Eastern Virginia Bankshares (EVBS) 10-Q 2006 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2006

or

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

For the transition period            from            to

Commission File Number: 000-23565

EASTERN VIRGINIA BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

VIRGINIA	54-1866052
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

330 Hospital Road, Tappahannock, Virginia	22560
(Address of principal executive offices)	(Zip Code)

(804) 443-8423

(Registrant’s telephone number, including area code)

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

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

Large accelerated filer  ¨ Accelerated filer  x Non-accelerated filer  ¨

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

The number of shares of the registrant’s Common Stock outstanding as of May 2, 2006 was 4,910,700.

EASTERN VIRGINIA BANKSHARES, INC.

FORM 10-Q

For the Quarter Ended March 31, 2006

Part I	Financial Information
Item 1.	Financial Statements	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	9
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4.	Controls and Procedures	17
Part II	Other Information
Item 1.	Legal Proceedings	17
Item 1A.	Risk Factors	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3.	Defaults Upon Senior Securities	18
Item 4.	Submission of Matters to a Vote of Security Holders	18
Item 5.	Other Information	18
Item 6.	Exhibits	18
Signatures		19

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands)

	March 31 2006 (unaudited)			December 31 2005 (audited)
Assets:
Cash and due from banks	$	20,232		$	21,516
Federal funds sold		523			—
Securities available for sale, at fair value		133,465			135,420
Loans, net of unearned income		595,953			574,085
Allowance for loan losses		(6,627	)		(6,601	)
Total loans, net		589,326			567,484
Deferred income taxes		3,028			2,820
Bank premises and equipment, net		14,749			15,147
Accrued interest receivable		3,521			3,583
Goodwill		5,725			5,725
Other assets		12,507			12,231
Total assets	$	783,076		$	763,926
Liabilities and Shareholders’ Equity:
Liabilities
Noninterest-bearing demand accounts	$	97,492		$	99,718
Interest-bearing deposits		530,097			528,625
Total deposits		627,589			628,343
Federal funds purchased		—			6,822
Federal Home Loan Bank advances		76,929			51,928
Trust preferred capital notes		10,310			10,310
Accrued interest payable		1,517			1,264
Other liabilities		4,298			3,385
Total liabilities		720,643			702,052
Shareholders’ Equity
Common stock of $2 par value per share, authorized 50,000,000 shares, issued and outstanding 4,909,875 and 4,905,701, respectively		9,820			9,812
Retained earnings		54,792			53,838
Accumulated other comprehensive (loss), net		(2,179	)		(1,776	)
Total shareholders’ equity		62,433			61,874
Total liabilities and shareholders’ equity	$	783,076		$	763,926

See Notes to Consolidated Financial Statements

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Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income(Unaudited)

(Dollars in thousands except per share amounts)

	Three Months Ended March 31
	2006		2005
Interest and Dividend Income
Loans	$	10,096	$	8,654
Interest on investments
Taxable interest income		1,134		962
Tax exempt interest income		367		410
Dividends		44		39
Interest on federal funds sold		40		14
Total interest and dividend income		11,681		10,079
Interest Expense
Deposits		3,276		2,375
Federal funds purchased		40		24
Interest on FHLB advances		692		274
Interest on trust preferred debt		182		136
Total interest expense		4,190		2,809
Net interest income		7,491		7,270
Provision for Loan Losses		113		8
Net interest income after provision for loan losses	$	7,378	$	7,262
Other Income
Service charges and fees on deposit accounts		718		685
Gain on available for sale securities		4		126
Other operating income		427		332
Total other income		1,149		1,143
Other Expenses
Salaries and benefits		3,733		3,559
Net occupancy expense of premises		971		889
Data processing		152		182
Consultant fees		253		257
Telephone		141		136
Marketing and advertising		147		72
Other operating expenses		976		1,032
Total other expenses		6,373		6,127
Income before income taxes		2,154		2,278
Income Tax Expense		603		607
Net income	$	1,551	$	1,671
Earnings per share, assuming dilution	$	0.32	$	0.34
Dividends per share	$	0.15	$	0.15

See Notes to Consolidated Financial Statements

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Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statement of Cash Flows(Unaudited)

(Dollars in thousands)

	Three Months Ended March 31
	2006			2005
Cash Flows from Operating Activities
Net income	$	1,551		$	1,671
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization/accretion, net		678			828
Provision for loan losses		113			8
(Gain) realized on available for sale securities		(4	)		(126	)
(Increase) decrease in other assets		(25	)		488
Increase in other liabilities		1,166			106
Net cash provided by operating activities		3,479			2,975
Cash Flows from Investing Activities
Proceeds from sales of securities available for sale		449			8,012
Proceeds from maturities, calls, and paydowns of securities		1,985			4,759
Purchase of debt securities		—			(2,993	)
Purchase of restricted stock		(1,272	)		(326	)
Net increase in loans		(21,955	)		(8,799	)
Purchases of bank premises and equipment		(282	)		(623	)
Net cash provided by / (used in) investing activities		(21,075	)		30
Cash Flows from Financing Activities
Net (decrease) in noninterest bearing and interest bearing demand deposits and savings accounts		(14,250	)		(5,184	)
Net increase in certificates of deposit		13,496			8,005
Issuance of common stock under dividend reinvestment plan		94			99
Stock based compensation		53			37
Dividends declared		(736	)		(732	)
Decrease in federal funds purchased		(6,822	)		(8,400	)
Increase in FHLB advances		25,000			7,000
Net cash provided by financing activities		16,835			825
Increase (decrease) in cash and cash equivalents		(761	)		3,830
Cash and cash equivalents
Beginning of period		21,516			17,797
End of period	$	20,755		$	21,627
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Cash payments for interest	$	3,937		$	2,697
Cash payments for income taxes	$	240		$	—

