The following is management's discussion and analysis of the company's consolidated financial condition, changes in financial condition, results of operations, liquidity, cash flows and capital resources. This discussion should be read in conjunction with the consolidated financial statements and accompanying notes in Part I, Item 1, "Financial Statements" in this Quarterly Report on Form 10-Q ("Form 10-Q") and Part II, Item 8, "Financial Statements and Supplementary Data" in the company's Annual Report on Form 10-K for the year ended December 31, 2011 ("2011 Form 10-K"). The data presented as of March 31, 2012 and for the three-month periods ended March 31, 2012 and 2011 is derived from our unaudited interim financial statements and include, in the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for a fair presentation of the data for such period. The data presented as of December 31, 2011 is derived from our audited financial statements as of and for the year ended December 31, 2011, which is included in the 2011 Form 10-K.

All references to "Xenith Bankshares", "our company", "we", "our" or "us" are to Xenith Bankshares, Inc. and its wholly-owned subsidiary, Xenith Bank, collectively. All references to "the Bank" are to Xenith Bank.

All dollar amounts included in the tables in this discussion and analysis are in thousands. Columns and rows of amount presented in tables may not total due to rounding.

BUSINESS OVERVIEW

Xenith Bankshares is a Virginia corporation that is the bank holding company for Xenith Bank, which is a Virginia banking corporation organized and chartered pursuant to the laws of the Commonwealth of Virginia and a member of the Federal Reserve. The Bank is a full-service, locally-managed commercial bank specifically targeting the banking needs of middle market and small businesses, local real estate developers and investors, private banking clients and select retail banking clients, which we refer to as our target customers. We are geographically focused on the Washington, D.C.-MD-VA-WV, Richmond-Petersburg, VA, and the Norfolk-Virginia Beach-Newport News, VA-NC metropolitan statistical areas, which we refer to as our target markets. The Bank conducts its principal banking activities through its six branches, with one branch located in Tysons Corner, Virginia, two branches located in Richmond, Virginia, and three branches located in Suffolk, Virginia. We acquired the three branches located in Suffolk, Virginia in the merger with First Bankshares, Inc., the parent company of its wholly-owned subsidiary SuffolkFirst Bank. SuffolkFirst Bank opened its first branch in Suffolk, Virginia in 2003 under the name of SuffolkFirst Bank. All of the former SuffolkFirst Bank branches operate under the name Xenith Bank. As of March 31, 2012, we had total assets of $495.2 million, total loans, net of the allowance for loan and lease losses, of $354.1 million, total deposits of $392.3 million and shareholders' equity of $80.6 million.

Our services and products consist primarily of taking deposits from, and making loans to, our target customers within our target markets. We provide a broad selection of commercial and retail banking products, including commercial and industrial loans, commercial and residential real estate loans, and select consumer loans. We also offer a wide range of checking, savings and treasury products, including remote deposit capture, automated clearing house transactions, debit cards, 24-hour ATM access, and Internet banking and bill pay service. We do not engage in any activities other than banking activities.

During the first quarter of 2012, the Bank began participating in a warehouse lending program with a leading national bank (the "participating bank") by entering into a sub-participation agreement with the participating bank. The participating bank and the Bank lend to mortgage companies that originate single-family residential mortgage loans for sale in the secondary market. Pursuant to the sub-participation agreement, the Bank purchases participations from selected non-bank mortgage originators that seek funding to facilitate the origination of loans. The originators underwrite and close mortgage loans consistent with established standards of approved investors and, once the loans close, the originators deliver the loans to the investor. Substantially all of the loans are conforming loans. Typically, the Bank, together with the participating bank, purchases up to an aggregate of a 99% participation interest with the originators financing the remaining 1%. These loans are held for short periods, usually less than 30 days and more typically 10-15 days. Accordingly, these loans are classified as held for sale and are carried at the lower of cost or fair value, determined on an aggregate basis. As of March 31, 2012, we had $29.1 million in loans held for sale.

