10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

x Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2006

or

¨ 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: 01-17377

COMMONWEALTH BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

VIRGINIA	54-1460991
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
403 Boush Street Norfolk, Virginia	23510
(Address of principal executive offices)	(Zip Code)

(757) 446-6900

(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  ¨

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock, $2.273 Par Value – 4,662,820 shares as of July 21, 2006

Commonwealth Bankshares, Inc.

Table of Contents

	Page
PART I - FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS (unaudited)
Consolidated Balance Sheets	3
June 30, 2006
December 31, 2005
Consolidated Statements of Income	4
Three months ended June 30, 2006
Three months ended June 30, 2005
Six months ended June 30, 2006
Six months ended June 30, 2005
Consolidated Statements of Comprehensive Income	5
Six months ended June 30, 2006
Six months ended June 30, 2005
Consolidated Statements of Stockholders’ Equity	6
Six months ended June 30, 2006
Year ended December 31, 2005
Year ended December 31, 2004
Consolidated Statements of Cash Flows	7
Six months ended June 30, 2006
Six months ended June 30, 2005
Notes to Consolidated Financial Statements	8 -11
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	11 -18
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	19
ITEM 4 – CONTROLS AND PROCEDURES	19
PART II - OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS	20
ITEM 1A – RISK FACTORS	20
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	20
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES	20
ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	20
ITEM 5 – OTHER INFORMATION	20
ITEM 6 – EXHIBITS	20
SIGNATURES	21

2

Commonwealth Bankshares, Inc.

Consolidated Balance Sheets

	June 30, 2006 (Unaudited)			December 31, 2005 (Audited)
Assets:
Cash and cash equivalents:
Cash and due from banks	$	9,363,141		$	11,895,510
Interest bearing deposits in banks		200,825			541,427
Federal funds sold		5,281,775			1,158,874
Total cash and cash equivalents		14,845,741			13,595,811
Investment securities:
Available for sale, at fair market value		8,047,506			8,394,193
Held to maturity, at amortized cost (fair market value was $514,059 and $538,131, respectively)		510,139			529,630
Total investment securities		8,557,645			8,923,823
Equity securities, restricted, at cost		6,637,850			5,327,400
Loans		612,607,212			508,903,377
Allowance for loan losses		(6,881,821	)		(5,523,087	)
Loans, net		605,725,391			503,380,290
Premises and equipment, net		9,462,410			8,155,332
Deferred tax assets		4,100,169			3,171,586
Accrued interest receivable		4,283,648			3,144,721
Other assets		4,941,295			3,755,375
Total assets	$	658,554,149		$	549,454,338
Liabilities and Stockholders’ Equity:
Liabilities:
Deposits:
Noninterest-bearing demand deposits	$	41,735,958		$	41,999,286
Interest-bearing		433,033,956			341,890,635
Total deposits		474,769,914			383,889,921
Short-term borrowings		76,455,600			65,604,000
Long-term debt		5,354,262			5,383,394
Junior subordinated debt securities		3,872,930			4,925,379
Trust preferred capital notes		20,619,000			20,619,000
Accrued interest payable		1,648,871			1,296,920
Other liabilities		7,457,971			5,005,705
Total liabilities		590,178,548			486,724,319
Stockholders’ Equity:
Common stock, par value $2.273, 16,500,000 shares authorized; 4,662,820 and 4,480,902 shares issued and outstanding in 2006 and 2005, respectively		10,598,590			10,183,868
Additional paid-in capital		37,706,714			36,479,909
Retained earnings		20,128,594			16,071,813
Accumulated other comprehensive income (loss)		(58,297	)		(5,571	)
Total stockholders’ equity		68,375,601			62,730,019
Total liabilities and stockholders’ equity	$	658,554,149		$	549,454,338

See accompanying notes to the consolidated financial statement (unaudited).

3

Commonwealth Bankshares, Inc.

Consolidated Statements of Income (Unaudited)

	Three months ended				Six months ended
	June 30, 2006		June 30, 2005		June 30, 2006		June 30, 2005
Interest and dividend income:
Loans, including fees	$	12,751,472	$	7,606,494	$	23,832,153	$	14,112,167
Investment securities:
Taxable		97,265		61,611		192,969		124,533
Tax exempt		16,731		19,581		33,642		39,045
Dividend income, equity securities, restricted		96,133		49,356		179,183		88,846
Other interest income		29,819		9,542		49,221		16,402
Total interest income		12,991,420		7,746,584		24,287,168		14,380,993
Interest expense:
Deposits		3,961,708		2,245,204		7,193,786		4,189,453
Federal funds purchased		—		3,804		—		3,804
Federal Home Loan Bank		1,072,555		435,594		2,034,277		703,666
Junior subordinated debt securities		75,690		102,238		166,048		206,613
Trust preferred capital notes		333,710		—		656,655		—
Long-term debt		54,149		53,280		107,515		106,547
Total interest expense		5,497,812		2,840,120		10,158,281		5,210,083
Net interest income		7,493,608		4,906,464		14,128,887		9,170,910
Provision for loan losses		750,000		685,000		1,420,000		1,015,000
Net interest income after provision for loan losses		6,743,608		4,221,464		12,708,887		8,155,910
Noninterest income:
Service charges on deposit accounts		294,162		289,582		548,222		529,982
Other service charges and fees		129,614		151,356		250,603		280,140
Mortgage brokerage income		428,006		432,406		764,269		771,137
Title insurance income		262,112		—		476,137		—
Investment service income		117,816		—		234,415		—
Other		35,080		67,294		77,098		105,680
Total noninterest income		1,266,790		940,638		2,350,744		1,686,939
Noninterest expense:
Salaries and employee benefits		2,236,507		1,568,010		4,305,145		3,116,524
Net occupancy expense		389,379		222,794		785,990		457,788
Furniture and equipment expense		337,804		294,705		673,775		582,219
Other operating expense		1,227,225		836,426		2,368,677		1,605,479
Total noninterest expense		4,190,915		2,921,935		8,133,587		5,762,010
Income before provision for income taxes and noncontrolling interest		3,819,483		2,240,167		6,926,044		4,080,839
Provision for income taxes		1,296,553		762,643		2,351,983		1,386,076
Income before noncontrolling interest		2,522,930		1,477,524		4,574,061		2,694,763
Noncontrolling interest in subsidiary		8,392		—		13,788		—
Net income	$	2,514,538	$	1,477,524	$	4,560,273	$	2,694,763
Basic earnings per share	$	0.54	$	0.43	$	0.99	$	0.80
Diluted earnings per share	$	0.49	$	0.37	$	0.89	$	0.69
Dividends paid per share	$	0.055	$	0.045	$	0.109	$	0.091
Basic weighted average shares outstanding		4,637,621		3,410,330		4,602,860		3,368,221
Diluted weighted average shares outstanding		5,266,764		4,130,471		5,250,648		4,094,732