See Notes to Consolidated Financial Statements

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EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                                                         (UNAUDITED)

1. The accompanying unaudited consolidated financial statements, prepared in accordance with instructions for Form 10-Q, do not include all of the information and notes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements. However, in the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position of Eastern Virginia Bankshares, Inc. (the “Company” or “EVB”) at March 31, 2006. The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005 (the “2005 Form 10-K”). Certain previously reported amounts have been reclassified to conform to current period presentation.

2. EVB was organized and chartered under the laws of the Commonwealth of Virginia on September 5, 1997 and commenced operations effective December 29, 1997 when Southside Bank and Bank of Northumberland, Inc. became wholly owned subsidiaries of EVB. The transaction was accounted for using the pooling-of-interest method of accounting. The Company opened its third subsidiary in May 2000 when Hanover Bank began operations in Hanover County, VA. All significant inter-company transactions and accounts have been eliminated in consolidation. On April 24, 2006, the Company completed the conversion to a one bank holding company by consolidating the three banking subsidiaries. The new bank began operating under the name “EVB” the morning of April 24, 2006.

3. The results of operations for the three-month period ending March 31, 2006 are not necessarily indicative of the results to be expected for the full year.

4. EVB’s amortized cost and estimated fair values of securities at March 31, 2006 and December 31, 2005 were as follows:

	March 31, 2006
(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for Sale:
Obligations of U.S. Government agencies	$	29,853	$	—	$	760	$	29,093
Mortgage-backed securities		34,637		19		977		33,679
State and political subdivisions		35,237		501		186		35,552
Corporate, CMO and other securities		30,848		38		1,936		28,950
Restricted securities		6,191		—		—		6,191
Total	$	136,766	$	558	$	3,859	$	133,465

	December 31, 2005
(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for Sale:
Obligations of U.S. Government agencies	$	29,849	$	1	$	549	$	29,301
Mortgage-backed securities		36,010		23		811		35,222
State and political subdivisions		35,373		584		162		35,795
Corporate, CMO and other securities		31,959		36		1,812		30,183
Restricted securities		4,919		—		—		4,919
Total	$	138,110	$	644	$	3,334	$	135,420

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At March 31, 2006, investments in an unrealized loss position that were temporarily impaired were as follows:

	March 31, 2006
	Less than 12 months				12 months or more				Total
(dollars in thousands) Description of Securities	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Obligations of U. S. Government agencies	$	14,894	$	343	$	13,949	$	417	$	28,843	$	760
Mortgage-backed securities		19,848		542		13,429		435		33,277		977
State/political subdivisions		8,476		77		3,117		109		11,593		186
Corporate, CMO’s and other securities		16,106		547		8,222		1,389		24,328		1,936
	$	59,324	$	1,509	$	38,717	$	2,350	$	98,041	$	3,859

Bonds with unrealized loss positions of less than 12 months duration at March 31, 2006 included 12 federal agencies, 22 mortgage-backed securities, 6 corporate bonds, 22 municipal bonds, and 6 CMO’s. Securities with losses of one year or greater duration included 20 federal agencies, 26 mortgage-backed securities, 11 corporate bonds, 9 municipal bonds, 3 federal agency preferred stocks and 1 CMO. The unrealized loss positions at March 31, 2006 were primarily related to interest rate movements. Holdings of GMAC and Ford Motor Credit contained unrealized loss positions because these securities have been downgraded by Moody’s and Standard & Poor’s rating agencies to levels below investment grade. As of March 31, 2006, the Company held $3.30 million par value in GMAC bonds and $250 thousand par value in Ford Motor Credit Corp bonds. These holdings are monitored regularly by EVB’s Chief Financial Officer and reported to the bank boards on a monthly basis. Given the attractive yield and the belief that the risk of default is remote, management has not recommended sale of the holdings.

