CITIZENS BANCORP OF VIRGINIA INC - FORM 10-Q

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EX-32.2 - CITIZENS BANCORP OF VIRGINIA INC	ex32-2.htm
EX-31.2 - CITIZENS BANCORP OF VIRGINIA INC	ex31-2.htm
EX-32.1 - CITIZENS BANCORP OF VIRGINIA INC	ex32-1.htm
EX-31.1 - CITIZENS BANCORP OF VIRGINIA INC	ex31-1.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-Q

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[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2011

[ ] Transition Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the transition period from ____________ to _____________

Commission File Number: 0-50576

CITIZENS BANCORP OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)

Virginia (State of incorporation or organization)	20-0469337 (I.R.S. Employer Identification No.)
126 South Main Street Blackstone, VA 23824 (434) 292-7221 (Address and telephone number of principal executive offices)

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 R No £

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

	Large accelerated filer £	Accelerated filer £
	Non-accelerated filer £	Smaller Reporting Company R
	(Do not check if smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes £ No R

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 2,348,509 shares of Common Stock as of May 5, 2011.

FORM 10-Q

For the Period Ended March 31, 2011

TABLE OF CONTENTS

Part I. Financial Information		Page No.
Item 1.	Financial Statements
Consolidated Balance Sheet		3
Consolidated Statements of Income		4
Consolidated Statements of Changes in Stockholders’ Equity		5
Consolidated Statements of Cash Flows		6
Notes to Interim Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition
	and Results of Operations	29
Item 4. Controls and Procedures		42
Part II. Other Information
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults upon Senior Securities	44
Item 4.	[Removed and Reserved]	44
Item 5.	Other Information	44
Item 6.	Exhibits	44
Signatures		45

Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets

(Dollars in thousands, except share data)

	March 31,			December 31,
	2011			2010
Assets	(Unaudited)

Cash and due from banks	$	6,430		$	5,427
Interest-bearing deposits in banks		1,831			1,857
Federal funds sold		10,776			15,460
Securities available for sale, at fair market value		86,852			82,745
Restricted securities, at cost		1,079			1,079
Loans, net of allowance for loan losses of $2,273
and $2,168		201,002			200,515
Premises and equipment, net		7,104			7,135
Accrued interest receivable		1,707			1,816
Other assets		10,735			10,996
Other real esate owned, net of valuation allowance
of $76		3,525			3,425

Total assets	$	331,041		$	330,455

Liabilities and Stockholders' Equity

Liabilities
Deposits:
Noninterest-bearing	$	34,854		$	33,161
Interest-bearing		241,083			244,827
Total deposits	$	275,937		$	277,988
FHLB advances		5,000			5,000
Other borrowings		6,514			5,149
Accrued interest payable		909			886
Accrued expenses and other liabilities		2,336			1,795
Total liabilities	$	290,696		$	290,818


Stockholders' Equity
Preferred stock, $0.50 par value; authorized 1,000,000 shares;
none outstanding	$	-		$	-
Common stock, $0.50 par value; authorized 10,000,000 shares;
issued and outstanding, 2,348,509 in 2011 and		1,174			1,177
2,353,509 in 2010
Retained earnings		39,580			39,308
Accumulated other comprehensive income (loss)		(409	)		(848	)
Total stockholders' equity	$	40,345		$	39,637

Total liabilities and stockholders' equity	$	331,041		$	330,455

See accompanying Notes to Interim Consolidated Financial Statements.

CITIZENS BANCORP OF VIRGINIA, INC. AND SUBSIDIARY
Consolidated Statements of Income (Unaudited)
(Dollars in thousands, except per share data)

	Three Months Ended
	March 31,
	2011		2010
Interest and Dividend Income
Loans, including fees	$	3,241	$	3,420
Investment securities:
Taxable		484		498
Tax-exempt		258		160
Federal Funds sold		7		5
Other		4		4
Total interest and dividend income	$	3,994	$	4,087

Interest Expense
Deposits	$	982	$	1,131
Other borrowings		38		37
Total interest expense	$	1,020	$	1,168

Net interest income	$	2,974	$	2,919

Provision for loan losses		150		300

Net interest income after provision
for loan losses	$	2,824	$	2,619

Noninterest Income
Service charges on deposit accounts	$	239	$	261
Net gain on sales of securities		-		4
Net gain on sales of loans		14		10
Net gain on sale of other real estate owned		7		-
Income from bank owned life insurance		72		68
ATM fee income		182		150
Other		49		64
Total noninterest income	$	563	$	557

Noninterest Expense
Salaries and employee benefits	$	1,369	$	1,364
Net occupancy expense		149		153
Equipment expense		122		131
FDIC deposit insurance		201		156
Other		593		564
Total noninterest expense	$	2,434	$	2,368

Income before income taxes	$	953	$	808

Income taxes		219		200

Net income	$	734	$	608
Earnings per share, basic & diluted	$	0.31	$	0.26

See accompanying Notes to Interim Consolidated Financial Statements.

CITIZENS BANCORP OF VIRGINIA, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders' Equity (Unaudited)

For the Three Months Ended March 31, 2011 and 2010

(Dollars in thousands)


							Accumulated
							Other
							Compre-
							hensive			Compre-
	Common			Retained			Income			hensive
	Stock			Earnings			(Loss)			Income			Total

Balance at December 31, 2009	$	1,186		$	38,177		$	(373	)				$	38,990
Comprehensive income:
Net Income		-			608			-		$	608			608
Other comprehensive income, net of taxes
Unrealized gains on securities available
for sale, net of deferred taxes		-			-			195			195			195
Less: reclassification adjustment for
gain on sale of securities, net of tax		-			-			(3	)		(3	)		(3	)
Other comprehensive income											192
Total comprehensive income		-			-			-		$	800			-
Shares repurchased		(3	)		(63	)		-						(66	)
Cash dividends declared ($0.17 per share)		-			(403	)		-						(403	)
Balance at March 31, 2010	$	1,183		$	38,319		$	(181	)				$	39,321

Balance at December 31, 2010	$	1,177		$	39,308		$	(848	)				$	39,637
Comprehensive Income:
Net income		-			734			-		$	734			734
Other comprehensive income, net of taxes
Unrealized gains on securities available
for sale, net of deferred taxes		-			-			439			439			439
Less: reclassification adjustment for
gain on sale of securities, net of tax		-			-			-			-			-
Total other comprehensive income										$	439
Total comprehensive income		-			-			-		$	1,173			-
Shares repurchased		(3	)		(63	)		-						(66	)
Cash dividends declared ($0.17 per share)		-			(399	)		-						(399	)
Balance at March 31, 2011	$	1,174		$	39,580		$	(409	)				$	40,345

See accompanying Notes to Interim Consolidated Financial Statements.

CITIZENS BANCORP OF VIRGINIA, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

	Three Months Ended
	March 31,
	2011			2010
Cash Flows from Operating Activities
Net Income	$	734		$	608
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation		271			146
Provision for loan losses		150			300
Net (gain) on sales of loans		(14	)		(10	)
Origination of loans held for sale		(1,002	)		(721	)
Proceeds from sales of loans		1,016			731
Net (gain) on sales and calls of securities		-			(4	)
Net amortization of securities		74			49
Net (gain) on sale of other real estate owned		(7	)		-
Changes in assets and liabilities:
Decrease in accrued interest receivable		109			4
Decrease in other assets		35			126
Increase (decrease) in accrued interest payable		23			(4	)
Increase in accrued expenses and other liabilities		541			309
Net cash provided by operating activities	$	1,930		$	1,534
Cash Flows from Investing Activities
Activity in available for sale securities:
Calls and sales	$	3,125			8,805
Maturities and prepayments		2,321			1,993
Purchases		(8,963	)		(21,670	)
Net (increase) decrease in loans		(772	)		3,743
Purchases of land, premises and equipment		(239	)		(68	)
Proceeds from sale of other real estate owned		42			-
Net cash (used in) investing activities	$	(4,486	)	$	(7,197	)
Cash Flows from Financing Activities
Net (decrease) increase in deposits	$	(2,051	)	$	3,940
Net increase in other borrowings		1,365			802
Repurchase of common stock		(66	)		(66	)
Dividends paid		(399	)		(403	)
Net cash (used in) provided by financing activities	$	(1,151	)	$	4,273
Net (decrease) in cash and cash equivalents	$	(3,707	)	$	(1,390	)
Cash and Cash Equivalents
Beginning of period		22,744			17,035
End of period	$	19,037		$	15,645
Supplemental Disclosures of Cash Flow Information
Cash paid during the period for:
Interest	$	997		$	1,172
Income Taxes	$	-		$	104
Supplemental Disclosures of Noncash Investing and
Financing Activities
Other real estate acquired in settlement of loans	$	135		$	124
Unrealized gains on securities available for sale	$	665		$	291

See accompanying Notes to Interim Consolidated Financial Statements.

Notes to Interim Consolidated Financial Statements

(Unaudited)

Note 1. General

The Consolidated Balance Sheets at March 31, 2011 and December 31, 2010, the Consolidated Statements of Income for the three months ended March 31, 2011 and March 31, 2010, and the Consolidated Changes in Stockholders’ Equity and Cash Flows for the three months ended March 31, 2011 and 2010, were prepared in accordance with instructions for Form 10-Q, and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements. However, in the opinion of Management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position at March 31, 2011 and the results of operations for the three months ended March 31, 2011 and 2010. The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Citizens Bancorp of Virginia, Inc. Annual Report on Form 10-K for the year ended December 31, 2010. The results of operations for the three-month period ended March 31, 2011 are not necessarily indicative of the results to be expected for the full year.

Citizens Bancorp of Virginia, Inc. (the “Company”) is a one-bank holding company formed on December 18, 2003. The Company is the sole shareholder of its only subsidiary, Citizens Bank and Trust Company (the “Bank”). The Bank conducts and transacts the general business of a commercial bank as authorized by the banking laws of the Commonwealth of Virginia and the rules and regulations of the Federal Reserve System. The Bank was incorporated in 1873 under the laws of Virginia. Deposits are insured by the Federal Deposit Insurance Corporation. As of March 31, 2011 the Bank employed 111 full-time employees. The address of the principal offices for the Company and the main office of the Bank is 126 South Main Street, Blackstone, Virginia, and all banking offices are located within the Commonwealth of Virginia.

Note 2. Securities

Investment decisions are made by the Management group of the Company and reflect the overall liquidity and strategic asset/liability objectives of the Company. Management analyzes the securities portfolio frequently and manages the portfolio to provide an overall positive impact to the Company’s income statement, balance sheet and liquidity needs. Securities available for sale are summarized below:

	March 31, 2011
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
U.S. government and	(Dollars in thousands)
federal agency	$	18,640	$	32	$	(65	)	$	18,607
State and municipal		28,463		355		(262	)		28,556
Agency mortgage-backed		36,240		656		(156	)		36,740
Non-agency mortgage-backed		2,297		6		(172	)		2,131
Corporate		753		65		-			818
Securities available for sale	$	86,393	$	1,114	$	(655	)	$	86,852

	December 31, 2010
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		(Losses)			Value
U.S. government	(Dollars in thousands)
and federal agency	$	16,761	$	36	$	(91	)	$	16,706
State and municipal		29,142		209		(646	)		28,704
Agency mortgage-backed		33,828		629		(198	)		34,259
Non-agency mortgage-backed		2,466		1		(192	)		2,275
Corporate		753		48		-			801
Securities available for sale	$	82,950	$	923	$	(1,127	)	$	82,745

The amortized cost and fair value of securities available for sale by contractual maturity at March 31, 2011 follows. Maturities may differ from contractual maturities in mortgage-backed securities because the mortgages underlying the securities may be called or prepaid without any penalties.

