Eastern Virginia Bankshares (EVBS) 10-Q 2008 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) OFTHE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2008

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, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer”, “non- accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

The number of shares of the registrant’s Common Stock outstanding as of May 5, 2008 was 5,867,544.

EASTERN VIRGINIA BANKSHARES, INC.

FORM 10-Q

For the Period Ended March 31, 2008

Part I	Financial Information
Item 1.	Financial Statements	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4.	Controls and Procedures	23
Part II	Other Information
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3.	Defaults Upon Senior Securities	24
Item 4.	Submission of Matters to a Vote of Security Holders	24
Item 5.	Other Information	24
Item 6.	Exhibits	24
Signatures		25

1

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands)

	March 31 2008 (unaudited)			December 31 2007
Assets:
Cash and due from banks	$	20,296		$	18,017
Federal funds sold		—			367
Securities available for sale, at fair value		180,882			160,865
Loans, net of unearned income		766,626			708,817
Allowance for loan losses		(8,743	)		(7,888	)
Total loans, net		757,883			700,929
Deferred income taxes		5,452			4,584
Bank premises and equipment, net		18,840			18,261
Accrued interest receivable		4,019			4,124
Other real estate		1,079			1,056
Goodwill		15,970			5,725
Other assets		13,129			12,783
Total assets	$	1,017,550		$	926,711
Liabilities and Shareholders’ Equity:
Liabilities
Noninterest-bearing demand accounts	$	120,575		$	95,823
Interest-bearing deposits		642,829			576,077
Total deposits		763,404			671,900
Federal funds purchased		8,126			17,099
Federal Home Loan Bank advances (FHLB)		136,071			127,071
Trust preferred debt		10,310			10,310
Accrued interest payable		2,696			3,539
Other liabilities		7,114			6,023
Total liabilities		927,721			835,942
Shareholders’ Equity
Common stock of $2 par value per share, authorized 50,000,000 shares, issued and outstanding 5,867,985 and 5,947,443, including 15,000 nonvested shares		11,736			11,865
Surplus		17,891			18,811
Retained earnings		65,338			63,616
Accumulated other comprehensive (loss), net		(5,136	)		(3,523	)
Total shareholders’ equity		89,829			90,769
Total liabilities and shareholders’ equity	$	1,017,550		$	926,711

See Notes to Consolidated Financial Statements

2

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income (Unaudited)

(Dollars in thousands except per share amounts)

	Three Months Ended March 31
	2008			2007
Interest and Dividend Income
Loans and fees on loans	$	12,765		$	12,090
Interest on investments:
Taxable interest income		1,471			1,100
Tax exempt interest income		410			329
Dividends		111			82
Interest on federal funds sold		6			314
Total interest and dividend income		14,763			13,915
Interest Expense
Deposits		4,896			4,591
Federal funds purchased		37			—
Interest on FHLB advances		1,434			1,002
Interest on trust preferred debt		191			208
Total interest expense		6,558			5,801
Net interest income		8,205			8,114
Provision for Loan Losses		450			153
Net interest income after provision for loan losses	$	7,755		$	7,961
Noninterest Income
Service charges and fees on deposit accounts		965			830
Debit/ credit card fees		256			145
Gain on sale of available for sale securities, net		42			—
Impairment - securities		(300	)		—
Actuarial gain - pension curtailment		1,328			—
Gain on sale of OREO, fixed assets and LLC		4			—
Other operating income		362			374
Total noninterest income		2,657			1,349
Noninterest Expenses
Salaries and benefits		3,689			3,664
Occupancy and equipment expense		1,091			1,010
Telephone		214			147
Marketing and advertising		224			199
Other operating expenses		1,377			1,258
Total noninterest expenses		6,595			6,278
Income before income taxes		3,817			3,032
Income Tax Expense		1,145			924
Net income	$	2,672		$	2,108
Earnings per share, assuming dilution	$	0.45		$	0.35
Dividends per share	$	0.16		$	0.16

See Notes to Consolidated Financial Statements

3

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statement of Cash Flows (Unaudited)

(Dollars in thousands)

	Three Months Ended March 31
	2008			2007
Cash Flows from Operating Activities
Net income	$	2,672		$	2,108
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		545			477
Investment amortization / (accretion), net		15			20
Provision for loan losses		450			153
(Gain) realized on available for sale securities’ transactions, net		(42	)		—
(Gain) on pension curtailment		(1,328	)		—
Impairment charge on securities		300			—
(Gain) on LLC investment		(4	)
Stock based compensation		74			63
Change in assets and liabilities:
(Increase) decrease in other assets		587			249
Increase (decrease) in other liabilities		(659	)		1,154
Net cash provided by operating activities		2,610			4,224
Cash Flows from Investing Activities
Proceeds from sales of securities available for sale		5,622			—
Proceeds from maturities, calls, and paydowns of securities		30,504			1,761
Purchase of debt securities		(58,384	)		(2,500	)
Purchase/retirement of restricted stock, net		(512	)		43
Net increase in loans		(8,485	)		(10,331	)
Acquisition of branches (See Note 12)		33,995			—
Purchases of bank premises and equipment		(1,023	)		(574	)
Net cash provided by (used in) investing activities		1,717			(11,601	)
Cash Flows from Financing Activities
Net increase (decrease) in noninterest bearing and interest bearing demand deposits and savings accounts		(1,972	)		3,772
Net increase in certificates of deposit		1,603			2,184
Repurchases and retirement of common stock		(1,229	)		—
Issuance of common stock under dividend reinvestment plan		106			103
Stock options exercised		—			20
Dividends declared		(950	)		(973	)
Decrease in federal funds purchased		(8,973	)		—
Increase in FHLB advances		9,000			—
Net cash provided by (used in) financing activities		(2,415	)		5,106
(Decrease) in cash and cash equivalents		1,912			(2,271	)
Cash and cash equivalents
Beginning of period		18,384			36,415
End of period		20,296			34,144
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest on deposits and other borrowings	$	6,943		$	5,443
Income taxes	$	—		$	—
Unrealized gain/(loss) on securities available for sale	$	(1,612	)	$	982

See Notes to Consolidated Financial Statements

4

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. (“we”, “us”, “our”, or “Company”) at March 31, 2008. The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2007 (the “2007 Form 10-K”). Certain previously reported amounts have been reclassified to conform to current period presentation.

Eastern Virginia Bankshares, Inc., based in Tappahannock, VA, is the parent company of EVB. EVB operates 25 retail branches in the Virginia counties of Caroline, Essex, Gloucester, Hanover, Henrico, King William, Lancaster, Middlesex, Northumberland, Southampton, Surry, Sussex and the City of Colonial Heights. Subsidiaries of EVB include EVB Investments, EVB Mortgage, EVB Insurance and EVB Title. The Company’s stock trades on the NASDAQ Global Market under the symbol EVBS.

