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XENITH BANKSHARES, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) The following is management's discussion and analysis of the company's consolidated financial condition, changes in financial condition, results of operations, liquidity, cash flows and capital resources. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes in Part I, Item 1, "Financial Statements" in this Quarterly Report on Form 10-Q ("Form 10-Q") and Part II, Item 8, "Financial Statements and Supplementary Data" in the company's Annual Report on Form 10-K for the year ended December 31, 2010 ("2010 Form 10-K"). The data presented at June 30, 2011 and for the three- and six-month periods ended June 30, 2011 is derived from unaudited interim financial statements and include, in the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the data for such period. All references to "Xenith Bankshares", "our company", "we", "our" or "us" are to Xenith Bankshares, Inc. and its wholly-owned subsidiary, Xentith Bank, collectively. All references to "the Bank" are to Xenith Bank. All dollar amounts included in the tables in this discussion and analysis are in thousands. BUSINESS OVERVIEW Xenith Bankshares is a Virginia corporation that is the bank holding company for Xenith Bank, which is a Virginia banking corporation organized and chartered pursuant to the laws of the Commonwealth of Virginia and a member of the Federal Reserve. The Bank is a full-service, locally-managed commercial bank specifically targeting the banking needs of middle market and small businesses, local real estate developers and investors, private banking clients and select retail banking clients, which we refer to as our target customers. We are geographically focused on the Washington, D.C.-Arlington-Alexandria, Richmond and Virginia Beach-Norfolk-Newport News metropolitan statistical area, which we refer to as our target markets. As of June 30, 2011, the Bank conducts its principal banking activities through its five branches, with one branch located in Tysons Corner, Virginia, one branch located in Richmond, Virginia and three branches located in Suffolk, Virginia. We acquired the three branches located in Suffolk, Virginia in the merger with First Bankshares, Inc., the parent company of its wholly-owned subsidiary SuffolkFirst Bank. SuffolkFirst Bank opened its first branch in Suffolk, Virginia in 2003 under the name of SuffolkFirst Bank. All of the former SuffolkFirst Bank branches operate under the name Xenith Bank. As of June 30, 2011, we had total assets of $288.6 million, total loans, net of the allowance for loan and lease losses, of $180.7 million, total deposits of $202.0 million and shareholders' equity of $64.8 million. Our services and products consist primarily of taking deposits from, and making loans to, our target customers within our target markets. We provide a broad selection of commercial and retail banking products, including commercial and industrial loans, commercial and residential real estate loans, and select consumer loans. We also offer a wide range of checking, savings and treasury products, including remote deposit capture, automated clearing house transactions, debit cards, 24-hour ATM access, and Internet banking and bill pay service. We do not engage in any activities other than banking activities. The primary source of our revenue is net interest income, which represents the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities used to fund those assets. Interest-earning assets include loans, available-for-sale securities, and federal funds sold. Interest-bearing liabilities include deposits and borrowings. Sources of non- 23 -------------------------------------------------------------------------------- Table of Contents interest income include service charges on deposit accounts, fees from loan originations, gains on the sale of securities, and other miscellaneous income. Deposits and Federal Home Loan Bank borrowed funds are our primary sources of funding. Our largest expenses are interest on our funding sources and salaries and related employee benefits. Merger of First Bankshares, Inc. and Xenith Corporation First Bankshares, Inc. ("First Bankshares") was incorporated in Virginia on March 4, 2008, and was the holding company for SuffolkFirst Bank, a community bank founded in the City of Suffolk, Virginia in 2002. On December 22, 2009, First Bankshares and Xenith Corporation, a Virginia corporation, completed the merger of Xenith Corporation with and into First Bankshares ("the merger"), with First Bankshares being the surviving entity in the merger. The merger was completed in accordance with the terms of an agreement of merger and related plan of merger, dated as of May 12, 2009, as amended. At the effective time of the merger, First Bankshares amended its amended and restated articles of incorporation to, among other things, change its name to Xenith Bankshares, Inc. In addition, following the completion of the merger, SuffolkFirst Bank changed its name to Xenith Bank. Acquisitions On July 29, 2011, the Bank acquired select loans totaling approximately $59 million and related assets associated with the Richmond, Virginia branch office ("the Branch") of Paragon Commercial Bank, a North Carolina banking corporation ("Paragon"), and assumed select deposit accounts totaling approximately $76 million and certain related liabilities associated with the Branch ("the Paragon Transaction"). The Paragon Transaction was completed in accordance with the terms of the Amended and Restated Purchase and Assumption Agreement, dated as of July 25, 2011 ("the Paragon Agreement"), between the Bank and Paragon. Under the terms of the Paragon Agreement, Paragon retains the real and personal property associated with the Branch office and, subject to receipt of required regulatory approvals, the Branch office will be closed. Under the terms of the Paragon Agreement, Paragon made a cash payment to the Bank in the amount of $17.3 million (subject to adjustment as provided in the Paragon Agreement), which represents the excess of approximately all of the liabilities assumed at a premium of 3.92%, over approximately all of the assets acquired at a discount of 3.77%. A final allocation of the consideration transferred in the Paragon Transaction is not complete. Also on July 29, 2011, the Bank acquired substantially all of the assets, including all loans, and assumed certain liabilities, including all deposits, of Virginia Business Bank ("VBB"), a Virginia banking corporation located in Richmond, Virginia, which was closed on July 29, 2011 by the Virginia State Corporation Commission (the "VBB Acquisition"). The Federal Deposit Insurance Corporation ("FDIC") is acting as court-appointed receiver of VBB. The VBB Acquisition was completed in accordance with the terms of the Purchase and Assumption Agreement, dated as of July 29, 2011 (the "VBB Agreement"), among the FDIC, Receiver for VBB, the FDIC and the Bank. Based upon a preliminary closing with the FDIC as of July 29, 2011, the Bank acquired total assets of approximately $93 million, including approximately $70 million in loans. The Bank also agreed to assume liabilities of approximately $87 million, including approximately $77 million in deposits. These amounts are estimates and, accordingly, are subject to adjustments based upon final settlement with the FDIC. The VBB Acquisition was completed without any shared-loss agreement. Under the terms of the VBB Agreement, the Bank received a discount of approximately $23.8 million on the net assets and did not pay a deposit premium. The Bank also received an initial cash payment from the