VALLEY FINANCIAL CORP /VA/ - FORM 10-Q

Attached files

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EX-3.1 - BYLAWS - VALLEY FINANCIAL CORP /VA/	ex31.htm
EX-32.1 - VALLEY FINANCIAL CORP /VA/	ex321.htm
EX-31.1 - VALLEY FINANCIAL CORP /VA/	ex311.htm
EX-32.2 - VALLEY FINANCIAL CORP /VA/	ex322.htm
EX-31.2 - VALLEY FINANCIAL CORP /VA/	ex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 2011

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from _____________________________to_____________________________________

Commission File Number: 000-28342

VALLEY FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

VIRGINIA (State or other jurisdiction of incorporation or organization)		54-1702380 (I.R.S. Employer Identification No.)

36 Church Avenue, S.W. Roanoke, Virginia (Address of principal executive offices)		24011 (Zip Code)

(540) 342-2265

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

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

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

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

Large accelerated filer o Accelerated filer o

Non-accelerated filer o (Do not check if a smaller reporting company) Smaller reporting company x

Indicate by checkmark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act.)

Yes o No x

At May 11, 2011, 4,697,256 shares of common stock, no par value, of the registrant were outstanding.

VALLEY FINANCIAL CORPORATION

FORM 10-Q

March 31, 2011

TABLE OF CONTENTS


Part I. FINANCIAL INFORMATION

	Item 1	Financial Statements
		Consolidated Balance Sheets	4
		Consolidated Statements of Operations	5
		Consolidated Statements of Cash Flows	6
		Notes to Consolidated Financial Statements	7

	Item 2	Management's Discussion and Analysis of Financial Condition and Results of Operations	26

	Item 3	Quantitative and Qualitative Disclosures about Market Risk	33

	Item 4	Controls and Procedures	34

Part II. OTHER INFORMATION

	Item 1	Legal Proceedings	34
	Item 1A	Risk Factors	34
	Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	34
	Item 3	Defaults Upon Senior Securities	34
	Item 4	(Removed and Reserved)	34
	Item 5	Other Information	35
	Item 6	Exhibits	35

SIGNATURES			36

EXHIBITS INDEX			37

CERTIFICATIONS			45

Forward-Looking and Cautionary Statements

The Private Securities Litigation Reform Act of 1995 (the “1995 Act”) provides a safe harbor for forward-looking statements made by or on our behalf. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of our management and on information available at the time these statements and disclosures were prepared.

This report includes and incorporates by reference forward-looking statements within the meaning of the 1995 Act. These statements are included throughout this report, and in the documents incorporated by reference in this report, and relate to, among other things, projections of revenues, earnings, earnings per share, cash flows, capital expenditures, or other financial items, expectations regarding acquisitions, discussions of estimated future revenue enhancements, potential dispositions, and changes in interest rates. These statements also relate to our business strategy, goals and expectations concerning our market position, future operations, margins, profitability, liquidity, and capital resources. The words “believe”, “anticipate”, “could”, “estimate”, “expect”, “intend”, “may”, “plan”, “predict”, “project”, “will”, and similar terms and phrases identify forward-looking statements in this report and in the documents incorporated by reference in this report.

Although we believe the assumptions upon which these forward-looking statements are based are reasonable, any of these assumptions could prove to be inaccurate and the forward-looking statements based on these assumptions could be incorrect. Our operations involve risks and uncertainties, many of which are outside of our control, and any one of which, or a combination of which, could materially affect our results of operations and whether the forward-looking statements ultimately prove to be correct.

Actual results and trends in the future may differ materially from those suggested or implied by the forward-looking statements depending on a number of factors. Factors that may cause actual results to differ materially from those expected include the following:

•

General economic conditions may deteriorate and negatively impact the ability of borrowers to repay loans and depositors to maintain balances;

•

General decline in the residential real estate construction and finance market;

•

Decline in market value of real estate in the Company’s markets;

•

Changes in interest rates could reduce net interest income and/or the borrower’s ability to repay loans;

•

Competitive pressures among financial institutions may reduce yields and profitability;

•

Legislative or regulatory changes, including changes in accounting standards, may adversely affect the businesses that the Company is engaged in;


	•		Increased regulatory supervision could limit our ability to grow and could require considerable time and attention of our management and board of directors;

•

New products developed or new methods of delivering products could result in a reduction in business and income for the Company;

•

The Company’s ability to continue to improve operating efficiencies;

•

Natural events and acts of God such as earthquakes, fires and floods;

•

Loss or retirement of key executives; and

•

Adverse changes may occur in the securities market.

These risks and uncertainties should be considered in evaluating the forward-looking statements contained herein. We caution readers not to place undue reliance on those statements, which speak only as of the date of this report.

PART 1 – FINANCIAL INFORMATION

Item 1. Financial Statements.

VALLEY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(In 000s, except share and share data)

	(Unaudited) 3/31/11			(Audited) 12/31/10
Assets
Cash and due from banks	$	5,651		$	4,318
Interest-bearing deposits in banks		63,450			19,994
Total cash and cash equivalents		69,101			24,312

Securities available-for-sale		143,073			145,894
Securities held-to-maturity (fair value: 3/31/11: $6,906 ; 12/31/10: $7,868)		6,640			7,634
Restricted equity securities		5,661			5,661
Loans, net of allowance for loan losses, 3/31/11: $10,500 ; 12/31/10: $11,003		525,558			533,291
Foreclosed assets		15,887			16,081
Premises and equipment, net		7,709			7,736
Bank owned life insurance		14,618			14,475
Accrued interest receivable		2,555			2,274
Other assets		8,601			10,230
Total assets	$	799,403		$	767,588


Liabilities and Shareholders’ Equity
Liabilities:
Noninterest-bearing deposits	$	17,039		$	17,768
Interest-bearing deposits		639,706			609,644
Total deposits		656,745			627,412

Federal funds purchased and securities sold under agreements to repurchase		17,558			17,296
Short-term borrowings		15,000			5,000
Long-term borrowings		33,000			43,000
Junior subordinated debentures		16,496			16,496
Accrued interest payable		1,017			1,058
Other liabilities		3,762			3,398
Total liabilities		743,578			713,660

Commitments and contingencies		-			-

Shareholders' equity:
Preferred stock, no par value; 10,000,000 shares authorized; 16,019 shares issued and outstanding at March 31, 2011 and December 31, 2010, respectively		15,535			15,494
Common stock, no par value; 10,000,000 shares authorized; 4,697,256 shares issued and outstanding at March 31, 2011 and 4,680,251 shares issued and outstanding at December 31, 2010		23,598			23,542
Retained earnings		17,071			16,011
Accumulated other comprehensive loss		(379	)		(1,119	)
Total shareholders’ equity		55,825			53,928
Total liabilities and shareholders’ equity	$	799,403		$	767,588
See accompanying notes to consolidated financial statements

VALLEY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In 000s, except share and per share data)

	Three Months Ended
	3/31/11			3/31/10
Interest Income:
Interest and fees on loans	$	7,051		$	7,331
Interest on securities–taxable		1,013			716
Interest on securities-nontaxable		160			121
Interest on deposits in banks		19			19
Total interest income		8,243			8,187
Interest Expense:
Interest on deposits		1,794			2,428
Interest on short-term borrowings		33			258
Interest on long-term borrowings		396			423
Interest on junior subordinated debentures		93			89
Interest on federal funds purchased and securities sold
under agreements to repurchase		11			11
Total interest expense		2,327			3,209
Net interest income		5,916			4,978
Provision for loan losses		(436	)		208
Net interest income after provision for loan losses		6,352			4,770

Noninterest Income:
Service charges on deposit accounts		331			307
Income earned on bank owned life insurance		143			134
Mortgage fee income		67			16
Brokerage fee income, net		55			59
Realized gain on sale of securities		14			-
Other income		31			21
Total noninterest income		641			537

Noninterest Expense:
Compensation expense		2,347			1,985
Occupancy and equipment expense		393			397
Data processing expense		273			282
Advertising and marketing expense		79			117
Insurance expense		1,047			362
Audit expense		61			64
Legal expense		303			88
Franchise tax expense		124			123
Deposit expense		104			93
Loan expense		53			78
Computer software expense		89			97
Consulting expense		97			99
Foreclosed asset expense, net		199			78
Other expense		289			322
Total noninterest expense		5,458			4,185
Income before income taxes		1,535			1,122

Income tax expense		434			274
Net income	$	1,101		$	848
Preferred dividends and accretion of discounts on warrants		242			239
Net income available to common shareholders	$	859		$	609

Earnings per share
Basic earnings per common share	$	0.18		$	0.13
Diluted earnings per common share	$	0.18		$	0.13
Weighted average shares outstanding		4,688,286			4,680,251
Diluted average shares outstanding		4,714,961			4,685,799
Dividends declared per common share	$	-		$	-

See accompanying notes to the consolidated financial statements

VALLEY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In 000s, except share and per share data)

	Three Months Ended
	3/31/11			3/31/10
Cash flows from operating activities
Net income	$	1,101		$	848
Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities:
Provision for loan losses		(436	)		208
Depreciation and amortization of bank premises, equipment and software		186			206
Stock compensation expense		56			46
(Increase) decrease in deferred income tax		432			(113	)
Net gains on sale of securities		(14	)		-
Net (gains) losses on foreclosed and repossessed assets		88			(18	)
Net losses on equipment disposals		23			5
Net amortization of bond premiums/discounts		380			159
(Increase) decrease in unearned loan fees		1			(28	)
(Increase) decrease in accrued interest receivable		(281	)		22
(Increase) decrease in other assets		1,177			(420	)
Increase in value of life insurance contracts		(143	)		(134	)
Decrease in accrued interest payable		(41	)		(717	)
Increase in other liabilities		364			1,947
Net cash and cash equivalents provided by operating activities		2,893			2,011

Cash flows from investing activities
Purchases of bank premises, equipment and software		(162	)		(79	)
Purchases of securities available-for-sale		(12,897	)		(14,829	)
Proceeds from sales/calls/paydowns/maturities of securities available-for-sale		16,091			9,119
Proceeds from sales/calls/paydowns/maturities of securities held-to-maturity		995			503
Proceeds from sale of foreclosed and repossessed assets		1,708			76
Capitalized costs related to foreclosed assets		-			(398	)
Decrease in loans, net		6,566			1,754
Net cash and cash equivalents provided by / (used in) investing activities		12,301			(3,854	)

Cash flows from financing activities
Increase (decrease) in non-interest bearing deposits		(729	)		3,159
Increase in interest bearing deposits		30,062			22,379
Proceeds from short-term borrowings		15,000			-
Principal repayments of short-term borrowings		(5,000	)		-
Principal repayments of long-term borrowings		(10,000	)		-
Increase (decrease) in securities sold under agreements to repurchase		262			(3,336	)
Cash dividends paid		-			(200	)
Net cash and cash equivalents provided by financing activities		29,595			22,002
Net increase in cash and cash equivalents		44,789			20,159

Cash and cash equivalents at beginning of year		24,312			31,878
Cash and cash equivalents at end of year	$	69,101		$	52,037

Supplemental disclosure of cash flow information
Cash paid during the period for interest	$	2,368		$	3,926
Cash paid during the period for income taxes	$	-		$	-

Noncash financing and investing activities
Transfer of loans to foreclosed property	$	1,602		$	405
Reclassification of borrowings from long-term to short-term	$	-		$	5,000

See accompanying notes to consolidated financial statements.