We were 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 our wholly owned subsidiaries. The transaction was accounted for using the pooling-of-interests method of accounting. We opened our third subsidiary in May 2000 when Hanover Bank began operations in Hanover County, Virginia. On April 24, 2006, we completed the conversion to a one-bank holding company by merging the three banking subsidiaries. The new bank began operating under the name “EVB” on April 24, 2006. All significant inter-company transactions and accounts have been eliminated in consolidation.

In the first quarter of 2008, we completed the previously announced purchase of 2 branches in the Richmond market from Millennium Bank. These branches are in new markets for our company and added $92 million in deposits and $49 million in loans to our balance sheet. This transaction should be accretive to earnings starting in the second quarter of 2008. (See Note 12) Earlier in the first quarter of 2008, we relocated our Village branch in Mechanicsville to a better location, the Windmill, which is right off Route 360 as you come into town. The visibility of the location has already brought new customers in the door. In addition, the building of an owned branch in the Quinton area of New Kent County, Virginia continues on schedule. We are constantly looking for accretive ways to expand our franchise.

The results of operations for the three-month period ended March 31, 2008 are not necessarily indicative of the results to be expected for the full year.

2. Our amortized cost and estimated fair values of securities at March 31, 2008 and December 31, 2007 were as follows:

	March 31, 2008
(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for Sale:
Obligations of U.S. Government agencies	$	35,640	$	476	$	46	$	36,070
Mortgage-backed securities		46,931		122		128		46,925
State and political subdivisions		41,603		513		733		41,383
Corporate, CMO and other securities		54,742		300		7,472		47,570
Restricted securities		8,934		—		—		8,934
Total	$	187,850	$	1,411	$	8,379	$	180,882

5

	December 31, 2007
(dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for Sale:
Obligations of U.S. Government agencies	$	43,284	$	285	$	54	$	43,515
Mortgage-backed securities		25,136		7		282		24,861
State and political subdivisions		41,137		384		310		41,211
Corporate, CMO and other securities		47,374		184		4,702		42,856
Restricted securities		8,422		—		—		8,422
Total	$	165,353	$	860	$	5,348	$	160,865

There are no securities classified as “Held to Maturity” or “Trading”.

At March 31, 2008, investments in an unrealized loss position that were temporarily impaired were as follows:

	March 31, 2008
	Less than 12 months				12 months or more				Total
(dollars in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Description of Securities
Obligations of U. S. Government agencies	$	22,948	$	46	$	—	$	—	$	22,948	$	46
Mortgage-backed securities		19,832		111		4,136		17		23,968		128
States and political subdivisions		12,336		733		—		—		12,336		733
Corporate, CMO and other securities		23,552		3,868		12,423		3,604		35,975		7,472
	$	78,668	$	4,758	$	16,559	$	3,621	$	95,227	$	8,379

Bonds with unrealized loss positions of less than 12 months duration at March 31, 2008 included 3 federal agencies, 10 corporate bonds, 15 mortgage-backed securities, 5 collateralized mortgage obligations (“CMO”), 1 federal agency preferred stock and 28 municipal bonds. Securities with losses of 12 months or greater duration included 11 mortgage-backed securities, 10 corporate bonds, 1 collateralized mortgage obligation and 3 federal agency preferred stocks. The unrealized loss positions at March 31, 2008 were primarily related to the widened market spreads for corporate securities. Holdings of GMAC and Ford Motor Credit Corp. 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, 2008, we held $3.0 million in GMAC bonds and $250 thousand in Ford Motor Credit Corp. bonds. These holdings are monitored regularly by our Chief Financial Officer and reported to the EVB Board on a monthly basis. Based on this analysis, we recorded a $300 thousand impairment charge on the GMAC holdings in March 2008. Given the attractive yield, our ability and intent to hold until maturity or principal recovery and the belief that the risk of default is remote, we have not recommended sale of the holdings and believe the remaining unrealized loss is temporary.

The 10 corporate issues with losses of less than 12 months include 5 pooled trust preferred securities packaged by FTN Financial and Keefe Bruyette and Woods secured by debt of banks and insurance companies, primarily banks, and 1 similar issue packaged by Suntrust Robinson Humphrey and Bear Stearns consisting solely of bank borrowings. We believe that these pooled trust preferred securities are high quality investments that have seen their market value decline as the spread between corporate and government bonds have widened to near record levels. None of these issues has been downgraded by rating agencies. As we have the positive intent and ability to hold these securities until maturity or a recovery in value, no decline was deemed to be other than temporary.

6

At December 31, 2007 investments in an unrealized loss position that were temporarily impaired were as follows:

	December 31, 2007
	Less than 12 months				12 months or more				Total
(dollars in thousands)	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Description of Securities
Obligations of U. S. Government agencies	$	14,275	$	22	$	5,873	$	32	$	20,148	$	54
Mortgage-backed securities		668		2		21,199		280		21,867		282
States and political subdivisions		5,650		51		5,026		259		10,676		310
Corporate, CMO and other securities		18,989		2,180		14,471		2,522		33,460		4,702
	$	39,582	$	2,255	$	46,569	$	3,093	$	86,151	$	5,348

3. Our loan portfolio was composed of the following at the dates indicated:

	(unaudited)			(audited)			(unaudited)
(Dollars in thousands)	March 31 2008			December 31 2007			March 31 2007
Commercial, industrial and agricultural loans	$	74,183		$	60,778		$	59,449
Residential real estate mortgage loans		339,777			317,767			295,710
Real estate construction loans		113,434			98,877			83,713
Commercial real estate loans		186,318			178,011			171,893
Consumer loans		50,879			52,170			49,619
All other loans		2,058			1,243			415
Total loans		766,649			708,846			660,799
Less unearned income		(23	)		(29	)		(67	)
Total loans net of unearned discount		766,626			708,817			660,732
Less allowance for loan losses		(8,743	)		(7,888	)		(7,113	)
Net loans	$	757,883		$	700,929		$	653,619

We had $5.3 million in non-performing assets at March 31, 2008 that included $734 thousand in loans past due 90 days or more but still accruing, $3.5 million in nonaccrual loans and $1.08 million classified as OREO.

4. Our allowance for loan losses was as follows at the dates indicated:

	(unaudited)			(audited)			(unaudited)
(in thousands)	March 31 2008			December 31 2008			March 31 2007
Balance at beginning of year	$	7,888		$	7,051		$	7,051
Reserve on loans acquired		488			—			—
Provision charged against income		450			1,238			153
Recoveries of loans charged off		144			460			143
Loans charged off		(227	)		(861	)		(234	)
Balance at end of year	$	8,743		$	7,888		$	7,113

7

Following is a summary pertaining to impaired loans:

	March 31 2008		December 31 2007
	(in thousands)
Impaired loans for which an allowance has been provided	$	6,446	$	4,365
Allowance related to impaired loans	$	1,895	$	1,054
Average balance of impaired loans	$	5,010	$	3,810

No additional funds are committed to be advanced in connection with impaired loans. Nonaccrual loans excluded from impaired loan disclosure under Statement of Financial Accounting Standards (“SFAS”) No. 114 amounted to $ 2.0 million and $1.4 million at March 31, 2008 and December 31, 2007, respectively.

