2008 annualreport

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2008 ANNUAL REPORT A Cohesive Vision. Solid Relationships.

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Table of Contents

Selected Financial Data ....................................................................................................................1

Letter to Shareholders ......................................................................................................................2

Stockholder and Investor Information ...........................................................................................4

Management’s Report on Internal Control Over Financial Reporting .......................................5

Report of Independent Registered Public Accounting Firm .......................................................6

Balance Sheets ...................................................................................................................................7

Statements of Operations ................................................................................................................8

Statements of Changes in Stockholders’ Equity ..........................................................................9

Statements of Cash Flows ............................................................................................................. 10

Notes to Financial Statements ..................................................................................................... 11

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Total Deposits($ amounts in millions)

Loans Outstanding($ amounts in millions)

Total Assets($ amounts in millions)

2005 2006 2007 2008

2005 2006 2007 2008

Balance Sheet Summary (at end of period):

Loans, net of unearned income $ 53,543 $ 98,015 $ 132,082 $ 152,962

Allowance for loans losses 547 931 1,277 2,942

Securities 19,579 23,924 37,641 41,009

Total assets 85,698 134,295 184,009 203,711

Deposits 65,955 111,474 154,885 171,011

Other indebtedness 2,500 5,000 10,000 15,176

Total liabilities 68,799 117,233 166,004 187,396

Stockholders’ equity 16,899 17,062 18,004 16,316

Summary of Earnings:

Total interest income $ 3,114 $ 7,462 $ 11,381 $ 12,427

Total interest expense 1,185 3,538 6,189 6,966

Provision for loan losses 464 384 346 1,764

Non-interest income (loss) (22) 157 220 533

Non-interest expense 3,277 3,598 4,559 5,545

Income (loss) before income taxes (1,834) 99 506 (1,315)

Income tax expense _ _ _ _

Net income (loss) (1,834) 99 506 (1,315)

Per Share Data:

Basic earnings (loss) per share $ (1.07) $ 0.03 $ 0.17 $ (0.43)

Diluted earning (loss) per common share (1.07) 0.03 0.17 (0.43)

Book value at year-end 5.57 5.63 5.94 5.38

Selected Ratio:

Return on average assets (3.34)% 0.09% 0.32% (0.66)%

Return on average equity (21.99)% 0.59% 2.92% (7.42)%

Average equity to average assets 15.20% 15.59% 10.80% 8.93%

Total risk based capital to risk adjusted assets 27.66% 14.96% 12.15% 10.62%

Leverage ratio 22.66% 13.39% 9.74% 7.94%

At December 31,

SELECTED FINANCIAL DATA

(Amounts in thousands, except per share data)

2005 2006 2007 2008

2005 2006 2007 2008

2005 006 20 007 20 00820

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200

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111

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CORPORATE INFORMATION

CORPORATE OFFICEBank of Virginia

11730 Hull Street Road

Midlothian, VA 23112

(804) 763-1333

AUDITORSYount, Hyde & Barbour, P.C.

50 South Cameron Street

Winchester, VA 22601

COMMON STOCK TRANSFER AGENT AND REGISTRARComputershare Investor Services, LLC

730 Peachtree Street, Suite 840

Atlanta, GA 30308

(312) 588-4993

COMMON STOCKBank of Virginia common stock is listed on the

NASDAQ Stock Market under the symbol BOVA.

BRANCH OFFICES11730 Hull Street Road


(804) 744-7576

6657 Lake Harbour Drive


(804) 639-6800

906 Branchway Road

Richmond, VA 23236

(804) 560-0660

4023 West Hundred Road

Chester, VA 23831

(804) 414-0208

10501 Patterson Avenue

Richmond, VA 23238

(804) 525-2660

Access up-to-date information on Bank of Virginia’s website at:

www.bankofva.com

10-K REPORTA copy of Bank of Virginia’s latest annual report on Form 10-KSB will be

provided without charge upon written request to:

Kenneth P. Mulkey

Senior Vice President, CFO and COO

Bank of Virginia

P.O. Box 5658


Access to all Bank of Virginia Securities and Exchange fi lings can be

obtained through the Investor Relations link on our website at:

www.bankofva.com.

SHAREHOLDER INQUIRIESQuestions concerning shareholder accounts, stock transfer requirements,

consolidation of accounts, lost certifi cates and name or address changes

should be directed to the transfer agent. All other shareholder questions

should be directed to:

Kenneth P. Mulkey


Bank of Virginia

P.O. Box 5658


(804) 763-1333

FINANCIAL INQUIRIESAll fi nancial analysts and professional investment managers should

direct their questions and requests for fi nancial information to:

Bank of Virginia

Chief Financial Offi cer

P.O. Box 5658


(804) 763-1333

2005 006 20 007 2 00820

53

200

150

100

50

0

98

132

153

2005 006 20 007 2 00820

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150

100

50

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86

134

184

204

14

TO OUR SHAREHOLDERS

Dear Shareholders,As always, let me begin by sincerely thanking you for your continued support of Bank of Virginia. Your support, with the dedication and commitment of our employees, has been an integral part of the bank’s growth and success. The economic landscape during 2008 was one of challenge and certainly created issues that the banking community has not seen for many years. I believe that these are unique times and uncharted waters.

The frenzy in the media has continued to fuel downward pressure on bank stocks. Unfortunately, the word “bank” has become a broad brush term that covers everything from well run, solid community banks, to the Wall Street giants that were at the root of many of the problems. Bank of Virginia epitomizes the traditional community bank in its actions and culture. We are an organization that supports the communities we serve nancially when appropriate but most importantly, by being active participants in the communities as volunteers, leaders and neighbors.

During 2008, our bank continued to focus on the basics of community banking. We provided nancing for small business growth and deposit solutions for individuals and businesses and did so with a level of service that is top tier. Additionally, in January of 2008 we opened our fth branch location which took the Bank of Virginia into the near west end of Richmond. Bank of Virginia is a place where people want to work, have the ability to make a difference, and know that their efforts are appreciated. When of cers and staff believe in what they do, the result will be quality customer service and an excellent banking experience. This is why I feel we have earned the right to say, Welcome Home.

Looking speci cally at 2008, I am proud to tell you that total assets exceeded $200 million, reaching $204 million. Compared to December 31, 2007 totals of $184 million, assets grew 10.7%. Loans, net of allowance for loan losses, grew from $130 million at year end 2007 to $153 million as of year end 2008 representing a 17.6% increase. This growth was the main contributor to the aforementioned asset growth.

In order to support our loan growth, we continued to place heavy emphasis on deposit acquistition since deposits serve as the source for our loan portfolio. In 2008, banks focused heavily on liquidity creating a highly competitive landscape. Noninterest-bearing deposits showed mild contraction of 4% while all interest bearing deposits grew over 11.7%. Midyear concerns over bank failures and FDIC strength precipitated a reallocation of deposits throughout the banking system.

Total interest income, the bank’s primary source of revenue, grew from $11.3 million at December 31, 2007 to $12.1 million as of December 31, 2008, a 6.7% increase. Management is pleased with this increase in light of the 400 basis point reduction in the prime lending rate throughout the year. These decreases caused an immediate repricing of the variable rate loan portfolio and created downward pressure on the overall net margin. The increase in total interest income was largely attributed to the increase in volume. Interest expense increased 12.6% due to increased volume of interest bearing accounts.

In the fourth quarter of the year management elected to increase the allowance for loan loss signi cantly due to the continued deterioration of the economy. Although the bank did not participate in any of the subprime lending, the overall economic slowdown and negative market movement is impacting the loan portfolio. The total 2008 provision for loan loss was $1.8 million compared to $346 thousand in 2007. This provision increases total allowance to $2.9MM or 1.9% of net loans.

The decision to increase the reserve to this magnitude was not made lightly. Management has increased its monitoring of the credit portfolio due to the economy. We feel comfortable that current reserve levels adequately cover potential losses and that the increased allowance was a prudent action given the continued uncertainty in the market. As a result of the aforementioned, a net loss of $1.3 million is reported for 2008, compared to income of $506 thousand for the year end 2007.

Looking ahead to 2009, management feels that the economic horizon remains uncertain. We feel that Bank of Virginia is well positioned to handle a continued recession, and is well poised for when the economy improves. We will continue to utilize the same sound underwriting standards that have served us well to date. This action should provide for controlled growth with sound returns.

In closing, I want to thank our shareholders, as well as our of cers and staff, for their continued support through 2008. There is a difference between Wall Street and Main Street, a difference that has been clari ed in 2008. I rmly believe that community banks will play an integral part in rebuilding our economy and Bank of Virginia will be a part of the process. Finally, if you know us only as a shareholder, I personally invite you to come bank with us. I am comfortable in saying that you will quickly understand why we feel we have earned the right to say “Welcome Home.” Sincerely,

Frank Bell, III President & CEO2

OFFICERS, MANAGERS & BOARD OF DIRECTORS

Chairman and Chief Executive Offi cer (left to right)

Henry “Hank” E. RichesonChairman of the Board

Frank Bell, IIIPresident and Chief Executive Offi cer

Board of Directors (left to right)

Front RowFrank Bell, III, Henry “Hank” E. Richeson and Claiborne G. Thomasson

Middle RowVernon E. LaPrade, Jr. and G. Waddy Garrett

Back RowThomas L. Gordon and J. Michael Jarvis

Senior Management Team (left to right)

Bruce T. BrockwellSenior Vice President and Chief Credit Offi cer

Ann-Cabell WilliamsSenior Vice President and Retail Executive

Kenneth P. MulkeySenior Vice President, Chief Financial Offi cer and Chief Operating Offi cer

Frank Bell, IIIPresident and Chief Executive Offi cer

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3

Total Deposits($ amounts in millions)

Loans Outstanding($ amounts in millions)

Total Assets($ amounts in millions)

2005 2006 2007 2008

2005 2006 2007 2008

Balance Sheet Summary (at end of period):

Loans, net of unearned income $ 53,543 $ 98,015 $ 132,082 $ 152,962

Allowance for loans losses 547 931 1,277 2,942

Securities 19,579 23,924 37,641 41,009

Total assets 85,698 134,295 184,009 203,711

Deposits 65,955 111,474 154,885 171,011

Other indebtedness 2,500 5,000 10,000 15,176

Total liabilities 68,799 117,233 166,004 187,396

Stockholders’ equity 16,899 17,062 18,004 16,316

Summary of Earnings:

Total interest income $ 3,114 $ 7,462 $ 11,381 $ 12,427

Total interest expense 1,185 3,538 6,189 6,966

Provision for loan losses 464 384 346 1,764

Non-interest income (loss) (22) 157 220 533

Non-interest expense 3,277 3,598 4,559 5,545

Income (loss) before income taxes (1,834) 99 506 (1,315)

Income tax expense _ _ _ _

Net income (loss) (1,834) 99 506 (1,315)

Per Share Data:

Basic earnings (loss) per share $ (1.07) $ 0.03 $ 0.17 $ (0.43)

Diluted earning (loss) per common share (1.07) 0.03 0.17 (0.43)

Book value at year-end 5.57 5.63 5.94 5.38

Selected Ratio:

Return on average assets (3.34)% 0.09% 0.32% (0.66)%

Return on average equity (21.99)% 0.59% 2.92% (7.42)%

Average equity to average assets 15.20% 15.59% 10.80% 8.93%

Total risk based capital to risk adjusted assets 27.66% 14.96% 12.15% 10.62%

Leverage ratio 22.66% 13.39% 9.74% 7.94%

At December 31,

SELECTED FINANCIAL DATA

(Amounts in thousands, except per share data)

2005 2006 2007 2008

2005 2006 2007 2008

2005 006 20 007 20 00820

66

200

150

100

50

0

111

155

171

CORPORATE INFORMATION

CORPORATE OFFICEBank of Virginia

11730 Hull Street Road


(804) 763-1333

AUDITORSYount, Hyde & Barbour, P.C.

50 South Cameron Street

Winchester, VA 22601

COMMON STOCK TRANSFER AGENT AND REGISTRARComputershare Investor Services, LLC

730 Peachtree Street, Suite 840

Atlanta, GA 30308

(312) 588-4993

COMMON STOCKBank of Virginia common stock is listed on the

NASDAQ Stock Market under the symbol BOVA.

BRANCH OFFICES11730 Hull Street Road


(804) 744-7576

6657 Lake Harbour Drive


(804) 639-6800

906 Branchway Road

Richmond, VA 23236

(804) 560-0660

4023 West Hundred Road

Chester, VA 23831

(804) 414-0208

10501 Patterson Avenue

Richmond, VA 23238

(804) 525-2660

Access up-to-date information on Bank of Virginia’s website at:

www.bankofva.com

10-K REPORTA copy of Bank of Virginia’s latest annual report on Form 10-KSB will be

provided without charge upon written request to:

Kenneth P. Mulkey


Bank of Virginia

P.O. Box 5658


Access to all Bank of Virginia Securities and Exchange fi lings can be

obtained through the Investor Relations link on our website at:

www.bankofva.com.

SHAREHOLDER INQUIRIESQuestions concerning shareholder accounts, stock transfer requirements,

consolidation of accounts, lost certifi cates and name or address changes

should be directed to the transfer agent. All other shareholder questions

should be directed to:

Kenneth P. Mulkey


Bank of Virginia

P.O. Box 5658


(804) 763-1333

FINANCIAL INQUIRIESAll fi nancial analysts and professional investment managers should

direct their questions and requests for fi nancial information to:

Bank of Virginia

Chief Financial Offi cer

P.O. Box 5658


(804) 763-1333

2005 006 20 007 2 00820

53

200

150

100

50

0

98

132

153

2005 006 20 007 2 00820

200

150

100

50

0

86

134

184

204

14

Notes Management’s Report on Internal Control Over Financial Reporting

Management of the Bank is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Management regularly monitors its internal control over financial reporting and takes appropriate action to correct any deficiencies that may be identified.

