10-Q/A

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q/A

(Amendment No. 1)

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

For the quarterly period ended September 30, 2009

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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	¨	Accelerated Filer	x
Non-Accelerated Filer	¨	Smaller Reporting Company	¨

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

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

Common Stock, $2.066 Par Value – 6,887,564 shares as of October 26, 2009

Commonwealth Bankshares, Inc.

Form 10-Q/A for the Quarter Ended September 30, 2009

(Amendment No. 1)

Table of Contents

	Page
EXPLANATORY NOTE
PART I – FINANCIAL INFORMATION
ITEM 1 – FINANCIAL STATEMENTS
Consolidated Balance Sheets	5
September 30, 2009 (Restated)
December 31, 2008
Consolidated Statements of Operations	6
Three months ended September 30, 2009 (Restated)
Three months ended September 30, 2008
Nine months ended September 30, 2009 (Restated)
Nine months ended September 30, 2008
Consolidated Statements of Comprehensive Income	7
Nine months ended September 30, 2009 (Restated)
Nine months ended September 30, 2008
Consolidated Statements of Equity	8
Nine months ended September 30, 2009 (Restated)
Year ended December 31, 2008
Year ended December 31, 2007
Consolidated Statements of Cash Flows	9
Nine months ended September 30, 2009 (Restated)
Nine months ended September 30, 2008
Notes to Consolidated Financial Statements	10 - 20
ITEM  2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	21 - 30
ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	30
ITEM 4 – CONTROLS AND PROCEDURES	30 - 32
PART II – OTHER INFORMATION
ITEM 1 – LEGAL PROCEEDINGS	32
ITEM 1A – RISK FACTORS	32
ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	32
ITEM 3 – DEFAULTS UPON SENIOR SECURITIES	32
ITEM 4 – SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	32
ITEM 5 – OTHER INFORMATION	32
ITEM 6 – EXHIBITS	32
SIGNATURES	33

2

Explanatory Note

Commonwealth Bankshares, Inc. (“Parent”, “we” or “us”) is filing this Amendment No. 1 (the “Amendment”) to its Quarterly Report on Form 10-Q for the quarter ended September 30, 2009, originally filed with the Securities and Exchange Commission (the “SEC”) on November 9, 2009 (the “Original Filing”), to amend and restate Parent’s unaudited consolidated financial statements as of and for the three and nine months ended September 30, 2009.

The allowance for loan losses and provision for loan losses were increased from amounts previously reported to reflect certain adjustments required in connection with the completion of an examination of Parent’s wholly owned subsidiary, Bank of the Commonwealth (the “Bank”), conducted by the Federal Reserve Bank of Richmond (the “FRB”). The examination commenced on October 19, 2009 using financial data as of September 30, 2009. As a result of the examination, the Bank has amended and subsequently refiled its Report of Condition with the FRB for the quarter ended September 30, 2009. The regulatory examination was underway, but not completed at the time Parent filed its third quarter results with the SEC. At the conclusion of the on-site work, the FRB examiners advised Parent and its independent auditors that, based on trends in asset quality, concentrations within the portfolio, reclassifications of certain loans, adjustment to the factors utilized in calculating the allowance and other metrics, in comparison to various national and custom peer groups with comparable characteristics, the Bank’s allowance for loan losses should be increased by $23.0 million. As a result of these findings the following changes to previously reported financial results are being made:

• The provision for loan losses for the three months ended September 30, 2009 is being increased from $21.9 million to $44.9 million;

• The provision for loan losses for the nine months ended September 30, 2009 is being increased from $29.4 million to $52.4 million;

• The allowance for loan losses as of September 30, 2009 is being increased to $64.0 million, or 6.08% of total loans, compared to the originally reported amount of $41.0 million, or 3.89% of total loans;

• Net loss after tax for the three months ended September 30, 2009 is being increased from $12.4 million to $27.4 million;

• Diluted loss per share for the three months ended September 30, 2009 is being increased from $1.81 to $3.99;

• Net loss after tax for the nine months ended September 30, 2009 is being increased from $11.3 million to $26.3 million;

• Diluted loss per share for the nine months ended September 30, 2009 is being increased from $1.64 to $3.82;

• Non-accrual loans as of September 30, 2009 is being increased to $82.8 million from the $70.8 million originally reported; and

• An additional $4.0 million in capital was injected into the Bank by Commonwealth as of September 30, 2009.

The decision to restate the third quarter financial statements was approved by the Audit Committee of the Board of Directors and the Board of Directors of Parent on January 27, 2010.

The information in this Amendment has been updated to give effect to the restatement. Parent has not modified or updated the information in the Original Filing except as necessary to reflect the effects of the restatement described above. This Amendment continues to speak as of the dates described herein, and Parent has not updated the disclosures contained in the Form 10-Q to reflect any events that occurred subsequent to such dates. Information not affected by the restatement is unchanged and reflects the disclosures made at the time of the filing of the Original Filing on November 9, 2009. Accordingly, this Amendment should be read in conjunction with Parent’s subsequent filings with the SEC, as information in such filings may update or supersede certain information contained in this Amendment.

3

Based on the foregoing, only the following items have been amended:

• Part I – Financial Information:

• Item 1 – Financial Statements

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

• Item 4 – Controls and Procedures

For the convenience of the reader, this Amendment sets forth the Original Filing in its entirety, although Parent is only amending those portions affected by the restatement described above.

In addition, as required by Rule 12b-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), new certifications by our principal executive officer and principal financial officer are filed herewith as Exhibits 31.1, 31.2 and 32.1.

4

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Commonwealth Bankshares, Inc.

Consolidated Balance Sheets

	September 30, 2009 (Restated - See Note B) (Unaudited)			December 31, 2008 (Audited)
Assets
Cash and cash equivalents:
Cash and due from banks	$	5,154,958		$	10,921,888
Interest bearing deposits in banks		23,638,434			200,384
Federal funds sold		1,328,172			550,095
Total cash and cash equivalents		30,121,564			11,672,367
Investment securities:
Available for sale, at fair market value		5,623,280			6,861,311
Held to maturity, at amortized cost (fair market value was $169,035 and $189,836, respectively)		169,071			191,232
Total investment securities		5,792,351			7,052,543
Equity securities, restricted, at cost		9,388,250			10,959,050
Loans		1,053,827,824			1,023,067,597
Allowance for loan losses		(64,041,223	)		(31,120,376	)
Loans, net		989,786,601			991,947,221
Premises and equipment, net		36,385,996			36,555,117
Other real estate owned		14,079,294			4,314,290
Deferred tax assets		21,487,197			12,402,798
Accrued interest receivable		4,956,323			5,698,425
Other assets		18,185,908			4,692,346
Total assets	$	1,130,183,484		$	1,085,294,157
Liabilities and Equity
Liabilities:
Deposits:
Noninterest-bearing demand deposits	$	47,619,696		$	47,258,681
Interest-bearing		913,306,085			715,747,724
Total deposits		960,925,781			763,006,405
Short-term borrowings		5,000,000			129,095,503
Long-term debt		50,000,000			55,295,936
Trust preferred capital notes		20,619,000			20,619,000
Accrued interest payable		2,202,778			2,202,431
Other liabilities		11,444,542			8,297,066
Total liabilities		1,050,192,101			978,516,341
Equity:
Common stock, par value $2.066, 18,150,000 shares authorized; 6,887,564 and 6,851,417 shares issued and outstanding in 2009 and 2008, respectively		14,229,707			14,155,028
Additional paid-in capital		63,838,616			63,757,066
Retained earnings		1,467,403			28,421,313
Accumulated other comprehensive income		15,702			38,839
Total stockholders’ equity		79,551,428			106,372,246
Noncontrolling interests		439,955			405,570
Total equity		79,991,383			106,777,816
Total liabilities and equity	$	1,130,183,484		$	1,085,294,157

See notes to unaudited consolidated financial statements.

5

Commonwealth Bankshares, Inc.