VALLEY FINANCIAL CORPORATION

Notes to Consolidated Financial Statements

March 31, 2011 (Unaudited)

(In thousands, except share and per share data)

Note 1. Organization and Summary of Significant Accounting Policies

Valley Financial Corporation (the "Company") was incorporated under the laws of the Commonwealth of Virginia on March 15, 1994, primarily to serve as a holding company for Valley Bank (the "Bank"), which opened for business on May 15, 1995. The Company's fiscal year end is December 31.

The consolidated financial statements of the Company conform to generally accepted accounting principles and to general banking industry practices. The interim period consolidated financial statements are unaudited; however, in the opinion of management, all adjustments of a normal recurring nature which are necessary for a fair presentation of the consolidated financial statements herein have been included. The consolidated financial statements herein should be read in conjunction with the Company's 2010 Annual Report on Form 10-K.

Interim financial performance is not necessarily indicative of performance for the full year.

The Company reports its activities as a single business segment.

Use of Estimates

The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Subsequent Events

In preparing these financial statements, the Company has evaluated events and transactions for potential recognition or disclosure.

Note 2. Securities

The carrying values, unrealized gains, unrealized losses, and approximate fair values of available-for-sale and held-to-maturity investment securities at March 31, 2011 are shown in the tables below. As of March 31, 2011, investments (including both available-for-sale and held-to-maturity) and restricted equity securities with amortized costs and fair values of $72,874 and $73,109 respectively, were pledged as collateral for public deposits, a line of credit available from the Federal Home Loan Bank, customer sweep accounts, and for other purposes as required or permitted by law.

The amortized costs, gross unrealized gains and losses, and approximate fair values of securities available-for-sale (“AFS”) as of March 31, 2011 and December 31, 2010 were as follows:

	Amortized Costs		Unrealized Gains		Unrealized Losses			Fair Values
March 31, 2011
U.S. Government and federal agency	$	6,669	$	90	$	(145	)	$	6,614
Government-sponsored enterprises		41,694		14		(883	)		40,825
Mortgage-backed securities		69,734		551		(414	)		69,871
Collateralized mortgage obligations		10,165		370		(1	)		10,534
States and political subdivisions		15,385		137		(293	)		15,229
	$	143,647	$	1,162	$	(1,736	)	$	143,073

December 31, 2010
U.S. Government and federal agency	$	6,892	$	71	$	(143	)	$	6,820
Government-sponsored enterprises		34,695		-		(1,198	)		33,497
Mortgage-backed securities		76,724		376		(889	)		76,211
Collateralized mortgage obligations		13,599		533		(1	)		14,131
States and political subdivisions		15,680		93		(538	)		15,235
	$	147,590	$	1,073	$	(2,769	)	$	145,894

* Such as FNMA, FHLMC and FHLB.

The amortized costs, gross unrealized gains and losses, and approximate fair values of securities held-to-maturity (“HTM”) as of March 31, 2011 and December 31, 2010 were as follows:

	Amortized Costs		Unrealized Gains		Unrealized Losses			Fair Values
March 31, 2011
Mortgage-backed securities	$	479	$	27	$	-		$	506
Collateralized mortgage obligations		3,400		189		-			3,589
States and political subdivisions		2,761		78		(28	)		2,811
	$	6,640	$	294	$	(28	)	$	6,906
December 31, 2010
Mortgage-backed securities	$	573	$	30	$	-		$	603
Collateralized mortgage obligations		3,707		152		-			3,859
States and political subdivisions		3,354		85		(33	)		3,406
	$	7,634	$	267	$	(33	)	$	7,868

The amortized costs and approximate fair values of our total private-label collateralized mortgage obligations were $3,135 and $3,307 as of March 31, 2011. The amortized costs and approximate fair values of our total private-label collateralized mortgage obligations were $4,392 and $4,561 as of December 31, 2010.

The following table presents the maturity ranges of securities available-for-sale and held-to-maturity as of March 31, 2011 and the weighted average yields of such securities. Maturities may differ from scheduled maturities on mortgage-backed securities and collateralized mortgage obligations because the mortgages underlying the securities may be repaid prior to the scheduled maturity date. Maturities on all other securities are based on the contractual maturity. The weighted average yields are calculated on the basis of the cost and effective yields weighted for the scheduled maturity of each security. Weighted average yields on tax-exempt obligations have been computed on a taxable equivalent basis using a tax rate of 34%.

INVESTMENT PORTFOLIO – MATURITY DISTRIBUTION

	Available for Sale							Held to Maturity
In thousands	Amortized Costs		Fair Value		Yield			Amortized Costs		Fair Value		Yield
U.S. Government and federal agency:
Within one year	$	15	$	15		5.86	%	$	-	$	-		-
After one but within five years		200		202		1.38	%		-		-		-
After five but within ten years		5,065		5,058		3.44	%		-		-		-
After ten years		1,389		1,339		4.10	%		-		-		-
Government-sponsored enterprises:
After five but within ten years		8,998		8,835		4.06	%		-		-		-
After ten years		32,696		31,990		4.85	%		-		-		-
Obligations of states and subdivisions:
After one but within five years		-		-		-			599		630		3.90	%
After five but within ten years		1,280		1,304		4.66	%		1,104		1,128		4.93	%
After ten years		14,105		13,925		6.25	%		1,058		1,053		6.72	%
Mortgage-backed securities		69,734		69,871		2.87	%		479		506		4.31	%
Collateralized mortgage obligations		10,165		10,534		3.87	%		3,400		3,589		5.56	%
Total	$	143,647	$	143,073				$	6,640	$	6,906

Total Securities by Maturity Period *
Within one year	$	15	$	15				$	-	$	-
After one but within five years	$	200	$	202				$	599	$	630
After five but within ten years	$	15,343	$	15,197				$	1,104	$	1,128
After ten years	$	48,190	$	47,254				$	1,058	$	1,053
Mortgage-backed securities	$	69,734	$	69,871				$	479	$	506
Collateralized mortgage obligations	$	10,165	$	10,534				$	3,400	$	3,589
Total by Maturity Period	$	143,647	$	143,073				$	6,640	$	6,906

* Maturities on mortgage-backed securities and collateralized mortgage obligations are not presented in this table because maturities may differ substantially from contractual terms due to early repayments of principal.

The following tables detail unrealized losses and related fair values in the Bank’s available-for-sale and held-to-maturity investment securities portfolios. This information is aggregated by the length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2011 and December 31, 2010, respectively.

Temporarily Impaired Securities in AFS Portfolio

In thousands	Less than 12 months					Greater than 12 months					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
March 31, 2011	Value		Losses			Value		Losses			Value		Losses
US Government and federal agency	$	4,258	$	(145	)	$	-	$	-		$	4,258	$	(145	)
Government-sponsored enterprises*		33,813		(883	)		-		-			33,813		(883	)
Mortgage-backed securities		34,947		(414	)		21		(1	)		34,968		(415	)
State and political subdivisions		9,617		(286	)		666		(7	)		10,283		(293	)
Total	$	82,635	$	(1,728	)	$	687	$	(8	)	$	83,322	$	(1,736	)

December 31, 2010
US Government and federal agency	$	4,336	$	(143	)	$	-	$	-		$	4,336	$	(143	)
Government-sponsored enterprises*		30,496		(1,198	)		-		-			30,496		(1,198	)
Mortgage-backed securities		44,768		(889	)		23		(1	)		44,791		(890	)
State and political subdivisions		11,887		(538	)		-		-			11,887		(538	)
Total	$	91,487	$	(2,768	)	$	23	$	(1	)	$	91,510	$	(2,769	)

Temporarily Impaired Securities in HTM Portfolio

In thousands	Less than 12 months					Greater than 12 months				Total
	Fair		Unrealized			Fair		Unrealized		Fair		Unrealized
March 31, 2011	Value		Losses			Value		Losses		Value		Losses
State and political subdivisions	$	237	$	(28	)	$	-	$	-	$	237	$	(28	)
Total	$	237	$	(28	)	$	-	$	-	$	237	$	(28	)

December 31, 2010
State and political subdivisions	$	230	$	(33	)	$	-	$	-	$	230	$	(33	)
Total	$	230	$	(33	)	$	-	$	-	$	230	$	(33	)

Management considers the nature of the investment, the underlying causes of the decline in the market value and the severity and duration of the decline in market value in determining if impairment is other than temporary. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Based upon this evaluation at March 31, 2011, there are three securities in the portfolio with unrealized losses for a period greater than 12 months. We have analyzed each individual security for Other Than Temporary Impairment (“OTTI”) purposes by reviewing delinquencies, loan-to-value ratios, and credit quality and concluded that all unrealized losses presented in the tables above are not related to an issuer’s financial condition but are due to changes in the level of interest rates and no declines are deemed to be other than temporary in nature.

Note 3. Loans

The major components of loans in the consolidated balance sheets at March 31, 2011 and December 31, 2010 are as follows:

	3/31/11			12/31/10

Commercial	$	91,753		$	92,809
Real estate:
Construction and land development		55,030			57,865
Residential, 1-4 families		126,497			126,657
Commercial real estate		257,762			261,969
Consumer		4,729			4,707
Deferred loan fees		287			287
		536,058			544,294

Allowance for loan losses		(10,500	)		(11,003	)
Net Loans	$	525,558		$	533,291

Substantially all one-four family residential and commercial real estate loans collateralize the line of credit available from the Federal Home Loan Bank and substantially all commercial and construction loans collateralize the line of credit with the Federal Reserve Bank of Richmond Discount Window. The aggregate amount of deposit overdrafts that have been reclassified as loans and included in the consumer category in the above table as of March 31, 2011 and December 31, 2010 was $88 and $102, respectively.

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

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

Commercial real estate loans are subject to underwriting standards and processes similar to commercial and industrial loans, in addition to those of real estate loans. These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally largely dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate market or in the general economy. Management monitors and evaluates commercial real estate loans based on collateral and risk grade criteria. In addition, management tracks the level of owner-occupied commercial real estate loans versus income producing loans. At March 31, 2011, approximately 44% of the outstanding principal balance of the Company’s commercial real estate loans was secured by owner-occupied properties and 51% was secured by income-producing properties.

With respect to construction and development loans that the Company may originate from time to time, the Company generally requires the borrower to have had an existing relationship with the Company and have a proven record of success. Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based upon estimates of costs and value associated with the complete project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Company until permanent financing is obtained. These loans are closely monitored by recurring on-site inspections during the construction phase and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, governmental regulation of real property, general economic conditions and the

availability of long-term financing.