Management assessed the Bank’s internal control over financial reporting as of December 31, 2008. This assessment was based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Bank maintained effective internal control over financial reporting as of December 31, 2008.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Further, because of changes in conditions, internal control effectiveness may vary over time.

This annual report does not include an attestation report of the Bank’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Bank’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Bank to provide only management’s report in this annual report.

Frank Bell, III Kenneth P. MulkeyPresident & Chief Executive Officer Senior Vice President & Chief Financial Officer

March 31, 2009

Frank Bell, III Kenneth P. MulkeySenior Vice President & Chief

5

BANK OF VIRGINIA

32

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Certi ed Public Accountants and Consultants


To the Board of Directors and ShareholdersBank of VirginiaMidlothian, Virginia

We have audited the accompanying balance sheets of Bank of Virginia as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in stockholder’s equity, and cash flows for the years ended December 31, 2008 and 2007. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bank of Virginia as of December 31, 2008 and 2007, and the results of its operations and its cash flows for the years ended December 31, 2008 and 2007, in conformity with U.S. generally accepted accounting principles.

We were not engaged to examine management’s assessment of the effectiveness of Bank of Virginia’s internal control over financial reporting as of December 31, 2008, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.

Winchester, VirginiaMarch 30, 2009

6

BANK OF VIRGINIA

Notes

BANK OF VIRGINIA

31

Balance Sheets At December 31,

Assets 2008 2007

Cash and due from banks $ 2,608,500 $ 4,183,359

Federal funds sold and interest-bearing deposits with banks 42,194 4,771,376

Total cash and cash equivalents 2,650,694 8,954,735

Securities available for sale, at fair market value 39,474,175 36,442,472

Restricted securities 1,534,550 1,198,800

Loans, net of allowance for loan losses of $2,942,988 and

$1,276,726 in 2008 and 2007, respectively 152,962,046 130,805,447

Premises and equipment, net 5,688,585 5,532,009

Accrued interest receivable 864,630 857,853

Other real estate owned 308,019 -

Other assets 229,220 217,311

Total assets $203,711,919 $184,008,627

Liabilities and Stockholders’ Equity

Deposits

Noninterest-bearing $ 12,483,762 $ 13,020,632

Savings and interest-bearing demand 18,770,259 17,122,793

Time, $100,000 and over 55,939,332 46,155,151

Other time 83,818,330 78,586,170

Total deposits 171,011,683 154,884,746

Accrued expenses and other liabilities 1,208,215 1,119,459

FHLB Borrowings 15,000,000 10,000,000

Federal funds purchased 176,000 -

Total liabilities 187,395,898 166,004,205

Stockholders’ Equity

Preferred stock, $5 par value, 5,000,000 shares authorized, none issued - -

Common stock, $2.50 par value, 40,000,000 shares authorized, 3,031,866

shares issued and outstanding in 2008 and 2007, respectively 7,579,665 7,579,665

Additional paid-in capital 14,705,508 14,693,218

Retained de cit (5,913,941)

Accumulated other comprehensive income (loss) (55,211) 330,885

Total stockholders’ equity 16,316,021 18,004,422

Total liabilities and stockholders’ equity $203,711,919 $184,008,627

See Notes to Financial Statements.

BANK OF VIRGINIA | FINANCIALS

7

(4,599,346)

BANK OF VIRGINIA

Of cers, Managers And Directors Of cers and Managers Frank Bell, III President & Chief Executive Of cerDirector

Henry “Hank” E. RichesonExecutive Vice PresidentChairman of the Board

Kenneth P. Mulkey Senior Vice President, Chief Financial Of cer & Chief Operating Of cerSecretary of the Board

Bruce T. Brockwell Senior Vice President Chief Credit Of cer

Ann-Cabell WilliamsSenior Vice President Retail Banking Executive

Thomas L. Adams Vice PresidentCommercial Loan Of cer

T. Rene’ MetzVice PresidentConstruction Loan Of cer

Scott T. RoweVice PresidentCommercial Loan Of cer

Directors Vernon E. LaPrade, Jr. Chairman EmeritusPresidentModel Realty Incorporated

Henry “Hank” E. RichesonChairman of the BoardBank of Virginia

Frank Bell, III President & Chief Executive Of cerBank of Virginia

G. Waddy GarrettPresidentGWG Financial, LLC

Thomas L. GordonSenior PartnerGordon, Dodson, Gordon & Rowlett, Attorneys at Law

J. Michael JarvisPresidentCharter Leasing Corporation

Claiborne G. Thomasson PresidentDiversi ed Restaurant Management & Consulting Incorporated

Nancy R. CoffmanVice PresidentHuman Resources

Ellen L. AllenVice PresidentLoan Operations Manager

Jane H. WagnerAssistant Vice President Small Business Loan Of cer

Donald “DJ” Seeterlin Assistant Vice PresidentInformation Technology &Security

Christina R. AllenBank Of cerLoan Processing Manager

Kimberly D. Norwood Bank Of cer Deposit Operations Manager

Michelle M. HastingsBank Of cerDirector of Marketing

Emmeline A. SullivanBank Of cerBranch Operations Manager

Amanda WilsonBranch Of cerBranch ManagerRetail Support ManagerSandra L. KrajacichAssistant Vice PresidentManager-Main Of ce

Tammy F. FergusonBranch Of cerManager-Chester Of ce

Raleigh C. Hobson, IIIBranch Of cerManager-Patterson Of ce

Sandra D. CreechBranch ManagerWinterpock Of ce

Janis L. HookBranch ManagerBranchway Of ce

30

Statements of Operations Years ended December 31, 2008 and 2007

2008 2007Interest income

Interest and fees on loans $10,220,810 $9,526,583

Investment securities 2,141,546 1,494,000

Federal funds sold and deposits with banks 65,115 359,886

Total interest income 12,147,471 11,380,469

Interest expense

Interest on deposits 6,432,811 5,868,301

Interest on federal funds purchased 22,435 5,052

Interest on FHLB borrowings 510,623 315,609

Total interest expense 6,965,869 6,188,962

Net interest income 5,461,602 5,191,507

Provision for loan losses 1,764,325 345,534

Net interest income after provision for loan losses 3,697,277 4,845,973

Noninterest income

Service charges on deposit accounts 206,456 121,619

Net gain on available for sale securities 186,697 11,776

Other fee income 140,318 86,057

Total noninterest income 533,471 219,452

Noninterest expense

Salaries and employee bene ts 3,110,236 2,709,305

Occupancy expense 410,422 319,740

Equipment expense 318,098 208,382

Data processing 457,809 351,517

Marketing expense 171,093 144,876

Legal and professional 239,444 146,791

Bank franchise tax 150,090 131,393

Other operating expenses 688,051 546,925

Total noninterest expense 5,545,243 4,558,929

Net income $(1,314,495) $ 506,496

Basic earnings per share $ (0.43) $ 0.17

Diluted earnings per share $ (0.43) $ 0.17

Weighted average shares outstanding, basic 3,031,866 3,031,866

Weighted average shares outstanding, diluted 3,031,866 3,032,355



829

2008 March 31 June 30 Sept 30 Dec 31Interest income $3,149,148 $3,043,803 $3,132,277 $3,102,243 Interest expense 1,884,389 1,723,643 1,694,484 1,663,353 Net interest income 1,264,759 1,320,160 1,437,793 1,438,890 Provision for loan losses 113,251 30,000 105,574 1,515,500 Net interest income after provision for loan losses 1,151,508 1,290,160 1,332,219 (76,610) Other income 84,609 83,945 99,264 78,956 Securities gains 55,096 68,568 25,405 37,628 Other expenses 1,380,226 1,386,194 1,339,581 1,439,342 Income before income taxes (89,013) 56,479 117,307 (1,399,368) Income taxes - - - - Net income $ (89,013) 56,479 117,307 (1,399,368) Basic earnings per share $ 0.03 $ 0.02 $ 0.04 $ (0.46) Diluted earnings per share $ 0.03 $ 0.02 $ 0.04 $ (0.46) Dividends $ - $ - $ - $ - Weighted-average basic shares 3,031,866 3,031,866 3,031,866 3,031,866 Weighted-average diluted shares 3,031,866 3,033,353 3,031,866 3,031,866

Note 13. Supplemental Quarterly Financial Data (Unaudited)Quarterly Earnings Summary

2007 March 31 June 30 Sept 30 Dec 31Interest income $2,507,455 $2,766,332 $2,938,774 $3,167,908 Interest expense 1,353,316 1,503,057 1,608,529 1,724,060 Net interest income 1,154,139 1,263,275 1,330,245 1,443,848 Provision for loan losses 86,837 104,928 55,404 98,365 Net interest income after provision for loan losses 1,067,302 1,158,347 1,274,841 1,345,483 Other income 39,506 52,526 52,628 63,016 Securities gains - - 460 11,316 Other expenses 1,001,853 1,091,971 1,139,233 1,325,872 Income before income taxes 104,955 118,902 188,696 93,943 Income taxes - - - - Net income $ 104,955 $ 118,902 $ 188,696 $ 93,943 Basic earnings per share $ 0.03 $ 0.04 $ 0.06 $ 0.03 Diluted earnings per share $ 0.03 $ 0.04 $ 0.06 $ 0.03 Dividends $ - $ - $ - $ - Weighted-average basic shares 3,031,866 3,031,866 3,031,866 3,031,866 Weighted-average diluted shares 3,032,137 3,033,550 3,031,866 3,031,866


28

Statements of Changes in Stockholders’ EquityYears ended December 31, 2008 and 2007

Balance, December 31, 2006 $ 7,579,665 $ 14,630,698 $ (5,105,842) $ (42,402) $ 17,062,119

Stock-based compensation expense - 62,520 - - 62,520

Comprehensive Income:

Net income - - 506,496 - 506,496

Unrealized gain on securities

available for sale - - - 385,063 385,063

Reclassi cation adjustment - - - (11,776) (6,235)

Other comprehensive income - - - 373,287 373,287

Total comprehensive income - - - - 879,783



Comprehensive income:

Net income - - (1,314,595) -


available for sale - - - (199,399) -

Reclassi cation adjustment - - - (186,697)

Other comprehensive income (386,096) 373,287




(386,096)

CommonStock

AdditionalPaid-inCapital

RetainedDe cit

AccumulatedOther

Compre-hensive

Income (Loss) Total


9

(11,776)

(1,314,595)

(186,697)

(1,700,691)

(16,316,021)

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

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 Bank 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 signi cant, or the net book value on the applicable business’ nancial statements if not considered signi cant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on nancial 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 Bank’s Statements of Income.

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

Fair Value Measurements at December 31, 2008(amounts in thousands) Using Quoted Prices in Active Signi cant Balance as Markets for Other Signi cant of Identical Observable Unobservable December 31, Assests Inputs InputsDescription 2008 (Level 1) (Level 2) (Level 3)

Impaired loans $ 1,500 $ - $ - $ 1,500

(199,399)

Statements of Cash Flows

Years ended December 31, 2008 and 2007 2008 2007 Cash Flows From Operating Activities: Reconciliation of net income to net cash provided by operating activities: Net (loss) income $ (1,314,595) $ 506,496 Net amortization (accretion) of discount on investment securities 43,826 (116,582) Depreciation and amortization 341,937 225,830 Provision for loan losses 1,764,325 345,534 Net gain on available for sale securities (186,697) (6,235) Stock-based compensation expense 12,290 62,520 Increase in accrued interest receivable (6,777) (291,583) Increase in other assets (319,928) (20,475) Increase in accrued expense other liabilities 88,756 359,711

Net cash provided by operating activities 423,137 1,211,475

Cash Flows from Investing Activities: Purchases of securities available for sale (43,080,078) Net change in restricted securities (335,750) (205,400) Sales of available for sale securities 34,519,557 1,236,485 Maturities and calls of available for sales securities - 11,945,000 Payments on mortgage-backed securities 5,285,593 1,694,777 Net increase in loans (23,920,924) Purchases of premises and equipment (498,513)

Net cash (used in) investing activities (28,030,115)

Cash Flows from Financing Activities: Net increase (decrease) in demand, savings, interest-bearing checking and money market deposits 1,110,596 5,416,534 Net increase in time deposits 15,016,341 37,994,730 Net proceeds from FHLB borrowings 5,176,000 5,000,000

Net cash provided by nancing activities 21,302,937 48,411,264

Net increase (decrease) in cash and cash equivalents (6,304,041) 413,546Cash and cash equivalents at beginning of year 8,954,735 8,541,189Cash and cash equivalents at end of year $ 2,650,694 $ 8,954,735Supplemental Disclosures of Cash Flow Information Cash payments for interest $ 6,951,209 $ 5,991,716Supplemental Disclosures of Noncash Investing Activities Fair value adjustment for securities $ (386,096) $ 373,287 Other real estate owned transferred from loans $ 308,019 -


(159,117)

(11,776)

(97,248)

(27,905,758)

1,694,777 (34,067,667)

(1,906,630)


10


27

(20,475)

(205,400)

(49,209,193)

In February of 2008, the FASB issued Staff Position No. 157-2 (FSP 157-2) which delayed the effective date of SFAS 157 for certain non nancial assets and non nancial liabilities except for those items that are recognized or disclosed at fair value in the nancial statements on a recurring basis. FSP 157-2 defers the effective date of SFAS 157 for such non nancial assets and non nancial liabilities to scal years beginning after November 15, 2008, and interim periods within those scal years. Thus, the Bank has only partially applied SFAS 157. Those items affected by FSP 157-2 include other real estate owned (OREO), goodwill and core deposit intangibles.