	Amortized		Fair
	Cost		Value
	(Dollars in thousands)
Maturing within one year	$	300	$	301
Maturing after one year through five years		11,900		12,004
Maturing after five years through ten years		10,953		11,056
Mturing after ten years		24,703		24,620
Agency mortgage-backed securities		36,240		36,740
Non-agency mortgage-backed securities		2,297		2,131
Securities available for sale	$	86,393	$	86,852

Information pertaining to securities with gross unrealized losses at March 31, 2011 and December 31, 2010, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is summarized as follows:

	Less than 12 Months					12 Months or More
	Fair		Unrealized			Fair		Unrealized
March 31. 2011	Value		(Loss)			Value		(Loss)
	(Dollars in thousands)
U.S. government
and federal agency	$	7,434	$	(65	)	$	-	$	-
State and municipal		9,250		(248	)		361		(14	)
Agency mortgage-backed		15,039		(156	)		-		-
Non-agency mortgage-backed		-		-			1,154		(172	)
Total temporarily impaired securities	$	31,723	$	(469	)	$	1,515	$	(186	)

	Less than 12 Months					12 Months or More
	Fair		Unrealized			Fair		Unrealized
December 31, 2010	Value		(Loss)			Value		(Loss)
	(Dollars in thousands)
U.S. government
and federal agency	$	10,412	$	(91	)	$	-	$	-
State and municipal		16,916		(619	)		348		(27	)
Agency mortgage-backed		10,408		(198	)		-		-
Non-agency mortgage-backed		695		(6	)		1,291		(186	)
Total temporarily impaired securities	$	38,431	$	(914	)	$	1,639	$	(213	)

The unrealized losses in the investment portfolio as of March 31, 2011 are considered temporary and are a result of general market fluctuations that occur daily and which have been more volatile since the current economic recession began. Management evaluates securities for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the intent of the Bank to sell the security, (2) whether it is more likely than not that the Bank will be required to sell the security before recovery of its amortized cost basis, and (3) whether the Bank expects to recover the securities entire amortized cost basis regardless of the Bank’s intent to sell the security.

In the Company’s Form 10-K report for December 31, 2010, management discussed its ongoing review of five non-agency collateralized mortgage obligations, also referred to as CMOs, three of which had credit agency ratings that were below investment grade as of December 31, 2010. Management’s analysis for the first quarter of 2011 indicated that all five of the non-agency CMOs remain rated below investment grade. Management’s analysis also indicated that all five securities have made consistent monthly payments through March 31, 2011. As of March 31, 2011, all five securities showed a net unrealized loss of 7.0% of the $2.4 million book value, which is an improvement as compared to the 7.56% net unrealized loss on the $2.5 million book value at December 31, 2010.

The most recently available data on the delinquency pipeline for the non-agency CMOs indicates that two of the securities that were the first to be downgraded by the credit rating agencies have experienced a slight worsening of their delinquency pipeline statistics; whereas the other three securities have not seen any significant change in their delinquency statistics. The two securities noted above are the same securities that necessitated the impairment write-down in December 2009. In analyzing the stress test results for all five CMO securities, management utilizes stress factors that are more severe than what has been experienced by each of the securities with regards to credit delinquencies, credit defaults and net liquidation results since the inception of the securities. Based upon the first quarter 2011 analysis, the first estimate of loss is indicated in one security to be approximately 20 months in the future while the second security’s estimated loss is approximately 43 months in the future. The security with an anticipated loss, in approximately 20 months, has a projected loss that is well within the credit impairment charge that was already provided. With the high number of factors considered in the stress test model, factors that are primarily impacted by how individual borrowers resolve their delinquencies, how quickly homes are brought through the foreclosure process and the results of liquidating foreclosed properties, management recognizes that it is critical to maintain an ongoing review of data coming from the servicers in order to monitor the likelihood of credit losses. The most immediate indication of credit-related losses will be when monthly payments on an individual security ceases.

The first quarter credit stress test analysis report noted that the average monthly principal pay-down for the first quarter of 2011 was $81.9 thousand and compares to the monthly average pay down of $106.7 thousand reported in management’s analysis for the fourth quarter of 2010. The monthly average principal pay down for the third quarter of 2010 was $113.7 thousand, for the second quarter of 2010 the pay down was $57.3 thousand and for the first quarter of 2010 the average monthly pay down was $51.9 thousand. The Company’s Chief Financial Officer continues to monitor all five securities for any further impairment and he is reporting the status of each security to the Board of Directors regularly.

A roll-forward of the OTTI amount related to credit losses on debt securities for the period ended March 31, 2011 is as follows:

	(Dollars in thousands)

Credit losses recognized in earnings, beginning of period	$	60

Recognition of credit losses for which an OTTI was not
perviously recognized		-

Credit losses recognized in earnings, end of period	$	60

The Bank’s investment in Federal Home Loan Bank (“FHLB”) stock totaled $923 thousand at March 31, 2011. FHLB stock is generally viewed as a long-term restricted investment security which is carried at cost, because there is no market for the stock other than for the FHLB or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. The Bank does not consider this investment to be other than temporarily impaired at March 31, 2011 and no impairment has been recognized on the Federal Home Loan Bank stock.

Note 3. Loans

The loan portfolio was composed of the following:

	March 31,		December 31,
	2011		2010
	(Dollars in thousands)
Residential Real Estate:
1-4 family	$	91,432	$	92,520
Home equity		10,978		10,816
Commercial Real Estate:
Owner occupied		25,554		23,884
Non-owner occupied		27,829		28,597
Farmland		8,607		8,787
Construction		14,186		12,943
Total real estate		178,586		177,547

Commercial & industrial loans		14,892		14,500
Consumer loans		9,797		10,636
Total loans	$	203,275	$	202,683

Loan Origination

The Company has certain lending policies and procedures in place that are designed to maximize loan income within an acceptable level of risk. Management reviews and the Board of Directors approve these policies and procedures on a regular basis. A reporting system supplements the review process by providing management and the Board with frequent reports related to loan production, loan quality, concentrations of credit, loan delinquencies and non-performing and potential problem loans. Diversification in the loan portfolio is a means of managing risk associated with fluctuations in economic conditions.

The Company has six loan portfolio level segments and eight loan class levels for reporting purposes.

The six loan portfolio level segments include:

Residential real estate loans are loans made to borrowers for the purchase of residential dwellings.

Commercial real estate loans are loans made to business entities for the purchase of real estate and buildings that will be used in the business.

Farmland loans are loans made to farming entities to acquire land used for agricultural purposes such as in the cultivation of crops or livestock.

Construction and land development loans are loans made to individuals or developers in order to construct homes, develop raw land into buildable acreage, or for commercial construction purposes.

Commercial and industrial loans are loans made to small and medium-sized businesses for any number of reasons especially working capital. Loans are typically secured by inventory, business equipment, furniture or receivables and they are frequently guaranteed by principals of the business.

Consumer loans are loans made to individuals and the loans may be secured by personal property or be unsecured.

Residential real estate loans, including home equity loans and lines of credit, are subject to underwriting standards that are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage of 80%, debt-to-income ratios, credit history, collection remedies, the number of such loans a borrower can have at one time and documentation requirements. While many of the statutory requirements are for the protection of the consumer, underwriting standards aid at mitigating the risks to the Company by setting acceptable loan-approval standards that marginal borrowers may not meet. Additional risk mitigating factors include: residential real estate typically serves as a borrower’s primary residence which encourages timely payments and the avoidance of foreclosure, the average dollar amount of a loan is typically less than that of a commercial real estate loan, and there are a large number of loans which help to diversify the risk potential.

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Company’s commercial real estate portfolio are diverse in terms of type and geographic location. This diversity helps reduce the Company’s exposure to adverse economic events that affect any single market or industry.

Management monitors and evaluates commercial real estate loans based on collateral, geography and risk grade criteria. Management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans. At March 31, 2011, approximately 47.87% of the outstanding principal balance of the Company’s commercial real estate loans was secured by owner-occupied properties, this is an increase from 45.51% at December 31, 2010.

Farmland loans are subject to underwriting standards and processes similar to commercial real estate loans. The loans are considered primarily on the borrower’s ability to make payments originating primarily from the cash flow of the business and secondarily as loans secured by real estate.

With respect to construction, land and land development loans that are secured by non-owner occupied properties that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten with independent appraisal reviews, lease rates and financial analysis of the borrowers. Construction loans are generally based upon estimates of costs and value associated with the complete project. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent

loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and prudently expand its business. Underwriting standards are designed to promote relationship banking rather than transactional banking. Once it is determined that the borrower’s management possesses sound ethics and solid business acumen, the Company’s management examines current and projected cash flows to determine the ability of the borrower to repay their obligations as agreed. Commercial and industrial loans are primarily made based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial and industrial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

To monitor and manage consumer loan risk, policies and procedures are developed and modified by credit administration and senior management. This activity, coupled with relatively small loan amounts that are spread across many individual borrowers, minimizes risk. Underwriting standards for home equity loans are heavily influenced by statutory requirements, which include, but are not limited to, a maximum loan-to-value percentage, debt-to-income ratios, credit history, and the number of such loans a borrower can have at one time.

The Company maintains a credit review department that reviews and validates the credit risk program on a periodic basis. In addition, the Company’s Audit and Risk Management Committee contracts with an independent loan review consulting firm the work of reviewing, among other things, loan relationships exceeding $250,000, a sample of loans underwritten within the authority of loan officers, and the risk grading of criticized and classified assets with balance in excess of $100,000. The firm provides a report to the Audit and Risk Management Committee upon the completion of their annual review. The loan review process complements and reinforces the risk identification and assessment decisions made by lenders and credit personnel, as well as the Company’s policies and procedures.

Concentrations of Credits

Most of the Company’s lending activity occurs within the Commonwealth of Virginia, more specifically within the South-Central Virginia markets that include Richmond. The majority of the Company’s loan portfolio consists of residential and commercial real estate loans. A substantial portion of its debtors’ ability to honor their contracts and the Company’s ability to realize the value of any underlying collateral, if needed, is influenced by the economic conditions in this market. As of March 31, 2011, there were no concentrations of commercial loans related to any individual purpose that was in excess of 6.12% of total loans.