Residential real estate loans are secured by deeds of trust on 1-4 family residential properties. The Bank also serves as a broker for residential real estate loans placed in the secondary market. There are occasions when a borrower or the real estate does not qualify under secondary market criteria, but the loan request represents a reasonable credit risk. On these occasions, if the loan meets the Bank’s internal underwriting criteria, the loan will be closed and placed in the Company’s portfolio. Residential real estate loans carry risk associated with the continued credit-worthiness of the borrower and changes in the value of collateral.

The Company routinely makes consumer loans, both secured and unsecured, for financing automobiles, home improvements, education, and personal investments. The credit history, cash flow and character of individual borrowers is evaluated as a part of the credit decision. Loans used to purchase vehicles or other specific personal property and loans associated with real estate are usually secured with a lien on the subject vehicle or property. Negative changes in a customer’s financial circumstances due to a large number of factors, such as illness or loss of employment, can place the repayment of a consumer loan at risk. In addition, deterioration in collateral value can add risk to consumer loans.

Risk Management. It is the Company’s policy that loan portfolio credit risk shall be continually evaluated and categorized on a consistent basis. The Board of Directors recognizes that commercial, commercial real estate and construction lending involve varying degrees of risk, which must be identified, managed, and monitored through established risk rating procedures. Management’s ability to accurately segment the loan portfolio by the various degrees of risk enables the Bank to achieve the following objectives:

§	Assess the adequacy of the Allowance for Loan and Lease Losses

§	Identify and track high risk situations and ensure appropriate risk management

§	Conduct portfolio risk analysis and make informed portfolio planning and strategic decisions.

§	Provide risk profile information to management, regulators and independent accountants as requested in a timely manner.

There are three levels of accountability in the risk rating process:

Risk Identification - The primary responsibility for risk identification lies with the account officer. It is the account officer's responsibility for the initial and ongoing risk rating of all notes and commitments in his or her portfolio. The loan officer is the one individual who is closest to the credit relationship and is in the best position to identify changing risks. Account officers are required to continually review the risk ratings for their credit relationships and make timely adjustments, up or down, at the time the circumstances warrant a change. Account officers are responsible for ensuring that accurate and timely risk ratings are maintained at all times. Account officers are allowed a maximum 30-day period to assess current financial information (e.g. prepare credit analysis) which may influence the current risk rating. Account officers are required to review the risk ratings of loans assigned to their portfolios on a monthly basis and to certify to the accuracy of the ratings. Certifications are submitted to the Chief Credit Officer and Chief Lending Officer for review. All risk rating changes (upgrades and downgrades) must be approved by the Chief Credit Officer prior to submission for input onto the Fidelity Commercial Loan System.

Risk Supervision - In addition to the account officer’s process of assigning and managing risk ratings, the Chief Credit Officer is responsible for periodically reviewing the risk rating process employed by lending officers. Through credit administration, the Chief Credit Officer manages the credit process which, among other things, includes maintaining and managing the risk identification process. The Chief Credit Officer is responsible for the accuracy and timeliness of account officer risk ratings and has the authority to override account officer risk ratings and initiate rating changes, if warranted. Upgrades from a criticized or classified category to a pass category or upgrades within the criticized/classified categories require the approval of the Senior Loan Committee or Directors’ Loan Committee based upon aggregate exposure. Upgrades must be reported to the Directors' Loan Committee and Board of Directors at their next scheduled meetings.

Risk Monitoring - Valley Bank has a loan review program to provide an independent validation of portfolio quality. This independent review is intended to assess adherence to underwriting guidelines, proper credit analysis and documentation. In addition, the loan review process is required to test the integrity, accuracy, and timeliness of account officer risk ratings and to test the effectiveness of the credit administration function's controls over the risk identification process. Portfolio quality and risk rating accuracy will be evaluated during regularly scheduled portfolio reviews. Risk Management is required to report all loan review findings to the quarterly joint meeting of the Audit Committee and Directors’ Loan Committee.

Related party loans. In the ordinary course of business, the Company has granted loans to certain directors, executive officers, significant shareholders and their affiliates (collectively referred to as “related parties”). These loans were made on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other unaffiliated persons, and do not involve more than normal credit risk or present other unfavorable features.

Nonaccrual and Past Due Loans. Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be

unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. Loans will be placed on nonaccrual status automatically when principal or interest is past due 90 days or more, unless the loan is both well secured and in the process of collection. In this case, the loan will continue to accrue interest despite its past due status. When interest accrual is discontinued, all unpaid accrued interest is reversed and any payments received are applied to the outstanding principal balance. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Nonaccrual loans and an age analysis of past due loans, segregated by class of loans, were as follows:

In thousands	30 - 59 Days Past Due		60 - 89 Days Past Due		90 Days or More Past Due		Total Past Due and Accruing		Non-accruals		Current and Accruing		Total Loans
March 31, 2011
Commercial - Non Real Estate
Commercial & Industrial	$	1,174	$	-	$	-	$	1,174	$	1,892	$	87,706	$	90,772
Business Manager		-		-		-		-		561		420		981
Commercial Real Estate
Owner occupied		1,990		-		-		1,990		1,034		109,172		112,196
Income producing		-		-		-		-		808		129,826		130,634
Multifamily		-		-		-		-		140		14,792		14,932
Construction & Development
1 - 4 Family		-		-		679		679		-		20,595		21,274
Other		-		-		1,457		1,457		5,577		25,300		32,334
Farmland		-		-		-		-		-		1,422		1,422
Residential
Equity Lines		732		75		-		807		-		29,693		30,500
1 - 4 Family		964		-		-		964		1,749		88,232		90,945
Junior Liens		74		-		-		74		50		4,928		5,052
Consumer - Non Real Estate
Credit Cards		2		3		4		9		-		1,187		1,196
Other		28		-		-		28		-		3,505		3,533
Total	$	4,964	$	78	$	2,140		7,182	$	11,811	$	516,778	$	535,771

December 31, 2010
Commercial - Non Real Estate
Commercial & Industrial	$	6	$	-	$	-	$	6	$	1,873	$	89,166	$	91,045
Business Manager		-		-		-		-		-		1,762		1,762
Commercial Real Estate
Owner occupied		880		-		-		880		1,037		112,647		114,564
Income producing		29		-		474		503		969		131,179		132,651
Multifamily		-		-		-		-		140		14,901		15,041
Construction & Development
1 - 4 Family		-		679		-		679		-		17,154		17,833
Other		1,458		-		-		1,458		6,360		30,789		38,607
Farmland		-		-		-		-		-		1,426		1,426
Residential
Equity Lines		24		65		503		592		43		29,777		30,412
1 - 4 Family		878		112		1,265		2,255		1,820		87,210		91,285
Junior Liens		5		29		-		34		-		4,926		4,960
Consumer - Non Real Estate
Credit Cards		17		19		2		38		-		1,168		1,206
Other		43		3		-		46		-		3,456		3,502
Total	$	3,340	$	907	$	2,244	$	6,491	$	12,242	$	525,561	$	554,294

Nonaccrual loans totaled $29.7 million and loans past due more than ninety days and still accruing totaled $4 thousand as of March 31, 2010.

Had non-accrual loans performed in accordance with their original contract terms, the Company would have recognized additional interest income in the amount of $152 during the quarter ended March 31, 2011, $1,227 during the year ended December 31, 2010 and $418 during the quarter ended March 31, 2010. There was one restructured loan totaling $224 at March 31, 2011 and no restructured loans at March 31, 2010.

Impaired Loans. Impaired loans are identified by the Company as loans in which it is determined to be probable that the borrower will not make interest and principal payments according to the contract terms of the loan. In determining impaired loans, our credit administration department reviews past-due loans, examiner classifications, Bank classifications, and a selection of other loans to provide evidence as to whether the loan is impaired. All loans rated as substandard are evaluated for impairment by the Bank’s Allowances for Loan and Lease Losses (“ALLL”) Committee. Once classified as impaired, the ALLL Committee individually evaluates the total loan relationship, including a detailed collateral analysis, to determine the reserve appropriate for each one. Any potential loss exposure identified in the collateral analysis is set aside as a specific reserve (valuation allowance) in the allowance for loan lease losses. If the impaired loan is subsequently resolved and it is determined the reserve is no longer required, the specific reserve will be taken back into income on the income statement for the period the determination is made. Impaired loans, or portions thereof, are charged off when deemed uncollectible. Impaired loans as of March 31, 2011 and December 31, 2010 are set forth in the following table:

In thousands	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2011
With no related allowance:
Commercial - Non Real Estate
Commercial & Industrial	$	2,626	$	2,954	$	-	$	3,978	$	10
Business Manager		-		-		-		-		-
Commercial Real Estate
Owner occupied		12,098		12,108		-		12,192		172
Income producing		808		830		-		1,004		-
Multifamily		140		354		-		354		-
Construction & Development
1 - 4 Family		-		-		-		-		-
Other		3,827		3,964		-		4,639		-
Farmland		-		-		-		-		-
Consumer - Non Real Estate
Credit Cards		-		-		-		-		-
Other		-		-		-		-		-
Residential
Equity Lines		75		75		-		75		-
1st D/T		2,129		2,643		-		4,309		23
Junior Liens		70		70		-		70		-
Total loans with no allowance	$	21,773	$	22,998	$	-	$	26,621	$	205

With an allowance recorded:
Commercial - Non Real Estate
Commercial & Industrial	$	983		999		16		1,030		16
Business Manager		361		561		200		1,067		-
Construction & Development
1 - 4 Family		627		679		52		679		7
Other		2,062		4,092		1,145		4,092		15
Consumer - Non Real Estate
Other		18		24		6		26		-
Residential
1st D/T		651		701		50		703		10
Total loans with an allowance	$	4,702	$	7,056	$	1,469	$	7,597	$	48

Total:
Commercial – Non Real Estate		3,970		4,514		216		6,075		26
Commercial Real Estate		13,046		13,292		-		13,550		172
Construction & Development		6,516		8,735		1,197		9,410		22
Consumer – Non Real Estate		18		24		6		26		-
Residential		2,925		3,489		50		5,157		33
Totals	$	26,475	$	30,054	$	1,469	$	34,218	$	253

December 31, 2010
With no related allowance:
Commercial - Non Real Estate
Commercial & Industrial	$	2,644	$	3,676	$	-	$	2,293	$	36
Business Manager		-		-		-		-		-
Commercial Real Estate
Owner occupied		12,301		12,310		-		12,553		705
Income producing		1,801		1,912		-		1,295		58
Multifamily		140		354		-		229		-
Construction & Development
1 - 4 Family		679		679		-		639		26
Other		4,610		6,241		-		9,773		-
Farmland		-		-		-		-		-
Consumer - Non Real Estate
Credit Cards		-		-		-		-		-
Other		20		20		-		22		1
Residential
Equity Lines		597		597		-		667		22
1st D/T		3,966		4,477		-		4,233		166
Junior Liens		21		21		-		22		1
Total loans with no allowance	$	26,779	$	30,287	$	-	$	31,726	$	1,015

With an allowance recorded:
Commercial - Non Real Estate
Commercial & Industrial		1,029		1,045		16		1,168		73
Construction & Development
1 - 4 Family		3,388		3,863		463		5,341		179
Other		2,470		4,092		737		3,726		-
Residential
1st D/T		641		705		64		712		42
Total loans with an allowance	$	7,528	$	9,705	$	1,280	$	10,947	$	294

Total:
Commercial – Non Real Estate	$	3,673	$	4,721	$	16	$	3,461	$	109
Commercial Real Estate	$	14,242	$	14,576	$	-	$	14,077	$	763
Construction & Development	$	11,147	$	14,875	$	1,200	$	19,479	$	205
Consumer – Non Real Estate	$	20	$	20	$	-	$	22	$	1
Residential	$	5,225	$	5,800	$	64	$	5,634	$	231
Totals	$	34,307	$	39,992	$	1,280	$	42,673	$	1,309

Total impaired loans totaled $35.7 million as of March 31, 2010. Impaired loans without a valuation totaled $26.7 million, impaired loans with a valuation totaled $9.0 million. Cash basis interest income was $309 for the quarter ended March 31, 2011 and $1.4 million for the year ended December 31, 2010.