In October of 2008, the FASB issued Staff Position No. 157-3 (FSP 157-3) to clarify the application of SFAS 157 in a market that is not active and to provide key considerations in determining the fair value of a nancial asset when the market for that nancial asset is not active. FSP 157-3 was effective upon issuance, including prior periods for which nancials statements were not issued.

SFAS 157 speci es a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs re ect market data obtained from independent sources, while unobservable inputs re ect the Bank’s market assumptions. The three levels of the fair value hierarchy under SFAS 157 based on these two types of inputs are as follows:

Level 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities. Level 2 –Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which signi cant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3 – Valuation is based on model-based techniques that use one or more signi cant inputs or assumptions that are unobservable in the market.

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

Securities available for saleSecurities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which signi cant 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).

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

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


Securities available for sale $ 39,474 $ - $ 39,474 $ -


26

Notes to Financial StatementsNote 1. Organization and Summary of Signi cant Accounting PoliciesOrganization

Summary of Signi cant Accounting Policies

Bank of Virginia (the “Bank”) was organized under the laws of the Commonwealth of Virginia to engage in a general banking business serving the communities in and around Chester eld County, Virginia. The Bank was in organization during the period from November 1, 2002, through January 11, 2004. The Bank commenced regular operations on January 12, 2004, and is a member of the Federal Reserve System, Federal Deposit Insurance Corporation and the Federal Home Loan Bank of Atlanta. The Bank is subject to the regulations of the Federal Reserve System and the State Corporation Commission of Virginia. Consequently, it undergoes periodic examinations by these regulatory authorities.

The accounting and reporting policies of the Bank are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The more signi cant of these policies are summarized below.(a) Use of EstimatesIn preparing nancial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to signi cant change in the near term relate to the determination of the allowance for loan losses and the valuation of deferred tax assets.(b) Cash and Cash EquivalentsFor purposes of the statement of cash ows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one day periods.(c) SecuritiesDebt securities that management has the positive intent and ability to hold to maturity are classi ed as “held to maturity” and recorded at amortized cost. Securities not classi ed as held to maturity, including equity securities with readily determinable fair values, are classi ed as “available for sale” and recorded at estimated fair value. The Bank classi es all securities as available for sale. Other restricted securities, such as Federal Reserve Bank stock, are carried at cost.Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are re ected in earnings as realized losses. In estimating other than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the nancial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time suf cient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the speci c identi cation method.(d) LoansThe Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by commercial loans throughout the greater Richmond, Virginia metropolitan area. The ability of the Bank’s debtors to honor their contracts is dependent upon numerous factors including the collateral performance, general economic conditions, as well as the underlying strength of borrowers and guarantors.


11

Financial Instruments with Book Value Equal to Fair ValueThe book values of cash and due from banks, federal funds sold and purchased, interest receivable, and interest payable and other liabilities are considered to be equal to fair value as a result of the short-term nature of these items.

Securities Available for SaleFor securities available for sale, fair value is based on current market quotations, where available. If quoted market prices are not available, fair value has been based on the quoted price of similar instruments.

LoansThe estimated value of loans held for investment is measured based upon discounted future cash ows and using the current rates for similar loans.

DepositsDeposits without a stated maturity, including demand, interest-bearing demand, and savings accounts, are reported at their carrying value in accordance with FAS No. 107. No value has been assigned to the franchise value of these deposits. For other types of deposits with xed maturities, fair value has been estimated by discounting future cash ows based on interest rates currently being offered on deposits with similar characteristics and maturities.

Borrowings and Other IndebtednessFair value has been estimated based on interest rates currently available to the Bank for borrowings with similar characteristics and maturities.

Commitments to Extend Credit, Standby Letters of Credit, and Financial GuaranteesFair values for off-balance-sheet, credit-related nancial 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 December 31, 2008 and 2007, the fair value of loan commitments and standby letters of credit was deemed to be immaterial and therefore are not included.

The Bank adopted SFAS No. 157, “Fair Value Measurements” (SFAS 157), on January 1, 2008 to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. SFAS 157 clari es that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

2008 2007 Carrying Carrying Amount Fair Value Amount Fair Value Assets: (Amounts in Thousands) (Amounts in Thousands) Cash and cash equivalents $ 2,651 $ 2,651 $ 8,955 $ 8,955 Securities available for sale 39,474 39,474 36,442 36,442 Loans held for investment 152,962 153,010 130,805 131,719 Interest receivable 865 865 858 858 Liabilities: Demand deposits 12,484 12,484 13,021 13,021 Savings and interest-bearing demand deposits 18,770 18,770 17,123 17,123 Time deposits 139,757 141,066 124,741 125,507 Interest payable 825 825 813 813 Federal Funds purchased 176 176 - - FHLB borrowings 15,000 15,152 10,000 10,008

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are generally reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination and commitment fees and certain direct costs are deferred and the net amount is amortized as an adjustment of the related loan’s yield. The Bank is amortizing these amounts over the loan’s contractual life or to the pay-off date if the balance is repaid prior to maturity.The accrual of interest on loans is discontinued at the time the loan becomes 90 days delinquent unless the credit is well-secured and in process of collection. Non-performing loans are placed either in nonaccrual status pending further collection efforts or charged off if collection of principal or interest is considered doubtful.All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on loans in nonaccrual status is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. (e) Allowance for Loan LossesThe allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan is con rmed. Subsequent recoveries, if any, are credited back to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to signi cant revision as more information becomes available. The allowance consists of speci c, general and unallocated components. The speci c component relates to loans that are classi ed as either doubtful, substandard or special mention. For such loans that are also classi ed as impaired, an allowance is established when the discounted cash ows (or collateral value or observed market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassi ed loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance re ects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating the speci c and general losses in the portfolio.The above referenced review may indicate that a loan is impaired. The impairment of a loan occurs when it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment is measured as the difference between the recorded investment in the loan and the evaluation of the present value of expected future cash ows or the observable market price of the loan. Loans that are collateral dependent, that is, loans where repayment is expected to be provided solely by the underlying collateral, and for which management has determined foreclosure is probable, are measured for impairment based on the fair value of the collateral. (f) Premises and EquipmentPremises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the assets’ estimated useful lives. Estimated useful lives range from 10 to 39 years for buildings and 3 to 7 years for autos, furniture, xtures and equipment. The value of land is carried at cost.(g) Foreclosed PropertiesAssets acquired through, or in lieu of, loan foreclosure are held for sale. They are initially recorded at the lower of the Bank’s cost or the assets’ fair market value at the date of foreclosure, less estimated selling costs thus establishing a new cost basis. Subsequent to foreclosure, valuations of the assets are periodically performed by management. Adjustments are made to the lower of the carrying amount or fair market value of the assets less selling costs. Revenue and expenses from operations and valuation changes are included in net expenses from foreclosed assets. The Bank had one foreclosed asset at December 31, 2008 totaling $308,000 and none at December 31, 2007.


12


25

A summary of the Bank’s option activity under the Plan as of December 31, 2008 and 2007, respectively and changes during the years then ended are presented in the following tables:

2008

Outstanding, beginning of year 175,000 $7.99 Granted 4,500 6.07 Exercised - - Forfeited - - Outstanding at December 31, 2007 179,500 $7.94 7 Exercisable at December 31, 2007 171,167 $7.98 7

2007


Option Shares

Weighted-AverageExercise Price

Weighted-Average remaining

contractual term (years)

SharesWeighted-Average

Exercise Price

Weighted-Average remaining contractual term (years)

As of December 31, 2008, there was $14,000 of total unrecognized compensation cost related to share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of just over 1 year. The aggregate intrinsic value of options is the amount by which the current market value of the underlying stock exceeds the exercise price of the option. As of December 31, 2008, the outstanding and exercisable options of the Bank had no intrinsic value. The weighted average strike price of options granted in 2008 and 2007 was $6.07 and $7.70, respectively.

Fair value information about nancial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another nancial instrument. Fair value is the amount at which a nancial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price if one exists.The following summary presents the methodologies and assumptions used to estimate the fair value of the Bank’s nancial instruments presented below. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash ows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be signi cantly different.

Note 12. Fair Value Measurements


24

(h) Income TaxesDeferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, operating loss carryforwards, and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences.Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, the recognition of the asset is less than probable. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.When tax returns are led, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the positions taken or the amount of the position that would be ultimately sustained. The bene t of a tax position is recognized in the nancial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax bene t that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the bene ts associated with tax positions taken that exceeds the amount measured as described above is recognized as a liability for unrecognized tax bene ts in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.Interest and penalties associated with the unrecognized tax bene ts are classi ed as additional income taxes in the statement of income.(i) Advertising CostsThe Bank follows the policy of charging the production costs of advertising to expense as incurred unless the advertising campaign extends for a signi cant time period, in which case, such costs will be amortized to expense over the duration of the advertising campaign.(j) Comprehensive IncomeAccounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.(k) Earnings (Loss) Per ShareBasic earnings per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share re ect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. At December 31, 2008, there were 179,500 option shares outstanding. Of the option shares outstanding none were dilutive and, as a result, had no impact on the calculation of computing diluted earnings per common share for the year ended December 31, 2008.(l) Stock Option PlanEffective January 1, 2006, the Bank adopted SFAS No. 123R (Revised 2004), Share-Based Payment (“SFAS No. 123R”), which replaces SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB Opinion No. 25”). SFAS 123R requires the costs resulting from all share-based payments to employees be recognized in the nancial statements. Stock-based compensation is estimated at the date of grant, using the Black-Scholes option valuation model for determining fair value. Under APB Opinion No. 25, compensation expense was generally not recognized if the exercise price of the option equaled or exceeded the market price of the stock on the date of grant. For the year ended December 31, 2008 and 2007, the Bank recognized stock-based compensation expense of $12,000 and $63,000, respectively or less than $.01 per share in 2008 and approximately $.02 per share in 2007.


13

account, long term care and supplemental insurance. The health and welfare plans are administered through Multiple Employer Welfare Association (“MEWA”). Monthly employer and employee contributions are remitted to a tax-exempt employer bene ts trust managed by the Virginia Bankers Association, against which the MEWA processes and pays claims.Deferred Compensation PlanThe Bank of Virginia has a deferred compensation agreement with its Chairman entered into in January 2005, providing for bene t payments commencing January 1, 2010, for a period of ve years. The liability as of December 31, 2008, was $211,000. The annual expense for December 31, 2008 and 2007 was $54,000 and $49,000, respectively. The obligation is based upon the present value of the expected payments over the expected payout and accrual period.Stock Option PlanAt the 2005 Annual Meeting, shareholders rati ed approval of the Bank of Virginia 2005 Stock Option Plan (“Plan”) which made available up to 200,000 shares for potential grants of Stock Options. The Plan was instituted to encourage and facilitate investment in the common stock of the Bank by key employees and executives and to assist in the long-term retention of service by those executives. The Plan covers employees as determined by the Bank’s Board of Directors from time to time. Options under the Plan were granted in the form of incentive stock options with the aggregate number of shares of common stock available for grant under the Plan set at 200,000 (adjusted for two-for-one stock split paid in 2005). Employee stock options granted under the Plan represent the rights to acquire the option shares according to the plan based upon the deemed grant date. The option price of each stock option is equal to the fair market value (as de ned by the Plan) of the Bank’s common stock on the date of each deemed grant. Vested stock options granted pursuant to the Plan are exercisable during employment and for a period of three months after employment ceases or twelve months from the date of the employee’s death. Any option not exercised within such period will be deemed cancelled.Pursuant to the Stock Option Plan, the Bank also granted stock options to certain non-employee directors. The Director options were granted as implemented to facilitate and encourage investment in the common stock of the Bank by directors whose efforts, solely as directors, are expected to contribute to the Bank’s future growth and continued success. The options granted to non-employee directors pursuant to the Plan expire at the earlier of 10 years from the date of grant or three years after the optionee ceases to serve as a director of the Bank. Options not exercised within the appropriate time shall expire and be deemed cancelled. The Plan covers non-employee directors as determined by the Bank’s Board of Directors. Options issued to directors under the Plan were granted in the form of non-statutory stock options.Similarly, options granted to employees pursuant to the Plan expire at the earlier of 10 years from the date of grant or three months after the optionee ceases to serve as an employee of the Bank. Options not exercised within the appropriate time shall expire and be deemed cancelled. Employee options issued pursuant to the plan were granted in the form of incentive stock options.The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model for determining fair value. The model employs the following assumptions:

• Dividend yield – calculated as the ratio of historical dividends paid per share of common stock to the stock price

• Expected life (term of the option) – based on the average of the contractual life and vesting schedule for the

• Expected volatility – based on the monthly historical volatility of the Bank’s stock price; • Risk-free interest rate – based upon the U.S. Treasury bill yield curve, for periods within the contractual life of the

on the date of grant;

the option, in effect at the time of the grant.

respective option;

2008 2007Dividend Yield 0% 0%Expected life (in years) 7.00 7.00Expected volatility 25% 25%Risk-free interest rate 3.40% 4.71%