Non-accrual and Past Due Loans

All loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due in accordance with the contractual terms of the underlying loan agreement. Loans are placed on non-accrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on non-accrual status regardless of whether or not such loans are considered past due. When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal due. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Aging and nonaccrual loans, by individual loan class, as of March 31, 2011 and December 31, 2010 was as follows:

	Loans		Loans								Accruing Loans1
	30 - 89 Days		90 or More Days		Total Past Due		Current		Total			90 or More Days		Nonaccrual1
At March 31, 2011	Past Due		Past Due		Loans		Loans		Loans			Loans		Loans
Residential Real Estate:	(In thousands)
1-4 family	$	2,885	$	1,459	$	4,344	$	87,088	$	91,432		$	43	$	1,955
Home equity		89		49		138		10,840		10,978			-		49
Commercial Real Estate
Owner occupied		-		628		628		24,926		25,554					627
Non-owner occupied		197		512		709		27,120		27,829					512
Farmland		-		9		9		8,598		8,607			-		9
Construction		16		229		245		13,941		14,186			-		245
Total real estate		3,187		2,886		6,073		172,513		178,586			43		3,397
Commercial and industrial		299		167		466		14,426		14,892			-		237
Consumer		166		16		182		9,615		9,797			-		89

Total loans	$	3,652	$	3,069	$	6,721	$	196,554	$	203,275		$	43	$	3,723

	Loans		Loans								Accruing Loans1
	30 - 89 Days		90 or More Days		Total Past Due		Current		Total			90 or More Days		Nonaccrual1
At December 31, 2010	Past Due		Past Due		Loans		Loans		Loans			Loans		Loans
Residential Real Estate:	(In thousands)
1-4 family	$	3,347	$	789	$	4,136	$	88,384	$	92,520		$	28	$	1,788
Home equity		30		49		79		10,737		10,816			-		49
Commercial Real Estate
Owner occupied		60		636		696		23,188		23,884					637
Non-owner occupied		58		815		873		27,724		28,597					815
Farmland		-		11		11		8,776		8,787			-		10
Construction		195		182		377		12,566		12,943			-		182
Total real estate		3,690		2,482		6,172		171,375		177,547			28		3,481
Commercial and industrial		320		316		636		13,864		14,500			89		302
Consumer		96		38		134		10,502		10,636			-		53

Total loans	$	4,106	$	2,836	$	6,942	$	195,741	$	202,683		$	117	$	3,836

1Accruing loans 90 or more days past due and nonaccrual loans are included in the aging and current loan columns of the tables based on their contractual payments, above.

Impaired Loans

Loans are considered impaired when, based on current information and events, it is probable the Corporation will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreement, including scheduled principal and interest payments. Impairment is evaluated in total for smaller-balance loans of a similar nature and on an individual loan basis for other loans. If a loan is impaired, a specific valuation allowance is allocated, if necessary, which represents either the present value of estimated future cash flows using the loans existing rate or the fair value of collateral if repayment is expected solely from the collateral. Interest payments on impaired loans are typically applied to principal unless collectability of the principal amount is reasonably assured, in which case interest is recognized on a cash basis. Impaired loans, or portions thereof, are charged off when deemed uncollectible.

Impaired loans, by class, as of March 31, 2011 and December 31, 2010 are shown in the tables below:

	Loans
At March 31, 2011	Unpaid Contractual		Total				Average		Interest
With no related allowance	Principal Balance		Recorded Investment		Related Allowance		Recorded Investment		Income Recognized
Residential Real Estate:	(In thousands)
1-4 family	$	155	$	155	$	-	$	155	$	3
Home equity		-		-		-		-		-
Commercial Real Estate:
Owner occupied		573		528		-		527		11
Non-owner occupied		1,384		1,384		-		1,295		24
Farmland		1,582		1,582		-		1,572		28
Construction		361		358		-		390		6
Commercial and industrial		776		244		-		757		15
Consumer installment		-		-		-		-		-
Total loans	$	4,831	$	4,251	$	-	$	4,696	$	87
With an allowance recorded
Residential Real Estate:
1-4 family	$	949	$	945	$	171	$	943	$	16
Home equity		-		-		-		-		-
Commercial Real Estate:
Owner occupied		669		628		55		632		12
Non-owner occupied		-		-		-		-		-
Farmland		-		-		-		-		-
Construction		72		72		34		72		1
Commercial and industrial		117		84		42		87		1
Consumer installment		71		71		71		71		2
Total loans	$	1,878	$	1,800	$	373	$	1,805	$	32
Total impaired loans1
Residential Real Estate:
1-4 family	$	1,104	$	1,100	$	171	$	1,098	$	19
Home equity		-		-		-		-		-
Commercial Real Estate:
Owner occupied		1,242		1,156		55		1,159		23
Non-owner occupied		1,384		1,384		-		1,295		24
Farmland		1,582		1,582		-		1,572		28
Construction		433		430		34		462		7
Commercial and industrial		893		328		42		844		16
Consumer installment		71		71		71		71		2
Total loans	$	6,709	$	6,051	$	373	$	6,501	$	119

	Loans
At December 31, 2010	Unpaid Contractual		Total				Average		Interest
With no related allowance	Principal Balance		Recorded Investment		Related Allowance		Recorded Investment		Income Recognized
Residential Real Estate:	(In thousands)
1-4 family	$	-	$	-	$	-	$	-	$	-
Home equity		-		-		-		-		-
Commercial Real Estate:
Owner occupied		881		825		-		850		66
Non-owner occupied		1,386		1,386		-		1,390		97
Farmland		1,546		1,546		-		2,081		145
Construction		412		409		-		415		27
Commercial and industrial		835		303		-		914		70
Consumer installment		-		-		-		-		-
Total loans	$	5,060	$	4,469	$	-	$	5,650	$	405
With an allowance recorded
Residential Real Estate:
1-4 family	$	653	$	649	$	113	$	640	$	44
Home equity		-		-		-		-		-
Commercial Real Estate:
Owner occupied		669		637		56		639		30
Non-owner occupied		-		-		-		-		-
Farmland		-		-		-		-		-
Construction		63		63		24		63		4
Commercial and industrial		121		90		45		100		6
Consumer installment		8		8		1		8		1
Total loans	$	1,514	$	1,447	$	239	$	1,450	$	85
Total impaired loans1
Residential Real Estate:
1-4 family	$	653	$	649	$	113	$	640	$	44
Home equity		-		-		-		-		-
Commercial Real Estate:
Owner occupied		1,550		1,462		56		1,489		96
Non-owner occupied		1,386		1,386		-		1,390		97
Farmland		1,546		1,546		-		2,081		145
Construction		475		472		24		478		31
Commercial and industrial		956		393		45		1,014		76
Consumer installment		8		8		1		8		1
Total loans	$	6,574	$	5,916	$	239	$	7,100	$	490


1TDR's (Troubled Debt Restructurings) included in the impaired loan tables above at March 31, 2011 and December 31, 2010 totaled $1.669 million and $1.720 million respectively.

The Company utilizes a risk grading matrix to assign a risk grade to each of its commercial loans. Loans are graded on a scale of 1 to 9. A description of the general characteristics of the 9 risk grades is as follows:

Grade 1 – “Excellent” This grade includes loans to borrowers with superior capacity to pay interest and principal. Foreseeable economic changes are unlikely to impair the borrowers’ strength. Typically, borrowers have an excellent organizational structure in place with highly regarded and experienced management. Stable business, relatively unaffected by business, credit, or product cycles, business is

significant in its market and has a well-defined market share. Borrower will have ready access to both public debt and equity markets under most conditions. Collateral is highly liquid, substantial margins are maintained, and primary/secondary sources of repayment are excellent. Loans secured by cash.

Grade 2 – “Good” This grade includes loans to borrowers that represent a solid, demonstrated capacity to pay interest and principal, but material downturns in economic conditions may impact the borrowers’ financial condition. Typically, borrowers exhibit low levels of leverage and the overall capitalization of the company is deemed satisfactory. Trends for revenue, core profitability and financial ratios are consistently above average with industry peers. Cash flow adequately covers dividends/withdrawals, and historic debt service in excess of 1.5 times. Collateral coverage is greater than 2.0 times or less than 50% loan-to-value ratio. Borrower has a stable, well-regarded and qualified management team in place, along with strong financial controls being evident. Normal industry stability, sales and profits are affected by business, credit or product cycles. Market share is stable. Borrower has the capability to refinance with another institution.

Grade 3 – “Standard” This grade includes loans to borrowers which have historically demonstrated an above adequate capacity to repay forecasted principal and interest charges; with debt service coverage of 1.20 times based on at least two years of historical earnings. Borrowers have inherent, definable weaknesses; however the weaknesses are not necessarily uncommon to a particular business, loan type or industry. Changes in economic circumstances could have non-material immediate repercussions on the borrowers’ financial condition. Collateral support is deemed to be satisfactory based on appropriate discount factoring to allow a recovery sufficient to pay-off the debt. Collateral could be reasonably collected and/or liquidated in the general market. Additional collateral may be deemed an abundance of caution. Earnings are generally positive, subject to influences of current market conditions and distributions are reasonable in relation to the overall financial picture of the company. Guarantor support is deemed to be marginal as evidenced by personal assets, which probably could not support the business in full, if needed.

Grade 4 – “Acceptable” This grade includes loans to borrowers that will have inherent, definable weaknesses, however these weaknesses are not necessarily uncommon to a particular business, loan type, or industry. Economic changes could have negative repercussions on the financial condition. Borrowers overall financial position would indicate financing in the market is feasible, at rates and terms typical of current market conditions. Debt service coverage is deemed acceptable at 1.00 to 1.19 times on a combined basis for at least two years of historical earnings. Borrowers exhibit moderately high to high levels of leverage as noted against policy and Risk Management Association industry averages. Tangible net worth is marginally positive or even showing signs of a deficit net worth. Collateral support is deemed to be acceptable or even marginal, but not strong based on appropriate discounting, asset quality may be questionable given specific nature of assets, often secondary non-business assets are required. Earnings are marginally positive or a trend of negative earnings is identified and distributions are considered to be in excess of reasonableness. Guarantor support is deemed to be marginal as evidenced by personal assets, which probably could not support the business in full if needed. Repayment history also shows a discernable level of delinquent payments.

Grade 5 – This grade includes loans on management’s “watch list” and is intended to be utilized on a temporary basis for pass grade borrowers where a significant risk-modifying action is anticipated in the near term.

Grade 6 – This grade is for “Other Assets Especially Mentioned” in accordance with regulatory guidelines. This grade is intended to be temporary and includes loans to borrowers whose credit quality has clearly deteriorated and are at risk of further decline unless active measures are taken to correct the situation.

Grade 7 – This grade includes “Substandard” loans, in accordance with regulatory guidelines, for which the accrual of interest may or may not have been stopped. This grade also includes loans where interest is more than 120 days past due and not fully secured and loans where a specific valuation allowance may be necessary, but does not exceed 30% of the principal balance.

Grade 8 – This grade includes “Doubtful” loans in accordance with regulatory guidelines. Such loans are placed on non-accrual status and may be dependent upon collateral having a value that is difficult to determine or upon some near-term event which lacks certainty. Additionally, these loans generally have a specific valuation allowance in excess of 30% of the principal balance.

