1,958,738


$
1,958,738Buildings and improvements


7,439,722



7,420,073Furniture and equipment


10,044,491



9,931,09319,442,951



19,309,904Less accumulated depreciation


10,212,560



9,453,130$
9,230,391


$
9,856,774





Depreciation expense for the years ending December 2009, 2008 and 2007 was $759 thousand, $859 thousand and $849 thousand, respectively.





Note 6. Investment in Bank Owned Life Insurance





The Bank is owner and designated beneficiary on life insurance policies maintained on certain of its officers and directors. The earnings from these policies are used to offset increases in employee benefit costs. The cash surrender value of these policies was $9.8 million and $9.4 million at December 31, 2009 and 2008, respectively.





68


Note 7. Maturities of Time Deposits





The aggregate amount of time deposits in denominations of $100,000 or more as of December 31, 2009 and 2008 was $74.2 million and $63.3 million, respectively. As of December 31, 2009, the scheduled maturities of time deposits are as follows:





December 312010

$
155,861,3452011


44,921,4642012


21,249,5092013


4,840,7632014


3,303,606$
230,176,687








Note 8. FHLB and Other Borrowings





Federal Home Loan Bank borrowings: The borrowings from the Federal Home Loan Bank of Atlanta, Georgia, are secured by qualifying residential and commercial first mortgage loans, qualifying home equity loans and certain specific investment securities. The Company, through its principal subsidiary, Central Virginia Bank, has available unused borrowing capacity from the Federal Home Loan Bank totaling $11.8 million. The borrowings at December 31, 2009 and 2008, consist of the following:





2009


2008Interest payable quarterly at a fixed rate of 2.99%,principal due and payable  March 14, 2014

$
5,000,000


$
5,000,000Interest payable quarterly at a fixed rate of 3.71%,principal due and payable on November 14, 2013


5,000,000



5,000,000Interest payable quarterly at a fixed rate of 4.5092%principal due and payable on July 24, 2017


5,000,000



5,000,000Interest payable quarterly at a fixed rate of 4.57%,principal due and payable on June 29, 2016, callable quarterly beginning September 29, 2006


5,000,000



5,000,000Interest payable quarterly at a fixed rate of4.655%, principal due and payable on June 29, 2011


5,000,000



5,000,000Interest payable quarterly at a fixed rate of 5.08%,principal due and payable on June 29, 2009, callable quarterly beginning September, 29, 2006


-



5,000,000Interest payable quarterly at a fixed rate of 4.315%,principal due and payable on August 22, 2016, callable quarterly beginning August 22, 2007


5,000,000



5,000,000Interest payable quarterly at a fixed rate of 3.82250%principal due and payable on November 19, 2012


10,000,000



10,000,000Overnight daily rate credit borrowing pre-payable daily at Bank’s option, maturityDecember 31, 2010, interest adjusted dailycurrently, 0.36% as of December 31, 2009.


10,000,000



14,500,000$
50,000,000


$
59,500,000








69





The contractual maturities of FHLB advances as of December 31, 2009 are as follows (dollars in thousands):





Due in 2010

$
10,000,000Due in 2011


-Due in 2012


15,000,000Due in 2013


5,000,000Due in 2014


5,000,000Thereafter


15,000,000$
50,000,000





Other borrowings: No federal funds were purchased at December 31, 2009 while $7.0 million was purchased at December 31, 2008.  The rate of interest was .6878% at December 31, 2008. These funds mature daily.





Securities sold under agreements to repurchase amounted to $1.0 million and $35.0 million at December 31, 2009 and December 31, 2008, respectively. These borrowings mature daily and are secured by U.S. Government Agency securities with fair values of $2.0 million at December 31, 2009 and $36.4 million at December 31, 2008. The rates of interest were 0.75% and 1.00% respectively at the same time periods. Repurchase agreements for customers total $1.7 million at December 31, 2009 and $1.3 million at December 31, 2008. These borrowings mature daily and are secured by U.S. Government Agency securities with fair values of $1.9 million at December 31, 2009 and $2.7 million at December 31, 2008. Interest rates of 0.35% and 0.50% were paid on these borrowings at the same time periods respectively.





On September 30, 2008, the Company entered into a loan agreement with the Bank’s primary correspondent bank, Community Bankers Bank, for $7.0 million. The terms of the loan are for a term of 12 months with monthly interest payments at a rate of 6%.  This loan was paid-in-full on March 31, 2009.





Borrowing facilities: The Bank has entered into various borrowing arrangements with other financial institutions for federal funds, and other borrowings. The total amount of borrowing facilities available as of December 31, 2009 total $128.8 million, of which $77.8        million remains available to borrow. The total amount of borrowing facilities at December 31, 2008, was approximately $142.7 million with $41.2 million available to borrow.