FDIC in the amount of $17.8 million based on the difference between the discounted net assets and the difference between the assets acquired and the liabilities assumed (subject to adjustment as provided in the VBB Agreement). A final allocation of the consideration transferred in the VBB Acquisition is not complete. The effective dates of the Paragon Transaction and the VBB Acquisition occurred after June 30, 2011. The impact of these transactions on our results of operations, financial condition, liquidity and capital resources is not discussed in Management's Discussion and Analysis presented herein. Industry Conditions In the second quarter of 2011, the economic recovery continued at a moderate pace, however slower than was expected earlier in the year. Recent labor market indicators have been weaker than anticipated. The monthly unemployment rate, as published by the Bureau of Labor Statistics, climbed to 9.2% in the second quarter of 2011 after dropping below 9.0% in the first quarter of 2011. The slowing of the recovery is due in part to higher food and energy prices, as well as supply chain disruptions associated with weather-related disruptions. Household spending and business investment in equipment and software have shown some expansion. Although, Freddie Mac reported that existing home sales in the first four months of 2011 were up approximately 5% from the average pace of 2010, in line with projections for the year, the housing market remains depressed. On June 22, 2011, the Federal Open Market Committee ("FOMC") publicly stated that it expects the pace of recovery to pick up over the coming quarters and the unemployment rate to resume a gradual decline. The FOMC also reaffirmed that economic conditions "are likely to warrant exceptionally low levels for the federal funds rate for an extended period." The FOMC also stated that it is maintaining its existing policy of reinvesting principal payments from its securities holdings. On June 30, 2011, the FOMC completed its purchase of $600 billion in long-term Treasury securities, in line with expectations. On August 5, 2011, days after U.S. lawmakers agreed to raise the debt ceiling through 2012, Standard and Poor's downgraded the U.S. government's credit rating from AAA to AA+. As the downgrade is unprecedented, it is uncertain how it will impact the equity and debt markets, as well as the economy as a whole. In an August 9, 2011 release, the FOMC stated it now expects a somewhat slower pace of recovery over the coming quarters and that downside risks to the economic outlook have increased. The FOMC stated it would keep the target range for the federal funds rate at 0 to ¼ percent. It stated conditions "are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013." Regulatory reform continued during the quarter, as regulatory agencies proposed and finalized rules mandated by the Dodd-Frank Act. The rules that became effective on April 1, 2011 require us to base our deposit insurance assessment calculation on our total average assets less average tangible equity, rather than domestic deposits. In addition, the FDIC revised the overall pricing 24-------------------------------------------------------------------------------- Table of Contents structure for large banks, resulting in assessment rates being affected by specific risk characteristics. We are actively evaluating these and future regulatory and legislative developments so that we will be in a position to adapt our business at the appropriate time. Outlook We believe we are well positioned to take advantage of competitive opportunities. We believe that we will benefit from (1) our capital base, which we believe will allow us to compete effectively with both the larger, more established super-regional and national banks, as well as the smaller, locally managed community banks operating in our target markets, (2) our advantageous market locations in our target markets, (3) our variety of banking services and products, and (4) our experienced management team and board of directors. We intend to execute our business strategy by focusing on developing long-term relationships with our target customer base through a team of bankers with significant experience in our target markets. In our continuing evaluation of our business strategy, we believe properly priced acquisitions can complement our organic growth. We may seek to acquire additional financial institutions or branches or assets of those institutions. Although our principal acquisition focus will be to expand our presence in our target markets, we may also expand into new markets or lines of business or offer new services or products. We are continually evaluating potential acquisitions to determine what is in the best interest of our company. Our goal in making these decisions is to maximize shareholder value. Critical Accounting Policies Our accounting policies are fundamental to an understanding of our consolidated financial position and consolidated results of operations. We believe that our accounting and reporting policies are in accordance with Generally Accepted Accounting Principles in the United States of America ("GAAP") and conform to general practices within the banking industry. Our financial position and results of operations are affected by management's application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities, and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in our consolidated financial position or results of operations or both our consolidated financial position and results of operations. We consider a policy critical if (1) the accounting estimate requires assumptions about matters that are highly uncertain at the time of the accounting estimate, and (2) different estimates that could reasonably have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on our financial statements. Using these criteria, we believe that our most critical accounting policy relates to the allowance for loan and lease losses, which reflects the estimated losses resulting from the inability of borrowers to make required loan payments. If the financial condition of borrowers were to deteriorate, resulting in an impairment of their ability to make payments, adjustments to our estimates would be made and additional provisions for loan and lease losses could be required, which could have a material adverse impact on our results of operations and financial condition. Further discussion of the estimates used in determining the allowance for loan and lease losses is contained in the discussion under "- Allowance for Loan and Lease Losses" below. Our critical accounting policies are discussed in detail in "Management's Discussion and Analysis of Financial Condition and Results of Operation - Critical Accounting Policies" and "Summary of Significant Accounting Policies" in the notes to the consolidated financial statements in our 2010 Form 10-K. Since December 31, 2010, there have been no changes in these policies that have had or could reasonably expected to have a material impact on our results of operations or financial condition. RESULTS OF OPERATIONS Net Loss For the three months ended June 30, 2011, we reported a net loss of $1.1 million, compared to a net loss of $1.9 million for the three months ended June 30, 2010. For the six months ended June 30, 2010, we reported a net loss of $2.6 million, compared to a net loss of $3.0 million for the six months ended June 30, 2010. Lower losses for both the three- and six-month periods ended June 30, 2011 compared to the same periods in 2010 were primarily driven by greater net interest income, partially offset by a higher provision for loan and lease losses, due to loan growth, in the six-month period ended June 30, 2011. 