Credit Quality Indicators. The Company categorizes loans and leases into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation,

public information, and current economic trends, among other factors. This categorization is made on all commercial, commercial real estate and construction and development loans. The Company analyzes loans and leases individually by classifying the loans and leases as to credit risk. This analysis is performed on a quarterly basis. The Company uses the following definitions for risk ratings:

Special Mention. Loans and leases classified as special mention, while still adequately protected by the borrower’s capital adequacy and payment capability, exhibit distinct weakening trends and/or elevated levels of exposure to external conditions. If left unchecked or uncorrected, these potential weaknesses may result in deteriorated prospects of repayment. These exposures require management’s close attention so as to avoid becoming undue or unwarranted credit exposures.

Substandard. Loans and leases classified as substandard are inadequately protected by the borrower’s current financial condition and payment capability or of the collateral pledged, if any. Loans and leases so classified have a well-defined weakness or weaknesses that jeopardize the orderly repayment of debt. They are characterized by the distinct possibility that the bank will sustain some loss if the

deficiencies are not corrected.

Doubtful. Loans and leases classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or orderly repayment in full, on the basis of current existing facts, conditions and values, highly questionable and improbable. Possibility of loss is extremely high, but because of certain important and reasonably specific factors that may work to the advantage and strengthening of the exposure, its classification as an estimate loss is deferred until its more exact status may be determined. The Company’s practice is to charge-off the portion of the loan amount determined to be doubtful in the quarter that the determination is made if the repayment of the loan is collateral dependent.

Loss. Loans and leases classified as loss are considered to be non-collectible and of such little value that their continuance as bankable assets is not warranted. This does not mean the loan has absolutely no recovery value, but rather it is neither practical nor desirable to defer writing off the loan, even though partial recovery may be obtained in the future. Losses are taken in the period in which they surface as uncollectible.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass rated loans. As of March 31, 2011 and December 31, 2010, and based on the most recent analysis performed at those dates, the risk category of loans and leases is as follows:

Internal Risk Rating Grades In thousands	Pass		Special Mention		Substandard		Doubtful		Loss
March 31, 2011
Commercial - Non Real Estate
Commercial & Industrial	$	79,636	$	5,706	$	5,430	$	-	$	-
Business Manager		380		-		601		-		-
Commercial Real Estate
Owner occupied		88,969		3,372		19,855		-		-
Income producing		119,856		7,918		2,860		-		-
Multifamily		14,792		-		140		-		-
Construction & Development
1 - 4 Family		12,088		1,631		7,555		-		-
Other		16,174		599		15,561		-		-
Farmland		352		881		189		-		-
Totals	$	332,247	$	20,107	$	52,191	$	-	$	-

Total:
Commercial - Non Real Estate		80,016		5,706		6,031		-		-
Commercial Real Estate		223,617		11,290		22,855		-		-
Construction & Development		28,614		3,111		23,305		-		-
Totals	$	332,247	$	20,107	$	52,191	$	-	$	-

December 31, 2010
Commercial - Non Real Estate
Commercial & Industrial	$	78,132	$	6,637	$	6,278	$	-	$	-
Business Manager		416		-		1,346		-		-
Commercial Real Estate
Owner occupied		88,985		4,248		21,508		-		-
Income producing		120,851		7,556		3,780		-		-
Multifamily		14,901		-		140		-		-
Construction & Development
1 - 4 Family		5,162		1,178		11,493		-		-
Other		18,708		749		19,149		-		-
Farmland		352		883		191		-		-
Totals	$	327,507	$	21,251	$	63,885	$	-	$	-

Total:
Commercial - Non Real Estate	$	78,548	$	6,637	$	7,624	$	-	$	-
Commercial Real Estate	$	224,737	$	11,804	$	25,428	$	-	$	-
Construction & Development	$	24,222	$	2,810	$	30,833	$	-	$	-

Totals

327,507

21,251

63,885

Note 4. Allowance for Loan Losses

All consumer-related loans, including residential real estate and non-real estate are evaluated and monitored based upon payment activity. Once a consumer related loan becomes past due on a recurring basis, the Company will pull that loan out of the homogenized pool and evaluate it individually for impairment. At this time, the consumer-related loan may be placed on the Company’s internal watch list and risk rated either special mention or substandard, depending upon the individual circumstances.

Risk Based on Payment Activity	Performing				Non-Performing
In thousands	3/31/11		12/31/10		3/31/11		12/31/10
Residential
Equity Lines	$	30,500	$	29,866	$	-	$	546
1st D/T		88,972		88,200		1,973		3,085
Junior Liens		5,002		4,960		50		-
Consumer - Non Real Estate
Credit Cards		1,192		1,203		4		2
Other		3,533		3,502		-		-
Totals	$	129,199	$	127,731	$	2,027	$	3,633

Total:
Residential	$	124,474	$	123,026	$	2,023	$	3,631
Consumer		4,725		4,705		4		2
Totals	$	129,199	$	127,731	$	2,027	$	3,633

The allowance for possible loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company’s allowance for loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of the allowance for loan losses is designed to account for credit deterioration as it occurs. The provision for loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, criticized loans and net charge-offs or recoveries, among other factors. The provision for loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans.

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

The Company’s allowance for loan losses consists of three elements: (i) specific valuation allowances determined in accordance with accounting principles regarding receivables based on probable losses on specific loans; (ii) historical valuation allowances determined in accordance with accounting principles regarding contingencies based on historical loan loss experience for similar loans with similar characteristics and trends, adjusted, as necessary, to reflect the impact of current conditions; and (iii) general valuation allowances determined in accordance with accounting principles regarding contingencies based on general economic conditions and other qualitative risk factors both internal and external to the Company.

The allowances established for probable losses on specific loans are based on a regular analysis and evaluation of problem loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed at the relationship manager level for all commercial loans. When a loan is added to the internal watch list, the

ALLL Committee analyzes the loan to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance for loan losses to the loan. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed, collateral deficiencies, and economic conditions affecting the borrower’s industry, among other things.

Historical valuation allowances are calculated based on the historical loss experience of specific types of loans at the time they were charged-off. The Company calculates historical loss ratios for pools of similar loans with similar characteristics based on the proportion of actual charge-offs experienced to the total population of loans in the pool. The historical loss ratios are periodically updated based on actual charge-off experience. A historical valuation allowance is established for each pool of similar loans based upon the product of the historical loss ratio and the total dollar amount of the loans in the pool. The Company’s pools of similar loans include commercial and industrial loans, commercial real estate loans, construction and development loans, residential real estate loans, and consumer and other loans. General valuation allowances are based on general economic conditions and other qualitative risk factors both internal and external to the Company. In general, such valuation allowances are determined by evaluating, among other things: (i) levels and trends in credit quality; (ii) trends in the volume of loans; (iii) the experience, ability and effectiveness of the bank’s lending management and staff; (iv) local economic trends and conditions; (v) credit concentration risk; (vi) current industry conditions; (vii) real estate market conditions; (viii) and large relationship credit risk. Management evaluates the degree of risk that each one of these components has on the quality of the loan portfolio on a quarterly basis. Each component is determined to have either a high, moderate or low degree of risk. The results are then input into a “general allocation matrix” to determine an appropriate general valuation allowance. Loans identified as losses by management, internal loan review and/or regulatory examiners are charged-off.

Changes in the allowance for loan losses by segment are as follows:

In thousands	Beginning Balance		Charge-offs			Recoveries		Provision			Ending Balance
March 31, 2011
Commercial – Non Real Estate	$	1,356	$	-		$	1	$	163		$	1,520
Commercial Real Estate		3,651		-			5		(298	)		3,358
Construction/Development		3,806		-			-		190			3,996
Residential Real Estate		2,138		(43	)		-		(533	)		1,562
Consumer		52		(33	)		3		42			64
Total	$	11,003	$	(76	)	$	9	$	(436	)	$	10,500

In thousands	Individually Evaluated for Impairment
	3/31/11				12/31/10
	Allowance		Total Loans		Allowance		Total Loans
Commercial – Non Real Estate	$	216	$	4,186	$	16	$	3,689
Commercial Real Estate		-		13,046		-		14,242
Construction/Development		1,197		7,713		1,200		12,347
Residential Real Estate		50		2,975		64		20
Consumer		6		24		-		5,289
Unallocated		-		-		-		-
Total	$	1,469	$	27,944	$	1,280	$	35,587

In thousands	Collectively Evaluated for Impairment
	3/31/11				12/31/10
	Allowance		Total Loans		Allowance		Total Loans
Commercial – Non Real Estate	$	1,304	$	87,567	$	1,340	$	89,120
Commercial Real Estate		3,358		245,003		3,651		248,014
Construction/Development		2,799		47,317		2,606		45,518
Residential Real Estate		1,512		123,522		2,074		121,368
Consumer		58		4,705		52		4,687
Unallocated		-		-		-		-
Total	$	9,031	$	508,114	$	9,723	$	508,707

Note 5. Foreclosed Assets

The following table summarizes the activity in foreclosed assets for the three-month period ended March 31, 2011 and the twelve-month period ended December 31, 2011:

	3/31/11			12/31/10
Balance, beginning of period	$	16,081		$	2,513
Additions		1,602			16,781
Capitalized items		-			400
Sales		(1,708	)		(3,213	)
Gain (loss)		(88	)		(400	)
Balance, end of period	$	15,887		$	16,081

Note 6. Earnings Per Share

Basic earnings per share are based upon the weighted average number of common shares outstanding during the period. The weighted average shares outstanding for the diluted earnings per share computations were adjusted to reflect the assumed conversion of shares available under stock options. The following tables summarize earnings per share and the shares utilized in the computations:

	Net Income Available to Common Shareholders (in thousands)		Weighted Average Shares		Per Share Amount
Quarter Ended March 31, 2011
Basic earnings per common share	$	859		4,688,286	$	0.18
Effect of dilutive stock options		-		26,675		-
Effect of dilutive stock warrants		-		-		-
Diluted earnings per common share	$	859		4,714,961	$	0.18

Quarter Ended March 31, 2010
Basic earnings per common share	$	609		4,680,251	$	0.13
Effect of dilutive stock options		-		5,548		-
Effect of dilutive stock warrants		-		-		-
Diluted earnings per common share	$	609		4,685,799	$	0.13

Note 7. Comprehensive Income

For the three months ended March 31, 2011 and 2010, total comprehensive income was $1,842 and $1,243, respectively.

