Eastern Virginia Bankshares (EVBS) 10-Q 2009 Q2 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 June 30, 2009

or

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

For the transition period from            to            

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “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 August 7, 2009 was 5,923,955

EASTERN VIRGINIA BANKSHARES, INC.

FORM 10-Q

For the Period Ended June 30, 2009

Part I	Financial Information
Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31
Part II	Other Information
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Submission of Matters to a Vote of Security Holders	32
Item 5.	Other Information	32
Item 6.	Exhibits	33
Signatures		33

2

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands)

	June 30,			December 31,
	2009			2008
	(unaudited)
Assets:
Cash and due from banks	$	15,160		$	13,214
Interest bearing deposits with banks		14,027			—
Federal funds sold		3,273			—
Securities available for sale, at fair value		168,807			161,879
Loans, net of unearned income		832,771			819,266
Allowance for loan losses		(11,487	)		(10,542	)
Total loans, net		821,284			808,724
Deferred income taxes		13,543			12,930
Bank premises and equipment, net		19,827			20,806
Accrued interest receivable		4,146			4,050
Other real estate		4,284			560
Goodwill		15,970			15,970
Other assets		17,681			13,230
Total assets	$	1,098,002		$	1,051,363
Liabilities and Shareholders’ Equity:
Liabilities
Noninterest-bearing demand accounts	$	92,514		$	90,090
Interest-bearing deposits		755,757			723,443
Total deposits		848,271			813,533
Federal funds purchased and Repurchase Agreements		671			3,593
Federal Home Loan Bank advances (FHLB)		123,929			134,643
Trust preferred debt		10,310			10,310
Accrued interest payable		2,349			2,512
Other liabilities		11,413			8,743
Total liabilities		996,943			973,334
Shareholders’ Equity
Preferred stock of $2 par value per share, authorized 10,000,000, issued and outstanding 2009: Series A; $1,000 Stated Value 24,000 shares Fixed Rate Cumulative Perpetual Preferred, 2008 none		24,000			—
Common stock of $2 par value per share, authorized 50,000,000, issued and outstanding 5,929,155 and 5,867,985 including 11,700 and 13,500 novested shares, respectively		11,835			11,798
Common stock surplus		18,739			18,456
Retained earnings		59,950			62,804
Warrant		1,481			—
Discount on preferred stock		(1,338	)		—
Accumulated other comprehensive (loss), net		(13,608	)		(15,029	)
Total shareholders’ equity		101,059			78,029
Total liabilities and shareholders’ equity	$	1,098,002		$	1,051,363

See Notes to Consolidated Financial Statements

3

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income(Unaudited)

(Dollars in thousands except per share amounts)

	Three Months Ended					Six Months Ended
	June 30,					June 30,
	2009			2008		2009			2008
Interest and Dividend Income
Loans and fees on loans	$	12,836		$	12,955	$	25,051		$	25,720
Interest on investments:
Taxable interest income		1,262			1,478		2,540			2,949
Tax exempt interest income		485			423		903			833
Dividends		40			145		40			256
Interest on deposits with banks		15			—		15			—
Interest on federal funds sold		18			30		40			36
Total interest and dividend income		14,656			15,031		28,589			29,794
Interest Expense
Deposits		5,019			5,198		9,913			10,094
Federal funds purchased and repurchase agreements		3			17		4			54
Interest on FHLB advances		1,340			1,431		2,693			2,865
Interest on trust preferred debt		102			146		223			337
Total interest expense		6,464			6,792		12,833			13,350
Net interest income		8,192			8,239		15,756			16,444
Provision for Loan Losses		750			1,300		1,650			1,750
Net interest income after provision for loan losses	$	7,442		$	6,939	$	14,106		$	14,694
Noninterest Income (Loss)
Service charges and fees on deposit accounts		948			1,016		1,882			1,981
Debit/ credit card fees		315			292		584			548
Gain on sale of available for sale securities, net		29			2		37			44
Impairment losses - securities (1)		(3,922	)		—		(3,922	)		(300	)
Actuarial gain - pension curtailment		—			—		—			1,328
Gain on sale of fixed assets		—			124		—			128
Gain on sale of OREO		7			—		25			—
Other operating income		354			500		682			862
Total noninterest income (loss)		(2,269	)		1,934		(712	)		4,591
Noninterest Expenses
Salaries and benefits		3,871			3,887		7,867			7,576
Occupancy and equipment expense		1,343			1,156		2,535			2,247
Telephone		150			275		440			489
FDIC expense		807			108		1,107			183
Franchise tax expense		136			128		279			254
Marketing and advertising		199			150		376			374
Merger related expenses		308			—		308			—
Other operating expenses		1,222			1,355		2,503			2,531
Total noninterest expenses		8,036			7,059		15,415			13,654
Income (loss) before income taxes		(2,863	)		1,814		(2,021	)		5,631
Income Tax Expense (Benefit)		(1,092	)		560		(973	)		1,705
Net income (loss)	$	(1,771	)	$	1,254	$	(1,048	)	$	3,926
Effective dividend on preferred stock		372			—		714			—
Net Income (loss) available to common shareholders		(2,143	)		1,254	$	(1,762	)	$	3,926
Earnings(loss) per share: basic	$	(0.36	)	$	0.21	$	(0.30	)	$	0.67
diluted	$	(0.36	)	$	0.21	$	(0.30	)	$	0.67
Dividends per share, common	$	0.05		$	0.16	$	0.21		$	0.32

(1) The total of other-than-temporary impairment losses on securities in the three and six months ended June 30,2009 is $4.317 million of which $395 thousand has been recognized in other comprehensive loss, and impairment losses of $3.922 million have been recognized in earnings in the quarter ended June 30, 2009.

See Notes to Consolidated Financial Statements

4

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statement of Cash Flows (Unaudited)

(Dollars in thousands)

	Six Months Ended
	June 30,
	2009			2008
Cash Flows from Operating Activities
Net income (loss)	$	(1,048	)	$	3,926
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation		1,138			1,087
Investment amortization / (accretion), net		87			30
Provision for loan losses		1,650			1,750
(Gain) realized on available for sale securities’ transactions, net		(37	)		(44	)
(Gain) on sale of real estate OREO		(25	)		(128	)
(Gain) on pension curtailment		—			(1,328	)
Impairment loss on securities		3,922			300
(Gain) on LLC investment		(10	)		(130	)
Stock based compensation		142			147
Change in assets and liabilities:
(Increase) in other assets		(5,874	)		(301	)
Increase (decrease) in other liabilities		2,507			(795	)
Net cash provided by operating activities		2,452			4,514
Cash Flows from Investing Activities
Proceeds from sales of securities available for sale		939			5,624
Proceeds from maturities, calls, and paydowns of securities		57,937			55,656
Purchase of debt securities		(67,899	)		(76,352	)
Purchase/retirement of restricted stock, net		293			(812	)
Net increase in loans		(17,935	)		(32,271	)
Acquisition of branches		—			33,995
Sale of fixed assets		—			209
Improvement to Other Real Estate					(99	)
Purchases of bank premises and equipment		(159	)		(2,354	)
Net cash (used in) investing activities		(26,824	)		(16,404	)
Cash Flows from Financing Activities
Net increase in noninterest bearing and interest bearing demand deposits and savings accounts		57,444			14,047
Net (decrease) in certificates of deposit		(22,705	)		(8,262	)
Repurchases and retirement of common stock		—			(1,237	)
Issuance of preferred stock under TARP CPP		24,000			—
Issuance of common stock under dividend reinvestment plan		177			217
Dividends declared		(1,662	)		(1,891	)
(Decrease) in federal funds purchased & repurchase agreements		(2,922	)		(599	)
Increase (decrease) in FHLB advances		(10,714	)		8,286
Net cash provided by financing activities		43,618			10,561
Increase (Decrease) in cash and cash equivalents		19,246			(1,329	)
Cash and cash equivalents
Beginning of period		13,214			18,384
End of period		32,460			17,055
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest on deposits and other borrowings		12,997			12,911
Income taxes		171			1,566
Unrealized gain/(loss) on securities available for sale		(2,187	)		(5,212	)

See Notes to Consolidated Financial Statements

5

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 June 30, 2009. 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, 2008 (the “2008 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 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 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 and the new bank began operating under the name “EVB”. All significant inter-company transactions and accounts have been eliminated in consolidation.