5. Borrowings from the Federal Home Loan Bank of Atlanta are disclosed below. We utilize FHLB borrowings for two purposes: (a) to match funds for specific loans or investments as an interest rate risk management tool and (b) for general funding of loan growth when the cost of borrowing is substantially below that of aggressive deposit funding.

	(unaudited)		(audited)		(unaudited)
	March 31 2008		December 31 2007		March 31 2007
Amortizing advances	$	3,571	$	3,571	$	5,000
LIBOR floating advances		10,000		10,000		—
Convertible advances		122,500		113,500		85,500
Total advances	$	136,071	$	127,071	$	90,500

The table presented below shows the maturities and potential call dates of FHLB advances. All but $13.6 million of the FHLB borrowings are convertible advances that have a call provision.

	Maturities Amount		Avg Rate		Callable Amount		Avg Rate
2008	$	1,429	3.15	%	$	55,000	4.62	%
2009		11,429	3.74	%		30,000	4.32	%
2010		5,713	5.57	%		28,500	4.20	%
2011		10,000	5.01	%		9,000	2.44	%
2015		13,500	3.87	%		—
2016		10,000	4.85	%		—
2017		75,000	4.30	%		—
2018		9,000	2.44	%		—
Total	$	136,071	4.22	%	$	122,500	4.29	%

6. 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 three month periods ended March 31, 2008 and March 31, 2007.

8

	Three Months Ended
	March 31, 2008			March 31, 2007
	Shares	Per Share Amount		Shares	Per Share Amount
Basic earnings per share	5,909,425	$	0.45	6,085,857	$	0.35
Effect of dilutive securities,
stock options	1,997		—	9,096		—
restricted stock	—		—	—		—
Diluted earnings per share	5,911,422	$	0.45	6,094,953	$	0.35

At March 31, 2008 and 2007, respectively, options to acquire 235,637 shares and 146,612 shares of common stock were not included in computing diluted earnings per common share because their effects were anti-dilutive.

7. On September 21, 2000, we adopted the Eastern Virginia Bankshares, Inc. 2000 Stock Option Plan (the “2000 Plan”) to provide a means for selected key employees and directors to increase their personal financial interest in our company, thereby stimulating their efforts and strengthening their desire to remain with us. Under the 2000 Plan, up to 400,000 shares of Company common stock may be granted. No options may be granted under the 2000 Plan after September 21, 2010. On April 17, 2003, the shareholders approved the 2003 Stock Incentive Plan, amending and restating the 2000 Plan (the “2003 Plan”) while still authorizing the issuance of up to 400,000 shares of common stock. There are 84,993 shares still available under the 2003 Plan.

On April 19, 2007, our shareholders approved the Eastern Virginia Bankshares, Inc. 2007 Equity Compensation Plan (the “2007 Plan”) to enhance our ability to recruit and retain officers, directors and employees with ability and initiative and to encourage such persons to have a greater financial interest in the company. The 2007 Plan authorizes the Company to issue up to 400,000 additional shares of common stock. No awards have been issued under the 2007 Plan.

In December 2004, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 123R, “Share-Based Payment”. SFAS 123R requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options, based on the fair value of those awards at the date of grant. We had already adopted SFAS No. 123 in 2002 and began recognizing compensation expense for stock option grants in that year, as all such grants had an exercise price not less than the fair market value on the date of the grant.

SFAS 123R also requires that new awards to employees eligible for retirement prior to the awards becoming fully vested be recognized as compensation cost over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. Our stock options granted to eligible participants prior to the adoption of SFAS 123R that had an accelerated vesting feature associated with employee retirement are being recognized, as required, as compensation cost over the vesting period except in the instance of participant’s actual retirement.

For the three-month periods ended March 31, 2008 and 2007, stock option compensation expense of $67 thousand and $63 thousand was included in salary and benefit expense.

Stock option compensation expense is the estimated fair value of options granted, amortized on a straight-line basis over the requisite service period for each stock grant award. Through March 31, there have been no awards issued in 2008. The weighted average estimated fair value of stock options granted in the years 2007, 2006 and 2005 was $5.95, $5.40 and $5.31, respectively. Fair value is estimated using the Black-Scholes option-pricing model with the assumptions indicated in the table below:

	2007		2006		2005
Dividend rate	2.82	%	2.97	%	2.76	%
Price Volatility	32.89	%	22.94	%	23.61	%
Risk-free interest rate	4.56	%	4.65	%	4.13	%
Expected life	7 Years		10 Years		10 Years

9

The dividend rate is calculated as the average quarterly dividend yield on our stock for the past seven years by dividing the quarterly dividend by the average daily closing price of the stock for the period. Volatility is a measure of the standard deviation of the daily closing stock price plus dividend yield for the same period. The risk-free interest rate is the seven-year Treasury strip rate on the date of the grant. The expected life of options granted in 2007 was calculated using the simplified method whereby the vesting period and the contractual period are averaged.

Stock option plan activity for the quarter ended March 31, 2008 is summarized below:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in yeas)	Intrinsic Value of Unexercised In-the Money Options (in thousands)
Outstanding at beginning of year	259,762		$	20.87
Granted	—			—
Exercised	—			—
Forfeited	(1,500	)		20.33
Oustanding at March 31, 2008	258,262			20.87	7.33	$	35
Options exercisable at March 31, 2008	52,150			23.18	4.92	$	35

As of March 31, 2008, there was $509 thousand of unrecognized compensation expense related to stock options that will be recognized over the remaining requisite service period of approximately 1.55 years. There were no options granted in the three month periods ended March 31, 2008 or 2007. There were no shares exercised in the three months ended March 31, 2008. There were 1,125 shares exercised in the first three months of 2007 at an average price of $16.10 providing cash proceeds of $20 thousand, with an intrinsic value of $9 thousand.

We awarded 15,000 shares of restricted stock to employees on December 20, 2007. One half of these shares are subject to time vesting at 20% per year over a five –year vesting. At March 31, 2008 there was $122 thousand of total unrecognized compensation related to the time-vested awards. The other half of the restricted share award is performance based and will vest on June 30, 2010 if, and only if, 2009 financial achievements of the Company meet very aggressive targets. Given the aggressive targets for the performance based award, compensation expense will be recognized only if the award vests. Compensation is accounted for using the fair market value of our common stock on the date the restricted shares were awarded, which was $17.25 per share. For the three months ended March 31, 2008, restricted stock compensation expense of $7 thousand was included in salary and benefit expense.

