UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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FORM 10-K

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x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from _______ to _______

Commission file number 0-50576

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CITIZENS BANCORP OF VIRGINIA, INC.

(Exact name of registrant as specified in its charter)

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.50 Par Value

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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No x

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 past 90 days. Yes x No o

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

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

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

Yes o No x

The aggregate market value of voting stock held by non-affiliates was $30,110,985 on June 30, 2011.

The number of outstanding shares of Common Stock as of the latest practicable date was 2,312,047 as of March 16, 2012.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement to be distributed to shareholders for the 2012 Annual Meeting of Shareholders are incorporated by reference into Part III of this Form 10-K.

Citizens Bancorp of Virginia, Inc.

Annual Report on Form 10-K

TABLE OF CONTENTS

PART I		Page
Item 1.	Business	1
Item 1A.	Risk Factors	11
Item 1B.	Unresolved Staff Comments	16
Item 2.	Properties	16
Item 3.	Legal Proceedings	16
Item 4.	Mine Safety Disclosures	16
PART II
Item 5.	Market for the Registrant’s Common Equity, Related Stockholder
	Matters and Issuer Purchases of Equity Securities	17
Item 6.	Selected Financial Data	18
Item 7.	Management’s Discussion and Analysis of Financial Condition
	and Results of Operations	19
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	42
Item 8.	Financial Statements and Supplementary Data	45
Item 9.	Changes in and Disagreements with Accountants on Accounting
	and Financial Disclosure	45
Item 9A.	Controls and Procedures	45
Item 9B.	Other Information	46
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	47
Item 11.	Executive Compensation	47
Item 12.	Security Ownership of Certain Beneficial Owners and Management
	and Related Stockholder Matters	47
Item 13.	Certain Relationships and Related Transactions, and
	Director Independence	47
Item 14.	Principal Accounting Fees and Services	47

PART IV

ITEM 15.	Exhibits, Financial Statement Schedules	48

PART I

ITEM 1. BUSINESS

General

Citizens Bancorp of Virginia, Inc. (the Company) is a one-bank holding company formed on December 18, 2003 headquartered in Blackstone, Virginia. The Company is the sole shareholder of its only subsidiary, Citizens Bank and Trust Company (the Bank). The Bank conducts and transacts the general business of a commercial bank as authorized by the banking laws of the Commonwealth of Virginia and the rules and regulations of the Federal Reserve System. The Bank was incorporated in 1873 under the laws of Virginia. Deposits are insured by the Federal Deposit Insurance Corporation. In September 1995, the Bank became a member of the Federal Home Loan Bank of Atlanta. Although the Company is a corporate entity, legally separate and distinct from the Bank, bank holding companies such as Citizens Bancorp of Virginia, Inc. are generally required to act as a source of financial strength for their subsidiary bank. The principal source of the Company’s income is dividends from the Bank. There are certain regulatory restrictions on the extent to which subsidiary banks can pay dividends or otherwise supply funds to the parent holding company. See the section captioned “Supervision and Regulation of Banking Activities” for further discussion of these matters.

The Bank’s primary activity is retail and commercial banking that includes commercial and consumer demand and time deposit accounts, real estate, commercial and consumer loans, online internet banking, 24-hour ATM network, brokerage services, safe deposit boxes, wire transfer services and other miscellaneous services incidental to the operation of a commercial bank. The Bank also acts as an agent for Visa. The Bank is authorized to have a trust department, but does not offer trust services. The Bank’s primary trade areas are served by its 11 banking offices located in the counties of Nottoway, Amelia, Prince Edward, Chesterfield, the City of Colonial Heights, and the Town of South Hill, Virginia.

The Bank’s primary revenue comes from retail banking in the form of interest income received on loans and investments. This income is partially offset by the Bank’s interest expense on deposits and borrowed funds, resulting in net interest income. The Bank’s earnings also come from noninterest income in the form of deposit fees, gains on the sale of loans and investments, ATM fees, Bank-owned Life Insurance, and other financial services. The Bank’s combined noninterest income and net interest income are offset by the Bank’s noninterest expense which includes employee compensation and benefits, occupancy, equipment and other operating expenses.

The Bank holds a 0.379% ownership in Infinex Investments, Inc., which delivers investment services to customers through the use of a dual-employee broker. The Bank also holds a 7.61% ownership interest in Bankers Title, LLC, which is a provider of title insurance. The Bank has an ownership interest of 1.49% in CBB Financial Corp. whose sole subsidiary is Community Bankers’ Bank, a provider of correspondent banking services exclusively to financial institutions. The financial position and operating results of these investments are not significant to the Bank as a whole and are not considered principal activities of the Bank.

The Company maintains an internet website at www.cbtva.com which contains information relating to the business. The Company makes available free of charge through its website its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K as soon as possible after such forms have been filed with the Securities and Exchange Commission. Copies of the Company’s Audit Committee Charter, Nominating Committee Charter and Code of Conduct are available upon written request to: Corporate Secretary, Citizens Bancorp of Virginia, Inc., 126 South Main Street, Blackstone, Virginia, 23824.

Competition

The Bank competes for business with numerous other financial institutions including large national and regional banks, credit unions, other community banks, mutual funds, brokerage firms and insurance companies offering deposit products. Some of these firms do not have a physical presence in our markets, but offer their products through local third party representatives or via the Internet. Factors such

as interest rates offered for loan and deposit products, the number and location of branches, and the reputation of the Bank affect the competition for deposits and loans. The Bank’s marketing and business development efforts are concentrated on developing long-term customer relationships, and building customer loyalty by providing loan and deposit products and financial services that meet our customers’ needs. The Bank targets individual retail and small-to-medium size commercial customers.

The Bank’s trade areas include the counties of Amelia, Brunswick, Buckingham, Charlotte, Chesterfield, Cumberland, Dinwiddie, Lunenburg, Mecklenburg, Nottoway, Prince Edward, the cities of Colonial Heights and Petersburg, and the Town of South Hill. The following data reflects the Bank’s market share in its primary market places at June 30, 2011, according to information obtained from the FDIC website. In Amelia County, the Bank held 34.33% of the market share, in Nottoway County, 61.12%, in Prince Edward County, 15.18%, in the City of Colonial Heights, 2.13%, in Mecklenburg County, 1.42% and in Chesterfield County, 0.12%.

Supervision and Regulation of Banking Activities

General

The supervision and regulation of bank holding companies and their subsidiaries is intended primarily for the protection of depositors, the FDIC’s deposit insurance fund and the banking system as a whole, and not necessarily for the protection of shareholders or creditors of bank holding companies. Bank regulatory agencies have broad enforcement power over bank holding companies and banks, including the power to impose substantial fines, operational restrictions and other penalties for violations of laws and regulations. Management believes the Company is in compliance in all material respects with these laws and regulations. Changes in the laws, regulations or policies that impact the Company cannot necessarily be predicted, but they may have a material effect on the business and earnings of the Company.

The following summary briefly describes the more significant provisions of applicable federal and state laws and certain regulations and the potential impact of such provisions on the Company and the Bank. This summary is not complete, and we refer you to the particular statutory or regulatory provisions or proposals for more information.

The Dodd-Frank Act

The events of the past few years have led to numerous new laws in the United States for financial institutions. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or “Dodd-Frank”), which was enacted in July 2010, significantly restructures the financial regulatory regime in the United States. Although the Dodd-Frank Act’s provisions that have received the most public attention generally have been those applying to or more likely to affect larger institutions, it contains numerous other provisions that will affect all bank holding companies and banks, including the Company and the Bank. Among other provisions affecting the Company’s businesses (some of which are discussed in more detail below):

FDIC Assessments on Deposit Insurance. The Dodd-Frank Act changes the assessment base for federal deposit insurance from the amount of insured deposits to average consolidated total assets less its average tangible equity. In addition, it increases the minimum size of the Deposit Insurance Fund (“DIF”) and eliminates its ceiling, with the burden of the increase in the minimum size on institutions with more than $10 billion in assets.

·	Repeal of Interest on Certain Accounts. Dodd-Frank repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

Consumer Financial Protection Bureau. Dodd-Frank centralized responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (“CFPB”), and giving it responsibility for implementing, examining and enforcing compliance with federal consumer protection laws.

Interchange Fees. Dodd-Frank provided that debit card interchange fees must be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. This provision is known as the “Durbin Amendment.” In June 2011, the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) adopted regulations setting the maximum permissible interchange fee as the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction, with an additional adjustment of up to one cent per transaction if the issuer implements certain fraud-prevention standards.

Enhanced Federal Reserve Board Supervision. Dodd-Frank authorized the Federal Reserve Board to adopt enhanced supervision and prudential standards for, among others, bank holding companies with total consolidated assets of $50 billion or more (often referred to as “systemically important financial institutions” or “SIFI”), and authorized the Federal Reserve Board to establish such standards either on its own or upon the recommendations of the Financial Stability Oversight Council (“FSOC”), a new systemic risk oversight body created by Dodd-Frank. In December 2011, the Federal Reserve Board issued for public comment a notice of proposed rulemaking establishing enhanced prudential standards responsive to these provisions for (i) risk-based capital requirements and leverage limits, (ii) stress testing of capital, (iii) liquidity requirements (iv) overall risk management requirements (v) resolution plan and credit exposure reporting and (vi) concentration/credit exposure limits. Comments on these proposed rules (the “Proposed SIFI Rules”), are due by March 31, 2012. The Proposed SIFI Rules address a wide, diverse array of regulatory areas, each of which is highly complex. Most of the Proposed SIFI Rules will not apply to the Company since the regulation applies to bank holding companies with consolidated assets of $50 billion or more. Two aspects of the Proposed SIFI Rules - requirements for annual stress testing of capital under one base and two stress scenarios and certain corporate governance provisions requiring, among other things, that a bank holding company establish a risk committee of its board of directors and that that committee include a “risk expert” - apply to bank holding companies with total consolidated assets of $10 billion or more and will not apply to the Company.

The implications of the Dodd-Frank Act for the Company will depend to a large extent on the manner in which rules adopted pursuant to the Dodd-Frank Act are implemented by the primary U.S. financial regulatory agencies as well as potential changes in market practices and structures in response to the requirements of the Dodd-Frank Act. The full impact will not be known until the rules, and other regulatory initiatives that overlap with the rules, are finalized and their combined impacts can be understood.

Securities and Exchange Commission

The Company must file annual, quarterly and other periodic reports with the Securities and Exchange Commission (the SEC).

The Company is affected by the corporate responsibility and accounting reform legislation signed into law on July 30, 2002, known as the Sarbanes-Oxley Act of 2002 (the SOA), and the related rules and regulations. The SOA includes provisions that, among other things: (1) require that periodic reports containing financial statements that are filed with the SEC be accompanied by chief executive officer and chief financial officer certifications as to their accuracy and compliance with law; (2) prohibit public companies, with certain limited exceptions, from making personal loans to their directors or executive officers; (3) require chief executive officers and chief financial officers to forfeit bonuses and profits if company financial statements are restated due to misconduct; (4) require audit committees to pre-approve all audit and non-audit services provided by an issuer’s outside auditors, except for de minimis non-audit services; (5) protect employees of public companies who assist in investigations relating to violations of the federal securities laws from job discrimination, otherwise known as “whistleblower” policy and provisions; (6) require companies to disclose in plain English on a “rapid and current basis” material changes in their financial condition or operations, as well as certain other specified information; (7) require a public company’s Section 16 insiders to make Form 4 filings with the SEC within two business days following the day on which purchases or sales of the company’s equity securities were made; and (8) increased penalties for existing crimes and created new criminal offenses. The Company has incurred additional expenses and we expect to continue to incur additional expenses in complying with the requirements of the SOA and related regulations adopted by the SEC and the Public Company Accounting Oversight Board. We anticipate that those expenses will not have a material effect on the Company’s results of operations or financial condition.

On September 15, 2010, the SEC issued Release No. 33-9142, “Internal Control Over Financial Reporting In Exchange Act Periodic Reports of Non-Accelerated Filers.” This release issued a final rule adopting amendments to its rules and forms to conform them to Section 404(c) of the Sarbanes-Oxley Act of 2002 (SOX), as added by Section 989G of the Dodd-Frank Wall Street Reform and Consumer Protection Act. SOX Section 404(c) provides that Section 404(b) shall not apply with respect to any audit report prepared for an issuer that is neither an accelerated filer nor a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934. Release No. 33-9142 was effective September 21, 2010. As a result, the Company is not required to have an independent auditor attestation of the Company’s internal controls over financial reporting, however management’s attestation is maintained and provided.

Regulations affecting the Company

Citizens Bancorp of Virginia, Inc. is incorporated under the laws of the Commonwealth of Virginia as a bank holding company, the Company is subject to the Bank Holding Company Act of 1956, as amended (the "BHC Act"), and is required to file annual reports and such additional information as may be required by the Federal Reserve Board (the "FRB") pursuant to the BHC Act. The FRB has the authority to examine the Company and the Bank. The BHC Act and other federal laws, of which some are discussed below, subject bank holding companies to restrictions on the types of activities in which they may engage, and to a range of supervisory requirements and activities, including regulatory enforcement actions for violations of laws and regulations.