At December 31, 2005, investments in an unrealized loss position that were temporarily impaired were as follows:

	December 31, 2005
	Less than 12 months				12 months or more				Total
(dollars in thousands) Description of Securities	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Obligations of U. S. Government agencies	$	17,448	$	255	$	10,601	$	294	$	28,049	$	549
Mortgage-backed securities		23,925		520		9,986		291		33,911		811
State/political subdivisions		7,566		53		3,120		109		10,686		162
Corporate, CMO’s and other securities		16,218		460		7,229		1,352		23,447		1,812
	$	65,157	$	1,288	$	30,936	$	2,046	$	96,093	$	3,334

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5. The Company’s loan portfolio was composed of the following at the dates indicated:

	(unaudited) March 31			(audited) December 31			(unaudited) March 31
(Dollars in thousands)	2006			2005			2005
Commercial, industrial and agricultural loans	$	56,940		$	55,732		$	48,805
Residential real estate mortgage loans		265,677			263,191			255,957
Real estate construction loans		58,203			47,620			27,958
Commercial real estate loans		161,501			151,897			133,591
Consumer loans		53,481			55,680			55,412
All other loans		408			321			326
Total loans		596,210			574,441			522,049
Less unearned income		(257	)		(356	)		(940	)
Total loans net of unearned discount		595,953			574,085			521,109
Less allowance for loan losses		(6,627	)		(6,601	)		(6,444	)
Net loans	$	589,326		$	567,484		$	514,665

The Company had $1.8 million in non-performing loans at March 31, 2006 that included $970 thousand in loans past due 90 days but still accruing and $868 thousand in nonaccrual loans.

6. The Company’s allowance for loan losses was as follows at the dates indicated:

(Dollars in thousands)	(unaudited) March 31 2006			(audited) December 31 2005			(unaudited) March 31 2005
Balance January 1	$	6,601		$	6,676		$	6,676
Provision charged against income		113			552			8
Recoveries of loans charged off		142			491			107
Loans charged off		(229	)		(1,118	)		(347	)
Balance at end of period	$	6,627		$	6,601		$	6,444

Following is a summary pertaining to impaired loans:

	March 31 2006		December 31 2005
	(in thousands)
Impaired loans for which an allowance has been provided	$	13,471	$	14,293
Allowance related to impaired loans	$	1,669	$	1,849
Average balance of impaired loans	$	13,960	$	17,175

No additional funds are committed to be advanced in connection with impaired loans. Nonaccrual loans excluded from impaired loan disclosure under FASB Statement No. 114 amounted to $723 thousand and $772 thousand at March 31, 2006 and December 31, 2005, respectively.

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7. The following table shows the weighted average number of shares used in computing per share earnings and the effect on the weighted average number of shares of diluted potential common stock. Potential dilutive common stock had no effect on earnings per share otherwise available to shareholders for the quarters ending March 31, 2006 and March 31, 2005.

	Three Months Ended
	March 31, 2006			March 31, 2005
	Shares	Per Share Amount		Shares	Per Share Amount
Basic earnings per share	4,907,788	$	0.32	4,883,747	$	0.34
Effect of dilutive securities, stock options	13,850		—	13,690		—
Diluted earnings per share	4,921,638	$	0.32	4,897,437	$	0.34

As of March 31, 2006 and 2005, respectively, options to acquire 30,150 shares and 30,150 shares of common stock were not included in computing diluted earnings per common share because their effects were anti-dilutive.

8. The Company’s Stock Compensation Plan was discussed in the 2005 Form 10-K under the heading “Note 12. Stock Compensation Plan”. There were no options granted, exercised or forfeited and no other changes in the three months ended March 31, 2006 and 2005 that impacted any of the information presented in the 2005 Form 10-K. The Company granted stock options for the first time in the second quarter of 2002, and in the fourth quarter of the same year adopted a policy to expense stock options. Stock options expense before income tax for the three month period ended March 31, 2006 was $53 thousand, compared to $37 thousand for the three month period ended March 31, 2005.

9. Components of net periodic benefit cost were as follows for the periods indicated:

	Three Months Ended March 31
	2006			2005
	(in thousands)
Components of Net Periodic Benefit Cost
Service cost	$	350		$	274
Interest cost		179			147
Expected return on plan assets		(163	)		(129	)
Amortization of prior service cost		5			5
Amortization of net obligation at transition		1			1
Recognized net actuarial loss		33			29
Net periodic benefit cost	$	405		$	327

The Company made its required 2006 fiscal year contribution to the pension plan in December 2005 in the amount of $1.31 million. The Company anticipates that it will make its 2007 contribution in December 2006. The pension plan has a fiscal year ending September 30, providing the Company flexibility as to the calendar year in which it makes pension plan contributions.

10. In March 2006, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No.156, “Accounting for Servicing of Financial Assets an amendment of FASB Statement 140” (Statement 156). Statement 156 amends Statement 140 with respect to separately recognized servicing assets and liabilities. Statement 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract and requires all servicing assets and

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liabilities to be initially measured at fair value, if practicable. Statement 156 also permits entities to subsequently measure servicing assets and liabilities using an amortization method or fair value measurement method. Under the amortization method, servicing assets and liabilities are amortized in proportion to and over the estimated period of servicing. Under the fair value measurement method, servicing assets are measured at fair value at each reporting date and changes in fair value are reported in net income for the period the change occurs.

Adoption of Statement 156 is required as of the beginning of fiscal years beginning subsequent to September 15, 2006. Earlier adoption is permitted as of the beginning of an entity’s fiscal year, provided the entity has not yet issued financial statements, including interim financial statements.

The Company does not expect the adoption of Statement 156 at the beginning of 2007 to have a material impact.