25 -------------------------------------------------------------------------------- Table of Contents The following table presents net loss and net loss per share information for the periods stated. On April 4, 2011 and April 14, 2011, common shares outstanding increased 4,000,000 and 600,000, respectively, as a result of the completion of our underwritten public offering of shares of our common stock on April 4, 2011 and the related exercise of the underwriters of their over-allotment option on April 14, 2011. For the Three Months Ended June 30, 2011 2010 Net loss $ (1,083 ) $ (1,940 ) Loss per share, basic and diluted $ (0.11 ) $ (0.33 ) For the Six Months Ended June 30, 2011 2010 Net loss $ (2,557 ) $ (3,042 ) Loss per share, basic and diluted $ (0.32 ) $ (0.52 ) Net Interest Income For the three months ended June 30, 2011, net interest income was $2.9 million compared to $2.1 million for the three months ended June 30, 2010. As presented in the table below, net interest margin for the three-month period ended June 30, 2011 was 4.35%, a 16 basis point decrease from the same period in 2010. Net interest margin is defined as the percentage of net interest income to average interest-earning assets. Higher net interest income was primarily due to higher average loan balances and lower rates paid on time deposits, partially offset by lower rates earned on investments and higher average savings deposit balances. Lower net interest margin in the three-month period ended June 30, 2011 compared to the same period of 2010 is the result of lower accretion from acquisition accounting adjustments. Excluding the effect of acquisition accounting adjustments, net interest margin increased 50 basis points to 3.50% for the three-month period ended June 30, 2011 from 3.00% for the same period in 2010. Average interest-earning assets and related interest income increased $77.1 million and $740 thousand, respectively, for the three-month period ended June 30, 2011 compared to the same period in 2010. Average interest-bearing liabilities increased $52.7 million; however, related interest expense declined $24 thousand for the three-month period ended June 30, 2011 compared to the same period in 2010. Yields on interest-earning assets decreased 51 basis points to 5.09%, while costs of interest-bearing liabilities declined 41 basis points to 0.98% when comparing the three-month period ended June 30, 2011 to the same period in 2010. For the six months ended June 30, 2011, net interest income was $5.6 million compared to $3.6 million for the six months ended June 30, 2010. As presented in the table below, net interest margin for the six months ended June 30, 2011 was 4.58%, a 56 basis point increase from the same period ended June 30, 2010. Excluding the effect of acquisition accounting adjustments, net interest margin for the six months ended June 30, 2011 was 3.46%, a 59 basis point increase from 2.87% for the same period in 2010. Contributing to higher net interest income and net interest margin was higher average loan balances and lower rates paid on time deposits, partially offset by lower yields on investments and higher average balances of savings deposits. Average interest-earning assets and related interest income increased $66.2 million and $2.0 million, respectively, for the six-month period ended June 30, 2011 compared to the same period in 2010. Average interest-bearing liabilities increased $50.0 million; however, related interest expense declined $37 thousand for the six-month period ended June 30, 2011 compared to the same period in 2010. Yields on interest-earning assets increased 22 basis points to 5.38%, while costs of interest-bearing liabilities declined 42 basis points to 1.04% when comparing the six-month period ended June 30, 2011 to the same period in 2010. Our acquired loan portfolio was discounted to fair value (for expected credit losses and for interest rates) immediately following the merger. The total performing loan discount of $4.1 million at the date of the merger is being recognized into interest income over the estimated remaining life of the loans. The performing loan discount accretion was $292 thousand and $429 thousand, respectively, for the three-month periods ended June 30, 2011 and June 30, 2010. The performing loan discount accretion was $836 thousand and $489 thousand, respectively, for the six-month periods ended June 30, 2011 and June 30, 2010. The effect of this accretion on net interest margin was 44 basis points and 93 basis points, respectively, for the three-month periods ended June 30, 2011 and June 30, 2010. The effect of this accretion on net interest margin was 68 basis points and 54 basis points, respectively, for the six-month periods ended June 30, 2011 and June 30, 2010. Acquired time deposits were also adjusted to fair value at the date of the merger for interest rates. The total adjustment at the date of the merger was $2.1 million and is being amortized as a reduction of interest expense over a two-year period. The effect of this amortization is a decrease in interest expense of $270 thousand for the three-month periods ended June 30, 2011 and June 30, 2010, and $540 thousand for the six-month periods ended June 30, 2011 and June 30, 2010. The effect of this adjustment on net interest margin was 41 basis points and 58 basis points, respectively, for the three-month periods ended June 30, 2011 and June 30, 2010 and 44 basis points and 60 basis points, respectively, for the six-month periods ended June 30, 2011 and June 30, 2010. 26 -------------------------------------------------------------------------------- Table of Contents The following table provides a detailed analysis of the effective yields and rates on average interest-earning assets and average interest-bearing liabilities for the periods stated. The average balances and other statistical data used in this table were calculated using daily average balances. Average Balances, Income and Expenses, Yields and Rates As of and For the Three Months Ended June 30, 2011 vs. 2010 Average Balances (1) Yield / Rate Income /Expense (7), (8) Increase Change due to (2) 2011 2010 2011 2010 2011 2010 (Decrease) Rate Volume Assets Interest-earning assets: Federal funds sold $ 653 $ 1,244 0.00 % 0.00 % $ - $ - $ - Investments / Interest-earning deposits 83,097 70,232 2.50 % 3.50 % 519 614 (95 ) (195 ) 100 Loans, gross (3) 179,400 114,533 6.30 % 6.95 % 2,827 1,991 836 (201 ) 1,037 Total interest-earning assets 263,150 186,009 5.09 % 5.60 % 3,346 2,605 741 (396 ) 1,137 Noninterest-earning assets: Cash and due from banks 2,821 2,829 Premises and fixed assets 6,273 6,796 Other assets 18,394 22,496 Allowance for loan and lease losses (2,766 ) (195 ) Total noninterest-earning assets 24,722 31,926 Total assets $ 287,872 $ 217,935 Liabilities and Shareholders' Equity Interest-bearing liabilities: Demand deposits $ 5,392 $ 20,681 0.21 % 0.81 % $ 3 $ 42 $ (39 ) $ (19 ) $ (20 ) Savings deposits 69,300 3,738 0.95 % 0.43 % 164 4 160 10 150 Time deposits 103,933 93,430 0.73 % 1.31 % 190 307 (117 ) (148 ) 31 Federal funds purchased and borrowed funds 20,158 28,278 2.54 % 2.21 % 128 156 (28 ) 22 (49 ) Total interest-bearing liabilities 198,783 146,127 0.98 % 1.39 % 485 509 (23 ) (135 ) 112 Noninterest-bearing liabilities: Noninterest-bearing demand deposits 24,651 14,177 Other liabilities 1,560 5,021 Total noninterest-bearing liabilities 26,211 19,198 Shareholders' equity 62,879 52,610 Total liabilities and shareholders' equity $ 287,872 $ 217,935 Interest rate spread (4) 4.11 % 4.21 % Net interest income (5) $ 2,861 $ 2,096 $ 764 $ (261 ) $ 1,025 Net interest margin (6) 4.35 % 4.51 % (1) Average balances are computed on a daily basis. (2) Change in interest due to both volume and rate has been allocated in proportion to the absolute dollar amounts of the change in each. (3) Nonaccrual loans have been included in the average balances. Only the interest collected on such loans has been included as income. (4) Interest rate spread is the average yield on interest-earning assets less the average rate on interest-bearing liabilities. (5) Net interest income is interest income less interest expense. (6) Net interest margin is net interest income expressed as a percentage of average interest-earning assets. (7) Interest income on loans in 2011 and 2010 includes $292 thousand and $429 thousand, respectively, in accretion related to fair value adjustments related to the merger. (8) Interest expense on time deposits in 2011 and 2010 is reduced by $270 thousand related to fair value adjustments related to the merger. 