Regulatory Restrictions on Dividends. It is the policy of the Federal Reserve Board that bank holding companies should pay cash dividends on common stock only out of income available over the past year, and only if prospective earnings retention is consistent with the holding company's expected future needs and financial condition. The policy provides that bank holding companies should not maintain a level of cash dividends that undermines the bank holding company's ability to serve as a source of strength to its banking subsidiary. Moreover, the Federal Reserve Board has stated that bank holding companies should inform the Federal Reserve Board reasonably in advance of declaring or paying a dividend that exceeds earnings for the period (e.g., quarter) for which the dividend is being paid. Under Federal Reserve Board policy and the Dodd-Frank Act, a bank holding company is required to act as a source of financial strength to its banking subsidiary and commit resources to its support.

The Company is currently considered to be “well capitalized” and does not expect that these laws, regulations or policies will materially affect its ability to pay dividends. Payment of dividends is at the discretion of the Company’s Board of Directors. The Company’s cash dividend policy limits cash dividend payments to 60% or less of the trailing 12-month net consolidated earnings. For the year ended December 31, 2011, the Company declared $1,590,265 in dividends payable to shareholders or 49.8% of trailing earnings.

Source of Strength Doctrine. The Federal Reserve Board policy has historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd-Frank Act codifies this policy as a statutory requirement. Under this requirement, the Company is expected to commit resources to support the Bank, including at times when the Company may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

Capital Adequacy Requirements. The Federal Reserve Board has issued risk-based and leverage capital guidelines applicable to banking organizations that it supervises. Under the risk-based capital requirements, the Company and the Bank are each generally required to maintain a minimum ratio of total risk-based capital to risk-weighted assets (including certain off-balance sheet activities, such as standby letters of credit) of 8%. At least half of the total risk-based capital must be composed of “Tier 1 Capital,” which is defined as common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles and ineligible deferred tax assets. The remainder may consist of “Tier 2 Capital,” which is defined as specific subordinated debt, some hybrid capital instruments and other qualifying preferred stock and a

limited amount of the loan loss allowance. In addition, each of the federal banking regulatory agencies has established minimum leverage capital requirements for banking organizations. Under these requirements, banking organizations must maintain a minimum ratio of Tier 1 capital to adjusted average quarterly assets equal to 4%, subject to federal bank regulatory evaluation of an organization’s overall safety and soundness. In sum, the capital measures used by the federal banking regulators are:

•	the Total Capital ratio, which includes Tier 1 Capital and Tier 2 Capital;

•	the Tier 1 Capital ratio; and

•	the leverage ratio.

Under these regulations, a bank will be:

•

“well capitalized” if it has a Total Capital ratio of 10% or greater, a Tier 1 Capital ratio of 6% or greater, and a leverage ratio of 5% or greater and is not subject to any written agreement, order, capital directive, or prompt corrective action directive by a federal bank regulatory agency to meet and maintain a specific capital level for any capital measure;

•	“adequately capitalized” if it has a Total Capital ratio of 8% or greater, a Tier 1 Capital ratio of 4% or greater, and a leverage ratio of 4% or greater – or 3% in certain circumstances – and is not well capitalized;

•	“undercapitalized” if it has a Total Capital ratio of less than 8%, a Tier 1 Capital ratio of less than 4% - or 3% in certain circumstances;

•	“significantly undercapitalized” if it has a Total Capital ratio of less than 6%, a Tier 1 Capital ratio of less than 3%, or a leverage ratio of less than 3%; or

•	“critically undercapitalized” if its tangible equity is equal to or less than 2% of average quarterly tangible assets.

The risk-based capital standards of the Federal Reserve Board explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution’s ability to manage these risks, as important factors to be taken into account by the agency in assessing an institution’s overall capital adequacy. The capital guidelines also provide that an institution’s exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a banking organization’s capital adequacy.

Federal Reserve Board guidelines also provide that banking organizations experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets. The Federal regulatory agencies may take various corrective actions against any undercapitalized bank holding company or bank, and any bank that fails to submit a capital restoration plan or fails to implement a plan accepted by the regulators. These powers include, but are not limited to, requiring the institution to be recapitalized, prohibiting asset growth, restricting interest rates paid, requiring prior approval of capital distributions by any bank holding company that controls the institution, requiring divestiture by the institution of its subsidiaries or by the holding company of the institution itself, requiring new election of directors, and requiring the dismissal of directors and officers. The Company and the Bank presently maintain sufficient capital to remain in compliance with these capital requirements. See Note 14 to the Consolidated Financial Statements, which is incorporated as part of this report.

The Board of Directors of the Company approved a stock repurchase program for the common stock of the Company on July 18, 2007. Further information on the stock repurchase program is found in Part 2, Item 5 of this report.

Safe and Sound Banking Practices. Bank holding companies are not permitted to engage in unsafe and unsound banking practices. The Federal Reserve Board's regulations, for example, generally require a holding company to give the Federal Reserve Board prior notice of any redemption or repurchase of its own equity securities, if the consideration to be paid, together with the consideration paid for any repurchases or redemptions in the preceding year, is equal to 10% or more of the company's consolidated net worth. The Federal Reserve Board has broad authority to prohibit activities of bank holding companies and their non-banking subsidiaries which represent unsafe and unsound banking practices or which constitute violations of laws or regulations, and can assess civil money penalties for certain activities conducted on a knowing and reckless basis, if those activities caused a substantial loss to a depository institution.

The FDIC is authorized to prohibit any DIF-insured institution from engaging in any activity that the FDIC determines by regulation or order to pose a serious threat to the deposit insurance fund. Also, the FDIC may initiate enforcement actions against banks, after first giving the institution’s primary regulatory authority an opportunity to take such action. The FDIC may terminate the deposit insurance of any depository institution if it determines, after a hearing, that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed in writing by the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If deposit insurance is terminated, the deposits at the institution at the time of termination, less subsequent withdrawals, shall continue to be insured for a period from six months to two years, as determined by the FDIC. Management is not aware of any existing circumstances that could result in termination of any of the Bank’s deposit insurance.

Acquisitions by Bank Holding Companies. The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, or ownership or control of any voting shares of any bank, if after such acquisition it would own or control, directly or indirectly, more than 5% of the voting shares of such bank. In approving bank acquisitions by bank holding companies, the Federal Reserve Board is required to consider the financial and managerial resources and future prospects of the bank holding company and the banks concerned, the convenience and needs of the communities to be served, and various competitive factors.

Control Acquisitions. The Change in Bank Control Act prohibits a person or group of persons from acquiring "control" of a bank holding company unless the Federal Reserve Board has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve Board, the acquisition of 10% or more of a class of voting stock of a bank holding company with a class of securities registered under Section 12 of the Exchange Act would, under the circumstances set forth in the presumption, constitute acquisition of control of the Company. In addition, under the Bank Holding Company Act, any entity is required to obtain the approval of the Federal Reserve Board before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of the Company's outstanding common stock, or otherwise obtaining control or a "controlling influence" over the Company.

Regulations affecting the Bank

Citizens Bank and Trust Company is incorporated under the laws of the Commonwealth of Virginia as a state-chartered commercial bank. The Bank is a wholly owned subsidiary of Citizens Bancorp of Virginia, Inc. and has been in continuous operation since August 23, 1873.

Insider Loans. Restrictions on loans to directors, executive officers, principal shareholders and their related interests ("insiders") contained in the Federal Reserve Act and Regulation O applies to the Bank and the Company. These restrictions include limits on loans to one borrower and conditions that must be met before such a loan can be made. There is also an aggregate limitation on all loans to insiders and their related interests. These loans cannot exceed the institution's total unimpaired capital and surplus, and the Federal Reserve may determine that a lesser amount is appropriate. Insiders are subject to enforcement actions for knowingly accepting loans in violation of applicable restrictions.

Restrictions on Distribution of Subsidiary Bank Dividends and Assets. Dividends paid by the Bank have been the Company's primary source of funds utilized to pay shareholder cash dividends and are expected to be for the foreseeable future. Capital adequacy requirements serve to limit the amount of dividends that may be paid by the Bank. Under Federal law, the Bank cannot pay a dividend if, after paying the dividend, it will be "undercapitalized." The Federal Reserve may declare a dividend payment to be unsafe and unsound even though the Bank would continue to meet its capital requirements after the dividend. For additional restrictions on the Bank’s ability to pay dividends, see the section captioned “Dividend Policy” in Item 5 located elsewhere in this report. Because the Company is a legal entity separate and distinct from the Bank, the Company's right to participate in the distribution of assets of the Bank in the event of the Bank's liquidation or reorganization would be subject to the prior claims of the Bank's creditors. In the event of a liquidation or other resolution of an insured depository institution, the claims of depositors and other general or subordinated creditors are entitled to a priority of payment over the claims of holders of any obligation of the institution to its shareholders, including any depository bank holding company (such as the Company) or any shareholder or creditor thereof.

Deposit Insurance. Substantially all of the deposits of the Bank are insured up to applicable limits by the Deposit Insurance Fund (“DIF”) of the FDIC and are subject to deposit insurance assessments to maintain the DIF. The FDIC utilizes a risk-based assessment system that imposes insurance premiums based upon a risk matrix that takes into account a bank’s capital level and supervisory rating (“CAMELS rating”). The risk matrix utilizes four risk categories which are distinguished by capital levels and supervisory ratings.

In November 2010, the FDIC issued a final rule to implement provisions of the Dodd-Frank Act that provide for temporary unlimited coverage for non-interest-bearing transaction accounts. The separate coverage for non-interest-bearing transaction accounts became effective on December 31, 2010 and terminates on December 31, 2012.

Effective April, 2011, the deposit insurance assessment base changed from total domestic deposits to average total assets minus average tangible equity, as required by the Dodd-Frank Act. The initial base assessment rate now ranges depending on an institutions risk category, from 5 to 35 basis points on an annualized basis (basis points representing cents per $100 of assessable assets). After the effect of potential base-rate adjustments, the total base assessment rate could range from 2.5 to 45 basis points on an annualized basis. The potential adjustments to an institution’s initial base assessment rate include (i) a potential decrease of up to 5 basis points for certain long-term unsecured debt (“unsecured debt adjustment”) and (ii) a potential increase of up to 10 basis points for brokered deposits in excess of 10% of domestic deposits (“brokered deposit adjustment”). As the DIF reserve ratio grows, the rate schedule will be adjusted downward. Additionally, the rule includes a new adjustment for depository institution debt whereby an institution would pay an additional premium equal to 50 basis points on every dollar of long-term, unsecured debt held that was issued by another insured depository institution (excluding debt guaranteed under the TLGP). The Company cannot provide any assurance as to the effect of these changes on its deposit insurance premium rate as such changes are dependent upon a variety of factors, some of which are beyond the Company’s control.

FDIC insurance expense totaled $391.7 thousand, $506.7 thousand, and $340.2 thousand in 2011, 2010 and 2009, respectively.

Examinations and Audits. The Federal Reserve Board and the Virginia State Corporation Commission’s Bureau of Financial Institutions periodically examine and evaluate the Bank. Based upon such examinations, the appropriate regulator may revalue the assets of the institution and require that it establish specific reserves to compensate for the difference between what the regulator determines the value to be and the carrying value of such assets.

Capital Adequacy Requirements. Refer to “Capital Adequacy Requirements” under “Regulations affecting the Company”, above.

Community Reinvestment Act. Under the Community Reinvestment Act and related regulations, depository institutions have an affirmative obligation to assist in meeting the credit needs of their market areas, including low and moderate-income areas, consistent with safe and sound banking practice. The Community Reinvestment Act requires the adoption by each institution of a Community Reinvestment Act statement for each of its market areas describing the depository institution’s efforts to assist in its community’s credit needs. Depository institutions are periodically examined for compliance with the Community Reinvestment Act and are periodically assigned ratings in this regard. Banking regulators consider a depository institution’s Community Reinvestment Act rating when reviewing applications to establish new branches, undertake new lines of business, and/or acquire part or all of another depository institution. An unsatisfactory rating can significantly delay or even prohibit regulatory approval of a proposed transaction by a bank holding company or its depository institution subsidiaries.

The Currency and Foreign Transactions Reporting Act. Also known as the Bank Secrecy Act (BSA), and its implementing regulation, 31 CFR 103, is a tool the U.S. government uses to fight drug trafficking, money laundering, and other crimes. Congress enacted the BSA to prevent banks and other financial service providers from being used as intermediaries for, or to hide the transfer or deposit of money derived from, criminal activity. The Federal Reserve Board monitors state member banks’ compliance with the BSA and 31 CFR 103.

Since its passage, Congress has amended the BSA a number of times to enhance law enforcement effectiveness. The Anti-Drug Abuse Act of 1986, which included the Money Laundering Control Act of 1986 (MLCA), strengthened the government's ability to fight money laundering by making it a criminal activity. The Money Laundering Suppression Act of 1994 (Title IV of the Riegle-Neal Community Development and Regulatory Improvement Act of 1994) required regulators to develop enhanced examination procedures and increase examiner training to improve the identification of money laundering schemes in financial institutions.