Consolidated Statements of Operations (Unaudited)

	Three months ended						Nine months ended
	September 30, 2009 (Restated - See Note B)			September 30, 2008			September 30, 2009 (Restated - See Note B)			September 30, 2008
Interest and dividend income:
Loans, including fees	$	16,170,222		$	16,591,408		$	49,256,386		$	47,062,028
Investment securities:
Taxable		53,294			89,623			179,010			265,107
Tax exempt		7,434			11,490			24,197			34,297
Dividend income, equity securities, restricted		67,600			83,751			118,467			350,613
Other interest income		3,594			5,072			6,128			14,972
Total interest and dividend income		16,302,144			16,781,344			49,584,188			47,727,017
Interest expense:
Deposits		6,662,360			6,081,569			19,263,771			17,694,351
Short-term borrowings		66,807			498,906			428,526			1,591,793
Long-term debt		491,571			540,625			1,455,250			1,610,762
Trust preferred capital notes		330,121			330,122			979,600			986,777
Total interest expense		7,550,859			7,451,222			22,127,147			21,883,683
Net interest income		8,751,285			9,330,122			27,457,041			25,843,334
Provision for loan losses		44,909,200			20,000,000			52,409,600			21,255,000
Net interest income (expense) after provision for loan losses		(36,157,915	)		(10,669,878	)		(24,952,559	)		4,588,334
Noninterest income:
Service charges on deposit accounts		339,287			399,643			966,752			1,062,876
Other service charges and fees		239,688			221,936			697,481			626,464
Mortgage brokerage income		183,928			255,289			664,646			849,031
Title insurance income		149,460			214,949			477,859			657,660
Investment service income		232,216			62,775			293,144			248,247
Loss on other real estate owned		(490,682	)		(40,411	)		(447,868	)		(99,785	)
Other		74,858			129,267			494,809			303,165
Total noninterest income		728,755			1,243,448			3,146,823			3,647,658
Noninterest expense:
Salaries and employee benefits		2,305,246			1,672,921			7,267,893			7,054,661
Net occupancy expense		970,167			959,000			2,972,473			2,615,894
Furniture and equipment expense		526,976			480,474			1,535,332			1,351,163
Other operating expense		2,701,041			1,341,193			6,544,199			3,826,155
Total noninterest expense		6,503,430			4,453,588			18,319,897			14,847,873
(Loss) before income taxes		(41,932,590	)		(13,880,018	)		(40,125,633	)		(6,611,881	)
Income tax (benefit)		(14,506,741	)		(4,779,143	)		(13,891,818	)		(2,259,848	)
Net (loss)		(27,425,849	)		(9,100,875	)		(26,233,815	)		(4,352,033	)
Less: Net income (loss) attributable to noncontrolling interests		7,788			(10,612	)		34,385			(20,427	)
Net (loss) attributable to the Company	$	(27,433,637	)	$	(9,090,263	)	$	(26,268,200	)	$	(4,331,606	)
Basic (loss) per share attributable to the Company’s common stockholders	$	(3.99	)	$	(1.33	)	$	(3.82	)	$	(0.63	)
Diluted (loss) per share attributable to the Company’s common stockholders	$	(3.99	)	$	(1.33	)	$	(3.82	)	$	(0.63	)
Dividends paid per common share	$	—		$	0.08		$	0.10		$	0.24
Basic weighted average shares outstanding		6,887,172			6,821,315			6,877,244			6,896,956
Diluted weighted average shares outstanding		6,887,172			6,836,813			6,877,244			6,920,420

See notes to unaudited consolidated financial statements.

6

Commonwealth Bankshares, Inc.

Consolidated Statements of Comprehensive Income (Unaudited)

	Nine months ended
	September 30, 2009 (Restated - See Note B)			September 30, 2008
Net (loss)	$	(26,233,815	)	$	(4,352,033	)
Other comprehensive income, net of income tax:
Net change in unrealized (loss) on securities available for sale		(23,137	)		(55,909	)
Comprehensive (loss)		(26,256,952	)		(4,407,942	)
Less: Comprehensive income (loss) attributable to noncontrolling interests		34,385			(20,427	)
Comprehensive (loss) attributable to the Company	$	(26,291,337	)	$	(4,387,515	)

See notes to unaudited consolidated financial statements.

7

Commonwealth Bankshares, Inc.

Consolidated Statements of Equity

Nine Months Ended September 30, 2009, and Years Ended December 31, 2008 and 2007

	Common Shares		Common Amount			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (loss)			Noncontrolling Interests			Total Equity
Balance, January 1, 2007	6,844,975		$	14,141,719		$	63,965,840		$	25,123,140		$	(5,320	)	$	61,208		$	103,286,587
Comprehensive income:
Net income	—			—			—			11,166,911			—			11,817			11,178,728
Change in unrealized gain on securities available for sale, net of tax effect	—			—			—			—			27,400			—			27,400
Total comprehensive income																			11,206,128
Issuance of common stock	86,012			177,699			1,048,005			—			—			—			1,225,704
Common stock repurchased	(15,400	)		(31,816	)		(293,375	)		—			—			—			(325,191	)
Stock based compensation expense-options issued	—			—			22,050			—			—			—			22,050
Cash dividends - $0.28 per share	—			—			—			(1,928,079	)		—			—			(1,928,079	)
Cash dividends - Noncontrolling interests	—			—			—			—			—			(14,048	)		(14,048	)
Balance, December 31, 2007	6,915,587			14,287,602			64,742,520			34,361,972			22,080			58,977			113,473,151
Comprehensive (loss):
Net (loss)	—			—			—			(3,739,069	)		—			(34,695	)		(3,773,764	)
Change in unrealized gain on securities available for sale, net of tax effect	—			—			—			—			16,759			—			16,759
Total comprehensive (loss)																			(3,757,005	)
Issuance of common stock	77,156			159,406			782,792			—			—			—			942,198
Common stock repurchased	(141,326	)		(291,980	)		(1,768,246	)		—			—			—			(2,060,226	)
Contributions from noncontrolling interest holder	—			—			—			—			—			390,000			390,000
Cash dividends - $0.32 per share	—			—			—			(2,201,590	)		—			—			(2,201,590	)
Cash dividends - Noncontrolling interests	—			—			—			—			—			(8,712	)		(8,712	)
Balance, December 31, 2008	6,851,417			14,155,028			63,757,066			28,421,313			38,839			405,570			106,777,816
Comprehensive (loss):
Net income (loss)	—			—			—			(26,268,200	)		—			34,385			(26,233,815	)
Change in unrealized (loss)on securities available for sale, net of tax effect	—			—			—			—			(23,137	)		—			(23,137	)
Total comprehensive (loss)																			(26,256,952	)
Issuance of common stock	36,147			74,679			81,550			—			—			—			156,229
Cash dividends - $0.10 per share	—			—			—			(685,710	)		—			—			(685,710	)
Balance, September 30, 2009 (Restated)	6,887,564		$	14,229,707		$	63,838,616		$	1,467,403		$	15,702		$	439,955		$	79,991,383

See notes to unaudited consolidated financial statements.

8

Commonwealth Bankshares, Inc.

Consolidated Statements of Cash Flows (Unaudited)

	Nine months ended
	September 30, 2009 (Restated - See Note B)			September 30, 2008
Operating activities:
Net (loss)	$	(26,233,815	)	$	(4,352,033	)
Adjustments to reconcile net (loss) to net cash provided by operating activities:
Provision for loan losses		52,409,600			21,255,000
Depreciation and amortization		1,926,981			1,536,774
Gain on the sale of premises and equipment		(997	)		(3,720	)
Loss on other real estate owned		776,395			99,785
Net amortization of premiums and accretion of discounts on investments securities		2,640			(7,170	)
Gain on the sale of investment securities available for sale		(1,691	)		—
Deferred tax assets		(9,072,480	)		(7,593,807	)
Net change in:
Accrued interest receivable		742,102			(509,355	)
Other assets		(13,493,562	)		(738,864	)
Accrued interest payable		347			(247,005	)
Other liabilities		3,147,476			(204,751	)
Net cash provided by operating activities		10,202,996			9,234,854
Investing activities:
Purchase of investment securities available for sale		(2,496,250	)		(3,533,927	)
Purchase of equity securities, restricted		(885,900	)		(9,406,900	)
Net purchase of premises and equipment		(1,808,840	)		(11,538,101	)
Net change in loans		(69,460,869	)		(179,356,775	)
Improvements to other real estate owned		(247,273	)		—
Proceeds from:
Calls and maturities of investment securities held to maturity		21,845			38,081
Sales and maturities of investment securities available for sale		3,698,592			3,606,258
Sales of equity securities, restricted		2,456,700			8,981,800
Sale of premises and equipment		51,977			4,000
Sale of other real estate owned		8,917,763			1,758,422
Net cash used in investing activities		(59,752,255	)		(189,447,142	)
Financing activities:
Net change in:
Demand, interest-bearing demand and savings deposits		(2,141,917	)		7,607,355
Time deposits		116,630,293			(4,894,737	)
Brokered time deposits		83,431,000			177,086,000
Short-term borrowings		(124,095,503	)		4,295,292
Long-term debt		(5,000,000	)		—
Principal payments on long-term debt		(295,936	)		(26,112	)
Dividends reinvested and sale of stock		156,229			656,839
Dividends paid to stockholders		(685,710	)		(1,655,232	)
Dividends paid to noncontrolling interests		—			(8,712	)
Contributions from noncontrolling interests		—			390,000
Common stock repurchased		—			(2,060,226	)
Net cash provided by financing activities		67,998,456			181,390,467
Net increase in cash and cash equivalents		18,449,197			1,178,179
Cash and cash equivalents, January 1		11,672,367			9,337,398
Cash and cash equivalents, September 30	$	30,121,564		$	10,515,577
Supplemental cash flow disclosure:
Interest paid during the period	$	22,126,800		$	22,130,688
Income taxes paid during the period	$	1,684,000		$	4,230,000
Supplemental noncash disclosure:
Transfer between loans and other real estate owned	$	19,259,622		$	2,845,873
Sale of other real estate owned financed by bank loans	$	4,550,213		$	1,360,000

See notes to unaudited consolidated financial statements.

9

Commonwealth Bankshares, Inc.