11. The following table displays detail of comprehensive income (in thousands) for the three months ended March 31, 2006 and 2005:

	Three Months Ended March 31
	2006			2005
Net income	$	1,551		$	1,671
Unrealized gains (losses) on securities available for sale, net of tax expense		(400	)		(1,401	)
Less: reclassification adjustment, net of tax		(3	)		(83	)
Total comprehensive income	$	1,148		$	187

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

Management’s discussion and analysis of financial information is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Eastern Virginia Bankshares, Inc. (the “Company” or “EVB”). This discussion provides information about the major components of the results of operations, financial condition, liquidity and capital resources of the Company. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements presented elsewhere in this report as well as the Annual Report of Eastern Virginia Bankshares on Form 10-K for the year ended December 31, 2005. Operating results include those of Southside Bank, Bank of Northumberland, Inc., Hanover Bank and subsidiaries of the banks combined for all periods presented. The three banking subsidiaries were consolidated on April 24, 2006.

CRITICAL ACCOUNTING POLICIES

General

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. For example, we use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses, however, could differ substantially from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) Statement of Financial Accounting Standards (SFAS) No. 5,Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS No. 114,Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of the collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

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The Company evaluates loans individually for impairment, including loans on nonaccrual, loans past due 90 days or more, restructured loans and other loans selected by management as required by SFAS No. 114. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of the impairment. If a loan evaluated individually is not impaired, then the loan is assessed for impairment under SFAS No. 5.

For loans without individual measures of impairment, the Company makes estimates of losses for groups of loans as required by SFAS No. 5. Loans are grouped by similar characteristics, including the type of loan, the assigned loan grade and general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is derived based upon historical loss rates for each loan type, the predominant collateral type for the group and the terms of the loan. The resulting estimate of losses for groups of loans are adjusted for relevant environmental factors and other conditions of the portfolio of loans including: borrower or industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in risk selection; level of experience, ability and depth of lending staff; and national and economic conditions.

The amounts of estimated losses for loans individually evaluated for impairment and groups of loans are added together for a total estimate of loan losses. The estimate of losses is compared to the allowance for loan losses of the Company as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional provision to the allowance is made. If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether a reduction to the allowance is necessary. While management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the valuations. Such adjustments would be made in the relevant period and may be material to the Consolidated Financial Statements.

EXECUTIVE OVERVIEW

Net income decreased 7.2% to $1.6 million for the first quarter of 2006, compared to $1.7 million for the same period in 2005. Diluted earnings per share decreased 5.9% to $0.32 for the first quarter of 2006, compared to $0.34 for the same quarter in 2005. Net interest income increased $221 thousand for the quarter ended March 31, 2006 when compared to the same period in 2005. This first quarter increase was the result of higher earnings on the loan portfolio and an increase in investment income offset by an increase in funding costs. Noninterest income without securities gains or losses was up $128 thousand, or 12.6%, for the quarter when compared to the same period in 2005 primarily from an increase in other investment income as the insurance, investment and mortgage groups had higher income than for the period ended March 31, 2005. Securities gains were down $122 thousand for the quarter when compared to the first quarter of 2005. Noninterest expense for the three months ended March 31, 2006 was up $246 thousand at $6.4 million compared to $6.1 million for the first quarter of 2005. Salaries and benefits were up 4.9% primarily from annual raises and an increase in pension expense; occupancy was up 9.2% mostly from lease increases and other expenses were down in total $10 thousand with most categories decreased, offset by a $75 thousand increase in marketing and advertising expenses for deposit advertisements and the one bank project.

Total assets at March 31, 2006 were $783.1 million, up $85.6 million, or 12.3%, from $697.4 million at March 31, 2005 and up $19.2 million, or 2.5%, from $763.9 million at December 31, 2005. For the quarter, total assets averaged $775.7 million, 12.0% above the first quarter 2005 average of $692.8 million. Total loans, net of unearned income, amounted to $596.0 million at March 31, 2006, an increase of $74.8 million, or 14.4%, from $521.1 million at March 31, 2005, and an increase of $21.9 million, or 3.8%, from $574.1 million at December 31, 2005. Net loans as a percent of total assets were 75.3% at March 31, 2006, as compared to 73.8% at March 31, 2005 and 74.3% at 2005 year-end. Loan demand continues to grow faster than deposits.

At March 31, 2006, the securities portfolio totaled $133.5 million, up $11.7 million, or 9.6%, from $121.8 million at March 31, 2005 and down $2.0 million, or negative 1.4%, from $135.4 million at December 31, 2005. Most of the funds that are invested in the securities portfolio are part of management’s effort to balance interest rate risk and to provide liquidity. There were $523 thousand of federal funds sold at March 31, 2006, down from $2.9 million at March 2005 and there were no federal funds sold at December 31, 2005 when the Company was in a purchased position of $6.8 million.

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Total deposits of $627.6 million at March 31, 2006 represented an increase of $34.9 million, or 5.9%, from $592.7 million one year ago and a slight decrease of $754 thousand, or less than 1.0%, from $628.3 million at December 31, 2005. EVB offers attractive, yet competitive, rates to maintain a strong stable deposit base. However, the price of funds has continued to rise in step with the Federal Reserve interest increases. At March 31, 2006, noninterest-bearing demand deposits were up $9.6 million or 11.0% and down $2.2 million or 2.2% compared to March 31 and December 31, 2005, respectively. For the same time periods, interest-bearing deposits were up $25.2 million, or 5.0%, and $1.5 million, or less than 1%, respectively.