Today more than 170 crimes are listed in the federal money laundering statutes. They range from drug trafficking, gunrunning, murder for hire, fraud, acts of terrorism, and the illegal use of a wetland. The list also includes certain foreign crimes. A financial institution must educate its employees, understand its customers and their businesses, and have systems and procedures in place to distinguish routine transactions from ones that rise to the level of suspicious activity. The reporting and record keeping requirements of the BSA regulations create a paper trail for law enforcement to investigate money laundering schemes and other illegal activities. This paper trail operates to deter illegal activity and provides a means to trace movements of money through the financial system.

USA PATRIOT Act of 2001. This regulation was enacted in response to the terrorist attacks, which occurred on September 11, 2001. The USA PATRIOT Act is intended to strengthen U.S. law enforcement's and the intelligence communities' abilities to work cohesively to combat terrorism on a variety of fronts. The impact of the PATRIOT Act on financial institutions of all kinds is significant and wide ranging. The PATRIOT Act contains sweeping anti-money laundering and financial transparency laws and requires various regulations, including standards for verifying customer identification at account opening, and rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

Financial Services Modernization Legislation. In November 1999, the Gramm-Leach-Bliley (GLB) Act of 1999 was enacted. The GLB Act repealed provisions of the Glass-Steagall Act which restricted the affiliation of Federal Reserve member banks with firms "engaged principally" in specified securities activities, and which restricted officer, director, or employee interlocks between a member bank and any company or person primarily engaged in specified securities activities. In addition, the GLB Act contained provisions that expressly preempt any state law restricting the establishment of financial affiliations, primarily related to insurance. The general effect of the law was to establish a comprehensive framework to permit affiliations among commercial banks, insurance companies, securities firms, and other financial service providers by revising and expanding the Bank Holding Company Act framework to permit a holding company to engage in a full range of financial activities through a new entity known as a financial holding company.

The GLB Act contains extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to its customers, both at the inception of the customer relationship and on an annual basis, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. The law provides that, except for specific limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to the customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. An institution may not disclose to a non-affiliated third party, other than to a consumer reporting agency, customer account numbers or other similar account identifiers for marketing purposes. The GLB Act also provides that the states may adopt customer privacy protections that are stricter than those contained in the Act.

Fair and Accurate Credit Transactions Act ("FACT Act"). The FACT Act includes many provisions concerning national credit reporting standards, and permits consumers, including the customers of the Company, to opt out of information sharing among affiliated companies for marketing purposes. The FACT Act also requires financial institutions, including banks, to notify their customers if they report negative information about them to credit bureaus or if the credit that is granted to them is on less favorable terms than generally available. Banks also must comply with guidelines established by their federal banking regulators to help detect identity theft.

Check Clearing for the 21st Century Act ("Check 21 Act"). This Act became effective in October 2004. The Check 21 Act creates a new negotiable instrument, called a "substitute check," which banks are required to accept as the legal equivalent of a paper check if it meets the requirements of the Check 21 Act. The Check 21 Act is designed to facilitate check truncation, to foster innovation in the check payment systems and to improve the payment system by shortening processing times and reducing the volume of paper.

Consumer Laws and Regulations. In addition to the laws and regulations discussed herein, the Bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. These laws and regulations include, but are not limited to, the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act, Federal Financial Privacy Laws, Interagency Guidelines Establishing Information Security Standards, and the Right to Financial Privacy Act. These laws and regulations regulate the manner in which financial institutions must deal with customers when taking deposits or making loans to such customers.

Future Regulatory Uncertainty

Federal regulation of financial institutions changes regularly and is the subject of constant legislative debate. The Company cannot forecast how Federal regulation of financial institutions may change in the future and the potential impact to its operations. As a result of the global economic recession, Congress and the Administration have enacted and are considering enacting laws that incorporate significant regulatory changes upon the financial services industry. The Company fully expects that the financial institution industry will remain heavily regulated in the foreseeable future and those additional laws or regulations may be adopted further regulating specific banking practices.

Employees

As of December 31, 2011, the Company and the Bank employed 108 full-time equivalent employees. The Company’s success is highly dependent on its ability to attract and retain qualified employees. Competition in the industry is intense for qualified employees; however, the Company believes it has been successful in recruiting qualified employees and believes relations with its employees are excellent. None of the Company’s employees are represented by collective bargaining agreements.

Executive Officers of the Registrant

The names, ages as of December 31, 2011, recent business experience and positions or offices held by each of the executive officers of the Company and the Bank are as follows:

Name and Position Held	Age	Recent Business Experience
Joseph D. Borgerding President, Chief Executive Officer and Director	54	Officer of the Bank since 2003. Elected as President, Chief Executive Officer and Director of the Company and the Bank September 2005 to present.

Geoffrey C. Warner Senior Vice President Interim Chief Financial Officer	61	Senior Vice President and Interim Chief Financial Officer of the Company and the Bank from March 16, 2012 to present.

Lynn K. Shekleton Senior Vice President, Secretary	56	Officer of the Bank since 1994. Senior Vice President and Secretary of the Company from May 2006 to present. Senior Vice President, Branch Administration and Human Resources of the Bank from May 2006 to present.

Availability of Information

The Company electronically files quarterly (Form 10-Q) and annual (Form 10-K) reports and proxy statements with the Securities and Exchange Commission (SEC) on a regular basis. Other reports are filed when necessary in accordance with the Securities Exchange Act of 1934.

The public may read and print any materials the Company files with the SEC at the SEC’s web site at http://www.sec.gov. In addition, any document filed by the Company with the SEC can be read and copied at the SEC’s public reference facilities at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Copies of documents can be obtained at prescribed rates by writing to the Public Reference Section of the SEC at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

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ITEM 1A. RISK FACTORS

An investment in our common stock involves risks and you should not invest in our common stock unless you understand these risk factors and how it could impact the value of your investment. The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair the Company’s business operations. This report is qualified in its entirety by these risk factors. You should read this section together with the other information, including our consolidated financial statements and related notes to the consolidated financial statements.

If any of the following risks actually occur, the Company’s financial condition and results of operations could be materially and adversely affected. If this were to happen, the market price of the Company’s common stock could decline significantly, and you could lose all or part of your investment.

Risks Related to the Company’s Business

The Corporation’s Business May Be Adversely Affected by Economic Conditions Generally

The Company's operations are principally located in the counties of Amelia, Nottoway, Prince Edward, Chesterfield, the City of Colonial Heights, the Town of South Hill and adjoining counties. Given the geographic concentration of its operations, the Company's results depend largely upon the general economic conditions in this market. Changes in the suburban and rural markets we serve may influence the growth rate of our loans and deposits, the quality of the loan portfolio and the loan and deposit pricing that we may obtain. Significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control would impact these local economic conditions and the demand for banking products and services generally, which could negatively affect our financial condition and performance.

A continuation of the recent economic turbulence could impact the Company’s performance, both directly by affecting our revenues and the value of our assets and liabilities, and indirectly by affecting our counterparties and the economy generally. Dramatic declines in the housing market in the past year have resulted in significant write-downs of asset values by financial institutions. The Company’s average level of nonperforming and delinquent loans remained at higher-than-historical levels during 2011. Concerns about the stability of the financial markets generally have reduced the availability of funding to certain financial institutions, leading to a tightening of credit, reduction of business activity and increased market volatility. The extreme levels of volatility and limited credit availability currently being experienced could continue to affect the U.S. banking industry and the broader U.S. and global economies, which would have an effect on all financial institutions, including the Company.

The Company Operates In A Highly Competitive Industry

The Company and the Bank face vigorous competition from other banks and other financial institutions, including savings and loan associations, savings banks, finance companies and credit unions for deposits, loans, and other financial services in our market area. Many of these banks and other financial institutions are significantly larger than we are and have greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of banking services. To a limited extent, we also compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, insurance companies and governmental organizations which may offer more favorable financing than we are able to offer. Many of our non-bank competitors have advantages over us in providing certain services. This competition may reduce or limit our margins and our market share and may adversely affect our results of operations and financial condition.

The Company Is Subject To Lending Risk

There are inherent risks associated with the Company’s lending activities. These risks include, among other things, the impact of changes in interest rates and changes in the economic conditions in the markets where the Company operates as well as those across the Commonwealth of Virginia and the United States. Increases in interest rates and/or weakening economic conditions could adversely impact

the ability of borrowers to repay outstanding loans or the value of the collateral securing these loans. The Company is also subject to various laws and regulations that affect its lending activities. Failure to comply with applicable laws and regulations could subject the Company to regulatory enforcement action that could result in the assessment of significant civil money penalties against the Company.

As of December 31, 2011, approximately 41.3% of the Company’s loan portfolio consisted of commercial and industrial, construction and commercial real estate mortgage loans. These types of loans are generally viewed as having more risk of default than residential real estate loans or consumer loans. These types of loans are also typically carrying larger balances than residential real estate loans and consumer loans. The deterioration of one or a few of these loans could cause a significant increase in non-performing loans. An increase in non-performing loans could result in a net loss of earnings from these loans, an increase in the provision for possible loan losses and an increase in loan charge-offs, all of which could have a material adverse effect on the Company’s financial condition and results of operations. See the section captioned “Asset Quality” in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” located elsewhere in this report for further discussion related to the asset quality of loans.

The Company Is Subject To Interest Rate Risk

The Company's earnings depend largely on the relationship between the yield on earning assets, primarily loans and investments, and the cost of funds, primarily deposits and borrowings. This relationship, known as the interest rate spread, is subject to fluctuation and is affected by economic and competitive factors which influence interest rates, the volume and mix of interest-earning assets and interest-bearing liabilities, and the level of non-performing assets. The Company is subject to interest rate risk to the degree that its interest-bearing liabilities reprice or mature more slowly or more rapidly or on a different basis than its interest-earning assets. Community banks are often at a competitive disadvantage in managing their cost of funds compared to the large regional, super-regional or national banks that have access to the national and international capital markets. These factors influence our ability to maintain a stable net interest margin. We seek to maintain a neutral position in terms of the volume of assets and liabilities that mature or re-price during any period so that we may reasonably predict our net interest margin; however, interest rate fluctuations, loan prepayments, loan production and deposit flows are constantly changing and influence our ability to maintain this neutral position and affect the demand of customers for the Company's products and services. Significant fluctuations in interest rates could have a material adverse effect on the Company's business, financial condition, results of operations or liquidity. For additional information regarding interest rate risk, see Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk" located elsewhere in this report.

The Company’s Allowance for Loan Losses May Be Insufficient

The allowance for loan losses is determined by analyzing historical loan losses, current trends in delinquencies and charge-offs, plans for problem loan resolution, the opinions of our regulators, changes in the size and composition of the loan portfolio and industry information. Also included in our estimates for loan losses are considerations with respect to the impact of economic events, the outcome of which are uncertain. Because any estimate of loan losses is necessarily subjective and the accuracy of any estimate depends on the outcome of future events, we face the risk that charge-offs in future periods will exceed our allowance for loan losses and that additional increases in the allowance for loan losses will be required. Additions to the allowance for loan losses would result in a decrease of our net income. Although we believe our allowance for loan losses is adequate to absorb probable losses in our loan portfolio, we cannot predict such losses or that our allowance will be adequate in the future. For a complete discussion on asset quality and the allowance for loan losses, see Part II, Item 7, “Critical Accounting Policies – Allowance for Loan Losses” and "Asset Quality" later in this report.

The Company Is Subject to Extensive Government Regulation and Supervision

The Company and the banking industry are subject to extensive regulation and supervision under federal and state laws and regulations. The restrictions imposed by such laws and regulations limit the manner in which the Company conducts its business, undertakes new investments and activities, and obtains financing. These regulations are designed primarily for the protection of the deposit insurance funds and consumers and not to benefit the Company's shareholders. The burden imposed by these

federal and state regulations may place banks in general, and specifically Citizens Bancorp of Virginia, Inc. and Citizens Bank & Trust Company, at a competitive disadvantage compared to less regulated competitors. Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future. The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of and government intervention in the financial services sector. Significant new laws or changes in, or repeals of, existing laws could have a material adverse effect on the Company's business, financial condition, results of operations, or liquidity. Further, Federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects credit conditions for the Company and any unfavorable change in these conditions could have a material adverse effect on the Company's business, financial condition, results of operations or liquidity. See the sections captioned “Supervision and Regulation of Banking Activities” included in Item 1, “Business” and Note 14, “Regulatory Matters” in the notes to consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data”, which are located elsewhere in this report.

The Recent Repeal of Federal Prohibitions on Payment of Interest on Demand Deposits Could Increase the Company’s Interest Expense

All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. As a result, beginning on July 21, 2011, financial institutions could commence offering interest on demand deposits to compete for clients. The Company’s interest expense will increase and its net interest margin will decrease if it begins offering interest on demand deposits to attract additional customers or maintain current customers, which could have a material adverse effect on the Company’s business, financial condition and results of operations.

The Company’s Controls and Procedures May Fail or Be Circumvented

Management regularly reviews and updates the Company’s internal controls, disclosure controls and procedures, and corporate governance policies and procedures. Any system of controls, however well designed and operated, is based in part on certain assumptions and can provide only reasonable, not absolute, assurances that the objectives of the system are met. Any failure or circumvention of the Company’s controls and procedures or failure to comply with regulations related to controls and procedures could have a material adverse effect on the Company’s business, results of operations and financial condition.