Grade 9 – This grade includes “Loss” loans in accordance with regulatory guidelines. Such loans are to be charged-off or charged-down when payment is acknowledged to be uncertain or when the timing or value of payments cannot be determined. “Loss” is not intended to imply that the loan or some portion of it will never be repaid, nor does it in any way imply that there has been a forgiveness of debt.

The following tables present credit quality by loan class as of March 31, 2011 and December 31, 2010.

					Special
At March 31, 2011	Pass		Watch		Mention		Substandard		Doubtful		Loss		Total
Residential Real Estate:	(In thousands)
1-4 family	$	84,934	$	1,758	$	1,123	$	3,582	$	35	$	-	$	91,432
Home equity		10,382		205		42		349		-		-		10,978
Commercial Real Estate:
Owner occupied		23,296		856		754		528		120		-		25,554
Non-owner occupied		24,793		1,038		1,433		564		-		-		27,828
Farmland		7,018		-		-		1,589		-		-		8,607
Construction		13,418		121		162		413		72		-		14,186
Total real estate loans		163,841		3,978		3,514		7,025		227		-		178,585
Commercial and industrial		11,838		2,615		111		258		70		-		14,892
Consumer		9,639		14		16		125		4		-		9,798

Total loans	$	185,318	$	6,607	$	3,641	$	7,408	$	301	$	-	$	203,275

					Special
At December 31, 2010	Pass		Watch		Mention		Substandard		Doubtful		Loss		Total
Residential Real Estate:	(In thousands)
1-4 family	$	86,147	$	1,428	$	1,233	$	3,662	$	50	$	-	$	92,520
Home equity		10,219		205		43		349		-		-		10,816
Commercial Real Estate:
Owner occupied		21,410		1,058		759		536		121		-		23,884
Non-owner occupied		25,438		848		1,438		873		-		-		28,597
Farmland		7,230		-		-		1,557		-		-		8,787
Construction		12,236		72		163		472		-		-		12,943
Total real estate loans		162,680		3,611		3,636		7,449		171		-		177,547
Commercial and industrial		11,491		2,505		111		319		74		-		14,500
Consumer		10,524		12		12		88		-		-		10,636

Total loans	$	184,695	$	6,128	$	3,759	$	7,856	$	245	$	-	$	202,683

Note 4. Allowance for Loan Losses

The allowance for loan losses is a reserve established through a provision for loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company’s allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by loan segment and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of the allowance for possible loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-

accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools.

The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including, among other things, the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications.

The Company's allowance for loan losses consists of three elements: (i) specific valuation allowances determined in accordance with ASC Topic 310 based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with ASC Topic 450 based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with ASC Topic 450 based on general economic conditions and other qualitative risk factors both internal and external to the Company. Provisions for loan losses increase the amount of the allowance based upon the above considerations. Amounts computed to produce an appropriate allowance amount in one period can subsequently be affected by any recoveries of previously charged-off amounts, which are credited to the allowance, and by the reduction of overall loan balances from one period to another. These events, as well as others, can result in producing an "unallocated reserve component" at the end of any period, which is not attributable to any specific loan segment.

The allowance established for probable losses on specific loans is based on a regular analysis and evaluation of problem loans. Commercial loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all commercial loans. When a loan has a calculated grade of 7 or higher, the loan is analyzed to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for possible loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, the relative risk grade of the loan and economic conditions affecting the borrower’s industry, among other things.

The historical component is calculated based on the historical charge-off experience of loan segments. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are periodically updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. The Company’s pools of similar loans include similar groups of residential real estate loans, commercial real estate loans, commercial and industrial loans, and consumer loans. The methodology employed to determine the historical loss ratio takes into consideration the net charge-offs for the most recent 36-months plus any specific reserve that are in place against individually impaired loans, by loan segment, at the time of the ratio calculation.

The general reserve component is based on general economic conditions and other qualitative risk factors both internal and external to the Company. In general, such valuation allowances are determined by evaluating, among other things: (i) the experience, ability and effectiveness of the Company’s lending management and staff; (ii) the effectiveness of the Company’s loan policies, procedures and internal controls; (iii) changes in asset quality; (iv) changes in loan portfolio volume;

(v) the composition and concentrations of credit; (vi) the impact of competition on loan pricing; (vii) the effectiveness of the internal loan review function; (viii) the impact of environmental risks on portfolio risks; and (ix) the impact of rising interest rates on portfolio risk. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component will have a certain percentage assigned to it and this percent will be applied against the specific loan segments that are impacted by the various factors, mentioned above. The results of the general component are then included to determine an appropriate valuation allowance.

Loans that are either partially or totally identified as losses by management, internal loan review and/or bank examiners are charged-off. Certain unsecured consumer loan accounts are charged-off automatically based on regulatory requirements.

(The remainder of this page is blank, intentionally.)

The following tables detail activity in the allowance for possible loan losses by portfolio segment as of March 31, 2011 and December 31, 2010. Allocation of a portion of the allowance to one category of loans does not preclude its availability to absorb losses in other categories.

	Residential Real Estate		Commercial Real Estate		Farmland			Construction			Commercial and Industrial			Consumer		Unallocated			Total
March 31, 2011
Beginning balance	$	876	$	535	$	25		$	203		$	224		$	56	$	249		$	2,168
Provision for possible losses		58		27		(1	)		80			37			74		(126	)		149
Charge-offs		-		-		-			(28	)		(25	)		-		-			(53	)
Recoveries		2		-		-			-			-			7		-			9
Net charge-offs		2		-		-			(28	)		(25	)		7		-			(44	)
Ending balance	$	936	$	562	$	24		$	255		$	236		$	137	$	123		$	2,273

Period-end amount allocated to:
Loans individually evaluated
for impairment	$	171	$	55	$	-		$	34		$	42		$	71	$	-		$	373
Loans collectively evaluated
for impairment		765		507		24			221			194			66		123			1,900
Ending balance	$	936	$	562	$	24		$	255		$	236		$	137	$	123		$	2,273

Total Loans	$	102,410	$	53,383	$	8,607		$	14,186		$	14,892		$	9,797	$	-		$	203,275

Loans individually evaluated
for impairment		1,100		2,540		1,582			430			328			71		-			6,051
Loans collectively evaluated
for impairment		101,310		50,843		7,025			13,756			14,564			9,726		-			197,224

	Residential Real Estate			Commercial Real Estate			Farmland			Construction			Commercial and Industrial			Consumer			Unallocated			Total
December 31, 2010
Beginning balance	$	686		$	503		$	33		$	205		$	823		$	97		$	326		$	2,673
Provision for possible losses		566			112			(8	)		280			(111	)		(12	)		(77	)		750
Charge-offs		(381	)		(80	)		-			(293	)		(488	)		(50	)		-			(1,292	)
Recoveries		5			-			-			11			-			21			-			37
Net charge-offs		(376	)		(80	)		-			(282	)		(488	)		(29	)		-			(1,255	)
Ending balance	$	876		$	535		$	25		$	203		$	224		$	56		$	249		$	2,168

Period-end amount allocated to:
Loans individually evaluated
for impairment	$	113		$	56		$	-		$	24		$	45		$	1		$	-		$	239
Loans collectively evaluated
for impairment		763			479			25			179			179			55			249			1,929
Ending balance	$	876		$	535		$	25		$	203		$	224		$	56		$	249		$	2,168

Total Loans	$	103,336		$	52,481		$	8,787		$	12,943		$	14,500		$	10,636		$	-		$	202,683

Loans individually evaluated
for impairment		649			2,848			1,546			472			393			8			-			5,916
Loans collectively evaluated
for impairment		102,687			49,633			7,241			12,471			14,107			10,628			-			196,767

A further discussion of the Company’s Allowance for Loan Losses appears later in this report in the Management Discussion and Analysis segment under the section titled, “Financial Condition and Results of Operations.”

Note 5. Other Real Estate Owned

An analysis of other real estate owned follows:

	March 31,			December 31,
	2011			2010
	(Dollars in thousands)
Balance at beginning of period	$	3,425		$	1,073
Additions		135			2,635
Impairments		-			(76	)
Disposals		(35	)		(207	)
Balance at end of period	$	3,525		$	3,425

Expenses applicable to other real estate owned include the following:

	Three Months Ended
	March 31,
	2011			2010
	(Dollars in thousands)
Net (gain) on sales of
real estate	$	(7	)	$	-
Impairment		-			-
Operating expenses, net of
rental income		12			3
	$	5		$	3

Note 6. FHLB Advances

At March 31, 2011 and December 31, 2010, the Company had outstanding advances totaling $5 million with the Federal Home Loan Bank of Atlanta, detailed below.

	March 31,		December 31,
	2011		2010
	(Dollars in thousands)
Five-year / two-year convertible advance at 2.47%
maturing February 5, 2013	$	5,000	$	5,000

Note 7. Other Borrowings

Other borrowings consist of $6.5 million and $5.1 million in overnight repurchase agreements as of March 31, 2011 and December 31, 2010, respectively. These balances are from deposit balances outstanding in the Investment Sweeps Account product, which is an overnight repurchase agreement product, not insured by the FDIC, but guaranteed by the Bank with securities of the US Government and Federal Agencies. This product is offered to commercial customers only.

Note 8. Earnings Per Share

The weighted average number of shares used in computing earnings per share was 2,348,787 shares for the three months ended March 31, 2011 and 2,368,932 shares for the three months ended March 31, 2010. The Company has no potentially dilutive stock options or stock warrants outstanding.

Note 9. Defined Benefit Pension Plan

The components of Net Periodic Benefit Cost for the three months ended March 31, 2011 and 2010 were as follows:

	Three Months Ended
		March 31,
(Dollars in thousands)		2011	2010

Service cost		$75	$69
Interest Cost		71	66
Expected return on plan assets		(81)	(73)
Amortization of prior service cost		(24)	(24)
Amortization of net actuarial loss		22	19
Net periodic benefit cost		$63	$57

The pension plan has a fiscal year ending September 30, providing the Company the flexibility as to the plan year in which it makes pension plan contributions. The defined benefit pension liability is computed at every December 31, only. The Company made its required 2011 fiscal year contribution to the pension plan in December 2010 in the amount of $202,283. The Company anticipates making the 2011 contribution by December 31, 2011. The Company estimates this contribution to be approximately $250,000.

Note 10. Fair Value Measurements

Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Accounting Standards Codification 820 Fair Value Measurements and Disclosures, (formerly SFAS No. 107) excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company.

The Company in estimating fair value disclosures for financial instruments used the following methods and assumptions:

Cash and cash equivalents: The carrying amounts of cash and short-term instruments approximate fair values.

Securities: Fair values for investment securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments.

Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (e.g., one-to-four family residential) and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses based upon interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Deposits: The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and certain types of money market accounts) are, by definition, equal to the amounts payable on demand at the reporting date (i.e., their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit approximate their fair values at the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a

discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Borrowings: The carrying amounts of federal funds purchased and other short term borrowings maturing within 90 days approximate their fair values. Fair values for Federal Home Loan Bank advances are estimated based upon current advance rates for the remaining term of the advance.

Accrued interest: The carrying amounts of accrued interest approximate fair value.

Off-balance-sheet instruments: Fair values for off-balance-sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. At March 31, 2011 and December 31, 2010, the fair value of loan commitments and standby letters of credit was deemed to be immaterial.

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows:

	March 31, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
	(Dollars in thousands)
Financial assets:
Cash and cash equivalents	$	19,037	$	19,037	$	22,744	$	22,744
Securities available for sale		86,852		86,852		82,745		82,745
Loans, net		201,002		214,192		200,515		215,132
Accrued interest receivable		1,707		1,707		1,816		1,816

Financial liabilities:
Deposits	$	275,937	$	274,115	$	277,988	$	279,598
Other borrowings		11,514		11,587		10,149		10,346
Accrued interest payable		909		909		887		887

The Company assumes interest rate risk as part of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent possible to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Company’s overall interest rate risk.

Accounting Standards Codification 820 Fair Value Measurements and Disclosures, (formerly known as SFAS No. 157), defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follow:

Level 1

inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

Level 2

inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

Level 3

inputs to the valuation methodology are unobservable and significant to the fair value measurement.

The following tables present the balances of financial assets measured at fair value on a recurring basis as of March 31, 2011 and December 31, 2010.

			Fair Value Measurements at March 31, 2011 Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Signigicant
	Balance as of		Identical		Observable		Unobservable
	March 31,		Assets		Inputs		Inputs
Description	2011		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Securities available
for sale
U.S. Government
and federal agency	$	18,607	$	-	$	18,607	$	-
State and municipal		28,556		-		28,556		-
Agency mortgage-backed		36,740		-		36,740		-
Non-agency mortgage-backed		2,131		-		2,131		-
Corporate		818		-		818		-


			Fair Value Measurements at December 31, 2010 Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Signigicant
	Balance as of		Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
Description		2010	(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Securities available
for sale
U.S. Government
and federal agency	$	16,705	$	-	$	16,705	$	-
State and municipal		28,704		-		28,704		-
Agency mortgage-backed		34,259		-		34,259		-
Non-agency mortgage-backed		2,275		-		2,275		-
Corporate		801		-		801		-

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

Securities available for sale:

Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that consider observable market data (Level 2).

Accounting principles permit the measurement of certain assets at fair value on a nonrecurring basis. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

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

			Carrying value at March 31, 2011
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
	Balance as of		Identical		Observable		Unobservable
	March 31,		Assets		Inputs		Inputs
Description	2011		(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired Loans, net of	$	1,427	$	-	$	1,427	$	-
valuation allowance
Other real estate owned	$	3,525	$	-	$	3,485	$	40


			Carrying value at December 31, 2010
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
	Balance as of		Identical		Observable		Unobservable
	December 31,		Assets		Inputs		Inputs
Description		2010	(Level 1)		(Level 2)		(Level 3)
	(Dollars in thousands)
Assets:
Impaired Loans, net of	$	1,208	$	-	$	1,043	$	165
valuation allowance
Other real estate owned	$	3,425	$	-	$	2,925	$	500

Impaired loans

Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Company using observable market data (Level 2).

However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

Other Real Estate Owned

The fair values are estimated based upon recent appraisal values of the property less costs to sell the property. Certain inputs used in appraisals are not always observable, and therefore Other Real Estate Owned may be categorized as Level 3. When inputs in appraisals are observable, they are classified as Level 2.

Note 11. Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (FASB) issued ASU 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, “Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period became effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures will be required for periods beginning on or after December 15, 2010. The Company has included the required disclosures in its consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, “Disclosure of Supplementary Pro Forma Information for Business Combinations.” The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. The Company will adopt this new guidance should it enter into a business combination in the future.

In December 2010, the FASB issued ASU 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The amendments in this Update are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The Company will adopt the new guidance when appropriate, currently the Company’s consolidated financial statements do not reflect any accounting goodwill.

The Securities Exchange Commission (SEC) has issued Final Rule No. 33-9002, “Interactive Data to Improve Financial Reporting”, which requires companies to submit financial statements in XBRL (extensible business reporting language) format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers are required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011. The Company expects to be filing its reports under the XBRL language after June 15, 2011.

In March 2011, the SEC issued Staff Accounting Bulletin (SAB) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series. This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASB’s Codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB Series. The effective date for SAB 114 is March 28, 2011. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” The amendments in this ASU clarify the guidance on a creditor’s evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulty. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company is currently assessing the impact that ASU 2011-02 will have on its consolidated financial statements.

(The remainder of this page is blank, intentionally.)

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis provides the reader with additional information that is helpful in gaining a greater understanding of the Company’s operating results, liquidity, capital resources and financial condition. This discussion and analysis should be read in conjunction with the Company’s Consolidated Financial Statements and Notes to the Interim Consolidated Financial Statements included in this quarterly report and the Company’s Annual Report on Form 10-K for the year ended December 31, 2010. Results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results for the year ending December 31, 2011 or any future period.

Forward-Looking Statements and Factors that Could Affect Future Results

Certain statements contained in this Quarterly Report on Form 10-Q that are not statements of historical fact constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Act”), notwithstanding that such statements are not specifically identified as such. In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company’s management or Board of Directors, including those relating to products or services; (iii) statements of future economic performance; and (iv) statements of assumptions underlying such statements. Words such as “believes”, “anticipates”, “expects”, “intends”, “targeted”, “continue”, “remain”, “will”, “should”, “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

changes in general economic and business conditions in our market area;

level of market interest rates;

risks inherent in making loans such as repayment risks and fluctuating collateral values;

Government intervention in the U.S. financial system;

The effect of changes in laws and regulations (including laws and regulations concerning taxes, banking, and securities) with which the Company and the Bank must comply;

successfully manage the Company’s growth and implement its growth strategies;

the successful management of interest rate risk; including changes in interest rates and interest rate policies;

the value of securities held in the Company’s investment portfolio;

rely on the Company’s Management team, including its ability to attract and retain key personnel;

continue to attract low cost core deposits to fund asset growth;

changes in banking regulations, generally accepted accounting principles and;

compete with other banks and financial institutions and companies outside of the banking industry, including those companies that have substantially greater access to capital and other resources;

the ability to rely on third party vendors that perform critical services for the Company;

technology utilized by the Company;

maintain expense controls and asset qualities as new branches are opened or acquired;

demand, development and acceptance of new products and services;

The effect of changes in accounting policies and practices, as may be adopted by the regulatory agencies, as well as the Public Company Accounting Oversight Board, the Financial Accounting Standards Board and other accounting standard setters;

maintain capital levels adequate to support the Company’s growth; and

plan for changing trends in customer profiles and behavior.

Because of these uncertainties, actual future results may be materially different from the results indicated by these forward looking statements. In addition, past results of operations do not necessarily indicate future results.

CRITICAL ACCOUNTING POLICIES

General

The financial condition and results of operations presented in the Consolidated Financial Statements, accompanying Notes to Interim Consolidated Financial Statements and Management's discussion and analysis are, to a large degree, dependent upon the accounting and reporting policies of the Company. The Company’s accounting and reporting polices are in accordance with generally accepted accounting principals within the United States of America and with general practices within the banking industry. The selection and application of these accounting policies by Management involve judgments, estimates, and uncertainties that are susceptible to change.

Presented below is a discussion of those accounting policies that Management believes are the most important to the portrayal and understanding of the Company’s financial condition and results of operations. The Critical Accounting Policies require Management's most difficult, subjective and complex judgments about matters that are inherently uncertain. In the event that different assumptions or conditions were to prevail, and depending upon the severity of such changes, materially different financial condition or results of operations is a reasonable likelihood.

Allowance for Loan Losses

The Company monitors and maintains an allowance for loan losses to absorb an estimate of probable losses inherent in the loan portfolio. The Company maintains policies and procedures that address the systems of controls over the following areas of maintenance of the allowance: the systematic methodology used to determine the appropriate level of the allowance to provide assurance that the systems are maintained in accordance with accounting principles generally accepted in the United States of America; the accounting policies for loan charge-offs and recoveries; the assessment and measurement of impairment in the loan portfolio; the loan grading system; and the general economic environment.

The Company evaluates various loans individually for impairment as required by ACS 310 Receivables. Loans evaluated individually for impairment include non-performing loans, such as loans on non-accrual, loans past due by 90 days or more, restructured loans and other loans selected by Management. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of impairment.

For loans without individual measures of impairment, the Company makes estimates of losses for groups of loans as required by Accounting Standards Codification 450-20 Loss Contingencies. Loans are

grouped by similar characteristics, including the type of loan, the assigned loan grade and the general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is derived based upon estimates of default rates for a given loan grade, the predominant collateral type for the group and the terms of the loan. The resulting estimate of losses for groups of loans are adjusted for relevant environmental factors and other conditions of the portfolio of loans, including: borrower and industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in underwriting standards and risk selection; level of experience, ability and depth of lending management; and national and local economic conditions.

The allowance for loan losses is determined by using estimates of historical losses by category for all loans; with the exception of “criticized loans”. Criticized loans are determined as a result of management evaluating and risk grading individual delinquent loans. Management may assign an estimated amount of reserve for criticized loans if there is the likelihood that not all of the loan amounts due will be collected based upon the most current information concerning the financial condition of the debtors and guarantors as well as the current evaluations of collateral value. The evaluation of criticized loans as to the need and adequacy of any reserves is performed at least quarterly or more frequently if conditions affecting certain loans should change. The impact of environmental factors such as the local and regional economic conditions, attributes of certain loan categories and other relevant matters are considered in estimating the allowance for loan losses and these factors are reviewed at least quarterly in order to capture any indications of worsening or improving environmental factors.

The amount of estimated impairment for individually evaluated loans and groups of loans is added together for a total estimate of loan losses. This estimate of losses is compared to the allowance for loan losses of the Company as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional provision to the allowance would be made. If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether the allowance falls outside a range of estimates. If the estimate of losses is below the range of reasonable estimates, the allowance would be reduced by way of a credit to the provision for loan losses.

The Company recognizes the inherent imprecision in estimates of losses due to various uncertainties and variability related to the factors used, and therefore a reasonable range around the estimate of losses is derived and used to ascertain whether the allowance is too high. If different assumptions or conditions were to prevail and it is determined that the allowance is not adequate to absorb the new estimate of probable losses, an additional provision for loan losses would be made, which the amount may be material to the consolidated financial statements.

For additional information regarding critical accounting policies, refer to Note 1 - Summary of Significant Accounting Policies in the notes to consolidated financial statements and the sections captioned “Application of Critical Accounting Policies and Accounting Estimates” and “Allowance and Provision for Possible Loan Losses” in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the 2010 Form 10-K. There have been no significant changes in the Company’s application of critical accounting policies related to the allowance for possible loan losses since December 31, 2010.