See accompanying notes to the consolidated financial statement (unaudited).

4

Commonwealth Bankshares, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

	Six months ended
	June 30, 2006			June 30, 2005
Net income	$	4,560,273		$	2,694,763
Other comprehensive income, net of income tax:
Net change in unrealized loss on securities available for sale		(52,726	)		(28,141	)
Comprehensive income	$	4,507,547		$	2,666,622

See accompanying notes to the consolidated financial statement (unaudited).

5

Commonwealth Bankshares, Inc.

Consolidated Statements of Stockholders’ Equity

Six Months Ended June 30, 2006, and Years Ended December 31, 2005 and 2004

	Common Shares	Common Amount		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (loss)			Total
Balance, January 1, 2004	2,077,098	$	4,720,678	$	6,547,479	$	7,529,445		$	392,963		$	19,190,565
Comprehensive income:
Net income	—		—		—		3,101,209			—			3,101,209
Change in unrealized loss on securities available for sale, net of tax effect	—		—		—		—			(339,745	)		(339,745	)
Total comprehensive income													2,761,464
Issuance of common stock	168,440		382,818		903,841		—			—			1,286,659
Issuance of common stock through private placement	1,037,735		2,358,490		11,870,493		—			—			14,228,983
Cash dividends - $0.182 per share	—		—		—		(443,522	)		—			(443,522	)
Balance, December 31, 2004	3,283,273		7,461,986		19,321,813		10,187,132			53,218			37,024,149
Comprehensive income:
Net income	—		—		—		6,634,308			—			6,634,308
Change in unrealized loss on securities available for sale, net of tax effect	—		—		—		—			(58,789	)		(58,789	)
Total comprehensive income													6,575,519
Issuance of common stock	133,919		304,360		1,049,696		—			—			1,354,056
Issuance of common stock through private placement	1,063,710		2,417,522		16,108,400		—			—			18,525,922
Cash dividends - $0.191per share	—		—		—		(749,627	)		—			(749,627	)
Balance, December 31, 2005	4,480,902		10,183,868		36,479,909		16,071,813			(5,571	)		62,730,019
(Unaudited)
Comprehensive income:
Net income	—		—		—		4,560,273			—			4,560,273
Change in unrealized loss on securities available for sale, net of tax effect	—		—		—		—			(52,726	)		(52,726	)
Total comprehensive income													4,507,547
Issuance of common stock	181,918		414,722		1,226,805		—			—			1,641,527
Cash dividends - $0.109 per share	—		—		—		(503,492	)		—			(503,492	)
Balance, June 30, 2006	4,662,820	$	10,598,590	$	37,706,714	$	20,128,594		$	(58,297	)	$	68,375,601

See accompanying notes to the consolidated financial statement (unaudited).

6

Commonwealth Bankshares, Inc.

Consolidated Statements of Cash Flows (Unaudited)

	Six months ended
	June 30, 2006			June 30, 2005
Operating activities:
Net income	$	4,560,273		$	2,694,763
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Provision for loan losses		1,420,000			1,015,000
Depreciation and amortization		599,298			484,630
Loss on the sale of premises and equipment		245			—
Net amortization of premiums and accretion of discounts on investments securities		(2,290	)		(1,678	)
Deferred tax assets		(901,421	)		(499,210	)
Net change in:
Loans held for sale		—			(12,186,651	)
Accrued interest receivable		(1,138,927	)		(597,103	)
Other assets		(1,185,920	)		(1,270,201	)
Accrued interest payable		351,951			158,972
Other liabilities		2,625,221			922,537
Net cash provided by (used in) operating activities		6,328,430			(9,278,941	)
Investing activities:
Purchase of securities available for sale		(19,766	)		(19,867	)
Purchase of equity securities, restricted		(6,655,985	)		(7,389,925	)
Net purchase of premises and equipment		(1,916,371	)		(392,436	)
Net change in loans		(103,696,305	)		(88,090,474	)
Proceeds from:
Calls and maturities of securities held to maturity		23,437			18,797
Sales and maturities of securities available for sale		284,909			1,208,979
Sale of equity securities, restricted		5,345,535			7,147,025
Sale of premises and equipment		9,750			—
Net cash used in investing activities		(106,624,796	)		(87,517,901	)
Financing activities:
Net change in:
Demand, interest-bearing demand and savings deposits		31,563,156			21,151,854
Time deposits		23,160,837			11,431,647
Brokered time deposits		36,156,000			43,364,957
Short-term borrowings		10,851,600			2,917,350
Principal payments on long-term debt		(29,132	)		(32,460	)
Dividends reinvested and sale of stock		347,327			19,100,170
Dividends paid		(503,492	)		(303,753	)
Net cash provided by financing activities		101,546,296			97,629,765
Net increase in cash and cash equivalents		1,249,930			832,923
Cash and cash equivalents, January 1		13,595,811			8,946,141
Cash and cash equivalents, June 30	$	14,845,741		$	9,779,064
Supplemental cash flow disclosure:
Interest paid during the period	$	9,806,330		$	5,051,111
Income taxes paid during the period	$	3,067,877		$	1,498,000
Supplemental noncash disclosure:
Conversion of convertible preferred securities for common stock	$	1,052,331		$	351,650
Transfer from loans held for sale to loans	$	—		$	11,289,500

See accompanying notes to the consolidated financial statements (unaudited).