27 -------------------------------------------------------------------------------- Table of Contents Average Balances, Income and Expenses, Yields and Rates As of and For the Six Months Ended June 30, 2011 vs. 2010 Average Balances (1) Yield / Rate Income /Expense (7), (8) Increase Change due to (2) 2011 2010 2011 2010 2011 2010 (Decrease) Rate Volume Assets Interest-earning assets: Federal funds sold $ 551 $ 1,219 0.00 % 0.00 % $ - $ - $ - Investments / Interest-earning deposits 74,532 70,521 2.68 % 3.07 % 1,000 1,084 (84 ) (143 ) 59 Loans, gross (3) 170,720 107,862 6.57 % 6.58 % 5,612 3,549 2,063 (3 ) 2,066 Total interest-earning assets 245,803 179,602 5.38 % 5.16 % 6,612 4,633 1,979 (146 ) 2,125 Noninterest-earning assets: Cash and due from banks 2,577 2,799 Premises and fixed assets 6,329 6,856 Other assets 18,495 20,061 Allowance for loan and lease losses (2,649 ) (160 ) Total noninterest-earning assets 24,752 29,556 Total assets $ 270,555 $ 209,158 Liabilities and Shareholders' Equity Interest-bearing liabilities: Demand deposits $ 5,511 $ 15,272 0.22 % 0.68 % $ 6 $ 52 $ (46 ) $ (23 ) $ (22 ) Savings deposits 58,069 3,661 0.92 % 0.49 % 268 9 259 14 245 Time deposits 102,351 93,225 0.85 % 1.41 % 436 658 (222 ) (282 ) 59 Federal funds purchased and borrowed funds 23,935 27,735 2.30 % 2.18 % 275 303 (28 ) 15 (43 ) Total interest-bearing liabilities 189,866 139,893 1.04 % 1.46 % 985 1,022 (37 ) (276 ) 239 Noninterest-bearing liabilities: Noninterest-bearing demand deposits 22,890 14,057 Other liabilities 2,068 2,047 Total noninterest-bearing liabilities 24,958 16,104 Shareholders' equity 55,731 53,161 Total liabilities and shareholders' equity $ 270,555 $ 209,158 Interest rate spread (4) 4.34 % 3.70 % Net interest income (5) $ 5,627 $ 3,611 $ 2,016 $ 130 $ 1,886 Net interest margin (6) 4.58 % 4.02 % (1) Average balances are computed on a daily basis. (2) Change in interest due to both volume and rate has been allocated in proportion to the absolute dollar amounts of the change in each. (3) Nonaccrual loans have been included in the average balances. Only the interest collected on such loans has been included as income. (4) Interest rate spread is the average yield on interest-earning assets less the average rate on interest-bearing liabilities. (5) Net interest income is interest income less interest expense. (6) Net interest margin is net interest income expressed as a percentage of average interest-earning assets. (7) Interest income on loans in 2011 and 2010 includes $836 thousand and $489 thousand, respectively, in accretion related to fair value adjustments related to the merger. (8) Interest expense on time deposits in 2011 and 2010 is reduced by $540 thousand related to fair value adjustments related to the merger. Noninterest Income Noninterest income decreased from $81 thousand for the three months ended June 30, 2010 to $48 thousand for the three months ended June 30, 2011. This decrease was primarily due to a net loss on the disposition of other real estate owned, ("OREO"), partially offset by higher gains on sales of investment securities. Noninterest income decreased from $258 thousand for the six months ended June 30, 2010 to $194 thousand for the six months ended June 30, 2011. This decrease was primarily due to lower gains on sales of investment securities in the 2011 period. Noninterest Expense For the three months ended June 30, 2011, noninterest expense was $3.5 million compared to $3.6 million for the three months ended June 30, 2010. Lower technology costs and other expenses in the 2011 period were partially offset by higher compensation and benefits costs in the same period. The Bank installed a new technology platform in the three-month period ended June 30, 2010. 28-------------------------------------------------------------------------------- Table of Contents For the six months ended June 30, 2011, noninterest expense was $6.9 million compared to $6.7 million for the six months ended June 30, 2010. Lower technology and other expenses in the 2011 period were partially offset by higher compensation and benefits expense. Higher compensation and benefits expenses have increased as we added personnel, including skilled bankers, to support our growth strategy. Income Taxes At June 30, 2011, net deferred tax assets were $7.6 million, for which a full valuation allowance was recorded, based primarily on the fact that we experienced cumulative losses over the past three years. Future realization of the tax benefit of existing deductible temporary differences and net operating loss carryforwards is dependent on the company generating sufficient future taxable income within the carryforward period, which under current law is 20 years. FINANCIAL CONDITION Securities The following tables present information about our securities portfolio as of the dates stated. Weighted average life calculations and weighted average yields are based on the current level of contractual maturities and expected prepayments as of the dates stated. June 30, 2011 Weighted Average Life Weighted Book Value Fair Value in Years Average Yield Securities available-for-sale: Mortgage-backed securities - Fixed rate $ 48,110 $ 49,215 4.62 3.31 % - Variable rate 3,084 3,250 4.67 3.02 % Agency notes/bonds-fixed rate 1,999 2,002 0.29 1.65 % Collateralized mortgage obligations 6,569 6,738 3.27 3.47 % Trust preferred securities 1,124 1,115 5.79 7.74 % Total securities available-for-sale $ 60,886 $ 62,320 4.35 3.33 % December 31, 2010 Weighted Average Life Weighted Book Value Fair Value in Years Average Yield Securities available-for-sale: Mortgage-backed securities - Fixed rate $ 43,446 $ 43,744 2.69 2.81 % - Variable rate 5,035 5,272 11.14 3.40 % Collateralized mortgage obligations 7,555 7,641 2.32 3.00 % Trust preferred securities 2,253 2,233 5.16 7.48 % Total securities available-for-sale $ 58,289 $ 58,890 3.48 3.06 % The following tables present a maturity analysis of our securities portfolio as of the dates stated. Weighted average life calculations and weighted average yields are based on the current level of contractual maturities and expected prepayments as of the dates stated. 