In the March 2008, we purchased two branches in the Richmond market from Millennium Bank which placed us in new markets for our company and added $92 million in deposits and $49 million in loans to our balance sheet. This transaction was accretive to earnings starting in the second quarter of 2008. In the third quarter of 2008, our Quinton branch in New Kent County, Virginia relocated to a permanent branch building to better serve a growing customer base. We are constantly looking for accretive ways to expand our franchise.

On April 3, 2009, Eastern Virginia Bankshares, Inc. announced a merger agreement with First Capital Bancorp located in the Richmond market. This will be a strategic alliance which will match up their strong commercial business with our strong retail experience. The merger is expected to take place in the fourth quarter of 2009 and is projected to be accretive to 2010 earnings. (See 8-K with the press release issued April 3, 2009.)

The results of operations for the three- and six-month periods ended June 30, 2009 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 June 30, 2009 and December 31, 2008 were as follows:

	June 30, 2009
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value
Available for Sale:
Obligations of U.S. Government agencies	$	26,221	$	458	$	78		26,601
Mortgage-backed and CMO securities		73,332		1,406		294		74,444
State and political subdivisions - taxable		877		21		—		898
State and political subdivisions - tax exempt		49,140		380		1,151		48,369
Pooled trust preferred securities		15,426		—		13,960		1,466
FNMA and FHLMC preferred stock		77		32		—		109
Corporate securities		10,810		55		2,886		7,979
Restricted securities		8,941		—		—		8,941
Total	$	184,824	$	2,352	$	18,369	$	168,807

6

	December 31, 2008
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Fair
(dollars in thousands)	Cost		Gains		Losses		Value
Available for Sale:
Obligations of U.S. Government agencies	$	33,149	$	540	$	70	$	33,619
Mortgage-backed and CMO securities		68,351		1,307		506		69,152
State and political subdivisions		39,376		753		888		39,241
Pooled trust preferred securities		19,075		—		15,493		3,582
FNMA and FHLMC preferred stock		94		—		—		94
Corporate securities		10,802		—		3,845		6,957
Restricted securities		9,234		—		—		9,234
Total	$	180,081	$	2,600	$	20,802	$	161,879

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

At June 30, 2009, investments in an unrealized loss position that were temporarily impaired were as follows:

	June 30, 2009
	Less than 12 months					12 months or more					Total
(dollars in thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
Description of Securities	Value		Loss			Value		Loss			Value		Loss
Obligations of U. S. Government agencies	$	11,948	$	78		$	—	$	—		$	11,948	$	78
Mortgage-backed and CMO securities		11,386		186			6,015		108			17,401		294
States and political subdivisions - tax exempt		16,769		424			7,368		727			24,137		1,151
Pooled trust preferred securities					(1)		1,281		7,129	(1)		1,281		7,129
Corporate securities		—		—			5,427		2,886			5,427		2,886
	$	40,103	$	688	(1)	$	20,091	$	10,850	(1)	$	60,194	$	11,538

Note:(1) Other Than Temporary Impaired securities are excluded from this table.

Bonds with unrealized loss positions of less than 12 months duration at June 30, 2009 included 2 federal agency, 13 mortgage-backed securities and 32 municipal bonds. Securities with unrealized losses of 12 months or greater duration included 2 mortgage-backed securities, 4 collateralized mortgage securities, 11 corporate bonds, and 3 pooled trust preferred securities. The unrealized loss positions at June 30, 2009 were primarily related to the widened market spreads for mortgage backed and corporate securities and lack of an orderly market for trust preferred securities. Holdings of GMAC 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 June 30, 2009, we held $3.0 million in GMAC 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 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. GMAC is a participant in the Treasury’s TARP Capital Purchase Program (“CPP”).

The 3 trust preferred issues with losses include 2 pooled trust preferred securities secured by debt of banks and insurance companies, primarily banks, and 1 similar issue consisting solely of bank borrowings. One of these trust preferred issues is the senior A tranche rated A3 by Moody’s, while the other 2 issues are the D “mezzanine” tranche rated BB by Fitch at time of issue, but downgraded to a CC rating by Fitch in the second quarter of 2009.

7

Because we do not intend to sell these investments and it is more likely than not that we will not be required to sell these investments before a recovery of unrealized losses, we do not consider these investments to be other-than-temporarily impaired at June 30, 2009 and no impairment has been recognized.

The Company’s investment in Federal Home Loan Bank (“FHLB”) stock totaled $7.5 million at June 30, 2009. FHLB stock is generally viewed as a long-term investment and as a restricted investment security that is carried at cost because there is no market for the stock other than the FHLB’s or member institutions. Therefore, when evaluating FHLB stock for impairment its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Despite the FHLB’s temporary suspension of cash dividend payments and in some instances repurchase of excess capital stock in 2009, the Company does not consider this investment to be other-than-temporarily impaired at June 30, 2009 and no impairment has been recognized.

As of June 30, 2009, we determined that it was necessary, following other than temporary impairment (“OTTI) requirements, to write down the cost basis of four pooled trust preferred securities through the income statement as an impairment charge of $3.922 million. The primary factor used to determine the credit portion of the impairment through the income statement for these securities was the discounted present value of projected cash flow where that present value of cash flow was less than the amortized cost basis of the securities. The present value of cash flow was developed using an EITF 99-20 model that considered performing collateral ratios, the level of subordination to senior tranches of the securities, credit ratings of and projected credit defaults in the underlying collateral. Additional information concerning the impaired pooled trust preferred holdings as of June 30, 2009 is presented in the table below:

			Discounted Present Value of Projected Cash Flow				Impairment			Percent of Underlying Collateral		Percent of Underlying Collateral		Percent of Underlying Collateral		June 30, 2009 Fitch
Security	Cost		Amount		Percentage		Loss			Performing		in Deferral		in Default		Rating
Pretsl XXIV	$	2,548	$	707	28	%	$	(1,841	)	79.41	%	17.83	%	2.76	%	CC
Pretsl XXV		2,547		1,093	43	%		(1,454	)	79.41	%	13.46	%	6.84	%	CC
Pretsl XXVI		2,052		1,781	87	%		(271	)	79.70	%	9.75	%	6.74	%	CC
Pretsl XXVII		3,791		3,435	91	%		(356	)	83.51	%	11.59	%	2.30	%	CC
	$	10,938	$	7,016			$	(3,922	)

The total unrealized loss on the pooled trust preferred securities with OTTI impairment loss was $10.75 million at June 30, 2009. The OTTI impairment loss has decreased the amortized cost by $3.92 million. The remaining $6.83 million discount of market value compared to amortized cost, net of deferred tax of $2.39 million, has decreased accumulated other comprehensive income (loss) by $4.44 million.