The Company Relies On Dividends From Its Subsidiaries For Most Of Its Revenue

Citizens Bancorp of Virginia, Inc., is a separate and distinct legal entity from its subsidiary. It receives substantially all of its revenue from dividends from the Bank. These dividends are the principal source of funds to pay dividends on the Company’s common stock. Various federal and/or state laws and regulations limit the amount of dividends that the Bank may pay to its parent. Also, the Company’s right to participate in a distribution of assets upon the Bank’s liquidation or reorganization is subject to the prior claims of the Bank’s creditors. In the event the Bank is unable to pay dividends to the Company, Citizens Bancorp of Virginia, Inc. may not be able to pay dividends on the Company’s common stock. The inability to receive dividends from the Bank could have a material adverse effect on the Company’s business, financial condition and results of operations. See the section captioned “Supervision and Regulation of Banking Activities” in Item 1, “Business” and Note 14 “Regulatory Matters” in the notes to consolidated financial statements included in Item 8, “Financial Statements and Supplementary Data”, which are located elsewhere in this report.

The Company Is Subject To Liquidity Risk

Liquidity risk is the risk that the Company will have insufficient cash or access to cash to satisfy current and future financial obligations, including demands for loans and deposit withdrawals, funding operating costs, and for other corporate purposes. Liquidity risk arises whenever the maturities of financial instruments included in assets and liabilities differ. The Company is subject to liquidity risk, which it mitigates by establishing and accessing lines of credit with various financial institutions and accessing the brokered CD markets. Results of operations could be affected if the Company were unable to satisfy current or future financial obligations. See Part II, Item 7, "Liquidity" found later in this Report.

The Company May Not Be Able To Attract and Retain Skilled People

The Company and the Bank represent a customer-focused, relationship-driven, and community-oriented financial services organization. The Company expects our future growth to be driven in a large part by the relationships maintained with our customers by Joseph D. Borgerding, President and Chief Executive Officer, the rest of our executive management team, and our lending officers. Neither the Company nor the Bank has employment agreements with Mr. Borgerding, executive management or our lending officers. The unexpected loss of Mr. Borgerding or other key employees could have a material adverse effect on our business and possibly result in reduced revenues and earnings. The Bank has invested in bank-owned life insurance that covers Mr. Borgerding and certain other members of executive management and the lending officers.

Our business strategy will require us to continue to attract, hire, motivate and retain skilled personnel to develop new customer relationships as well as new financial products and services. Many experienced banking professionals employed by our competitors are covered by agreements not to compete or solicit their existing customers if they were to leave their current employment. These agreements make the recruitment of these professionals more difficult. Meanwhile, the market for these people is competitive, and we cannot assure you that we will be successful in attracting or hiring skilled personnel or be successful in retaining existing personnel.

The Company’s Information Systems May Experience An Interruption Or Breach In Security

The Company depends upon data processing, software, communication, and information exchange on a variety of computing platforms and networks, including the Internet. Despite instituted safeguards, the Company cannot be certain that all of its systems are entirely free from vulnerability to attack or other technological difficulties or failures. The Company relies on the services of a variety of vendors to meet its data processing and communication needs. If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted, and the Company could be exposed to claims from customers. Any of these results could have a material adverse effect on the Company's business, financial condition, results of operations or liquidity.

The Company Continually Encounters Technological Change

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company’s future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations. Many of the Company’s competitors have substantially greater resources to invest in technological improvements. The Company may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to its customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.

The Company’s Operations Rely on Certain External Vendors

The Company is reliant upon certain external vendors to provide products and services necessary to maintain day-to-day operations of the Company. Accordingly, the Company’s operations are exposed to risk that these vendors will not perform in accordance with the contracted arrangements under service level agreements. The Company maintains a system of comprehensive policies and a control framework designed to monitor vendor risks including, among other things, (i) changes in the vendor’s organizational structure, (ii) changes in the vendor’s financial condition, (iii) changes in the vendor’s support for existing products and services and (iv) changes in the vendor’s strategic focus. While the Company believes these policies and procedures help to mitigate risk, the failure of an external vendor to perform in accordance with the contracted arrangements under service level agreements could be disruptive to the Company’s operations, which could have a material adverse impact on the Company’s business and, in turn, the Company’s financial condition and results of operations.

Risks Associated With The Company’s Common Stock

Citizens Bancorp of Virginia, Inc. May Reduce or Eliminate Dividends on its Common Stock in the Future

Holders of the Company’s common stock are only entitled to receive such dividends as its board of directors may declare out of funds legally available for such payments. Although the Company has historically declared cash dividends on its common stock, it is not required to do so and may reduce or eliminate its common stock dividend in the future. This could adversely affect the market price of the Company’s common stock. Also, Citizens Bancorp of Virginia, Inc. is a bank holding company, and its ability to declare and pay dividends is dependent on certain federal regulatory considerations, including the guidelines of the Federal Reserve regarding capital adequacy and dividends affecting both the Company and its primary source of revenue, dividends from the Bank.

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ITEM 1B. UNRESOLVED STAFF COMMENTS

The Company has no unresolved comments from the SEC staff.

ITEM 2. PROPERTIES

The corporate headquarters of Citizens Bancorp of Virginia, Inc, and the main office of the Bank are located at 126 South Main Street, Blackstone, Virginia. The location consists of a full service banking office as well as administrative, operational and electronic data processing offices. Additional banking offices are located within Nottoway County at 101 North Main Street, Blackstone, Virginia; 1575 South Main Street, Blackstone, Virginia; 210 Carter Street, Crewe, Virginia; and 102 Second Street, Northeast, Burkeville, Virginia. In Amelia County, the banking office is located at 9060 North Five Forks Road. Banking offices in Prince Edward County are located at 1517 West Third Street (Route 460 West), Farmville, 712 South Main Street, Farmville and a remote ATM location at 200 North Main Street, Farmville, Virginia. The Chesterfield County banking office is located at 10001 Courtview Commons Lane, Chesterfield, Virginia. In the City of Colonial Heights the banking office is located at 946 Southpark Boulevard. In Mecklenburg County the banking office is located at 622 East Atlantic Street, South Hill, Virginia. All real estate and improvements at these locations are owned by the Bank except for the real estate at the Chesterfield branch, which is under a lease agreement for five years renewable for five additional terms of five years each. The current lease term is scheduled to end April 30, 2014.

All of the Company’s properties are in good operating condition and are adequate for the Company’s present and anticipated future needs.

ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings to which the Company is a party or of which the property of the Company is subject.

ITEM 4. MINE SAFETY DISCLOSURES

None

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PART II

ITEM 5.

MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock Performance and Dividends

The Company’s common stock is not listed on a national securities exchange, nor is it actively traded; only 5.1% of the average number of outstanding shares traded during 2011. Due to the extremely limited number of transactions, the average sale price of the Company’s common stock may not be indicative of its actual value.

Shares of the Company’s common stock trade through the OTC BULLETIN BOARD® (OTCBB) under the stock symbol “CZBT.” The OTCBB is a regulated quotation service that displays real-time quotes, last sale prices, and volume information in over-the-counter (OTC) equity securities. The OTCBB is a quotation medium for subscribing members, not an issuer listing service, and should not be confused with the NASDAQ Stock MarketSM or any other exchange. Investors must contact a broker/dealer to trade OTCBB securities. Investors do not have direct access to the OTCBB service. The Securities and Exchange Commission’s order-handling rules, which apply to NASDAQ-listed securities, do not apply to OTCBB securities.

As of March 16, 2012, the Company had approximately 740 shareholders of record. As of that date, the closing price of the common stock was $14.90. The chart below illustrates the high and low bid prices of common stock as reported on the OTCBB and the dividends declared during the last two years.

Market Price and Dividends

	2011						2010
Quarter	High		Low		Dividends		High		Low		Dividends
First	$	14.25	$	12.75	$	0.17	$	13.00	$	10.75	$	0.17
Second	$	15.00	$	13.10	$	0.17	$	13.75	$	11.22	$	0.17
Third	$	15.00	$	13.75	$	0.17	$	14.25	$	12.50	$	0.17
Fourth	$	15.50	$	13.80	$	0.17	$	13.99	$	12.55	$	0.17

Dividend Policy

The Company historically has paid cash dividends on a quarterly basis. The final determination of the timing, amount and payment of dividends on the Common Stock is at the discretion of the Company’s Board of Directors and will depend upon the earnings of the Company and the Bank, the financial condition of the Company and other factors, including general economic conditions and applicable governmental regulations and policies as discussed in Item 1., “Business – Supervision and Regulation,” above, the section captioned “Capital” included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Note 14 - Regulatory Matters” contained in the notes to consolidated financial statements filed as part of this report, after Item 15.

The Company is organized under the Virginia Stock Corporation Act, which prohibits the payment of a dividend if, after giving it effect, the corporation would not be able to pay its debts as they become due in the usual course of business or if the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved, to satisfy the preferential rights upon dissolution of any preferred shareholders.

The Company is a legal entity separate and distinct from its subsidiary. Its ability to distribute cash dividends will depend primarily on the ability of the Bank to pay dividends to it, and the Bank is subject to laws and regulations that limit the amount of dividends that it can pay. As a state member bank, the Bank is subject to certain restrictions imposed by the reserve and capital requirements of federal and Virginia banking statutes and regulations. Under Virginia law, a bank may not declare a dividend in

excess of its undivided profits. Additionally, the Bank may not declare a dividend if the total amount of all dividends, including the proposed dividend, declared by it in any calendar year exceeds the total of its retained net income of that year to date, combined with its retained net income of the two preceding years, unless the dividend is approved by the Federal Reserve. In addition, the Company is subject to certain regulatory capital requirements to maintain capital at or above regulatory minimums. These regulatory capital requirements affect its dividend policies.

Stock Repurchases

The Board of Directors of the Company approved the establishment of the current Stock Repurchase Plan July 18, 2007. The Stock Repurchase Plan is structured under the Securities and Exchange Commission’s Rule 10b5-1. The Plan went into effect on September 1, 2007, and is renewable every six months, at the recommendation of management and approval by the Board of Directors. The Company has an agreement with Scott & Stringfellow, Inc. to act as the Company’s agent in facilitating the repurchase of the Company’s common stock. The Plan calls for the repurchase of up to 40,000 shares of stock for each six month term. The Board of Directors reviews the results of the Plan, monthly. The Plan has been continuously reapproved since its inception.

The table below represents the record of when shares of common stock were repurchased during the most recent fiscal quarter.

Repurchase Plan Table

					Total number		Maximum number
					of shares		of shares that
	Total number		Average		purchased as		may yet be
	of shares		price paid		part of publicly		purchased
Period	purchased		per share		announced plan		under the plan
October 1 to
October 31, 2011		-	$	-		-		22,733
November 1 to
November 30, 2011		5,000	$	14.75		114,508		17,733
December 1 to
December 31, 2011		-	$	-		-		40,000

Total		5,000	$	14.75

The six-month terms for the Stock Repurchase Plan do not coincide with calendar quarters. A new term for the Plan began on December 1, 2011, which brought the maximum number of shares yet to be purchased under the Plan back to 40,000 shares as of December 1, 2011.

ITEM 6. SELECTED FINANCIAL DATA

Not applicable.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATION

General

Management’s discussion and analysis is intended to assist the reader in evaluating and understanding the consolidated results of operations and financial condition of the Company and should be read in conjunction with the Company’s Consolidated Financial Statements and Notes to Consolidated Financial Statements. The following discussion provides information about the major components of the results of operations and financial condition, liquidity, and capital resources of the Company.

Forward Looking Statements

The Company makes forward looking statements in this annual report that are subject to risks and uncertainties. These forward looking statements include statements regarding profitability, liquidity, allowance for loan losses, interest rate sensitivity, market risk, growth strategy, and financial and other goals. The words “believes,” “expects,” “may,” “will,” “should,” “projects,” “contemplates,” “anticipates,” “forecasts,” “intends,” or other similar words or terms are intended to identify forward looking statements.

These forward looking statements are subject to significant uncertainties because they are based upon or are affected by factors including:

·	Local, regional, and national economic conditions and the impact they may have on the Company and its customers and the Company’s assessment of that impact;

·	Government intervention in the U.S. financial system;

·	Level of market interest rates;

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

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

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

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

·	The ability to successfully manage growth or to implement growth strategies if the Company is unable to identify attractive markets, locations or opportunities to expand in the future;

·	Reliance on an experienced management team, including ability to attract and retain key personnel;

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

·	Demand, development and acceptance of new products and services;

·	Changes in consumer spending, borrowings and savings habits;

·	Changes in the Company’s liquidity position;

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

·	Technology utilized by the Company;

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

·	Maintaining capital levels adequate to support growth;

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

·	Changes in the Company’s organization, compensation and benefit plan;

·	The Company’s success at managing the risks involved in the foregoing items.

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

Application of Critical Accounting Polices and Accounting Estimates

The accounting and reporting policies followed by the Company conform, in all material respects, to accounting principles generally accepted in the United States and to general practices within the financial services industry. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. While the Company bases estimates on historical experience, current information and other factors deemed to be relevant, actual results could differ from those estimates.