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Balance Sheet

Total assets for the Company increased to $331.0 million at March 31, 2011 compared to $330.5 million at December 31, 2010, representing an increase of $500 thousand or 0.18%.

Total net loans at March 31, 2011 were $201.0 million, an increase of $500 thousand from the December 31, 2010 amount of $200.5 million. For the three months ended March 31, 2011, $10.9 million in loans were originated, a 41.6% increase as compared to $7.7 million for the three months ended March 31, 2010. The increase in loan origination activity in the first three months of 2011 provided an encouraging sign of a slightly improving local economy. Businesses and consumers are approaching any new lending opportunities cautiously, often choosing to refinance and consolidate existing loan balances to take advantage of the lower rate environment.

Gross loan balances at March 31, 2011 as compared to December 31, 2010 indicated that during the first three months of 2011 loans secured by real estate increased $1.5 million or 0.83% and this was partially offset by a decrease in consumer and agricultural loans totaling $985 thousand or 9.0%. Commercial and tax-exempt loans had a net increase of $114 thousand or 0.80% for the first quarter of 2011. Real estate secured loans totaled $178.8 million or 88.0% of the loan portfolio at March 31, 2011 as compared to $177.3 million and 87.5% of the loan portfolio at December 31, 2010. The non-real estate segments of the loan portfolio include agricultural, tax-exempt municipal, commercial and consumer loans. At March 31, 2011 the totals for each segment was $337 thousand, $239 thousand and $14.2 million and $9.6 million, respectively.

Management is maintaining its standard loan pricing methodology and underwriting standards during these difficult economic times and we believe that refusing to relax these standards is critical for maintaining loan quality, even though it may result in a slower growth rate of the loan portfolio. It is Management’s goal for the Bank to continue to be a source of credit for creditworthy commercial businesses, farmers, and consumers during this difficult economic environment. Gross loans as a percent of total assets were 61.4% at March 31, 2011, as compared to 61.3% at December 31, 2010.

Available for sale securities increased to $86.9 million at March 31, 2011, or 26.3% of total assets, which is an increase of $4.2 million from $82.7 million at December 31, 2010. The increase in the investment portfolio from year-end can be attributed to the decline in the level of Federal Funds Sold. At March 31, 2011 the investment portfolio had an unrealized gain of $303 thousand net of Federal income taxes, which is an increase of $438 thousand when compared to an unrealized loss of $135 thousand, net of Federal income taxes, at December 31, 2010. Management’s current strategy for the investment portfolio is to focus investment purchases so that investment maturities will be laddered over a period of time when interest rates are rising. When this strategy was set into place approximately two years ago, economic forecasts indicated that rates would rise in mid-2010. However, overall market interest rates are only expected to go slightly higher later in 2011, if at all, according to revised economists’ forecasts.

During the first quarter of 2011, the consolidated investment portfolio had $3.125 million in securities that were called or approximately 3.7% of the consolidated investment portfolio’s average balance of $84.4 million for the first quarter of 2010. This amount represents a significant reduction in the volume of called securities as compared to the fourth quarter of 2010 when $9.4 million in securities were called and in the third quarter of 2010 when $12.4 million in securities were called. Portfolio projections for the remaining nine months of 2011 anticipate only $1.1 million in called securities.

The availability of securities with the credit grade and duration preferred by management continue to be in short supply. Management’s strategy was re-investment of the called securities without taking on excessive duration; while maintaining a diverse, high quality investment portfolio for the Company and the Bank. While the strategy is being successfully implemented, the yield of the recently purchased securities is lower than the yield of the securities that were called. The expectations are that the yield on the investment portfolio may decline in the near-term, and management does expect a decline in the overall portfolio yield to be acceptable given the forward-looking strategy of having securities mature as interest rates rise in the future. The investment securities of both the Company and the Bank at March 31, 2011 were held as “available for sale”.

Restricted securities totaled $1.1 million at March 31, 2011 and represent equity investments held by the Bank in the Federal Reserve Bank of Richmond, the Federal Home Loan Bank of Atlanta and Community Bankers’ Bank. These securities are required to be held by member banks.

Interest bearing deposits in other banks decreased by $26 thousand at March 31, 2011 to $1.831 million as compared to $1.857 million at December 31, 2010. Federal funds sold decreased $4.7 million to $10.8 million at March 31, 2011 from $15.5 million at December 31, 2010. The Company’s liquidity on hand at March 31, 2011 as represented by cash, due from banks, interest bearing deposits in banks and federal funds sold was $19.0 million or 5.7% of total assets which is $3.7 million lower than $22.7 million or 6.9% of total assets at December 31, 2010.

Allowance for Loan Losses

The allowance for loan losses at March 31, 2011 was $2.273 million compared to $2.168 million at December 31, 2010. The allowance for loan losses, as a percentage of total outstanding loans, increased to 1.12% at March 31, 2011 from 1.07% at December 31, 2010. The Company charged off $53 thousand in loans, recovered $9 thousand from previous write-offs, and provided an additional $150 thousand to the allowance during the three months ended March 31, 2011.

The ratio of net charge-offs to average loans, net of deferred fees was 0.02% for the first three months of 2011 and this compares to 0.12% for the first three months of 2010. For 2011, $27.7 thousand or 51.9% of the total charge-offs were related to loans secured by real estate, $25.0 thousand or 47.0% of the total charge-offs were secured by other assets and $600 or 1.1% were related to consumer loan charge-offs. For the first three months of 2010, $50.8 thousand in real estate-secured loans were charged-off or 76.2% of total charge-offs for the period and $15.8 thousand or 23.7% of total charge-offs were charge-offs against consumer loans. Management expects an increase in charge-offs for the remainder of 2011. The majority of the charge-offs are expected to be related to loans secured by real estate. Further, management does not expect the overall ratio of net charge-offs for 2011 to exceed the 0.59% ratio for 2010.

Management’s methodology for estimating the appropriate level of the allowance for loan losses is based upon bank regulatory guidance and generally accepted accounting principles for maintaining adequate reserves against loan losses. Periodically, management does classify certain loans and provides specific reserves for these loans when it is determined that negative conditions affecting the customer have occurred and will expose the Bank to a potential loss on a given loan(s). Management continues to work aggressively with debtors to resolve delinquencies and mitigate potential repossession or foreclosure of collateral.

Management’s calculation of the allowance for loan losses consists of three main segments, 1- estimating future loan losses by loan category using the Bank’s historical average net losses for each category, 2- the impact of various environmental factors such as the decline in real estate value, unemployment, the volume of past due loans, etc., and 3- the determination of criticized loans, where classified/impaired loans are individually evaluated for probable loss based upon what the Bank could recover from liquidating collateral and from individual guarantors on the loan. Loans classified as loss, doubtful or substandard are adequately reserved for at the report date and are not expected to have a material impact beyond what has been reserved. Specific reserves for impaired loans will be adjusted should material changes occur to a loan’s collateral value or if there is any further deterioration of the credit. Management is closely monitoring any potential indication of credit deterioration, beyond the classified loans currently reported.

The allowance for loan losses-to-total loans ratio increased from 1.07% of gross loans at December 31, 2010 to 1.12% of gross loans at March 31, 2011. The increase is primarily the result of providing $150 thousand in additional provision during the first three months of 2011. During this period, net charge-offs totaled $44.5 thousand and the historical net charge-offs ratio used in the calculation of the allowance increased from the previous quarter given that the ratio is comprised of a rolling 36-month history of net charge-offs. The first quarter provision for loan losses of $150 thousand is a $150 thousand decrease in provision as compared to the first quarter of 2010 provision of $300 thousand. In evaluating the adequacy of the allowance for loan losses, the criticized loans component is the one component, out of a total of three components that generally fluctuates most in quarter-to-quarter comparisons. These fluctuations can occur in the total balance of criticized loans and/or in the amount of allowance that is specifically reserved for individual loans. The amount of criticized loans at December 31, 2010 was $12.1 million. This category decreased $700 thousand to $11.4 million at March 31, 2011. Management is focused on ensuring that the allowance for loan losses reflects the added risks posed as a result of the prolonged economic recession. Management believes the allowance for loan losses is adequate to cover credit losses inherent in the loan portfolio at March 31, 2011.

Management reviews external economic factors quarterly and reports changes to these factors, which are a major component of the allowance calculation. Management continues to work at improving the status of criticized credits for which the Bank maintains significant reserves. These efforts include the addition of more collateral and/or the collection of payments which serve to improve these credits. For a more detailed discussion on the computation of the of allowance for loan losses, see “Note 4 – Allowance for

Loan Losses” in the Notes to Interim Consolidated Financial Statements earlier in this report, also under the section heading of “Critical Accounting Policies” and the discussion “Provision for Loan Losses” found later in this report.

Deposits

Total deposits of $275.9 million at March 31, 2011 represented a decrease of $2.1 million from $278.0 million at December 31, 2010. Total certificates of deposit at March 31, 2011 were $127.9 million, $5.5 million lower from $133.4 million at December 31, 2010. Certificates of deposit are higher costing funds as compared to checking, savings or money market accounts. CDs represented 46.4% of total deposit balances at March 31, 2011 as compared to 48.0% of total deposit balances at December 31, 2010. The significant reason for the decrease in certificates of deposits during the first quarter of 2011 was the non-renewal of a $3 million certificate for a local municipality, while some customers choose to move maturing funds into more liquid accounts such as money market accounts.

Non-interest bearing deposits totaled $34.9 million at March 31, 2011, which is a 5.1% increase from $33.2 million at December 31, 2010. Interest-bearing deposits accounted for 87.4% of total deposits at March 31, 2011 which is a 0.7% increase from 88.1% at December 31, 2010. The Bank continues to make progress in attracting low-cost deposit accounts. The ratio of low-cost deposit account balances as a percentage of total average deposit account balances was 52.9% for the three months ended March 31, 2011 as compared to 50.9% for the same period ended March 31, 2010. Management continues to adhere to its deposit pricing plan that maximizes the benefits of the low interest rate environment by reducing the Bank’s interest costs. Management’s goals continue to include growing low-cost deposit account balances.

Borrowings

Borrowings include overnight repurchase agreements from commercial customers that utilize the Business Investment Sweeps product and long-term advances from the Federal Home Loan Bank of Atlanta (the “FHLB”). A secondary source of other borrowings would be overnight advances from lines of credit established with correspondent banks. For additional details on borrowing sources, see the “Liquidity” section later in this report. At March 31, 2011 the Company had total borrowings of $11.5 million that consisted of $6.5 million in overnight repurchase agreements and an outstanding term advance with the FHLB of $5.0 million. This is compared to $10.1 million in borrowings at December 31, 2010.

Stockholders’ Equity

Stockholders’ equity was $40.3 million at March 31, 2011 compared to $39.6 million at December 31, 2010. The book value per common share was $17.18 at March 31, 2011 compared to $16.84 at December 31, 2010. On January 14, 2011, shareholders were paid a quarterly dividend of $0.17 per share or $400 thousand. On March 24, 2011, the Board of Directors approved another quarterly cash dividend of $0.17 per share, or $399 thousand, payable to shareholders on April 15, 2011. Total average outstanding shares for the first three months of 2011 were 2,348,787 shares as compared to the average outstanding shares of 2,363,947 shares for the year ended December 31, 2010.