In September 2006, the Financial Accounting Standards Board (FASB) reached a consensus on Emerging Issues Task Force (“EITF”) Issue 06-4, “Accounting for Deferred Compensation and Postretirement Bene t Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” (“EITF Issue 06-4”). In March 2007, the FASB reached a consensus on EITF Issue 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements,” (“EITF Issue 06-10”). Both of these standards require a company to recognize an obligation over an employee’s service period based upon the substantive agreement with the employee such as the promise to maintain a life insurance policy or provide a death bene t postretirement. The Bank adopted the provisions of these standards effective January 1, 2008. The adoption of these standards was not material to the Bank’s nancial statements.In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 de nes fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements but rather provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. This Statement is effective for nancial statements issued for scal years beginning after November 15, 2007 and interim periods within those years. The FASB has approved a one-year deferral for the implementation of the Statement for non nancial assets and non nancial liabilities that are recognized or disclosed at fair value in the nancial statements on a nonrecurring basis. The Bank adopted SFAS 157 effective January 1, 2008. The adoption of SFAS 157 was not material to the Bank’s nancial statements. In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). This Statement permits entities to choose to measure many nancial instruments and certain other items at fair value. The objective of this Statement is to improve nancial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at speci ed election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument and is irrevocable. SFAS 159 is effective as of the beginning of an entity’s rst scal year that begins after November 15, 2007, with early adoption available in certain circumstances. The Bank adopted SFAS 159 effective January 1, 2008. The Bank decided not to report any existing nancial assets or liabilities at fair value that are not already reported, thus the adoption of this statement did not have a material impact on the Bank’s nancial statements.In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141(R)). The Standard will signi cantly change the nancial accounting and reporting of business combination transactions. SFAS 141(R) establishes principles for how an acquirer recognizes and measures the identi able assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the nancial statements to evaluate the nature and nancial effects of the business combination. SFAS 141(R) is effective for acquisition dates on or after the beginning of an entity’s rst year that begins after December 15, 2008. The Bank does not expect the implementation of SFAS 141(R) to have a material impact on it nancial statements, at this time.In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements an Amendment of ARB No. 51” (SFAS 160). The Standard will signi cantly change the nancial accounting and reporting of noncontrolling (or minority) interests in consolidated nancial statements. SFAS 160 is effective as of the beginning of an entity’s rst scal year that begins after December 15, 2008, with early adoption prohibited. The Bank does not expect the implementation of SFAS 160 to have a material impact on its nancial statements, at this time.In November 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings” (SAB 109). SAB 109 expresses the current view of the staff that the expected net future cash ows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SEC registrants are expected to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modi ed in scal quarters beginning after December 15, 2007. Implementation of SAB 109 did not have a material impact on the Bank’s nancial statements.

Recent Accounting Pronouncements


14


23

The Bank’s actual capital amounts and ratios as of December 31, 2008 and 2007, respectively, are presented in the following table (dollars in thousands).

December 31, 2008

Amount Ratio Amount Ratio Amount Ratio (Amounts in Thousands) Total Capital (to Risk Weighted Assets) $18,567 10.62% $13,992 8.00% $17,489 10.00% Tier 1 Capital (to Risk Weighted Assets) $16,371 9.36% $ 6,996 4.00% $ 10,494 6.00% Tier 1 Capital (to Average Assets) $16,371 7.94% $ 8,251 4.00% $10,314 5.00%

December 31, 2007

Amount Ratio Amount Ratio Amount Ratio (Amounts in Thousands) Total Capital (to Risk Weighted Assets) $18,950 12.15% $12,480 8.00% $15,601 10.00% Tier 1 Capital (to Risk Weighted Assets) $17,673 11.33% $ 6,240 4.00% $ 9,360 6.00% Tier 1 Capital (to Average Assets) $17,673 9.74% $14,518 8.00% $14,518 8.00%

MinimumTo Be Well

Capitalized UnderPrompt CorrectiveAction ProvisionsActual

MinimumCapital Requirement

MinimumTo Be Well



Employee 401(k) Savings PlanThe Bank provides a 401(k) Plan that is available to employees meeting minimum eligibility requirements. The cost of Bank contributions under the 401(k) Plan was $65,000 and $48,000 for the years ended December 31, 2008 and 2007, respectively. The Board has authorized a match of employee elective deferrals up to 50% of participant contributions on the rst six percent of eligible deferrals. The employee participants have various investment alternatives available in the 401(k) Plan; however, Bank stock is currently not permitted as an investment alternative.Employee Welfare PlanThe Bank provides bene t programs to eligible full-time and part-time employees who elect coverage under the plan. Each plan has its own eligibility requirement. During an annual enrollment period each year, employees have the opportunity to change their coverage or, in certain circumstances, more frequently due to certain life-changing events. Generally, amounts paid by employees for bene t coverage is deducted from their pay on a before-tax basis. Certain bene ts are deducted on an after-tax basis.Various insurance bene ts offered to employees consist of medical, dental, vision, life, accidental death and dismemberment, long term disability, short term disability, medical spending account, dependent care spending

Note 11. Employee Bene t Plans

Note 9. Financial Instruments With Off-Balance Sheet Risk


22

In December 2007, the SEC issued Staff Accounting Bulletin No. 110, “Use of a Simpli ed Method in Developing Expected Term of Share Options” (SAB 110). SAB 110 expresses the current view of the staff that it will accept a company’s election to use the simpli ed method discussed in SAB 107 for estimating the expected term of “plain vanilla” share options regardless of whether the company has suf cient information to make more re ned estimates. The staff noted that it understands that detailed information about employee exercise patterns may not have been widely available by December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the use of the simpli ed method beyond December 31, 2007. Implementation of SAB 110 did not have a material impact on the Bank’s nancial statements.In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of SFAS No. 133,” (“SFAS No. 161”). SFAS No. 161 requires that an entity provide enhanced disclosures related to derivative and hedging activities. SFAS No. 161 is effective for the Bank on January 1, 2009.In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). The intent of FSP No. 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash ows used to measure the fair value of the assets under SFAS No. 141(R). FSP No. 142-3 is effective for the Company on January 1, 2009, and applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. The adoption of FSP No. 142-3 is not expected to have a material impact on the Bank’s nancial statements.In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” (“SFAS No. 162”). SFAS No. 162 identi es the sources of accounting principles and the framework for selecting the principles to be used in the preparation of nancial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” Management does not expect the adoption of the provision of SFAS No. 162 to have any impact on the Bank’s nancial statements.In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clari cation of the Effective Date of FASB Statement No. 161,” (“FSP 133-1 and FIN 45-4”). FSP 133-1 and FIN 45-4 require a seller of credit derivatives to disclose information about its credit derivatives and hybrid instruments that have embedded credit derivatives to enable users of nancial statements to assess their potential effect on its nancial position, nancial performance and cash ows. The disclosures required by FSP 133-1 and FIN 45-4 will be effective for the Bank on December 31, 2008 and is not expected to have a material impact on the nancial statements.In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” (“FSP 157-3”). FSP 157-3 clari es the application of SFAS No. 157 in determining the fair value of a nancial asset during periods of inactive markets. FSP 157-3 was effective as of September 30, 2008 and did not have material impact on the Bank’s nancial statements.In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” FSP No. FAS 140-4 and FIN 46(R)-8 requires enhanced disclosures about transfers of nancial assets and interests in variable interest entities. The FSP is effective for interim and annual periods ending after December 15, 2008. Since the FSP requires only additional disclosures concerning transfers of nancial assets and interest in variable interest entities, adoption of the FSP will not affect the Bank’s nancial condition, results of operations or cash ows.In January 2009, the FASB reached a consensus on EITF Issue 99-20-1. This FSP amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Bene cial Interests and Bene cial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and other related guidance. The FSP is effective for interim and annual reporting periods ending after December 15, 2008 and shall be applied prospectively. The FSP was effective as of December 31, 2008 and did not have a material impact on the Bank’s nancial statements.


15

December 31, 2008 2007 Unfunded commitments under lines of credit $27,127,481 $30,141,605Commercial and standby letters of credit 2,422,508 4,033,933

The Bank is party to credit-related nancial instruments with off-balance sheet risk in the normal course of business to meet the nancing needs of its customers. These nancial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.The Bank’s exposure to credit loss is represented by the contractual amount of these commitments. The Bank follows the same credit policies in making commitments as it does for on-balance sheet instruments.

At December 31, 2008 and 2007 the following nancial instruments were outstanding whose contract amounts represent credit risk:

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have xed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on management’s credit evaluation of the customer.Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit usually contain a speci ed maturity date and may not be drawn upon to the total extent to which the Bank is committed. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on management’s credit evaluation of the customer.Commercial and standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral supporting those commitments, if deemed necessary.The Bank maintains its cash accounts in several correspondent banks. Capital ratios of correspondents are reviewed periodically to ensure that their capital ratios are maintained at acceptable levels. The uninsured portion of deposits held with these institutions was $42,000 at December 31, 2008.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s nancial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, nancial institutions must meet speci c capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. A nancial institution’s capital amounts and classi cation are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.Quantitative measures established by regulation to ensure capital adequacy require nancial institutions to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as de ned in the regulations) to risk-weighted assets (as de ned), and of Tier 1 capital (as de ned) to average assets (as de ned). Management believes, as of December 31, 2008, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2008, the most recent noti cation from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table on the following page. There are no conditions or events since that noti cation that management believes have changed the institution’s category.

Note 10. Minimum Regulatory Capital Requirements

Note 2. Securities Amortized cost and fair values of securities available for sale are as follows: December 31, 2008

Mortgage-backed securities $ 37,047,497 $ 333,866 $ (313,179) $ 37,068,184Securities of U.S. government agencies 1,500,818 8,450 - 1,509,268Corporate bonds 981,071 - (84,348) 896,723Total $ 39,529,386 $ 342,316 $ (397,527) $ 39,474,175

December 31, 2007

Mortgage-backed securities $ 27,876,268 $ 257,311 $ (11,245) $ 28,122,334Securities of U.S. government agencies 7,257,960 88,152 - 7,346,112 Corporate bonds 977,359 7,416 (10,749) 974,026 Total $ 36,111,587 $ 352,879 $ (21,994) $ 36,442,472

1 year or less $ 1,500,818 $ 1,509,268 Over 1 year through 5 years 495,285 441,804 Over 5 years through 10 years 485,786 454,919 Mortgage-backed securities 37,047,497 37,068,184 Total $39,529,386 $39,474,175

As of December 31, 2008, the portfolio continues to be largely concentrated in average maturities of ve years or less. The portfolio is available to support liquidity needs of the Bank, but lines with correspondents and the FHLB have been opened as an alternate source of funds in addition to the deposit base. There were $35.7 million ($34.5 million of available for sale and $1.2 million in restricted securities) in securities sales during 2008 and $1.2 million in proceeds from sales of securities available for sale during 2007. Gross realized gains were approximately $268,000 in 2008 with $81,000 in corresponding losses recorded in 2008. This compares to $12,000 in gross gains realized in 2007 along with no losses realized for the comparable period.At December 31, 2008, the combined depreciation in value of the individual securities in an unrealized loss position for less than 12 months was less than 1% of the combined reported value of the aggregate securities portfolio. Management does not believe any individual unrealized loss as of December 31, 2008 represents an other-than-temporary impairment. The Bank has the intent and ability to hold these securities until such time as the value recovers or the securities mature. Furthermore, the change in value is entirely attributable to changes in market interest rates and not the credit quality of the issuer.

AmortizedCost

Gross UnrealizedGain (Losses)

FairValue

AmortizedCost


FairValue

AmortizedCost

FairValue


16

The amortized cost and fair value of securities available for sale as of December 31, 2008, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.

Note 8. Income TaxesThe Bank les income tax returns in the U.S. federal jurisdiction. With few exceptions, the Bank is no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to 2004.The Bank adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes”, on January 1, 2007 with no impact on the nancial statements. The tax effects of temporary differences that give rise to signi cant portions of the deferred tax assets and de-ferred tax liabilities at December 31, 2008 and 2007, respectively, are presented below:


21

The provision for income taxes charged to operations as of December 31, 2008 and 2007 consists of the following:

The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the periods due to the following as of December 31, 2008 and 2007:

Under the provisions of the Internal Revenue Code, the Bank has approximately $2.3 million of taxable net operating loss carryforwards which can be offset against future taxable income. The carryforwards expire in varying amounts between December 31, 2024 and December 31, 2025. The full realization of the tax bene ts associated with the carryforwards depends predominately upon the recognition of ordinary income during the carryforward period.

2008 2007 Current tax expense - - Deferred tax (bene t) (556,256) (89,730) Change in valuation allowance 556,256 89,730 - -

2008 2007Computed “expected” tax expense (bene t) (446,962) 172,209Increase (decrease) in income taxes resulting from: Nondeductible expenses 9,455 22,643 Net operating loss carryforward (utilized) 437,507 (194, 852) - -

December 31, 2008 2007Deferred Tax Assets: Allowance for loan losses $ 954,100 $382,708 Organizational and start-up expenses - 53,663Bank premises and equipment 86,544 71,323Unrealized loss on securities available for sale 18,772 - Unrealized asset losses 9,056 11,707Accrued vacation 34,119 27,993Deferred compensation 71,978 53,308Other, net 1,161 - $1,175,730 $600,702Unrealized gain on securities available for sale - Deferred Tax Liabilities -

$1,175,730 $488,201 Less: Valuation Allowance (1,175,730) Net Deferred Tax Assets $ - $ -

(112,501)

(488,201)

(112,501)

Executive of cers, directors and their af liates had borrowings of $7.8 million and $3.6 million and unfunded commitments of $2.5 million and $2.8 million with the Bank at December 31, 2008 and 2007, respectively.During the year ended December 31, 2008, total principal additions were $9.4 million and total principal payments were $5.2 million.In addition, executive of cers, directors and their af liates maintained deposits of $1.4 million at December 31, 2008 and $3.7 million at December 31, 2007.These transactions occurred in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with unrelated persons.