Note 9. Capital Trust Preferred Securities





Capital trust preferred securities represent preferred beneficial interests in the assets of Central Virginia Bankshares Statutory Trust I (Trust). The Trust holds $5.2 million in floating rate junior subordinated debentures due December 17, 2033, issued by the Company on December 17, 2003. Distributions on the $5.0 million in Preferred Securities are payable quarterly at an annual rate of three-month LIBOR plus 2.85% (3.13% and 6.61% at December 31, 2009 and 2008 respectively). However, the Company has the option to defer distributions for up to five years.  Cash distributions on the Preferred Securities are made to the extent interest on the debentures is received by the Trust. In the event of certain changes or amendments to regulatory requirements or federal tax rules, the Preferred Securities are redeemable in whole. Otherwise, the Preferred Securities are generally redeemable by the Company in whole or in part on or after December 17, 2008, at 100% of the liquidation amount. The Trust’s obligations under the Preferred Securities are fully and unconditionally guaranteed by the Company. For regulatory purposes, the Preferred Securities are considered a component of Tier I capital.  Refer to Note 22 for further discussion of deferred payments.





Note 10. Income Tax Matters





The Company files income tax returns in the U.S. federal jurisdiction and the Commonwealth of Virginia. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2008. The Company and the Bank file a consolidated federal income tax return.  The Company has federal net operating loss of $5.3 million available to offset future taxable income, which portions thereof will expire at various times through 2029.  The consolidated income tax (benefit) for the years ended December 31, 2009, 2008, and 2007, are as follows:







70





2009


2008


2007Currently tax expense (benefit)

$
(2,015,185
)

$
1,053,610


$
1,204,710Deferred tax benefit


(2,177,331
)


(6,801,320
)


(158,392
)$
(4,192,516
)

$
(5,747,710
)

$
1,046,318





A reconciliation of the expected income tax expense computed at 34% to the income tax expense (benefit) included in the consolidated statements of operations for the years ended December 31, 2009, 2008 and 2007 follows:





2009


2008


2007Computed “expected” tax expense (benefit)

$
(4,541,762
)

$
(5,226,624
)

$
1,711,910Tax-exempt interest


(188,909
)


(192,073
)


(212,301
)Disallowance of interest expensededuction for the portion attributableto carrying tax-exempt obligations


24,585



23,843



30,763Dividends received deduction


(39,552
)


(195,758
)


(246,946
)Increase in cash value of life insurance


(82,592
)


(73,853
)


(68,473
)Increase in allowance for loan losses


555,739



74,891



1,920Tax credits from limited partnershipinvestment


-



(159,355
)


(159,355
)Other


79,975



1,219



(11,200
)$
(4,192,516
)

$
(5,747,710
)

$
1,046,318





71


The components of the net deferred tax asset are as follows at December 31, 2009 and 2008:





2009


2008Deferred tax assets:Allowance for loan losses

$
3,455,389


$
1,232,434Less valuation allowance


(863,847
)


(308,109
)2,591,542



924,325Unrealized loss on securities available for sale


2,915,965



5,251,576Other than temporary impairment of securities


4,556,155



6,425,966Net operating loss carryforward


1,797,110



-Tax credit carryfoward


488,659



-Passive loss carryover


30,812



30,812Net deferred loan fees


125,422



125,422Accrued professional fees


-



20,767Accrued supplemental retirement expense


637,829



558,286Limited partnership investment


49,904



20,067Reserve for uncollectible late charges


6,809



6,809Interest income on nonaccrual loans


147,309



102,47913,347,516



13,466,509Deferred tax liabilities:Property and equipment


348,498



348,498Cumulative increase in cash surrender value


378,491



313,287Other investments


32,929



58,846759,918



720,631Net deferred tax asset

$
12,587,598


$
12,745,878





As of December 31, 2009 and 2008, the Company had recorded net deferred income tax assets (DTA) of $12.6 million and $12.7 million respectively.  The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is ‘more likely than not” that all or a portion of the deferred tax asset will not be realized.  “More likely than not” is defined as greater than a 50% chance.  All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed.  Management’s assessment is primarily dependent on historical taxable income and projections of future taxable income, which are directly related to the Company’s core earnings capacity and its prospects to generate core earnings in the future.  Projections of core earnings and taxable income are inherently subject to uncertainty and estimates that may change given an uncertain economic outlook, banking industry conditions and other factors.  Management is considering certain transactions that would increase the likelihood that a DTA will be realized.  Execution of certain transactions may be considered viable but changing market conditions, tax laws, and other factors could affect the success thereof.  Based upon management’s analysis of available evidence, it has determined that it is “more likely than not” that the Company’s deferred income tax assets as of December 31, 2009 will be fully realized and therefore no valuation allowance was recorded with the exception of a valuation allowance already assigned to the allowance for loan losses.  However, the Company can give no assurance that in the future its DTA will not be impaired since such determination is based on projections of future earnings and the possible effect of the certain transactions, which are subject to uncertainty and estimates that may change given economic conditions and other factors.  Due to the uncertainty of estimates and projections, it is possible that the Company will be required to record adjustments to the valuation allowance in future reporting periods.