8

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

	December 31, 2008
	Less than 12 months				12 months or more				Total
(dollars in thousands)	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
Description of Securities	Value		Loss		Value		Loss		Value		Loss
Obligations of U.S. Government agencies	$	20,000	$	—	$	930	$	70	$	20,930	$	70
Mortgage-backed and CMO securities		8,325		87		5,054		419		13,379		506
States and political subdivisions		14,643		888		—		—		14,643		888
Pooled trust preferred securities		736		197		2,846		15,296		3,582		15,493
FNMA and FHLMC preferred stock		—		—		—		—		—		—
Corporate securities		2,960		536		3,997		3,309		6,957		3,845
	$	46,664	$	1,708	$	12,827	$	19,094	$	59,491	$	20,802

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

	(unaudited) June 30			(audited) December 31			(unaudited) June 30
(Dollars in thousands)	2009			2008			2008
Commercial, industrial and agricultural loans	$	75,996		$	69,024		$	67,582
Residential real estate mortgage loans		385,241			372,067			350,181
Real estate construction loans		93,287			102,837			127,080
Commercial real estate loans		228,904			221,769			193,600
Consumer loans		45,024			47,226			49,861
All other loans		4,327			6,354			1,773
Total loans		832,779			819,277			790,077
Less unearned income		(8	)		(11	)		(19	)
Total loans net of unearned discount		832,771			819,266			790,058
Less allowance for loan losses		(11,487	)		(10,542	)		(9,711	)
Net loans	$	821,284		$	808,724		$	780,347

We had $25.8 million in non-performing assets at June 30, 2009 that included $8.6 million in loans past due 90 days or more but still accruing, $8.7 million in nonaccrual loans, $4.2 million in restructured loans and $4.3 million classified as OREO.

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

	(unaudited) June 30			(audited) December 31			(unaudited) June 30
(in thousands)	2009			2008			2008
Balance at beginning of year	$	10,542		$	7,888		$	7,888
Reserve on loans acquired		—			488			488
Provision charged against income		1,650			4,025			1,750
Recoveries of loans charged off		283			554			240
Loans charged off		(988	)		(2,413	)		(655	)
Balance at end of year	$	11,487		$	10,542		$	9,711

9

Following is a summary pertaining to impaired loans:

	June 30		December 31
	2009		2008
	(in thousands)
Impaired loans for which an allowance has been provided	$	18,592	$	9,264
Impaired loans for which no valuation allowance has been provided		2,625		14,977
Allowance related to impaired loans	$	3,639	$	2,881
Average balance of impaired loans	$	16,254	$	8,564

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 $1.8 million and $15.0 million at June 30, 2009 and December 31, 2008, 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) June 30		(audited) December 31		(unaudited) June 30
	2009		2008		2008
Amortizing advances	$	1,429	$	2,143	$	2,857
LIBOR floating advances		—		10,000		10,000
Convertible advances		122,500		122,500		122,500
Total advances	$	123,929	$	134,643	$	135,357

The table presented below shows the maturities and potential call dates of FHLB advances. All but $1.4 million of the FHLB borrowings are convertible advances that have a call provision.

	Maturities				Callable
	Amount		Avg Rate		Amount		Avg Rate
2009		715	3.15	%		85,000	4.51	%
2010		5,714	5.58	%		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	$	123,929	4.26	%	$	122,500	4.29	%

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6. The following table shows the weighted average number of shares used in computing per share earnings (loss) 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- and six-month periods ended June 30, 2009 and 2008.

	Three Months Ended
	June 30, 2009				June 30, 2008
		Per Share				Per Share
	Shares	Amount			Shares	Amount
Basic earnings (loss) per share	5,914,396	$	(0.36	)	5,870,673	$	0.21
Effect of dilutive securities, stock options	—		—		1,678		—
Diluted earnings (loss) per share	5,914,396	$	(0.36	)	5,872,351	$	0.21

	Six Months Ended
	June 30, 2009				June 30, 2008
		Per Share				Per Share
	Shares	Amount			Shares	Amount
Basic earnings (loss) per share	5,909,902	$	(0.30	)	5,890,048	$	0.67
Effect of dilutive securities, stock options	—		—		1,838		—
Diluted earnings (loss) per share	5,909,902	$	(0.30	)	5,891,886	$	0.67

At June 30, 2009 and 2008, respectively, options to acquire 284,117 shares and 234,387 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 55,638 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

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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 where a participant reaches normal retirement age of 65 prior to the normal vesting date.

For the three- and six-month periods ended June 30, 2009 and 2008, stock option compensation expense of $63 thousand and $66 thousand and $125 thousand and $133 thousand, respectively 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 June 30, there have been no awards issued in 2009. The weighted average estimated fair value of stock options granted in the year 2008 was $3.62. Fair value is estimated using the Black-Scholes option-pricing model with the assumptions indicated in the table below:

	2008
Dividend rate:	2.82	%
Price Volatility:	33.25	%
Risk-free interest rate:	3.56	%
Expected life:	7 Years

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 2008 was calculated using the simplified method whereby the vesting period and the contractual period are averaged.

Stock option plan activity for the six months ended June 30, 2009 is summarized below:

					Intrinsic
					Value of
		2009		Weighted	Unexercised
		Weighted		Average	In-the
		Average		Remaining	Money
		Exercise		Contractual	Options
	Shares	Price		Life (in years)	(in thousands)
Outstanding at beginning of year	304,312	$	19.49
Granted	—		—
Exercised	—		—
Forfeited	20,195		20.21
Outstanding at June 30, 2009	284,117		19.44	6.58	none
Options exercisable at June 30, 2009	87,530		21.72	4.22

As of June 30, 2009, there was $365 thousand of unrecognized compensation expense related to stock options that will be recognized over the remaining requisite service period of approximately 2.25 years. There were no options granted in the three- and six-month periods ended June 30, 2009 or 2008. There were no shares

exercised in the three month or six month periods ended June 30, 2009 or 2008.

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 period. In December 2008, 1,500 of these shares vested and in April 2009, 800 shares were forfeited. At June 30, 2009 there was $45 thousand of total unrecognized compensation related to the time-vested awards. The other half of the restricted share award of which 1,000 shares have been forfeited, is performance based and will vest on June 30, 2010 if, and only if,

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2009 financial achievements of the Company meet very aggressive pre-specified targets. Given the aggressive targets for the performance-based award, the Company does not anticipate these awards to vest and therefore no compensation expense has been recorded to date on these awards. 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- and six-month periods ended June 30, 2009 and 2008, restricted stock compensation expense of $11 thousand and $7 thousand and $17 thousand and $14 thousand, respectively, was included in salary and benefit expense.

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

	Three Months Ended						Six Months Ended
	June 30						June 30
	2009			2008			2009			2008
	(in thousands)						(in thousands)
Components of Net Periodic Benefit Cost
Service cost	$	165		$	229		$	330		$	458
Interest cost		191			192			382			384
Expected return on plan assets		(179	)		(266	)		(358	)		(533	)
Amortization of prior service cost		5			6			10			11
Amortization of net obligation at transition		—			—			—			1
Net (gain) / loss		53			—			106			(1,328	)
Net periodic benefit cost	$	235		$	161		$	470		$	(1,007	)

We made our required 2008 fiscal year contribution to the pension plan in December 2008 in the amount of $642 thousand. We project that we will make a contribution of $941 thousand in 2009.

9. SFAS No. 157, Fair Value Measurements

The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the fair discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS No.107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of our Company.

We adopted SFAS No. 157, “Fair Value Measurements” (SFAS 157), on January 1, 2008 to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. SFAS 157 clarifies that fair value of certain assets and liabilities is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.