Notes to Consolidated Financial Statements (Unaudited)

September 30, 2009

Note A – Basis of Presentation

The accounting and reporting policies of Commonwealth Bankshares, Inc. (the “Parent”) and its subsidiaries, Commonwealth Bankshares Capital Trust II (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 (“Bank of the Commonwealth Mortgage”), Commonwealth Financial Advisors, LLC, Commonwealth Property Associates, LLC and WOV Properties, LLC, are in accordance with accounting principles generally accepted in the United States of America (“GAAP”) 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. In addition, the Parent owns the Trust which is an unconsolidated subsidiary. The subordinated debt owed to this Trust is reported as a liability of the Parent.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America 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, 2008. The results of operations for the nine months ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year. The Company has evaluated subsequent events for potential recognition and/or disclosure through March 31, 2010, the date the consolidated financial statements included in this Amendment were issued. Based on this evaluation, the Company has no events to report.

The Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”) became effective on July 1, 2009. At that date, the ASC became FASB’s officially recognized source of authoritative U.S. GAAP applicable to all public and non-public non-governmental entities, superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”) and related literature. Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies.

Certain 2008 amounts have been reclassified to conform to the 2009 presentation.

Note B – Restatement of Previously Issued Financial Statements

The Company has restated the accompanying unaudited consolidated financial statements as of and for the three and nine months ended September 30, 2009. The allowance for loan losses and provision for loan losses were increased from amounts previously reported to reflect certain adjustments required in connection with the completion of an examination of Parent’s wholly owned subsidiary, Bank of the Commonwealth, conducted by the Federal Reserve Bank of Richmond (the “FRB”). The examination commenced on October 19, 2009 using financial data as of September 30, 2009. At the conclusion of the on-site work, the FRB examiners advised Parent and its independent auditors that, based on trends in asset quality, concentrations within the portfolio, reclassifications of certain loans, adjustment to the factors utilized in calculating the allowance and other metrics, in comparison to various national and custom peer groups with comparable characteristics, the Bank’s allowance for loan losses should be increased by $23.0 million. As a result of these findings, the Company concluded that:

• The provision for loan losses for the three months ended September 30, 2009 should be increased from $21.9 million to $44.9 million;

10

• The provision for loan losses for the nine months ended September 30, 2009 should be increased from $29.4 million to $52.4 million;

• The allowance for loan losses as of September 30, 2009 should be increased to $64.0 million, or 6.08% of total loans, compared to the originally reported amount of $41.0 million, or 3.89% of total loans;

• Net loss after tax for the three months ended September 30, 2009 should increase from $12.4 million to $27.4 million;

• Diluted loss per share for the three months ended September 30, 2009 should increase from $1.81 to $3.99;

• Net loss after tax for the nine months ended September 30, 2009 should increase from $11.3 million to $26.3 million;

• Diluted loss per share for the nine months ended September 30, 2009 should increase from $1.64 to $3.82;

• Non-accrual loans as of September 30, 2009 should increase to $82.8 million from the $70.8 million originally reported; and

• An additional $4.0 million in capital should be injected into the Bank by Commonwealth as of September 30, 2009.

The effect of the restatement is as follows:

Consolidated Balance Sheets as of September 30, 2009

	As Reported		Adjustment			Restated
Allowance for loan losses	$	41,041,223	$	23,000,000		$	64,041,223
Loans, net	$	1,012,786,601	$	(23,000,000	)	$	989,786,601
Deferred tax assets	$	15,487,647	$	5,999,550		$	21,487,197
Other assets	$	16,186,058	$	1,999,850		$	18,185,908
Total assets	$	1,145,184,084	$	(15,000,600	)	$	1,130,183,484
Retained earnings	$	16,468,003	$	(15,000,600	)	$	1,467,403
Total stockholder’s equity	$	94,552,028	$	(15,000,600	)	$	79,551,428
Total equity	$	94,991,983	$	(15,000,600	)	$	79,991,383
Total liabilities and equity	$	1,145,184,084	$	(15,000,600	)	$	1,130,183,484

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Consolidated Statements of Operations

	Three Months Ended September 30, 2009									Nine Months Ended September 30, 2009
	As Reported			Adjustment			Restated			As Reported			Adjustment			Restated
Provision for loan losses	$	21,909,200		$	23,000,000		$	44,909,200		$	29,409,600		$	23,000,000		$	52,409,600
Net interest income (expense) after provision for loan losses	$	(13,157,915	)	$	(23,000,000	)	$	(36,157,915	)	$	(1,952,559	)	$	(23,000,000	)	$	(24,952,559	)
(Loss) before income taxes	$	(18,932,590	)	$	(23,000,000	)	$	(41,932,590	)	$	(17,125,633	)	$	(23,000,000	)	$	(40,125,633	)
Income tax (benefit)	$	(6,507,341	)	$	(7,999,400	)	$	(14,506,741	)	$	(5,892,418	)	$	(7,999,400	)	$	(13,891,818	)
Net (loss)	$	(12,425,249	)	$	(15,000,600	)	$	(27,425,849	)	$	(11,233,215	)	$	(15,000,600	)	$	(26,233,815	)
Net (loss) attributable to the Company	$	(12,433,037	)	$	(15,000,600	)	$	(27,433,637	)	$	(11,267,600	)	$	(15,000,600	)	$	(26,268,200	)
Basic (loss) per share attributable to the Company’s common stockholders	$	(1.81	)	$	(2.18	)	$	(3.99	)	$	(1.64	)	$	(2.18	)	$	(3.82	)
Diluted (loss) per share attributable to the Company’s common stockholders	$	(1.81	)	$	(2.18	)	$	(3.99	)	$	(1.64	)	$	(2.18	)	$	(3.82	)

Consolidated Statements of Comprehensive Income

	Nine Months Ended September 30, 2009
	As Reported			Adjustment			Restated
Net (loss)	$	(11,233,215	)	$	(15,000,600	)	$	(26,233,815	)
Comprehensive (loss)	$	(11,256,352	)	$	(15,000,600	)	$	(26,256,952	)
Comprehensive (loss) attributable to the Company	$	(11,290,737	)	$	(15,000,600	)	$	(26,291,337	)

Consolidated Statements of Cash Flows

	Nine Months Ended September 30, 2009
	As Reported			Adjustment			Restated
Net (loss)	$	(11,233,215	)	$	(15,000,600	)	$	(26,233,815	)
Provision for loan losses	$	29,409,600		$	23,000,000		$	52,409,600
Deferred tax assets	$	(3,072,930	)	$	(5,999,550	)	$	(9,072,480	)
Other assets	$	(11,493,712	)	$	(1,999,850	)	$	(13,493,562	)

Certain amounts were also restated and additional disclosures provided in the footnotes primarily in “Note C – Earnings Per Share”, “Note E – Loans”, “Note F – Allowance for Loan Losses”, “Note H – Deferred Income Taxes”, and “Note I – Fair Value Measurements”.

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Note C – Earnings Per Share

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

	Three months ended						Nine months ended
	September 30, 2009 (Restated)			September 30, 2008			September 30, 2009 (Restated)			September 30, 2008
Net (loss) attributable to the Company	$	(27,433,637	)	$	(9,090,263	)	$	(26,268,200	)	$	(4,331,606	)
Weighted average shares outstanding		6,887,172			6,821,315			6,877,244			6,896,956
Basic (loss) per common share attributable to the Company’s common stockholders	$	(3.99	)	$	(1.33	)	$	(3.82	)	$	(0.63	)
Effect of dilutive securities on EPS:
Weighted average shares outstanding		6,887,172			6,821,315			6,877,244			6,896,956
Effect of stock options		—			15,498			—			23,464
Diluted average shares outstanding		6,887,172			6,836,813			6,877,244			6,920,420
Diluted (loss) per common share attributable to the Company’s common stockholders	$	(3.99	)	$	(1.33	)	$	(3.82	)	$	(0.63	)

Options to acquire 463,732 and 420,474 shares of common stock were not included in computing diluted (loss) per common share for the three months ended September 30, 2009 and 2008, respectively, because their effects were anti-dilutive. Options to acquire 463,732 and 348,479 shares of common stock were not included in computing diluted (loss) per common share for the nine months ended September 30, 2009 and 2008, respectively, because their effects were anti-dilutive.