72


Note 11. Defined Contribution Plan





The Bank provides a qualified defined contribution plan for all eligible full-time and part-time employees. The plan is governed by ERISA and the plan document. The plan is administered through the Virginia Bankers Association Benefits Corporation and may be amended or terminated by the Board of Directors at any time. The defined contribution plan is comprised of two components, Profit-Sharing and the 401K. Once eligible and participating, employees are 100 percent vested in all employer and employee contributions.





Profit-Sharing: This portion of the plan is discretionary and is based on the profitability of the Company on an annual basis. The Board of Directors approves the Company’s profit-sharing percentage contribution annually. The approved contribution amount is credited to the participant’s individual account during the first quarter of each year for the prior year. Contributions for 2008, and 2007 represented 3.5 percent, and 7.0 percent, respectively of all participants’ eligible wages.  The Company did not make a profit-sharing contribution in 2009.





401K: This portion of the plan provides for employee contributions of a portion of their eligible wages on a pre-tax basis subject to statutory limitations. The Bank provides a matching contribution of $1.00 for every $1.00 the participant contributes up to 3 percent of the participant’s eligible wages and $.50 for every $1.00 contributed of the next 2 percent of their eligible wages.





The total contributions to both of the above plans for the years ended December 31, 2009, 2008, and 2007, were $161 thousand, $343 thousand, and $504 thousand, respectively.





Note 12. Supplemental Executive Retirement Agreements





The Bank has established a Supplemental Executive Retirement Plan, (the “SERP”), a nonqualified, unfunded, defined benefit arrangement for selected executive and senior officers of the Bank as designated by the Board of Directors. The participants in the SERP as of December 31, 2009 include the four executive officers as well as six other senior officers. The costs associated with this plan, as well as several other general employee benefit plans are partially offset by earnings attributable to the Bank’s purchase of single premium Bank Owned Life Insurance (“BOLI”). The SERP provides an annual award equal to 25 percent of the participant’s final compensation, payable monthly over a 15-year period, following normal retirement at age 65, provided the participant has been employed by the Bank for a minimum of 8 years. A further provision exists for early retirement beginning at age 60, subject to the same 8-year service requirement, but with reduced benefits depending on the number of years preceding age 65 the participant elects to retire. Should the participant’s employment terminate due to disability or death, and the requirements necessary to receive a supplemental benefit under the SERP have otherwise been met, the benefit shall be paid to the participant or the surviving spouse. No benefits are payable should the participant’s employment terminate for any reason other than retirement, disability, death, or a change in control. The Company calculates the adequacy of the total accrued SERP liability as well as the annual expense to be recorded each year.





The accrued liability payable at December 31, 2009 and 2008 totaled $1.9 million and $1.6 million, respectively. The Company’s expense related to the plan was $249 thousand, $345 thousand, and $318 thousand for 2009, 2008, and 2007, respectively.





Note 13. Commitments and Contingencies





Financial instruments with off-balance-sheet risk: The Bank is party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.





The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as they do for on-balance-sheet instruments. A summary of the Bank’s commitments at December 31, 2009 and 2008 is as follows:





2009


2008Commitments to extend credit

$
55,472,077


$
65,672,372Unfunded commitments under lines of credit


5,191,466



5,525,328Standby letters of credit


4,425,130



3,891,842$
65,088,673


$
75,089,542





73





Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s credit-worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation of the party. Collateral held varies, but may include accounts receivable, crops, livestock, inventory, property and equipment, residential real estate, and income-producing commercial properties.





Unfunded commitments under commercial lines-of-credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines-of-credit are uncollateralized and usually do not contain a specified maturity date and ultimately may not be drawn upon to the total extent to which the Company is committed.





Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Collateral held varies as specified above and is required in instances which the Bank deems necessary.





Concentrations of credit risk: All of the Bank’s loans, commitments to extend credit, and standby letters of credit have been granted to customers within the state and, more specifically, the area surrounding Richmond, Virginia. The concentrations of credit by type of loan are set forth in Note 3. Although the Bank has a diversified loan portfolio, a substantial portion of its debtors’ ability to honor their contracts is dependent upon the agribusiness and construction sectors of the economy.





Note 14. Related Party Transactions





The Company’s banking subsidiary has had, and may be expected to have in the future, banking transactions in the ordinary course of business with directors, officers, their immediate families, and affiliated companies in which they are principal stockholders (commonly referred to as related parties), all of which have been, in the opinion of management, on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others.