The Board of Directors and Management recognize the intrinsic value of the Company. The banking industry as a whole has seen stock prices decline since 2007 due in part to the investment community’s concern about the overall banking industry’s ability to withstand the severe economic recession that impacted the industry in several areas such as interest margin compression, losses due to subprime lending, and the decline in housing and commercial real estate values. The Company’s stock is not actively traded: for example, the average daily trading volume for the first three months of 2011 was 435 shares or 58 shares more than the 377 shares traded on an average daily basis during the first 3 months of 2010; which is 0.02% of the average outstanding shares for the respective periods. This lack of liquidity in the Company’s stock is the primary reason for the existing stock repurchase program which has been in place since September 2007.

The Board reauthorized the stock repurchase plan on November 18, 2010, effective December 1, 2010 until May 31, 2011. The Agreement permits the purchase of up to 40,000 shares during the six-month

term. The plan is renewable every six months, at the discretion of the Board of Directors. The renewal of the stock repurchase plan will be considered at the May 26, 2011 Board of Directors meeting.

The change in Accumulated Other Comprehensive Income at March 31, 2011 versus December 31, 2010 was a result of an improvement in the market value of the Company’s consolidated investment securities portfolio. At March 31, 2011, the Company had an unrealized gain on available for sale securities of $303 thousand, net of income taxes, an increase of $438 thousand from the unrealized loss of $135 thousand, net of income taxes, at December 31, 2010. At March 31, 2011 and December 31, 2010, Accumulated Other Comprehensive Income included $712 thousand in unfunded pension liability, net of income taxes. The unfunded pension liability is recomputed only as of each December 31.

Off-Balance Sheet Arrangements

Financial instruments include commitments to extend credit and standby letters of credit. These commitments include standby letters of credit of approximately $672 at March 31, 2011 and $671 thousand at December 31, 2010. These instruments contain various elements of credit and interest rate risk in excess of the amount recognized in the consolidated statements of financial condition. Additionally, unfunded loan commitments of approximately $23.9 million at March 31, 2011, and $23.5 million at December 31, 2010.

Net Income

For the three months ended March 31, 2011 the Company reported net income of $734 thousand as compared to $608 thousand for the same period in 2010 which is an increase of $126 thousand. Income per basic and diluted share was $0.31 for the three months ended March 31, 2011 as compared to $0.26 per basic and diluted share for the period ended March 31, 2010.

The Company had an annualized return on average assets of .90% and an annualized return on average equity of 7.54% for the three months ended March 31, 2011, as compared to an annualized return on average assets and average equity of .76% and 6.16%, respectively, for the same period in 2010.

The year-to-year increase in net income of $126 thousand is attributable to the following favorable factors:

A decrease in the provision for loan losses of $150 thousand.

A decrease in interest expense of $148 thousand.

An increase in non-interest income of $6 thousand.

These factors were partially offset by unfavorable results in:

A decrease of $93 thousand in interest income due to the mix of earning assets which produced lower earning asset yields.

An increase in non-interest expense of $66 thousand.

An increase in income taxes of $19 thousand as a result of the higher pre-tax income. The effective income tax rate for the three months ended March 31, 2011 of 22.98% as compared to 24.75% for the three months ended March 31, 2010.

Net Interest Income

Net interest income is the Company’s primary source of earnings and represents the difference between interest and fees earned on loans, investments and other earning assets and the interest expense paid on deposits and other interest bearing liabilities. The cost of funds represents interest expense on deposits and other borrowings. Non-interest bearing deposit accounts and capital are other components representing funding sources. Changes in the volume and mix of earning assets and funding sources,

along with the changes in yields earned and rates paid, determine changes in net interest income. The following narrative discussion is to complement the Average Balances, Interest Yields and Rates, and Net Interest Margin table which immediately follows and presents interest income on a tax-equivalent basis. The Company’s investment securities portfolio is the only category reflected in the table that is adjusted for tax-exempt interest income. The discussion using a tax-equivalent basis allows the reader to more accurately compare yields of the investment securities to all other taxable interest-bearing assets. Therefore, GAAP income presented on the income statement for investment securities totaling $742 thousand, for the period ended March 31, 2011, has been adjusted to $874 thousand in order to reflect the taxable equivalence of the tax-exempt securities, using a Federal income tax rate of 34%. The prior period shown on the table was likewise adjusted.

For the three months ended March 31, 2011 net interest income (on a tax-equivalent basis) was $3.106 million as compared to $3.003 million for the three months ended March 31, 2010, an increase of $103 thousand or 3.4%. Interest income (on a tax-equivalent basis) decreased $45 thousand for the first quarter of 2011 as compared to the year-earlier period. Interest income was primarily affected by a shift in balances moving out of loans and into investment securities. Average loan balances when compared to the prior year period, declined $13.8 million at a yield of 6.51%, These balances for the most part moved into investment securities, which had a $12.7 million increase over the prior year period and earned a tax-equivalent yield of 4.09%, this explains the primary factor in the lower interest income for 2011 as compared to 2010. Investment income (on a tax-equivalent basis) increased $132 thousand in the three months ended March 31, 2011 as compared to the three months ended March 31, 2010; largely as a result of the higher average balance of the investment portfolio in the first quarter of 2011 as compared to the first quarter of 2010. Lower loan income negatively affected interest income. Loan income declined $179 thousand in the year-to-year period due to increases in non-accrual loans, lower average outstanding balances, and lower interest rates seen for new loans and loans that are repricing to lower rates. Interest income for deposits at other banks remained on par for the quarter ended March 31, 2011 as compared to the same period a year ago, with yields declining 51 basis points in the year-to-year comparison.

A small portion of the liquidity generated by the Company’s investment securities portfolio was used to repurchase outstanding common shares under the stock repurchase plan described later in this Report under Part 2, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds.

The tax-equivalent yield on earning assets for the three months ended March 31, 2011 was 5.56%, a decrease of 13 basis points from the yield of 5.69% reported in the comparable period of 2010. The decrease in the earning assets yield for the period ended March 31, 2011 as compared to the same periods in 2010 is primarily the result of the following occurrences: the reduction of short-term interest rates and its impact on new loans and securities held for investment, the re-pricing of existing loans and investment securities to lower yields and a shift of loan balances into investment securities.

Reconciliation of GAAP Net Interest Income to Tax-exempt Net Interest Income

	Three Months Ended
	March 31, 2011		March 31, 2010
	(Dollars in thousands)
Net interest income, GAAP basis		2,974		2,919

Tax benefit from tax-exempt securities		132		84

Net interest income, tax-exempt basis		3,106		3,003

Tax-exempt securities tax benefit is computed at the statutory rate of 34%.

For the three months ended March 31, 2011 the average balance for interest bearing liabilities was $253.2 million or $6.3 million greater than the $246.9 million for the three months ended March 31, 2010. The cost of interest bearing liabilities for the first quarter of 2011 was 1.63%, a decrease of 29 basis points from the 1.92% cost for the first quarter of 2010.

The increase in interest bearing deposits is attributable to customers seeking a safe refuge for funds that are being withdrawn from mutual and stock funds as well as a greater awareness by customers for the

need to have full FDIC deposit insurance coverage. While moving funds to banks, customers are hesitant to purchase certificates of deposits and opting for shorter, better paying alternatives such as money market deposit accounts. Management is aware of the liquidity risk that this customer behavior could present for the Bank and plans have been developed to manage such risk if it should present itself in the future.

Average non-interest deposit balances for the three months ended March 31, 2011 were $35.4 million or $500 thousand less than the $35.9 million for the same period of 2010. While a number of factors could be attributable to this decrease, the most likely scenarios include the fact that consumers and businesses are in the process of deleveraging themselves (paying down debt) and an increasing number of households that are facing reduced incomes due to reduced work schedules or layoffs and they are being forced to erode their cash balances to cover everyday living expenses.

The net interest margin is net interest income expressed as a percentage of average earning assets. The tax equivalent net interest margin for the three months ended March 31, 2011 was 4.19% which is 9 basis points higher than the net interest margin for the quarter ended March 31, 2010 of 4.10%.

The table on the following page labeled “Average Balances, Interest Yields and Rates, and Net Interest Margin” presents the average balances and rates of the various categories of the Company’s assets and liabilities. Included in the table is a measurement of interest rate spread and margin. Interest rate spread is the difference (expressed as a percentage) between the interest rate earned on earning assets less the interest expense on the interest bearing liabilities. While net interest spread provides a quick comparison of earnings rates versus the cost of funds, Management believes that the interest margin provides a better measurement of performance. Investment securities’ income and yields are adjusted to reflect their tax equivalency.

(The remainder of the page left blank, intentionally.)

Average Balances, Interest Yields and Rates, and Net Interest Margin

	Three Months Ended March 31,
	2011							2010
	Average				Average			Average				Average
(Dollars in Thousands)	Balance		Interest		Yield/Rate			Balance		Interest		Yield/Rate

ASSETS:
Interest earning assets:
Interest bearing deposits with other banks and
other short-term investments	$	1,847	$	4		0.88	%	$	1,091	$	4		1.39	%
Loans (1)		201,985		3,241		6.51	%		215,749		3,420		6.43	%
Investment securities available for sale (2)		85,528		874		4.09	%		72,812		742		4.08	%
Federal funds sold		11,578		7		0.24	%		7,586		5		0.24	%
Total interest earning assets	$	300,938	$	4,126		5.56	%	$	297,238	$	4,171		5.69	%

Total average non-earning assets		30,435							27,832
Less: allowance for credit losses		2,205							2,762
Net average non-earning assets		28,230							25,070
TOTAL AVERAGE ASSETS	$	329,168						$	322,308


LIABILITIES AND STOCKHOLDERS'
EQUITY:

Interest bearing liabilities:
Interest bearing demand	$	40,450	$	17		0.17	%	$	37,569	$	16		0.17	%
Savings		72,509		113		0.63	%		66,460		167		1.02	%
Time deposits		129,465		852		2.67	%		132,177		948		2.91	%
Other borrowings		10,777		38		1.43	%		10,699		37		1.44	%
Total interest bearing liabilities	$	253,201	$	1,020		1.63	%	$	246,905	$	1,168		1.92	%


Noninterest bearing liabilities:
Noininterest bearing demand		32,757							33,322
Other liabilities		2,621							2,614
Total noninterest bearing liabilities		35,378							35,936


Stockholders' equity		40,589							39,467
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY	$	329,168						$	322,308

Net interest income			$	3,106						$	3,003
Net interest spread						3.93	%						3.77	%
Net interest margin						4.19	%						4.10	%

(1) Includes Loans Held for Sale and average daily balance of non-accrual loans.
(2) Income and yield are reported on a tax equivalent basis assuming a federal tax rate of 34%.