Note D – Investment Securities

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

	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
September 30, 2009
Available for sale:
U.S. Government and agency securities	$	4,496,255	$	16,055	$	—		$	4,512,310
Mortgage-backed securities		458,780		4,919		(1,987	)		461,712
State and municipal securities		644,454		4,804		—			649,258
	$	5,599,489	$	25,778	$	(1,987	)	$	5,623,280
Held to maturity:
Mortgage-backed securities	$	169,071	$	356	$	(392	)	$	169,035
	$	169,071	$	356	$	(392	)	$	169,035
December 31, 2008
Available for sale:
U.S. Government and agency securities	$	5,500,548	$	60,867	$	—		$	5,561,415
Mortgage-backed securities		527,570		2,883		(9,506	)		520,947
State and municipal securities		774,346		4,603		—			778,949
	$	6,802,464	$	68,353	$	(9,506	)	$	6,861,311
Held to maturity:
Mortgage-backed securities	$	191,232	$	—	$	(1,396	)	$	189,836
	$	191,232	$	—	$	(1,396	)	$	189,836

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Information pertaining to securities with gross unrealized losses at September 30, 2009 and December 31, 2008 aggregated by investment category and length of time that the individual securities have been in a continuous loss position, follows:

	Less Than 12 Months				12 Months or More				Total
September 30, 2009	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. Government and agency securities	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities		5,131		29		232,074		1,958		237,205		1,987
State and municipal securities		—		—		—		—		—		—
Total temporarily impaired securities	$	5,131	$	29	$	232,074	$	1,958	$	237,205	$	1,987
	Less Than 12 Months				12 Months or More				Total
December 31, 2008	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
U.S. Government and agency securities	$	—	$	—	$	—	$	—	$	—	$	—
Mortgage-backed securities		349,929		7,251		63,142		2,255		413,071		9,506
State and municipal securities		—		—		—		—		—		—
Total temporarily impaired securities	$	349,929	$	7,251	$	63,142	$	2,255	$	413,071	$	9,506

The unrealized loss positions at September 30, 2009 were directly related to interest rate movements as there is minimal credit risk exposure in these investments. All securities are investment grade or better. Bonds with unrealized loss positions of less than 12 months duration at September 30, 2009 included two federal agency mortgage-backed securities. Securities with losses of one year or greater duration included four federal agency mortgage-backed securities.

No impairment has been recognized on any securities in a loss position because of management’s intent and demonstrated ability to hold securities to scheduled maturity or call dates.

A maturity schedule of investment securities as of September 30, 2009 is as follows:

	Available for Sale				Held to Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Due:
In one year or less	$	2,969,999	$	2,978,439	$	—	$	—
After one year through five years		1,174,455		1,177,135		—		—
After five years through ten years		996,255		1,005,994		—		—
After ten years		—		—		—		—
		5,140,709		5,161,568		—		—
Mortgage-backed securities		458,780		461,712		169,071		169,035
	$	5,599,489	$	5,623,280	$	169,071	$	169,035

At September 30, 2009 and December 31, 2008, the Company had investment securities with carrying values of $5,486,600 and $6,458,376, respectively, pledged to secure public deposits, and $28,996 and $32,348, respectively, pledged to secure treasury, tax and loan deposits.

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Note E – Loans

Major classifications of loans are summarized as follows:

	September 30, 2009 (Restated)			December 31, 2008
Construction and development	$	255,439,598		$	294,648,864
Commercial		76,435,630			79,465,321
Commercial mortgage		539,867,779			470,268,305
Residential mortgage		171,981,204			168,056,143
Installment loans to individuals		11,951,235			12,664,740
Other		479,553			627,172
Gross loans		1,056,154,999			1,025,730,545
Unearned income		(2,327,175	)		(2,662,948	)
Allowance for loan losses		(64,041,223	)		(31,120,376	)
Loans, net	$	989,786,601		$	991,947,221

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Non-performing assets are as follows:

	September 30, 2009 (Restated)			December 31, 2008
Non-accrual loans:
Construction and development	$	51,778,610		$	32,369,133
Commercial		3,599,720			1,796,896
Commercial mortgage		15,358,582			3,192,328
Residential mortgage		11,805,922			6,941,885
Installment loans to individuals		213,315			175,670
		82,756,149			44,475,912
Loans contractually past-due 90 days or more:
Construction and development		—			1,055,561
Commercial		363,919			367,719
Commercial mortgage		—			1,464,837
Residential mortgage		—			258,406
Installment loans to individuals		—			17,446
Other		760			2,968
		364,679			3,166,937
Total non-performing loans		83,120,828			47,642,849
Other real estate owned		14,079,294			4,314,290
Total non-performing assets	$	97,200,122		$	51,957,139
Allowance as a percentage of non-performing assets		65.89	%		59.90	%
Non-performing assets as a percentage of total assets		8.60	%		4.79	%

Note F – Allowance for Loan Losses

A summary of transactions in the allowance for loan losses for the nine months ended September 30, 2009 and 2008 were as follows:

	September 30, 2009 (Restated)			September 30, 2008
Balance at beginning of year	$	31,120,376		$	9,423,647
Provision charged to operating expense		52,409,600			21,255,000
Loans charged-off		(19,529,088	)		(630,389	)
Recoveries of loans previously charged-off		40,335			3,873
Balance at end of period	$	64,041,223		$	30,052,131

Note G – Premises and Equipment

Premises and equipment are summarized as follows:

	September 30, 2009			December 31, 2008
Land	$	2,189,418		$	1,753,908
Building and improvements		8,581,354			3,443,002
Leasehold improvements		21,528,731			22,712,139
Furniture and equipment		17,212,472			16,527,393
Construction in progress		—			3,461,610
		49,511,975			47,898,052
Less accumulated depreciation		(13,125,979	)		(11,342,935	)
	$	36,385,996		$	36,555,117

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Note H – Deferred Income Taxes

As of September 30, 2009 and December 31, 2008, the Company had recorded net deferred income tax assets (“DTA”) of approximately $21.5 million and $12.4 million, respectively. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax asset will not be realized. “More likely than not” is defined as greater than a 50% chance. All available evidence, both positive and negative is considered to determine whether, based on the weight of that evidence, a valuation allowance is needed. Management’s assessment is primarily dependent on historical taxable income and projections of future taxable income, which are directly related to the Company’s core earnings capacity and its prospects to generate core earnings in the future. Projections of core earnings and taxable income are inherently subject to uncertainty and estimates that may change given uncertain economic outlook, banking industry conditions and other factors. Management is considering certain transactions that would increase the likelihood that a DTA will be realized. Execution of certain transactions may be considered viable but changing market conditions, tax laws, and other factors could affect the success thereof. Based upon management’s analysis of available evidence, it has determined that it is “more likely than not” that the Company’s deferred income tax assets as of September 30, 2009 will be fully realized and therefore no valuation allowance was recorded. However, the Company can give no assurance that in the future its DTA will not be impaired since such determination is based on projections of future earnings and the possible effect of the certain transactions, which are subject to uncertainty and estimates that may change given economic conditions and other factors. Due to the uncertainty of estimates and projections, it is reasonably possible that the Company will be required to record adjustments to the valuation allowance in future reporting periods.

Due to the net operating loss incurred in the nine months ended September 30, 2009 and for the year ended December 31, 2008, the Company has recorded income taxes receivable of approximately $7.3 million and $609.7 thousand, respectively, which are included in other assets on the accompanying consolidated balance sheets.

Note I – Fair Value Measurements

FASB ASC Topic 820 “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. FASB ASC Topic 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability shall not be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

FASB ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, FASB ASC Topic 820 establishes 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 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

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• Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

• Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial and non-financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein.

Financial assets measured at fair value on a recurring basis include the following:

Available for Sale Securities. Available for sale securities are recorded at fair value on a recurring basis. Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy.

The following table summarizes financial assets measured at fair value on a recurring basis as of September 30, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Assets Measured at Fair Value on a Recurring Basis at September 30, 2009

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at September 30, 2009
	(in thousands)
Assets
Available for sale securities	$	—	$	5,623	$	—	$	5,623

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Certain financial and non-financial assets are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment).

Financial assets measured at fair value on a non-recurring basis include the following:

Impaired Loans. A loan is considered impaired, based on current information and events, if it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. The measurement of impaired loans is based on the present value of expected future cash flows discounted at the historical effective interest rate, the observable market price of the loan or the fair value of the collateral. All collateral-dependent loans are measured for impairment based on the fair value of the collateral securing the loan. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent licensed appraiser outside of the Company using observable market data. This valuation would be considered Level 3. An allowance is allocated to an impaired loan if the carrying value exceeds the estimated fair value. Impaired loans had a carrying amount of $253.1 million, with a valuation allowance of $36.1 million at September 30, 2009.

Other Real Estate Owned. Real estate acquired through, or in lieu of, foreclosure is held for sale and is stated at the lower of cost or estimated fair market value of the property, less estimated disposal costs, if any. The Company estimates fair value at the asset’s liquidation value less disposal costs using management’s assumptions which are based on current market trends and historical loss severities for similar assets. Any excess of cost over the estimated fair market value at the time of acquisition is charged to the allowance for loan losses. The estimated fair market value is reviewed periodically by management and any write-downs are charged against current earnings in the Company’s consolidated statements of operations. Other real estate owned had a carrying amount of $14.1 million at September 30, 2009. For the nine months ended September 30, 2009, the Company recorded $554.4 thousand in losses due to valuation adjustments on other real estate owned property in its consolidated statements of operations.

The following table summarizes financial assets measured at fair value on a non-recurring basis as of September 30, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Assets Measured at Fair Value on a Non-Recurring Basis at September 30, 2009 (Restated)

	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at September 30, 2009
	(in thousands)
Assets
Impaired loans	$	—	$	—	$	216,999	$	216,999
Other real estate owned	$	—	$	—	$	14,079	$	14,079

Non-financial assets measured at fair value on a non-recurring basis include the following:

Goodwill. Goodwill requires an impairment review at least annually and more frequently if certain impairment indicators are evident. Goodwill had a carrying amount of $249.5 thousand at September 30, 2009. Based on the annual testing for impairment of goodwill, there have been no impairment charges to date.