FHLB borrowings at March 31, 2006 totaled $76.9 million, a $47.1 million, or 157.7% increase over $29.9 million at March 31, 2005. This change reflects management’s continued strategy to take advantage of interest rate spreads that benefit the Company by locking in the interest rate spread over the life of the liability. With the loan demand outpacing deposit growth, this is a reasonable approach to control funding costs.

FASB Pronouncement No. 115 requires the Company to show the effect of market changes in the value of securities available for sale. The effect of the change in market value of securities, net of income taxes, is reflected in a line titled “Accumulated other comprehensive income/(loss), net” in the Shareholders’ Equity section of the Consolidated Balance Sheets and was negative $2.2 million at March 31, 2006, a decrease of $1.3 million from March 31, 2005 and a decrease of $403 thousand from December 31, 2005. The unrealized gain or (loss) on securities is presented as a value at one specific point in time but fluctuates significantly over time depending on interest rate changes.

RESULTS OF OPERATIONS

Net Income

Net income for the quarter ended March 31, 2006 was $1.6 million, a decrease of $120 thousand from first quarter 2005 earnings of $1.7 million. Most of this decrease is reflected in a decrease of $122 thousand in the gains on securities, which were $4 thousand for the quarter ended March 31, 2006 compared to $126 thousand for the same quarter in 2005. Noninterest expense was up $246 thousand, or 4.0% on a year-to-year quarterly comparison, reflecting a slowing of expense growth. On a linked quarter basis, noninterest expense is up only $28 thousand.

Net interest income increased $221 thousand for the quarter ended March 31, 2006, compared to the same period in 2005. This increase was the result of strong loan growth which resulted in increased interest income on loans of $1.4 million and an increase in investment income of $160 thousand compared to last year. These increases were offset by dramatic increases in funding expenses which increased $1.4 million compared to the same period last year. This was the result of continued rising interest rates and increased borrowings to fund loan growth in a rising rate environment. Deposit interest was up $901 thousand with the majority of the increase coming from customers moving to higher rate certificates of deposits. In addition, FHLB borrowings expense was up $418 thousand as borrowings funded the loan growth. Provision for loan loss was up $105 thousand compared to March 2005 reflecting the impact of loan growth since the quality of loan assets is the best in the Company’s history. Noninterest income excluding gains on securities sales was up $128 thousand for the first quarter of 2006 compared to the first quarter 2005. Service charges and fees on deposits were up 4.8% mostly as a result of increased noninterest account volume. More importantly, other operating income was up $95 thousand as a result of title insurance income increasing $12 thousand and the mortgage and investment companies generating a higher level of income compared to March 2005. Gain on sale or call of securities was down $122 thousand. Noninterest expense increased $246 thousand for the quarter compared to the comparable period in 2005 and reflects more normal expense increases in operating categories such as salaries and benefits up $174 thousand, or 4.9% and occupancy, up $82 thousand, or 9.2%. These expenses are being incurred to increase future income by adding front line employees to service customers, make loans and provide convenient banking locations for our customers.

The yield on earning assets was 6.63% for the quarter ended March 31, 2006 compared to 6.48% for the same period in 2005. The cost of interest bearing liabilities was 2.77% for the quarter ended March 31, 2006, up 67 basis points when compared to 2.10% for the quarter ended March 31, 2005. Both of these increases reflect the impact of the Federal Reserve interest rate increases which have increased loan pricing and created a much more competitive and expensive

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cost of funds. The FHLB borrowings that the Company began increasing late in the second quarter 2005 influence the higher funding cost but also offer a lower cost alternative to higher certificate of deposit rates. Return on average assets was 0.81%, compared to 0.98%, and EVB’s return on average equity was 10.07% compared to 11.24% for the quarters ended March 31, 2006 and 2005, respectively.

Net Interest Income

Net interest income on a fully tax equivalent basis totaled $7.7 million for the quarter, a $204 thousand increase over the Company’s performance for the first quarter of 2005. Average earning assets for the quarter ended March 31, 2006 increased 12.8% to $724.4 million compared to $642.5 million for the same quarter of 2005. Average loans increased 13.8%, average securities increased 7.7% and average federal funds sold increased 42.1% when comparing March 31, 2006 to the same period in 2005. The fully tax equivalent net interest margin for the three-month period ended March 31, 2006 was 4.28% compared to 4.56% for the year ended 2005 and 4.70% for the March 31, 2005 quarter end. For the quarter, the yield on earning assets was up 15 basis points and the cost of interest bearing liabilities was up 67 basis points, substantially narrowing the spread between earnings from and cost of funds. This reflects pressure on loan pricing as the cost of funding is up and the Federal Reserve raised interest rates again during the quarter. A table that discloses fully tax equivalent net interest income calculations for the quarters ended March 31, 2006 and 2005 follows.