In October of 2008, the FASB issued Staff Position No. 157-3 (FSP 157-3) to clarify the application of SFAS 157 in a market that is not active and to provide key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP 157-3 was effective upon issuance, including prior periods for which financials statements were not issued.

SFAS 157 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. The three levels of the fair value hierarchy under SFAS 157 based on these two types of inputs are as follows:

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

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• 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 available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2).

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2009. Securities identified in Note 3 as restricted securities including stock in the Federal Home Loan Bank of Atlanta (“FHLB”) and the Federal Reserve Bank (“FRB”) are excluded from the table below since there is no ability to sell these securities except when the FHLB or FRB require redemption based on either our borrowings at the FHLB, or in the case of the FRB changes in certain portions of our capital.

			Fair Value Measurements at June 30, 2009 Using
Description	Balance as of June 30, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Available-for-sale securities	$	159,866	$	—	$	159,866	$	—

Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.

The following describes the valuation techniques used to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:

Impaired Loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed external appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value

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on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Income.

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 our valuation or OREO follows the provisions of SFAS No. 157.

The following table summarizes our financial assets that were measured at fair value on a nonrecurring basis as of June 30, 2009.

			Fair Value Measurements at June 30, 2009 Using
Description	Balance as of June 30, 2009		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	14,953	$	—	$	9,757	$	5,196
Other real estate owned		4,124		—		—		4,124

The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.

Cash and Short-Term Investments

For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

Securities

For securities and marketable equity securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. For other securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted prices for similar securities. All securities prices are provided by independent third party vendors.

Loans

For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans were estimated using discounted cash flow analyses, using interest rates currently being offered.

Deposit Liabilities

The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using market rates for deposits of similar remaining maturities.

Short-Term Borrowings

The carrying amounts of federal funds purchased and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the current incremental borrowing rates for similar types of borrowing arrangements.

Long-Term Debt

The fair values of our long-term borrowings are estimated using discounted cash flow analyses based on our current incremental borrowing rates for similar types of borrowing arrangements.

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Accrued Interest

The carrying amounts of accrued interest approximate fair value.

Off-Balance-Sheet Financial Instruments

The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.

The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.

At June 30, 2009 and December 31, 2008, the fair value of loan commitments and standby letters of credit are immaterial to fair value.

The estimated fair values and related carrying amounts of our financial instruments are as follows:

	June 30, 2009				December 31, 2008
	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
	(in thousands)				(in thousands)
Financial assets:
Cash and short-term investments	$	32,460	$	32,460	$	13,214	$	13,214
Securities - available for sale		168,807		168,807		161,879		161,879
Loans, net		821,284		863,161		808,724		835,595
Accrued interest receivable		4,146		4,146		4,050		4,050
Financial liabilities:
Noninterest-bearing deposits	$	92,514	$	92,514	$	90,091	$	90,091
Interest-bearing deposits		755,757		731,959		723,442		713,498
Short-term borrowings		671		671		3,593		3,593
Federal Home Loan Bank advances		123,929		118,348		134,643		139,400
Trust preferred debt		10,310		10,765		10,310		10,868
Accrued interest payable		2,349		2,349		2,512		2,512

We assume interest rate risk (the risk that general interest rate levels will change) as a result of our normal operations. As a result, the fair values of our financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to us. We attempt to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. We monitor rates and maturities of assets and liabilities and attempt to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate our overall interest rate risk.

10. Recent Accounting Pronouncements

In April 2009, the Financial Accounting Standards Board (FASB) issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies.” FSP FAS

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141(R)-1 amends and clarifies SFAS 141(R) to address application issues on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. The FSP is effective for assets and liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company/Bank does not expect the adoption of FSP FAS 141(R)-1 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” FSP FAS 157-4 provides additional guidance for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased. The FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009, and shall be applied prospectively. The Company/Bank does not expect the adoption of FSP FAS 157-4 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments.” FSP FAS 107-1 and APB 28-1 amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,” to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. In addition, the FSP amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods. The FSP is effective for interim periods ending after June 15, 2009. The Company/Bank does not expect the adoption of FSP FAS 107-1 and APB 28-1 to have a material impact on its consolidated financial statements.

In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments.” FSP FAS 115-2 and FAS 124-2 amend other-than-temporary impairment guidance for debt securities to make guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities. The FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities. FSP FAS 115-2 and FAS 124-2 is effective for interim and annual periods ending after June 15, 2009. The Company does not expect the adoption of FSP FAS 115-2 and FAS 124-2 to have a material impact on its consolidated financial statements.

In April 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 111 (SAB 111). SAB 111 amends and replaces SAB Topic 5.M. in the SAB Series entitled “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities.” SAB 111 maintains the SEC Staff’s previous views related to equity securities and amends Topic 5.M. to exclude debt securities from its scope. The Company does not expect the implementation of SAB 111 to have a material impact on its consolidated financial statements.

In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, “Subsequent Events.” SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance

sheet date but before financial statements are issued or are available to be issued. SFAS 165 is effective for interim and annual periods ending after June 15, 2009. The Company does not expect the adoption of SFAS 165 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140.” SFAS 166 provides guidance to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS 166 must be applied as of the beginning of the first annual reporting period that begins after November 15, 2009 and for interim periods within that first annual reporting period. Earlier application is prohibited. The Company does not expect the adoption of SFAS 166 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R).” SFAS 167 improves financial reporting by enterprises involved with variable interest

17

entities. SFAS 167 will be effective as of the beginning of the first annual reporting period that begins after November 15, 2009 and for interim periods within that first annual reporting period. Earlier application is prohibited. The Company does not expect the adoption of SFAS 167 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – a replacement of FASB Statement No. 162.” SFAS 168 establishes the FASB Accounting Standards Codification, which will become the source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification will become non-authoritative. SFAS 168 is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company does not expect the adoption of SFAS 168 to have a material impact on its consolidated financial statements.

In June 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 112 (SAB 112). SAB 112 revises or rescinds portions of the interpretative guidance included in the codification of SAB’s in order to make the interpretive guidance consistent with current U.S. GAAP. The Company does not expect the adoption of SAB 112 to have a material impact on its consolidated financial statements.

11. The following table displays detail of comprehensive income (loss) for the six-month periods ended June 30, 2009 and 2008:

	Six Months Ended
	June 30
(dollars in thousands)	2009			2008
Net income (loss)	$	(1,048	)	$	3,926
Unrealized gains (losses) on securities available for sale, net of tax expense		1,444			(5,183	)
Less: reclassification adjustment, for gain on sale of available for sale securities, net of tax		(24	)		(29	)
Total comprehensive income (loss)	$	372		$	(1,286	)

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 2008 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.

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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) Statement of Financial Accounting Standards (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, such as nonaccrual loans, 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, 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 local 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 considered. 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 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.

Impairment of Securities

Impairment of securities occurs when the fair value of a security is less than its amortized cost basis. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either⁽¹⁾ we intend to sell the security or⁽²⁾ it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If, however, we do not intend to sell the security before recovery, we must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in earnings on the statements of income and the remaining portion of impairment must be recognized in other

19

comprehensive income. For equity securities, impairment is considered to be other-than-temporary based on our ability and intent to hold the investment until recovery of fair value. Other-than-temporary impairment of an equity security results in a loss that must be included in earnings on the statements of income. On a quarterly basis we review each investment security for other-than-temporary impairment based on criteria that includes cost exceeding market value by 20% or greater, the duration of the market decline, the financial health of and specific prospects for the issuer, out best estimate of the cash flows expected to be collected from debt securities, our intention with regard to holding the security to maturity and the likelihood that we could be required to sell the security before recovery.