10

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

	Three Months Ended March 31
	2008			2007
	(in thousands)
Components of Net Periodic Benefit Cost
Service cost	$	229		$	373
Interest cost		192			196
Expected return on plan assets		(267	)		(189	)
Amortization of prior service cost		5			5
Amortization of net obligation at transition		1			1
*Recognized net actuarial gain		(1,328	)		20
Net periodic benefit cost	$	(1,168	)	$	406

* Note: $1.3 million was booked as an extraordinary gain in the non interest income category while $160 thousand was booked as pension expense in the quarter.

We made our required 2007 fiscal year contribution to the pension plan in December 2007 in the amount of $1.63 million. While we project that we will recognize $642 thousand of pension expense in 2008, no contribution will be required because of the pension curtailment gain discussed above.

9. SFAS No. 157,Fair Value Measurements, defines fair value, establishes a framework for measuring fair value, establishes a three-level valuation hierarchy for disclosure of fair value measurement and enhances disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

• Level 1 inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

• Level 2 – inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.

• Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement.

Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:

Securities

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

Loans held for sale

Loans held for sale which is required to be measured in a lower of cost or fair value. Under SFAS No. 157, market value is to represent fair value. Management obtains quotes or bids on all or part of these loans directly from the purchasing financial institutions. Premiums received or to be received on the quotes or bids are indicative of the fact that cost is lower than fair value. At March 31, 2008, our company had no loans held for sale.

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Impaired loans

SFAS No. 157 applies to loans measured for impairment using the practical expedients permitted by SFAS No. 114,Accounting by Creditors for Impairment of a Loan, including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.

Other Real Estate Owned

Certain assets such as other real estate owned (OREO) are measured at fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of SFAS No. 157.

10. Recent Accounting Pronouncements

In December 2007, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141(R)). The Standard will significantly change the financial accounting and reporting of business combination transactions. SFAS 141(R) establishes the criteria for how an acquiring entity in a business combination recognizes the assets acquired and liabilities assumed in the transaction; establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. Acquisition related costs including finder’s fees, advisory, legal, accounting valuation and other professional and consulting fees are required to be expensed as incurred. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008 and early implementation is not permitted. We do not expect the implementation to have a material impact on our consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No.160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS 160). SFAS 160 requires us to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited. We do not expect the implementation of SFAS 160 to have a material impact on our consolidated financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standards No. No. 161, “Disclosures about Derivative Instruments and Hedging Activities – an amendment of FASB Statement No. 133” (SFAS 161). SFAS 161 changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under Statement 133 and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. We do not expect the implementation of SFAS 161 to have a material impact on our consolidated financial statements.

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11. The following table displays detail of comprehensive income for the three-month periods ended March 31, 2008 and 2007:

	Three Months Ended March 31
	2008			2007
Net income	$	2,672		$	2,108
Unrealized gains (losses on securities available for sale, net of tax expense		(1,585	)		982
Less: reclassification adjustment, net of tax		(27	)		—
Total comprehensive income	$	1,060		$	3,090

12. On March 14, 2008, we purchased two branches from Millennium Bank, N. A. The purchase price of $8.5 million represented a 9.25% premium on the deposits assumed at the date of consummation.

The acquisition included the assumption of certain deposit accounts and purchase of selected loans and fixed assets as follows:

Assets purchased (at fair value):
Cash	$	275
Loans		48,896
Furniture, fixtures and equipment		102
Other assets		173
Goodwill		10,245
Core deposit intangibles		20
Total assets acquired	$	59,711
Liabilities acquired (at fair value):
Deposit accounts	$	93,499
Other liabilities		207
Total liabilities assumed	$	93,706
Net liabilities assumed	$	33,995

Of the acquired intangible assets, $20 thousand was assigned to core deposit intangibles to be amortized over a period of 28.5 months. The unamortized balance of accumulated core deposit intangibles, including previous branch acquisitions, was $719 thousand and $980 thousand at March 31, 2008 and 2007, respectively. The estimated aggregate amortization expense for core deposit intangibles for the next 30 months is $24 thousand per month.

In addition, $1.6 million was assigned as a discount on the certificates of deposit assumed, while $438 thousand was assigned as a premium on the loans purchased. Weighted average lives for the certificates of deposit and loans receivable were 1.05 years and 7.0 years, respectively. The unamortized balance of the CD discount was $1.6 million and $0.0 at March 31, 2008 and 2007, respectively. The unamortized balance of the loan premium was $438 thousand and $0.0 at March 31, 2008 and 2007, respectively. The estimated aggregate CD discount on a monthly basis through March 2009 is $130 thousand per month. The estimated aggregate loan premium amortization on a monthly basis for the 84 months beginning April 2008 is $5 thousand.

We have also booked to Goodwill $488 thousand of loan loss reserve on the acquired loans and $84 thousand of acquisition costs including legal fees, conversion fees, legal advertising and legal mailings.

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

We present management’s discussion and analysis of financial information to aid the reader in understanding and evaluating our financial condition and results of operations. This discussion provides information about our major components of the results of operations, financial condition, liquidity and capital resources. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements presented elsewhere in this report and in the 2007 Form 10-K. Operating results include those of all our operating entities combined for all periods presented.

We provide a broad range of personal and commercial banking services including commercial, consumer and real estate loans. We complement our lending operations with an array of retail and commercial deposit products and fee-based services. Our services are delivered locally by well-trained and experienced bankers, whom we empower to make decisions at the local level so that they can provide timely lending decisions and respond promptly to customer inquiries. We believe that, by offering our customers personalized service and a breadth of products, we can compete effectively as we expand within our existing markets and into new markets.

CRITICAL ACCOUNTING POLICIES

General

Our 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 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) SFAS No. 5,Accounting for Contingencies, which requires that losses be accrued when their occurrence is probable 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.

We evaluate non-performing loans individually for impairment 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, we make 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 estimates 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 our allowance for loan losses as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional provision to the allowance would be evaluated to determine whether an addition to the allowance is needed. 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 would be necessary. While management uses the best

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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.

Goodwill and Intangible Assets

SFAS No. 141,Business Combinations, requires the purchase method of accounting be used for all business combinations initiated after June 30, 2001. For purchase acquisitions, we are required to record assets acquired, including identifiable intangible assets, and liabilities at their fair value, which in many instances involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analysis or other valuation techniques. Effective January 1, 2001, we adopted SFAS No. 142 Goodwill and Other Intangible Assets (“SFAS 142”) which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of SFAS No. 142 discontinue the amortization of goodwill and intangible assets with indefinite lives, but require at least an annual impairment review and more frequently if certain impairment indicators are in evidence. Additionally, we adopted SFAS No. 147Acquisitions of Certain Financial Institutions, on January 1, 2002, and determined that core deposit intangibles will continue to be amortized over their estimated useful lives.