The information that follows discloses the reclassification adjustments and the income taxes related to the net unrealized gains on securities available-for-sale that are included in other comprehensive income, net of income taxes for the three-month periods ended March 31, 2011 and 2010.

In thousands	3 Months Ended
	3/31/11			3/31/10
Net unrealized gains on securities available for sale:
Net unrealized holding gains during the year	$	1,136		$	599
Reclassification adjustment for gains realized in income, net of taxes		(9	)		-
Income tax expense		(386	)		(204	)
Other comprehensive income, net of income taxes	$	741		$	395

Note 8. Borrowings

Short-term Federal Home Loan Bank (“FHLB”) borrowings totaled $15,000 at March 31, 2011 and $5,000 at December 31, 2010. The Company paid in full the $5,000 advance that matured on February 9, 2011 and added two new short-term advances during the first quarter of 2011 to offset maturing Quickrate certificates of deposits due to the cost effectiveness of the FHLB short-term advances. Long-term FHLB borrowings totaled $33,000 at March 31, 2011 and $43,000 at December 31, 2010. The Company repaid a $10 million long-term FHLB advance that was called by FHLB on March 29, 2011. This long-term advance carried an interest rate of 2.63%.

Note 9. Stock Based Compensation

The Company has two share-based compensation plans, which are described Company’s Annual Report Form 10-K. The compensation cost that has been charged against income for those plans was approximately $56 and $46 for the three-month periods ended March 31, 2011 and 2010 respectively. The Company has no nonqualified stock options outstanding at March 31, 2011.

A summary of option activity during the three-month periods ended March 31, 2011 and 2010 is presented below:

March 31, 2011	Options Outstanding			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Intrinsic Value of Options Exercised		Weighted Average Contractual Term
Balance at 12/31/10		232,550		$	8.44	$	2.64	$	-	5.78 years

Granted		1,000			4.87		2.09
Expired		(13,800	)		5.17		0.95

Balance at 3/31/11		219,750		$	8.63	$	2.75	$	60,817	5.91 years

Exercisable at 3/31/11		143,458		$	10.00	$	3.14	$	11,069	4.85 years

March 31, 2010	Options Outstanding		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Intrinsic Value of Options Exercised			Weighted Average Contractual Term
Balance at 12/31/09		237,850	$	8.77	$	2.76	$	(125	)	6.65 years

Granted		6,700		4.05		1.42
Balance at 3/31/10		244,550	$	8.64	$	2.72	$	41		6.49 years

Exercisable at 3/31/10		130,950	$	10.03	$	3.01	$	n/a		4.80 years

Information regarding options vested during the three-month periods ended March 31, 2011 and 2010 are as follows:

	3 Months Ended
		3/31/11		3/31/10
Number of options vested:			9,040		7,700
Total grant date fair value of options vested:		$	28	$	26

A summary of restricted stock activity during the three-month period ended March 31, 2011 and 2010 is presented below:

	3/31/11					3/31/10
	Non-Vested Restricted Stock Outstanding			Weighted Average Grant Date Fair Value		Non-Vested Restricted Stock Outstanding		Weighted Average Grant Date Fair Value
Beginning balance outstanding		64,015		$	4.26		30,000	$	4.62

Granted		5,000		$	3.44		36,195	$	4.05
Vested		(10,405	)	$	4.05		-		-
Ending balance outstanding		58,610		$	4.22		66,195	$	4.31

Note 10. Fair Value

The fair value of an asset or liability is the price that would be received to sell that asset or paid to transfer that liability in an orderly transaction occurring in the principal market (or most advantageous market in the absence of a principal market) for such asset or liability. In estimating fair value, the Company utilizes valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Such valuation techniques are consistently applied. Inputs to valuation techniques include the assumptions that market participants would use in pricing an asset or liability. Generally accepted accounting principles regarding fair value measurements establish a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

Level 1: Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

Level 2: Significant other observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, and other inputs that are observable or can be corroborated by observable market data.

Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets or liabilities.

The following is a description of valuation methodologies used for assets and liabilities recorded at fair value. The determination of where an asset or liability falls in the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosures each quarter and based on various factors, it is possible that an asset or liability may be classified differently from quarter to quarter. However, the Company expects changes in classifications between levels will be rare.

Securities: Investment securities are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for the specific securities but rather by relaying on the securities’ relationship to other benchmark quoted securities. Level 1 securities include those traded on nationally recognized securities exchanges, U.S. Treasury securities, and money market funds. Level 2 securities include U.S. Agency securities, mortgage-backed securities issued by government sponsored entities, municipal bonds and corporate debt securities. Securities classified as Level 3 include asset-backed securities in less liquid markets.

Loans: The Company does not record loans at fair value on a recurring basis. However, from time to time, a loan is considered impaired and an allowance for loan losses is established. Loans for which it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement are considered impaired. The fair value of impaired loans is estimated using one of several methods, including collateral value, market value of similar debt, enterprise value, liquidation value and

discounted cash flows. Those impaired loans not requiring an allowance represent loans for which the fair value of the expected repayments or collateral exceed the recorded investments in such loans. At March 31, 2011, substantially all of the total impaired loans were evaluated based on the fair value of the collateral. Impaired loans where an allowance is established based on the fair value of collateral require classification in the fair value hierarchy. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the impaired loan as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the impaired loan as nonrecurring Level 3.

Foreclosed assets: Foreclosed assets are adjusted to fair value upon transfer of the loans to foreclosed assets. Subsequently, foreclosed assets are carried at net realizable value. Fair value is based upon independent market prices, appraised values of the collateral, or management’s estimation of the value of the collateral. When the fair value of the collateral is based on an observable market price or a current appraised value, the Company records the foreclosed asset as nonrecurring Level 2. When an appraised value is not available or management determines the fair value of the collateral is further impaired below the appraised value and there is no observable market price, the Company records the foreclosed asset as nonrecurring Level 3.

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis as of March 31, 2011 are summarized below:

In thousands	Total		Level 1		Level 2		Level 3
Investment securities available-for-sale:
U.S. Government and federal agency	$	6,614	$	-	$	6,614	$	-
Government-sponsored enterprises		40,825		-		40,825		-
Mortgage-backed securities		69,871		-		69,871		-
Collateralized mortgage obligations		10,534		-		10,534		-
States and political subdivisions		15,229		-		15,229		-
Total assets at fair value	$	143,073	$	-	$	143,073	$	-

Total liabilities at fair value	$	-	$	-	$	-	$	-

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

The Company may be required from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with U.S. generally accepted accounting principles. These include assets that are measured at the lower of cost or market that were recognized at fair value below cost at the end of the period. Assets measured at fair value on a nonrecurring basis as of March 31, 2011 are included in the table below:

In thousands	Total		Level 1		Level 2		Level 3
Impaired loans
Commercial	$	3,970	$	-	$	3,609	$	361
Commercial Real Estate		13,046		-		13,046		-
Residential Real Estate		2,919		-		2,919		-
Construction Real Estate		6,516		-		6,516
Construction Real Estate		24		-		24		-
Foreclosed assets		15,887		-		15,327		560
Total assets at fair value	$	42,362	$	-	$	41,441	$	921

Total liabilities at fair value	$	-	$	-	$	-	$	-

Accounting standards for financial instruments require disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. These accounting standards exclude certain financial instruments and all non-financial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company.

The methodologies for estimating fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The estimated fair value approximates carrying value for cash and cash equivalents, accrued interest and the cash surrender value of life insurance policies. The methodologies for other financial assets and liabilities are discussed below:

Loans: For variable-rate loans that re-price frequently and with no significant changes in credit risk, fair values are based on carrying

values. The fair values for other loans were estimated using discounted cash flow analyses, using interest rates currently being offered. An overall valuation adjustment is made for specific credit risks as well as general portfolio credit risk.

Deposit liabilities: The fair values disclosed for demand and savings deposits are, by definition, equal to the amount payable on demand at the reporting date. The fair values for certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated contractual maturities on such time deposits.

Short-term borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements, and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Federal Home Loan Bank of Atlanta advances: The fair values of the Company’s Federal Home Loan Bank of Atlanta advances are estimated using discounted cash flow analyses based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Junior Subordinated Debentures: The values of the Company’s junior subordinated debentures are variable rate instruments that reprice on a quarterly basis, therefore, carrying value is adjusted for the three month repricing lag in order to approximate fair value.

Off-Balance-Sheet Financial Instruments: The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At March 31, 2011, the fair value of loan commitments and stand-by letters of credit was immaterial.

The carrying amounts and approximate fair values of the Company's financial instruments are as follows at March 31, 2011 and December 31, 2010:

	March 31, 2011				December 31, 2010
In thousands	Carrying Amounts		Approximate Fair Values		Carrying Amounts		Approximate Fair Values
Financial assets
Cash and due from banks	$	5,651	$	5,651	$	4,318	$	4,318
Interest-bearing deposits in banks		63,450		63,450		19,994		19,994
Securities available-for-sale		143,073		143,073		145,894		145,894
Securities held-to-maturity		6,640		6,906		7,634		7,868
Restricted equity securities		5,661		5,661		5,661		5,661
Loans, net		525,558		531,547		533,791		539,953
Bank owned life insurance		14,618		14,618		14,475		14,475

Financial liabilities
Total deposits		656,745		657,951		627,412		628,827
Short-term borrowings		17,558		17,558		17,296		17,296
Federal Home Loan Bank Advances		48,000		50,653		48,000		51,232
Junior subordinated debentures		16,496		15,865		16,496		15,864

Note 11. Commitments and Contingencies

The federal income tax returns of the Company for 2009 remain subject to examination by the IRS, generally for three years after they are filed. The Company will file its 2010 tax return by the legal filing deadline.

Litigation

The Bank was named a defendant in litigation filed by Ukrop’s Super Markets, Inc. (“Ukrop’s”) against the Bank in relation to a lease agreement with IMD Investment Group, LLC (“IMD”). The litigation was filed in the Circuit Court for the City of Richmond, Virginia on or about July 22, 2010. The suit alleges that pursuant to an August 31, 2009 Subordination, Attormment and Non-Disturbance Agreement (the “SNDA”) between Ukrop’s and the Bank, when the Bank foreclosed on the Deed of Trust, it automatically succeeded to the position of IMD under the lease between IMD and Ukrop’s and became responsible for any alleged breaches of that lease by IMD. Ukrop’s is requesting monetary damages in an amount of approximately $8.7 million as a result of IMD’s alleged breach of contract. Following the filing of the suit, Valley Bank rescinded its right as high bidder at the foreclosure sale to purchase the real property and never closed on the transaction and thus disputes it succeeded in interest as a landlord. At this time, the Bank disputes Ukrop’s allegations and believes that they are without merit and that the Bank’s risk of loss is remote. The Bank intends to vigorously defend itself. The trial date has been scheduled for December 2011.