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Average Balances, Income and Expense, Yields and Rates (1)

	Three Months Ended March 31
	2006							2005
	Average Balance			Income/ Expense		Yield/ Rate		Average Balance			Income/ Expense		Yield/ Rate
Assets:
Securities
Taxable	$	99,209		$	1,180	4.82	%	$	85,529		$	1,001	4.75	%
Tax exempt (1)		35,741			528	5.99	%		39,756			590	6.02	%
Total securities		134,950			1,708	5.13	%		125,285			1,591	5.15	%
Federal funds sold		3,437			40	4.72	%		2,419			14	2.35	%
Loans, net of unearned income (2)		586,037			10,096	6.99	%		514,781			8,654	6.82	%
Total earning assets		724,424			11,844	6.63	%		642,485			10,259	6.48	%
Less allowance for loan losses		(6,682	)						(6,714	)
Total non-earning assets		57,962							56,984
Total assets	$	775,704						$	692,755
Liabilities & Shareholders' Equity:
Interest bearing deposits
Checking	$	79,956		$	84	0.43	%	$	77,554		$	104	0.54	%
Savings		109,227			341	1.27	%		125,999			310	1.00	%
Money market savings		48,295			182	1.53	%		54,203			120	0.90	%
Large dollar certificates of deposit (5)		96,975			945	3.95	%		68,955			575	3.38	%
Consumer certificates of deposit		194,899			1,724	3.59	%		175,662			1,266	2.92	%
Total interest-bearing deposits		529,352			3,276	2.51	%		502,373			2,375	1.92	%
Federal funds purchased		3,609			40	4.49	%		—			—	—
Other borrowings		79,966			874	4.43	%		40,183			434	4.38	%
Total interest-bearing liabilities		612,927			4,190	2.77	%		542,556			2,809	2.10	%
Noninterest-bearing liabilities
Demand deposits		94,312							85,402
Other liabilities		6,006							4,499
Total liabilities		713,245							632,457
Shareholders' equity		62,459							60,298
Total liabilities and shareholders' equity	$	775,704						$	692,755
Net interest income				$	7,654						$	7,450
Interest rate spread (3)						3.86	%						4.38	%
Interest expense as a percent of average earning assets						2.35	%						1.76	%
Net interest margin (4)						4.28	%						4.70	%

Notes:

(1) Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 34%.

(2) Nonaccrual loans have been included in the computations of average loan balances.

(3) Interest rate spread is the average yield on earning assets, calculated on a fully taxable basis, less the average rate incurred on interest-bearing liabilities.

(4) Net interest margin is the net interest income, calculated on a fully taxable basis assuming a federal income tax rate of 34%, expressed as a percentage of average earning assets.

(5) Large dollar certificates of deposit are certificates issued in amounts of $100,000 or greater.

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Noninterest Income

Noninterest income excluding net realized gains on securities sales was $1.1 million for the first quarter of 2006 compared to $1.0 million for the same quarter in 2005. Net realized gain on called or sold securities was $4 thousand for the three months ended March 31, 2006, down $122 thousand when compared to $126 thousand for the same period of 2005. Service charges on deposit accounts were $718 thousand for the quarter, compared to $685 thousand for the comparable period in 2005. Other operating income increased to $427 thousand for the first quarter, compared to $332 thousand for the three months ended March 31, 2005.

Noninterest Expense

Total noninterest expense increased $246 thousand, or 4.0%, from $6.1 million for the first quarter of 2005 to $6.4 million in the three months ended March 31, 2006. The increase in noninterest expense was the result of overall growth of the Company and organization costs related to the one bank holding company reorganization. The expense increases included $87 thousand related to a new branch office opened in June 2005 at Glenns and $82 thousand in occupancy and equipment, offset by a decline in other expenses. Management is pleased with these results but recognizes the one bank reorganization costs in the second quarter of 2006 may increase the other expense category for that period. On a linked quarter basis, noninterest expense was up $28 thousand or less than 1% for the quarter.

Total salary and benefits expense increased $174 thousand, or 4.9%, from $3.6 million in the first quarter of 2005 to $3.7 million in the three months ended March 31, 2006. Salary expense was up $147.0 thousand or 5.6%, while other personnel expenses declined which resulted in a 2.3% increase in salaries and wages. Despite an increase in pension costs, overall benefits are up slightly with an increase of 1.4% or $8 thousand in taxes and insurance and a 3.5% increase in other benefits. The salary expense increase was the result of growth in the front line, income producing areas with $36 thousand of the salary increase coming from the new branch at Glenns which opened in June 2005, the addition of commercial lenders and branch personnel and normal merit increases. Full time equivalent employees (FTE’s) were up 8.5, or 3% to 294 at the end of March 2006 compared to 285 for the same quarter end in 2005. On a linked quarter basis, FTE’s are down from 296 at year-end December 2005. This decrease of two FTE’s is a milestone reflecting the control management is exerting over its highest noninterest expense.

Net occupancy and equipment expense increased $82 thousand, or 9.2% compared to March 31, 2005, from $889 thousand in 2005 to $971 thousand in 2006, with $35 thousand of the increase directly related to the cost of the Glenns office that opened in June 2005.