The primary source of our revenue is net interest income, which represents the difference between interest income on interest-earning assets and interest expense on interest-bearing liabilities used to fund those assets. Interest-earning assets include loans, available-for-sale securities, and federal funds sold. Interest-bearing liabilities include deposits and borrowings. Sources of non-interest income include service charges on deposit accounts, gains on the sale of securities and other miscellaneous income. Deposits and Federal Home Loan Bank borrowed funds are our primary sources of funding. Our largest expenses are interest on our funding sources and salaries and related employee benefits.

Merger of First Bankshares, Inc. and Xenith Corporation

First Bankshares, Inc. ("First Bankshares") was incorporated in Virginia in 2008, and was the holding company for SuffolkFirst Bank, a community bank founded in the City of Suffolk, Virginia in 2002.

On December 22, 2009, First Bankshares and Xenith Corporation, a Virginia corporation, completed the merger of Xenith Corporation with and into First Bankshares (the "merger"), with First Bankshares being the surviving entity in the merger. The merger

was completed in accordance with the terms of an agreement of merger and related plan of merger, dated as of May 12, 2009, as amended. At the effective time of the merger, First Bankshares amended its amended and restated articles of incorporation to, among other things, change its name to Xenith Bankshares, Inc. In addition, following the completion of the merger, SuffolkFirst Bank changed its name to Xenith Bank.

Acquisitions

Effective on July 29, 2011, the Bank acquired select loans totaling $58.3 million and related assets associated with the Richmond, Virginia branch office (the "Paragon Branch") of Paragon Commercial Bank, a North Carolina banking corporation ("Paragon"), and assumed select deposit accounts totaling $76.6 million and certain related liabilities associated with the Paragon Branch (the "Paragon Transaction"). The Paragon Transaction was completed in accordance with the terms of the Amended and Restated Purchase and Assumption Agreement, dated as of July 25, 2011 (the "Paragon Agreement"), between the Bank and Paragon. Under the terms of the Paragon Agreement, Paragon retained the real and personal property associated with the Paragon Branch and, following the receipt of required regulatory approvals, the Paragon Branch was closed. At the closing of the Paragon Transaction, Paragon made a cash payment to the Bank in the amount of $17.3 million, which represented the excess of approximately all of the liabilities assumed at a premium of 3.92%, over approximately all of the assets acquired at a discount of 3.77%.

Also effective on July 29, 2011, the Bank acquired substantially all of the assets, including all loans, and assumed certain liabilities, including all deposits, of Virginia Business Bank ("VBB"), a Virginia banking corporation located in Richmond, Virginia, which was closed on July 29, 2011 by the Virginia State Corporation Commission (the "VBB Acquisition"). The Federal Deposit Insurance Corporation ("FDIC") is acting as court-appointed receiver of VBB. The VBB Acquisition was completed in accordance with the terms of the Purchase and Assumption Agreement, dated as of July 29, 2011 (the "VBB Agreement"), among the FDIC, receiver for VBB, the FDIC and the Bank.

The Bank acquired total assets of $92.9 million, including $70.9 million in loans, and assumed liabilities of $86.9 million, including $77.5 million in deposits. Under the terms of the VBB Agreement, the Bank received a discount of approximately $23.8 million on the net assets and did not pay a deposit premium. The Bank also received a cash payment from the FDIC in the amount of $17.8 million based on the difference between the discount received ($23.8 million) and the net assets of VBB ($5.9 million). The VBB Acquisition was completed without any shared-loss agreement.

We believe the Paragon Transaction and the VBB Acquisition provide strategic and financial growth for the Bank, while leveraging our existing infrastructure costs.

Industry Conditions

Across the country, the recent recession and tepid recovery have impacted businesses, consumers and real estate values, and has taken a toll on banks. Since the beginning of 2009, the FDIC has closed over 400 failed banks. Georgia, Florida, California and Illinois account for over half of all the failures. In Virginia, there have been four failures, one of which was Virginia Business Bank, the assets and liabilities of which we acquired in July 2011. Besides the number of actual bank failures, the recession and weak recovery have taken a toll on many banks that are still operating. In our target markets alone, there are numerous banks that are undercapitalized, have high levels of criticized and non-performing assets, and some are under written agreements with their regulators requiring that they address their short-comings.