Financial Instruments with Off-Balance-Sheet Risk

In the normal course of business to meet the financing needs of its customers, the Company is a party to financial instruments with off-balance-sheet risk, which involve commitments to extend credit. These instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit is represented by the contractual amount of those instruments. The same credit policy is used in making commitments as is used for on-balance-sheet risk. At March 31, 2011 outstanding commitments to extend credit were $122,893 as compared to $124,663 at December 31, 2010.

Commitments to extend credit are agreements to lend to a customer as long as there is no breach of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments may expire without ever being drawn upon; therefore, the total commitment amounts do not necessarily represent future cash outlays for the Company.

Derivative Financial Instruments

For asset/liability management purposes, we may use interest rate swap agreements to hedge interest rate risk exposure to declining rates. Such derivatives are used as part of the asset/liability management process and are linked to specific assets, and have a high correlation between the contract and the underlying item being hedged, both at inception and throughout the hedge period. Cash flows resulting from the derivative financial instruments that are accounted for as hedges of assets and liabilities are classified in the cash flow statement in the same category as the cash flow of the items being hedged. At March 31, 2011 and December 31, 2010 the Company did not have any derivative agreements related to interest rate hedging in place.

Note 12. Regulatory Matters

Regulatory Agreement

On September 30, 2010, the Company and the Bank entered into a written agreement (“Written Agreement”) with the Federal Reserve Bank of Richmond (the “Reserve Bank”). Under the terms of the Written Agreement, the Bank agreed to develop and submit to the Reserve Bank for approval written plans to, among other matters, strengthen credit risk management policies, revise its contingency funding plan, maintain an adequate allowance for loan and lease losses, and improve the Bank’s earnings and overall condition.

The Company has submitted all plans required pursuant to the terms of the agreement and provides updates to these plans on a regular basis. Additionally, both the Company and the Bank have agreed to maintain sufficient capital and to refrain from declaring or paying dividends without prior regulatory approval. The Company has agreed that it will not make any other form of payment representing a reduction in Bank’s capital or make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without prior regulatory approval. The Company also has agreed not to incur, increase or guarantee any debt or to purchase or redeem any shares of its stock without prior regulatory approval.

The Company and the Bank have appointed a committee to monitor compliance with the Written Agreement. The directors of the Company and the Bank have recognized and unanimously agree with the common goal of financial soundness represented by the Written Agreement and have confirmed the intent of the directors and executive management to diligently seek to comply with all requirements of the Written Agreement.

Dividends

The Company's principal source of funds for dividend payments is dividends received from the Bank. The amount of dividends that may be paid by the Bank to the Company will depend on the Bank’s earnings and capital position and is limited by state law, regulations and policies. A state bank may not pay dividends from its capital; all dividends must be paid out of net undivided profits then on hand. Before any dividend is declared, any deficit in capital funds originally paid in shall have been restored by earnings to their initial level, and no dividend shall be declared or paid by any bank which would impair the paid-in-capital of the bank. As of March 31, 2011 and December 31, 2010, the amount available for payment of dividends was $25,273 and $24,035 respectively. Pursuant to the terms of the Written Agreement, prior approval must be obtained from the Reserve Bank before any distributions can be made on the Company’s Preferred Stock, any interest payments can be made on its Trust Preferred Securities, and any common dividends can be declared.

Capital Requirements

The Company and the Bank are subject to various regulatory capital requirements administered by the federal and state banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital

guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Company's and the Bank's capital amounts and classification 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 the Company and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). Management believes, as of March 31, 2011 and December 31, 2010 that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of March 31, 2011 and December 31, 2010, the Company and the Bank were categorized as “well capitalized” as defined by applicable regulations. To be categorized as “well capitalized”, the Company and Bank must maintain minimum total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table below. There are no conditions or events since that date that management believes have changed the Company's or the Bank's category. The Company's and the Bank's actual capital amounts and ratios are also presented in the table below.

	Actual					Minimum Required For Capital Adequacy Purposes					Minimum to be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

March 31, 2011
Total Capital (to Risk Weighted Assets):
Consolidated	$	79,458		13.8	%	$	46,167		8.0	%		n/a		n/a
Valley Bank	$	73,145		12.7	%	$	46,025		8.0	%	$	57,531		10.0	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	72,204		12.5	%	$	23,083		4.0	%		n/a		n/a
Valley Bank	$	65,913		11.5	%	$	23,012		4.0	%	$	34,519		6.0	%
Tier 1 Capital - Leverage (to Average Assets):
Consolidated	$	72,204		9.3	%	$	30,941		4.0	%		n/a		n/a
Valley Bank	$	65,913		8.5	%	$	30,855		4.0	%	$	38,568		5.0	%

December 31, 2010
Total Capital (to Risk Weighted Assets):
Consolidated	$	78,423		13.4	%	$	46,918		8.0	%		n/a		n/a
Valley Bank	$	72,031		12.3	%	$	46,783		8.0	%	$	58,479		10.0	%
Tier 1 Capital (to Risk Weighted Assets):
Consolidated	$	71,047		12.1	%	$	23,459		4.0	%		n/a		n/a
Valley Bank	$	64,674		11.1	%	$	23,392		4.0	%	$	35,087		6.0	%
Tier 1 Capital - Leverage (to Average Assets):
Consolidated	$	71,047		9.1	%	$	31,372		4.0	%		n/a		n/a
Valley Bank	$	64,674		8.3	%	$	31,293		4.0	%	$	39,117		5.0	%

Note 13. Shareholders’ Equity

On April 29, 2010, the Board of Directors determined to suspend regular quarterly cash dividends on the $16.0 million on the Series A Preferred Stock. The Company’s Board of Directors took this action in consultation with the Federal Reserve Bank of Richmond as required by regulatory policy guidance. The Company currently has sufficient capital and liquidity to pay the scheduled dividends on the Series A Preferred Dividends; however, must obtain approval from the Federal Reserve Bank of Richmond under the terms of the Written Agreement. As of March 31, 2011, the Company has deferred four quarterly dividend payments. The Series A Preferred Stock dividend in arrears is $801,000, or $50.00 per share, which has not been recognized in the consolidated financial statements. In the event the Company defers dividends of the Series A Preferred Stock for an aggregate of six quarterly dividend periods, holders of the Series A Preferred Stock will be entitled to elect two additional members to the Company’s Board of Directors at the next shareholder meeting.

The Company’s Board of Directors has also determined to suspend interest payments on the Company’s trust preferred securities beginning in April 2010. As of March 31, 2011, all interest expense has been recognized in the consolidated financial statements and the total amount payable is $405,000.

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

Management’s discussion and analysis of the financial condition and results of operations of the Company as of and for the three month periods ended March 31, 2011 and 2010 is as follows. The discussion should be read in conjunction with the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Written Agreement with the Federal Reserve

On September 30, 2010, the Company and the Bank entered into a written agreement (“Written Agreement”) with the Federal Reserve Bank of Richmond (the “Reserve Bank”). Under the terms of the Written Agreement, the Bank has agreed to develop and submit to the Reserve Bank for approval written plans to, among other matters, strengthen credit risk management policies, maintain an adequate allowance for loan and lease losses, revise its contingency funding plan, and improve the Bank’s earnings and overall condition.

Both the Company and the Bank have also agreed to submit capital plans to maintain sufficient capital and to refrain from declaring or paying dividends without prior regulatory approval. The Company has agreed that it will not take any other form of payment representing a reduction in Bank’s capital or make any distributions of interest, principal or other sums on subordinated debentures or trust preferred securities without prior regulatory approval. The Company also has agreed not to incur, increase or guarantee any debt or to purchase or redeem any shares of its stock without prior regulatory approval.

Critical Accounting Estimates

General

The Company’s financial statements are prepared in accordance with Accounting Principles Generally Accepted in the United States “USGAAP” and with general practices within the banking industry. In connection with the application of those principles, we have made judgments and estimates which, in the case of the determination of our allowance for loan losses, deferred tax assets, and foreclosed assets have been critical to the determination of our financial position and results of operations.

Management considers accounting estimates to be critical to reported financial results if (i) the accounting estimate requires management to make assumptions about matters that are highly uncertain and (ii) different estimates that management reasonably could have used for the accounting estimate in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, could have a material impact on the Company’s financial statements.

For a discussion on the Company’s critical accounting estimates, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Non-GAAP Financial Measures

The Company measures the net interest margin as an indicator of profitability. The net interest margin is calculated by dividing tax-equivalent net interest income by total average earning assets. Because a portion of interest income earned by the Company is nontaxable, the tax-equivalent net interest income is considered in the calculation of this ratio. Tax-equivalent net interest income is calculated by adding the tax benefit realized from interest income that is nontaxable to total interest income then subtracting total interest expense. The tax rate utilized in calculating the tax benefit for 2011 and 2010 is 34%. The reconciliation of tax-equivalent net interest income, which is not a measurement under GAAP, to net interest income, is reflected in the table below.

In thousands	Three months ended 3/31/11			Twelve months ended 12/31/10			Three months ended 3/31/10
Net interest income, non tax-equivalent	$	5,916		$	21,063		$	4,978
Less: tax-exempt interest income		(160	)		(563	)		(121	)
Add: tax-equivalent of tax-exempt interest income		242			853			183
Net interest income, tax-equivalent	$	5,998		$	21,353		$	5,040

Results of Operations

Net Income

2011 Compared to 2010

Net income for the three-month period ending March 31, 2011 was $1,101,000 as compared to net income of $848,000 for the same period last year, an increase of $253,000 or 29.8%. After the dividend on preferred stock and accretion of discounts on warrants, net income available to common shareholders was $859,000, or $0.18 per diluted common share, as compared to $609,000 or $0.13 per diluted common share for the first quarter of 2010. The Company’s earnings for the first quarter of 2011 produced an annualized return on average total assets of 0.58% and an annualized return on average shareholders’ equity of 7.97%, as compared to 0.48% and 6.58%, respectively for the same period last year. Loan loss provisions decreased $644,000 in comparison to the prior year period, from $208,000 in 2010 to ($436,000) in the three-month period ended March 31, 2011.

2010 Compared to 2009

Net income for the quarter ended March 31, 2010 was $848,000, compared to net income of $148,000 for the same period in 2009, an increase of $700,000 or 473.0%. After the dividend on preferred stock and accretion on discounts on warrants, net income available to common shareholders for the quarter was $609,000 or $0.13 per diluted common share as compared to a net loss to common shareholders of $87,000 or $0.02 per diluted common share for the first quarter of 2009. The increase in net income was primarily due to a decrease in our loan loss provisions, from $1,433,000 in the first three months of 2009 to $208,000 in the first quarter of 2010.

