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U. S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C.  20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

CENTRAL VIRGINIA BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

2036 New Dorset Road

P. O. Box 39

Powhatan, Virginia 23139

(Address of principal executive offices, Zip Code)

(804) 403-2000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  X   No __ 

Indicate by check mark whether the registrant is an accelerated filer (as described in Rule 12b-2 of the Exchange Act).  Yes       No   X  

As of March 31, 2004, 2,131,180 shares were outstanding.

CENTRAL VIRGINIA BANKSHARES, INC.

QUARTERLY REPORT ON FORM 10-Q

INDEX

Part I.  Financial Information

Page No.

  Item 1

Financial Statements

Consolidated Balance Sheets -  

March 31, 2004 and December 31, 2003 (Unaudited)

3

Consolidated Statements of Income - Three

Months Ended March 31, 2004 and 2003 (Unaudited)

4

Consolidated Statements of Cash Flows - Three

Months Ended March 31, 2004 and 2003 (Unaudited)

6

Notes to Consolidated Financial Statements -

March 31, 2004 and 2003 (Unaudited)

7

  Item 2

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

12

  Item 3

Quantitative and Qualitative Disclosures About Market Risk

19

  Item 4

Controls and Procedures

19

Part II.  Other Information

  Item 6

Exhibits and Reports on Form 8-K

20

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PART I

ITEM 1

FINANCIAL STATEMENTS

CENTRAL VIRGINIA BANKSHARES, INC.

CONSOLIDATED BALANCE SHEETS

March 31, 2004 and December 31, 2003

(Unaudited)

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CENTRAL VIRGINIA BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

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CENTRAL VIRGINIA BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

 (Continued)

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CENTRAL VIRGINIA BANKSHARES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Three Months Ended March 31, 2004 and 2003

(Unaudited)

-6-

CENTRAL VIRGINIA BANKSHARES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

March 31, 2004 and 2003

(Unaudited)

Note 1.  Basis of Presentation

The consolidated financial statements include the accounts of Central Virginia Bankshares, Inc and its subsidiaries (the “Company”).  Significant intercompany accounts and transactions have been eliminated in consolidation.

The information contained in the financial statements is unaudited and does not include all of the information and footnotes required by auditing standards generally accepted in the United States of America for completed financial statements. However, in the opinion of management, all adjustments necessary for a fair presentation of the results of the interim periods presented have been made.  All adjustments are of a normal recurring nature.  The results of operations for the interim periods are not necessarily indicative of the results that may be expected for the full year.

Note 2.  Comprehensive Income

A reconciliation from net income to total comprehensive income for the three months ended March 31, 2004 and 2003 is as follows:

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-8-

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Note 5.  FHLB Borrowings

The borrowings from the Federal Home Loan Bank of Atlanta, Georgia, are secured by qualifying first mortgage loans and certain securities. The borrowings consist of the following:

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Note 6.  Interest Rate Swap Agreement

The Corporation has entered into an interest rate swap agreement related to the issuance of the trust preferred securities. The swap is utilized to manage interest rate exposure and is designated as a highly effective cash flow hedge. The differential to be paid or received on all swap agreements is accrued as interest rates change and is recognized over the life of the agreement in interest expense. The swap agreement expires December 17, 2008, and has an interest rate of 6.405%. The notional amount is $5,000,000. The effect of these agreements is to make the Corporation less susceptible to changes in interest rates by effectively converting certain variable rate debt to fixed rate debt. The unrealized loss on the interest rate swap agreement was $120,961 and zero at March 31, 2004 and December 31, 2003, respectively.

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ITEM 2

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Results of Operations

The Company’s net income in the first quarter of 2004 was 1,021,824, an increase of 24% or $198,206 as compared to $823,618 in the first quarter of 2003.  The improved results for 2004 are primarily due to an increase in net interest income, which rose $387,967 or 14% from the previous year.  Other components of the current results are other non-interest income, which rose by $30,326 or 5% in 2004 compared to 2003, an increase of $32,500 in the provision for possible loan loss expense, and growth in other non-interest expense of $182,625, an increase of only 9% over the prior year’s first quarter, and an increase in income taxes of $4,962.  For the first quarter of 2004, basic earnings per share were $.48 and diluted earnings per share were $.47, compared to $.40 and $.38, respectively, for the same period in 2003, increases of 20.4% and 24.4%. The Company’s annualized return on average equity was 13.85% in the first quarter of 2004, compared to 13.06% for the first quarter of 2003, while the return on average assets was 1.12% and 1.15% for these periods, respectively.