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 at both June 30, 2009 and December 31, 2008. Based on the testing of goodwill for impairment, no impairment charges have been recorded. 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 $359 thousand and $503 thousand, at June 30, 2009 and December 31, 2008, respectively, and are included in other assets.

OVERVIEW

Second quarter results for 2009 reflect the impact of continued volatility and uncertainty in the current recessionary economic environment. Our financial statements reflect the local impact of this recession with large increases in average federal funds sold, limited loan growth, high loan loss provision, an increase in Other Real Estate Owned (“OREO”), lower interest income as a result of the rapid rate declines in late 2008, decreased noninterest income, including a securities impairment, and an increase in noninterest expense primarily as a result of our branch expansion last year. These changes are not limited to just our bank. Community banks including our Company rely primarily on earnings from lending in the local markets that they serve. Community banks are living with the hardship of their customers and neighbors and being impacted by the slowing of loan payments resulting in deterioration in asset quality. We hold pooled trust preferred debt and a significant number of banks have either deferred making interest payments on their pooled trust preferred debt or have defaulted on that debt. Deterioration of our trust preferred investments resulted in a $3.9 million impairment charge in the quarter. At June 30, the FDIC, which liquidates failed banks, assessed a special charge on all member banks, in addition to the already increased quarterly fee. These unusual occurrences have obscured the core performance of many financial institutions and potentially could continue to do so until the economy comes out of this recession.

With the Treasury Capital Purchase Program (“CPP”), banks have been put in another unusual position. They have large amounts of cash from the Treasury’s purchase of preferred stock, but nowhere to effectively invest the funds. The Federal Reserve has pushed interest rates to historic lows with the result that fed funds rates and other short-term interest rates yield approximately 0.25%, compared to the 5% dividend being paid on the Treasury investment. In an effort to deal with this issue, we have looked at other secure short term investment options to increase our earnings. While these excess funds increase our ability to lend, the recession has created a hesitation by customers to take on debt. This hesitation combined with industry wide tighter credit quality standards than a year ago has slowed demand for credit.

While we continue to be well capitalized, our financial statements reflect the local impact of these issues. In addition to the valuation issues, the increased deposit insurance expense and merger expenses, our balance sheet shows large increases in loan loss provision compared to historical levels, collection expense, OREO, past due loans and bankruptcies. In spite of all the negatives that we see around us, there are some signs that the economy is changing. Some of the leading economic indicators are sporadically moving sideways or even up. As these changes become more

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pronounced, the possibility of improvement in the economy becomes more likely. This may take some time to materialize, meaning we will continue to live with our hardships and those of our customers and neighbors and the impact of slower loan payments which deteriorate our asset quality.

At the beginning of the second quarter, management announced on April 3, 2009, a definitive merger agreement with First Capital Bancorp, Inc. (“FCVA”) in the Richmond marketplace. This strategic alliance is expected to close early in the fourth quarter of 2009. This business combination should enhance the position of the Company in the faster growth markets in and around Richmond, Virginia. With both companies well capitalized, the anticipation of operational savings by utilizing existing capacity and the strong skills in both businesses, management expects to see a much stronger company going into 2010. Under the purchase approach to accounting for a combination like this, all merger related expenses are recognized on the books as they occur, thereby resulting in lower earnings until the merger closes. Gains when the transaction is completed are expected to more than cover the upfront expenses.

A $3.9 million securities impairment charge, a $507 thousand FDIC special assessment and $308 thousand of merger related expenses resulted in a net income (loss) available to common shareholders of $2.1 million for the second quarter of 2009, compared to $1.3 million net income in the second quarter of 2008. Net interest income was $8.2 million in the second quarter of both 2009 and 2008, a meaningful improvement compared to the $641 thousand decrease from the first quarter of 2009 compared to the first quarter 2008. Noninterest income, including the impairment charge, was ($2.3) million for the second quarter, a $4.2 million decline from $1.9 million for the three months ended June 30, 2008. Noninterest expense increased $977 thousand from $7.1 million in the second quarter of 2008 to $8.0 million for the second quarter of 2009. This increase was primarily from a $699 thousand increase in FDIC expense and $308 thousand in merger expense. The emerging trend of smaller decreases in loan interest income and larger decreases in deposit costs resulted in an improved net interest margin for the second quarter at 3.27% compared to 3.12% in the first quarter of 2009. While the second quarter 2009 net interest margin is below the 3.59% for the second quarter of 2008, it appears to have reversed the quarter to quarter downward trend. Average earning assets growth for the second quarter of 2009 increased $88.2 million compared to the second quarter of 2008. Average loans were $57.3 million above the average loans for the second quarter of 2008. Federal funds sold increased to $38.6 million compared to $5.7 million in the same quarter of the prior year while the average yield decreased from 2.11% to 0.19%. Average interest-bearing deposit balances increased $104.0 million, or $46.7 million more than loan growth in the second quarter of 2009.

Investment income declined, partially from lower rates on new investments, but more from the Treasury conservatorship of FNMA and FHLMC which eliminated our agency preferred stock dividends and the temporary elimination of dividends from the Atlanta FHLB. Loan loss provision for the second quarter was $750 thousand compared to $1.3 million in 2008. For the year, the provision is $1.7 million compared to $1.8 million through the first six months of 2008. Management still sees risk in the loan portfolio and expects to continue higher provision expense through the remainder of 2009. Without the merger and FDIC increases, other noninterest expenses were down except for occupancy and marketing. Our branch expansion and infrastructure changes in 2008 resulted in the increased occupancy expense.

Looking to the rest of the year, we are still looking for the federal government’s economic stimulus plan to revive loan demand. In an effort to assist our customers, we initiated a special loan program in the second quarter to relieve some of the payment pressure and we continue to explore other loan products to assist our customers. On a linked quarter basis, interest income on loans increased $621 thousand while interest expense on deposits increased $125 thousand which points to a change in future income. Over the remainder of the year we anticipate $240 million in certificates of deposit repricing at lower rates which should further enhance the net interest margin. The Federal Reserve continues to focus on reviving the economy, so we do not anticipate any major rate changes unless inflation is rekindled by an economic expansion. The Treasury CPP investment has enhanced our capital position as the parent infused the bank with $20 million more of regulatory capital. We anticipate increased loan losses in the short run and have prepared for that expectation. We have quality individuals managing our past due loans and foreclosed properties to minimize our potential losses. As the economy recovers, we are positioned to take advantage of all opportunities that present themselves.

Financial Condition

Return on average assets (“ROA”) for the second quarter of 2009 declined to (0.78%), compared to 0.50% in the same quarter of 2008, and return on common average equity (“ROE”) declined to (11.28%) compared to 5.57% for the

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quarter ended June 30, 2008. For the first six months of 2009, ROA declined to (0.33%), compared to 0.81% for the same period in 2008, and ROE declined to (4.64%) compared to 8.64% for the period ended June 30, 2008. For the second quarter of 2009 the net loss was $1.8 million, and the net loss after $372 thousand effective preferred dividend was $2.1 million compared to net income of $1.3 million in the second quarter of 2008. For the six months ended June 30, 2009, the net loss was $1.0 million and the net loss after effective preferred dividend was $1.8 million compared to net income of $3.9 million for the first six months of 2008.