20

The following tables re ects those investments in a continuous unrealized loss position for less than 12 months and for 12 months or longer.

There were no held to maturity securities at December 31, 2008 or 2007.

At December 31, 2008, U.S. Government agency obligations with a combined carrying value of $3.4 million were pledged to secure public funds with the State of Virginia.

Note 3. Loans A summary of the balances of loans outstanding as of December 31 was as follows: 2008 2007Real Estate: Construction $33,134,434 $ 31,146,841 Commercial 55,224,028 50,877,451 Residential 10,345,371 8,458,330 Home Equity 14,532,842 11,130,446 Commercial 39,090,641 27,331,431 Consumer 3,577,736 3,137,674

$155,905,034 $132,082,173 Less: Allowance for loan losses 2,942,988 1,276,726 Loans, net $152,962,046 $130,805,447 Overdrafts totaling $4,000 and $5,000 were reclassi ed from deposits to loans at December 31, 2008 and 2007, respectively.

Description of Securities

Mortgage-backed securities 14,323,112 (313,179) - - 14,323,112 Corporate bonds 896,733 (84,348) - - 896,733

Total $15,219,845 $(397,527) $ - $ - $15,219,845


Mortgage-backed securities 1,650,663 (11,245) - - 1,650,663 (11,245) Corporate bonds 473,676 (10,749) - - 473,676 (10,749)

Total $ 2,124,339 $ (21,994) $ - $ - $ 2,124,339 (21,994)

UnrealizedLosses

Fair ValueUnrealizedLosses


Fair Value

UnrealizedLosses



Fair Value

December 31, 2008

December 31, 2007

Less than 12 Months 12 Months or longer Total


(313,179)

(84,348)

$(397,527)


17

Note 6. Related Party Transactions

Three months or less $12,857,400 $16,890,804Over 3 through 6 months 7,413,315 16,532,338Over 6 through 12 months 16,228,396 24,227,175Over 12 months 19,440,221 26,118,013 $55,939,332 $83,818,330

The maturities of time deposits $100,000 and over and other time deposits at December 31, 2008 and 2007 are as follows:

Time deposits $100,000 and over

Other time deposits


Other time deposits

Three months or less $ 9,266,938 $17,240,573Over 3 through 6 months 10,169,028 17,097,002Over 6 through 12 months 12,637,699 20,183,935Over 12 months 14,081,486 24,064,660 $46,155,151 $78,586,170

2008

2007

Note 7. Time Deposits

Remaining maturities on time deposits are as follows: 2009 $ 94,199,4282010 19,642,2762011 8,619,7462012 12,154,322Later Years 5,141,890 $139,757,662

An analysis of the allowance for loan losses follows:

December 31, 2008 2007Beginning Balance $1,276,726 $931,192 Provision for loan losses 1,764,325 345,534 Loans charged off (98,063) - Recoveries on loans previously charged off - - Balance, December 31, $2,942,988 $1,276,726

The following information is a summary pertaining to impaired and nonaccrual loans:Update for interest earned December 31, 2008 2007 (in thousands)Impaired loans without a valuation allowance 940 -Impaired loans with a valuation allowance 2,500 - Total impaired loans 3,440Valuation allowance related to impaired loans 1,000 - Total nonaccrual loans 244 - Total past-due 90 days or more and still accruing 696 -

Average investment in impaired loans 3,018 - Interest income recognized on impaired loans 55 -

The balance in xed assets in process and construction in the table above in 2007 relates to the Bank’s 5th branch located on Patterson Avenue in Richmond, VA, and subsequently opened in early January 2008. The branch-in-process total for 2007 enumerated above includes $83,000 in capitalized interest on the branch project. Fixed assets in process in 2008 relate to assets acquired that will be deployed in 2009. As of December 31, 2008, the Bank has lease agreements for three branch banking facilities. All such leases qualify as operating leases. One of the leases expired in August 2008 and was renewed for one year to allow time for a replacement branch to be built. Following is a schedule by years of future minimum rental payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of December 31, 2008:

There were two loans evaluated for impairment at December 31, 2008. One of the loans, as discussed below, was not deemed impaired due to the suf ciency of cash ows from the collateral while a speci c provision for loan loss of $1 million has been recorded for the other deemed impairment. In addition, there were two loans 90 days past due totaling $940,000 at December 31, 2008. One of these loans is still accruing interest at December 31, 2008 and the collateral position is suf cient to allow for collection of all interest due on the note. At December 31, 2007, there were no loans 90 days past due.


19


18

The Bank has unsecured lines of credit with correspondent banks totaling approximately $12 million available for overnight borrowing. These lines are subject to annual renewal and $176,000 was being utilized at December 31, 2008. In addition, the Bank is a member of the FHLB which provides for additional lines of credit and other products offered by the FHLB. These borrowings are largely secured by the Bank’s loan portfolio and pledged securities. The FHLB maintains a blanket security agreement on qualifying collateral while pledged securities are held by the FHLB. As of December 31, 2008, the Bank is entitled to borrow up to 30% of total assets or approximately $61 million at December 31, 2008. At December 31, 2008, the Bank had two structured borrowings of $5.0 million each maturing in October 2011 and August 2012, respectively from the FHLB which are xed for a period of time and then callable at various increments over the life of the borrowing. The rst borrowing of $5.0 million bears an interest rate of 4.375% while the second bears a rate of 4.40%. Should either of the borrowings be repaid prior to maturity, the Bank may have to pay a termination fee to unwind the obligation. These structured borrowings from the FHLB are subject to conversion by the FHLB to a oating rate advances based upon the contract terms. If converted, the advance may be repaid and the transaction terminated. In addition, at December 31, 2008, the Bank was borrowing overnight funds of $5 million. Overnight funds are priced daily and at December 31, 2008, they were priced at .46%. The average rate paid for borrowings (including the above referenced FHLB borrowings) in 2008 was 3.70%.

For the years ended December 31, 2008 and 2007, respectively, depreciation expense was $342,000 and $226,000, respectively.

Total rent expense for the years ended December 31, 2008 and 2007 amounted to $125,000 and $122,000, respectively.

Year ended December 31: 2009 $ 116,233 2010 121,260 2011 124,467 2012 127,761 2013 131,144 Later Years 626,066 Total minimum payments required: $1,246,931

2008 2007Fixed assets in process and construction $ 59,260 $2,933,193 Buildings and improvements 3,253,979 1,679,708 Land 2,006,083 754,542 Furniture, xtures and equipment 1,060,057 665,581Leasehold improvements 491,520 366,902 Automobiles 86,684 77,535 $6,957,583 $6,477,461 Less accumulated depreciation 1,268,998 945,452 $5,668,585 $5,532,009

Note 4. Premises and Equipment

A summary of the cost and accumulated depreciation of premises and equipment follows:

Note 5. Borrowings

Executive of cers, directors and their af liates had borrowings of $7.8 million and $3.6 million and unfunded commitments of $2.5 million and $2.8 million with the Bank at December 31, 2008 and 2007, respectively.During the year ended December 31, 2008, total principal additions were $9.4 million and total principal payments were $5.2 million.In addition, executive of cers, directors and their af liates maintained deposits of $1.4 million at December 31, 2008 and $3.7 million at December 31, 2007.These transactions occurred in the ordinary course of business on substantially the same terms as those prevailing at the time for comparable transactions with unrelated persons.


20

The following tables re ects those investments in a continuous unrealized loss position for less than 12 months and for 12 months or longer.

There were no held to maturity securities at December 31, 2008 or 2007.

At December 31, 2008, U.S. Government agency obligations with a combined carrying value of $3.4 million were pledged to secure public funds with the State of Virginia.

Note 3. Loans A summary of the balances of loans outstanding as of December 31 was as follows: 2008 2007Real Estate: Construction $33,134,434 $ 31,146,841 Commercial 55,224,028 50,877,451 Residential 10,345,371 8,458,330 Home Equity 14,532,842 11,130,446 Commercial 39,090,641 27,331,431 Consumer 3,577,736 3,137,674

$155,905,034 $132,082,173 Less: Allowance for loan losses 2,942,988 1,276,726 Loans, net $152,962,046 $130,805,447 Overdrafts totaling $4,000 and $5,000 were reclassi ed from deposits to loans at December 31, 2008 and 2007, respectively.


Mortgage-backed securities 14,323,112 (313,179) - - 14,323,112 Corporate bonds 896,733 (84,348) - - 896,733

Total $15,219,845 $(397,527) $ - $ - $15,219,845


Mortgage-backed securities 1,650,663 (11,245) - - 1,650,663 (11,245) Corporate bonds 473,676 (10,749) - - 473,676 (10,749)

Total $ 2,124,339 $ (21,994) $ - $ - $ 2,124,339 (21,994)

UnrealizedLosses



Fair Value

UnrealizedLosses



Fair Value

December 31, 2008

December 31, 2007



(313,179)

(84,348)

$(397,527)


17

Note 6. Related Party Transactions

Three months or less $12,857,400 $16,890,804Over 3 through 6 months 7,413,315 16,532,338Over 6 through 12 months 16,228,396 24,227,175Over 12 months 19,440,221 26,118,013 $55,939,332 $83,818,330

The maturities of time deposits $100,000 and over and other time deposits at December 31, 2008 and 2007 are as follows:


Other time deposits


Other time deposits

Three months or less $ 9,266,938 $17,240,573Over 3 through 6 months 10,169,028 17,097,002Over 6 through 12 months 12,637,699 20,183,935Over 12 months 14,081,486 24,064,660 $46,155,151 $78,586,170

2008

2007

Note 7. Time Deposits

Remaining maturities on time deposits are as follows: 2009 $ 94,199,4282010 19,642,2762011 8,619,7462012 12,154,322Later Years 5,141,890 $139,757,662

Note 2. Securities Amortized cost and fair values of securities available for sale are as follows: December 31, 2008

Mortgage-backed securities $ 37,047,497 $ 333,866 $ (313,179) $ 37,068,184Securities of U.S. government agencies 1,500,818 8,450 - 1,509,268Corporate bonds 981,071 - (84,348) 896,723Total $ 39,529,386 $ 342,316 $ (397,527) $ 39,474,175

December 31, 2007

Mortgage-backed securities $ 27,876,268 $ 257,311 $ (11,245) $ 28,122,334Securities of U.S. government agencies 7,257,960 88,152 - 7,346,112 Corporate bonds 977,359 7,416 (10,749) 974,026 Total $ 36,111,587 $ 352,879 $ (21,994) $ 36,442,472

1 year or less $ 1,500,818 $ 1,509,268 Over 1 year through 5 years 495,285 441,804 Over 5 years through 10 years 485,786 454,919 Mortgage-backed securities 37,047,497 37,068,184 Total $39,529,386 $39,474,175

As of December 31, 2008, the portfolio continues to be largely concentrated in average maturities of ve years or less. The portfolio is available to support liquidity needs of the Bank, but lines with correspondents and the FHLB have been opened as an alternate source of funds in addition to the deposit base. There were $35.7 million ($34.5 million of available for sale and $1.2 million in restricted securities) in securities sales during 2008 and $1.2 million in proceeds from sales of securities available for sale during 2007. Gross realized gains were approximately $268,000 in 2008 with $81,000 in corresponding losses recorded in 2008. This compares to $12,000 in gross gains realized in 2007 along with no losses realized for the comparable period.At December 31, 2008, the combined depreciation in value of the individual securities in an unrealized loss position for less than 12 months was less than 1% of the combined reported value of the aggregate securities portfolio. Management does not believe any individual unrealized loss as of December 31, 2008 represents an other-than-temporary impairment. The Bank has the intent and ability to hold these securities until such time as the value recovers or the securities mature. Furthermore, the change in value is entirely attributable to changes in market interest rates and not the credit quality of the issuer.

AmortizedCost


FairValue

AmortizedCost


FairValue

AmortizedCost

FairValue


16

The amortized cost and fair value of securities available for sale as of December 31, 2008, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.

Note 8. Income TaxesThe Bank les income tax returns in the U.S. federal jurisdiction. With few exceptions, the Bank is no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to 2004.The Bank adopted the provisions of FIN 48, “Accounting for Uncertainty in Income Taxes”, on January 1, 2007 with no impact on the nancial statements. The tax effects of temporary differences that give rise to signi cant portions of the deferred tax assets and de-ferred tax liabilities at December 31, 2008 and 2007, respectively, are presented below:


21

The provision for income taxes charged to operations as of December 31, 2008 and 2007 consists of the following:

The income tax provision differs from the amount of income tax determined by applying the U.S. federal income tax rate to pretax income for the periods due to the following as of December 31, 2008 and 2007:

Under the provisions of the Internal Revenue Code, the Bank has approximately $2.3 million of taxable net operating loss carryforwards which can be offset against future taxable income. The carryforwards expire in varying amounts between December 31, 2024 and December 31, 2025. The full realization of the tax bene ts associated with the carryforwards depends predominately upon the recognition of ordinary income during the carryforward period.