Net Interest Income.  The Company’s net interest income was $3,156,977 for the first quarter of 2004, compared to $2,769,010 for the first quarter of 2003, an increase of 14%.  This increase in net interest income was attributable primarily to interest earned on loans increasing by $20,157 or 0.8%, while interest on investment securities and federal funds sold increased by $559,205 or 31%. The combined total of interest on the aforementioned earning assets exceeded the prior year’s comparable quarter by $579,362 or 13%. The continued repricing of certificate of deposits to lower rates resulted in reduced interest expense, however, increases in the volume of interest bearing deposits due to continued deposit growth generated additional interest expense.  Accordingly, when both are combined, the total interest on deposits increased by only $32,176 or 2.25% as compared to the prior year’s first quarter. Increases in interest on total borrowings, which now include interest on the capital trust preferred long term debt issued in December 2003, increased by $159,219 or 94% compared to first quarter 2003. The stability of prevailing interest rates at historically low levels over the past year, and the increase in total earning assets due to continuing deposit growth, are the primary factors contributing to the improvement in net interest income. Average interest earning assets rose by $75,170,074 or 29% to $336.5 million from $261.3 million in the first quarter of 2003.  Of this increase in interest earning assets, investment securities increased from an average of $115.3 million in 2003 to $172.5 million in 2004.  The fully taxable equivalent annualized yield on investment securities was 5.95% at March 31, 2004 compared to 6.52% in the previous year.  Average total deposits for the quarter rose 23.3% or $55.5 million to $293.3 million when compared to the same period in 2003.

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The following table sets forth the Company’s average interest earning assets (on taxable 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.

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The net interest margin is a measure of net interest income performance.  It represents the difference between interest income, including net loan fees earned, and interest expense, reflected as a percentage of average interest earning assets.  The Company’s net interest margin was 4.01% for the first quarter of 2004, compared to 4.38% for the first quarter of 2003.

Non-Interest Income.  For the first three months of 2004, non-interest income totaled $648,757, an increase of 5%, or $30,326 from the same period in 2003.  The two principal components of this increase are growth of $46,059 in non-deposit investment product and insurance sales commissions, coupled with a decline of $37,289 in deposit fees and charges.

Non-Interest Expenses.  The Company’s total non-interest expenses of $2,300,920 for the first quarter of 2004 increased by $182,625 or 9% compared to the same period in 2003.  Expenses related to  salaries and employee benefits not treated as an adjustment to the yield on loans increased 11.4% compared to the same period in 2003.  This increase reflects normal additions to staff required as the company grows as well as the impact of employee health and welfare plans.  Other increases in equipment expense, office supplies, telephone and postage are in line with the growth of the Company.

Income Taxes.  The Company reported income taxes of $340,490 for the first quarter of 2004, compared to $335,528 for the first quarter of 2003.  These amounts yielded effective tax rates of 25.0% and 28.9%, respectively.  The improvement in tax efficiency is due largely to increased investments in non-taxable municipal and non-taxable bank eligible agency preferred stock investments.

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, 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.

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 Bank’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.

At March 31, 2004, total loans net of unearned income increased $11.5 million from December 31, 2003 and increased $23.1 million from March 31, 2003.  The loan to deposit ratio was 57.0% at March 31, 2004, compared to 52.7% at December 31, 2003 and 59.9% at March 31, 2003.  As of March 31, 2004, real estate loans accounted for 75.2% of the loan portfolio, consumer loans were 6.5%, and commercial and industrial loans totaled 18.3% of the loan portfolio.

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Asset Quality.  Non-performing assets include non-accrual loans, loans 90 days or more past due, restructured loans, other real estate owned, and other non-performing assets.  Non-accrual loans are loans on which interest accruals have been discontinued.  Loans which reach non-accrual status 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.  Other real estate owned (OREO) is real estate acquired through foreclosure.

The following table summarizes non-performing assets:

Management does not believe that the increase in the level of non-performing loans reflects any systemic problem in the Company’s loan portfolio. Rather, the increase in the total non-performing assets is attributable to the inclusion of one loan of approximately $1 million which is greater than 90 days past due as a result of a dispute between the principals. Management feels that there is a very low probability of loss to the Company as the credit is well secured, management has begun appropriate collection efforts, and the situation is expected to be resolved in due course. As of March 31, 2004, management is not aware of any other credits that involve serious doubts as to the ability of such borrowers to comply with the existing payment terms.