All other noninterest expenses decreased $10 thousand to $1.66 million for the first quarter of 2006 from $1.68 million for the same period in 2005. Most of the expense categories were down with only telephone up $5 thousand and advertising and marketing up $75 thousand. This last expense was incurred to promote deposits growth and to begin the efforts to publicize the new bank name. Additional expense related to the one bank consolidation roll out will be incurred in the second quarter of 2006 but should cease after the second quarter 2006. Professional services expense was down $56 thousand from last year as a result of lower consulting fees.

Income Taxes

Income tax expense for the quarter ended March 31, 2006 was $603 thousand, compared to $607 thousand for the same period in 2005. Income taxes reflected an effective tax rate of 28.0% for the first quarter of 2006 compared to 26.6% for the first quarter 2005 and 27.8% for the full year 2005. Also impacting the effective tax rate is a decrease in the income from nontaxable bonds as the Company decreased the percentage of the investment portfolio invested in these instruments.

ASSET QUALITY

The Company’s allowance for loan losses is an estimate of the amount needed to provide for possible losses in the loan portfolio. In determining adequacy of the allowance, management considers the Company’s historical loss experience, the size and composition of the loan portfolio, specific impaired loans, the overall level of nonperforming loans, the value and adequacy of collateral and guarantors, experience and depth of lending staff, effects of credit concentrations and economic conditions. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge offs, net of recoveries. Because the risk of loan loss includes general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses can only be an estimate. (See the Allowance for Loan Losses discussion under Critical Accounting Policies earlier in this section.)

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Total nonperforming assets, which consist of nonaccrual loans, loans past due 90 days and still accruing interest and foreclosed properties were $1.8 million at March 31, 2006, $2.5 million at December 31, 2005 and $4.8 million at March 31, 2005. Nonperforming assets are composed largely (81.3%) of loans secured by real estate in the Company’s market area. Based on estimated fair values of the related real estate, management considers these amounts recoverable, with any individual deficiency covered by the allowance for loan losses. Total loan charge-offs, less recoveries, amounted to $87 thousand for the quarter representing an annualized ratio of net charge-offs to total average loans, net of unearned income, of 0.06% for the quarter ended March 31, 2006 compared to first quarter 2005 net charge-offs of $240 thousand with an annualized ratio of net charge-offs of 0.19% for the quarter, and 2005 full year net charge-offs of $627 thousand, or 0.12% of average loans. The 0.31% ratio of nonperforming loans to total loans at March 31, 2006 was down from 0.44% at December 31, 2005 and from 0.92% at March 31, 2005. This decrease results from improved loan quality with a significant decrease in impaired and nonperforming loans with the nonaccrual ratio reaching another historical low at March 31, 2006.

The allowance for loan losses of $6.6 million at March 31, 2006 is flat when compared to $6.6 million at December 31, 2005 and $6.4 million at March 31, 2005. The allowance is up $26 thousand from year-end and up $183 thousand compared to March 31, 2005. This fairly level balance in the allowance reflects strong asset quality over the last year as increases to the provision reflected the inherent strength of new loans. The ratio of allowance for loan losses to total loans was 1.11% at March 31, 2006, compared to 1.15% at 2005 year-end and 1.24% at March 31, 2005. The allowance for loans losses at March 31, 2006 includes $1.67 million of specific impaired loan reserves.

At March 31, 2006, the Company reported $13.5 million in impaired loans, a decrease of $4.5 million from $18.0 million at March 31, 2005 and a decrease of $822 thousand from $14.3 million at December 31, 2005. The average balance of impaired loans for the three months ended March 31, 2006 was $13.9 million.

The following table summarizes the Company’s nonperforming assets at the dates indicated.

Nonperforming Assets
(Dollars in thousands)	March 31 2006			December 31 2005			March 31 2005
Nonaccrual loans	$	868		$	884		$	3,494
Restructured loans		—			—			—
Loans past due 90 days and accruing interest		970			1,655			1,292
Total nonperforming loans	$	1,838		$	2,539		$	4,786
Other real estate owned		—			—			—
Total nonperforming assets	$	1,838		$	2,539		$	4,786
Nonperforming assets to total loans and other real estate		0.31	%		0.44	%		0.92	%
Allowance for loan losses to nonaccrual loans		763.58	%		746.72	%		184.43	%
Net charge-offs to average loans for the year		0.06	%		0.12	%		0.19	%
Allowance for loan losses to period end loans		1.11	%		1.15	%		1.24	%

LIQUIDITY

Liquidity represents the Company’s ability to meet present and future deposit withdrawals, to fund loans, to maintain reserve requirements and to operate the organization. To meet its liquidity needs, EVB maintains cash reserves and has an adequate flow of funds from maturing loans, securities and short-term investments. In addition, EVB’s subsidiary banks maintain borrowing arrangements with major regional banks and with the Federal Home Loan Bank. Management considers its sources of liquidity to be sufficient to meet its estimated liquidity needs.