Aggregate loan transactions with related parties for the years ended December 31, 2009 and 2008 were as follows:





2009


2008Balance, beginning

$
5,063,941


$
3,504,807New loans


614,091



3,727,570Repayments


(1,068,614
)


(2,168,436
)Balance, ending

$
4,609,418


$
5,063,941





Note 15. Preferred Stock and Warrant





On January 22, 2009,  the Company held a Special Meeting of Shareholders for the purpose of approving an amendment and restatement of the Articles of Incorporation of Central Virginia Bankshares, Inc. to authorize the issuance of preferred stock. The primary purpose of authorizing preferred stock is to allow participation in the Capital Purchase Program (“Capital Purchase Program”) established by the U.S. Department of the Treasury (“Treasury”) under the Emergency Economic Stabilization Act of 2008 (“EESA”). At the meeting, affirmative votes were received from not less than two-thirds of the shares of common stock then outstanding thereby approving the amendment of the Articles of Incorporation and authorizing the Company to issue up to 1,000,000 shares of preferred stock.





On January 30, 2009, as part of the Capital Purchase Program, the Company issued and sold to Treasury for an aggregate purchase of $11,385,000 in cash (i) 11,385 shares of the Company’s fixed rate cumulative perpetual preferred stock, Series A, par value $1.25 per share, having a liquidation preference of $1,000 per share (“Series A Preferred Stock”) and (ii) a ten-year warrant to purchase up to 263,542 shares of the Company’s common stock, par value $1.25 per share (“Common Stock”), at an initial exercise price of $6.48 per share (“Warrant”). The Series A Preferred Stock may be treated as Tier 1 capital for regulatory capital adequacy determination purposes.





74


Cumulative dividends on the Series A Preferred Stock will accrue on the liquidation preference at a rate of 5% per annum for the first five years, and at a rate of 9% per annum thereafter. The Series A Preferred Stock has no maturity date and ranks senior to the Common Stock with respect to the payment of dividends. The Company may redeem the Series A Preferred Stock at 100% of their liquidation preference (plus any accrued and unpaid dividends) beginning on January 30, 2012. Prior to this date, the Company may redeem the Series A Preferred Stock at 100% of their liquidation preference (plus and accrued and unpaid dividends) if (i) the Company has raised aggregate gross proceeds in one or more qualified equity offerings (as defined in the purchase agreement with Treasury) of at least $2.85 million, and (ii) the aggregate redemption price does not exceed the aggregate net proceeds from such qualified equity offerings. Pursuant to the American Reinvestment and Recovery Act of 2009, the Company may also redeem the Series A Preferred Stock with the consent of Federal Reserve.





The purchase agreement pursuant to which the Series A Preferred Stock and the Warrant were sold contains limitations on the payment of dividends or distributions on the Common Stock (including the payment of the cash dividends in excess of the Company’s current quarterly cash dividend of $0.105 per share) and on the Company’s ability to repurchase, redeem or acquire its Common Stock or other securities, and subjects the Company to certain of the executive compensation limitations included in the EESA until such time as Treasury no longer owns any debt or equity securities acquired through the Capital Purchase Program. Refer to Note 22 for further discussion on the discontinuation of dividends.





Note 16. Stock Dividend





On June 13, 2008, the Company issued 122,425 shares of common stock pursuant to a 5% stock dividend for stockholders of record as of May 30, 2008. As a result of the stock dividend, common stock was increased by $153 thousand, surplus was increased by $1.8 million, and retained earnings was decreased by $2.0 million. All references in the accompanying consolidated financial statements to the number of common shares and per-share amounts for prior periods have been restated to reflect this stock dividend.  No stock dividends were issued in 2009.





Note 17. Stock Option Plan





The Company has a Stock Plan that provides for the grant of Stock Options up to a maximum of 341,196 shares of common stock of which 185,389 shares have not been issued. This Plan was adopted to foster and promote the long-term growth and financial success of the Company by assisting in recruiting and retaining directors and key employees by enabling individuals who contribute significantly to the Company to participate in its future success and to associate their interests with those of the Company. The options were granted at the market value on the date of each grant. The maximum term of the options is ten years. All shares reported have been restated for the 5% stock dividend in 2008.





The following table presents a summary of options under the Plan at December 31, 2009:





Shares


Weighted Average Exercise Price


Aggregate Intrinsic Value(1)Outstanding at beginning of year


49,230


$
14.04Granted


-



-Exercised


-



-Forfeited


(27,441
)


11.51Outstanding at end of year


21,789



17.23


$
-Options exercisable at year-end


21,789


$
17.23


$
-





(1) The aggregate intrinsic value of a stock option in the table above represents the total pre-tax intrinsic value (the amount by which the current market value of the underlying stock exceeds the exercise price of the option) that would have been received by the option holders had all option holders exercised their options on December 31, 2009. This amount changes based on changes in the market value of the Company’s stock.