Goodwill totaled $16.0 million and $5.7 million as of March 31, 2008 and December 31, 2007, respectively. Based on the testing of goodwill for impairment, no impairment charges have been recorded. As described in Note 12, this increase was due to our acquisition in the first quarter of 2008. Core deposit intangible assets are being amortized over the period of expected benefit, which ranges from 2.39 to 7.0 years. Core deposit intangibles, net of amortization, amounted to $719 thousand and $770 thousand, respectively.

OVERVIEW

Net income for the quarter ended March 31, 2008 increased $564 thousand or 26.8% when compared to the same period in 2007. Increases in net interest income of 1.1% and noninterest income of 97.0% fueled the income growth, while an increase in noninterest expenses of 5.0% and provision expense of 194% negatively impacted net income for the quarter. Net interest income increased $91 thousand reflecting the economic impact of the FOMC’s aggressive lowering of the target federal funds rate during the first quarter. Interest income was up $848 thousand, or 6.1%, as loans and investments provided strong returns on the asset growth of 2007. Interest expense increased $757 thousand, or 13.0%, reflecting the slower change in funding cost when rates decline so quickly. Provision for loan losses increased $297 thousand over the 2007 level, as management continued preparation for the effects of a possible recessionary market. Noninterest income increased $1.3 million as a result of increases in most of the categories but more importantly, due to a $1.3 million gain from pension curtailment as our pension liability decreased and a $300 thousand impairment charge we applied to our investment portfolio. Without the gain, noninterest income would have declined $20 thousand and with out either of the nonrecurring items this income would have been up $280 thousand or 20.8%. Noninterest expense increased $317 thousand, or 5.0% as a result of our expansion with the purchase of the Millennium branches, the relocation in Mechanicsville to the new Windmill location, increased regulatory expense and infrastructure improvements.

Management is excited about our growth in income, assets and locations but recognizes the tough economic environment we have been and will continue working in for 2008. The yield curve has returned to a more normal slope as a result of the Federal Reserve’s rate cuts. These changes in rates have caused a large portion of our loan portfolio to re-price instantly, while our deposits have longer maturity terms and will not re-price until later in the year. Management sees three areas of concentration in 2008: (1) bring the deposit cost down by re-pricing new deposits at then current market rates; (2) prepare for potential loan problems as a result of the weak economy by building up our loan loss reserve; and (3) continue to grow our earning assets in order to benefit from the long term effects of a lower rate environment. We believe our core earnings are strong and growing. Many of the expense increases in the first quarter were nonrecurring which should help in the next two quarters. We anticipate opening a new branch in the fourth quarter of 2008 which will potentially create some drag on earnings. While subprime lending was not and is not part of our growth strategy and we do not see the huge write-downs that have made headlines over the last six months, we recognize that we will be impacted by the fallout. Our securities impairment charge is an indirect effect of the securitization of bonds with mortgages. With job growth declining, the potential for more slow pays and defaults on loans increases. We are a community bank in diversified markets which requires different skills to help our customers in these markets. The year, 2008 offers challenges which will test our strategies and our ability to deal with our economic environment. We look forward to the year.

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Total assets at March 31, 2008 were $1.0 billion, up $90.8 million, or 9.8%, from $926.7 million at year end 2007 and up $156.7 million, or 18.2% from March 31, 2007, when total assets were $860.8 million. This is the result of strong growth and the acquisition of the Millennium branches which added over $90 million to our footings. These branches place the company in new and growing markets for our franchise and going forward, we anticipate strong growth from them. For the quarter, total assets averaged $931.4 million, 8.6% above the first quarter 2007 average of $857.3 million. At March 31, 2008, total loans, net of unearned income, amounted to $766.6 million an increase of $57.8 million, or 8.2%, from $708.8 million at December 31, 2007. Average loans for the first quarter 2008, increased $64.6 million to $719.9 million compared to $655.3 million for the same period in 2007. At March 31, 2008, net loans as a percent of total assets were 75.3%, as compared to 76.5% at December 31, 2007 reflecting greater growth in the investment portfolio from funds acquired in the Millennium branches acquisition. Loan demand has been good in the first quarter of 2008, but there are signs that it could slow as the economy gets worse and conservatism toward growth takes over our customer’s business thinking.

At March 31, 2008, the investment portfolio totaled $180.9 million, an increase of $51.5 million from $129.3 million at March 31, 2007 and up $20.0 million, or 12.4%, from $160.9 million at December 31, 2007. During the first quarter of 2008, with rates dropping rapidly resulting in numerous calls on bonds, we prefunded some investments at relatively strong rates in anticipation of the extra funding we received from the Millennium transaction in late March. If the Federal Reserve continues lowering rates, as most economic indicators imply will happen, we expect calls to continue at an above normal pace. The funds from these potential transactions will be used to fund loans or purchase new bonds based on what the current market situation dictates. Most of the funds that are invested in the investment portfolio are part of management’s effort to balance interest rate risk and to provide liquidity. We were in a funds purchased position at the end of the first quarter 2008 with $8.1 million of federal funds purchased at March 31, 2008, while there was $17.1 million in federal funds purchased at December 31, 2007 and $17.6 million in federal funds sold at March 31, 2007. The stock offering in December 2006 and the acquisition in March 2008 have funded our growth and minimized the need to borrow over the last 15 months.

Total deposits of $763.4 million at March 31, 2008 represented an increase of $91.5 million, or 13.6%, from $671.9 million at year-end 2007 and an increase of $103.5 million, or 15.7%, from $659.9 million at March 31, 2007. The branch acquisitions added approximately $91.9 million to our deposit base. Year-over-year, all deposit categories were up except savings. Noninterest-bearing demand deposits of $120.6 million at March 31, 2008 increased $24.8 million when compared to $95.8 million at December 31, 2007 and up $23.0 million from $97.6 million at the end of the same quarter in 2007. Interest-bearing deposits at March 31, 2008, increased $66.8 million, or 11.6%, to $642.8 million compared to $576.1 million at December 31, 2007 and up $80.5 million, or 14.3%, compared to $562.3 million at March 31, 2007. These last two statistics highlight the importance of the acquisition because with out the inflow, noninterest bearing deposits would have been down and interest bearing deposits would have increased minimally compared to the prior periods. While some of the time deposits from the Millennium branches were priced higher than our existing base, the influx of noninterest bearing deposits and our effort to lower our cost of funds should minimize any impact on the margin as we go through the year. All deposit prices are evaluated frequently, especially at the point when rates are decreased, to adjust them to the new rate environment. Even our signature growth deposit product, Reward Checking, had its rate decreased from 5.01% to a still above market 4.01%.