The Federal Open Market Committee ("FOMC") publicly stated in April 2012 that the economy has been expanding moderately and labor market conditions have improved. However, despite some improvement, the housing sector remains depressed and the unemployment rate remains elevated. The FOMC expects moderate economic growth over the coming quarters and then to pick up gradually, as well as a gradual improvement in employment. The FOMC stated that inflation has picked up somewhat due to increases in prices of crude oil and gasoline; though, it does not predict higher inflation longer term. The FOMC expects "to maintain a highly accommodative stance for monetary policy" and that economic conditions "are likely to warrant exceptionally low levels for the federal funds rate for at least through late 2014." The FOMC also stated that it is maintaining its existing policy of reinvesting principal payments from its securities holdings. The unemployment rate, as published by the Bureau of Labor Statistics, was 8.2% at the end of the first quarter of 2012, which is down only slightly from 8.5% at the end of 2011.

Our nation's unemployment and underemployment problems have led to a prolonged period of very low interest rates, squeezing the net interest margins of all banks and making it harder for banks to make a profit.

Outlook

We believe we are well positioned to take advantage of competitive opportunities. We believe that we will benefit from (1) our capital base, which we believe will allow us to compete effectively with both the larger, more established super-regional and national banks, as well as the smaller, locally managed community banks operating in our target markets, (2) our advantageous market locations in our target markets, (3) our variety of banking services and products, and (4) our experienced management team and board of directors. We intend to execute our business strategy by focusing on developing long-term relationships with our target customer base through a team of bankers with significant experience in our target markets.

In our continuing evaluation of our business strategy, we believe properly priced acquisitions can complement our organic growth. We may seek to acquire other financial institutions or branches or assets of those institutions. Although our principal acquisition focus is to expand our presence in our target markets, we may also expand into new markets or lines of business or offer new services or products. We evaluate potential acquisitions to determine what is in the best interest of our company. Our goal in making these decisions is to maximize shareholder value.

Critical Accounting Policies

Our accounting policies are fundamental to an understanding of our consolidated financial position and consolidated results of operations. We believe that our accounting and reporting policies are in accordance with Generally Accepted Accounting Principles in the United States of America ("GAAP") and conform to general practices within the banking industry. Our financial position and results of operations are affected by management's application of accounting policies, including estimates, assumptions and judgments made to arrive at the carrying value of assets and liabilities, and amounts reported for revenues, expenses and related disclosures. Different assumptions in the application of these policies could result in material changes in our consolidated financial position or results of operations or both our consolidated financial position and results of operations.

We consider a policy critical if (1) the accounting estimate requires assumptions about matters that are highly uncertain at the time of the accounting estimate, and (2) different estimates that could reasonably have been used in the current period, or changes in the accounting estimate that are reasonably likely to occur from period to period, would have a material impact on our financial statements. Using these criteria, we believe that our most critical accounting policy relates to the allowance for loan and lease losses, which reflects the estimated losses resulting from the inability of borrowers to make required loan payments. If the financial condition of borrowers were to deteriorate, resulting in an impairment of their ability to make payments, adjustments to our estimates would be made and additional provisions for loan and lease losses could be required, which could have a material adverse impact on our results of operations and financial condition. Further discussion of the estimates used in determining the allowance for loan and lease losses is contained in the discussion under " - Allowance for Loan and Lease Losses" below.

Our critical accounting policies are discussed in detail in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" and "Summary of Significant Accounting Policies" in the notes to the consolidated financial statements in our 2011 Form 10-K. Since December 31, 2011, there have been no changes in these policies that have had or could reasonably expect to have a material impact on our results of operations or financial condition.

RESULTS OF OPERATIONS

Net Income (Loss)

For the three months ended March 31, 2012, we reported net income of $0.3 million, compared to a net loss of $1.5 million for the three months ended March 31, 2011. Net income for the three-month period ended March 31, 2012 compared to the same period in 2011 was driven by greater net interest income, which increased $2.3 million, partially offset by greater noninterest expense, which increased $1.3 million. Also contributing to net income in the three-month period ended March 31, 2012 compared to the net loss for the same period of 2011 was a lower provision for loan and lease losses of $0.6 million and higher noninterest income of $0.2 million in the 2012 period.