Management forecloses on delinquent real estate loans when all other repayment possibilities have been exhausted.  Real estate acquired through foreclosure (OREO) was $18,000 at March 31, 2004, and $97,000 at both December 31, 2003 and March 31, 2003.  All of the OREO at March 31, 2004 was in the Company’s primary service area and consisted of one building lot.  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.  The Bank is actively marketing all foreclosed real estate and does not anticipate material write-downs in value prior to disposition.  Other non-performing assets consist of a small business financing revenue bond that had defaulted on its interest payments during 2001.  In accordance with the trust indenture, the trustee has foreclosed on the underlying collateral securing the bond and the property is currently being marketed for sale.  The purchase price of the bond in January 1999 was $190,000 and its current carrying value is $140,000.  

Management has analyzed the potential risk of loss on the Company’s loan portfolio, given the loan balances and the value of the underlying collateral, and has recognized losses where appropriate. Non-performing loans are monitored on an ongoing basis as part of the Company’s regular loan review process.

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Management reviews the adequacy of its loan loss allowance at the end of each month.  Based primarily on the Company’s loan classification system, which classifies problem credits as substandard, doubtful, or loss, additional provisions for losses may be made monthly.  Furthermore, past experiences led management to conclude that as a general matter it is prudent to operate with a high level of reserves.  The ratio of the allowance for loan losses to total loans was 1.53% at March 31, 2004; 1.55% at December 31, 2003; and 1.49% at March 31, 2003, respectively.  Management feels that the growth of the allowance for loan losses, while not at the same rate as the portfolio growth, is adequate to provide for future losses.   At March 31, 2004 the ratio of the allowance for loan losses to non-performing loans was 92.0%, compared to 142.4% at December 31, 2003 and 153.2% at March 31, 2003.

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.  Management believes, based on its review, that the Company has adequate reserves to cover any future write down that may be required on these loans.

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 collectibility of the existing portfolio. Management evaluates the loan portfolio in light of economic conditions, changes in the nature and value of the portfolio, industry standards and other relevant factors.  Specific 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.

The provision for loan losses totaled $142,500 for the quarter ended March 31, 2004 and $110,000 for the same period in 2003.  In the opinion of management, the provision charged to operations has been sufficient to absorb the current year’s net loan losses while continuing to provide for potential future loan losses in view of a somewhat uncertain economy.

Securities

The Company’s investment securities portfolio serves primarily as a source of liquidity, safety and yield.  Certain of the securities are pledged to secure public deposits and others are specifically identified as collateral for borrowings from the Federal Home Loan Bank or repurchase agreements with 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.  During the first quarter of 2004, total securities decreased to $162.1 million or 44.0% of total assets at March 31, 2004 compared to $177.0 million or 48.4% at December 31, 2003 and $111.5 million or 38.0% at March 31, 2003.

The securities portfolio consists of two components, securities held to maturity and securities available for sale.  Securities are classified as held to maturity when management has the intent and the Company has the ability at the time of purchase to hold the securities to maturity.  Securities held to maturity are carried at cost adjusted for amortization of premiums and accretion of discounts.   Securities to be held for indefinite periods of time are classified as available for sale and accounted for at market value.  Securities available for sale include securities that may be sold in response to changes in market interest rates, changes in the security’s prepayment risk, increases in loan demand, general liquidity needs and other similar factors.  The Company’s recent purchases of securities have generally been limited to securities of investment grade credit quality with short to intermediate term maturities.

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The fully taxable equivalent annualized average yield on the entire portfolio was 5.95% for the first quarter of 2004, compared to 6.52% for the same period in 2003.  This decline in yield is principally due to Government Agency securities with call options and coupon rates above the current market levels being called by the issuing agency.  The proceeds of these redemptions have been reinvested in new securities with lower coupons in line with broader current market rates.  The market value of the entire portfolio exceeded the book value by $5.3 million at March 31, 2004.

Deposits and Short-Term Borrowings

The Company’s predominate source of funds is 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 located within the communities served.  The Company generally does not accept out of market deposits, nor does it solicit or accept any brokered deposits.