FHLB borrowings at March 31, 2008 totaled $136.1 million, a $45.6 million, or 50.4%, increase over $90.5 million at March 31, 2007 and up $9.0 million from $127.1 million at December 31, 2007. Loan demand continued to outpace deposit growth for most of the first quarter of 2008, requiring management to obtain alternative low cost funding for the loan growth early in the quarter. Going through the current year, we expect to attract lower cost deposits to match with loans that will be repricing at lower rates and to cover loan growth. We do not anticipate additional borrowing this year, but that is dictated by the markets and the economic environment.

SFAS No. 115, discussed in the 2007 Form 10-K, 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 (loss), net” in the Shareholders’ Equity section of the Consolidated Balance Sheets. The securities portion was a negative $4.5 million at March 31, 2008, an increase of $1.6 million from a negative $2.9 million at

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December 31, 2007 and an increase of $3.0 million from a negative $1.5 million at March 31, 2007. Also included in this line item is a $606 thousand negative amount related to the pension plan (SFAS No. 158). The unrealized 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 increased 26.8% to $2.7 million for the three months ended March 31, 2008, compared to $2.1 million for the same period in 2007. Diluted earnings per share increased 28.6% to $0.45 for the first quarter of 2008, compared to $0.35 for the same quarter in 2007. Net interest income increased $91 thousand for the quarter ended March 31, 2008, when compared to the same period in 2007. This increase in net interest income for 2008’s first quarter was the result of higher earnings on the loan portfolio despite lower rates, higher earnings on the investment portfolio which more than offset a $308 thousand decline in funds sold income and an increase of $757 thousand in total funding costs. This increase in interest income was more than offset by a $297 thousand increase in provision for loan loss, as we increased our reserve in anticipation of the potential economic impact on our loan portfolio and increased the classification of loans designated as impaired. Noninterest income excluding securities gains was up $1.3 million, or 94.8%, for the quarter when compared to the same period in 2007. Of this increase, $1.0 million resulted from two extraordinary items (1) a $1.3 million, one-time gain on pension curtailment as we implemented changes in the pension plan, and (2) a $300 thousand impairment charge taken on the GMAC holdings in our investment portfolio.

Noninterest expense rose $317 thousand, or 5.0%, for the three months ended March 31, 2008, compared to the comparable period in 2007, as all categories increased. Salaries and benefits increased $25 thousand or 0.7%, as increases in salaries and other benefit increases were nearly offset by a $246 thousand decrease in pension expense. Net occupancy expense rose $81 thousand to $1.1 million compared to $1.0 million for the quarter ended March 31, 2007. Occupancy expense was impacted primarily by increased costs associated with the relocation to the new Windmill office. Other expenses increased $211 thousand as telephone expense increased $67 thousand due to infrastructure changes, marketing and advertising increased $25 thousand as a result of branch opening costs, and other operating expenses rose $119 thousand. Other operating expense was primarily impacted by a $75 thousand increase in FDIC insurance expense.

Return on average assets (ROA) increased to 1.15% in the first quarter of 2008, compared to 1.00% in the same quarter of 2007, and return on average equity (ROE) increased to 11.63% compared to 9.66% for the quarters ended March 31, 2008 and 2007, respectively.

Net Interest Income

Our primary source of income is net interest income which on a fully tax equivalent basis totaled $8.4 million for the first quarter of 2008, a $126 thousand increase over the first quarter of 2007. Average earning assets for the first quarter 2008 were $877.7 million an increase of $71.4 million compared to $806.3 for the period ended March 31, 2007. Average loans increased $64.6 million, or 9.9%. Average securities increased $29.4 million, or 23.0%. Average federal funds sold decreased $22.6 million, or 96.3% as funds on hand in the first quarter of 2007 from the December 2006 stock offering were redeployed to higher yielding assets. The fully tax equivalent net interest margin for the three-month period ended March 31, 2008 was 3.84% compared to 4.15% for the same quarter ended in 2007. For the quarter, the yield on earning assets declined 22 basis points to 6.85%, compared to 7.07% for the first quarter of 2007, and the cost of interest bearing liabilities was up 5 basis points to 3.60% from 3.55% in the same period in 2007, narrowing the spread between the yield on earning assets and the cost of funds. This decline in earning assets yield reflects the impact of multiple rate cuts by the Federal Reserve beginning in the second half of 2007 and the intense competition in loan pricing. Our increase in funding costs is more specifically related to a year-over-year increase in interest checking of 68 basis points. Interest checking also displayed the largest growth of any category at $28.1 million, or 29.6%. The cost of money market savings increased 6 basis points while the average balances increased $1.3 million. Savings deposit average balances fell $9.7 million while the cost decreased 24 basis points. Large certificates of deposit average balances rose $7.9 million while the cost dropped 12 basis points. Consumer certificates of deposits average balances increased $790 thousand while the cost decreased 8 basis points.

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Seeing some declines in cost of funds, we believe, are the first sign that our adjustment to market deposit pricing is having an impact on the margin. We are well aware of the challenge that we face and believe that wholesale funding and development/implementation of new deposit products are ways to manage the margin. Depositors are still undecided on where to place their money. They want yield and security. They are worried about the economy, their jobs and the future. Our goal is to convince them that our products meet their needs and if they do not, then develop products that will. To achieve this goal, we have developed the position of deposit manager to monitor our deposits from a marketing stand point, and to make concerted efforts to enhance our products. With the rapid rate cuts by the Federal Reserve, many loans with variable rates re-price immediately while fixed rate deposits reprice more slowly. Deposits will re-price but it will take some time to get the margin back to our accustomed levels. We anticipate that a positively sloping yield curve will enhance the margin. Other factors are harder to gauge in this up and down market which changed almost daily in the first quarter. Monitoring the markets, listening to our customers and utilizing our market models should help us adjust quickly to all challenges.

Tables that disclose fully tax equivalent net interest income calculations for the three-month periods ended March 31, 2008 and 2007 follow:

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

	Three Months Ended March 31,
	2008							2007
	Average Balance			Income/ Expense		Yield/ Rate		Average Balance			Income/ Expense		Yield/ Rate
Assets:
Securities
Taxable	$	115,657		$	1,581	5.50	%	$	95,835		$	1,182	5.00	%
Tax exempt (1)		41,233			591	5.77	%		31,699			474	6.06	%
Total securities		156,890			2,172	5.57	%		127,534			1,656	5.27	%
Federal funds sold		875			6	2.76	%		23,456			314	5.43	%
Loans, net of unearned income (2)		719,924			12,765	7.13	%		655,335			12,090	7.48	%
Total earning assets		877,689			14,943	6.85	%		806,325			14,060	7.07	%
Less allowance for loan losses		(8,139	)						(7,115	)
Total non-earning assets		61,809							58,102
Total assets	$	931,359						$	857,312
Liabilities & Shareholders’ Equity:
Interest bearing deposits
Checking	$	122,931		$	627	2.05	%	$	94,857		$	320	1.37	%
Savings		75,851			185	0.98	%		85,581			257	1.22	%
Money market savings		42,800			259	2.43	%		41,484			243	2.38	%
Large dollar certificates of deposit (3)		127,431			1,485	4.69	%		119,484			1,417	4.81	%
Other certificates of deposit		217,819			2,340	4.32	%		217,029			2,354	4.40	%
Total interest-bearing deposits		586,832			4,896	3.36	%		558,435			4,591	3.33	%
Federal funds purchased		4,413			36	3.28	%		—			—
Other borrowings		141,337			1,626	4.63	%		104,421			1,210	4.70	%
Total interest-bearing liabilities		732,582			6,558	3.60	%		662,856			5,801	3.55	%
Noninterest-bearing liabilities
Demand deposits		99,045							95,478
Other liabilities		7,556							10,504
Total liabilities		839,183							768,838
Shareholders’ equity		92,176							88,474
Total liabilities and shareholders’ equity	$	931,359						$	857,312
Net interest income				$	8,385						$	8,259
Interest rate spread (4)						3.25	%						3.52	%
Interest expense as a percent of average earning assets						3.01	%						2.92	%
Net interest margin (5)						3.84	%						4.15	%

Notes:

(1) Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 35%.

The tax equivalent adjustment for the quarter is $180 thousand, compared to $145 thousand in the prior year.

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

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

(4) 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.

(5) Net interest margin is the net interest income, calculated on a fully taxable basis assuming a federal income tax rate

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Noninterest Income

This category includes all income not related to interest on investments and interest and fees on loans. Noninterest income excluding net realized gains on securities sales and all other one time gains or losses in the quarter was $1.6 million for the first quarter of 2008 compared to $1.3 million for the same quarter in 2007. Service charges on deposit accounts for the quarter ended March 31, 2008 were $965 thousand, compared to $830 thousand for the comparable period in 2007. Debit and credit card fees increased $111 thousand or 76.6% for the first quarter 2008 to $256 thousand compared to $145 thousand in the first quarter 2007. For the quarter ended March 31, 2008, investment subsidiary fees were $91 thousand, an increase of $19 thousand or 25.9% compared to $72 thousand for the same period in 2007. Service charge increases were from a combination of rate and volume increases. Debit and credit card increases were the result of more usage of debit cards which raised the fees related to these transactions and more fee and interchange income from credit card transactions. Part of the volume is a direct result of our Reward Checking product which requires a minimum number of transactions. The increase in investment services income is the result of better sales in the first quarter 2008 compared to 2007. Other operating income without debit and credit card fees or investment services fees decreased $31 thousand in the first quarter as a result of lower mortgage fees in 2008 compared to 2007 first quarter.

Noninterest Expense

This category includes all expenses other than interest paid on deposits and borrowings. Total noninterest expense increased $317 thousand with increases in all the identified categories when comparing 2008 and 2007 first quarter results. Salaries and benefits increased $25 as a result of an increase in salary and wages of $242 thousand offset by a net decrease of $218 thousand in the other personnel categories with the decrease in pension plan expense being the largest contributor. Occupancy expense increased $81 thousand from increased depreciation for new locations, higher rent and higher custodial costs. Telephone expense is up as a result of infrastructure changes which have some upfront cost and required the running of 2 systems in parallel. Marketing and advertising increased from higher expense for branch openings. Other operating expenses increased $119 thousand with FDIC expense up $56 thousand and miscellaneous loan expenses up $59 thousand from new loans and higher collection expense.

Income Taxes

Income tax expense for the quarter ended March 31, 2008 was $1.1 million, compared to $924 thousand for the same period in 2007. This increase was primarily the result of higher income and our effort to control tax expense. The effective tax rate for the quarter was 30.0%. The primary source of the increase for the quarter was the tax on the pension curtailment gain.

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.)

Total nonperforming assets, which consist of nonaccrual loans, loans past due 90 days and still accruing interest and foreclosed properties, were $5.3 million at March 31, 2008, $2.9 million at December 31, 2007 and $2.4 million at March 31, 2007. Nonperforming assets are composed largely (94.1%) of loans secured by real estate in the Company’s market area or Other Real Estate Owned (OREO). In the first quarter of 2008, OREO increased $23 thousand which represents improvements on the homes securing this credit, incurred in an effort to ready the properties for sale. Even with the slow real estate markets, home values in our markets are holding up better than the nationwide averages. We still anticipate selling these properties to recover the full value that we have in them.

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Total loan charge-offs, less recoveries, amounted to $83 thousand for the first quarter of 2008 compared to $91 thousand for the same quarter in 2007, while the annualized ratio of net charge-offs to total average loans, net of unearned income, was 0.05% for the first quarter of 2008 compared to 0.06% for the same quarter in 2007. These strong numbers reflect the emphasis that management places on credit quality management, especially in an environment with increasing credit risk in the financial services industry. Due to the economic environment, we expect an increase in problem loans during 2008.

The allowance for loan losses of $8.7 million at March 31, 2008 increased $1.6 million when compared to $7.1 million at March 31, 2007 and was up $855 thousand, compared to $7.9 million at December 31, 2007. The increase in allowance over the last year has been largely a matter of management increasing the reserve in anticipation of potential economic problems in later 2008 and as a result of an increase in impaired loans. Management believes the balance in the allowance reflects what an economic downturn may do to our current strong asset quality. Management has directed higher than historical additions to the allowance to better prepare the company for the impact of a potential recessionary economic environment. The ratio of allowance for loan losses to total loans was 1.14% at March 31, 2008, 1.11% at 2007 year-end and 1.08% at March 31, 2007. The allowance for loan losses at March 31, 2008 included $1.9 million of specific impaired loan reserves.

At March 31, 2008, the Company reported $6.4 million in impaired loans, an increase of $2.1 million from $4.4 million at December 31, 2007 and an increase of $2.1 million from $4.3 million at March 31, 2007. The average balance of impaired loans for the three months ended March 31, 2008 was $5.0 million.

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

Nonperforming Assets (Dollars in thousands)	March 31 2008			December 31 2007			March 31 2007
Nonaccrual loans	$	3,533		$	1,449		$	1,414
Restructured loans		—			—			—
Loans past due 90 days and accruing interest		734			358			977
Total nonperforming loans	$	4,267		$	1,807		$	2,391
Other real estate owned		1,079			1,056			—
Total nonperforming assets	$	5,346		$	2,863		$	2,391
Nonperforming assets to total loans and other real estate		0.70	%		0.40	%		0.36	%
Allowance for loan losses to nonaccrual loans		247.49	%		544.37	%		503.22	%
Net charge-offs to average loans for the year		0.05	%		0.06	%		0.06	%
Allowance for loan losses to period end loans		1.14	%		1.11	%		1.08	%

LIQUIDITY

Liquidity represents our ability to meet present and future deposit withdrawals, to fund loans, to maintain reserve requirements and to operate the organization. To meet our liquidity needs, we maintain cash reserves and have an adequate flow of funds from maturing loans, securities and short-term investments. In addition, our subsidiary bank maintains borrowing arrangements with major regional banks and with the Federal Home Loan Bank (“FHLB”). We consider our sources of liquidity to be sufficient to meet our estimated liquidity needs.