The following table presents net income (loss) and net earnings (loss) per common share information for the periods stated. In April 2011, common shares outstanding increased 4.6 million as a result of the completion of our underwritten public offering of shares of our common stock. In September 2011, we received $8.4 million from the U.S. Department of Treasury pursuant to its Small Business Lending Fund Program ("SBLF") and issued 8,361 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series A.

                                                       For the Three Months Ended March 31,
                                                       2012                         2011
Net income (loss)                                 $          312             $            (1,474 )

Preferred stock dividend                                     (21 )                            -

Net income (loss) available to common
shareholders                                      $          291             $            (1,474 )

Earnings (loss) per common share, basic and
diluted                                           $         0.03             $             (0.25 )

Net Interest Income

For the three months ended March 31, 2012, net interest income was $5.1 million compared to $2.8 million for the three months ended March 31, 2011. Higher net interest income was primarily due to higher average loan and investment balances, partially offset by both lower yields on these balances and higher balances of interest-bearing liabilities. As presented in the table below, net

interest margin for the three-month period ended March 31, 2012 was 4.44%, a 48 basis point decrease from 4.92% for the same period in 2011. Net interest margin is defined as the percentage of net interest income to average interest-earning assets. Excluding the effect of acquisition accounting adjustments, net interest margin for the three months ended March 31, 2012 increased 36 basis points to 3.84% from 3.48% for the same period in 2011. Higher net interest margin, excluding acquisition accounting adjustments, was primarily due to higher average investment and loan balances, partially offset by lower yields on investment balances and higher average savings and money market balances; however, these balances were at lower yields.

Average interest-earning assets and related interest income increased $231.9 million and $2.9 million, respectively, for the three-month period ended March 31, 2012 compared to the same period in 2011. Average interest-bearing liabilities and related interest expense increased $169.5 million and $557 thousand, respectively, for the three-month period ended March 31, 2012 compared to the same period in 2011. Yields on interest-earning assets decreased 45 basis points to 5.36%, while costs of interest-bearing liabilities increased 10 basis points to 1.21%, when comparing the three-month period ended March 31, 2012 to the same period in 2011.

Our loan portfolios acquired in the merger, the Paragon Transaction and VBB Acquisition were discounted to estimated fair value (for credit and interest rates) as of the acquisition dates. A portion of the discounts taken to record the acquired loans at estimated fair value is being recognized (accreted) into interest income over the estimated remaining life of the loans or the period of expected cash flows from the loans. Amounts received in excess of the carrying value of loans accounted for on cost recovery are also accreted into interest income at the time of recovery. Loan discount accretion for the three months ended March 31, 2012 and 2011 was $684 thousand and $539 thousand, respectively. The effect of this accretion on net interest margin was 60 basis points and 96 basis points, respectively, for the three-month periods ended March 31, 2012 and 2011.

In addition, acquired time deposits were adjusted to estimated fair value at the date of the merger for interest rates. The total adjustment at the date of the merger was $2.1 million and was amortized as a reduction of interest expense over a two-year period beginning December 2009. The effect of this amortization was a decrease in interest expense of $270 thousand for the three-month period ended March 31, 2011 and no effect on the three-month period ended March 31, 2012. Excluding the effect of this fair value adjustment, the cost of interest-bearing liabilities decreased 49 basis points in the period ended March 31, 2012 compared to the same period of 2011.

The following table provides a detailed analysis of the effective yields and rates on average interest-earning assets and average interest-bearing liabilities as of and for the periods stated. The average balances and other statistical data used in this table were calculated using daily average balances.