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

Accounting policies related to the allowance for possible loan losses are considered to be critical, as these policies involve considerable subjective judgment and estimation by management. The allowance for possible loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company’s allowance for possible loan loss methodology includes allowance allocations calculated in accordance with Accounting Standards Codification (ASC) Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” The level of the allowance reflects management’s continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political and regulatory conditions and unidentified losses inherent in the current loan portfolio, as well as trends in the foregoing. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in management’s judgment, should be charged off. While management utilizes its best judgment and information available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond the Company’s control, including the performance of the Company’s loan portfolio, the economy, changes in interest rates and the view of the regulatory authorities toward loan classifications. See the section captioned “Allowance and Provision for Possible Loan Losses” elsewhere in this discussion and Note 4 – “Allowance for Loan Losses” in the notes to consolidated financial statements which follows Item 15, later in this report, for further details of the risk factors considered by management in estimating the necessary level of the allowance for possible loan losses.

Executive Overview

The Company conducts the general business of a commercial bank, offering traditional lending and deposit products to businesses and individuals. Revenue is generated primarily from interest income received on loans, investments combined with fee income and other miscellaneous revenue sources. This income is primarily offset by interest paid on deposits and borrowed funds, provision for loan losses and other noninterest expenses such as salaries and employee benefits, occupancy expense and other miscellaneous expenses.

The Company reported net income of $3,192,000 in 2011, an increase of 8.3% or $244,000 from 2010 net income of $2,948,000. Net income on a basic and diluted per share basis was reported as $1.37 and $1.25 in 2011 and 2010, respectively. Earnings of the Company in 2011 were strong despite the low interest rate environment, higher loan loss provision than pre-recession levels, and weak loan demand. The loan loss provision decreased by $65,000 from the amount recorded for 2010 as a result of declines in both non-accrual loans and loans past due 30 days or more.

As part of this report and its discussion of the results of operations, management refers to “taxable-equivalent adjustments”. Taxable-equivalent adjustments are the result of increasing income from tax-free investments by an amount equal to the taxes that would be paid if the income were fully taxable based on a 34% federal tax rate, thus making tax-exempt yields comparable to taxable asset yields. Refer to the

reconciliation of taxable-equivalent income to US GAAP income in the footnote to the Average Balance Sheet and Income Data, found later in this report.

Results of Operations

The table below lists the Company’s quarterly performance for the years ended December 31, 2011 and 2010.

Summary of Financial Results by Quarter

	Three Months Ended
(in thousands)	2011								2010
	Dec. 31		Sep. 30		Jun. 30		Mar. 31		Dec. 31		Sep. 30		Jun. 30		Mar. 31

Interest income	$	3,833	$	3,863	$	3,978	$	3,994	$	3,940	$	4,143	$	4,200	$	4,087

Interest expense		777		893		986		1,020		1,088		1,127		1,144		1,168

Net Interest income		3,056		2,970		2,992		2,974		2,852		3,016		3,056		2,919

Provision for loan losses		160		225		150		150		150		150		150		300

Net interest income after
provision for loan losses		2,896		2,745		2,842		2,824		2,702		2,866		2,906		2,619


Non-interest income		682		659		592		563		650		530		604		557

Non-interest expense		2,460		2,376		2,355		2,434		2,358		2,402		2,397		2,368

Income before applicable
income taxes		1,118		1,028		1,079		953		994		994		1,113		808

Applicable income taxes		276		236		255		219		232		232		297		200

Net Income	$	842	$	792	$	824	$	734	$	762	$	762	$	816	$	608

Net income per share,
basic and diluted	$	0.36	$	0.34	$	0.35	$	0.31	$	0.32	$	0.32	$	0.34	$	0.26

Summary

Total assets decreased $1.8 million during 2011 from $330.4 million in 2010 to $328.6 million, or a .55% decrease. Net loans decreased $3.1 million during 2011 from $200.5 million in 2010 to $197.4 million, or a 1.6% decrease and this was a reflection of the weak economy and lowered demand for business and consumer loans. Investment securities available for sale increased $1.8 million to $84.5 million at December 31, 2011 from $82.7 million at December 31, 2010. Average earning assets for 2011 were $299.6 million, a decrease of $3.3 million or 1.1% as compared to the annual average for 2010 of $302.9 million. Year-over-year average balances by earning asset category, included: loan balances decreasing $9.1 million, securities balances increased $3.8 million and Federal funds sold and other interest bearing balances increased $2.0 million over the prior year.

Total deposits were $271.6 million at December 31, 2011, a decrease of $6.4 million or 2.3% compared to $278.0 million at the end of 2010. On average, deposit account balances were $272.5 million for 2011 as compared to $275.2 million for 2010; a decrease of $2.7 million or .98%. The deposit category that saw the highest average balance decrease over 2010 was time deposits, down $10.3 million. This decrease was partially offset with an increase of $2.5 million in interest-bearing checking accounts, a $1.5 million increase in savings accounts and a $3.5 million increase in money-market accounts.

Other borrowings consisted of term advances from the Federal Home Loan Bank of Atlanta and overnight commercial repurchase agreements known as the Investment Sweeps product, which are non-deposit accounts, not insured by FDIC and collateralized by the Bank with US Government or Federal Agency securities sufficient to cover average account balances. During 2011 the Investment Sweeps product balances averaged $6.1 million; or an increase of $800 thousand over the average balance for

2010 of $5.3 million. The advance from the Federal Home Loan Bank of Atlanta remained unchanged at $5.0 million for the periods ended December 31, 2011 and December 31, 2010.

Stockholders' equity balance at December 31, 2011 was $41.846 million, an increase of $2.208 million from the year earlier ending balance of $39.638 million. Retained earnings, net of dividends and repurchased common stock grew $1.225 million from December 31, 2010 to December 31, 2011. The increase in accumulated other comprehensive income of $997 thousand from December 31, 2010 to December 31, 2011 was attributed to an increase of $869 thousand in the unfunded pension liability and a increase of $1.866 million in the mark-to-market value of the investment securities portfolio. Book value per common share at December 31, 2011 was $17.99, an increase of 6.8% or $1.15 from the book value per share of $16.84 at December 31, 2010. The stock closed at $14.80 on December 31, 2011 or 82% of book value as compared to a December 31, 2010 closing stock price of $13.10 or 78% of book value.

The Company’s return on average assets (ROAA) for 2011 was 0.97% compared to 0.90% in 2010 and 0.91% in 2009 while the return on average equity (ROAE) was 7.63% for 2011 compared to 7.29% in 2010 and 7.49% in 2009. While improved compared to 2010, the Company’s 2011 earnings reflected the lingering effects of the recession that was responsible for anemic economic activity leading to business failures, high unemployment, consumers and businesses postponing purchases in favor of paying off outstanding loans and historically-low levels of interest rates. These incidences resulted in an overall decline in loan balances, new loans originating at lower rates and adjustable-rate loans repriced at lower rates. The liquidity from the overall decline in loans was generally invested in securities at significantly lower yields. On the deposit side while volume was strong in lower cost deposit accounts as compared to the previous year, the interest margin benefited mainly from the 34 basis-point decrease in certificate of deposit account yields. The ROAE for the Company has historically been lower than peer financial institutions due to the higher amount of capital held by the Bank and the Company.

The provision for loan losses amounted to $685 thousand for 2011, a decrease of $65 thousand as compared to the $750 thousand provision for 2010. Adversely classified loans totaled $10.6 million as of December 31, 2011, which is $1.3 million lower than the $11.9 million at December 31, 2010. The allowance-to-total-loans ratio increased from 1.07% at December 31, 2010 to 1.18% at December 31, 2011, primarily as a result of watch credits increasing from $6.1 million as of December 31, 2010 to $10.5 million as of December 31, 2011. Management believes that the allowance was appropriate to cover any foreseeable loan losses as of December 31, 2011.

Noninterest income and noninterest expense for 2011 continued to be impacted by several factors which can be attributed to the recession. Noninterest income totaled $2.496 million or $92 thousand more than the $2.404 million reported for 2010. Areas where noninterest income increased in 2011 from the prior year included the cash surrender value of bank-owned life insurance increased to $296.1 thousand in 2011 or $4.1 thousand more than in 2010, and ATM fee income increased $110.9 thousand when compared to 2010. These increases were partially offset by an impairment charge of $50 thousand on other than temporarily impaired securities. Noninterest expense totaled $9.625 million for 2011, which is an increase of $36 thousand, or .38%, from the $9.589 million recorded for 2010. Higher costs were seen in a few categories that included: other expenses, up $43 thousand in 2011 over 2010, compensation-related costs increased $70 thousand over the previous year, and OREO expenses, net of rental income, increased $106 thousand in 2011 over 2010. These increases were partially offset with a decline in occupancy expense of $15 thousand, a decline in equipment expense of $64 thousand and a decline in FDIC insurance of $115 thousand.

The effective income tax rate for the Company decreased for 2011 to 23.61% as compared to 24.59% for 2010, due to an increase in tax exempt interest income.

The following table summarizes the net changes in the income statement as discussed above:

							Net			Percent
	2011			2010			Change			Change

Return on Average Assets		0.97	%		0.90	%		0.07	%		7.78	%

Return on Average Equity		7.63	%		7.29	%		0.34	%		4.66	%

(in thousands)

Net interest income	$	11,992		$	11,843		$	149			1.26	%

Provision for loan losses		685			750			(65	)		-8.67	%

Non-interest income		2,496			2,404			92			3.83	%

Non-interest expense		9,624			9,589			35			0.37	%

Net income before provision
for income taxes		4,179			3,909			270			6.91	%

Income taxes		987			961			26			2.71	%

Net income	$	3,192		$	2,948		$	244			8.28	%

Net Interest Income

Net interest income, the amount by which interest income on interest earning assets exceeds interest expense on interest bearing liabilities, is the most significant component of the Company’s earnings. Net interest income is the function of several factors consisting of changes in the volume and composition (mix) of interest earning assets, funding sources, and market interest rates. While management’s policies influence these factors, external forces such as customer needs and demands, competition and economic and monetary policies of the Federal Reserve Board are also contributing forces.

The Federal Reserve Board influences the general market rates of interest, including the deposit and loan rates offered by many financial institutions. The Company’s loan portfolio is significantly affected by changes in the prime interest rate. The prime interest rate, which is the rate offered on loans to borrowers with strong credit, began 2008 at 7.25% and decreased 200 basis points in the first quarter, 25 basis points in the second quarter and 175 basis points in the fourth quarter to end the year at 3.25%. During 2009, 2010 and 2011, the prime interest rate remained at 3.25%. The intended federal funds rate, which is the cost of immediately available overnight funds, fluctuated in a similar manner to the prime interest rate. It began 2008 at 4.25% and decreased 200 basis points in the first quarter, 25 basis points in the second quarter and 175 basis points in the fourth quarter to end the year at 0.25%. During 2009, 2010 and 2011, the intended federal funds rate remained at zero to 0.25%.

The Company’s balance sheet has historically been asset sensitive, meaning that earning assets generally reprice more quickly than interest-bearing liabilities. Therefore, the Company’s net interest margin was likely to increase in sustained periods of rising interest rates and decrease in sustained periods of declining interest rates. In an effort to mitigate the effects of declining interest rates, the Bank began in 2008 to implement interest rate floors on newly originated commercial loans, home equity lines of credit and adjustable rate residential mortgages. An “interest rate floor” is part of the contractual terms of a loan note when the loan’s interest rate is subject to change during the life of the loan on either a variable or adjustable basis and the interest rate is pegged to a certain market index, such as the prime rate or LIBOR. The terms of an interest rate floor state a specific minimum interest rate that will be charged even if the base index results in a lower interest rate.

The Company is primarily funded by interest-bearing liabilities consisting of deposit account products and other borrowings. Other borrowings include the overnight investment product offered to commercial customers which is known as the Investment Sweeps product and advances from the Federal Home Loan Bank of Atlanta. Other borrowings represented 4.45% of total average interest bearing liabilities for 2011. A higher percentage of interest-bearing deposit account balances are in time deposits. During 2011, time deposits averaged 51.5% of total interest-bearing deposit account balances, while low-

cost deposit account balances for savings, interest checking and money-market accounts averaged 48.4% of total interest-bearing deposit account balances in 2011. The lower-cost funding base is expected to have a positive impact on the Company’s net interest income and net interest margin. As stated previously in the section captioned “Supervision and Regulation of Banking Activities” included in Item 1, Business, elsewhere in this report, the Dodd-Frank Act repealed the federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts beginning July 21, 2011. Although the ultimate impact of this legislation on the Company has not yet been determined, the Company expects interest costs associated with demand deposits to increase. Additional analysis of the components of the Company’s net interest margin is presented below.

Rate and Volume Analysis(1)

The following table depicts the changes in interest income and interest expense caused by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates when compared to the previous period. Interest income on securities is shown in this table on a tax-equivalent basis. This rate/volume table is intended to be used in conjunction with the Average Balance Sheet Data, shown on the following page.