2008 2007 Current tax expense - - Deferred tax (bene t) (556,256) (89,730) Change in valuation allowance 556,256 89,730 - -

2008 2007Computed “expected” tax expense (bene t) (446,962) 172,209Increase (decrease) in income taxes resulting from: Nondeductible expenses 9,455 22,643 Net operating loss carryforward (utilized) 437,507 (194, 852) - -

December 31, 2008 2007Deferred Tax Assets: Allowance for loan losses $ 954,100 $382,708 Organizational and start-up expenses - 53,663Bank premises and equipment 86,544 71,323Unrealized loss on securities available for sale 18,772 - Unrealized asset losses 9,056 11,707Accrued vacation 34,119 27,993Deferred compensation 71,978 53,308Other, net 1,161 - $1,175,730 $600,702Unrealized gain on securities available for sale - Deferred Tax Liabilities -

$1,175,730 $488,201 Less: Valuation Allowance (1,175,730) Net Deferred Tax Assets $ - $ -

(112,501)

(488,201)

(112,501)

Note 9. Financial Instruments With Off-Balance Sheet Risk


22

In December 2007, the SEC issued Staff Accounting Bulletin No. 110, “Use of a Simpli ed Method in Developing Expected Term of Share Options” (SAB 110). SAB 110 expresses the current view of the staff that it will accept a company’s election to use the simpli ed method discussed in SAB 107 for estimating the expected term of “plain vanilla” share options regardless of whether the company has suf cient information to make more re ned estimates. The staff noted that it understands that detailed information about employee exercise patterns may not have been widely available by December 31, 2007. Accordingly, the staff will continue to accept, under certain circumstances, the use of the simpli ed method beyond December 31, 2007. Implementation of SAB 110 did not have a material impact on the Bank’s nancial statements.In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of SFAS No. 133,” (“SFAS No. 161”). SFAS No. 161 requires that an entity provide enhanced disclosures related to derivative and hedging activities. SFAS No. 161 is effective for the Bank on January 1, 2009.In April 2008, the FASB issued FASB Staff Position (FSP) No. 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP No. 142-3”). FSP No. 142-3 amends the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under FASB SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). The intent of FSP No. 142-3 is to improve the consistency between the useful life of a recognized intangible asset under SFAS No. 142 and the period of expected cash ows used to measure the fair value of the assets under SFAS No. 141(R). FSP No. 142-3 is effective for the Company on January 1, 2009, and applies prospectively to intangible assets that are acquired individually or with a group of other assets in business combinations and asset acquisitions. The adoption of FSP No. 142-3 is not expected to have a material impact on the Bank’s nancial statements.In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles,” (“SFAS No. 162”). SFAS No. 162 identi es the sources of accounting principles and the framework for selecting the principles to be used in the preparation of nancial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles. SFAS No. 162 is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles.” Management does not expect the adoption of the provision of SFAS No. 162 to have any impact on the Bank’s nancial statements.In September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, “Disclosures about Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clari cation of the Effective Date of FASB Statement No. 161,” (“FSP 133-1 and FIN 45-4”). FSP 133-1 and FIN 45-4 require a seller of credit derivatives to disclose information about its credit derivatives and hybrid instruments that have embedded credit derivatives to enable users of nancial statements to assess their potential effect on its nancial position, nancial performance and cash ows. The disclosures required by FSP 133-1 and FIN 45-4 will be effective for the Bank on December 31, 2008 and is not expected to have a material impact on the nancial statements.In October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active,” (“FSP 157-3”). FSP 157-3 clari es the application of SFAS No. 157 in determining the fair value of a nancial asset during periods of inactive markets. FSP 157-3 was effective as of September 30, 2008 and did not have material impact on the Bank’s nancial statements.In December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, “Disclosures by Public Entities (Enterprises) about Transfers of Financial Assets and Interests in Variable Interest Entities.” FSP No. FAS 140-4 and FIN 46(R)-8 requires enhanced disclosures about transfers of nancial assets and interests in variable interest entities. The FSP is effective for interim and annual periods ending after December 15, 2008. Since the FSP requires only additional disclosures concerning transfers of nancial assets and interest in variable interest entities, adoption of the FSP will not affect the Bank’s nancial condition, results of operations or cash ows.In January 2009, the FASB reached a consensus on EITF Issue 99-20-1. This FSP amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Bene cial Interests and Bene cial Interests That Continue to Be Held by a Transferor in Securitized Financial Assets,” to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The FSP also retains and emphasizes the objective of an other-than-temporary impairment assessment and the related disclosure requirements in FASB Statement No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” and other related guidance. The FSP is effective for interim and annual reporting periods ending after December 15, 2008 and shall be applied prospectively. The FSP was effective as of December 31, 2008 and did not have a material impact on the Bank’s nancial statements.


15

December 31, 2008 2007 Unfunded commitments under lines of credit $27,127,481 $30,141,605Commercial and standby letters of credit 2,422,508 4,033,933

The Bank is party to credit-related nancial instruments with off-balance sheet risk in the normal course of business to meet the nancing needs of its customers. These nancial instruments include commitments to extend credit and standby letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet.The Bank’s exposure to credit loss is represented by the contractual amount of these commitments. The Bank follows the same credit policies in making commitments as it does for on-balance sheet instruments.

At December 31, 2008 and 2007 the following nancial instruments were outstanding whose contract amounts represent credit risk:

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have xed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on management’s credit evaluation of the customer.Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit usually contain a speci ed maturity date and may not be drawn upon to the total extent to which the Bank is committed. The amount of collateral obtained, if it is deemed necessary by the Bank, is based on management’s credit evaluation of the customer.Commercial and standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those letters of credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank generally holds collateral supporting those commitments, if deemed necessary.The Bank maintains its cash accounts in several correspondent banks. Capital ratios of correspondents are reviewed periodically to ensure that their capital ratios are maintained at acceptable levels. The uninsured portion of deposits held with these institutions was $42,000 at December 31, 2008.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s nancial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, nancial institutions must meet speci c capital guidelines that involve quantitative measures of assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. A nancial institution’s capital amounts and classi cation are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.Quantitative measures established by regulation to ensure capital adequacy require nancial institutions to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as de ned in the regulations) to risk-weighted assets (as de ned), and of Tier 1 capital (as de ned) to average assets (as de ned). Management believes, as of December 31, 2008, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2008, the most recent noti cation from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table on the following page. There are no conditions or events since that noti cation that management believes have changed the institution’s category.

Note 10. Minimum Regulatory Capital Requirements

In September 2006, the Financial Accounting Standards Board (FASB) reached a consensus on Emerging Issues Task Force (“EITF”) Issue 06-4, “Accounting for Deferred Compensation and Postretirement Bene t Aspects of Endorsement Split-Dollar Life Insurance Arrangements,” (“EITF Issue 06-4”). In March 2007, the FASB reached a consensus on EITF Issue 06-10, “Accounting for Collateral Assignment Split-Dollar Life Insurance Arrangements,” (“EITF Issue 06-10”). Both of these standards require a company to recognize an obligation over an employee’s service period based upon the substantive agreement with the employee such as the promise to maintain a life insurance policy or provide a death bene t postretirement. The Bank adopted the provisions of these standards effective January 1, 2008. The adoption of these standards was not material to the Bank’s nancial statements.In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS 157). SFAS 157 de nes fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS 157 does not require any new fair value measurements but rather provides enhanced guidance to other pronouncements that require or permit assets or liabilities to be measured at fair value. This Statement is effective for nancial statements issued for scal years beginning after November 15, 2007 and interim periods within those years. The FASB has approved a one-year deferral for the implementation of the Statement for non nancial assets and non nancial liabilities that are recognized or disclosed at fair value in the nancial statements on a nonrecurring basis. The Bank adopted SFAS 157 effective January 1, 2008. The adoption of SFAS 157 was not material to the Bank’s nancial statements. In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (SFAS 159). This Statement permits entities to choose to measure many nancial instruments and certain other items at fair value. The objective of this Statement is to improve nancial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The fair value option established by this Statement permits all entities to choose to measure eligible items at fair value at speci ed election dates. A business entity shall report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. The fair value option may be applied instrument by instrument and is irrevocable. SFAS 159 is effective as of the beginning of an entity’s rst scal year that begins after November 15, 2007, with early adoption available in certain circumstances. The Bank adopted SFAS 159 effective January 1, 2008. The Bank decided not to report any existing nancial assets or liabilities at fair value that are not already reported, thus the adoption of this statement did not have a material impact on the Bank’s nancial statements.In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141(R)). The Standard will signi cantly change the nancial accounting and reporting of business combination transactions. SFAS 141(R) establishes principles for how an acquirer recognizes and measures the identi able assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the nancial statements to evaluate the nature and nancial effects of the business combination. SFAS 141(R) is effective for acquisition dates on or after the beginning of an entity’s rst year that begins after December 15, 2008. The Bank does not expect the implementation of SFAS 141(R) to have a material impact on it nancial statements, at this time.In December 2007, the FASB issued Statement of Financial Accounting Standards No. 160, “Noncontrolling Interests in Consolidated Financial Statements an Amendment of ARB No. 51” (SFAS 160). The Standard will signi cantly change the nancial accounting and reporting of noncontrolling (or minority) interests in consolidated nancial statements. SFAS 160 is effective as of the beginning of an entity’s rst scal year that begins after December 15, 2008, with early adoption prohibited. The Bank does not expect the implementation of SFAS 160 to have a material impact on its nancial statements, at this time.In November 2007, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value Through Earnings” (SAB 109). SAB 109 expresses the current view of the staff that the expected net future cash ows related to the associated servicing of the loan should be included in the measurement of all written loan commitments that are accounted for at fair value through earnings. SEC registrants are expected to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modi ed in scal quarters beginning after December 15, 2007. Implementation of SAB 109 did not have a material impact on the Bank’s nancial statements.

Recent Accounting Pronouncements


14


23

The Bank’s actual capital amounts and ratios as of December 31, 2008 and 2007, respectively, are presented in the following table (dollars in thousands).

December 31, 2008

Amount Ratio Amount Ratio Amount Ratio (Amounts in Thousands) Total Capital (to Risk Weighted Assets) $18,567 10.62% $13,992 8.00% $17,489 10.00% Tier 1 Capital (to Risk Weighted Assets) $16,371 9.36% $ 6,996 4.00% $ 10,494 6.00% Tier 1 Capital (to Average Assets) $16,371 7.94% $ 8,251 4.00% $10,314 5.00%

December 31, 2007

Amount Ratio Amount Ratio Amount Ratio (Amounts in Thousands) Total Capital (to Risk Weighted Assets) $18,950 12.15% $12,480 8.00% $15,601 10.00% Tier 1 Capital (to Risk Weighted Assets) $17,673 11.33% $ 6,240 4.00% $ 9,360 6.00% Tier 1 Capital (to Average Assets) $17,673 9.74% $14,518 8.00% $14,518 8.00%

MinimumTo Be Well



MinimumTo Be Well



Employee 401(k) Savings PlanThe Bank provides a 401(k) Plan that is available to employees meeting minimum eligibility requirements. The cost of Bank contributions under the 401(k) Plan was $65,000 and $48,000 for the years ended December 31, 2008 and 2007, respectively. The Board has authorized a match of employee elective deferrals up to 50% of participant contributions on the rst six percent of eligible deferrals. The employee participants have various investment alternatives available in the 401(k) Plan; however, Bank stock is currently not permitted as an investment alternative.Employee Welfare PlanThe Bank provides bene t programs to eligible full-time and part-time employees who elect coverage under the plan. Each plan has its own eligibility requirement. During an annual enrollment period each year, employees have the opportunity to change their coverage or, in certain circumstances, more frequently due to certain life-changing events. Generally, amounts paid by employees for bene t coverage is deducted from their pay on a before-tax basis. Certain bene ts are deducted on an after-tax basis.Various insurance bene ts offered to employees consist of medical, dental, vision, life, accidental death and dismemberment, long term disability, short term disability, medical spending account, dependent care spending

Note 11. Employee Bene t Plans


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(h) Income TaxesDeferred taxes are provided on a liability method whereby deferred tax assets are recognized for deductible temporary differences, operating loss carryforwards, and tax credit carryforwards. Deferred tax liabilities are recognized for taxable temporary differences.Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, the recognition of the asset is less than probable. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.When tax returns are led, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the positions taken or the amount of the position that would be ultimately sustained. The bene t of a tax position is recognized in the nancial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax bene t that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the bene ts associated with tax positions taken that exceeds the amount measured as described above is recognized as a liability for unrecognized tax bene ts in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.Interest and penalties associated with the unrecognized tax bene ts are classi ed as additional income taxes in the statement of income.(i) Advertising CostsThe Bank follows the policy of charging the production costs of advertising to expense as incurred unless the advertising campaign extends for a signi cant time period, in which case, such costs will be amortized to expense over the duration of the advertising campaign.(j) Comprehensive IncomeAccounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.(k) Earnings (Loss) Per ShareBasic earnings per share represent income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share re ect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. At December 31, 2008, there were 179,500 option shares outstanding. Of the option shares outstanding none were dilutive and, as a result, had no impact on the calculation of computing diluted earnings per common share for the year ended December 31, 2008.(l) Stock Option PlanEffective January 1, 2006, the Bank adopted SFAS No. 123R (Revised 2004), Share-Based Payment (“SFAS No. 123R”), which replaces SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees (“APB Opinion No. 25”). SFAS 123R requires the costs resulting from all share-based payments to employees be recognized in the nancial statements. Stock-based compensation is estimated at the date of grant, using the Black-Scholes option valuation model for determining fair value. Under APB Opinion No. 25, compensation expense was generally not recognized if the exercise price of the option equaled or exceeded the market price of the stock on the date of grant. For the year ended December 31, 2008 and 2007, the Bank recognized stock-based compensation expense of $12,000 and $63,000, respectively or less than $.01 per share in 2008 and approximately $.02 per share in 2007.