75


Information pertaining to options outstanding at December 31, 2009 is as follows:





Options Outstanding
Options ExercisableRange of Exercise Prices
Number Outstanding
Weighted Average Remaining Contractual Life
Weighted

Average Exercise Price
Number Exercisable
Weighted

Average Exercise Price$7.52

$11.12 - $12.53

$15.21 - $24.81
2,458

4,924

14,407
0.04 years

2.55 years

3.97 years
$7.52

$11.53

$20.83
2,458

4,924

14,407
$7.52

$11.53

$20.83





No options were exercised in 2009.





Note 18.  (Loss) Earnings Per Common Share





The following data show the amounts used in computing (loss) earnings per common share and the effect on income and the weighted average number of shares of dilutive potential common stock for the years ended December 31, 2009, 2008 and 2007.





2009


2008


2007(Loss) income available to common stockholdersused in basic EPS

$
(9,756,009
)

$
(9,624,714
)

$
3,988,711Weighted average number of commonshares used in basic EPS


2,606,162



2,579,812



2,553,760Effect of dilutive securities:Stock options


–



–



29,892Weighted number of common shares anddilutive potential stock used in diluted EPS


2,606,162



2,579,812



2,583,652





All shares reported have been restated for the 5% stock dividend distributed in June 2008. For 2009 and 2008, stock options for 21,789 and 49,230 shares of common stock, respectively, were not considered in computing diluted earnings per common share because they were anti-dilutive.





Note 19. Regulatory Matters





The Company (on a consolidated basis) and Bank are subject to various regulatory capital requirements administered by its primary federal regulator, the Federal Reserve Bank. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly, additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and Bank must meet specific capital guidelines that involve quantitative measures of the Company’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.





Quantitative measures established by regulation to ensure capital adequacy require the Company to maintain minimum amounts and ratios as set forth in the table below of total and Tier I capital as defined in the regulations to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, 2009, that the Company and Bank meet all capital adequacy requirements to which it is subject.







76


As of December 31, 2009, the most recent notification from the Federal Reserve Bank categorized the Bank as adequately capitalized under the regulatory framework for prompt corrective action. To be categorized as such, the Bank must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the institution’s category.


To Be Well CapitalizedFor Capital
Under Prompt CorrectiveActual
Adequacy Purposes
Action ProvisionsAmount
Ratio
Amount
Ratio
Amount
Ratio(Dollars in Thousands)As of December 31, 2009:Total Capital (to Risk Weighted Assets)Consolidated
$31,649
9.23%
$27,435
8.00%
N/ACentral Virginia Bank
30,248
8.83%
27,396
8.00%
$34,245
10.00%Tier I Capital (to Risk Weighted Assets)Consolidated
27,285
7.96%
13,718
4.00%
N/ACentral Virginia Bank
25,884
7.56%
13,698
4.00%
$20,547
6.00%Tier I Capital (to Average Assets)Consolidated
27,285
5.76%
18,934
4.00%
N/ACentral Virginia Bank
25,884
5.49%
18,870
4.00%
$23,587
5.00%As of December 31, 2008:Total Capital (to Risk Weighted Assets)Consolidated
$ 35,140
9.19%
$ 30,587
8.00%
N/ACentral Virginia Bank
40,595
10.64%
30,524
8.00%
$ 38,155
10.00%Tier I Capital (to Risk Weighted Assets)Consolidated
31,344
8.20%
15,294
4.00%
N/ACentral Virginia Bank
36,799
9.64%
15,262
4.00%
22,893
6.00%Tier I Capital (to Average Assets)Consolidated
31,344
6.55%
19,141
4.00%
N/ACentral Virginia Bank
36,799
7.72%
19,070
4.00%
23,838
5.00%
 
 Because our total risk-based capital ratio was below 10% as of December 31, 2009, we are considered to be only “adequately capitalized” under the regulatory framework for prompt corrective action.  Similarly, the Bank is considered to be “adequately capitalized” under applicable regulations.  Section 29 of the Federal Deposit Insurance Act limits the use of brokered deposits by institutions that are less than “well-capitalized” and allows the FDIC to place restrictions on interest rates that institutions may pay.
 
 On May 29, 2009, the FDIC approved a final rule to implement new interest rate restrictions on institutions that are not “well-capitalized”.   The rule, which became effective on January 1, 2010, limits the interest rate paid by such institutions to 75 basis points above a national rate, as derived from the interest rate average of all institutions.  On December 4, 2009, the FDIC issued a Financial Institution Letter, FIL-69-2009, which requires institutions that are not well-capitalized to request a determination from the FDIC whether they are operating in an area where rates paid on deposits are higher than the national rate.  The Financial Institution Letter allows the institutions that submit determination requests by December 31, 2009 to follow the national rate for local customers by March 1, 2010, if determined not to be operating in a high rate area.  Regardless of the determination, institutions must use the national rate caps to determine conformance for all deposits outside the market area beginning January 1, 2010.
 