FASB ASC Topic 825 “Financial Instruments” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported

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at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies for other financial assets and financial liabilities are discussed below:

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

Equity Securities. The carrying amount approximates fair value.

Investment Securities. Fair values are based on published market prices or dealer quotes. Available-for-sale securities are carried at their aggregate fair value.

Loans, Net. For loans receivable with short-term and/or variable characteristics, the total receivables outstanding approximate fair value. The fair value of other loans is estimated by discounting the future cash flows using the build up approach to discount rate construction. Components of the discount rate include a risk free rate, credit quality component and a service charge component.

Accrued Interest Receivable and Accrued Interest Payable. The carrying amount approximates fair value.

Deposits. The fair value of noninterest bearing deposits and deposits with no defined maturity, by FASB ASC Topic 825 definition, is the amount payable on demand at the reporting date. The fair value of time deposits is estimated by discounting the future cash flows using the build up approach to discount rate construction. Components of the discount rate include a risk free rate, credit quality component and a service charge component.

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.

Long-Term Debt. The fair values of the Company’s long-term debt are estimated using discounted cash flow analysis based on the Company’s current incremental borrowing rates for similar types of borrowing arrangements.

Loan Commitments, Standby and Commercial Letters of Credit. Fair values for off-balance sheet lending commitments approximate the contract or notional value taking into account the remaining terms of the agreement and the counterparties’ credit standings. The fair values of these items are not significant and are not included in the following table.

The estimated fair value and the carrying value of the Company’s recorded financial instruments are as follows:

	September 30, 2009				December 31, 2008
(in thousands)	Carrying Amount (Restated)		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Cash and cash equivalents	$	30,122	$	30,122	$	11,672	$	11,672
Investment securities		5,792		5,792		7,053		7,051
Equity securities		9,388		9,388		10,959		10,959
Loans, net		989,787		1,051,115		991,947		1,042,324
Accrued interest receivable		4,956		4,956		5,698		5,698
Deposits		960,926		985,776		763,006		788,103
Short-term borrowings		5,000		5,000		129,096		129,096
Long-term debt		50,000		54,655		55,296		61,841
Accrued interest payable		2,203		2,203		2,202		2,202

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

The financial information in this item has been updated to reflect the restatement as discussed in the Explanatory Note to this Amendment and in Note B to our Consolidated Financial Statements contained elsewhere in this document.

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 Corporation 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, six branches in Virginia Beach, four branches in Chesapeake, two branches in Portsmouth, one branch in Suffolk, and four branches in North Carolina, located in Powells Point, Waves, Moyock and Kitty Hawk. Bank of the Commonwealth Mortgage currently operates one mortgage branch office in Virginia Beach and one mortgage branch office in Gloucester, Virginia. Executive Title Center currently operates one title insurance branch office in Norfolk and one title insurance branch office in Suffolk, Virginia. Commonwealth Financial Advisors currently has two locations, one in Virginia Beach and one in Norfolk, Virginia.

The Company concentrates its marketing efforts in the cities of Norfolk, Virginia Beach, Portsmouth, Chesapeake and Suffolk, Virginia and Northeastern North Carolina. The Company intends to continue concentrating its banking activities in its current markets, which the Company believes are attractive areas 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, 2008.

Forward-Looking Statements

Some of the matters discussed below and elsewhere in this report include forward-looking statements. These forward-looking statements include statements regarding profitability, liquidity, adequacy of the allowance for loan losses, interest rate sensitivity, market risk and financial and other goals. Forward-looking statements often use words such as “believes,” “expects,” “plans,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends” or other words of similar meaning. You can also identify them by the fact that they do not relate strictly to historical or current facts. The forward-looking statements we use in this report are subject to significant risks, assumptions and uncertainties, including among other things, the following important factors that could affect the actual outcome of future events:

• Our dependence on key personnel;

• The high level of competition within the banking industry;

• Our dependence on commercial real estate loans that could be negatively affected by a further downturn in the real estate market;

• Continued unfavorable economic conditions in the overall national economy as well as in our specific market areas within Hampton Roads, Virginia and Northeastern North Carolina;

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

• The adequacy of our estimate for known and inherent losses in our loan portfolio;

• Changes in interest rates;

• Our ability to manage our growth;

• Our ability to assess and manage our asset quality;

• Our ability to maintain internal control over financial reporting;

• Our ability to raise capital as needed by our business;

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• Our reliance on secondary sources, such as Federal Home Loan Bank (“FHLB”) advances, federal funds lines of credit from correspondent banks and out-of-market time deposits, to meet our liquidity needs;

• Impacts of implementing various accounting standards;

• Governmental and regulatory changes that may adversely affect our expenses and cost structure; and

• Other factors described from time to time in our SEC filings.

Because of these and other uncertainties, our actual results and performance may be materially different from results indicated by these forward-looking statements. In addition, our past results of operations are not necessarily indicative of future performance.

We caution you that the above list of important factors is not all inclusive. These forward-looking statements are made as of the date of this report, and we may not undertake steps to update these forward-looking statements to reflect the impact of any circumstances or events that arise after the date the forward-looking statements are made.

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. See Note 1 – Summary of Significant Accounting Policies, of the Notes to Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2008, for further information related to the allowance for loan losses.

New Accounting Pronouncements

As discussed in Note A – Basis of Presentation, on July 1, 2009, the Accounting Standards Codification became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles applicable to all public and non-public non-governmental entities, superseding existing FASB, AICPA, EITF and related literature. Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. All other accounting literature is considered non-authoritative. The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies.

In June 2009, the FASB issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles, a Replacement of FASB Statement No. 162”, which was primarily codified into FASB ASC Topic 105 “Generally Accepted Accounting Standards”. This guidance will become the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with generally accepted accounting principles. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative guidance for SEC registrants. All guidance contained in the Codification carries an equal level of authority. All non-grandfathered, non-SEC accounting literature not included in the Codification is superseded and deemed non-authoritative. This guidance became effective for the Company’s financial statements for financial periods ending after September 15, 2009. Beginning in the third quarter of 2009, this guidance impacts the Company’s consolidated financial statements and related disclosures as all references to authoritative accounting literature reflect the newly adopted codification.

In June 2009, the FASB issued SFAS No. 167, “Amendments to FASB Interpretation No. 46(R)”, which has not yet been codified in the FASB ASC. This guidance is a revision to pre-existing guidance pertaining to the consolidation and disclosures of variable interest entities. Specifically, it changes how a company determines when an entity that is insufficiently capitalized or is not controlled through voting (or similar rights) should be

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consolidated. The determination of whether a company is required to consolidate an entity is based on, among other things, an entity’s purpose and design and a company’s ability to direct the activities of the entity that most significantly impact the entity’s economic performance. The guidance requires additional disclosures about the reporting entity’s involvement with variable-interest entities and any significant changes in risk exposure due to that involvement as well as its affect on the entity’s financial statements. This guidance became effective for the Company’s financial statements for financial periods ending after January 1, 2010. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets, an Amendment of FASB Statement No. 140”, which was primarily codified into FASB ASC Topic 860 “Transfers and Servicing”. This guidance amends prior accounting guidance to enhance reporting about transfers of financial assets, including securitizations, and where companies have continuing exposure to the risks related to transferred financial assets. This guidance eliminates the concept of a “qualifying special-purpose entity” and changes the requirements for derecognizing financial assets. The guidance also requires additional disclosures about all continuing involvements with transferred financial assets including information about gains and losses resulting from transfers during the period. This guidance became effective for the Company’s financial statements for financial periods ending after January 1, 2010. The Company does not anticipate that the adoption of this guidance will have a material impact on its consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events”, which was primarily codified into FASB ASC Topic 855 “Subsequent Events”. This guidance is intended to establish general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. In particular, it establishes that the Company must evaluate subsequent events through the date the financial statements are issued, the circumstances under which a subsequent event should be recognized, and the circumstances for which a subsequent event should be disclosed. This guidance requires disclosure of the date through which an entity has evaluated subsequent events. This guidance became effective for the Company’s financial statements for financial periods ending after June 15, 2009. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2009, the FASB issued SFAS No. 115-2 and SFAS No. 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (“SFAS 115-2/124-2”), which was primarily codified into FASB ASC Topic 320 “Investments – Debt and Equity Securities”. This guidance for debt securities requires a write-down when fair value is below amortized cost in circumstances where: (1) an entity has the intent to sell a security; (2) it is more likely than not that an entity will be required to sell the security before recovery of its amortized cost basis; or (3) an entity does not expect to recover the entire amortized cost basis of the security. If an entity intends to sell a security or if it is more likely than not that the entity will be required to sell the security before recovery, an other-than-temporary impairment (“OTTI”) write-down is recognized in earnings equal to the entire difference between the security’s amortized cost basis and its fair value. If an entity does not intend to sell the security or it is not more likely than not that it will be required to sell the security before recovery, the OTTI write-down is separated into an amount representing credit loss, which is recognized in earnings, and an amount related to all other factors, which is recognized in other comprehensive income. This accounting standard does not amend existing recognition and measurement guidance related to OTTI write-downs of equity securities. This guidance also extends disclosure requirements related to debt and equity securities to interim reporting periods. This guidance became effective for the Company’s financial statements for financial periods ending after June 15, 2009. The adoption of the guidance did not have a material impact on the Company’s consolidated financial statements. The adoption of this guidance resulted in additional disclosures surrounding the debt and equity securities of the Company, which are included in Note D – Investment Securities.