Total assets at June 30, 2009 were $1.10 billion, up $46.7 million, or 4.4%, from $1.05 billion at year-end 2008 and up $70.5 million, or 6.9% from June 30, 2008, when total assets were $1.03 billion. This increase is the result of strong deposit growth, particularly in the first quarter of 2009 and the addition of $24 million from the issuance of preferred stock. Loan growth through June 30, 2009 was $13.5 million, or 1.6% compared to the 2008 year-end balance. Actual loan growth in the second quarter compared to first quarter 2009 was $3.7 million or less than 1%. For the quarter, total average assets were $1.1 billion, an increase of 9.48% compared to $1.01 billion in the second quarter of 2008. For the quarter ended June 30, 2009, average total loans, net of unearned income were $830.9 million, an increase of $57.3 million, or 7.4%, from $773.6 million for the same period in 2008. For the six months ended June 30, 2009, total average assets were $1.1 billion, an increase of $120.5 million compared to $969.7 million for the same period in 2008. At June 30, 2009, net loans as a percent of total assets were 75.8%, as compared to 76.9% at December 31, 2008. While this portfolio should be able to generate a strong earnings stream, the current economic uncertainty overshadows our near term earnings.

At June 30, 2009, the investment portfolio totaled $168.8 million, an increase of $6.9 million from $161.9 million at December 31, 2008 and up $300 thousand compared to $168.5 million at June 30, 2008. Interest rates during the first six-month period of 2009 were fairly steady and low compared to the same quarter in the prior year. Our unrealized loss decreased $4.6 million compared to year-end 2008. The reported balances for 2009 are after the $3.9 million impairment taken at the end of the second quarter. We continue to monitor the payment streams of these instruments focusing on the deferred payments and defaulted payments. Potential for more impairment exists but is dependent on the level of banks that may defer or default on their interest payments. For more detail, see securities Note 2 to the consolidated financial statements earlier in the document. 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. Our participation in the TARP Capital Purchase Program was an effort to increase liquidity, recognizing the potential liquidity impact that the increase in unrealized losses could have and to assist in our loan growth.

Total deposits continued to grow. At June 30, 2009 deposits were $848.3 million an increase of $78.7 million, or 10.2%, from $769.6 million at the same point in 2008 and up $34.7 million from the year-end 2008 balance of $813.5 million. Deposits decreased $4.4 million compared to the first quarter balance of $852.6 million. This is primarily the result of the maturity of $27 million of brokered deposits during the first six months of 2009. The cost of deposits is projected to continue to decrease as large blocks of certificates of deposit reprice over the next six months. On an average basis, deposits increased $97.4 million from $760.3 million in the second quarter of 2008 to $857.7 million for the same period in 2009. All of the increase was in interest-bearing deposits, primarily in core money market and NOW accounts. Deposit prices are evaluated frequently by our asset liability committee and adjusted as needed to reflect the competitive rate environment.

FHLB borrowings at June 30, 2009 totaled $123.9 million, a $10.7 million, or 8.0%, decrease compared to $134.6 million at December 31, 2008 and an $11.4 million decrease from $135.4 million at June 30, 2008. With the large balance in federal funds sold, we do not anticipate additional borrowing this year. Over the remainder of the year, we expect to cover our funding needs by attracting lower cost deposits and anticipate maturing certificates of deposit will re-price at lower rates.

SFAS 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 (loss), net” in the Shareholders’ Equity section of the Consolidated Balance Sheets. The securities portion was a $10.4 million loss at June 30, 2009 a decrease of $1.4 million from an $11.8 million loss at December 31, 2008 and an increase of $1.7 million compared to an $8.1 million loss at June 30, 2008. 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. The valuation is particularly erratic in these stressed economic times. Also included in this line item is a $3.2 million loss related to the market decrease in the value of the pension plan (SFAS No. 158).

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RESULTS OF OPERATIONS

Net Income

With the addition of the preferred stock on our balance sheet, we need to analyze income on two levels: income from operations and income available to common shareholders. Preferred dividends and accretion of discount on the preferred stock are recorded before any dividends are paid to the common stock holders.

With the inclusion of the unusual items mentioned earlier, net income available to common shareholders was ($2.1) million compared to $1.3 million in the second quarter of 2008. Diluted and basic earnings per common share decreased $0.57 to a loss of $0.36, compared to $0.21 income for the same quarter in 2008. Without the $3.9 million securities impairment, the $507 thousand FDIC special assessment and the merger expense of $308 thousand, the Company would have had positive pretax income. Net interest income for the quarter was $8.2 million for both 2009 and 2008. There was an actual decrease of $47 thousand for the quarter ended June 30, 2009, when compared to the same period in 2008. The second quarter decrease is $594 thousand less than the decline in the first quarter of 2009. Interest and fees on loans were down $119 thousand, or 0.9 %, while deposit costs were down $179 thousand, or 3.4 % compared to second quarter 2008. Interest income on investments declined by $259 thousand compared to the second quarter in 2008. While we have made some adjustments in our portfolio that has resulted in increased income from tax exempt securities, these increases could not overcome the loss of FNMA and FHLMC securities income and the loss of the FHLB dividend. Federal funds sold with an average balance of $38.6 million and a yield of only 0.19% earned $18 thousand during the second quarter. During the quarter, we moved $14 million from Fed funds to a category called interest-bearing deposits in other banks. These funds, which had an average balance in the second quarter of $5.6 million, earned $15 thousand with a yield of 1.08%. This earnings stream should improve in the third quarter of 2009. We continue to explore other higher earning investment alternatives to improve earnings on this large pool of funds. Interest bearing liabilities expense decreased $328 thousand for the second quarter compared to the same period in 2008 and had decreases in all categories. With the falling deposit costs, we are anticipating an improvement of the squeeze on our net interest margin in the second half of the year. Loan loss provision for the second quarter 2009 was $750 thousand, a decline of $550 thousand from $1.3 million in the second quarter 2008, when the company started making major increases to our reserve for loan losses.

Noninterest income for the second quarter 2009 was ($2.3) million, compared to $1.9 million in 2008’s second quarter, a decline of $4.2 million, or 217%. Excluding the impact of the securities impairment mentioned above, noninterest income was down $281 thousand at $1.7 million for the second quarter 2009 compared to $1.9 million for the same period in 2008. Deposit fees declined $68 thousand and investment fees were down $23 thousand, while 2008 had a $128 thousand gain on a fixed assets sale and $130 thousand gain on an LLC investment.

Noninterest expense for the second quarter of 2009 increased $977 thousand, or 13.8% compared to 2008 from $7.1 million in 2008 to $8.0 million in second quarter 2009. This increase was primarily from the $507 thousand FDIC assessment and the $308 thousand in merger expenses. Occupancy expense increased $187 thousand due to our branch expansions in 2008. Telephone and other operating expense decreased $126 and $133 thousand, respectively. Management continues to monitor controllable expenses closely.

For the six months ended June 30, 2009, net income before the preferred dividend was ($1.05) million, a decrease of ($5.0) million compared to $3.9 million at the same date in 2008. Net interest income decreased $688 thousand with a decrease of $1.2 million in interest income offset by a decrease in interest expense of $517 thousand. Loan loss provision expense was $1.7million through June 30, 2009 down $100 thousand from $1.8 million in 2008. Management is confident that the repricing strategies put in place to counter the mismatch of interest income and expense is working. Noninterest income for the first six months of 2009 was ($712) thousand, a decrease of $5.3 million compared to 2008’s $4.6 million. In addition to the items mentioned in the second quarter review above, we had a $1.3 million actuarial gain on pension curtailment in 2008. Without the unusual items in both years, noninterest income decreased $354 thousand as a result of a 5% decrease in deposit fees and a 19% decline in other operating income. (See table below.) Noninterest expense increased $1.8 million from $13.7 million in 2008 to $15.4 million for the period ended June 30, 2009. Of that increase, $1.2 million is from a $924 thousand increase in FDIC expense and the $308 thousand merger expenses taken

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in the second quarter of 2009. The remainder of the increase is from $291 thousand in salaries and benefits as group insurance and pension costs rose and $288 thousand in occupancy and equipment as a result of our branch purchase in 2008.