7

Commonwealth Bankshares, Inc.

Notes to Consolidated Financial Statements (Unaudited)

June 30, 2006

Note A – Basis of Presentation

The accounting and reporting policies of Commonwealth Bankshares, Inc. (the “Parent”) and its subsidiaries, Commonwealth Bankshares Capital Trust I (the “Trust”), and Bank of the Commonwealth (the “Bank”) and its subsidiaries, BOC Title of Hampton Roads, Inc., T/A Executive Title Center, BOC Insurance Agencies of Hampton Roads, Inc., Community Home Mortgage of Virginia, Inc., T/A Bank of the Commonwealth Mortgage and Commonwealth Financial Advisors, LLC, are in accordance with accounting principles generally accepted in the United States of America and conform to accepted practices within the banking industry. The accompanying consolidated financial statements include the accounts of the Parent, the Bank and its subsidiaries, collectively referred to as “the Company”. All significant intercompany balances and transactions have been eliminated in consolidation. FASB Interpretation No. 46(R) requires that the Company no longer consolidate Commonwealth Bankshares Capital Trust I. The junior subordinated debt of the Trust is reflected as a liability of the Company.

The accompanying unaudited financial statements have been prepared in accordance with generally accepted accounting principles in the United States for interim financial reporting and with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. For further information, refer to the financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2005.

On May 16, 2006, the Board of Directors approved an amendment to the Articles of Incorporation of the Company to increase the number of authorized shares of Common Stock from 15,000,000 to 16,500,000 shares, to reduce the par value of each share from $2.50 to $2.273 per share, and effect an eleven-for-ten stock split distributed on June 30, 2006 to shareholders of record on June 19, 2006.

All share and per share amounts included in the accompanying consolidated financial statements and footnotes have been restated for all periods presented to reflect the stock split.

Certain 2005 amounts have been reclassified to conform to the 2006 presentation.

Note B – Earnings Per Share

Basic earnings per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by the weighted average common and potential dilutive common equivalent shares outstanding, determined as follows:

8

	Three months ended				Six months ended
	June 30, 2006		June 30, 2005		June 30, 2006		June 30, 2005
Earnings available to common shareholders	$	2,514,538	$	1,477,524	$	4,560,273	$	2,694,763
Weighted average shares outstanding		4,637,621		3,410,330		4,602,860		3,368,221
Basic earnings per common share	$	0.54	$	0.43	$	0.99	$	0.80
Effect of dilutive securities:
Earnings available to common shareholders	$	2,514,538	$	1,477,524	$	4,560,273	$	2,694,763
Junior subordinated debt securities interest net of tax effect		48,149		64,487		103,615		130,436
Earnings available to common plus assumed conversion	$	2,562,687	$	2,562,687	$	4,663,888	$	2,825,199
Effect of dilutive securities on EPS:
Weighted average shares outstanding		4,637,621		3,410,330		4,602,860		3,368,221
Effect of stock options		106,179		39,762		93,147		39,974
Effect of junior subordinated debt securities		522,964		680,379		554,641		686,537
Diluted average shares outstanding		5,266,764		4,130,471		5,250,648		4,094,732
Diluted earnings per common share	$	0.49	$	0.37	$	0.89	$	0.69

Note C – Investment Securities

The amortized costs and fair values of investment securities are as follows:

	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
June 30, 2006
Available for sale:
U.S. Government and agency securities	$	6,009,520	$	—	$	(87,841	)	$	5,921,679
Mortgage-backed securities		952,424		1,579		(12,775	)		941,228
State and municipal securities		1,173,891		10,708		—			1,184,599
	$	8,135,835	$	12,287	$	(100,616	)	$	8,047,506
Held to maturity:
Mortgage-backed securities	$	333,483	$	427	$	(2,520	)	$	331,390
State and municipal securities		176,656		6,013		—			182,669
	$	510,139	$	6,440	$	(2,520	)	$	514,059
December 31, 2005
Available for sale:
U.S. Government and agency securities	$	6,009,424	$	3,501	$	(27,673	)	$	5,985,252
Mortgage-backed securities		1,093,497		4,219		(12,770	)		1,084,946
State and municipal securities		1,299,712		24,283		—			1,323,995
	$	8,402,633	$	32,003	$	(40,443	)	$	8,394,193
Held to maturity:
Mortgage-backed securities	$	357,610	$	543	$	(1,180	)	$	356,973
State and municipal securities		172,020		9,138		—			181,158
	$	529,630	$	9,681	$	(1,180	)	$	538,131

9

Note D - Loans

Major classifications of loans are summarized as follows:

	June 30, 2006			December 31, 2005
Construction and development	$	143,824,021		$	103,090,975
Commercial		56,511,523			51,895,643
Commercial mortgage		305,287,071			257,204,304
Residential mortgage		94,775,661			86,353,111
Installment loans to individuals		12,871,869			11,596,862
Other		1,287,042			659,231
Gross loans		614,557,187			510,800,126
Unearned income		(1,949,975	)		(1,896,749	)
Allowance for loan losses		(6,881,821	)		(5,523,087	)
Loans, net	$	605,725,391		$	503,380,290
Non-performing assets are as follows:
	June 30, 2006			June 30, 2005
Non-accrual loans:
Construction and development	$	—		$	—
Commercial		93,462			424,093
Commercial mortgage		—			—
Residential mortgage		—			—
Installment loans to individuals		43,962			17,160
Other		—			—
		137,424			441,253
Loans contractually past-due 90 days or more:
Construction and development		—			—
Commercial		115,757			—
Commercial mortgage		—			—
Residential mortgage		—			—
Installment loans to individuals		862			—
Other		1,597			705
		118,216			705
Total non-performing loans	$	255,640		$	441,958
Other real estate owned	$	—		$	—
Total non-performing assets	$	255,640		$	441,958
Allowance as a percentage of non-performing assets		2692.00	%		861.21	%
Non-performing assets as a percentage of total assets		0.04	%		0.09	%