	2011 vs. 2010									2010 vs. 2009
	Increase/			Change Due To:						Increase/			Change Due To:
(In thousands)	(Decrease)			Rate			Volume			(Decrease)			Rate			Volume
Assets:
Loans	$	(619	)	$	(36	)	$	(583	)	$	(510	)	$	(193	)	$	(317	)
Securities available for sale(2)		18			(127	)		145			780			(383	)		1,163
Federal funds sold and other		6			(3	)		9			(168	)		(94	)		(74	)

Total interest-earning assets	$	(595	)	$	(166	)	$	(429	)	$	102		$	(670	)	$	772

Liabilities:
Demand deposits	$	5		$	1		$	4		$	8		$	2		$	6
Savings deposits		(148	)		(187	)		39			91			(100	)		191
Time deposits		(705	)		(430	)		(275	)		(663	)		(518	)		(145	)
Other borrowings
FHLB Advances		(6	)		(6	)		-			(80	)		50			(130	)
Short-term borrowings		2			(2	)		4			2			-			2

Total interest-bearing liabilities	$	(852	)	$	(624	)	$	(228	)	$	(642	)	$	(566	)	$	(76	)

Net interest income	$	257		$	458		$	(201	)	$	744		$	(104	)	$	848

Notes:

(1) Changes caused by the combination of rate and volume are allocated based on the percentage caused by each.

(2) Income is reported on a tax-equivalent basis, assuming a federal income tax rate of 34%.

Average Balance Sheet and Income Data
(In thousands)

	Years Ended December 31,

				2011								2010								2009
	Average					Yield/			Average					Yield/			Average					Yield/
	Balance			Interest		Rate			Balance			Interest		Rate			Balance			Interest		Rate

ASSETS

Interest earning assets:

Loans	$	202,580		$	12,938		6.39	%	$	211,708		$	13,557		6.40	%	$	216,629		$	14,067		6.49	%
Securities Available for Sale		85,710			3,213		3.75	%		81,918			3,195		3.90	%		53,107			2,415		4.55	%
Federal funds sold and other		11,334			47		0.41	%		9,301			41		0.44	%		18,058			209		1.16	%

Total interest earning assets		299,624			16,198		5.41	%		302,927			16,793		5.54	%		287,794			16,691		5.80	%

Non-interest earning assets:

Cash and due from banks		7,151								7,194								7,688
Premises and equipment, net		7,019								7,380								7,674
Other assets		16,798								13,893								11,934

Less allowance for loan losses		(2,279	)							(2,865	)							(2,302	)

TOTAL	$	328,313							$	328,529							$	312,788


LIABILITIES AND SHAREHOLDERS' EQUITY

Interest bearing liabilities:
Demand deposits	$	41,808		$	74		0.18	%	$	39,331		$	69		0.18	%	$	36,145		$	61		0.17	%
Savings deposits		73,588			430		0.58	%		68,634			578		0.84	%		47,349			487		1.03	%
Time deposits		122,952			3,023		2.46	%		133,256			3,728		2.80	%		137,940			4,391		3.18	%
Other borrowings
FHLB advances		5,000			119		2.38	%		5,000			125		2.50	%		10,655			205		1.92	%
Short-term borrowings		6,088			29		0.48	%		5,290			27		0.50	%		5,089			25		0.50	%

Total interest bearing liabilities		249,436			3,675		1.47	%		251,511			4,527		1.80	%		237,178			5,169		2.18	%

Non-interest bearing liabilities:

Demand deposits		34,154								33,979								34,400
Other		2,920								2,597								3,406

		286,510								288,087								274,984

Stockholders' equity		41,803								40,442								37,804

TOTAL	$	328,313							$	328,529							$	312,788

Net interest earnings				$	12,523							$	12,266							$	11,522

Interest rate spread							3.93	%							3.74	%							3.62	%

Net interest margin							4.18	%							4.05	%							4.00	%


Notes: Tax-exempt interest income for investment securities has been adjusted to a tax-equivalent basis, resulting
in an increase in interest income of $530, $423 and $294 for 2011, 2010 and 2009 respectively.
A Federal income tax rate of 34% was used.

Non-Accrual loans are included in average loans outstanding.

Net Interest Income Analysis

Net interest income, on a tax equivalent basis, increased $257 thousand in 2011 as compared to 2010 and increased $744 thousand in 2010 as compared to 2009. The net interest margin, which is net income expressed as a percentage of average earning assets, was 4.18% for 2011, 4.05% for 2010 and 4.00% for 2009. The improvement in the net interest margin from 2009 to 2011 is a result of a greater decline in interest paid on liabilities than interest earned on assets.

The greatest contribution to the improvement of net interest income in 2011 and in 2010 was the decline in interest expense for time deposit accounts in each of the prior years. Interest costs and rates on time deposits declined from $3.728 million for 2010 to $3.023 million in 2011, a decrease of $705 thousand or 18.9%. In 2010, the interest expense for time deposits dropped by $663 thousand to $3.728 million from 2009 when the cost was $4.391 million.

The average earning assets yield for 2011 was 5.41% as compared to 5.54% for 2010, a decrease of 13 basis points and the yield decreased 26 basis points in 2010 from a yield of 5.80% for 2009. The decrease in earning assets yields over the last 3 years is a direct result of declining interest rates discussed earlier in this section and the decrease of loans as a percentage of total earning assets. In 2009, loans accounted for 75.3% of average earning assets compared to 69.9% in 2010 and 67.6% in 2011. Loans generally have significantly higher yields compared to securities and Federal funds sold and, as such, have a more positive effect on the net interest margin. Average earning assets for 2011 were $299.6 million, a $3.3 million or 1.09% decline from their balance of $302.9 million during 2010. Balances during 2010 showed an increase of $15.1 million or 5.25% from 2009.

Loans averaged $202.6 million in 2011. This was a decrease of $9.1 million from the $211.7 million in average loans for 2010. During 2010, average loan balances were $4.9 million lower than the average loan balances of $216.6 million in 2009. The average loan yield was 6.39% in 2011 compared to 6.40% in 2010 and 6.49% in 2009. The decline of loan interest income of $619 thousand for 2011 from 2010 and the $510 thousand decline in loan interest income from 2009 to 2010 can be attributed to the continued low interest rate environment as well as decreased average balances outstanding.

Securities averaged 28.6% of earning assets in 2011 as compared to the 27.0% average share in 2010 and 18.5% of average earning assets for 2009. The increase in securities as a percentage of earning assets was the direct result of slow loan demand over the 3-year period. The decline of market interest rates from 2009 to 2011 is evidenced by the decline of the yield on securities from 4.55% in 2009 to 3.90% in 2010 and to 3.75% for 2011. The average duration of the securities portfolio is generally from 3 to 5 years, which helps to sustain the liquidity position of the balance sheet. This level of duration will react more quickly to changes in interest rates, either up or down. The securities portfolio is structured in a manner that will provide funding for loan demand in the future.

Federal funds sold and other interest bearing account balances comprise the smallest portion of earning assets and it is intended to serve the immediate liquidity needs of the Company. During 2011, the average balance was $11.3 million or 3.8% of total earning assets as compared to $9.3 million or 3.1% of earning assets for 2010 and $18.1 million or 6.2% of earning assets for 2009. The yield for 2011 was 0.41% as compared to .44% for 2010 and 1.16% for 2009. The decline in yield from 2009 to 2011 was attributable not only to the decline in overnight rates, but also to the fact that CDs the Bank held during 2009 had matured at the end of that year.

Total average interest-bearing liabilities decreased $2.1 million to $249.4 million during 2011 as compared to $251.5 million for 2010, which was an increase of $14.3 million over the average interest- bearing liabilities of $237.2 million for 2009. The yield on average interest-bearing liabilities was 1.47% or 33 basis points less than the yield of 1.80% for 2010, which was 38 basis points less than the 2.18% yield for 2009. Total interest expense for 2011 was $3.675 million or $852 thousand less than the $4.527 million reported for 2010 and a decrease of $642 thousand from the interest expense of $5.169 million for 2009. Average deposits decreased $2.7 million or .98% for 2011 compared to 2010 and increased $19.4 million or 7.6% in 2010 as compared to 2009. Average interest-bearing deposits decreased $2.9 million in 2011 as compared to 2010 and increased $19.8 million in 2010 as compared to 2009. Average interest-bearing deposits as a percentage of average deposits were 87.4% for 2011 and compared to 87.6% for 2010 and 86.5% as a percentage for 2009. The average cost of interest-bearing deposits was 1.48% in 2011 compared to 1.81% in 2010 and 2.23% in 2009. The decrease in the average cost of interest-bearing deposits during the comparable periods was primarily the result of the on-going low rate environment and

a shift in the deposit account mix from time deposit accounts to low cost deposit accounts such as interest-bearing checking, savings and money market accounts.

The Company’s net interest spread, which represents the difference between the average rate earned on earning assets and the average rate paid on interest-bearing liabilities, was 3.93% in 2011 compared to 3.74% in 2010 and 3.62% in 2009. The net interest spread, as well as the net interest margin, will be impacted by future changes in short-term and long-term interest rate levels, as well as the impact from the competitive environment. A discussion of the effects of changing interest rates on net interest income is set forth in Item 7A. Quantitative and Qualitative Disclosures About Market Risk included elsewhere in this report.

Provision for Possible Loan Losses

The provision for possible loan losses is determined by management as the amount to be added to the allowance for possible loan losses after net charge-offs have been deducted to bring the allowance to a level which, in management’s best estimate, is necessary to absorb probable losses within the existing loan portfolio. The provision for possible loan losses totaled $685 thousand in 2011 compared to $750 thousand in 2010 and $900 thousand in 2009. See the section captioned “Allowance for Possible Loan Losses” elsewhere in this discussion for further analysis of the provision for possible loan losses.

Noninterest Income

The following table illustrates the main revenue sources for noninterest income:

(in thousands)
	2011			2010		2009
Service charges on deposit accounts	$	1,052		$	1,036	$	1,241
Gain on sale or call of securities		7			32		21

Other-than-temporary impairments		(55	)		-		(562	)
Less: Noncredit portion of OTTI impairments		(5	)		-		(502	)
Net other-than-temporary impairments		(50	)		-		(60	)

Net gain on sales of loans		87			68		71
Income from bank owned life insurance		296			292		282
ATM fees		760			649		552
Other fees		344			327		389
Total noninterest income	$	2,496		$	2,404	$	2,496

The Company’s noninterest income increased 3.82% to $2.496 million in 2011, compared to $2.404 million in 2010, and $2.496 million in 2009. Changes in various components of non-interest income are discussed below in more detail.

Service charges on deposit accounts. Service charges on deposit accounts for 2011 increased $16 thousand, or 1.5%, as compared to 2010. The increase in service charges on deposit accounts was due to increased service charge activity on commercial accounts and overdraft/insufficient funds charges on consumer accounts. Service charges on deposit accounts decreased $205 thousand in 2010, or 16.5%, as compared to 2009.

Gain on sale or calls of securities. The Company did not have any security sales in 2011, 2010 and 2009. The gain for those years was directly attributable to securities that were called by the issuer prior to maturity. Gain on calls of securities for 2011 was $7 thousand as compared to $32 thousand for 2010 and $21 thousand for 2009.

Other-than-temporary impairments. During 2011 management recorded a $50 thousand other-than-temporary (OTTI) impairment relating to non-agency CMO securities. At December 31, 2009, management recorded an other-than-temporary impairment relating to what is determined to be a permanent credit loss involving non-agency CMO securities in the amount of $60 thousand. The determination of the credit loss is discussed later in this report under the heading “Impaired Securities”. There was no impairment charge related to credit loss for any of the portfolio securities in 2010.

Net gain on sale of loans. The level of interest rates during the 2011 is the primary reason why the Company reported higher gains on sale of loans. Much of the activity in secondary market loan origination and sales is dependent on customers refinancing their existing mortgages. While refinancing activity declined during 2009 and 2010, the continued low interest rate environment in 2011 has given customers an opportunity to refinance through the secondary market. The net gain on the sales of loans was $87 thousand for 2011, $68 thousand for 2010 and $71 thousand for 2009.

Income from bank owned life insurance. The Company maintains insurance policies for certain officers of the Company and the Bank and the increase in cash surrender value related to these policies is reported as non-interest income. The amount recorded as income is determined by the individual insurance companies and is subject to market interest rates. During 2011, $296 thousand was recorded as income as compared to $292 thousand for 2010, and $282 thousand for 2009.

ATM fees. The Company reports revenues from automated teller machines (ATMs), interchange network fees and PIN-based debit card transaction fees as ATM fees. For 2011, the Company earned $760 thousand in fee income, or 17.1% higher revenue than the $649 thousand earned in 2010, which was 17.6% greater than the fee income of $552 thousand reported for 2009. In 2011 the Federal Reserve implemented a new regulation which could significantly impact the level of interchange fees that may be charged. While banks with less than $10 billion in assets (such as this Bank) are exempted from this measure, as a practical matter we expect that all banks could be forced by market pressures to lower their interchange fees or face potential rejection of their cards by retailers. The Company cannot provide any assurance as to the ultimate impact of this proposal on the amount of income from Visa check card usage reported in future periods; however, the Company’s revenues from Visa check card usage could likely be significantly reduced from current levels.

Other fees. The other fees category includes ancillary services performed for customers such as check cashing, wire transfers, merchant processing fees, etc. Also included are various fees and dividends received from industry relationships such as banking associations and insurance companies. Income from these sources tends to be variable and can fluctuate from year to year, particularly when one-time rebates are earned by the Company. For 2011, other fees were $344 thousand or a $17 thousand increase from the $327 thousand received in 2010. Other fees for 2010 were $62 lower than the $389 thousand recorded in 2009.