29-------------------------------------------------------------------------------- Table of Contents June 30, 2011 After 1 After 5 Weighted Year Weighted Years Weighted Weighted Weighted Within Average Through Average Through 10 Average After 10 Average Average 1 Year Yield 5 Years Yield Years Yield Years Yield Total Yield Securities available for sale: Mortgage-backed securities - Fixed rate $ - - $ - - $ 8,405 2.45 % $ 40,810 3.48 % $ 49,215 3.31 % - Variable rate - - - - - - 3,250 3.02 % 3,250 3.02 % Collateralized mortgage obligations - - - - - - 6,738 3.48 % 6,738 3.48 % Agency notes/bonds-fixed rate - - 2,002 1.65 % - - - - 2,002 1.65 % Trust preferred securities - - - - - - 1,115 7.74 % 1,115 7.74 % Total securities available for sale $ - - $ 2,002 1.65 % $ 8,405 2.45 % $ 51,913 3.55 % $ 62,320 3.33 % December 31, 2010 After 1 After 5 Weighted Year Weighted Years Weighted Weighted Weighted Within Average Through Average Through 10 Average After 10 Average Average 1 Year Yield 5 Years Yield Years Yield Years Yield Total Yield Securities available-for-sale: Mortgage-backed securities - Fixed rate $ - - $ - - $ 4,695 1.92 % $ 39,049 2.92 % $ 43,744 2.81 % - Variable rate - - - - - - 5,272 3.40 % 5,272 3.40 % Collateralized mortgage obligations - - - - - - 7,641 3.00 % 7,641 3.00 % Trust preferred securities - - - - - - 2,233 7.48 % 2,233 7.48 % Total securities available-for-sale $ - - $ - - $ 4,695 1.92 % $ 54,195 3.17 % $ 58,890 3.06 % Loans The following table provides the maturity analysis of our loan portfolio as of the date stated based on whether loans are variable-rate or fixed-rate loans: 30 -------------------------------------------------------------------------------- Table of Contents June 30, 2011 Variable Rate Fixed Rate Within 1 to 5 After 1 to 5 After Total 1 year years 5 years Total years 5 years Total Maturities Commercial and industrial (1) $ 36,235 $ 19,767 $ 5,300 $ 25,067 $ 18,536 $ 910 $ 19,446 $ 80,747 Commercial real estate (2) 14,488 46,930 46 46,977 7,969 2,629 10,598 72,062 Residential real estate 5,584 6,397 1,709 8,106 4,493 4,478 8,971 22,662 Consumer (3) 926 3,405 - 3,405 598 - 598 4,930 Overdrafts 12 - - - - - - 12 Total loans $ 57,245 $ 76,499 $ 7,056 $ 83,555 $ 31,595 $ 8,017 $ 39,613 $ 180,413 (1) Excludes $1,098 thousand in nonaccrual fixed-rate loans. (2) Excludes $2,146 thousand in nonaccrual variable-rate loans. (3) Excludes $4 thousand in nonaccrual fixed-rate loans. December 31, 2010 Variable Rate Fixed Rate Within 1 to 5 After 1 to 5 After Total 1 year years 5 years Total years 5 years Total Maturities Commercial and industrial (1) $ 35,446 $ 13,895 376 $ 14,271 $ 15,876 $ 1,078 $ 16,954 $ 66,671 Commercial real estate (2) 21,208 22,426 - 22,426 9,457 1,246 10,704 54,338 Residential real estate 6,508 4,053 582 4,635 7,953 4,241 12,194 23,337 Consumer (3) 712 3,055 1 3,056 912 14 926 4,694 Overdrafts 14 - - - - - - 14 Total loans $ 63,887 $ 43,430 959 $ 44,389 $ 34,198 $ 6,580 $ 40,777 $ 149,053 (1) Excludes $1,374 thousand in nonaccrual fixed-rate loans. (2) Excludes $2,697 thousand in nonaccrual variable-rate loans. (3) Excludes $20 thousand in nonaccrual fixed-rate loans. A certain degree of risk is inherent in the extension of credit. Management has established loan and credit policies and guidelines designed to control both the types and amounts of risks we take and to minimize losses. Such policies and guidelines include loan underwriting parameters, loan-to-value parameters, credit monitoring guidelines, adherence to regulations, and other prudent credit practices. Loans secured by real estate were 66.5% of the loan portfolio at June 30, 2011 and 73.1% at December 31, 2010. Residential real estate loans consist primarily of first and second lien loans, including home equity lines and credit loans, secured by residential real estate located primarily in our target markets. Typically, our loan-to-value benchmark for these loans is at or below 80% at inception, with satisfactory debt-to-income ratios as well. Commercial real estate, or CRE, loans are secured by business and commercial properties. Typically, our loan-to-value benchmark for these loans is at or below 80% at inception, with satisfactory debt service coverage ratios as well. The repayment of both residential and owner-occupied commercial real estate loans depends primarily on the income and cash flows of the borrowers, with the real estate serving as a secondary source of repayment. Allowance for Loan and Lease Losses Our allowance for loan and lease losses consists of (1) a component for individual loan impairment recognized and measured pursuant to Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 310, "Accounting by Creditors for Impairment of a Loan" ("Topic 310"), and (2) components of collective loan impairment recognized pursuant to Topic 450, "Accounting for Contingencies" ("Topic 450"). We maintain specific reserves for individually impaired loans pursuant to Topic 310. A loan is impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due (interest as well as principal) according to the contractual terms of the loan agreement. We determine the allowance for loan and lease losses based on a periodic evaluation of the loan portfolio. This evaluation is a combination of quantitative and qualitative analysis. Quantitative factors include loss history for similar types of loans that we originate in our portfolio, as well as loss history from banks in Virginia and across the country. In evaluating our loan portfolio, we consider qualitative factors, including general economic conditions, nationally, regionally and in our target markets, and the values of collateral securing our loan portfolio. These quantitative and qualitative factors and estimates may be subject to significant change. Increases to the allowance for loan and lease losses are made by charges to the provision for loan and lease losses, which is reflected 31-------------------------------------------------------------------------------- Table of Contents on the consolidated statements of operations and comprehensive income (loss). Loans deemed to be uncollectible are charged against the allowance for loan and lease losses at the time of determination, and recoveries of previously charged-off amounts are credited to the allowance for loan and lease losses. In assessing the adequacy of the allowance for loan and lease losses as of the end of a reporting period, we also evaluate our loan risk ratings. Each loan is assigned two "risk ratings" at origination. One risk rating is based on our assessment of the borrower's financial capacity, and the other is based on our assessment of the quality of our collateral. In addition to our assessment of risk ratings, we also consider changes to our policies and procedures, internal observable data related to trends within the loan portfolio, such as concentrations and aging of the portfolio, and external observable data such as industry and general economic trends. Although we use various data and information sources to establish our allowance for loan and lease losses, future adjustments to the allowance for loan and lease losses may be necessary, if conditions, circumstances or events are substantially different from the assumptions used in making the assessments. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan and lease losses. Such agencies may require us to recognize additions to the allowance for loan and lease losses based on their judgments of information available to them at the time of their examination. As of December 22, 2009, prior to the merger, our allowance for loan and lease losses was $6.7 million. Immediately following the merger, the allowance for loan and lease losses was reduced to $0 due to adjustments attributable to the acquisition method of accounting. For the three months and six months ended June 30, 2011, we recorded provision expense of $510 thousand and $1.5 million, respectively. For the three and six months ended June 30, 2010, we recorded a provision of $470 thousand and $510 thousand, respectively. Our allowance for loan and lease losses as of June 30, 2011 is primarily for new loan production since the merger and changes in credit quality related to the purchased loan portfolio. The following table presents the allowance for loan and losses by loan type and the percent of loans in each category to total loans for the dates stated: June 30, 2011 December 31, 2010 Percent of Percent of loans in each loans in each category to category to Amount total loans Amount total loans Balance at end of period applicable to: Commercial and industrial $ 934 44.6 % $ 470 44.4 % Commercial real estate 1,798 40.4 % 1,106 37.3 % Residential real estate 233 12.3 % 164 15.2 % Consumer 21 2.7 % 26 3.1 % Total allowance for loan and lease losses $ 2,986 100.0 % $ 1,766 100.0 % Nonperforming Assets It is our policy to discontinue the accrual of interest income on nonperforming loans. We consider a loan as nonperforming when it is greater than 90 days past due as to interest and principal or when there is serious doubt as to collectability, unless the estimated net realized value of collateral is sufficient to assure collection of principal balance and accrued interest. As of June 30, 2011 and December 31, 2010, there were no loans greater than 90 days past due with respect to principal and interest for which interest was accruing. At June 30, 2011, we had no OREO assets. As of December 31, 2010, we had $1.5 million in OREO consisting of hotel/mixed use and single family properties resulting from foreclosure. OREO asset valuations are evaluated periodically, and any necessary write down to fair value is recorded as impairment. In the three- and six-month periods ended June 30, 2011, $76 thousand and $15 thousand, respectively, was recorded as a loss on the sale of OREO. All of our nonperforming assets at June 30, 2011 were acquired in the merger, and their carrying values were adjusted to fair value immediately following the merger, in applying the acquisition method of accounting. 32-------------------------------------------------------------------------------- Table of Contents The following table summarizes our nonperforming assets as of the dates stated: June 30, 2011 December 31, 2010 Nonaccrual loans $ 3,248 $ 2,841 Other real estate owned - 1,485 Total nonperforming assets $ 3,248 $ 4,326 Nonperforming assets as a percentage of total loans 1.80 % 2.82 % Nonperforming assets as a percentage of total assets 1.13 % 1.72 % Net charge-offs as a percentage of average loans 0.15 % 0.18 % Allowance for loan and lease losses as a percentage of total loans 1.65 % 1.15 % Allowance for loan and lease losses to nonaccrual loans 91.93 % 62.14 % Deposits Deposits represent our primary source of funds and are comprised of demand deposits, savings deposits and time deposits. Deposits at June 30, 2011 totaled $202.0 million compared to deposits of $175.1 million at December 31, 2010, an increase of 15.3%. Demand deposits, including money market accounts, increased $33.3 million, or approximately 47.6% over balances at December 31, 2010, while time deposits decreased $6.7 million, or approximately 6.6% from balances at December 31, 2010. The following table presents the average balances and rates paid, by deposit category, as of the dates stated: June 30, 2011 December 31, 2010 Amount Rate Amount Rate Noninterest-bearing demand deposits $ 22,890 - $ 16,564 - Interest-bearing deposits: Demand and money market 59,959 0.90 % 26,425 0.84 % Savings accounts 3,620 0.50 % 3,537 0.50 % Time deposits $100,000 or greater (1) 49,220 1.18 % 38,326 1.63 % Time deposits less than $100,000 53,224 0.54 % 60,333 1.15 % Total interest-bearing deposits 166,023 0.85 % 128,621 1.21 % Total average deposits $ 188,913 0.75 % $ 145,185 1.07 % (1) Includes brokered deposits of $5.1 million at June 30, 2011 and $10.2 million at December 31, 2010. The following table presents maturities of large denomination time deposits (equal to or greater than $100,000) as of June 30, 2011: Percent of Within 3 Over 12 Total Months 3-6 Months 6-12 Months (1) Months Total Deposits Time deposits $ 9,071 $ 3,883 $ 9,474 $ 17,858 $ 40,286 19.95 % (1) Includes brokered deposits of $5.1 million. Short-Term Borrowings 33 -------------------------------------------------------------------------------- Table of Contents The following table summarizes the period-end balance, highest month-end balance, average balance and weighted average rate of short-term borrowings for each of the periods stated: June 30, 2011 December 31, 2010 Highest Weighted Highest Weighted Period-end Month-end Average Average Year-end Month-end Average Average Balance Balance Balance Rate Balance Balance Balance Rate Federal funds purchased $ - $ 2,191 $ 568 0.76 % $ - - $ 37 0.76 % Other borrowings - 1,000 1,571 0.09 % - $ 4,700 742 0.81 % Total short-term borrowings $ - $ 3,191 $ 2,139 $ - $ 4,700 $ 779 0.57 % LIQUIDITY AND CAPITAL RESOURCES In the six-month period ended June 30, 2011, cash and cash equivalents increased $7.1 million compared to a decrease of $21.6 million in the same period in 2010. Net cash used in operating activities was $1.2 million for the six-month period ended June 30, 2011 compared to net cash used in operating activities of $4.3 million for the same period in 2010. The lower use of cash in operating activities is primarily due to a lower net loss and an increase in other assets in the 2011 period. Net cash used in investing activities was $31.8 million for the six-month period ended June 30, 2011 compared to net cash used in investing activities of $45.7 million for the same period in 2010. In the six-month period ended June 30, 2011, net cash invested in securities was $42.5 million lower than in the same period of 2010; however, in the six-month period ended June 30, 2011, our net investment in loans was $13.0 million higher than in the same period in 2010. Net cash provided by financing activities in the six-month period ended June 30, 2011 was $40.0 million compared to $28.4 million for the same period of 2010. Greater cash provided by financing activities in the six-month period ended June 30, 2011 was primarily due to the issuance and sale of 4,600,000 shares of our common stock in an underwritten public offering, as more fully described below. Liquidity Liquidity is the ability to generate or acquire sufficient amounts of cash when needed and at a reasonable cost to accommodate deposit withdrawals, payments of debt and operating expenses and increased loan demand, and to achieve stated objectives (including working capital requirements). These events may occur daily or in other short-term intervals in the normal operation of business. Historical trends may help management predict the amount of cash required. In assessing liquidity, management gives consideration to various factors, including stability of deposits, maturity of time deposits, quality, volume and maturity of assets, sources and costs of borrowings, concentrations of business and industry, competition and our overall financial condition. Our primary sources of liquidity are cash, due from banks, federal funds sold and securities in our available-for-sale portfolio. We have access to a credit line from our primary correspondent bank in the amount of $9.0 million. This line is for short-term liquidity needs and is subject to the prevailing federal funds interest rate. In addition, we have a secured borrowing facility with the Federal Home Loan Bank. The total credit availability is equal to 30% of our total assets. Under this facility, we have one non-amortizing term loan outstanding for $20 million, which was originated on January 25, 2008, bears a rate of 2.5%, and matures on January 25, 2013. As of June 30, 2011, our total credit availability under this facility was $59.4 million, based our March 31, 2011 balance sheet. We also have an uncommitted line of credit by a national bank to borrow federal funds up to $5.0 million