In April 2009, the FASB issued SFAS No. 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments”, which was primarily codified into FASB ASC Topic 825 “Financial Instruments”. This guidance requires disclosures about fair value of financial instruments in interim and annual financial statements. This guidance became effective for the Company’s financial statements for financial periods ending after June 15, 2009. The adoption of this guidance resulted in additional disclosures surrounding the interim fair values of the Company’s financial instruments, which are included in Note I – Fair Value Measurements.

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Stock Compensation Plans

The Company has stock option plans that provide for the issuance of restricted stock awards, stock options in the form of incentive stock options and non-statutory stock options, stock appreciation rights and other stock-based awards to employees and directors of the Company. Stock option compensation expense is the estimated fair value of options granted on the date of grant using the Black-Scholes option-pricing model. Share-based compensation expense is recorded in salary and employee benefits. Substantially, all employee stock options are awarded at the end of the year as part of an employee’s overall compensation, based on the individual’s performance during the year, and either vest immediately or over a nominal vesting period. There were no options granted during the nine months ended September 30, 2009 and 2008, respectively. There have been no significant changes in the assumptions for the Black-Scholes option-pricing model previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. A summary of the Company’s stock option activity and related information for the nine months ended September 30, 2009 is as follows:

	Stock Options Outstanding	Weighted Average Exercise Price		Remaining Contractual Life ( in months)	Aggregate Intrinsic Value
Balance at December 31, 2008	463,732	$	17.36
Granted	—		—
Forfeited	—		—
Exercised	—		—
Expired	—		—
Balance at September 30, 2009	463,732	$	17.36	63.96	$	(5,637,632	)
Balance exercisable at September 30, 2009	463,732	$	17.36	63.96	$	(5,637,632	)

See Note 19 - Stock Based Compensation Plans of the Notes to Consolidated Financial Statements contained in our Annual Report on Form 10-K for the year ended December 31, 2008, for further information related to stock based compensation.

Financial Condition

Total assets at September 30, 2009 were $1.1 billion, an increase of 4.1% or $44.9 million from December 31, 2008. Total loans, the Company’s largest and most profitable asset, ended the quarter at a record $1.0 billion, an increase of $30.8 million or 3.0% from December 31, 2008. The continued loan growth was achieved not only by the high loan demand generated by the low interest rate environment, but also by our presence in new markets as a result of our branch expansion, and by the efforts of the Company’s loan officers to develop new loan relationships combined with the support of existing customers.

As of September 30, 2009, 82.5% 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 61.9% of these commercial loans are collateralized with real estate, and accordingly do not represent an unfavorable risk. At September 30, 2009, 67.4% 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 third quarter of 2009 with deposits at September 30, 2009 reaching a record $960.9 million, an increase of $197.9 million from December 31, 2008. Noninterest-bearing demand deposits increased by $361.0 thousand or 0.8% and interest-bearing deposits increased by $197.6 million or 27.6%. Time deposits, excluding broker certificates of deposit, increased $116.6 million during the first nine months of 2009, with interest-bearing demand and savings accounts decreasing $3.1 million and increasing $574.6 thousand, respectively. Included in time deposits less than $100,000 as of

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September 30, 2009 and December 31, 2008 are $446.1 million and $362.7 million, respectively, in broker certificates of deposits. The interest rates paid on these deposits are consistent, if not lower, than the market rates offered in our local area. Also included in time deposits less than $100,000 are CDARS (Certificate of Deposit Account Registry Service) and QwickRate deposits. As of September 30, 2009 and December 31, 2008, the Company had $1.0 million and $4.7 million in CDARS deposits, respectively. As of September 30, 2009 and December 31, 2008, the Company had $1.3 million and $0 in QwickRate deposits, respectively. Management believes the overall growth in deposits is a result of the Company’s competitive interest rates on all deposit products, new branch locations, special promotions and product enhancements, as well as the Company’s continued marketing efforts. The Company’s core deposit base is predominantly provided by individuals and businesses located within communities served.

As of September 30, 2009, short-term borrowings (advances from FHLB and FRB) were $5.0 million, compared to $129.1 million outstanding on December 31, 2008. The decrease in short-term borrowings was due to the $197.9 million or 25.9% increase in deposits for the first nine months of 2009. With our deposit growth continuing to outpace our loan growth for the nine months ended September 30, 2009, the Company was able to pay down our advances with the FHLB and thus reduce our reliance on borrowings from secondary sources.

Results of Operation

During the first nine months of 2009, the Company reported a loss of $26.3 million, an increase of 506.4% over the loss of $4.3 million reported in the first nine months of 2008. Due to the prolonged economic downturn, continued economic uncertainties and the completion of an examination of the Bank by the FRB management elected to provide an additional $52.4 million to its allowance for loan losses during the first nine months of 2009. This is an increase of $31.2 million over the comparable period in 2008. On a per share basis, our diluted loss increased 506.3% to $3.82 for the nine months ended September 30, 2009 compared to a loss per share of $0.63 for the same period in 2008. Net loss for the quarter ended September 30, 2009 totaled $27.4 million, an increase of 201.8% or $18.3 million over the amount reported in the second quarter of 2008. During the third quarter of 2009, management elected to provide $44.9 million to its allowance for loan losses. This is an increase of $24.9 million over the same period in 2008. Diluted loss per share equaled $3.99 for the three months ended September 30, 2009 compared to a loss of $1.33 per share for the same period in 2008.

Profitability as measured by the Company’s return on average assets (“ROA”) was (3.13%) and (0.63%) for the nine months ended September 30, 2009 and 2008, respectively. ROA was impacted by the increase in the net loss of 506.4% and by the increase in average assets of $198.1 million or 21.5% from September 30, 2008 to September 30, 2009. The return on average equity (“ROE”) was (32.81%) and (5.01%) for the nine months ended September 30, 2009 and 2008, respectively. The decrease in ROE is the result of the increase in the net loss and the decline in year-to-date average equity of $8.4 million or 7.3% from September 30, 2008 to September 30, 2009. The decrease in year-to-date average equity is the result of our net loss of $3.7 million for the year ended December 31, 2008 and the $2.1 million in common stock repurchased during the same period. For the quarter ended September 30, 2009, ROA was (9.53%) and ROE was (101.60%).

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, short-term borrowings and long-term debt 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 these assets and liabilities, as well as changes in interest rates when compared to previous periods of operations. Net interest income was $27.5 million for the nine months ended September 30, 2009, an increase of $1.6 million or 6.2% over the $25.8 million for the nine months ended September 30, 2008. For the quarter ended September 30, 2009, net interest income was $8.8 million, a decrease of $578.8 thousand or 6.2% over the comparable period in 2008.

Total interest and dividend income was $49.6 million for the nine months ended September 30, 2009, an increase of $1.9 million or 3.9% over the same period of 2008. Interest income on loans, including fees, increased $2.2 million or 4.7% to $49.3 million for the nine months ended September 30, 2009 as compared to the same period in 2008. For the quarter ended September 30, 2009, total interest and dividend income was

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$16.3 million and interest income on loans, including fees, was $16.2 million, decreases of 2.9% and 2.5%, respectively over the comparable period in 2008. Contributing to this decrease was the increase in the balance of non-accruing loans during the quarter which further lowered interest income.

Interest expense was $22.1 million and $21.9 million for the nine months ended September 30, 2009 and 2008, respectively. Interest expense for the third quarter of 2009 was $7.6 million, as compared to $7.5 million for the third quarter of 2008. The slight increase in interest expense can be attributed to the increase in the Company’s average interest bearing liabilities, which was offset by the decrease in the overall rate paid on these liabilities. Average interest bearing liabilities increased $205.3 million or 27.4% from September 30, 2008 to September 30, 2009. This substantial increase was mostly due to the $208.8 million increase in total deposits as of September 30, 2009 as compared to 2008. The overall average rate paid on our interest bearing liabilities decreased 81 basis points between September 30, 2008 and September 30, 2009, which is primarily due to the declining interest rate environment.

The net interest margin, calculated by expressing net interest income as a percentage of average interest earning assets, is an indicator of the Company’s effectiveness 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) was 3.42% during the first nine months of 2009, as compared to 3.93% for the same period in 2008. The compression of our margins from the prior year can be attributed to the Federal Reserve lowering the Federal Funds rate 175 basis points between October 2008 and December 2008, along with the continued pressure on deposit pricing and the pricing of some deposit products which lag the decrease in the prime rate, which has an immediate affect on variable loans. In addition, the competitiveness for deposits from the reduction in liquidity throughout the financial markets has kept rates at a high level relative to loan rates. Also contributing to the compression of our margins was the increase in the balance of non-accruing loans which further lowered interest income. For the quarter ended September 30, 2009, the net interest margin was 3.22% compared to 3.95% for the third quarter in 2008.