Total deposits decreased by $2.4 million between December 31, 2003 and March 31, 2004; this decline was fully anticipated, as a result of one commercial depositor closing its escrow account of over $10 million in January 2004.  Excluding this one transaction, deposits increased by $7.6 million in the first quarter of 2004.  Deposits increased by $53.1 million, or 21.6% between March 31, 2004 and March 31, 2003.  The average aggregate interest rate paid on deposits was 2.0% in the first quarter of 2004, compared to 2.41% for the same period in 2003.  The majority (53%) 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 Company does not solicit nor does it have any brokered deposits.  The following table is a summary of time deposits of $100,000 or more by remaining maturities at March 31, 2004:

Borrowings from the Federal Home Loan Bank have changed in structure in both overnight and term advances in order to take advantage of the current low interest rate environment.  Term advances were $26 million at March 31, 2004, $21 million at and December 31, 2003, and $16 million at March 31, 2003. The increase at March 31, 2004 is a result of a new five year borrowing entered into to extend the Company liabilities at a time of low interest rates.  Overnight advances were $4.5 million at March 31, 2004 compared to $5 million at December 31, 2003 and March 31, 2003.

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.  

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The Bank’s capital position continues to exceed regulatory requirements.  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 less goodwill.  Total Capital consists of Tier 1 Capital, qualifying subordinated debt and a portion of the allowance for loan losses.  Risk-based capital ratios are calculated with reference to risk-weighted assets, which consist of both on and off-balance sheet risks.  The Leverage Ratio consists of Tier 1 Capital divided by quarterly average assets.  The Company, in view of the significant growth experienced over the past several years and the resulting impact on various capital ratios, recognized the eventual need for additional capital to support further expansion or acquisitions and used the proceeds from the issuance of the $5 million capital trust preferred securities in December 2003 to purchase additional shares of stock in the Bank, thereby increasing the capital position of Central Virginia Bank.

Banking regulations also require the Bank to maintain certain minimum capital levels in relation to Bank Assets.  A comparison of the Bank’s actual regulatory capital as of March 31, 2004, with minimum requirements, as defined by regulation, is shown below:

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 the 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, and selling securities under repurchase agreements. To further meet its liquidity needs, the Company also has access to the Federal Reserve System discount window.  In the past, growth in deposits and proceeds from the maturity of investment securities has been sufficient to fund the net increase in loans.  However, in 2000 the Company had to make use of its borrowing availability as the flow of deposits slowed.  In 2001, although the flow of deposits increased sufficiently to fund loan growth, the Company used portions of its borrowing availability to purchase marketable securities in an effort to increase net interest income.  

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.

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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 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.

Forward-Looking Statements

Certain information contained in this discussion 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” 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.

ITEM 3

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT

MARKET RISK

Not applicable pursuant to Instructions to Item 305(c) of Regulation S-K.

ITEM 4

CONTROLS AND PROCEDURES

As of the end of the period covered by this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934, as amended.  Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company’s periodic filings with the Securities and Exchange Commission.

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The Company’s management is also responsible for establishing and maintaining adequate internal control over financial reporting.  There were no changes in the Company’s internal control over financial reporting identified in connection with the evaluation of it that occurred during the Company’s last fiscal quarter that materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

PART II

ITEM 6

EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits:

31.1

Rule 13a-14(a) Certification of Chief Executive Officer

31.2

Rule 13a-14(a) Certification of Chief Financial Officer

32.1

Statement of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. § 1350

(b)

Form 8-K.  No reports were filed on Form 8-K in the period for which this report is filed.

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SIGNATURES

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

CENTRAL VIRGINIA BANKSHARES, INC.

(Registrant)

Date:  May 17, 2004

/s/ Ralph Larry Lyons

Ralph Larry Lyons, President and Chief Executive

Officer (Principal Executive Officer)

Date:  May 17, 2004

/s/ Charles F. Catlett, III

Charles F. Catlett, III, Senior Vice President and

Chief Financial Officer (Principal Financial Officer)

EXHIBIT INDEX

Exhibit No.

Description

31.1

Rule 13(a)-14(a) Certification of Chief Executive Officer.

31.2

Rule 13(a)-14(a) Certification of Chief Financial Officer.

32.1

Statement of Chief Executive Officer and Chief Financial

Officer Pursuant to 18 U.S.C. Section 1350.