Note E – Allowance For Loan Losses

A summary of transactions in the allowance for loan losses for the six months ended June 30, 2006 and 2005 were as follows:

	June 30, 2006			June 30, 2005
Balance at beginning of year	$	5,523,087		$	2,839,315
Provision charged to operating expense		1,420,000			1,015,000
Loans charged-off		(61,791	)		(49,006	)
Recoveries of loans previously charged-off		525			871
Balance at end of period	$	6,881,821		$	3,806,180

10

Note F – Premises and Equipment

Premises and equipment are summarized as follows:

	June 30, 2006			December 31, 2005
Land	$	345,402		$	345,403
Building and improvements		3,040,031			3,029,245
Leasehold improvements		2,759,935			2,552,211
Furniture and equipment		9,278,676			8,779,399
Construction in progress		1,385,713			210,194
		16,809,757			14,916,452
Less accumulated depreciation		(7,347,347	)		(6,761,120	)
	$	9,462,410		$	8,155,332

Note G – Subsequent Events

On July 18, 2006, the Company declared a $0.055 per share cash dividend payable August 31, 2006, to shareholders of record on August 21, 2006.

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

General

The sole business of Commonwealth Bankshares, Inc. is to serve as a holding company for Bank of the Commonwealth. The Company was incorporated as a Virginia Company on June 6, 1988, and on November 7, 1988 it acquired the Bank.

Bank of the Commonwealth was formed on August 28, 1970 under the laws of Virginia. Since the Bank opened for business on April 14, 1971, its main banking and administrative offices have been located in Norfolk, Virginia. The Bank currently operates four branches in Norfolk, four branches in Virginia Beach, two branches in Chesapeake and one branch in Portsmouth. Bank of the Commonwealth Mortgage currently operates one mortgage branch office in Virginia Beach, one mortgage branch office in Gloucester, one mortgage branch office in Richmond, Virginia and a mortgage branch office in Kill Devil Hills, North Carolina. Executive Title Center currently operates one title insurance branch office in Norfolk and one title insurance branch in Gloucester, Virginia. Commonwealth Financial Advisors currently has three locations, one in Virginia Beach and two in Norfolk, Virginia.

The Bank concentrates its marketing efforts in the cities of Norfolk, Virginia Beach, Portsmouth and Chesapeake, Virginia. The Company’s present intention is to continue concentrating its banking activities in its current market, which the Company believes, is an attractive area in which to operate.

The following discussion provides information about the important factors affecting the consolidated results of operations, financial condition, capital resources and liquidity of the Company. This report identifies trends and material changes that occurred during the reporting period and should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2005.

In addition to historical information, the following discussion contains forward looking statements that are subject to risks and uncertainties that could cause the Company’s actual results to differ materially from those anticipated, including risks associated with general economic conditions and interest rate trends. These forward looking statements include, but are not limited to, statements regarding management’s expectations that the Company will continue to experience growth in core operating earnings, improved credit quality and increased service fee income, and that the Company may pay cash dividends in the future. Readers are cautioned not to place undue reliance on these forward looking statements, which reflect management’s analysis only as of the date hereof.

11

Critical Accounting Policies

Certain critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. The Company’s most critical accounting policy relates to the Company’s allowance for loan losses, which reflects the estimated losses resulting from the inability of the Company’s borrowers to make required loan payments. If the financial condition of the Company’s borrowers were to deteriorate, resulting in an impairment of their ability to make payments, the Company’s estimates would be updated, and additional provisions for loan losses may be required.

New Accounting Pronouncement

In June 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109” (FIN 48). FIN 48 prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is assessing FIN 48 and has not determined the impact that the adoption of FIN 48 will have on its results of operations.

Stock Compensation Plans

At June 30, 2006, the Company has four stock-based compensation plans, which are more fully described in Item 11 and Note 20 in our Annual Report on Form 10-K for the year ended 2005. Prior to 2006, the Company accounted for stock-based compensation under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. Under APB 25, compensation cost was only recognized for the excess, if any, of the quoted market price of the stock at the grant date or other measurement date over the amount an employee must pay to acquire the stock. As such, under APB 25 the Company recognized no compensation expense for stock options since the exercise prices equaled the market value of the underlying common stock on the date of grant. In December 2004, FASB enacted Statement of Financial Accounting Standards 123 – revised 2004 (“SFAS 123R”), Share-Based Payment, which replaced Statement of Financial Accounting Standards No. 123 (“SFAS 123”), Accounting for Stock-Based Compensation, and supercedes APB Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees and amended FASB Statement No. 95, Statement of Cash Flows. SFAS 123R requires the measurement of all share-based payments to employees, including grants of employee stock options, using a fair-value based method and the recording of such expense in our consolidated statements of income.

On January 1, 2006, the Company adopted SFAS 123R using the modified prospective transition method. Under this transition method, compensation cost to be recognized beginning in the first quarter of 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of SFAS 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS 123R. The modified prospective transition method does not require the restatement of prior periods to reflect the fair value method of expensing stock-based compensation. Substantially, all employee stock options are awarded at the end of the year as part of an employees overall compensation, based on the individual’s performance during that year, and either vest immediately or over a nominal vesting period. The adoption of SFAS 123R had no impact on the Company’s consolidated statements of income or net income per share.