13

account, long term care and supplemental insurance. The health and welfare plans are administered through Multiple Employer Welfare Association (“MEWA”). Monthly employer and employee contributions are remitted to a tax-exempt employer bene ts trust managed by the Virginia Bankers Association, against which the MEWA processes and pays claims.Deferred Compensation PlanThe Bank of Virginia has a deferred compensation agreement with its Chairman entered into in January 2005, providing for bene t payments commencing January 1, 2010, for a period of ve years. The liability as of December 31, 2008, was $211,000. The annual expense for December 31, 2008 and 2007 was $54,000 and $49,000, respectively. The obligation is based upon the present value of the expected payments over the expected payout and accrual period.Stock Option PlanAt the 2005 Annual Meeting, shareholders rati ed approval of the Bank of Virginia 2005 Stock Option Plan (“Plan”) which made available up to 200,000 shares for potential grants of Stock Options. The Plan was instituted to encourage and facilitate investment in the common stock of the Bank by key employees and executives and to assist in the long-term retention of service by those executives. The Plan covers employees as determined by the Bank’s Board of Directors from time to time. Options under the Plan were granted in the form of incentive stock options with the aggregate number of shares of common stock available for grant under the Plan set at 200,000 (adjusted for two-for-one stock split paid in 2005). Employee stock options granted under the Plan represent the rights to acquire the option shares according to the plan based upon the deemed grant date. The option price of each stock option is equal to the fair market value (as de ned by the Plan) of the Bank’s common stock on the date of each deemed grant. Vested stock options granted pursuant to the Plan are exercisable during employment and for a period of three months after employment ceases or twelve months from the date of the employee’s death. Any option not exercised within such period will be deemed cancelled.Pursuant to the Stock Option Plan, the Bank also granted stock options to certain non-employee directors. The Director options were granted as implemented to facilitate and encourage investment in the common stock of the Bank by directors whose efforts, solely as directors, are expected to contribute to the Bank’s future growth and continued success. The options granted to non-employee directors pursuant to the Plan expire at the earlier of 10 years from the date of grant or three years after the optionee ceases to serve as a director of the Bank. Options not exercised within the appropriate time shall expire and be deemed cancelled. The Plan covers non-employee directors as determined by the Bank’s Board of Directors. Options issued to directors under the Plan were granted in the form of non-statutory stock options.Similarly, options granted to employees pursuant to the Plan expire at the earlier of 10 years from the date of grant or three months after the optionee ceases to serve as an employee of the Bank. Options not exercised within the appropriate time shall expire and be deemed cancelled. Employee options issued pursuant to the plan were granted in the form of incentive stock options.The fair value of each option award is estimated on the date of grant using a Black-Scholes option valuation model for determining fair value. The model employs the following assumptions:

• Dividend yield – calculated as the ratio of historical dividends paid per share of common stock to the stock price

• Expected life (term of the option) – based on the average of the contractual life and vesting schedule for the

• Expected volatility – based on the monthly historical volatility of the Bank’s stock price; • Risk-free interest rate – based upon the U.S. Treasury bill yield curve, for periods within the contractual life of the

on the date of grant;

the option, in effect at the time of the grant.

respective option;

2008 2007Dividend Yield 0% 0%Expected life (in years) 7.00 7.00Expected volatility 25% 25%Risk-free interest rate 3.40% 4.71%

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are generally reported at their outstanding unpaid principal balances adjusted for the allowance for loan losses. Interest income is accrued on the unpaid principal balance. Loan origination and commitment fees and certain direct costs are deferred and the net amount is amortized as an adjustment of the related loan’s yield. The Bank is amortizing these amounts over the loan’s contractual life or to the pay-off date if the balance is repaid prior to maturity.The accrual of interest on loans is discontinued at the time the loan becomes 90 days delinquent unless the credit is well-secured and in process of collection. Non-performing loans are placed either in nonaccrual status pending further collection efforts or charged off if collection of principal or interest is considered doubtful.All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on loans in nonaccrual status is accounted for on the cash basis or cost recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. (e) Allowance for Loan LossesThe allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan is con rmed. Subsequent recoveries, if any, are credited back to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to signi cant revision as more information becomes available. The allowance consists of speci c, general and unallocated components. The speci c component relates to loans that are classi ed as either doubtful, substandard or special mention. For such loans that are also classi ed as impaired, an allowance is established when the discounted cash ows (or collateral value or observed market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassi ed loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance re ects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating the speci c and general losses in the portfolio.The above referenced review may indicate that a loan is impaired. The impairment of a loan occurs when it is probable that the Bank will be unable to collect all amounts due according to the contractual terms of the loan agreement. Impairment is measured as the difference between the recorded investment in the loan and the evaluation of the present value of expected future cash ows or the observable market price of the loan. Loans that are collateral dependent, that is, loans where repayment is expected to be provided solely by the underlying collateral, and for which management has determined foreclosure is probable, are measured for impairment based on the fair value of the collateral. (f) Premises and EquipmentPremises and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the assets’ estimated useful lives. Estimated useful lives range from 10 to 39 years for buildings and 3 to 7 years for autos, furniture, xtures and equipment. The value of land is carried at cost.(g) Foreclosed PropertiesAssets acquired through, or in lieu of, loan foreclosure are held for sale. They are initially recorded at the lower of the Bank’s cost or the assets’ fair market value at the date of foreclosure, less estimated selling costs thus establishing a new cost basis. Subsequent to foreclosure, valuations of the assets are periodically performed by management. Adjustments are made to the lower of the carrying amount or fair market value of the assets less selling costs. Revenue and expenses from operations and valuation changes are included in net expenses from foreclosed assets. The Bank had one foreclosed asset at December 31, 2008 totaling $308,000 and none at December 31, 2007.


12


25

A summary of the Bank’s option activity under the Plan as of December 31, 2008 and 2007, respectively and changes during the years then ended are presented in the following tables:

2008


2007


Option Shares

Weighted-AverageExercise Price

Weighted-Average remaining

contractual term (years)

SharesWeighted-Average

Exercise Price

Weighted-Average remaining contractual term (years)

As of December 31, 2008, there was $14,000 of total unrecognized compensation cost related to share-based compensation arrangements granted under the Plan. That cost is expected to be recognized over a weighted-average period of just over 1 year. The aggregate intrinsic value of options is the amount by which the current market value of the underlying stock exceeds the exercise price of the option. As of December 31, 2008, the outstanding and exercisable options of the Bank had no intrinsic value. The weighted average strike price of options granted in 2008 and 2007 was $6.07 and $7.70, respectively.

Fair value information about nancial instruments, whether or not recognized in the balance sheet, for which it is practical to estimate the value is based upon the characteristics of the instruments and relevant market information. Financial instruments include cash, evidence of ownership in an entity, or contracts that convey or impose on an entity that contractual right or obligation to either receive or deliver cash for another nancial instrument. Fair value is the amount at which a nancial instrument could be exchanged in a current transaction between willing parties, other than in a forced sale or liquidation, and is best evidenced by a quoted market price if one exists.The following summary presents the methodologies and assumptions used to estimate the fair value of the Bank’s nancial instruments presented below. The information used to determine fair value is highly subjective and judgmental in nature and, therefore, the results may not be precise. Subjective factors include, among other things, estimates of cash ows, risk characteristics, credit quality, and interest rates, all of which are subject to change. Since the fair value is estimated as of the balance sheet date, the amounts that will actually be realized or paid upon settlement or maturity on these various instruments could be signi cantly different.

Note 12. Fair Value Measurements


26

Notes to Financial StatementsNote 1. Organization and Summary of Signi cant Accounting PoliciesOrganization

Summary of Signi cant Accounting Policies

Bank of Virginia (the “Bank”) was organized under the laws of the Commonwealth of Virginia to engage in a general banking business serving the communities in and around Chester eld County, Virginia. The Bank was in organization during the period from November 1, 2002, through January 11, 2004. The Bank commenced regular operations on January 12, 2004, and is a member of the Federal Reserve System, Federal Deposit Insurance Corporation and the Federal Home Loan Bank of Atlanta. The Bank is subject to the regulations of the Federal Reserve System and the State Corporation Commission of Virginia. Consequently, it undergoes periodic examinations by these regulatory authorities.

The accounting and reporting policies of the Bank are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. The more signi cant of these policies are summarized below.(a) Use of EstimatesIn preparing nancial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to signi cant change in the near term relate to the determination of the allowance for loan losses and the valuation of deferred tax assets.(b) Cash and Cash EquivalentsFor purposes of the statement of cash ows, cash and cash equivalents include cash on hand, amounts due from banks and federal funds sold. Generally, federal funds are purchased and sold for one day periods.(c) SecuritiesDebt securities that management has the positive intent and ability to hold to maturity are classi ed as “held to maturity” and recorded at amortized cost. Securities not classi ed as held to maturity, including equity securities with readily determinable fair values, are classi ed as “available for sale” and recorded at estimated fair value. The Bank classi es all securities as available for sale. Other restricted securities, such as Federal Reserve Bank stock, are carried at cost.Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are re ected in earnings as realized losses. In estimating other than temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the nancial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time suf cient to allow for any anticipated recovery in fair value. Gains and losses on the sale of securities are recorded on the trade date and are determined using the speci c identi cation method.(d) LoansThe Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by commercial loans throughout the greater Richmond, Virginia metropolitan area. The ability of the Bank’s debtors to honor their contracts is dependent upon numerous factors including the collateral performance, general economic conditions, as well as the underlying strength of borrowers and guarantors.


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Financial Instruments with Book Value Equal to Fair ValueThe book values of cash and due from banks, federal funds sold and purchased, interest receivable, and interest payable and other liabilities are considered to be equal to fair value as a result of the short-term nature of these items.

Securities Available for SaleFor securities available for sale, fair value is based on current market quotations, where available. If quoted market prices are not available, fair value has been based on the quoted price of similar instruments.

LoansThe estimated value of loans held for investment is measured based upon discounted future cash ows and using the current rates for similar loans.

DepositsDeposits without a stated maturity, including demand, interest-bearing demand, and savings accounts, are reported at their carrying value in accordance with FAS No. 107. No value has been assigned to the franchise value of these deposits. For other types of deposits with xed maturities, fair value has been estimated by discounting future cash ows based on interest rates currently being offered on deposits with similar characteristics and maturities.

Borrowings and Other IndebtednessFair value has been estimated based on interest rates currently available to the Bank for borrowings with similar characteristics and maturities.

Commitments to Extend Credit, Standby Letters of Credit, and Financial GuaranteesFair values for off-balance-sheet, credit-related nancial 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 December 31, 2008 and 2007, the fair value of loan commitments and standby letters of credit was deemed to be immaterial and therefore are not included.

The Bank adopted SFAS No. 157, “Fair Value Measurements” (SFAS 157), on January 1, 2008 to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. SFAS 157 clari es that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

2008 2007 Carrying Carrying Amount Fair Value Amount Fair Value Assets: (Amounts in Thousands) (Amounts in Thousands) Cash and cash equivalents $ 2,651 $ 2,651 $ 8,955 $ 8,955 Securities available for sale 39,474 39,474 36,442 36,442 Loans held for investment 152,962 153,010 130,805 131,719 Interest receivable 865 865 858 858 Liabilities: Demand deposits 12,484 12,484 13,021 13,021 Savings and interest-bearing demand deposits 18,770 18,770 17,123 17,123 Time deposits 139,757 141,066 124,741 125,507 Interest payable 825 825 813 813 Federal Funds purchased 176 176 - - FHLB borrowings 15,000 15,152 10,000 10,008

Statements of Cash Flows

Years ended December 31, 2008 and 2007 2008 2007 Cash Flows From Operating Activities: Reconciliation of net income to net cash provided by operating activities: Net (loss) income $ (1,314,595) $ 506,496 Net amortization (accretion) of discount on investment securities 43,826 (116,582) Depreciation and amortization 341,937 225,830 Provision for loan losses 1,764,325 345,534 Net gain on available for sale securities (186,697) (6,235) Stock-based compensation expense 12,290 62,520 Increase in accrued interest receivable (6,777) (291,583) Increase in other assets (319,928) (20,475) Increase in accrued expense other liabilities 88,756 359,711

Net cash provided by operating activities 423,137 1,211,475

Cash Flows from Investing Activities: Purchases of securities available for sale (43,080,078) Net change in restricted securities (335,750) (205,400) Sales of available for sale securities 34,519,557 1,236,485 Maturities and calls of available for sales securities - 11,945,000 Payments on mortgage-backed securities 5,285,593 1,694,777 Net increase in loans (23,920,924) Purchases of premises and equipment (498,513)

Net cash (used in) investing activities (28,030,115)

Cash Flows from Financing Activities: Net increase (decrease) in demand, savings, interest-bearing checking and money market deposits 1,110,596 5,416,534 Net increase in time deposits 15,016,341 37,994,730 Net proceeds from FHLB borrowings 5,176,000 5,000,000

Net cash provided by nancing activities 21,302,937 48,411,264

Net increase (decrease) in cash and cash equivalents (6,304,041) 413,546Cash and cash equivalents at beginning of year 8,954,735 8,541,189Cash and cash equivalents at end of year $ 2,650,694 $ 8,954,735Supplemental Disclosures of Cash Flow Information Cash payments for interest $ 6,951,209 $ 5,991,716Supplemental Disclosures of Noncash Investing Activities Fair value adjustment for securities $ (386,096) $ 373,287 Other real estate owned transferred from loans $ 308,019 -


(159,117)

(11,776)

(97,248)

(27,905,758)

1,694,777 (34,067,667)

(1,906,630)


10


27

(20,475)

(205,400)

(49,209,193)

In February of 2008, the FASB issued Staff Position No. 157-2 (FSP 157-2) which delayed the effective date of SFAS 157 for certain non nancial assets and non nancial liabilities except for those items that are recognized or disclosed at fair value in the nancial statements on a recurring basis. FSP 157-2 defers the effective date of SFAS 157 for such non nancial assets and non nancial liabilities to scal years beginning after November 15, 2008, and interim periods within those scal years. Thus, the Bank has only partially applied SFAS 157. Those items affected by FSP 157-2 include other real estate owned (OREO), goodwill and core deposit intangibles.