							Change
	Jun-09			Jun-08			Amount			Percent
Total noninterest income reported (GAAP)	$	(712	)	$	4,591		$	(5,303	)	-115.5	%
Less Impairment - securities		(3,922	)		(300	)		(3,622	)	1207.3	%
Less Actuarial gain - pension curtailment		—			1,328			(1,328	)	-100.0	%
Total noninterest income without unusual items	$	3,210		$	3,563		$	(353	)	-9.9	%

Net Interest Income

For the second quarter of 2009, net interest income on a fully tax equivalent basis totaled $8.4 million, compared to $8.4 million in the second quarter of 2008. Net interest income is our primary source of income. Average earning assets for the quarter ended June 30, 2009 were $1.03 billion, an increase of $88.2 million compared to $943.0 million for the same period in 2008. Average loans increased $57.3 million, or 7.4%. Average securities decreased $7.6 million, or 4.6%. Average federal funds sold increased $32.9 million, or over 575%, for the second quarter of 2009, reflecting the continued influence of increases in deposits, the slowing of loan growth and the influx of the Treasury CPP investment. The fully tax equivalent net interest margin for the three-month period ended June 30, 2009 was 3.27% compared to 3.59% for the same quarter in 2008 and is up from 3.12% in the first quarter of 2009. For the second quarter of 2009, the yield on earning assets declined 71 basis points to 5.78%, compared to 6.49% for the second quarter of 2008, and the cost of interest bearing liabilities was down 49 basis points to 2.88% from 3.37% in the same period in 2008. This 22 basis point decrease in earnings in our net interest margin compared to a 71 basis point spread in the first quarter of 2009 indicates some easing of the margin squeeze. Part of this is from reducing our nonaccrual loan balances from $17.2 million at the end of the first quarter of 2009 to $8.5 million at the end of the second quarter, but interest expense is a major contributor. Our funding costs continued to decrease with certificates of deposit and savings cost all down, while our money market and interest checking products, our major growth categories in the quarter, had increases. For the three months ended June 30, 2009, the average balances for money market savings and interest checking increased $39.9 and $32.4 million respectively, while certificates grew $33.4 million, all compared to the average balances for the second quarter of 2008.

For the six months ended June 30, 2009, net interest income on a fully tax equivalent basis was down $658 thousand from $16.8 million in 2008 to $16.2 million in 2009. Of this decline, $637 thousand occurred in the first quarter of 2009. The yield on earning assets of 5.74% for the six months ended June 30, 2009 compared to 6.66% for the same period in 2008, but was up 5 basis points from the first quarter of 2009. The cost of interest-bearing liabilities was 2.91% for the first six months of 2009 compared to 3.47% for the same period in 2008. On a year to date basis, average balances for interest-bearing deposits grew $125.1 million, or 20.0%, with increases in all categories except savings. The other interest bearing liabilities average balances were down $10.6 million.

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Going into the second half of 2009, management’s objective in the margin measure is to find better investments for the excess funds on our balance sheet. The notes in the following schedule show the derivation of the tax equivalent interest amount that is added to GAAP net interest income. The tables below disclose fully tax equivalent net interest income calculations for the three-month period and six month periods ended June 30, 2009 and 2008:

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

	Three Months Ended June 30,
	2009							2008
	Average Balance			Income/ Expense		Yield/ Rate		Average Balance			Income/ Expense		Yield/ Rate
Assets:
Securities
Taxable	$	109,402		$	1,301	4.77	%	$	122,054		$	1,623	5.35	%
Tax exempt (1)		46,746			700	6.00	%		41,653			609	5.88	%
Total securities		156,148			2,001	5.14	%		163,707			2,232	5.48	%
Interest bearing deposits with banks		5,563			15	1.08	%		—			—	0.00	%
Federal funds sold		38,601			18	0.19	%		5,717			30	2.11	%
Loans, net of unearned income (2)		830,850			12,836	6.20	%		773,580			12,955	6.74	%
Total earning assets		1,031,162			14,870	5.78	%		943,004			15,217	6.49	%
Less allowance for loan losses		(11,410	)						(8,906	)
Total non-earning assets		83,792							73,851
Total assets	$	1,103,544						$	1,007,949
Liabilities & Shareholders’ Equity:
Interest bearing deposits
Checking	$	177,718		$	754	1.70	%	$	145,365		$	744	2.06	%
Savings		73,688			136	0.74	%		75,338			176	0.94	%
Money market savings		88,759			363	1.64	%		48,873			289	2.38	%
Large dollar certificates of deposit (3)		181,673			1,607	3.55	%		143,490			1,668	4.68	%
Other certificates of deposit		243,247			2,159	3.56	%		247,981			2,321	3.76	%
Total interest-bearing deposits		765,085			5,019	2.63	%		661,047			5,198	3.16	%
Federal funds purchased & REPO’s		602			2	1.33	%		2,570			17	2.66	%
Other borrowings		134,470			1,443	4.30	%		145,899			1,577	4.35	%
Total interest-bearing liabilities		900,157			6,464	2.88	%		809,516			6,792	3.37	%
Noninterest-bearing liabilities
Demand deposits		92,592							99,272
Other liabilities		10,579							8,640
Total liabilities		1,003,328							917,428
Shareholders’ equity		100,216							90,521
Total liabilities and shareholders’ equity	$	1,103,544						$	1,007,949
Net interest income				$	8,406						$	8,425
Interest rate spread (4)						2.90	%						3.12	%
Interest expense as a percent of average earning assets						2.49	%						2.90	%
Net interest margin (5)						3.27	%						3.59	%

Notes:

(1) Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 34%. The tax equivalent adjustment for the quarter is $184 thousand, compared to $181 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 of 34%, expressed as a percentage of average earning assets.

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

	Six Months ended June 30,
	2009							2008
	Average			Income/		Yield/		Average			Income/		Yield/
	Balance			Expense		Rate		Balance			Expense		Rate
Assets:
Securities
Taxable	$	106,812		$	2,580	4.87	%	$	118,856		$	3,205	5.42	%
Tax exempt (1)		43,844			1,300	5.98	%		41,442			1,200	5.82	%
Total securities		150,656			3,880	5.19	%		160,298			4,405	5.53	%
Interest bearing deposits with banks		2,883			15	1.05	%		—			—	0.00	%
Federal funds sold		37,595			40	0.21	%		3,296			36	2.20	%
Loans, net of unearned income (2)		827,613			25,051	6.10	%		746,752			25,720	6.93	%
Total earning assets		1,018,747			28,986	5.74	%		910,346			30,161	6.66	%
Less allowance for loan losses		(11,070	)						(8,522	)
Total non-earning assets		82,523							67,830
Total assets	$	1,090,200						$	969,654
Liabilities & Shareholders’ Equity:
Interest bearing deposits
Checking	$	169,778		$	1,471	1.75	%	$	136,598		$	1,372	2.02	%
Savings		72,750			285	0.79	%		75,594			361	0.96	%
Money market savings		80,050			782	1.97	%		45,836			548	2.40	%
Large dollar certificates of deposit (5)		182,070			3,253	3.60	%		135,461			3,152	4.68	%
Consumer certificates of deposit		246,802			4,122	3.37	%		232,899			4,661	4.02	%
Total interest-bearing deposits		751,450			9,913	2.66	%		626,388			10,094	3.24	%
Federal funds purchased & REPO’s		588			4	1.37	%		3,492			54	3.11	%
Other borrowings		135,925			2,916	4.33	%		143,618			3,202	4.48	%
Total interest-bearing liabilities		887,963			12,833	2.91	%		773,498			13,350	3.47	%
Noninterest-bearing liabilities
Demand deposits		91,734							96,709
Other liabilities		10,956							8,114
Total liabilities		990,653							878,321
Shareholders’ equity		99,547							91,333
Total liabilities and shareholders’ equity	$	1,090,200						$	969,654
Net interest income				$	16,153						$	16,811
Interest rate spread (3)						2.82	%						3.19	%
Interest expense as a percent of average earning assets						2.54	%						2.95	%
Net interest margin (4)						3.20	%						3.71	%

Notes:

(1) Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 34%. The tax equivalent adjustment for the six months is $549 thousand, compared to $457 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 of 34%, expressed as a percentage of average earning assets.