During 2005, the Company disclosed pro forma compensation expense annually by calculating the stock option grants’ fair value using the Black-Scholes model and disclosing the impact on net income and net income per share. No disclosure of pro forma compensation expense was made for the years ended December 31, 2004 and 2003 as the impact to compensation expense would not have been material had it been applied.

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Financial Condition

Total assets at June 30, 2006 reached a new high of $658.6 million, up 19.9% or $109.1 million from $549.5 million at December 31, 2005. Total loans, the Company’s largest and most profitable asset, ended the quarter at a record $612.6 million, up $103.7 million or 20.4% from December 31, 2005. The low interest rate environment, our strong local economy and the efforts of our experienced loan officers to develop new loan relationships combined with the support of existing customers continue to generate record loan demand for the Company.

As of June 30, 2006, 82.3% of the Company’s loan portfolio consisted of commercial loans, which are considered to provide higher yields, but also generally carry a greater risk. It should be noted that 60.4% of these commercial loans are collateralized with real estate, and accordingly do not represent an unfavorable risk. At June 30, 2006, 65.1% of the Bank’s total loan portfolio consisted of loans collateralized with real estate.

Deposits are the most significant source of the Company’s funds for use in lending and general business purposes. The Company’s strong growth in deposits continued into the second quarter of 2006 with deposits at June 30, 2006 reaching a record $474.8 million, an increase of $90.9 million from December 31, 2005. Noninterest-bearing demand deposits decreased by $263.3 thousand or 0.6% and interest-bearing deposits increased by $91.1 million or 26.7%. Time deposits, excluding broker certificates of deposit, increased $23.2 million during the second quarter of 2006, with interest-bearing demand and savings accounts increasing $32.2 million and decreasing $402.9 thousand, respectively. To help fund the record increase in the loan portfolio during the first half of 2006, the Company added $36.2 million in broker certificates of deposit. The interest rates paid on these deposits are consistent with the market rates offered in our local area. Management believes the growth in deposits is a result of the new branch locations, increased promotional efforts put forth by the Company as well as the efforts of our experienced staff to attract new customers through our special promotions, product enhancements and offering unsurpassed service. The Company’s deposits are predominantly provided by individuals and businesses located within communities served.

As of June 30, 2006, short-term borrowings (advances from FHLB) were $76.5 million, compared to $65.6 million outstanding on December 31, 2005. The increase in short-term borrowings was primarily a result of our loan demand continuing to increase at a faster pace than our deposit growth.

Results of Operation

During the first six months of 2006, the Company reached a record $4.6 million in net income, an increase of 69.2% over the $2.7 million reported in the first six months of 2005. On a per share basis, diluted earnings was 89 cents for the six months ended 2006, up 20 cents or 29.0% from the 69 cents reported in the comparable period in 2005. Net income for the quarter ended June 30, 2006 totaled $2.5 million an increase of 70.2% or $1.0 million over the amount reported in the second quarter of 2005. Diluted earnings per share equaled 49 cents for three months ended June 30, 2006 compared to 37 cents for the same period in 2005.

Profitability as measured by the Company’s return on average assets (ROA) was 1.53% and 1.36% for the six months ended June 30, 2006 and 2005, respectively. ROA was impacted by the record increase in net income of 69.2% which was offset by an increase in average assets of $202.6 million or 50.7% from June 30, 2005 to June 30, 2006. The return on average equity (ROE) was 14.11% and 14.01% for the six months ended June 30, 2006 and 2005, respectively. The increase in ROE is the result of the record increase in net income which was offset by the growth in average equity of $26.4 million or 68.1% from June 30, 2005 to June 30, 2006. The substantial growth in average equity is the result of the $19.34 million in additional capital raised by the Company during the second quarter of 2005 through a private placement of its common stock. For the quarter ended June 30, 2006, ROA 1.60% and ROE was 15.15%.

A fundamental source of the Company’s earnings, net interest income, is defined as the difference between income on earning assets and the cost of funds supporting those assets. Significant categories of earning assets are loans and securities, while deposits and short-term borrowings represent the major portion of interest- bearing liabilities. The level of net interest income is impacted primarily by variations in the volume and mix of

13

these assets and liabilities, as well as changes in interest rates when compared to previous periods of operations. Net interest income was a record $14.1 million for the six months ended June 30, 2006, an increase of $5.0 million or 54.1% over the comparable period in 2005. For the quarter ended June 30, 2006, net interest income was $7.5 million, an increase of $2.6 million or 52.7% over the comparable period in 2005.

Total interest income was $24.3 million for the six months ended June 30, 2006, an increase of $9.9 million or 68.9% over the same period of 2005. For the quarter ended June 30, 2006, total interest income reached a record $13.0 million, an increase of $5.2 million or 67.7% over the second quarter of 2005. Strong loan demand continued into the second quarter of 2006 generating record increases in interest income. Interest income on loans increased $9.7 million or 68.9% to $23.8 million for the six months ended June 30, 2006 and $5.1 million or 67.6% to $12.8 million for the three months ended June 30, 2006, as compared to the same time periods in 2005, respectively.

Interest expense of $10.2 million for the six months ended June 30, 2006 represented a $4.9 million increase from the comparable period in 2005. Interest expense for the second quarter of 2006 was $5.5 million, up $2.7 million from the quarter ended June 30, 2005. The increase was primarily attributable to the record increase in the Company’s average interest bearing liabilities, along with the increase in overall rates paid on liabilities as a result of the rising interest rate environment. Year to date average interest bearing liabilities increased $166.1 million or 52.2% from June 30, 2005 to June 30, 2006, while the overall rates paid on these liabilities increased 93 basis points to 4.23%.