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, the economic environment and other factors, both internal and external, that may affect the quality and future loss experience of the credit portfolio. At September 30, 2009, the Company had total allowance for loan losses of $64.0 million or 6.06% of total loans. As a result of the growth in the loan portfolio, the continued economic uncertainties as well as the completion of the Bank’s examination by the FRB, the Company made provisions for loan losses of $52.4 million for the first nine months of 2009, an increase of $31.2 million or 146.6% over the same period of 2008. Loan charge-offs for the nine months ended September 30, 2009 totaled $19.5 million and recoveries for the same period totaled $40.3 thousand. Of the $19.5 million in loan charge-offs as of September 30, 2009, substantially the entire amount was comprised of relationships with specific reserve allocations previously established. Net charge-offs as a percentage of average loans outstanding was 1.85% and 0.07% for the nine months ended September 30, 2009 and 2008, respectively.

Non-performing assets were $97.2 million or 8.60% of total assets at September 30, 2009 compared to $33.1 million or 3.24% of total assets at September 30, 2008. Non-performing loans increased $35.5 million in the first nine months of 2009 to $83.1 million. Non-performing loans at September 30, 2009 were comprised of 138 loans, which is reflective of the impact of the weak housing market and slowing economy. $80.2 million or 96.4% of the total non-performing loans are comprised of 117 loans secured by real estate, of which $51.8 million are construction and development loans. The Company has developed a Loan Impairment Committee to monitor non-performing assets, past due loans, identify potential problem credits and develop action plans to work through these loans as promptly as possible. As all non-performing loans are deemed impaired, the Committee has individually reviewed the underlying collateral value (less cost to sell) on each of these loans as a part of its analysis of impaired loans. As a result of this comprehensive analysis, a $13.5 million specific reserve for loan losses has been established for non-performing loans. Based on current collateral values, we believe our reserve is adequate to cover any short falls resulting from the sale of the underlying collateral. Based on current accounting and regulatory guidelines the Company has provided a reserve based on current market values for these impaired loans however, management plans to work with our customers to get through

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these unprecedented economic times and to minimize any potential credit exposure. Management has taken a proactive approach to monitoring these loans and will continue to actively manage these credits to minimize losses.

Other real estate owned (“OREO”) totaled $14.1 million and $4.3 million at September 30, 2009 and December 31, 2008, respectively. The balance at September 30, 2009 was comprised of 38 properties of which 20 were residential properties. For the three months ended September 30, 2009, new foreclosures included 16 properties totaling $6.9 million, of which $2.1 million represented five residential properties. OREO sales for the three months ended September 30, 2009 consisted of one residential property, two residential lots and one commercial property and resulted in a net gain of $63.7 thousand. As of September 30, 2009, there was one residential property and two residential lots under contract for sale. Subsequent to September 30, 2009, the one residential property and one of the residential lots sold resulting in a net gain of $24.0 thousand. The remaining properties are being actively marketed and management does not anticipate any material losses associated with these properties. For the three and nine months ended September 30, 2009, the Company recorded $554.4 thousand in losses resulting from valuation adjustments on OREO properties as compared to $0 in the comparable 2008 periods. Asset quality remains a top priority for the Company. We continue to allocate significant resources to the expedient disposition of non-performing and other lower quality assets.

Noninterest income for the nine months ended September 30, 2009 equaled $3.1 million, a decrease of $500.8 thousand from the amount reported for the same period in 2008. Revenues generated from the Bank’s mortgage, title and investment subsidiaries for the nine months ended September 30, 2009 were $1.4 million as compared to $1.8 million for the same period in 2008. The $319.3 thousand or 18.2% decrease is a result of the continued weakness in the economy, specifically in the housing market. Offsetting the reduction in subsidiary revenues for the nine months ended September 30, 2009 was a 9.0% decrease and an 11.3% increase in service charges on deposit accounts and other service charges and fees, respectively. Included in service charges on deposit accounts for the nine months ended September 30, 2009 and 2008 were $784.6 thousand and $904.2 thousand, respectively, in non-sufficient funds (“NSF”) fees. Included in other service charges and fees for the nine months ended September 30, 2009 and 2008 were $353.3 thousand and $310.0 thousand, respectively, in ATM fee income. For the nine months ended September 30, 2009 and 2008, the Company recorded losses on OREO totaling $447.9 thousand and $99.8 thousand, respectively. For 2009, $106.5 thousand relates to gains on the sale of OREO, while the remaining amount was for losses resulting from valuation adjustments as mentioned above. For 2008, the entire amount was for losses on the sale of OREO. For the three months ended September 30, 2009, noninterest income was $728.8 thousand, a decrease of $514.7 thousand, or 41.4% from the comparable period in 2008. Revenues generated from the Bank’s mortgage, title and investment subsidiaries for the three months ended September 30, 2009 were $565.6 thousand as compared to $533.0 thousand for the same period in 2008. For the three months ended September 30, 2009, there was a 15.1% decrease and a 7.7% increase in service charges on deposit accounts and other service charges and fees, respectively. Included in service charges on deposit accounts for the three months ended September 30, 2009 and 2008 was $273.6 thousand and $354.3 thousand, respectively, in NSF fees. Included in other service charges and fees for the three months ended September 30, 2009 and 2008 was $127.1 thousand and $112.8 thousand, respectively, in ATM fee income. For the three months ended September 30, 2009 and 2008, the Company recorded losses on OREO totaling $490.7 thousand and $40.4 thousand, respectively. For 2009, $63.7 thousand relates to gains on the sale of OREO, while the remaining amount was for losses resulting from valuation adjustments as mentioned above. For 2008, the entire amount was for losses on the sale of OREO.

Noninterest expense represents the overhead expenses of the Company. Costs associated with handling our substantial asset and liability growth, including the expansion of our branch network, resulted in increases to every component of noninterest expense. Noninterest expense for the nine months ended September 30, 2009 totaled $18.3 million, an increase of $3.5 million over the $14.8 million recorded during the comparable period in 2008. For the quarter ended September 30, 2009, noninterest expense was $6.5 million, an increase of $2.0 million or 46.0% from the same period in 2008. The ratio of annualized noninterest expense to year-to-date average total assets was 2.19% and 2.15% for the nine months ended September 30, 2009 and 2008, respectively. The ratio of annualized noninterest expense to quarter-to-date average total assets was 2.26% and 1.79% for the three months ended September 30, 2009 and 2008, respectively.

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A key measure of overhead is the operating efficiency ratio. The operating efficiency ratio is calculated by dividing noninterest expense by net bank revenue on a tax equivalent basis. Efficiency gains can be achieved by controlling costs and generating more diverse and higher levels of noninterest income along with increasing our margins. The Company’s efficiency ratio (tax equivalent basis) was 59.82% and 68.56% for the nine months and three months ended September 30, 2009, as compared to 50.30% and 42.08% for the comparable periods in 2008. For the three and nine months ended September 30, 2009, the Company’s efficiency ratios were impacted by the increase in losses on OREO as well as the increases to FDIC insurance and expenses related to OREO properties.

Salaries and employee benefits, the largest component of noninterest expense, increased by $213.2 thousand or 3.0% to $7.3 million for the nine months ended September 30, 2009 compared to the $7.1 million reported during the first nine months of 2008. The year to date increase was the result of the addition of several new positions, including the staff needed to operate the Bank’s two new branches that opened subsequent to September 30, 2008 and an increase in certain employee benefit costs. These increases were offset by a reduction to accruals related to profit sharing and incentive expense and a reduction in volume-based commission expensed for the mortgage and investment services. For the quarter ended September 30, 2009, salaries and employee benefits increased $632.3 thousand to $2.3 million compared to $1.7 million for the quarter ended September 30, 2008. Occupancy expense increased $356.6 thousand for the nine months ended September 30, 2009 compared to the same period in 2008. For the quarter ended September 30, 2009, occupancy expense increased $11.2 thousand or 1.2% over the $959.0 thousand reported in the third quarter of 2008. The increase relates to the addition of four new branch locations in 2008, two of which opened subsequent to September 30, 2008. Other noninterest operating expenses, which includes a grouping of numerous transactions relating to normal banking operations, increased $2.7 million for the nine months ended September 30, 2009, a 71.0% increase over the comparable period for 2008. The increase was comprised of increases of $81.6 thousand, $887.0 thousand and $1.6 million in bank franchise taxes, FDIC insurance and expenses related to OREO properties, respectively, which were offset by a $186.4 thousand reduction in advertising and marketing expense. For the quarter ended September 30, 2009, other noninterest operating expenses increased $1.4 million or 101.4% over the $1.3 million reported in the second quarter of 2008. The increase was comprised of increases of $251.3 thousand and $982.1 thousand in FDIC insurance and expenses related to OREO properties, respectively, which was offset by decreases of $5.4 thousand and $39.2 thousand in bank franchise taxes and advertising and marketing expense, respectively. During the second quarter of 2009, the FDIC increased deposit insurance costs for all banks and levied a special one time assessment to replenish the Deposit Insurance Fund.

Income tax benefit for the nine months ended September 30, 2009 and 2008 was $13.9 million and $2.3 million, respectively. For the three months ended September 30, 2009 and 2008, income tax benefit was $14.5 million and $4.8 million, respectively. The Company’s effective tax rate was 34.6% for the nine months and three months ended September 30, 2009, compared to 34.2% and 34.4% for the comparable periods in 2008.