Provision for Loan Losses

For the three months ended March 31, 2011, the Bank provided $150 thousand to the Allowance for Loan Losses. This was $150 thousand less than the $300 thousand provided for the three months ended March 31, 2010. The amount of provision recorded for 2011 is appropriate with management’s ongoing analysis of non-performing loans and currently performing loans that show the potential to deteriorate further.

As of March 31, 2011, the Bank’s non-accrual loans were $3.723 million as compared to $3.836 million at December 31, 2010; or a decrease of $113 thousand from year-end. For the same reporting periods, total impaired loans were $6.051 million at March 31, 2011 and $5.916 million at December 31, 2010; or an increase of $135 thousand from year-end.

Management analyzes the Bank’s collateral position and probable future loss on any loan and provides specific reserves for those loans (as needed), prior to those loans actually becoming nonperforming loans. Therefore, when a loan becomes nonperforming, it is likely to already have an allowance provided for it without the need for additional provision during the same quarter when the loan moves to nonperforming status. Also see the discussion on criticized loans, earlier in this report, under the “Allowance for Loan Losses” heading.

Noninterest Income

Noninterest income includes deposit fees, gains on the sales of securities, other real estate owned (“OREO”) and loans held for sale, and ATM fees. Noninterest Income for the three months ended March 31, 2011 increased 1.08% to $563 thousand from $557 thousand at March 31, 2010. Revenue from the net gain on sale of securities, the net gain on sale of OREO and losses incurred from the impairment of OREO, is considered as non-recurring revenue, therefore noninterest income, excluding these items was $556 thousand for the three months ended March 31, 2011 and $557 thousand for the same period in 2010; a decrease of $1 thousand. Below is a representation of the changes to the significant components of noninterest income.

	Three months ended
(Dollars in thousands)	March 31,		March 31,		%
	2011		2010		Change

Noninterest Income
Service charges on deposit accounts	$	239	$	261		-8.4	%
Net gain on sales of loans		14		10		40.0	%
Net gain on sale of securities		-		4		-100.0	%
Net gain on sale of other real estate owned		7		-		100.0	%
Income from bank owned life ins.		72		68		5.9	%
ATM fee income		182		150		21.3	%
Other income		49		64		-23.4	%
Total noninterest income	$	563	$	557		1.1	%

Service charges on deposit accounts decreased $22 thousand for the three months ended March 31, 2011 to $239 thousand from $261 at March 31, 2010, chiefly due to changes in the Bank’s customer behavior, revised policies regarding overdraft accounts and the continuing popularity of “totally free” checking products. The revised overdraft policies limited the daily amount of overdraft fees that a customer could be assessed, the automated closure of long-term overdrawn checking accounts, and providing customers’ information on overdraft fees charged to their account in the current cycle and for the year-to-date. Management is also exploring other deposit account changes in response to the effects of Federal regulations.

Net gain on sales of loans increased $4 thousand for the three months ended March 31, 2011 to $14 thousand from $10 thousand at March 31, 2010.

Net gain on sale of securities $4 thousand in income was realized in the three months ended March 31, 2010 as a result of Agency securities being called at par value. The Company has not sold securities during the three months ended March 31, 2011 or March 31, 2010.

Net gain on sale of real estate owned increased $7 thousand for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010. The Bank did not have any property sales in the first quarter of 2010.

ATM fee income increased $32 thousand for the three months ended March 31, 2011 to $182 thousand from $150 thousand at March 31, 2010 as a result of increased ATM and point of sale transactions by the Bank’s customers and fees received from non-customers using the Bank’s ATMs. A portion of this increase is the result of changes management has made to the existing Bank/interchange relationships.

Other income decreased $15 thousand for the three months ended March 31, 2011 to $49 thousand from $64 thousand at March 31, 2010. Other income generally consists of incidental fees and services that tend to be variable in nature.

Noninterest Expense

Noninterest expense includes employee compensation and benefits-related costs, occupancy and equipment expense, data processing and other overhead costs. Noninterest expense increased 2.8% for the quarter ended March 31, 2011 to $2.434 million from $2.368 million at March 31 2010.

Management’s strategy is to maintain strict controls over non-interest expenses, and where possible, these efforts are being realized with only moderate increases being seen in noninterest expenses over the previous year. FDIC insurance and costs associated with loan collection efforts and OREO properties are areas where higher-than-normal increases have occurred. The following table outlines the changes in significant components:

	Three months ended
(Dollars in thousands)	March 31,		March 31,		%
	2011		2010		Change
Noninterest Expense
Salaries and employee benefits	$	1,369	$	1,364		0.4	%
Net occupancy expense		149		153		-2.6	%
Equipment expense		122		131		-6.9	%
FDIC Insurance		201		156		28.8	%
Data Processing		67		75		-10.7	%
Other operating expense		526		489		7.6	%
Total noninterest expense	$	2,434	$	2,368		2.8	%

Salaries and employee benefits increased $5 thousand for the three months ended March 31, 2011 to $1.369 million from $1.364 million at March 31, 2010.

Net occupancy expense decreased $4 thousand for the three months ended March 31, 2011 to $149 thousand from $153 thousand at March 31, 2010.

Equipment expense decreased $9 thousand for the three months ended March 31, 2011 to $122 thousand from $131 thousand at March 31, 2010.

FDIC deposit insurance increased $45 thousand for the three months ended March 31, 2011 to $201 thousand from $156 thousand at March 31, 2010.

Data processing expense decreased $8 thousand for the three months ended March 31, 2011 to $67 thousand from $75 thousand at March 31, 2010.

Other operating expense increased $37 thousand for the three months ended March 31, 2011 to $526 thousand from $489 thousand at March 31, 2010.

Liquidity

Liquidity management involves the ability to meet the cash flow requirements of depositors wanting to withdraw funds, of borrowers needing assurance that sufficient funds will be available to meet their credit needs and the Company’s current and future expenditures. Liquidity can best be demonstrated by an analysis of cash flows. The primary source of cash flows is from operating activities. Operating activities provided $1.930 million of liquidity for the three-month period ended March 31, 2011, compared to $1.534 million for the same three months in 2010; or an increase of $396 thousand. The principal elements of these operating flows are net income, increased for significant non-cash expenses for the provision for loan losses, depreciation and securities amortization.

Other sources or uses of liquidity come from investing activities and financing activities. Investing activities required a net use of liquidity totaling $4.486 million that was primarily used to increase the investment securities portfolio by $3.517 million and increase the loan portfolio by $772 thousand for the three months ended March 31, 2011. For the three months ended March 31, 2011, financing activities required use of liquidity principally due to the net decrease in deposit account balances of $2.051 million. Financing activities can be sources of liquidity as a result of issuing debt, borrowed funds or the additional issuance of Company stock.

At March 31, 2011, the Company had $19.037 million in cash and cash equivalents on hand.

The Company maintains extensive sources of liquidity including blanket collateral borrowing lines with the Federal Reserve Bank of Richmond and the Federal Home Loan Bank of Atlanta which had a net availability of $43.8 million at March 31, 2011. In addition, there are short-term unsecured borrowing lines totaling $27.4 million at March 31, 2011, which are with four correspondent banks.

As of March 31, 2011 the Bank has the following lines of credit available.

Collateralized Lines of Credit
Federal Home Loan Bank of Atlanta	$	45,063,472
Federal Reserve Bank of Richmond		3,742,657
Less: Outstanding advances		(5,000,000	)
Sub-total Collateralized Lines of Credit	$	43,806,129

Unsecured, Short-term Lines
CenterState Bank	$	6,000,000
Community Bankers Bank		11,400,000
First Tennessee Bank NA		10,000,000
Sub-total Unsecured, Short-term Lines	$	27,400,000

Total Available Lines of Credit	$	71,206,129

Other borrowings consisted of $6.5 million in short-term borrowings from balances outstanding in the Investment Sweeps Account product at March 31, 2011; at December 31, 2010 the balance of this product was $5.1 million. The Investment Sweeps Account is an overnight repurchase agreement product, not insured by FDIC, but guaranteed by the Bank with US Government and Federal Agency securities. This product is offered to commercial customers only.

The Company monitors its liquidity position on a regular basis and continuously adjusts its assets to maintain adequate liquidity levels. The Company has established satisfactory liquidity targets and reports its liquidity ratios to the Board of Directors on a monthly basis. The Company considers its sources of liquidity to be sufficient to meet its estimated needs.

(The remainder of this page left blank, intentionally.)

Item 4. Controls and Procedures

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our Management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision and with the participation of our Management, including our Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this quarterly report. Based on that evaluation, the Company has concluded that these controls and procedures are effective. In addition, our Management, including our Chief Executive Officer and Chief Financial Officer, is also responsible for establishing and maintaining adequate internal control over financial reporting.

There was no change in the Company’s internal control over financial reporting that occurred during the three months ended March 31, 2011 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Part II. Other Information

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

There are no material changes from any of the risk factors previously disclosed in the Company’s 2010 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Board of Directors voted to approve continuation of the common stock repurchase plan at their regularly scheduled meeting held on November 18, 2010. The renewed plan period was effective December 1, 2010 and expires May 31, 2011. Purchases under the plan are limited to an individual six-month total of 40,000 shares and the maximum per share price to be paid is $16.00. The stock repurchase plan was originally announced on August 20, 2007.

The Board of Directors reviews the results of the repurchase plan monthly. The continuation of the repurchase plan is evaluated by the Directors prior to the reauthorization of the repurchase plan for an additional 6-month period. The Company will consider whether or not it will repurchase additional shares based upon a number of factors including market conditions, the Company’s performance, and other strategic planning considerations.

The table below indicates the shares that were repurchased during the most recent fiscal quarter:

Common Stock Repurchase Plan Table

					Total number		Maximum number
					of shares		of shares that
	Total number		Average		purchased as		may yet be
	of shares		price paid		part of publicly		purchased
Period	purchased		per share		announced plan		under the plan
January 1 to
January 31, 2011		5,000	$	13.00		5,000		30,000
February 1 to
February 28, 2011		-		-		0		30,000
March 1 to
March 31, 2011		-		-		0		30,000
Total		5,000	$	13.00		5,000		30,000

Item 3. Defaults upon Senior Securities

None outstanding.

Item 4. [Removed and Reserved]

Item 5. Other Information

None.

Item 6. Exhibits

See Exhibit Index.

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.

	CITIZENS BANCORP OF VIRGINIA, INC.
	(Registrant)


Date: May 13, 2011	/s/ Joseph D. Borgerding
	Joseph D. Borgerding
	President and Chief Executive Officer


Date: May 13, 2011	/s/ Ronald E. Baron
	Ronald E. Baron
	Senior Vice President and Chief Financial Officer

EXHIBIT INDEX

Exhibit Number

	31.1	Rule 13a-14(a) Certification of Principal Executive Officer

	31.2	Rule 13a-14(a) Certification of Principal Financial Officer

	32.1	Statement of Principal Executive Officer Pursuant to 18 U.S.C. ss.1350

	32.2	Statement of Principal Financial Officer Pursuant to 18 U.S.C. ss.1350

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