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Noninterest Expense

The main components of noninterest expense and their respective change are detailed in the table below:

(in thousands)
	2011			2010			2009

Salaries and employee benefits	$	5,484		$	5,415		$	5,309

Occupancy		590			605			580

Equipment		469			534			571

FDIC deposit insurance		392			506			340

Net (gain) loss on sale of other real
estate owned		(29	)		(13	)		6

Impairment - other real estate owned		105			76			-

OREO expenses, net of rental income		175			69			64

Other (1)		2,439			2,396			2,104

Total noninterest expense	$	9,625		$	9,588		$	8,974

(1) Please reference Note 13 of the Consolidated Financial Statements for the principal
components of Other Expenses.

The Company’s noninterest expense for 2011 was $9.625 million, an increase of $37 thousand or .39% as compared to the $9.588 million recorded in 2010. Non-interest expense for 2010 increased $614 thousand or 6.84% over the $8.974 million for 2009.

Salaries and employee benefits. Salaries and employee benefits costs in 2011 increased $69 thousand or 1.28% to $5.484 million as compared to $5.415 million for 2010 and 2010 costs were an increase of $106 thousand or 1.99% over the costs for 2009. Included in this category is the deferral of loan origination costs which are required by ASC 310-20, “Nonrefundable Fees and Other Costs”. The Accounting Standard requires the deferral of direct loan origination costs, mostly consisting of personnel costs and nonrefundable fees over the life of the loan. The amount deferred is dependent on the number of loans originated in a given period. In years when loan origination activity is less than a previous year, then the deferral of costs will be less, which results in increasing the total amount of compensation costs for the current year. In 2011 deferred costs totaled $250 thousand or $46 thousand less than the $296 thousand for 2010 and this was $128 thousand less than the deferred amount of $424 thousand for 2009. Total salaries and employee benefits costs, exclusive of the deferred loan costs, were $5.734 million for 2011 a increase of $23 thousand from the $5.711 million for 2010 and $5.733 million for 2009.

The Company provides a defined benefit pension plan for eligible employees. The service costs and related administrative fees for 2011 were $262 thousand which is an increase of $25 thousand from the $237 thousand for 2010 and when comparing 2010 to 2009, the cost for 2010 was $120 thousand less than the $357 thousand for 2009. Service costs are determined by actuarial methods and are affected by a number of factors including expected return on plan assets and these estimates are impacted depending on the overall performance of the economy. Based upon actuarial data provided as of December 31, 2011, the net periodic costs for 2011 are anticipated to be approximately $364 thousand, excluding plan administrative costs.

Occupancy. Total occupancy expense for 2011 was $590 thousand, which is $15 thousand lower than the $605 thousand expensed in 2010 and compares to the $580 thousand recorded in 2009. The higher cost for 2010 is mainly attributable to one-time maintenance costs. Building depreciation for the comparative period was $239 thousand for 2011, $238 thousand for 2010 and $229 thousand for 2009. During the last several years, it has been management’s practice to recommend capital budgets that were focused on planned building improvements that avoid significant additional depreciation for future years while maintaining attractive and safe facilities. Local property taxes increased $1 thousand to $53 thousand from $52 thousand in 2010 and $48 thousand in 2009. Utility costs for 2011 were $113

thousand or $9 thousand more than the $104 thousand recorded for for 2010, and $103 thousand for 2009.

Equipment. Total equipment expense for 2011 totaled $469 thousand, a decrease of $65 thousand from the $534 thousand expensed in 2010 and compares to the $571 thousand for 2009. The primary contributor to the year-over-year decreases in equipment expense has been lower equipment depreciation costs. Depreciation expense for 2011 was $285 thousand, a decrease of $69 thousand from the $354 thousand expensed in 2010 and this amount was a reduction of $29 thousand from the $383 thousand expensed in 2009. Equipment replacement, including computer hardware, is on a scheduled basis and equipment purchases are budgeted as part of the Bank’s annual Capital Budget Plan.

FDIC deposit insurance. FDIC deposit insurance expense for 2011 was $392 thousand, a decrease of $114 thousand over the $506 thousand in premium expense charged in 2010. The FDIC instituted higher insurance premiums on all insured depository institutions beginning in 2009. In 2009, the Bank paid a special Deposit Insurance Fund assessment in the amount of $138 thousand. This was the first special assessment imposed by the FDIC in recent years. Additionally, the Bank’s one-time credit allowance ended as of June 30, 2009. The one-time credit allotted to banks nationwide had been part of the Deposit Insurance Fund as of December 31, 1996, the Bank was originally allotted a credit of $244 thousand and during 2008 the Bank realized $119 thousand of this credit against premium costs and for 2009 the Bank realized a credit of $31 thousand. The Bank participated in the Transaction Account Guarantee Program during 2010 and 2009. Deposit insurance cost for participating in the TAGP was $7 thousand for 2010 and $6 thousand for 2009.

Impairment – other real estate owned. The Company has acquired other real estate owned as a result of foreclosures and the acceptance of deeds-in-lieu of foreclosure. The lack of qualified buyers for these properties has resulted in holding the properties for extended periods. In accordance with accounting standards ASC 310 and ASC 360, management had certain OREO properties re-appraised during 2011 and those property values had declined and this change was reported as an impairment charge of $105 thousand. During 2010 there was an impairment charge of $76. The Company had no impairment charges in 2009.

OREO expense, net of rental income. This category includes any costs related to holding foreclosed assets. Revenues and expenses are recorded in earnings as they occur. OREO expenses for 2011 were $175 thousand, an increase of $106 thousand from the $69 thousand for 2010 and compares to the 2009 cost of $64 thousand.

Other expense. Total other expenses for 2011 were $2.439 million, an increase of $43 thousand from the $2.396 million for 2010 and compares to the 2009 cost of $2.104 million. The areas of cost which impacted this category involved expenses related to legal, collection, and foreclosure costs for deteriorating loan relationships, renegotiated core processing contracts, and cost reduction related to the branch capture conversion. Some of the more significant components included in other expense are discussed below.

Collection and foreclosure-related expenses associated with delinquent loans, including legal costs and costs associated with the acquisition of real estate acquired through foreclosure were responsible for $102 thousand in costs during 2011 as compared to $192 thousand in costs during 2010.

Provision for Income Taxes

Income before income taxes includes both taxable income and tax-exempt income, including interest on municipal securities and bank-owned life insurance. The effective income tax rate, based on income before taxes is, therefore, lower than the statutory Federal income tax rate of 34%. Financial institutions in the Commonwealth of Virginia are not subject to a state income tax; rather, a franchise tax is assessed and paid. The cost of the franchise tax is recorded as part of the Other Expense category discussed above. The effective income tax rate for 2011 was 23.61% or a decrease from 24.59% in 2010 and 26.43% in 2009. Income taxes for 2011 totaled $987 thousand an increase of $26 thousand from $961 million reported for 2010 and a decrease of $31 thousand from the $1.018 million reported in 2009. The income tax expense for 2009 decreased by $128 thousand to $1.018 million from the expense for 2008 of $1.146 million. The decrease in the effective income tax rates over the comparative period is primarily attributed to a higher level of tax-exempt securities income.

Asset Quality

Allowance and Provision for Loan Losses

The allowance for possible loan losses is a reserve established through a provision for possible loan losses charged to expense, which represents management’s best estimate of probable losses that have been incurred within the existing portfolio of loans. The allowance, in the judgment of management, is necessary to reserve for estimated loan losses and risks inherent in the loan portfolio. The Company’s allowance for possible loan loss methodology includes allowance allocations calculated in accordance with ASC Topic 310, “Receivables” and allowance allocations calculated in accordance with ASC Topic 450, “Contingencies.” Accordingly, the methodology is based on historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools and specific loss allocations, with adjustments for current events and conditions. The Company’s process for determining the appropriate level of the allowance for possible loan losses is designed to account for credit deterioration as it occurs. The provision for possible loan losses reflects loan quality trends, including the levels of and trends related to non-accrual loans, past due loans, potential problem loans, classified and criticized loans and net charge-offs or recoveries, among other factors. The provision for possible loan losses also reflects the totality of actions taken on all loans for a particular period. In other words, the amount of the provision reflects not only the necessary increases in the allowance for possible loan losses related to newly identified criticized loans, but it also reflects actions taken related to other loans including, among other things, any necessary increases or decreases in required allowances for specific loans or loan pools. See Note 4 – “Allowance for Loan Losses” in the accompanying notes to consolidated financial statements included elsewhere in this report for further details regarding the Company’s methodology for estimating the appropriate level of the allowance for possible loan losses.

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Activity in the allowance for possible loan losses is presented in the following table:

Five-Year Loan Charge-offs and Recoveries Summary

	December 31,
(in thousands)	2011			2010			2009			2008			2007
Allowance, beginning of period	$	2,168		$	2,673		$	2,167		$	1,950		$	1,935

Charge-offs:

Commercial & Industrial		25			488			21			-			10

Commercial Real Estate		276			80			-			-			-

Real Estate - Mortgage		337			381			328			101			16

Real Estate - Construction		31			293			-			-			-

Consumer		81			50			100			63			105

Total Charge-offs	$	750		$	1,292		$	449		$	164		$	131

Recoveries:

Commercial & Industrial	$	18		$	-		$	3		$	78		$	1

Commercial Real Estate		-			-			-			-			-

Real Estate - Mortgage		38			5			2			7			5

Real Estate - Construction		170			11			-			-			-

Consumer		23			21			50			51			378

Total Recoveries	$	249		$	37		$	55		$	136		$	384

Net Charge-offs (Recoveries)	$	501		$	1,255		$	394		$	28		$	(253	)

Provision for loan losses	$	685		$	750		$	900		$	245		$	(238	)

Allowance, end of period	$	2,352		$	2,168		$	2,673		$	2,167		$	1,950

Ratio of net charge-offs to
average loans outstanding		0.25	%		0.59	%		0.18	%		0.01	%		-0.12	%

Net charge-offs during 2011 decreased $754 thousand to $501 thousand compared to 2010 net charge-offs of $1.255 million. As a percentage of average loans, net charge-offs decreased 34 basis points in 2011 compared to 2010 versus an increase of 41 basis points in 2010 compared to 2009. The Company continues to experience a reduction in the levels of non-accrual loans and loans past due 30 days or more. The increase in charge-offs in 2010 was reflective of certain business failures, declining collateral value, and foreclosure action taken by the Bank as a direct result of the recessionary economy. The predominance of charge-offs in 2011 and in 2010 was concentrated in residential and commercial real estate loans. The Bank recognized net recoveries of $253 thousand in 2007 as a result of reaching settlement agreements with loan guarantors. This significant recovery resulted in a recapture of prior-year provision expense in 2007 of $238 thousand.

The provision for possible loan losses reflects loan quality trends, including the level of net charge-offs or recoveries, among other factors. The provision for possible loan losses decreased $65 thousand in 2011 to $685 thousand compared to $750 thousand in 2010 and decreased $150 thousand in 2010 compared to the $900 thousand provision for 2009. The decrease in the provision for possible loan losses during 2011 is reflective of a decreasing trend in the level of non-performing loans. The increase in the provision for possible loan losses during 2009 compared to 2008 was partly due to higher levels of net charge-offs, an increase in classified loans and declining collateral values related to the weaker economic conditions.

After considering factors such as portfolio and economic conditions, delinquency trends, past loan loss experience, the volume of new loans, increases in the watch category, as well as other factors

deserving recognition, the allowance for loan losses was set at $2.352 million at December 31, 2011. This is an increase of $184 thousand from December 31, 2010 and $321 thousand lower than the allowance balance at December 31, 2009. The lingering effects of the economic recession could lead to a higher level of nonperforming loans during 2012. The Company is taking prudent steps to appropriately provide for potential losses by adhering to sound allowance for loan loss methodology and monitoring trends in watch list credits.

The following table shows the allocation of the allowance for loan losses at the dates indicated. The allocation of portions of the allowance to specific categories of loans is not intended to be indicative of future losses, and does not restrict the use of the allowance to absorb losses in any category of loans.