                                                                                          Average Balances, Income and Expenses, Yields and Rates
                                                                                              As of and For the Three Months Ended March 31,
                                                                                                                                                            2012 vs. 2011
                                                      Average Balances (1)            Yield / Rate            Income / Expense (7), (8)          Increase          Change due to (2)
                                                       2012           2011          2012        2011           2012               2011          (Decrease)         Rate         Volume
Assets
Interest-earning assets:
Federal funds sold                                  $    1,924      $     447        0.11 %      0.00 %    $          1       $         -      $          1      $      1       $    -
Investments / Interest-earning deposits                125,928         62,743        1.61 %      3.06 %             506                480               26          (302 )         328
Loans held for sale                                      4,255             -         3.87 %      0.00 %              41                 -                41            -             41
Loans held for investment, gross (3)                   324,596        161,650        6.87 %      6.89 %           5,575              2,786            2,789            (9 )       2,799

Total interest-earning assets                          456,703        224,840        5.36 %      5.81 %           6,123              3,266            2,857          (311 )       3,167


Noninterest-earning assets:
Cash and due from banks                                  4,673          2,330
Premises and fixed assets                                6,018          6,387
Other assets                                            20,344         21,725
Allowance for loan and lease losses                     (4,345 )       (2,532 )

Total noninterest-earning assets                        26,690         27,910


Total assets                                        $  483,393      $ 252,750


Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Demand deposits                                     $   12,210      $   5,631        0.28 %      0.23 %    $          8       $          3     $          5      $     -        $     4
Savings and money market deposits                      176,194         46,713        0.90 %      0.89 %             397                104              294             3           292
Time deposits                                          141,834        100,752        1.58 %      0.97 %             559                245              314           190           125
Federal funds purchased and borrowed funds              20,074         27,753        1.84 %      2.13 %              92                148              (55 )         (18 )         (37 )

Total interest-bearing liabilities                     350,312        180,849        1.21 %      1.11 %           1,057                500              557           174           384


Noninterest-bearing liabilities:
Noninterest-bearing demand deposits                     50,332         21,109
Other liabilities                                        2,229          2,289

Total noninterest-bearing liabilities                   52,561         23,398


Shareholders' equity                                    80,520         48,503


Total liabilities and shareholders' equity          $  483,393      $ 252,750


Interest rate spread (4)                                                             4.15 %      4.70 %

Net interest income (5)                                                                                    $      5,066       $      2,766     $      2,300      $   (485 )     $ 2,784


Net interest margin (6)                                                              4.44 %      4.92 %

(1) Average balances are computed on a daily basis.

(2) Change in interest due to both volume and rates has been allocated in proportion to the absolute dollar amounts of the change in each.

(3) Nonaccrual loans have been included in the average balances. Only the interest collected on such loans has been included as income.

(4) Interest rate spread is the average yield on interest-earning assets less the average rate on interest-bearing liabilities.

(5) Net interest income is interest income less interest expense.

(6) Net interest margin is net interest income expressed as a percentage of average interest-earning assets.

(7) Interest income on loans in 2012 and 2011 includes $684 thousand and $539 thousand, respectively, in accretion related to acquired loans.

(8) Interest expense on time deposits in 2011 is reduced by $270 thousand related to acquistion fair value adjustments. There is no fair value adjustment in 2012.

Noninterest Income

For the three months ended March 31, 2012, noninterest income increased $209 thousand compared to the same period of 2011. This increase was primarily due to gains on sales of investment securities.

Noninterest Expense

Noninterest expense increased $1.3 million to $4.7 million for the three months ended March 31, 2012 from the same period in 2011. Higher noninterest expenses were primarily due to higher compensation and benefits of $852 thousand as we hired the personnel associated with the Paragon Branch, which was acquired in July 2011, and other personnel. Technology expenses increased $130 thousand, approximately one-half of which was due to the conversions that occurred in the fourth quarter of 2011 related to the acquired loans and assumed deposits. The remaining increase was to support our growth.

Income Taxes

In the three months ended March 31, 2012 and 2011, we reported no income tax expense or benefit. Deferred tax assets, as of March 31, 2012, were $5.2 million for which a full valuation allowance was recorded, based primarily on the fact that we experienced cumulative losses over the past three years. Future realization of the tax benefit of existing deductible temporary differences and net operating loss carryforwards is dependent on the company generating sufficient future taxable income within the carryforward period, which under current law is 20 years.

FINANCIAL CONDITION

Securities

The following tables present information about our securities portfolio as of
. . .