on an unsecured basis. The uncommitted line is not a confirmed line or loan and terminates on June 30, 2012, if not cancelled earlier. Borrowings under this arrangement bear interest at the prevailing federal funds rate. At June 30, 2011, there were no borrowings outstanding under this uncommitted line of credit. On April 4, 2011, we completed the issuance and sale of 4,000,000 shares of our common stock at a public offering price of $4.25 per share pursuant to an effective registration statement filed with the Securities and Exchange Commission ("SEC"). On April 14, 2011, we completed the issuance and sale of an additional 600,000 shares of our common stock in connection with the over-allotment option granted by us to the underwriters of the offering. Net proceeds, after the underwriters' discount and expenses, were $17.7 million. In management's opinion, we maintain the ability to generate sufficient amounts of cash to cover normal requirements and any additional needs that may arise, within realistic limitations, for the foreseeable future. Capital Adequacy Capital management in a regulated financial services industry must properly balance return on equity to shareholders, while maintaining sufficient capital levels and related risk-based capital ratios to satisfy regulatory requirements. Our capital management strategies have been developed to maintain our "well-capitalized" position. We are subject to various regulatory capital requirements administered by federal and other bank regulators. Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary actions by regulators that, if 34 -------------------------------------------------------------------------------- Table of Contents undertaken, could have a direct material adverse effect on us and our financial performance. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and reclassifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum Tier 1 leverage, Tier 1 risk-based capital and total risk-based capital ratios. On December 7, 2009, BankCap Partners received approval from the Federal Reserve to acquire up to 65.02% of the common stock of First Bankshares (now Xenith Bankshares), and indirectly, SuffolkFirst Bank (now Xenith Bank). The approval order contained conditions related to BankCap Partners, as well as the conduct of the Bank's business. The condition applicable to the Bank provided that, during the first three years of operation after the merger, which is the period beginning December 22, 2009 and ending December 22, 2012, the Bank must operate within the parameters of its business plan submitted in connection with BankCapPartners' application to the Federal Reserve, and the Bank must obtain prior written regulatory consent to any material change in its business plan. The business plan sets forth minimum leverage and risk-based capital ratios of at least 10% and 12%, respectively, through 2012. As of June 30, 2011, we met all minimum capital adequacy requirements to which we are subject, including those contained in our business plan as submitted to the Federal Reserve, and are categorized as "well- capitalized". Since June 30, 2011, there are no conditions or events that management believes have changed our status as "well-capitalized". 35-------------------------------------------------------------------------------- Table of Contents The following table presents Tier 1 and total risk-based capital and risk-weighted assets for the Bank and Xenith Bankshares as of the date stated: June 30, 2011 Xenith Bank Xenith Bankshares Tier 1 capital $ 48,758 $ 49,337 Total risk-based capital 51,246 52,584 Risk-weighted assets 197,702 198,526 The following table compares capital ratios for the Bank and Xenith Bankshares to regulatory minimum and well-capitalized ratios as of the date stated: June 30, 2011 Regulatory Xenith Bank Xenith Bankshares Minimum Well Capitalized Tier 1 leverage ratio 17.85 % 18.07 % 4.00 % > 5.00 % Tier 1 risk-based capital ratio 24.56 % 24.96 % 4.00 % > 6.00 % Total risk-based capital ratio 25.81 % 26.60 % 8.00 % > 10.00 % Pursuant to our business plan submitted to the Federal Reserve with the application of BankCap Partners to acquire up to 65.02% of the common stock of First Bankshares (now Xenith Bankshares), and indirectly, SuffolkFirst Bank (now Xenith Bank), we are required to maintain leverage and risk-based capital ratios of at least 10% and 12%, respectively, through 2012. Interest Rate Sensitivity Financial institutions can be exposed to several market risks that may impact the value or future earnings capacity of an organization. Our primary market risk is interest rate risk. Interest rate risk is inherent in banking, because as a financial institution, we derive a significant amount of our operating revenue from "purchasing" funds (customer deposits and borrowings) at various terms and rates. These funds are invested into interest-earning assets (loans, investments, etc.) at various terms and rates. Interest rate risk is the exposure to fluctuations in future earnings (earnings at risk) and value (market value at risk) resulting from changes in interest rates. This exposure results from differences between the amounts of interest-earning assets and interest-bearing liabilities that re-price within a specific time period as a result of scheduled maturities and repayment and contractual interest rate changes. The balance sheet may be asset or liability sensitive at a given time. We intend to manage the Bank's asset or liability sensitivity to optimize earnings, to minimize interest rate risk and to preserve capital within policy limits. Management strives to control the Bank's exposure to interest rate volatility, and we operate under an asset and liability management policy approved by our board of directors. In addition, we emphasize the loan and deposit pricing characteristics that best meet our current view on the future direction of interest rates and use sophisticated analytical tools to support our asset and liability processes. 36 -------------------------------------------------------------------------------- Table of Contents Gap Analysis Gap analysis tools monitor the "gap" between interest-sensitive assets and interest-sensitive liabilities. The Bank uses a simulation model to forecast future balance sheet and income statement behavior. By studying the effects on net interest income of rising, stable and falling interest rate scenarios, we attempt to mitigate risks associated with anticipated interest rate movements by understanding the dynamic nature of our balance sheet components. We evaluate our balance sheet components (securities, loan and deposit portfolios) to manage our interest rate risk position. A negative interest-sensitive gap results when interest-sensitive liabilities exceed interest-sensitive assets for a specific re-pricing "time horizon". The gap is positive when interest-sensitive assets exceed interest-sensitive liabilities for a given time period. For a bank with a positive gap, rising interest rates would be expected to have a positive effect on net interest income, and falling rates would be expected to have a negative effect. The following table reflects the balances of interest-earning assets and interest-bearing liabilities at the earlier of their re-pricing or maturity dates. Variable-rate loans are reflected at the earliest re-pricing interval since they re-price according to their terms. Borrowed funds are reflected at the earlier of their maturity or contractual re-pricing interval. Interest-bearing liabilities, with no contractual maturity, such as interest-bearing transaction accounts and savings deposits, are reflected at expected rates of attrition. Time deposits and fixed-rate loans are reflected at their respective contractual maturity dates. The following table, "Gap Report", indicates that, on a cumulative basis through the next 12 months, our interest rate-sensitive assets exceed interest rate-sensitive liabilities, resulting in an asset-sensitive position at June 30, 2011 of $60.6 million. This net asset-sensitive position was a result of $161.3 million in interest rate-sensitive assets being available for re-pricing during the next 12 months and $100.7 million in interest rate-sensitive liabilities being available for re-pricing during the next 12 months. Our gap position at June 30, 2011 is considered by management to be favorable in a flat to increasing interest rate environment. 