Allocation of Allowance for Loan Losses

	2011					2010					2009					2008					2007
			Percent of					Percent of					Percent of					Percent of					Percent of
(in thousands)	Amount		total loans			Amount		total loans			Amount		total loans			Amount		total loans			Amount		total loans
Commercial &
Industrial	$	228		6.86	%	$	224		7.15	%	$	663		7.22	%	$	345		9.32	%	$	346		11.18	%
Commercial Real
Estate Loans		571		31.33	%		560		30.23	%		878		31.14	%		606		27.56	%		1,031		25.25	%
Real Estate -
Mortgage		900		49.64	%		876		50.98	%		761		49.26	%		535		47.76	%		351		45.82	%
Real Estate -
Construction		211		7.98	%		203		6.39	%		273		5.82	%		417		7.66	%		108		8.85	%

Consumer loans		59		4.18	%		56		5.25	%		98		6.56	%		264		7.70	%		114		8.90	%

Unallocated		383		0.00	%		249		0.00	%		-		0.00	%		-		0.00	%		-		0.00	%
Balance End of
Period	$	2,352		100.00	%	$	2,168		100.00	%	$	2,673		100.00	%	$	2,167		100.00	%	$	1,950		100.00	%

Non-Performing Assets

Year-end non-performing assets and accruing past due loans were as follows:

	December 31,
(in thousands)	2011		2010		2009		2008		2007

Non-accrual loans	$	2,086	$	3,836	$	5,259	$	1,115	$	1,179

Troubled debt restructurings (not on non-accrual)		472		1,328		-		-		-

Loans past due 90 days or more
and still accruing		-		117		83		241		- -

Other real estate owned		7,430		3,425		1,073		957		-

Total Non-performing assets	$	9,988	$	8,706	$	6,415	$	2,313	$	1,179

Non-performing assets include non-accrual loans, troubled debt restructurings and foreclosed assets. Other real estate owned balances represent the lower of cost or appraised value less cost to sell of real estate acquired through foreclosure by the Bank. The Bank regularly evaluates the carrying value of such assets and adjusts the balances as required by recording an impairment charge to current earnings. The Bank actively markets such properties to reduce potential losses. Expenses related to carrying these assets are recorded in current earnings.

Financial Condition

Summary

At December 31, 2011, the Company had total assets of $328.6 million compared to $330.5 million at December 31, 2010. The decrease is total assets was primarily due to a decline in loan balances.

Stockholders’ equity at December 31, 2011 was $41.8 million compared to $39.6 million at December 31, 2010. The net increase in total equity is mainly the result of the net increase in market values of available for sale securities and the decrease in the unfunded pension liability, and the net income for 2011. (Refer to Consolidated Statements of Changes in Stockholders’ Equity for further details.)

Loan Portfolio

The Bank uses the funds generated from deposits, short-term FHLB advances, combined with investment portfolio liquidity to support its lending activities and it competes aggressively for loans in its market areas. Loan originations for 2011 totaled $41.9 million or a 27.4% increase over the $32.9 million originated in 2010. Loan originations in 2011 improved over 2010, however, remain well below historical averages. Tepid loan demand coupled with loan refinances to secondary market fixed rates have negatively impacted total loan balances. Even with the year to year increase of loan originations in 2011, the year to year comparison saw a decline in total loans; at December 31, 2011, loans totaled $199.7 million or a decrease of $3.0 million from the $202.7 million at December 31, 2010. Loans decreased $14.8 million from $217.5 million at December 31, 2009 to $202.7 million at December 31, 2010.

Loans are made predominantly to individuals and businesses located in the Bank’s trade area. Approximately 89.0% of the loan portfolio on December 31, 2011 was composed of real estate secured loans.

Summary of Loans Held for Investment

	December 31,
(in thousands)	2011		2010		2009		2008		2007

Commercial & Industrial	$	13,700	$	14,500	$	15,705	$	19,859	$	23,643

Commercial Real Estate		62,580		61,268		67,740		58,714		53,362

Real Estate - Mortgage		99,141		103,336		107,166		101,750		96,831

Real Estate - Construction		15,939		12,943		12,660		16,321		18,697

Consumer		8,355		10,636		14,264		16,402		18,798

Total Loans	$	199,715	$	202,683	$	217,535	$	213,046	$	211,331

The Company does not engage in highly leveraged transactions. Commitments to extend credit and standby letters of credit to customers in the normal course of business totaled $24.2 million at December 31, 2011. (See Financial Instruments with Off-Balance Sheet Risk discussion).

The following table shows the maturities of loans outstanding as of December 31, 2011.

			Maturing After One		After
	Within		But Within		Five
(In thousands)	One Year		Five Years		Years		Total

Commercial & Industrial	$	8,488	$	4,713	$	499	$	13,700

Commercial Real Estate		16,699		40,526		5,355		62,581

Real Estate - Mortgage		28,836		60,954		9,351		99,141

Real Estate - Construction		4,454		10,609		876		15,939

Consumer		1,510		6,670		175		8,355

Total Loans	$	59,987	$	123,472	$	16,256	$	199,715

Maturities after one year with:
Fixed interest rates:			$	122,137	$	16,118	$	138,255

Variable interest rates:			$	1,335	$	138	$	1,473

Investment Securities

The investment securities portfolio has a primary role in the management of the Company’s liquidity requirements, interest rate sensitivity and in generating substantial interest income. Investment securities play a key role in diversifying the Company’s balance sheet. The investment securities provide the Company’s balance sheet with an average maturity duration that is shorter (under 7 years) than compared to the loan portfolio which generally has longer average maturities (5 years and greater). The Company’s securities portfolio is generally used to meet collateral requirements for public funds deposits and for commercial customers utilizing the overnight repurchase program. The investment securities portfolio is actively utilized to assist in managing the Company’s interest rate sensitivity and prepayment risks. It is managed to ensure adequate balance sheet liquidity can be obtained to fund loans or for other needs.

Restricted securities are excluded from this discussion since they represent required investments in the capital stock of certain correspondent banks. The value held in restricted securities is mainly based upon the level of business activity the Bank has with the correspondent bank or other requirements that have no bearing on balance sheet growth or investment strategies of either the Bank or the Company. Restricted securities are carried at cost.

The investment policy of the Company prohibits any investment in any form of equity security, whether it is private, publicly-traded, or Federal government-sponsored entities (GSEs). Corporate debt investments are permitted for nationally-known, highly-rated companies.

The investment policy does not require the immediate liquidation of any security that falls below the investment grade rating of BBB minus for Fitch and S&P, or Baa3 for Moody’s. The liquidation of a security simply due to a credit rating change without considering other factors such as the likelihood of the security recovering from the downgrade or the possibility of ultimately recovering the full book value of the security might lead to taking losses unnecessarily. If a security falls below investment grade, management is required to monitor the security for any subsequent deterioration and to provide the board of directors with an update monthly. As of December 31, 2011, the Company held five securities with below investment grade ratings. These securities are discussed below under “Impaired Securities”.

All investment securities are classified as available for sale and are carried at fair value adjusted for amortization of premiums and the accretion of discounts. By classifying the securities as available for sale, management has the opportunity to react to changing liquidity needs and market conditions.

The Company’s investment securities portfolio grew $1.8 million or 2.14% from December 31, 2010 to December 31, 2011. The growth in the investment portfolio was a result of investing the excess liquidity created by the $3 million decline in the loan portfolio. While management prefers to see balance

sheet growth being channeled into loan growth, given the greater earnings spread that generally exists for loans versus investment securities, loan growth remains a challenge as customers continue to deleverage, loan demand remains below historical levels, and loan refinances to non-bank fixed rate mortgages continue to accelerate. Available for sale securities represented 25.7% of total assets at December 31, 2011 as compared to 25% of total assets at December 31, 2010.

The table below provides the consolidated investment portfolios for both the Company and the Bank.

Investment Securities Portfolio

	December 31,
(in thousands)	2011		2010		2009


U.S. Government
and federal agency	$	8,038	$	16,705	$	26,370

State and political subdivisions		32,528		28,704		19,100

Agency mortgage-backed		41,711		34,259		17,508

Non-agency mortgage-backed		1,400		2,275		3,022

Other		835		801		777

Total available for sale securities	$	84,512	$	82,745	$	66,777

	Projected Maturities for Investment Securities Portfolio
	At December 31, 2011
						After One Year					After Five But
	Within One Year					Within Five Years					Within Ten Years					After Ten Years
				T/E					T/E					T/E					T/E
(in thousands)	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield

U.S government
and federal agencies	$	-		0.00	%	$	3,006		1.35	%	$	3,006		1.59	%	$	2,026		2.79	%

State and municipal		2,426		4.44	%		1,872		2.95	%		3,688		5.58	%		24,542		5.60	%

Agency mortgage backed		-		0.00	%		149		4.31	%		9,779		2.07	%		31,783		3.22	%

Non-agency mortgage-backed		-		0.00	%		-		0.00	%		-		0.00	%		1,400		5.46	%

Other		-		0.00	%		835		5.28	%		-		0.00	%		-		0.00	%

Total	$	2,426				$	5,862				$	16,473				$	59,751

Mortgage backed securities are detailed in the above table based on expected weighted average maturities of the individual security. The tax equivalent yield is based upon a federal income rate of 34%.

At December 31, 2011 and 2010, investment securities with a market value of $26,269,749 and $27,828,340, respectively, were pledged to collateralize public deposits and for other purposes.

Impaired Securities

As of December 31, 2011, the Company had a total of five investment securities that are considered non-Agency collateralized mortgage obligations (CMO) that were securitized by private firms and not by the Federal agencies, Fannie Mae (FNMA) or Freddie Mac (FHLMC). At December 31, 2011, all five securities were rated below investment grade. The Company’s investment policy does require quarterly monitoring of any security that is downgraded below investment grade; however the policy does not require the sale of the security simply based on the downgrading event. Management discusses the

result of its quarterly impairment analysis to the ALCO Committee and to the full Board of Directors. The underlying collateral consists of jumbo, fixed-rate, residential mortgage loans with original 30-year terms. Jumbo mortgages are loans that in most areas have original loan balances that exceed $417,000. Collectively, these securities had a book value at December 31, 2011 of $1,399,670 and represented 1.66% of the total available for sale securities’ book value of $84,511,794. Monthly payments continue to be received on each security which represents principal and interest payments made by the underlying mortgagors.

CMOs are a hybrid form of a mortgage-backed security that creates separate pools of pass-through rates for different classes of bondholders with varying maturities, called tranches. The securities were purchased between November 2005 and December 2007. The Company purchased senior tranches of each security and each security met all of the investment policy’s pre-purchase requirements. The purchase of a senior tranche provides that the investor is paid out first with prepayments and repayments of principal and interest until they are paid off. The yield of a senior tranche is typically lower as compared to less senior tranches, conversely, the risk of bearing credit losses is deemed to be less in a senior tranche than it is for the lower tranches which inherently carry higher risk of loss as a result of credit defaults. The securities were rated by the credit rating agencies, Fitch and Standard & Poors, as AAA when purchased.

Since the announced downgrades by the credit rating agencies, Fitch and Standard & Poors, management has used the results from analytical cash flow models which it obtains from third party consultants to determine these securities might be other than temporarily impaired (OTTI). Among the inputs used for the analytical model are the current credit default statistics of each individual security. The models project the future cash flows assuming that the default statistics remain unchanged until the security’s stated maturity date. The results of the stress testing concluded that as of December 31, 2011, there existed some likelihood of credit losses in three of the five CMO securities. During 2011 the Company recorded an additional impairment of $50 thousand based upon loss results projected by the model. On a cumulative basis, the Company has recorded a total $110 thousand in impairment loss through December 31, 2011. Management believes that the OTTI allowance is sufficient to cover any projected losses relating to the five CMO securities.

Deposits

The Company’s predominant source of funds is depository accounts, which are comprised of demand deposits, savings, money market accounts, and time deposits. The Company’s deposits are principally provided by individuals and businesses located within the communities served. In 2008, the Bank began to offer certificates of deposits that provided FDIC deposit insurance up to $50 million per customer. Management sought to offer this product as a convenience to those customers who desire this type of guarantee and has chosen not to extensively promote the offering.

The average balance for 2011 of all interest bearing deposit account products was $238.3 million, a decrease of $2.9 million or 1.20% as compared to the average balance of $241.2 million for 2010. The average rate of interest-bearing deposit accounts was 1.48% for 2011 and this is a decrease of 33 basis points from the rate of 1.81% for 2010. Management places an emphasis on increasing lower cost deposit account balances, which includes savings, money market and interest-bearing checking accounts, as a means of managing the net interest margin. For 2011, the average balance of noninterest demand deposit accounts increased $175 thousand for an average of $34.1 million during 2011 as compared to an average balance of $34.0 million for 2010. The economic downturn has forced individuals and businesses to rely on cash in their accounts for everyday living expenditures and business operations and to pay down individual or business debt.

The low cost deposit account strategy also includes money market accounts. During 2011, average balances of money market accounts increased $3.4 million for an annual average balance of $53.7 million for 2011 as compared to an annual average balance of $50.3 million for 2010. For 2011, the average cost for money market accounts was .65%, a decrease of 36 basis points from the average cost of 1.01% for 2010. During 2011, customers continued to take advantage of the Bank’s tiered money market product.

Other low cost deposit accounts such as interest-bearing demand deposit accounts and savings accounts had average annual balance for 2011 of $61.7 million, an increase of $3.4 million in comparison

to an average balance of $57.7 million for 2010. Time deposits had an average balance of $123.0 million for 2011 or a decrease of $10.3 million when compared to the average balance of $133.3 million for 2010.

Average Deposits and Rates Paid

	2011					2010					2009
(in thousands)	Amount		Rate			Amount		Rate			Amount		Rate

Non-interest bearing
demand deposits	$	34,154				$	33,979				$	34,400

Interest bearing demand
deposits		41,808		0.18	%		39,331		0.18	%		36,145		0.17	%

Savings deposits		73,588		0.58	%		68,634		0.84	%		47,349		1.03	%

Time deposits		122,952		2.46	%		133,256		2.80	%		137,940		3.18	%

CITIZENS BANCORP OF VIRGINIA INC 10-K