 Although there can be no assurance that we will be successful, the Board and management will make their utmost efforts to raise sufficient capital to regain “well-capitalized” status at all levels, and we are continuing to explore options for raising additional capital.


Note 20. Fair Value Measurements





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










77


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





Level 1 -
Valuation is based on quoted prices in active markets for identical assets and liabilities.Level 2 -
Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which significant assumptions can be derived primarily from or corroborated by observable data in the market.Level 3 -
Valuation is based on model-based techniques that use one or more significant inputs or assumptions that are unobservable in the market.




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


Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or substantially similar securities by using pricing models that considers observable market data (Level 2).





The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 and December 31, 2008:





Fair Value Measurements at December 31, 2009 UsingDescription
Balance as of December 31, 2009
Quoted Prices in Active Markets for Identical Assets

(Level 1)
Significant Other Observable Inputs

(Level 2)
Significant Unobservable Inputs

(Level 3)Available for Sale Securities
$122,965,676
$    -
$122,965,676
$    -








Fair Value Measurements at December 31, 2008 UsingDescription
Balance as of December 31, 2008
Quoted Prices in Active Markets for Identical Assets

(Level 1)
Significant Other Observable Inputs

(Level 2)
Significant Unobservable Inputs

(Level 3)Available for Sale Securities
$140,854,918
$    -
$140,854,918
$    -





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





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





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





Loans held for sale: Loans held for sale are carried at the lower of cost or market value. These loans currently consist of one-to-four family residential loans originated for sale in the secondary market and SBA loan certificates held pending being pooled into an SBA security. Fair value is based on the price secondary markets are currently offering for similar loans and SBA certificates using observable market data which is not materially different than cost due to the short duration between origination and sale (Level 2). As such, the Company records any fair value adjustments on a nonrecurring basis. No nonrecurring fair value adjustments were recorded on loans held for sale during the year ended December 31, 2009. Gains and losses on the sale of loans are recorded within income from mortgage banking on the Consolidated Statements of Operations.





78


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





The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis during the period.





Fair Value Measurements at December 31, 2009 UsingDescription

Balance as of December 31, 2009


Quoted Prices in Active Markets for Identical Assets

(Level 1)


Significant Other Observable Inputs

(Level 2)


Significant Unobservable Inputs

(Level 3)Impaired Loans Net of Valuation Allowance

$
24,476,505


$
-


$
24,476,505


$
-Other Real Estate Owned

$
3,574,864


$
-


$
3,574,864





Fair Value Measurements at December 31, 2008 UsingDescription

Balance as of December 31, 2008


Quoted Prices in Active Markets for Identical Assets

(Level 1)


Significant Other Observable Inputs

(Level 2)


Significant Unobservable Inputs

(Level 3)Impaired Loans Net of Valuation Allowance

$
2,987,834


$
-


$
2,987,834


$
-Other Real Estate Owned

$
1,172,972


$
-


$
1,172,972





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





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





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





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


79


Loans held for sale:  The carrying amount of loans held for sale approximate their fair values.





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





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





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





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





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





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





The following is a summary of the carrying amounts and estimated fair values of the Company’s financial assets and liabilities at December 31, 2009 and 2008:





2009


2008Dollars in 000’s


Dollars in 000’sCarrying Amount


Estimated Fair Value


Carrying Amount


Estimated Fair ValueFinancial assets:Cash and due from banks

$
8,010


$
8,010


$
6,565


$
6,565Federal funds sold


4,493



4,493



-



-Securities available for sale


122,966



122,966



140,855



140,855Securities held to maturity


4,441



4,526



5,087



5,114Loans held for sale


2,143



2,143



1,102



1,102Loans, net


281,490



289,738



289,609



298,411Accrued interest receivable


2,415



2,415



2,808



2,808Financial liabilities:Demand and variable rate deposits


155,350



155,350



126,421



126,421Certificates of deposit


230,177



233,287



221,542



230,832Federal funds purchased andsecurities sold under repurchaseagreements


2,707



2,707



43,302



43,302FHLB borrowings


50,000



53,255



59,500



59,590Short-term borrowings


-



-



7,000



7,000Capital trust preferred securities


5,155



5,155



5,155



5,155Accrued interest payable


574



574



646



646





At December 31, 2009 and 2008, the Company had outstanding standby letters of credit and commitments to extend credit.  These off-balance sheet financial instruments are generally exercisable at the market rate prevailing at the date the underlying transaction will be completed, and, therefore, they were deemed to have an immaterial affect on the current fair market value.





80


Note 21. Condensed Parent-Only Financial Statements





Financial statements for Central Virginia Bankshares, Inc., are presented below.