The net interest margin, which is calculated by expressing net interest income as a percentage of average interest earning assets, is an indicator of the Company’s efficiency in generating income from earning assets. The net interest margin is affected by the structure of the balance sheet as well as by competition and the economy. The Company’s net interest margin (tax equivalent basis) increased from 4.80% during the first six months of 2005 to 4.91% for the same period in 2006. This increase can be attributed to changes in the balance sheet mix, changes in the yields obtained from interest earning assets and paid on interest bearing liabilities, the prevailing interest rate environment and changes in volume.

The provision for loan losses is the annual cost of maintaining an allowance for inherent credit losses. The amount of the provision each year and the level of the allowance are matters of judgment and are impacted by many factors, including actual credit losses during the period, the prospective view of credit losses, loan performance measures and trends (such as delinquencies and charge-offs), loan growth, and other factors, both internal and external that may affect the quality and future loss experience of the credit portfolio. At June 30, 2006, the Company had total allowance for loan losses of $6.9 million or 1.12% of total loans. As a result of the significant growth in the loan portfolio, the Company made provisions for loan losses of $1,420,000 for the first six months of 2006, compared to $1,015,000 for the same period of 2005. Loan charge-offs for the six months ended June 30, 2006 totaled $61,791 and recoveries for the same period totaled $525.

Despite the rapid growth in the Company’s loan portfolio, asset quality remains exceptional. Non-performing assets were $255.6 thousand or 0.04% of total assets at June 30, 2006, compared to $442.0 thousand or 0.09% of total assets at June 30, 2005. Non-accrual loans at June 30, 2006 consisted of ten loans which totaled $137.4 thousand. The majority of the non-accrual loans are making monthly payments and in most cases are secured with workout arrangements currently in place. Based on current expectations relative to portfolio characteristics and performance measures including loss projections, management considers the level of the allowance to be adequate.

Noninterest income for the six months ended June 30, 2006 equaled $2.4 million, an increase of $663.8 thousand over the $1.7 million reported for the six months ended June 30, 2005. For the three months ended June 30, 2006, noninterest income was $1.3 million, up $326.2 thousand or 34.7% over the comparable period in 2005. Revenues generated from the formation of the investment company (fourth quarter 2005) contributed $234.4 and $117.8 thousand to noninterest income for the six months and three months ended June 30, 2006, respectively. Also included in noninterest income for the first six months of 2006 was $476.1 thousand in revenues from the title company which commenced operations in July 2005.

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Noninterest expense represents the overhead expenses of the Company. Noninterest expense for the six months ended June 30, 2006 totaled $8.1 million, an increase of $2.4 million over the $5.8 million recorded during the six months ended June 30, 2005. Salaries and employee benefits, the largest component of noninterest expense, increased by $1.2 million or 38.1% over the $3.1 million reported during the first six months of 2005. For the quarter ended June 30, 2006, salaries and employee benefits increased $668.5 thousand to $2.2 million as compared to $1.6 million for the quarter ended June 30, 2005. This increase was driven by annual merit increases, the addition of several new positions, including the additional staff needed to operate the Bank’s two new branches which were opened in the latter part of 2005 and the branch opened in the second quarter of 2006, an increase in certain employee benefit costs, the formation of the Title Company and the Investment Company and the expansion of the Mortgage Company. Occupancy expense increased $328.2 thousand for the six months ended June 30, 2006 as compared to same period in 2005. This increase relates to the addition of the Bank’s new Ocean View and Western Branch Blvd. branch locations which opened in the third quarter of 2005, the addition of the private bank center which opened in the second quarter of 2006, the addition of two title company locations, one mortgage company location, three financial company locations and the relocation of our data processing center to a larger, state of the art facility. Other noninterest operating expenses, which include a grouping of numerous transactions relating to normal banking operations, increased $763.2 thousand to $2.4 million or 47.5% over the comparable period for 2005. The major part of this increase is the result of the Company’s continued investment in an extensive multimedia advertising campaign utilizing billboards, radio and newspaper to promote and reinforce its presence throughout Southside Hampton Roads. For the six months ended June 30, 2006, advertising and marketing expense increased $205.5 thousand or 55.4% over the comparable period for 2005. In addition, due to the strong growth and increase in shareholders’ equity, the bank franchise tax increased $160.0 thousand or 113.3% for the six months ended June 30, 2006.

Capital Resources

Total stockholders’ equity for the Company increased to $68.4 million from $62.7 million or 9% from December 31, 2005 to June 30, 2006. Contributing to the increase in total stockholders’ equity was our record earnings of $4.6 million for the first six months of 2006. Stockholders’ equity for June 30, 2006 reflects a $58.3 thousand net unrealized loss on securities available for sale in accordance with FASB 115, as compared to a $5.6 thousand net unrealized loss as of December 31, 2005.

The Federal Reserve Board, the Office of Controller of the Currency, and the FDIC have issued risk-based capital guidelines for U.S. banking organizations. These guidelines provide a capital framework that is sensitive to differences in risk profiles among banking companies.

Risk-based capital ratios are another measure of capital adequacy. At June 30, 2006, the Bank’s risk-adjusted capital ratios were 14.77% for Tier 1 and 15.91% for total capital, well above the required minimums of 4% and 8%, respectively. These ratios are calculated using regulatory capital (either Tier 1 or total capital) as the numerator and both on and off-balance sheet risk-weighted assets as the denominator. Tier 1 capital consists primarily of common equity less goodwill and certain other intangible assets. Total capital adds certain qualifying debt instruments and a portion of the allowance for loan losses to Tier 1 capital. One of four risk weights, primarily based on credit risk, is applied to both on and off-balance sheet assets to determine the asset denominator. Under Federal Reserve Bank rules, the Bank was considered “well capitalized,” the highest category of capitalization defined by the regulators, as of June 30, 2006.

In order to maintain a strong equity capital position and to protect against the risks of loss in the investment and loan portfolios and on other assets, management will continue to monitor the Bank’s capital position. Several measures have been or will be employed to maintain the Bank’s strong capital position, including but not limited to continuing its efforts to return all non-performing assets to performing status, monitoring the Bank’s growth and continued utilization of its formal asset/liability policy.