0-180 Days 181-360 days 1-3 Years Over 3 Years Totals Assets: Cash and cash due $ 13,949 $ - $ - $ - $ 16,369 Fed Funds Sold 2,909 - - - 2,909 Securities 4,843 1,638 8,817 48,927 65,660 Loans 132,679 5,277 21,600 18,279 184,589 Allowance for loan and lease losses - - - - - Premises and Equipment - - - - - Intangibles - - - - - OREO - - - - - Other Assets - - - - - Total Assets $ 154,380 $ 6,915 $ 30,417 $ 67,206 $ 288,719 Liabilities and Equity Demand deposits $ - $ - $ - $ - $ 22,679 Interest-bearing deposits 62,392 38,350 74,654 13,365 189,277 Fed Funds Purchased - - - - - Borrowed funds - - 20,000 - 20,000 Other liabilities - - - - 1,824 Shareholders' equity - - - - 64,820 Total Liabilities and Equity $ 62,392 $ 38,350 $ 94,654 $ 13,365 $ 298,601 Discrete Gap: $ 91,988 $ (31,435 ) $ (64,237 ) $ 53,841 Cumulative Gap: $ 91,988 $ 60,553 $ (3,684 ) $ 50,157 Commitments and Contingencies In the normal course of business, we have commitments under credit agreements to lend to customers as long as there is no material violation of any condition established in the contracts. These commitments generally have fixed expiration dates or other termination clauses and may require payments of fees. Because many of the commitments may expire without being completely drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Additionally, we issue letters of credit, which are conditional commitments to guarantee the performance of customers to third parties. The credit risk involved in issuing letters of credit is the same as that involved in extending loans to customers. 37 -------------------------------------------------------------------------------- Table of Contents These commitments represent outstanding off-balance sheet commitments. The following table presents unfunded loan commitments outstanding as of the date stated: June 30, 2011 Commercial lines of credit $ 27,731 Construction loans - Commercial 14,933 - Residential 1,037 Home equity lines of credit 5,828 Consumer and overdraft protection 679 Letters of credit 2,758 Total commitments $ 52,966 CAUTIONARY NOTICE ABOUT FORWARD-LOOKING STATEMENTS Certain statements included in this Form 10-Q are "forward-looking statements". All statements other than statements of historical facts contained in this Form 10-Q, including statements regarding our plans, objectives and goals, future events or results, our competitive strengths and business strategies, and the trends in our industry are forward-looking statements. The words "believe," "will," "may," "could," "estimate," "project," "predict," "continue," "anticipate," "intend," "should," "plan," "expect," "appear," "future," "likely," "probably," "suggest," "goal," "potential" and similar expressions, as they relate to our company, are intended to identify forward-looking statements. Forward-looking statements made in this Form 10-Q reflect beliefs, assumptions, and expectations of future events or results, taking into account the information currently available to us. These beliefs, assumptions, and expectations may change as a result of many possible events, circumstances or factors, not all of which are currently known to us. If a change occurs, our business, financial condition, liquidity, results of operations and prospects may vary materially from those expressed, or implied by, in the forward-looking statements. You should carefully consider these matters, along with the risks discussed under "Risk Factors" in Part I, Item 1A in the 2010 Form 10-K and the following factors, which are not intended to be exhaustive, that may cause actual results to vary materially from our forward-looking statements: • general economic conditions nationally, regionally or in our target markets; • the efforts of government agencies to stabilize the equity and debt markets; • the adequacy of our allowance for loan losses and the methodology for determining such allowance; • adverse changes in our loan portfolio and credit risk-related losses and expenses; • concentrations within our loan portfolio, including exposure to commercial real estate loans, and to our target markets; • our dependence on our target markets in and around Virginia; • reduced deposit flows and loan demand as well as increasing default rates; • changes in interest rates, reducing our margins or the volumes or values of the loans we make and the deposits and investments we hold; • business conditions in the financial services industry, including competitive pressures among financial services companies, new service and product offerings by competitors, and similar factors; • the degree and nature of our competition, with the understanding that competitors may have greater financial resources and access to capital and may offer services that enable those competitors to compete more successfully than we can; • the regulatory environment, including evolving banking industry standards, changes in legislation or regulation; • our ability and willingness to pay dividends on our common stock in the future; • changes in accounting principles, policies and guidelines as well as estimates and assumptions used in the preparation of our financial statements; • volatility of the market price of our common stock and capital markets generally; • our dependence on limited markets in and around Virginia; • our limited operating history; • changes in our competitive strengths or business or strategies; • the availability, terms and deployment of debt and equity capital; 38 -------------------------------------------------------------------------------- Table of Contents • our dependence upon key personnel whose continued service is not guaranteed and our ability to identify, hire and retain highly qualified personnel in the future; • our ability to implement our business strategies successfully; • the adequacy of our cash reserves and liquidity; • negative publicity and the impact on our reputation; • rapidly changing technology; • war or terrorist activities causing deterioration in the economy; • other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services; and • the risks discussed in our public filings with the SEC. 39 -------------------------------------------------------------------------------- Table of Contents As a result of these factors, among others, the future events or results that are the subject of our beliefs, assumptions and expectations expressed in, or implied by, our forward-looking statements in this Form 10-Q may not be achieved in any specified time frame, or at all, which could be material. Accordingly and as noted above, you should not place undue reliance on these forward-looking statements. All subsequent written and oral forward-looking statements attributable to us or the persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. Except as required by applicable law or regulations, we do not undertake, and specifically disclaim any obligation, to update or revise any forward-looking statement. |