BALANCE SHEETSDecember 31,Assets

2009


2008Cash

$
188,364


$
317,795Investment in subsidiary


29,802,841



30,738,452Securities available for sale, at fair value


1,157,196



1,103,875Accrued interest receivable


5,053



8,105Other assets


313,997



296,102$
31,467,451


$
32,464,329LiabilitiesCapital trust preferred securities

$
5,155,000


$
5,155,000Short-term borrowings


-



7,000,000Accrued interest payable


-



1,167Other liabilities


93,400



-5,248,400



12,156,167Stockholders' EquityPreferred stock


11,385,000



-Common stock


3,272,932



3,245,275Surplus


16,893,243



16,870,988Retained earnings


261,269



10,380,523Common stock warrant


411,947



-Discount on preferred stock


(344,939
)


-Accumulated other comprehensive (loss), net


(5,660,401
)


(10,188,624
)Total stockholders’ equity


26,219,051



20,308,162Total liabilities and stockholders’ equity

$
31,467,451


$
32,464,329








81





STATEMENTS OF OPERATIONSYears Ended December 31,2009


2008


2007Income:Dividends received from subsidiary

$
-


$
1,015,000


$
2,115,000Equity (deficit) in undistributed earnings (loss) of subsidiary


(8,930,158
)


(10,225,902
)


2,242,806Dividend income


77,966



36,788



32,872Net realized gains on sale of securities available for sale


2,623



-



3,600Gain (loss) on valuation of swap agreement


-



-



(27,447
)Gain (loss) on sale of assets


-



-



(1,932
)Income (expense) on swap agreement


-



-



33,777Other income


775



1,301



1,375(8,848,794
)


(9,172,813
)


4,400,051Expenses:Operating expenses


142,595



254,901



188,900Interest expense


305,169



436,728



414,414447,764



691,629



603,314(Loss) income before income taxes


(9,296,558
)


(9,864,442
)


3,796,737Income tax (benefit)


(130,951
)


(239,728
)


(191,974
)Net (loss) income

$
(9,165,607
)

$
(9,624,714
)

$
3,988,711Effective dividend on preferred stock


590,402



-



-Net (loss) income available

to common shareholders

$
(9,756,009
)

$
(9,624,714
)

$
3,988,711





82





STATEMENTS OF CASH FLOWSYears Ended December 31,2009


2008


2007Cash Flows From Operating ActivitiesNet (loss) income

$
(9,165,607
)

$
(9,624,714
)

$
3,988,711Adjustments to reconcile net (loss) income to netcash provided by operating activities:Undistributed (earnings) deficit of subsidiary


8,930,158



10,225,902



(2,242,806
)Deferred income taxes


(100,719
)


(15,096
)


-Accretion on securities


5,391



(807
)


-Amortization of trust preferred origination cost


-



20,625



22,500(Gain) loss on valuation of Swap Agreement


-



-



27,447Loss on write-down of securities


-



44,400



-Realized (gain) on sales of securities available for sale


(2,623
)


-



(3,600
)Realized (gain) loss on sale of assets


-



-



1,932(Increase) decrease in other assets:Accrued interest receivable


3,052



(8,105
)


-Other assets


505,926



(60,575
)


(57,898
)Increase in other liabilities:Accrued interest payable


(1,167
)


1,167



-Other liabilities


169,182



-



-Net cash provided by operating activities


343,593



582,797



1,736,286Cash Flows From Investing ActivitiesProceeds from sales and calls of securities available for sale


1,020,875



-



120,000Purchase of securities available for sale


(1,540,172
)


(775,000
)


(76,875
)Capital investment in subsidiary bank


(3,502,000
)


(6,000,000
)


-Proceeds from sale of assets


-



-



112,525Net cash (used in) provided by investing activities


(4,021,297
)


(6,775,000
)


155,650Cash Flows From Financing ActivitiesNet proceeds from issuance of preferred stock


11,348,189



-



-Net proceeds (repayment) from short-term borrowings


(7,000,000
)


7,000,000



-Net proceeds from issuance of common stock


86,723



273,650



445,948Payment for fractional shares of common stock


-



(4,691
)


-Dividends paid on preferred stock


(450,657
)


-



-Dividends paid on common stock


(435,982
)


(1,640,509
)


(1,751,165
)Net cash provided by (used in) financing activities


3,548,273



5,628,450



(1,305,217
)(Decrease) increase in cash


(129,431
)


(563,753
)


586,719Cash, beginning


317,795



881,548



294,829Cash, ending

$
188,364


$
317,795


$
881,548





83


Note 22. Subsequent Events


On February 12, 2010, the Company notified the U.S. Department of the Treasury that pursuant to Section 3(b) of the Certificate of Designations for the $11,385,000 Fixed Rate Cumulative Perpetual Preferred Stock, Series A, (CUSIP 155792989), the Board of Directors of Central Virginia Bankshares, Inc. determined that the payment of the quarterly cash dividend of $142,312.50 due on February 16, 2010, and subsequent quarterly payments on such preferred stock should be deferred.
  On March 4, 2010 the Company notified U.S. Bank, National Association that pursuant to Section 2.11 of the Indenture dated December 17, 2003 among Central Virginia Bankshares, Inc. as Issuer and U.S. Bank, National Association, as Trustee for the $5,155,000 Floating Rate Junior Subordinated Deferrable Interest Debentures due 2033, (CUSIP 155793AA0), the Board of Directors of Central Virginia Bankshares, Inc. had determined to defer the regular quarterly Interest Payments on such Debentures, effective March 31, 2010.
 