During the first quarter of 2008, we executed net new FHLB borrowings of $9 million to take advantage of attractive rates in prefunding the expected inflow of funds from our purchase of the Millennium branches. The average rate on the new fixed-rate borrowings is 2.44%. We have made it a practice to fund growth at times with FHLB borrowings if the rates were below our interest bearing deposit costs. These borrowings have some potential long-term interest risk if rates fall significantly, but overall give us an acceptable spread and funding rate. We have relied on FHLB borrowings to support our growth at times in the past and will continue to evaluate funding opportunities as necessary to support future growth. These were the only changes to our contractual obligations that would impact liquidity since the 2007 Form 10-K disclosure. At March 31, 2008, we had immediate available credit with the FHLB of $8.7 million and with nonaffiliated banks of $14.0 million. See Note 5 to the Consolidated Financial Statements in the 2007 Form 10-K for further FHLB information.

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There have been no material changes in off-balance sheet arrangements since the 2007 Form 10-K disclosure.

Management believes that we maintain overall liquidity sufficient to satisfy our depositors’ requirements and meet our customers’ credit needs.

CAPITAL RESOURCES

Our risk-based capital position at March 31, 2008 was $88.3 million, or 11.47% of risk-weighted assets, for Tier 1 capital and $95.7 million, or 12.43%, for total risk based capital. Our Tier 1 leverage ratio at March 31, 2008 was 9.67%. Our year-end 2007 ratios were 13.82%, 14.75% and 10.80%, respectively. Enhancing our capital ratios to support future growth was the primary reason for the December 2006 stock offering. At March 31, 2007, these ratios were 15.06%, 16.17% and 11.40%, respectively.

Tier 1 capital consists primarily of common shareholders’ equity, while total risk based capital adds our trust preferred borrowing and 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 are required to have a Tier 1 capital of at least 4% and a total capital ratio 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.

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. We caution you to be aware of the speculative nature of “forward-looking statements.” These statements are not guarantees of performance or results. Statements that are not historical in nature, including statements that include the words “may,” “anticipate,” “estimate,” “could,” “should,” “would,” “will,” “plan,” “predict,” “project,” “potential,” “expect,” “believe,” “intend,” “continue,” “assume” and similar expressions, are intended to identify forward-looking statements. Although these statements reflect our good faith belief based on current expectations, estimates and projections about (among other things) the industry and the markets in which we operate, they are not guarantees of future performance. Whether actual results will conform to our expectations and predictions is subject to a number of known and unknown risks and uncertainties, including the risks and uncertainties discussed in this Form 10-Q, including the following:

• changes in the quality or composition of our loan or investment portfolios, including adverse developments in borrower industries, decline in real estate values in our markets, or in the repayment ability of individual borrowers or issuers;

• changes in the interest rates affecting our deposits and our loans;

• the loss of any of our key employees;

• the strength of the economy in our target market area, as well as general economic, market, or business conditions;

• changes in our competitive position, competitive actions by other financial institutions and the competitive nature of the financial services industry and our ability to compete effectively against other financial institutions in our banking markets;

• an insufficient allowance for loan losses as a result of inaccurate assumptions;

• our ability to manage growth;

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• our potential growth, including our entrance or expansion into new markets, the opportunities that may be presented to and pursued by us and the need for sufficient capital to support that growth;

• our ability to assess and manage our asset quality;

• changes in government monetary policy, interest rates, deposit flow, the cost of funds, and demand for loan products and financial services;

• our ability to maintain internal control over financial reporting;

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

• our reliance on secondary sources, such as Federal Home Loan Bank advances, sales of securities and loans, federal funds lines of credit from correspondent banks and out-of-market time deposits, to meet our liquidity needs;

• changes in laws, regulations and the policies of federal or state regulators and agencies; and

• other circumstances, many of which are beyond our control.

All of the forward-looking statements made in this filing are qualified by these factors, and there can be no assurance that the actual results anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us or our business or operations. You should also refer to risks detailed under the “Risk Factors” section included in the 2007 Form 10-K and otherwise included in our periodic and current reports filed with the Securities and Exchange Commission for specific factors that could cause our actual results to be significantly different from those expressed or implied by our forward-looking statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no material changes in market risk since 2007 year end as disclosed in the 2007 Form 10-K.

Item 4. Controls and Procedures

We maintain disclosure controls and procedures that are designed to provide assurance that the information required to be disclosed by us in the reports that we file or submit 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 our 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 our Chief Executive Officer and Chief Financial Officer. Based on such evaluation, such officers concluded that our disclosure controls and procedures were effective as of the end of such period. In addition, while we have reorganized and centralized many functions over the last year, we have maintained the control points that had been previously established.

There was no change in our internal control over financial reporting that occurred during the quarter ended March 31, 2008 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. We believe that the merger of our subsidiary banks has had a positive impact on internal controls by decreasing the number of banks, accounts and internal processes and procedures.

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 we and our subsidiaries are involved pertains to collection suits involving delinquent loan accounts in the normal course of business.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in the 2007 Form 10-K.

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

In January 2001, the Board of Directors gave the authority to management to repurchase up to 5% of the outstanding shares of the company’s stock per calendar year based on the number of shares outstanding on December 31, of the preceding year. This authority has been reaffirmed each year and was most recently reaffirmed in June of 2007. There is no stated expiration date for the Plan. The table below highlights the number of shares eligible and purchased in 2008.

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Issuer Purchases of Equity Securities

	For the three months ended March 31, 2008
	(a)	(b)		(c)	(d)
Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced plans	Maximum number of shares that may yet be purchased under the plans
2008 Beginning balance					297,372
Jan 1 - Jan 31	12,010	$	16.90	12,010	285,362
Feb 1 - Feb 29	19,111	$	18.47	19,111	266,251
Mar 1 - Mar 31	38,984	$	17.27	38,984	227,267
Quarter 1	70,105	$	17.54	70,105	227,267
Total 2008	70,105	$	17.54	70,105	227,267

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   3.1	–	Bylaws of Eastern Virginia Bankshares, Inc., as amended February 21, 2008, attached as Exhibit 3.1 to the Company’s current report on Form 8-K filed February 27, 2008, incorporated herein by reference.
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

Chief Financial Officer

Date: May 5, 2008

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Exhibit Index

Exhibit   3.1	–	Bylaws of Eastern Virginia Bankshares, Inc., as amended February 21, 2008, attached as Exhibit 3.1 to the Company’s current report on Form 8-K filed February 27, 2008, incorporated herein by reference.
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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