The following table shows our key performance ratios for the periods ended March 31, 2011, December 31, 2010 and March 31, 2010:

Key Performance Ratios (1)

	3 months			12 months			3 months
	Ended			Ended			Ended
	3/31/11			12/31/10			3/31/10
Return on average assets		0.58	%		0.46	%		0.48	%
Return on average equity (2)		7.97	%		6.49	%		6.58	%
Net interest margin (3)		3.33	%		2.97	%		2.95	%
Cost of funds		1.32	%		1.72	%		1.96	%
Yield on earning assets		4.63	%		4.64	%		4.83	%
Basic net earnings per common share	$	0.18		$	0.54		$	0.13
Diluted net earnings per common share	$	0.18		$	0.54		$	0.13

(1) Ratios are annualized.

(2) The calculation of ROE excludes the effect of any unrealized gains or losses on investment securities available-for-sale.

(3) Calculated on a fully taxable equivalent basis (“FTE”).

Net Interest Income

The primary source of the Company’s banking revenue is net interest income, which represents the difference between interest income on earning assets and interest expense on liabilities used to fund those assets. Earning assets include loans, securities, and federal funds sold. Interest bearing liabilities include deposits and borrowings. To compare the tax-exempt yields to taxable yields, amounts are adjusted to pretax equivalents based on a 34% federal corporate income tax rate.

Net interest income is affected by changes in interest rates, volume of interest bearing assets and liabilities, and the composition of those assets and liabilities. The “interest rate spread” and “net interest margin” are two common statistics related to changes in net interest income. The interest rate spread represents the difference between the yields earned on interest earning assets and the rates paid for interest bearing liabilities. The net interest margin is defined as the percentage of net interest income to average earning assets. Earning assets obtained through noninterest bearing sources of funds such as regular demand deposits and shareholders’ equity result in a net interest margin that is higher than the interest rate spread.

2011 Compared to 2010

Net interest income for the three-month period ended March 31, 2011 was $5.9 million, a $0.9 million or 18.0% increase when compared to the $5.0 million reported for the same period in 2010. The Company’s net interest margin, at 3.33%, increased by 38 basis points over the 2.95% reported for the same quarter last year. In comparison to the linked quarter, the Company’s net interest margin increased by 19 basis points over the 3.14% reported for the fourth quarter of 2010.

The increase in net interest income and corresponding increase in net interest margin is primarily attributable to the reduction in funding costs over the last 12 months. The Company’s cost of funding was 1.32% during the three-month period ended March 31, 2011, compared to the 1.96% reported in the same period last year and the 1.43% in the linked quarter. Decreased rates on our primary non-maturity deposit products, including MyLifestyle checking, MyLifestyle savings and Prime Money Market accounts, and more aggressive pricing on time deposits have led to the decrease in funding costs. In contrast to the decline in funding costs, we have been able to maintain the earning rates in our loan portfolio. The Company’s yield on loans was 5.33% during the three-month period ended March 31, 2011, compared to the 5.21% reported in the same period last year and the 5.34% in the linked quarter. Due to declines in the yield on investments, however, the yield on earning assets has declined to 4.58% during the three-month period ended March 31, 2011, compared to the 4.83% reported in the same period last year, but increased from 4.53% in the linked quarter. The declines in funding costs have been much more significant, leading to the overall increase in our net interest margin.

2010 Compared to 2009

Net interest income for the three-month period ended March 31, 2010 was $5.0 million, a $0.4 million, or 8.0% increase when compared to the $4.6 million reported for the same period in 2009. Our net interest margin was 2.95% in comparison to 2.89% for the first quarter of 2009, an increase of 6 basis points. During the first quarter of 2010, interest income decreased by $100,000 as compared to the prior year due to declining yields in our investment portfolio and interest expense declined by $500,000 due to an overall reduction in our funding costs on deposits and borrowings.

Noninterest Income

2011 Compared to 2010

Noninterest income for the three-month period ended March 31, 2011 was $641,000, an increase of $104,000 compared to the $537,000 for the same period last year. Increases in mortgage fee income and service charges on deposit accounts were the primary reasons for the increase.

2010 Compared to 2009

Noninterest income decreased $126,000 for the three-month period ended March 31, 2010, or 18.0%, compared to the same period in 2009, from $699,000 to $573,000. The primary cause in the reduction was the $267,000 in gains realized on securities sold in the first quarter of 2009.

Noninterest Expense

2011 Compared to 2010

Noninterest expense for the three-month period ended March 31, 2011 was $5.4 million, an increase of $1.3 million, or 31%, compared to the same period last year. Specific items to note are as follows:

Compensation expense increased $362,205 due primarily to profit sharing payments of $200,000 made as the result of the improvement in impaired loans during the quarter and increased retirement expenses of $87,000. The increase in retirement expenses is due to the reversal of $66,000 as the result of the retirement of one of our executives during the first quarter of 2010. The remaining increase is due to merit, equity, and promotional increases that went into effect January 1, 2011;

·	Insurance expense increased $685,000 primarily due to FDIC adjustments totaling $433,482. The remaining increase is due to an increase in the assessment rate as well as the increase in deposits as compared to the quarter ended March 31, 2010;

·	Legal fees increased $215,000 due to increased litigation costs; and

·	Net foreclosed asset expense increased by $121,000 due to the $88,000 loss recognized on the sale of foreclosed assets in comparison to the $18,000 gain recognized in the first three months of 2010.

The most significant of these increases in noninterest expenses, the additional FDIC insurance premiums amounting to $433,482, will not recur in subsequent quarters in 2011. We believe the Company’s expense ratios continue to outperform its peers by significant margins.

2010 Compared to 2009

Noninterest expense for the first quarter of 2010 totaled $4.2 million, an increase of $500,000, or 13.5%, compared to $3.7 million during the same quarter in 2010. Our insurance costs, primarily from FDIC insurance fees, rose dramatically from $204,000 in the first three months of 2009 to $362,000 in the first three months of 2010, an increase of 77.5%. Advertising and marketing expenses increased $60,000, or 105.3%, as we rolled out two new exciting deposit products, MyTunes Checking and MyLifestyle Savings, during the period. Compensation expense increased by $203,000, however two-thirds of this increase is based on lower salary deferrals upon origination of loans, due to a significant decrease in loan growth.

Asset Quality

Summary of Allowance for Loan Losses

2011 Compared to 2010

The allowance for loan losses was $10.5 million as of March 31, 2011, compared to $11.0 million as of December 31, 2010 and $14.3 million reported a year earlier. The ratio of the allowance for loan losses to total loans outstanding was approximately 1.96% at March 31, 2011, which compares to approximately 2.02% of total loans at December 31, 2010 and 2.51% of total loans at March 31, 2010. These estimates are primarily based on our historical loss experience, portfolio concentrations, evaluation of individual loans and economic conditions. A total of $1.5 million in specific reserves was included in the balance of the allowance for loan losses as of March 31, 2011 for impaired loans, which compares to a total of $1.3 million as of December 31, 2010 and $4.1 million at March 31, 2010.

The Company recorded a net reduction of provisions for potential loan losses of $436,000 for the first quarter of 2011, a decrease of $644,000 as compared to the same period last year. During the first quarter of 2011:

·	the Company successfully collected full payment on a relationship that included a $463,000 specific reserve at December 31, 2010, and as a result reversed the entire reserve;

·	the Company set aside additional specific reserves on one residential real estate development totaling $460,000;

·	the Company established new specific reserves of $200,000 on an operating company that closed its doors and filed Chapter 7 Bankruptcy during the first quarter; and

·	the Company recorded a reduction to general reserves of $624,000 as a result of the reduction in impaired loans, the reduction in charge-offs, the continued decline in loan balances, as well as a reduction in the environmental risk assessment associated with the Company’s real estate portfolios.

We believe the allowance for loan losses is adequate to provide for expected losses in the loan portfolio, but there are no assurances that it will be.

2010 Compared to 2009

For the three-month period ended March 31, 2010, we recorded a provision for losses on loans of $208,000 compared to $1.4 million for the same period prior year, a decrease of $1.2 million. The ratio of the allowance for loan losses to total loans outstanding was approximately 2.51% at March 31, 2010, which compares to approximately 2.56% at December 31, 2009. At March 31, 2010, our total reserves amounted to $14.3 million with $4.1 million as specific reserves on our impaired loans and $10.2 million as general reserves to cover inherent risks in our loan portfolio based on the current economic environment.

Non-Performing Assets

Nonperforming assets include nonaccrual loans, loans past due 90 days or more, restructured loans and foreclosed/ repossessed property. A loan will be placed on nonaccrual status when collection of all principal or interest is deemed unlikely. A loan will be placed on nonaccrual status automatically when principal or interest is past due 90 days or more, unless the loan is both well secured and in the process of being collected. In this case, the loan will continue to accrue interest despite its past due status.

A restructured loan is a loan in which the original contract terms have been modified due to a borrower’s financial condition or there has been a transfer of assets in full or partial satisfaction of the loan. A modification of original contractual terms is generally a concession to a borrower that a lending institution would not normally consider.

Based on generally accepted accounting standards for receivables, a loan is impaired when, based on current information and events, it is likely that a creditor will be unable to collect all amounts, including both principal and interest, due according to the contractual terms of the loan agreement.

The Company’s ratio of non-performing assets as a percentage of total assets decreased 22 basis points to 3.76% as of March 31, 2011 as compared to 3.98% as of December 31, 2010 and decreased 70 basis points as compared to 4.46% as of March 31, 2010. Non-performing assets decreased slightly from $30.6 million at December 31, 2010 to $30.1 million at March 31, 2011. Non-performing assets consisted of non-accrual loans of $11.8 million, foreclosed assets of $15.9 million, troubled debt restructurings of $0.2 million and loans totaling $2.1 million that were past due greater than 90 days. The Company anticipates full payment of all past due amounts.

Net charge-offs as a percentage of average loans receivable amounted to 0.1% for the first quarter of 2011, compared to 0.13% for the fourth quarter of 2010 and 0.10% for the same quarter in the prior year. Net charge-offs for the quarter ended March 31, 2011 were $68,000, in comparison to $689,000 for the fourth quarter of 2010 and $574,000 for the same quarter one year ago.

Nonperforming assets at March 31, 2011, December 31, 2010 and March 31, 2010 are presented in the following table:

Nonperforming Assets

In thousands	3/31/11		12/31/10		3/31/10
Nonaccrual loans	$	11,811	$	12,242	$	29,695
Loans past due 90 days or more		2,140		2,244		4
Restructured loans		224		-		-
Total nonperforming loans	$	14,175	$	14,486	$	29,699

Foreclosed, repossessed and idled properties		15,887		16,081		3,258
Total nonperforming assets	$	30,062	$	30,567	$	32,957

If nonaccrual loans had performed in accordance with their original terms, additional interest income would have been recorded in the amount of $152,000 for the three months ended March 31, 2011; $1.2 million for the year ended December 31, 2010; and $418,000 for the three months ended March 31, 2010.

Higher Risk Loans

Certain types of loans, such as option ARM products, interest-only loans, subprime loans, and loans with initial teaser rates, can have a greater risk of non-collection than other loans. We do not offer option ARM, interest-only, or subprime mortgage loans.