 Subsequent to December 31, 2009, Management completed their loan by loan impairment analysis of adversely classified loans.  This analysis resulted in an increase of impaired loans and related valuation allowance to $53,084,640 and $6,629,570, respectively, from previously reported amounts of $12,495,516 and $3,136,230, respectively.  Accordingly, impaired loan disclosures in Note 3 and Note 20 have been revised to reflect these adjustments.





84





SIGNATURES





Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





CENTRAL VIRGINIA BANKSHARES, INC.Date: May 17, 2010
By:
/s/ Ralph Larry LyonsRalph Larry LyonsPresident and Chief Executive Officer





Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.








May 17, 2010
/s/ Ralph Larry LyonsRalph Larry Lyons

President and Chief Executive Officer; Director

(Principal Executive Officer)May 17, 2010
/s/ Charles F. Catlett, IIICharles F. Catlett, III

Senior Vice President and Chief Financial Officer

(Principal Financial Officer)May 17, 2010
/s/ Robert B. EastepRobert B. Eastep

Vice President and Chief Accounting Officer

(Principal Accounting Officer)May 17, 2010
/s/ John B. LarusJohn B. Larus

DirectorMay 17, 2010
/s/ Elwood C. MayElwood C. May

Secretary of the Board of Directors








85





May 17, 2010
/s/ James T. NapierJames T. Napier

Chairman of the Board of DirectorsMay 17, 2010
/s/ Kemper W. Baker, Jr.Kemper W. Baker, Jr.

DirectorMay 17, 2010
/s/ Roseleen P. RickRoseleen P. Rick

DirectorMay 17, 2010
/s/ William C. Sprouse, Jr.William C. Sprouse, Jr.

DirectorMay 17, 2010
/s/ Phoebe P. ZarnegarPhoebe P. Zarnegar

DirectorMay 17, 2010
/s/ Clarke C. JonesClarke C. Jones

Director





86


EXHIBITS INDEX





Item No.
Description3.1
Amended and Restated Articles of Incorporation, as amended January 27, 2009 (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008).3.2
Articles of Amendment to the Amended and Restated Articles of Incorporation (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 4, 2009).3.3
Bylaws as Amended and Restated (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on December 21, 2004.1
Specimen of Registrant’s Common Stock Certificate (incorporated herein by reference to Exhibit 1 to the Registrant’s Form 8-A filed with the SEC on May 2, 1994).4.2
Specimen of Registrant’s Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A (incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 4, 2009).4.3
Warrant to Purchase Shares of Common Stock, dated January 30, 2009 (incorporated herein by reference to Exhibit 4.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 4, 2009).10.1
Supplemental Executive Retirement Plan (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005).10.2
Letter Agreement, dated as of January 30, 2009, by and between Central Virginia Bankshares, Inc. and the United States Department of the Treasury (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 4, 2009).10.3
Form of Waiver agreement between the Senior Executive Officers and Central Virginia Bankshares, Inc. (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 4, 2009).10.4
Form of Consent agreement between the Senior Executive Officers and Central Virginia Bankshares, Inc. (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Current Report on Form 8-K filed with the SEC on February 4, 2009).10.5
Employment Agreement, dated as of February 17, 2009, by and between Central Virginia Bankshares, Inc. and Ralph Larry Lyons (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on March 31, 2009).10.6
Change of Control Agreement dated as of April 21, 2009, by and between Central Virginia Bankshares, Inc. and Charles F. Catlett, III (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 24, 2009).10.7
Change of Control Agreement dated as of April 21, 2009, by and between Central Virginia Bankshares, Inc. and Leslie S. Cundiff (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed with the SEC on April 24, 2009).21.1
Subsidiaries of the Registrant (incorporated herein by reference to Exhibit 21.1 to the Registrant’s Form 10-K filed with the SEC on April 15, 2010).23.1
Consent of Yount, Hyde & Barbour, P.C. (filed herewith).31.1
Rule 13a-14(a) Certification of Chief Executive Officer (filed herewith).31.2
Rule 13a-14(a) Certification of Chief Financial Officer (filed herewith).32.1
Statement of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 (filed herewith).99.1
TARP Certification of Chief Executive Officer (incorporated herein by reference to Exhibit 99.1 to the Registrant’s Form 10-K filed with the SEC on April 15, 2010).99.2
TARP Certification of Chief Financial Officer (incorporated herein by reference to Exhibit 99.2 to the Registrant’s Form 10-K filed with the SEC on April 15, 2010).