Cash Dividend and Stock Split

In compliance with the Company’s dividend payout policy, on February 28, 2006 the Company paid a cash dividend of 5.45 cents per share, totaling $249.5 thousand. On May 31, 2006 the Company paid a 5.45 cent dividend totaling $254.0 thousand. Total dividends of 10.9 cents per share paid during the first six months of 2006 are up 20% from the 9.1 cents per share paid during the same time period in 2005.

15

On May 16, 2006, the Board of Directors approved an amendment to the Articles of Incorporation of the Company to increase the number of authorized shares of Common Stock from 15,000,000 to 16,500,000 shares, to reduce the par value of each share from $2.50 to $2.273 per share, and effect an eleven-for-ten stock split distributed on June 30, 2006 to shareholders of record on June 19, 2006.

All share and per share amounts included in the accompanying consolidated financial statements and footnotes have been restated for all periods presented to reflect the stock split.

Interest Sensitivity and Liquidity

The Company’s primary component of market risk is exposure to interest rate volatility. Fluctuations in interest rates will impact both the level of interest income and interest expense and the market value of the Company’s interest earning assets and interest bearing liabilities.

The Company’s Asset/Liability Management Committee (ALCO) is responsible for formulating liquidity strategies, monitoring performance based on established objectives and approving new liquidity initiatives. ALCO’s overall objective is to optimize net interest income within the constraints of prudent capital adequacy, liquidity needs, the interest rate and economic outlook, market opportunities, and customer requirements. General strategies to accomplish this objective include maintaining a strong balance sheet, achieving solid core deposit growth, taking on manageable interest rate risk, and adhering to conservative financial management on a daily basis. These strategies are monitored regularly by ALCO and reviewed periodically with the Board of Directors.

The primary goal of the Company’s asset/liability management strategy is to maximize its net interest income over time while keeping interest rate risk exposure within levels established by the Company’s management. The Company’s ability to manage its interest rate risk depends generally on the Company’s ability to match the maturities and re-pricing characteristics of its assets and liabilities while taking into account the separate goals of maintaining asset quality and liquidity and achieving the desired level of net interest income. The principal variables that affect the Company’s management of its interest rate risk include the Company’s existing interest rate gap position, management’s assessment of future interest rates and the withdrawal of liabilities over time. In addition, the Company uses simulation modeling to forecast future balance sheet and income statement behavior. By studying the effects on net interest income of rising, stable and falling interest rate scenarios, the Company can position itself to take advantage of anticipated interest rate movements, and protect itself from unanticipated interest rate movements, by understanding the dynamic nature of its balance sheet components.

One technique the Company uses in managing its interest rate risk exposure is the management of the Company’s interest sensitivity gap. The interest sensitivity gap is defined as the difference between the amount of interest earning assets anticipated, based upon certain assumptions, to mature or re-price within a specific time period and the amount of interest bearing liabilities anticipated, based upon certain assumptions, to mature or re-price within that time period. At June 30, 2006, the Company’s one year “positive gap” (interest earning assets maturing or re-pricing within the same period exceed interest bearing liabilities maturing or re-pricing within the same period) was approximately $55.9 million, or 8.49% of total assets. Thus, during periods of rising interest rates, this implies that the Company’s net interest income would be positively affected because the yield of the Company’s interest earning assets is likely to rise more quickly than the cost of interest bearing liabilities. At December 31, 2005, the Company’s one year “positive gap” was approximately $52.3 million, or 9.53% of total assets.

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The following tables set forth the amount of interest earning assets and interest bearing liabilities outstanding at June 30, 2006 and December 31, 2005 that are subject to re-pricing or that mature in each of the future time periods shown. Loans and securities with call or balloon provisions are included in the period in which they balloon or may first be called. Except as stated above, the amount of assets and liabilities shown that re-price or mature during a particular period were determined in accordance with the contractual terms of the asset or liability.

Interest Rate Sensitivity Analysis

	June 30, 2006
(in thousands)	Within 90 Days			91 Days to One Year			After One but Within Five Years			After Five Years			Total
Interest Earning Assets:
Investment securities	$	1,304		$	520		$	5,447		$	1,287		$	8,558
Equity securities		—			—			—			6,638			6,638
Loans		295,089			17,990			193,946			107,532			614,557
Interest bearing deposits		201			—			—			—			201
Federal funds sold		5,282			—			—			—			5,282
Total	$	301,876		$	18,510		$	199,393		$	115,457		$	635,236
Cumulative totals		301,876			320,386			519,779			635,236
Interest Bearing Liabilities:
Deposits:
Demand	$	89,358		$	—		$	—		$	—		$	89,358
Savings		7,932			—			—			—			7,932
Time deposits, $100,000 and over		8,641			22,572			46,275			10,343			87,831
Other time deposits		16,131			43,015			170,367			18,400			247,913
Short-term borrowings		76,456			—			—			—			76,456
Long-term debt		350			4			5,000			—			5,354
Junior subordinated debt securities		—			—			—			3,873			3,873
Trust preferred capital notes		—			—			—			20,619			20,619
Total	$	198,868		$	65,591		$	221,642		$	53,235		$	539,336
Cumulative totals		198,868			264,459			486,101			539,336
Interest sensitivity gap	$	103,008		$	(47,081	)	$	(22,249	)	$	62,222		$	95,900
Cumulative interest sensitivity gap	$	103,008		$	55,927		$	33,678		$	95,900
Cumulative interest sensitivity gap as a percentage of total assets		15.64	%		8.49	%		5.11	%		14.56	%		—

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Interest Rate Sensitivity Analysis