Junior-lien mortgages can also be considered higher risk loans and our junior lien portfolio currently consists of balances totaling $22.4 million (4.2% of total portfolio) at March 31, 2011. Loans included in this category that were initially made with high loan-to-value ratios of 100% or greater have current balances totaling $1.7 million at March 31, 2011. Since 2003, we have experienced charge-offs totaling $830,000 in junior lien mortgages.

Financial Condition

Total assets at March 31, 2011 were $799.4 million, up $31.8 million or 41% from $767.6 million at December 31, 2010. The principal components of the Company’s assets at the end of the period were $69.1 million in cash and cash equivalents, $148.7 million in securities available-for-sale, including restricted equity securities, $6.6 million in securities held-to-maturity and $536.1 million in gross loans. Total assets at December 31, 2010 were $767.6 million with the principal components consisting of $24.3 million in cash and cash equivalents, $151.6 million in securities available-for-sale, including restricted equity securities, $7.6 million in securities held-to-maturity and $544.3 million in gross loans.

Total liabilities at March 31, 2011 were $743.6 million, up from $713.7 million at December 31, 2010, an increase of $29.9 million or 42%. Deposits increased $29.3 million or 5% to $656.7 million from the $627.4 million level at December 31, 2010. Our deposit growth for the past three years has been phenomenal due to the innovative and exciting suite of products and exceptional level of customer service offered to our customers. We were successful in growing our core deposits by 39% from March 31, 2010 to March 31, 2011.

Capital Adequacy

The management of capital in a regulated financial services industry must properly balance return on equity to shareholders while maintaining sufficient capital levels and related risk-based capital ratios to satisfy regulatory requirements. The Company’s capital management strategies have been developed to provide attractive rates of returns to shareholders, while maintaining its “well-capitalized” position at the banking subsidiary.

The primary source of additional capital to the Company is earnings retention, which represents net income less dividends declared. In an effort to continue preservation of capital, we have issued deferral notices to the trustees of the Company’s Trust Preferred Securities for interest payments due after March 26, 2010. Likewise, the Board of Directors has deferred the preferred dividend payments due on the Company’s Series A Preferred Stock, beginning with the May 15, 2010 payment. These deferrals will continue to be evaluated on a quarterly basis, and following the Company’s entrance into a Written Agreement with the Reserve Bank on September 30, 2010, any decision to pay interest on the Trust Preferred Securities, the preferred dividend on Series A Preferred Stock or dividends on or common stock will require the approval of the Reserve Bank.

The Company and its banking subsidiary are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company and the subsidiary bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action under the Federal Deposit Insurance Corporation Improvement Act (“FDICIA”), the Company and its banking subsidiary must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and reclassifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and its banking subsidiary to maintain minimum amounts and ratios of total and Tier 1 capital to average assets. As of March 31, 2011 and December 31, 2010, the Company and the subsidiary bank met all minimum capital adequacy requirements to which they are subject and are categorized as “well capitalized”. These capital amounts and ratios are incorporated by reference to Note 12 of the consolidated financial statements herein.

Interest Rate Risk

Interest rate risk is the exposure to fluctuations in the Company’s future earnings (earnings at risk) and value (economic value at risk) resulting from changes in interest rates. This exposure results from differences between the amounts of interest earning assets and interest bearing liabilities that reprice within a specified time period as a result of scheduled maturities and repayment and contractual interest rate changes. The Company was liability sensitive at December 31, 2010 as simulation results indicated that net interest income would increase in a down rate environment and decrease in an upward rate environment.

Despite the Company’s risk position being within the guidelines set by policy, we restructured our prime money market portfolio by reducing the target percentage of the Wall Street Journal Prime from 40% to 25% for balances $25,000 and greater, and embedding a temporary floor on the portfolio of 1.00% which is in effect through the end of 2011. This restructure was effective April 25, 2011 and it effectively eliminates a significant portion of our sensitivity to rising rates and provides the potential to further improve our net interest margin.

Our simulation results at March 31, 2011 include this restructure in the assumptions and as a result, the Company’s sensitivity position has shifted from liability sensitive to asset sensitive in all rising rate scenarios modeled, indicating that net interest income will increase in an upward rate environment and remain relatively flat in a downward rate environment. Below is a summary of the change from December 31, 2010 to March 31, 2011:

Change in Yield Curve	Change in Net Interest Income December 31, 2010						Change in Net Interest Income March 31, 2011
+200 basis points		(3	%)	$	(703	)		5	%	$	1,222
+ 100 basis points		(2	%)		(526	)		2	%		479
Level – Base Case		-			-			-			-
- 100 basis points		5	%		1,099			0	%		113
- 200 basis points		9	%		2,107			1	%		153

Likewise, we improved our Economic Value of Equity (EVE) position as well:

Change in Yield Curve	Change in EVE December 31, 2010						Change in EVE March 31, 2011
+200 basis points		(12	%)	$	(8,429	)		(9	%)	$	(7,038	)
+ 100 basis points		(6	%)		(3,923	)		(4	%)		(3,188	)
Level – Base Case		-			-			-			-
- 100 basis points		6	%		3,986			4	%		2,993
- 200 basis points		8	%		5,329			5	%		3,425

For a further discussion on interest rate risks, see the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Liquidity

One of the principal goals of the Bank’s asset and liability management strategy is to maintain adequate liquidity. Liquidity measures our ability to meet our maturing obligations and existing commitments, to withstand fluctuations in deposit levels, to fund our operations and to provide for customers’ credit needs. Liquidity represents a financial institution’s ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds from alternative funding sources. We sell excess funds overnight to provide an immediate source of liquidity and as of March 31, 2011 we had a total of $62.9 million in overnight funds at the Reserve Bank. Overnight cash maintained in interest-bearing accounts averaged $34.8 million in the first quarter of 2011 compared to an average of $34.7 million during the same period last year and compared to an average of $61.6 million in the fourth quarter of 2010. The Company also maintains approved lines of credit with correspondent banks as backup liquidity sources.

The secondary liquidity source for both short-term and long-term borrowings consists of a secured line of credit from the Federal Home Loan Bank (“FHLB”). At March 31, 2011, the line of credit had $48 million outstanding under a total available line of $80.7 million. Borrowings from the FHLB are secured by a blanket collateral agreement on a pledged portion of the Bank’s 1-4 family residential real estate loans, multifamily mortgage loans, and commercial mortgage collateral. Additionally, we have an established line of credit with the Reserve Bank’s Discount Window that had no outstanding balance under a total available line of $32.2 million at March 31, 2011. Borrowings from the FRB Discount Window are secured by a collateral agreement on a pledged portion of the Bank’s commercial and real estate construction collateral.

The Company maintains a liquidity policy as a means to manage liquidity and the associated risk. The policy includes a Liquidity Contingency Plan (“the Liquidity Plan”) that is designed as a tool for the Company to detect liquidity issues in order to protect depositors, creditors and shareholders. The Liquidity Plan includes monitoring various internal and external indicators such as changes in core deposits and changes in the market conditions. It provides for timely responses to a wide variety of funding scenarios ranging from changes in loan demand to a decline in the Company’s quarterly earnings to a decline in market price of the Company’s stock. The Liquidity Plan calls for specific responses designed to meet a wide range of liquidity needs based upon assessments that are performed on a recurring basis by the Company and its Board of Directors.

As a result of our management of liquid assets and our ability to generate liquidity through alternative funding sources, we believe we maintain overall liquidity sufficient to meet our depositors’ requirements and satisfy our customers’ credit needs.

Recent and Future Accounting Considerations

In July 2010, the Receivables topic of the Accounting Standards Codification (“ASC”) was amended by Accounting Standards Update (“ASU”) 2010-20 to require expanded disclosures related to a company’s allowance for credit losses and the credit quality of its financing receivables. The amendments require the allowance disclosures to be provided on a disaggregated basis. The Company is required to include these disclosures in their interim and annual financial statements. See Notes 3 and 4.

Disclosures about Troubled Debt Restructurings (“TDRs”) required by ASU 2010-20 were deferred by the Financial Accounting Standards Board (“FASB”) in ASU 2011-01 issued in January 2011. In April 2011 FASB issued ASU 2011-02 to assist creditors with their determination of when a restructuring is a TDR. The determination is based on whether the restructuring constitutes a concession and whether the debtor is experiencing financial difficulties as both events must be present.

Disclosures related to TDRs under ASU 2010-20 will be effective for reporting periods beginning after June 15, 2011.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

Not applicable.

Item 4. Controls and Procedures.

As of the end of the period covered by the report, an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. There has not been any change in our internal control over financial reporting that occurred during the last quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting.

The design of any system of controls is based in part upon certain assumptions about the likelihood of future events. There can be no assurance that any design will succeed in achieving its stated goal under every potential condition, regardless of how remote. In addition, the operation of any system of controls and procedures is dependent upon the employees responsible for executing it. While we have evaluated the operation of our disclosure controls and procedures and found them effective, there can be no assurance that they will succeed in every instance to achieve their objective.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

Item 1A. Risk Factors.

There were no material changes to the Company’s risk factors as disclosed in the Annual Report on Form 10-K for December 31, 2010.

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

There were no unregistered sales of equity securities during the quarter.

Item 3. Defaults Upon Senior Securities.

The Company is not in default of the terms of the Series A Preferred Stock. However, on April 29, 2010, the Board of Directors determined to suspend regular quarterly cash dividends on the $16.0 million Series A Preferred Stock. The Company’s board of directors took this action in consultation with the Federal Reserve Bank of Richmond as required by regulatory policy guidance. The Company currently has sufficient capital and liquidity to pay the scheduled dividends on the Series A Preferred Dividends; however, must obtain approval from the Federal Reserve Bank of Richmond under the terms of the Written Agreement. As of March 31, 2011, the Company has deferred four quarterly dividend payments. The Series A Preferred Stock dividend in arrears is $801,000, or $50.00 per share, which has not been recognized in the consolidated financial statements. In the event the Company defers dividends of the Series A Preferred Stock for an aggregate of six quarterly dividend periods, holders of the Series A Preferred Stock will be entitled to elect two additional members to the Company’s Board of Directors at the next shareholder meeting.

Item 4. (Removed and Reserved).

Item 5. Other Information.

None.

Item 6. Exhibits

Exhibit Number		Description

3.1		Bylaws, as amended and restated May 4, 2011*

31.1		Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2		Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1		Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2		Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

* Filed herewith.

SIGNATURES

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

	VALLEY FINANCIAL CORPORATION

Date: May 11, 2011	By:	/s/ Ellis L. Gutshall
		Ellis L. Gutshall
		President and Chief Executive Officer


Date: May 11, 2011	By:	/s/ Kimberly B. Snyder
		Kimberly B. Snyder
		Chief Financial Officer

EXHIBIT INDEX

Exhibit Number		Description

3.1		Bylaws, as amended and restated May 4, 2011*

31.1		Chief Executive Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

31.2		Chief Financial Officer Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

32.1		Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

32.2		Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

* Filed herewith.

VALLEY FINANCIAL CORP /VA/ - FORM 10-Q - May 11, 2011

Attached files

VALLEY FINANCIAL CORP /VA/ Reports