Capital Resources

Total stockholders’ equity for the Company decreased $26.8 million, or 25.2%, to $79.6 million at September 30, 2009 compared to $106.4 million at December 31, 2008. The decrease in total stockholders’ equity for the first nine months of 2009 was the result of our loss of $26.3 million and by the payment of cash dividends totaling $685.7 thousand.

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 a measure of capital adequacy. At September 30, 2009, the Bank’s risk-adjusted capital ratios were 8.91% for Tier 1 and 10.23% 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

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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 rules, the Bank was considered “well capitalized,” the highest category of capitalization defined by the regulators, as of September 30, 2009. To further bolster the Bank’s capital position, during the first nine months of 2009, Parent invested an additional $19.0 million into the Bank.

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 Dividends

In compliance with the Company’s dividend payout policy, on February 27, 2009, the Company paid a cash dividend of 8.0 cents per share, totaling $548.1 thousand. On May 29, 2009, the Company paid a cash dividend of 2.0 cents per share, totaling $137.6 thousand. Total dividends of 10 cents per share paid during the nine months ended September 30, 2009 were down 58.3% from the 24.0 cents per share paid during the same period in 2008. The Company’s dividend payout ratio for the nine months ended September 30, 2009 and 2008 was (2.6%) and (38.2%), respectively. For the three months ended September 30, 2009 and 2008, the dividend payout ratio was 0.0% and (6.0%), respectively.

Off-Balance Sheet Arrangements

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. For more information on the Company’s off-balance sheet arrangements, see Note 22 of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2008.

Contractual Obligations

The Company’s contractual obligations consist of operating lease obligations, FHLB and FRB borrowings, trust preferred capital notes, standby letters of credit and commitments to extend credit. There have been no material changes to the contractual obligations disclosed in the Annual Report on Form 10-K for the year ended December 31, 2008.

Liquidity

Bank liquidity is a measure of the ability to generate and maintain sufficient cash flows to fund operations and to meet financial obligations to depositors and borrowers promptly and in a cost-effective manner. Asset liquidity is provided primarily by maturing loans and investments, and by cash received from operations. Other sources of asset liquidity include readily marketable assets, especially short-term investments, and long-term investment securities that can serve as collateral for borrowings. On the liability side, liquidity is affected by the timing of maturing liabilities and the ability to generate new deposits or borrowings as needed.

The Company maintains a liquid portfolio of both assets and liabilities and attempts to mitigate the risk inherent in changing rates in this manner. Cash, interest bearing deposits in banks, federal funds sold and investments classified as available for sale totaled $35.7 million as of September 30, 2009. To provide liquidity for current ongoing and unanticipated needs, the Company maintains a portfolio of marketable investment securities, and structures and monitors the flow of funds from these securities and from maturing loans. The Company maintains access to short-term funding sources as well, including a federal funds line of credit with its correspondent banks up to $20.0 million, the ability to borrow from the Federal Reserve Discount Window up to $103.4 million and from the Federal Home Loan Bank of Atlanta up to $200.1 million. As a result of the Company’s management of liquid assets, and the ability to generate liquidity through liability funding, including the use of broker certificates of deposit, management believes that the Company maintains overall liquidity sufficient to satisfy its depositor’s requirements and to meet customers’ credit needs.

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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.

Inflation

The Company carefully reviews Federal Reserve monetary policy in order to ensure an appropriate position between the cost and utilization of funds.

The effect of changing prices on financial institutions is typically different than on non-banking companies since virtually all of the Company’s assets and liabilities are monetary in nature. In particular, interest rates are significantly affected by inflation, but neither the timing nor the magnitude of the changes is directly related to price level indices. Accordingly, management believes the Company can best counter inflation over the long-term by managing net interest income and controlling net increases in noninterest income and expenses.

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, 2008.

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 defined in Rule 13a-15(e) and 15d-15(e) of Exchange Act) as of the end of the period covered by this report. Among other factors in its evaluation, the Company considered the underlying reasons for the amendment and restatement of its unaudited consolidated financial statements, which is more fully described in the “Explanatory Note” on page 3 and Note B of the Notes to the Consolidated Financial Statements (Unaudited) located elsewhere in this Amendment No. 1, and the material weakness in internal control over financial reporting described below. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that, as of September 30, 2009, the Company’s disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms 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 to disclose material information otherwise required to be set forth in the Company’s periodic reports.

Changes in Internal Control over Financial Reporting. There was no change in the internal control over financial reporting that occurred during the quarter ended September 30, 2009 that has materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

Subsequent to September 30, 2009, however, the Company began to implement certain changes to its internal control over financial reporting to remediate a material weakness identified in October 2009, as described further below. The Company expects the changes related to the remediation plan to materially affect and improve its internal control over financial reporting.

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In connection with a recent examination of the Bank by the FRB, it was determined that the Bank’s previously filed Report of Condition and the Company’s Form 10-Q, each for the quarter ended September 30, 2009, needed to be amended. The regulatory examination was underway, but not completed, at the time the Company filed its Form 10-Q for the quarter ended September 30, 2009 with the SEC. At the conclusion of the on-site work, the FRB examiners advised the Company and its independent auditors that, based on trends in asset quality, concentrations within the portfolio, reclassifications of certain loans, adjustment to the factors utilized in calculating the allowance and other metrics, and in comparison to various national and custom peer groups with comparable characteristics, the Bank’s allowance for loan losses should be increased by $23 million. Based on the advice of the FRB examiners, the Audit Committee of the Board of Directors of the Company and the Board of Directors of the Company approved the restatement of the Company’s financial statements for the quarter ended September 30, 2009 on January 27, 2010.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. As a result of the restatement, management has concluded that a material weakness existed at September 30, 2009 as a result of inadequate internal control policies related to the determination of the allowance for loan losses. Specifically, the Company’s policies and procedures did not provide for timely evaluation of management’s approach to assessing credit risk inherent in the Company’s loan portfolio or timely revision of that approach to reflect changes in the economic environment. The methodology and systems for the establishment of both general reserves and specific reserves on loans need improvement in order to adequately estimate the expected losses in the Company’s loan portfolio. Further, the system for the identification and evaluation of nonaccrual and impaired loans and resulting implications to revenue recognition needs to be updated.

Remediation Plan

The Company has developed the following plan to remediate the identified material weakness, and is implementing the following measures as quickly as practicable to enhance its internal control over financial reporting.

• Reviewing the overall loan loss provision process by assessing and enhancing the historical risk factors, recent trends in portfolio performance and economic forecasts used in determining the provision for loan losses.

• Enhancing the methodology used in determining the provision for loan losses by assessing and updating related assumptions, valuations and judgments of management in light of the current economic and regulatory environment.

• Ensuring that the historical loss experience and all significant qualitative or environmental factors that affect the collectability of the portfolio are appropriately considered.

• Continuing to enhance the Company’s training for its loan officers in the risk rating and problem loan identification process (credit administration staff along with the Company’s independent loan review team will continue to have full authority in the final judgment of credit ratings).

• Expanding the Company’s credit analysis department to ensure timely review of borrowers’ current financial conditions.

• Hiring a Chief Credit Officer to oversee and strengthen credit administration.

• Implementing continual assessment of lending and credit administration policies and procedures, and revising them as necessary to promote a culture that expects reliability and integrity of data.

The Company’s Board of Directors is actively monitoring these remedial efforts and may direct that additional measures be taken, as it deems appropriate from time to time. Through these steps, the Company believes it will appropriately address the material weakness in its internal control over financial reporting as of September 30, 2009. However, the Company cannot assure you that it or its independent accountants will not in the future identify further material weaknesses or significant deficiencies in the Company’s internal control over financial

31

reporting that have not been discovered to date. In addition, the effectiveness of any system of internal controls is subject to inherent limitations and there can be no assurance that the Company’s internal control over financial reporting will prevent or detect all errors.

Part II. OTHER INFORMATION

Item 1. Legal Proceedings

As of September 30, 2009, 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, 2008.

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

We announced an open ended program in May 2007 by which we were authorized to repurchase an unlimited number of our own shares of common stock in open market and privately negotiated transactions. During the first nine months of 2009, we repurchased no shares of our common stock.

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

There was no submission of matters to a vote of security holders during the quarter.

Item 5. Other Information

None.

Item 6. Exhibits

(a) Exhibits

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2	Certification of Chief 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

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.

		Commonwealth Bankshares, Inc. (Registrant)
Date:	March 31, 2010	by:	/S/    EDWARD J. WOODARD, JR., CLBB
			Edward J. Woodard, Jr., CLBB
			Chairman of the Board,
			President and Chief Executive Officer
Date:	March 31, 2010	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/A 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: March 31, 2010	/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/A 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: March 31, 2010	/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/A for the period ended September 30, 2009, 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: March 31, 2010	/s/ Edward J. Woodard, Jr., CLBB
	Edward J. Woodard, Jr., CLBB
	Chairman, President and
	Chief Executive Officer
Date: March 31, 2010	/s/ Cynthia A. Sabol, CPA
	Cynthia A. Sabol, CPA
	Executive Vice President and
	Chief Financial Officer