In the first quarter 2006, the Company borrowed an additional $25 million from the FHLB to fund loan growth and match the growth to rates lower than the current certificate of deposit rates. This continues a strategy that began during the first half of 2005 when the Company entered into three transactions with the FHLB in order to fund loan growth and

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take advantage of interest spreads between the Company’s deposit interest rates and the FHLB rates. The Company has made it a practice to fund growth at times with FHLB borrowings if the rates were below the Company’s interest bearing deposit costs. These borrowings have some potential long-term interest risk if rates fall significantly but overall give the Company an excellent spread and funding rate. One of the transactions from 2005 for $10 million is a leveraged transaction where the borrowing is offsetting 3-5 year loan balances. Another 2005 transaction is for $13.5 million to lock in the spread on some investments. The spread on these transactions is better than the spread the Company would have received by attracting 5-year certificate funds. The first quarter transaction increased the Company’s contractual borrowings by $25.0 million from $51.9 million at year-end 2005. Management will continue to look for funding opportunities while operating in a rising rate environment. These were the only changes to our contractual obligations that would impact liquidity since the 2005 Form 10-K disclosure.

There have been no material changes in off-balance sheet arrangements that would impact liquidity since the 2005 Form 10-K disclosure.

CAPITAL RESOURCES

EVB’s strong capital position provides the resources and flexibility to support asset growth, to absorb potential losses and to expand the Company’s franchise when appropriate. The Company’s risk-based capital position at March 31, 2006 was $67.6 million, or 11.73% of risk-weighted assets, for Tier 1 capital and $74.3 million, or 12.88%, for total risk based capital. The risk-based capital position is up slightly in total dollars but the ratio itself is down slightly when compared to year end 2005, when the Company reported $66.6 million, or 12.04%, for Tier 1 risk based capital and $73.2 million, or 13.23%, for total risk based capital. The lower ratio is primarily impacted by the continued growth in risk based assets.

Tier 1 capital consists primarily of common shareholders’ equity, while total risk based capital adds a portion of the allowance for loan losses to Tier 1. Risk weighted assets are determined by assigning various levels of risk to different categories of assets and off-balance sheet activities. Under current risk based capital standards, all banks and bank holding companies, including the Company, are required to have Tier 1 capital of at least 4% and total capital of at least 8%.

INFLATION

In financial institutions, unlike most other industries, virtually all of the assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on a bank’s performance than the effects of general levels of inflation. While interest rates are significantly impacted by inflation, neither the timing nor the magnitude of the changes are directly related to price level movements. The impact of inflation on interest rates, loan demand, and deposits is reflected in the Consolidated Financial Statements.

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FORWARD-LOOKING STATEMENTS

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import. Such forward-looking statements involve known and unknown risks including, but not limited to:

• Interest rate fluctuations and the Company’s ability to successfully manage that risk

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

• Funding cost in an increasingly competitive environment

• Risk inherent in the investment portfolio which comprises approximately 17.0% of the Company’s total assets

• Changes in general economic and business conditions

• Competition within and from outside the banking industry

• Maintaining capital levels adequate to support the Company’s growth

• The ability to successfully manage the Company’s growth or implement its growth strategies if the Company is unable to identify attractive markets, locations or opportunities to expand in the future

• Reliance on the Company’s management team, including its ability to attract and retain key personnel

• New products and services in the banking industry

• Problems with technology utilized by the Company

• Changing trends in customer profiles

• Integration of newly acquired branches or businesses, including maintaining cost controls and asset quality

• Changes in laws and regulations applicable to the Company

Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risk since 2005 year end as disclosed in the 2005 Form 10-K.

Item 4. Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to provide assurance that the information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission. An evaluation of the effectiveness of the design and operations of the Company’s disclosure controls and procedures as of the end of the period covered by this report was carried out under the supervision and with the participation of management, including the Company’s Chief Executive Officer and Chief Financial Officer. Based on such evaluation, such officers concluded that the Company’s disclosure controls and procedures were effective as of the end of such period. In addition, while the Company has reorganized and centralized many functions over the last year, it has maintained the control points that have been established. There was no change in the Company’s internal control over financial reporting that occurred during the quarter ended March 31, 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

There are no material pending legal proceedings to which the registrant or any of its subsidiaries is a party. The only litigation in which EVB and its subsidiaries are involved pertains to collection suits involving delinquent loan accounts in the normal course of business.

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Item 1A. Risk Factors

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

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds(not applicable)

Item 3. Defaults Upon Senior Securities(not applicable)

Item 4. Submission of Matters to a Vote of Security Holders(not applicable)

Item 5. Other Information(not applicable)

Item 6. Exhibits

    Exhibit 31.1 – Rule 13a-14(a) Certification of Chief Executive Officer

    Exhibit 31.2 – Rule 13a-14(a) Certification of Chief Financial Officer

    Exhibit 32.1 – Section 906 Certification of Chief Executive Officer

    Exhibit 32.2 – Section 906 Certification of Chief Financial Officer

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SIGNATURES

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

Eastern Virginia Bankshares, Inc.

/s/ Joe A. Shearin

Joe A. Shearin

President and Chief Executive Officer

/s/ Ronald L. Blevins

Ronald L. Blevins

Senior Vice President and Chief Financial Officer

Date: May 4, 2006

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Exhibit Index

Exhibit 31.1 – Rule 13a-14(a) Certification of Chief Executive Officer

Exhibit 31.2 – Rule 13a-14(a) Certification of Chief Financial Officer

Exhibit 32.1 – Section 906 Certification of Chief Executive Officer

Exhibit 32.2 – Section 906 Certification of Chief Financial Officer

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