	December 31, 2005
(in thousands)	Within 90 Days			91 Days to One Year			After One but Within Five Years			After Five Years			Total
Interest Earning Assets:
Investment securities	$	52		$	519		$	7,478		$	875		$	8,924
Equity securities		—			—			—			5,327			5,327
Loans		233,583			28,722			141,467			107,028			510,800
Interest bearing deposits		541			—			—			—			541
Federal funds sold		1,159			—			—			—			1,159
Total	$	235,335		$	29,241		$	148,945		$	113,230		$	526,751
Cumulative totals		235,335			264,576			413,521			526,751
Interest Bearing Liabilities:
Deposits:
Demand	$	57,129		$	—		$	—		$	—		$	57,129
Savings		8,335			—			—			—			8,335
Time deposits, $100,000 and over		4,457			24,624			34,384			11,398			74,863
Other time deposits		12,820			38,887			123,114			26,743			201,564
Short-term borrowings		65,604			—			—			—			65,604
Long-term debt		376			4			5,003			—			5,383
Junior subordinated debt securities		—			—			—			4,925			4,925
Trust preferred capital notes		—			—			—			20,619			20,619
Total	$	148,721		$	63,515		$	162,501		$	63,685		$	438,422
Cumulative totals		148,721			212,236			374,737			438,422
Interest sensitivity gap	$	86,614		$	(34,274	)	$	(13,556	)	$	49,545		$	88,329
Cumulative interest sensitivity gap	$	86,614		$	52,340		$	38,784		$	88,329
Cumulative interest sensitivity gap as a percentage of total assets		15.76	%		9.53	%		7.06	%		16.08	%

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

There have been no significant changes from the quantitative and qualitative disclosures made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Item 4. Controls and Procedures

Disclosure Controls and Procedures. The Company, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and regulations and that such information is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company or its subsidiary to disclose material information otherwise required to be set forth in the Company’s periodic reports.

Management’s Report on Internal Control over Financial Reporting. Management of the Company is responsible for establishing and maintaining effective internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and board of directors regarding the preparation and fair presentation of published financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2006. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control – Integrated Framework. Based on our assessment, we believe that, as of June 30, 2006, the Company’s internal control over financial reporting is effective based on those criteria.

Management’s assessment of the effectiveness of internal control over financial reporting as of December 31, 2005 was not required to be audited at that time, by PKF Witt Mares, PLC, the independent registered public accounting firm who also audited the Company’s consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2005.

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Part II. OTHER INFORMATION

Item 1. Legal proceedings

As of June 30, 2006, there were no legal proceedings against the Company.

Item 1A. Risk factors

There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Item 2. Unregistered sales of equity securities and use of proceeds

There were no changes in the Company’s securities during the quarter.

Item 3. Defaults upon senior securities

There were no defaults upon senior securities during the quarter.

Item 4. Submission of matters to a vote of security holders

The Annual Meeting of Stockholders was held on June 27, 2006. Of the 4,231,553 shares entitled to vote at the meeting, 3,175,896 voted. The following matter was voted on at the meeting.

Proposal I: The Shareholders of the Company elected two members of the Board of Directors for three year terms as Class III directors until the Annual Meeting of Shareholders in 2009. Votes for each nominee were as follows:

	FOR	WITHHELD
Laurence C. Fentriss	3,140,832	35,064
Edward J. Woodard, Jr.	3,140,777	35,119

The following Class I and Class II directors whose terms expire in 2007 and 2008 continued in office: E. Carlton Bowyer, Ph. D., Morton Goldmeier, William D. Payne, M.D., Richard J. Tavss, Herbert L. Perlin, Kenneth J. Young and Thomas W. Moss, Jr.

Item 5. Other information

None.

Item 6. Exhibits

(a) Exhibits

31.1	Certification of CEO pursuant to Rule 13a-14(a).
31.2	Certification of Principal Financial Officer pursuant to Rule 13a-14(a).
32.1	Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350.

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SIGNATURES

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

	Commonwealth Bankshares, Inc.
	(Registrant)
Date: August 11 , 2006	by:	/s/ Edward J. Woodard, Jr., CLBB
		Edward J. Woodard, Jr., CLBB
		Chairman of the Board,
		President and Chief Executive Officer
Date: August 11, 2006	by:	/s/ Cynthia A. Sabol, CPA
		Cynthia A. Sabol, CPA
		Executive Vice President,
		& Chief Financial Officer

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EX-31.1

Exhibit 31.1

CERTIFICATION

I, Edward J. Woodard, Jr., CLBB certify that:

1. I have reviewed this quarterly report on Form 10-Q of Commonwealth Bankshares, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 11, 2006	/s/ Edward J. Woodard, Jr., CLBB
	Edward J. Woodard, Jr., CLBB
	Chairman, President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION

I, Cynthia A. Sabol, CPA certify that:

1. I have reviewed this quarterly report on Form 10-Q of Commonwealth Bankshares, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 11, 2006	/s/ Cynthia A. Sabol, CPA
	Cynthia A. Sabol, CPA
	Executive Vice President and Chief Financial Officer

EX-32.1

Exhibit 32.1

CERTIFICATION

The undersigned, as the chief executive officer and the chief financial officer of Commonwealth Bankshares, Inc., certify that to the best of their knowledge and belief the Quarterly Report on Form 10-Q for the period ended June 30, 2006, which accompanies this certification, fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and the information contained in the periodic report fairly presents, in all material respects, the financial condition and results of operations of Commonwealth Bankshares, Inc. at the dates and for the periods indicated. The foregoing certification is made pursuant to §906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. §1350), and shall not be relied upon for any other purpose. The undersigned expressly disclaim any obligation to update the foregoing certification except as required by law.

Date: August 11, 2006	/s/ Edward J. Woodard, Jr., CLBB
	Edward J. Woodard, Jr., CLBB
	Chairman, President and Chief Executive Officer
Date: August 11, 2006	/s/ Cynthia A. Sabol, CPA
	Cynthia A. Sabol, CPA
	Executive Vice President and Chief Financial Officer