SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C. 20549





FORM
10-K





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.











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
            36ITEM
      11.
            EXECUTIVE
      COMPENSATION
            36ITEM
      12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERSAND
      MANAGEMENT AND RELATED STOCKHOLDER MATTERS
            36ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS,AND DIRECTOR
      INDEPENDENCE
            36ITEM
      14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES
            36PART
      IVITEM
      15.
            EXHIBITS AND
      FINANCIAL STATEMENT SCHEDULES
            36








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




As of the end of
the period covered by this report, the Company has evaluated the effectiveness
of and documented the design and operations of its disclosure controls and
procedures that are designed to insure that the Company records, processes,
summarizes and reports in a timely and effective manner the information required
to be disclosed in reports filed with or submitted to the Securities and
Exchange Commission. In designing and evaluating the disclosure controls and
procedures, management recognizes that no control or procedure, no matter how
well designed and operated, can provide absolute assurance that the desired
control objectives will be achieved. However, management believes it has both
appropriate and effective controls over financial disclosure and reporting, and
has applied prudent judgment in evaluating the cost-benefit relationship of
these controls and procedures.




The Company carried
out its evaluation under the supervision and with the participation of the
Company’s Chief Executive Officer and Chief Financial Officer. Based upon this
evaluation, they concluded that, as of the date of this evaluation, the
Company’s disclosure controls are effective and adequate to ensure the clarity
and material completeness of the Company’s disclosure in its periodic reports
filed with or submitted to the Securities and Exchange Commission.





Management's
Annual 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.





Based on our
evaluation under the frameworks described above, our management has concluded
that our internal control over financial reporting was effective 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.





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.





ITEM
      9B.
            OTHER
      INFORMATION





None.


PART III





ITEM
      10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





Information set
forth under the heading “ELECTION OF DIRECTORS”; “Committees”; “Code of Ethics”;
and “Section 16(a) Beneficial Ownership Reporting Compliance” of the definitive
2010 Proxy Statement of the registrant furnished to shareholders in connection
with its Annual Meeting to be held in June 2010 (the “2010 Proxy Statement”) is
hereby incorporated by reference.





ITEM
      11.
            EXECUTIVE
      COMPENSATION





Information set
forth under the heading “REMUNERATION” (except for the information set forth
under the heading “Compensation Committee Report on Executive Compensation”) of
the 2010 Proxy Statement is hereby incorporated by reference.





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





Information set
forth under the heading “SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL
OWNERS” and “Equity Compensation Plan Information” of the 2010 Proxy Statement
are hereby incorporated by reference.





ITEM
      13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE





Information set
forth under the heading “Certain Transactions” of the 2010 Proxy Statement is
hereby incorporated by reference.





ITEM
      14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES





Information set
forth under the heading “Fees of Independent Public Accountants” and
“Pre-Approved Services” of the 2010 Proxy Statement is hereby incorporated by
reference.





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).   36
  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 (filed herewith).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 (filed
  herewith).99.2
            TARP
      Certification of Chief Financial Officer (filed
  herewith).


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





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






























































37


CENTRAL
VIRGINIA BANKSHARES, INC.





CONSOLIDATED
FINANCIAL REPORT





DECEMBER
31, 2009















































































































































38
















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, 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.





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








39





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.














40





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.




41


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.





42





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.

















43





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.








44


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)














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.
  46


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


47


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.





48


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.





49


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.


50


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





51


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








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
            )





52





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.








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








53


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





54


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
            
            $
            2,140,020
            
            
            $
            4,649,709Impaired
      loans with a valuation allowance
            
            
            10,355,496
            
            
            
            4,121,208Total
      impaired loans
            
            $
            12,495,516
            
            
            $
            8,770,917Valuation
      allowance related to impaired loans
            
            $
            3,136,230
            
            
            $
            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.





55


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








56





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:







57





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





58


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.





59


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





60





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.





61


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.








62


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.





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.





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.





63


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.





64


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
            $
      7,219,266
            $   -
            $
      7,219,266
            $    -





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
            $    -





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.


65


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.





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








66





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





67





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





68


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.














69





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: April
      15, 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.








April 15,
      2010
            /s/ Ralph Larry
      LyonsRalph Larry
      Lyons
              President and
      Chief Executive Officer; Director
              (Principal
      Executive Officer)April 15,
      2010
            /s/ Charles F. Catlett,
      IIICharles F.
      Catlett, III
              Senior Vice
      President and Chief Financial Officer
              (Principal
      Financial Officer)April 15,
      2010
            /s/ Thomas R. Thornton,
      Jr.Thomas R.
      Thornton, Jr.
              Vice
      President
              (Principal
      Accounting Officer)April 15,
      2010John B.
      Larus
              DirectorApril 15,
      2010
            /s/ Elwood C.
      MayElwood C.
      May
              Secretary of
      the Board of Directors








70





April 15,
      2010
            /s/ James T.
      NapierJames T.
      Napier
              Chairman of
      the Board of DirectorsApril 15,
      2010Kemper W.
      Baker, Jr.
              DirectorApril 15,
      2010Roseleen P.
      Rick
              DirectorApril 15,
      2010
            /s/ William
      C. Sprouse, Jr.William C.
      Sprouse, Jr.
              DirectorApril 15,
      2010
            /s/ Phoebe P.
      ZarnegarPhoebe P.
      Zarnegar
              DirectorApril 15,
      2010
            /s/ Clarke C.
      JonesClarke C.
      Jones
              Director





71


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 (filed herewith).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 (filed
  herewith).99.2
              TARP
      Certification of Chief Financial Officer (filed
  herewith).