In October of 2008, the FASB issued Staff Position No. 157-3 (FSP 157-3) to clarify the application of SFAS 157 in a market that is not active and to provide key considerations in determining the fair value of a nancial asset when the market for that nancial asset is not active. FSP 157-3 was effective upon issuance, including prior periods for which nancials statements were not issued.

SFAS 157 speci es a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs re ect market data obtained from independent sources, while unobservable inputs re ect the Bank’s market assumptions. The three levels of the fair value hierarchy under SFAS 157 based on these two types of inputs are as follows:

Level 1 – Valuation is based on quoted prices in active markets for identical assets and liabilities. Level 2 –Valuation is based on observable inputs including quoted prices in active markets for similar assets and liabilities, quoted prices for identical or similar assets and liabilities in less active markets, and model-based valuation techniques for which signi cant assumptions can be derived primarily from or corroborated by observable data in the market.

Level 3 – Valuation is based on model-based techniques that use one or more signi cant inputs or assumptions that are unobservable in the market.

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

Securities available for saleSecurities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which signi cant 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).

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

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


Securities available for sale $ 39,474 $ - $ 39,474 $ -


28

Statements of Changes in Stockholders’ EquityYears ended December 31, 2008 and 2007



Comprehensive Income:

Net income - - 506,496 - 506,496


available for sale - - - 385,063 385,063

Reclassi cation adjustment - - - (11,776) (6,235)

Other comprehensive income - - - 373,287 373,287




Comprehensive income:

Net income - - (1,314,595) -


available for sale - - - (199,399) -

Reclassi cation adjustment - - - (186,697)

Other comprehensive income (386,096) 373,287




(386,096)

CommonStock

AdditionalPaid-inCapital

RetainedDe cit

AccumulatedOther

Compre-hensive

Income (Loss) Total


9

(11,776)

(1,314,595)

(186,697)

(1,700,691)

(16,316,021)

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

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 Bank 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 signi cant, or the net book value on the applicable business’ nancial statements if not considered signi cant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on nancial 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 Bank’s Statements of Income.

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


Impaired loans $ 1,500 $ - $ - $ 1,500

(199,399)

Statements of Operations Years ended December 31, 2008 and 2007

2008 2007Interest income

Interest and fees on loans $10,220,810 $9,526,583

Investment securities 2,141,546 1,494,000

Federal funds sold and deposits with banks 65,115 359,886

Total interest income 12,147,471 11,380,469

Interest expense

Interest on deposits 6,432,811 5,868,301

Interest on federal funds purchased 22,435 5,052

Interest on FHLB borrowings 510,623 315,609

Total interest expense 6,965,869 6,188,962

Net interest income 5,461,602 5,191,507

Provision for loan losses 1,764,325 345,534

Net interest income after provision for loan losses 3,697,277 4,845,973

Noninterest income

Service charges on deposit accounts 206,456 121,619

Net gain on available for sale securities 186,697 11,776

Other fee income 140,318 86,057

Total noninterest income 533,471 219,452

Noninterest expense

Salaries and employee bene ts 3,110,236 2,709,305

Occupancy expense 410,422 319,740

Equipment expense 318,098 208,382

Data processing 457,809 351,517

Marketing expense 171,093 144,876

Legal and professional 239,444 146,791

Bank franchise tax 150,090 131,393

Other operating expenses 688,051 546,925

Total noninterest expense 5,545,243 4,558,929

Net income $(1,314,495) $ 506,496

Basic earnings per share $ (0.43) $ 0.17

Diluted earnings per share $ (0.43) $ 0.17

Weighted average shares outstanding, basic 3,031,866 3,031,866

Weighted average shares outstanding, diluted 3,031,866 3,032,355



829

2008 March 31 June 30 Sept 30 Dec 31Interest income $3,149,148 $3,043,803 $3,132,277 $3,102,243 Interest expense 1,884,389 1,723,643 1,694,484 1,663,353 Net interest income 1,264,759 1,320,160 1,437,793 1,438,890 Provision for loan losses 113,251 30,000 105,574 1,515,500 Net interest income after provision for loan losses 1,151,508 1,290,160 1,332,219 (76,610) Other income 84,609 83,945 99,264 78,956 Securities gains 55,096 68,568 25,405 37,628 Other expenses 1,380,226 1,386,194 1,339,581 1,439,342 Income before income taxes (89,013) 56,479 117,307 (1,399,368) Income taxes - - - - Net income $ (89,013) 56,479 117,307 (1,399,368) Basic earnings per share $ 0.03 $ 0.02 $ 0.04 $ (0.46) Diluted earnings per share $ 0.03 $ 0.02 $ 0.04 $ (0.46) Dividends $ - $ - $ - $ - Weighted-average basic shares 3,031,866 3,031,866 3,031,866 3,031,866 Weighted-average diluted shares 3,031,866 3,033,353 3,031,866 3,031,866

Note 13. Supplemental Quarterly Financial Data (Unaudited)Quarterly Earnings Summary

2007 March 31 June 30 Sept 30 Dec 31Interest income $2,507,455 $2,766,332 $2,938,774 $3,167,908 Interest expense 1,353,316 1,503,057 1,608,529 1,724,060 Net interest income 1,154,139 1,263,275 1,330,245 1,443,848 Provision for loan losses 86,837 104,928 55,404 98,365 Net interest income after provision for loan losses 1,067,302 1,158,347 1,274,841 1,345,483 Other income 39,506 52,526 52,628 63,016 Securities gains - - 460 11,316 Other expenses 1,001,853 1,091,971 1,139,233 1,325,872 Income before income taxes 104,955 118,902 188,696 93,943 Income taxes - - - - Net income $ 104,955 $ 118,902 $ 188,696 $ 93,943 Basic earnings per share $ 0.03 $ 0.04 $ 0.06 $ 0.03 Diluted earnings per share $ 0.03 $ 0.04 $ 0.06 $ 0.03 Dividends $ - $ - $ - $ - Weighted-average basic shares 3,031,866 3,031,866 3,031,866 3,031,866 Weighted-average diluted shares 3,032,137 3,033,550 3,031,866 3,031,866

Balance Sheets At December 31,

Assets 2008 2007

Cash and due from banks $ 2,608,500 $ 4,183,359

Federal funds sold and interest-bearing deposits with banks 42,194 4,771,376

Total cash and cash equivalents 2,650,694 8,954,735

Securities available for sale, at fair market value 39,474,175 36,442,472

Restricted securities 1,534,550 1,198,800

Loans, net of allowance for loan losses of $2,942,988 and

$1,276,726 in 2008 and 2007, respectively 152,962,046 130,805,447

Premises and equipment, net 5,688,585 5,532,009

Accrued interest receivable 864,630 857,853

Other real estate owned 308,019 -

Other assets 229,220 217,311

Total assets $203,711,919 $184,008,627

Liabilities and Stockholders’ Equity

Deposits

Noninterest-bearing $ 12,483,762 $ 13,020,632

Savings and interest-bearing demand 18,770,259 17,122,793

Time, $100,000 and over 55,939,332 46,155,151

Other time 83,818,330 78,586,170

Total deposits 171,011,683 154,884,746

Accrued expenses and other liabilities 1,208,215 1,119,459

FHLB Borrowings 15,000,000 10,000,000

Federal funds purchased 176,000 -

Total liabilities 187,395,898 166,004,205

Stockholders’ Equity

Preferred stock, $5 par value, 5,000,000 shares authorized, none issued - -

Common stock, $2.50 par value, 40,000,000 shares authorized, 3,031,866

shares issued and outstanding in 2008 and 2007, respectively 7,579,665 7,579,665

Additional paid-in capital 14,705,508 14,693,218

Retained de cit (5,913,941)

Accumulated other comprehensive income (loss) (55,211) 330,885

Total stockholders’ equity 16,316,021 18,004,422

Total liabilities and stockholders’ equity $203,711,919 $184,008,627



7

(4,599,346)

BANK OF VIRGINIA

Of cers, Managers And Directors Of cers and Managers Frank Bell, III President & Chief Executive Of cerDirector

Henry “Hank” E. RichesonExecutive Vice PresidentChairman of the Board

Kenneth P. Mulkey Senior Vice President, Chief Financial Of cer & Chief Operating Of cerSecretary of the Board

Bruce T. Brockwell Senior Vice President Chief Credit Of cer

Ann-Cabell WilliamsSenior Vice President Retail Banking Executive

Thomas L. Adams Vice PresidentCommercial Loan Of cer

T. Rene’ MetzVice PresidentConstruction Loan Of cer

Scott T. RoweVice PresidentCommercial Loan Of cer

Directors Vernon E. LaPrade, Jr. Chairman EmeritusPresidentModel Realty Incorporated

Henry “Hank” E. RichesonChairman of the BoardBank of Virginia

Frank Bell, III President & Chief Executive Of cerBank of Virginia

G. Waddy GarrettPresidentGWG Financial, LLC

Thomas L. GordonSenior PartnerGordon, Dodson, Gordon & Rowlett, Attorneys at Law

J. Michael JarvisPresidentCharter Leasing Corporation

Claiborne G. Thomasson PresidentDiversi ed Restaurant Management & Consulting Incorporated

Nancy R. CoffmanVice PresidentHuman Resources

Ellen L. AllenVice PresidentLoan Operations Manager

Jane H. WagnerAssistant Vice President Small Business Loan Of cer

Donald “DJ” Seeterlin Assistant Vice PresidentInformation Technology &Security

Christina R. AllenBank Of cerLoan Processing Manager

Kimberly D. Norwood Bank Of cer Deposit Operations Manager

Michelle M. HastingsBank Of cerDirector of Marketing

Emmeline A. SullivanBank Of cerBranch Operations Manager

Amanda WilsonBranch Of cerBranch ManagerRetail Support ManagerSandra L. KrajacichAssistant Vice PresidentManager-Main Of ce

Tammy F. FergusonBranch Of cerManager-Chester Of ce

Raleigh C. Hobson, IIIBranch Of cerManager-Patterson Of ce

Sandra D. CreechBranch ManagerWinterpock Of ce

Janis L. HookBranch ManagerBranchway Of ce

30


Certi ed Public Accountants and Consultants


To the Board of Directors and ShareholdersBank of VirginiaMidlothian, Virginia

We have audited the accompanying balance sheets of Bank of Virginia as of December 31, 2008 and 2007, and the related consolidated statements of operations, changes in stockholder’s equity, and cash flows for the years ended December 31, 2008 and 2007. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bank of Virginia as of December 31, 2008 and 2007, and the results of its operations and its cash flows for the years ended December 31, 2008 and 2007, in conformity with U.S. generally accepted accounting principles.

We were not engaged to examine management’s assessment of the effectiveness of Bank of Virginia’s internal control over financial reporting as of December 31, 2008, included in the accompanying Management’s Annual Report on Internal Control Over Financial Reporting and, accordingly, we do not express an opinion thereon.

Winchester, VirginiaMarch 30, 2009

6

BANK OF VIRGINIA

Notes

BANK OF VIRGINIA

31

Notes Management’s Report on Internal Control Over Financial Reporting

Management of the Bank is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Management regularly monitors its internal control over financial reporting and takes appropriate action to correct any deficiencies that may be identified.

Management assessed the Bank’s internal control over financial reporting as of December 31, 2008. This assessment was based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, management concluded that the Bank maintained effective internal control over financial reporting as of December 31, 2008.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Further, because of changes in conditions, internal control effectiveness may vary over time.

This annual report does not include an attestation report of the Bank’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Bank’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Bank to provide only management’s report in this annual report.

Frank Bell, III Kenneth P. MulkeyPresident & Chief Executive Officer Senior Vice President & Chief Financial Officer

March 31, 2009

Frank Bell, III Kenneth P. MulkeySenior Vice President & Chief

5

BANK OF VIRGINIA

32

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Table of Contents

Selected Financial Data ....................................................................................................................1

Letter to Shareholders ......................................................................................................................2

Stockholder and Investor Information ...........................................................................................4

Management’s Report on Internal Control Over Financial Reporting .......................................5

Report of Independent Registered Public Accounting Firm .......................................................6

Balance Sheets ...................................................................................................................................7

Statements of Operations ................................................................................................................8

Statements of Changes in Stockholders’ Equity ..........................................................................9

Statements of Cash Flows ............................................................................................................. 10

Notes to Financial Statements ..................................................................................................... 11

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2008 annualreport

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