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Noninterest Income (loss)

This category includes all income not related to interest on investments and interest and fees on loans. Noninterest income (loss) for the three months ended June 30, 2009 was ($2.3) million, a decrease of $4.2 million from $1.9 million for the same three months of 2008. Most of this decline was the result of the $3.9 million securities impairment taken in the second quarter of 2009. The three recurring lines in this income section are deposit fees, card fees and other operating income. For the second quarter of 2009, these totaled $1.6 million compared to $1.8 million for the same period in 2008, a decline of $191 thousand in the core noninterest income categories. Deposit fees for the quarter were $948 thousand compared to $1.0 million in the same period in 2008, down $68 thousand compared to the same period in the prior year, reflecting a significant decline in non sufficient funds (“NSF”) fees and lower demand deposit account (“DDA”) service charges. The decline in NSF appears to be part of the economic situation where customers are being more frugal and watching their balances. The decline in DDA service charges reflects a decline in our noninterest bearing deposit balances which are down $8.8 million from June 2008. Many of these balances are moving into other no service charge products if the account rules are followed. Card fees were $315 thousand for the quarter ended June 30, 2009 an increase of $23 thousand from $292 thousand for the same period in 2008. This category was a growth source over the last couple of years but the recession has slowed usage of the cards. Other operating income decreased $146 thousand from $500 thousand for the three months ended June 30, 2008 to $354 thousand in 2009. Most of this decline is the result of a gain, of $129 thousand that we received when our investment LLC changed processors in 2008. In addition, we took a $128 thousand gain on the sale of fixed assets in 2008 when we moved one of our branch locations and sold the previous location.

For the six months ended June 30, 2009, noninterest income was ($712) thousand compared to $4.6 million for the same period in 2008, a decrease of $5.3 million. Most of this change can be explained by unusual items in each year. In 2009, there was a securities impairment of $3.9 million compared to $300 thousand for the first six months of 2008, resulting in net loss of $3.6 million when comparing the two periods. In 2009, there were no gains to offset the $1.3 million actuarial gain from our pension plan taken in the first quarter of 2008, resulting in a net loss of $1.3 million for the comparable period. The remaining balance of the decrease is covered by the $128 thousand fixed asset gain and the $130 thousand LLC gain mentioned above. Core noninterest earnings excluding the LLC gain decreased $99 thousand.

Noninterest Expense

This category includes all expenses other than interest paid on deposits and borrowings. Total noninterest expense was $8.0 million for the quarter ended June 30, 2009, an increase of $977 thousand, or 13.9%, compared to $7.1 million in the same quarter of 2008. The increase is the result of a $699 thousand increase in FDIC expense and the $308 in merger related expense taken in the second quarter of 2009. Merger expenses include legal, marketing cost or other expenses related to bringing the companies together and are accumulated as a separate total in expenses. Salary and benefits is relatively flat quarter to quarter with a $16 thousand decrease from 2008. Occupancy and equipment increased $187 thousand due to increased operating expense for our new branches and relocations opened during 2008. Telephone expense is down $126 thousand primarily because we had some infrastructure expenses in the second quarter of 2008. Marketing expense increased $49 thousand from payments to our advertising agency for branch sales tools such as video streaming and signage. Other operating expense decreased $133 thousand from $1.4 million in 2008 to $1.2 million in 2009. This is the result of initiatives that have deceased our supplies, printing, courier and armored car services expenses.

For the six months ended June 30, 2009 total noninterest expense increased $1.8 million from $13.7 million in 2008 to $15.4 million in 2009. Again, $1.2 million of this increase is the result of $924 thousand increase in FDIC expense and the $308 thousand in merger related expense. Salaries and benefits are up $291 thousand, or 3.8%, due to increases in our group insurance expense and pension plan expense. Occupancy expense is up $288 thousand for the same reasons it was up in the second quarter. Telephone expense decreased $49 thousand again related to improvement costs in the second quarter of 2008. Franchise tax increased $25 thousand as a result of our growth in 2008. Other operating expense year-to-date decreased $28 thousand, primarily from the lower expenses in the second quarter.

Income Taxes

Income tax expense for the quarter ended June 30, 2009 was a benefit of $1.1 million compared to a charge of $560 thousand in the same quarter of the prior year, a $1.7 million decrease with the benefit driven by the securities impairment. Income tax expense for the six months ended June 30, 2009 was a benefit of $973 thousand compared to $1.7 million expense for the same period in 2008, a decrease of $2.7 million. Again, the 2009 number is driven by the securities impairment.

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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, restructured loans, loans past due 90 days and still accruing interest and foreclosed properties, were $25.8 million at June 30, 2009, $20.9 million at March 31, 2009, $16.7 million at December 31, 2008 and $5.5 million at June 30, 2008. This increase is the result of a depressed economy that has put record numbers of people out of work, making their ability to pay on formerly good paying loans a challenge. The weak real estate market, which has slowed sales of homes, has caused our OREO amount to increase. Nonperforming assets are composed largely of loans secured by real estate (96.9%) in the Company’s market area and repossessed properties in our OREO balances. At the end of the second quarter OREO was $4.3 million compared to $943 thousand at the end of March 2009 and $560 thousand at year-end 2008 and $1.2 million at June 30, 2008. At June 30, 2009, we had two homes and a developer’s property with eight lots in our OREO inventory. We expect to recover the current balance in this account and subsequent to June 30, 2009 received $2.1 million to apply to this balance. As more foreclosures occur in our markets, we expect our OREO balance to increase over most of 2009. The depressed economy has affected our real estate markets causing deflation in property values.

Nonaccrual loans are $8.7 million at June 30, 2009, a decrease of $4.9 million from $13.6 million at year-end 2008 and an increase of $5.4 million from $3.4 million at June 30, 2008. The decrease reflects the transfer of nonaccrual loans to both OREO and $4.2 million in restructured loans to assist our customers in paying out there debt. Of the current balance of $8.7 million in nonaccrual loans, $8.6 million is secured. Within these secured loans, $8.2 million are secured by real estate, $285 thousand are secured by various commercial equipment and inventories and the remainder is covered by individual homes. Of the real estate secured loans, $3.8 million are real estate construction, $2.5 million are residential real estate and $1.8 million are commercial properties. At this point in time, despite the weak real estate market, management anticipates recovering over 90% of the value and has made increased provision allotments to cover the potential losses.

At June 30, 2009 the last component of our nonperforming loans, loans past due 90 days and accruing interest, was $8.6, million an increase of $6.0 million from year end 2008 and an increase of $7.6 million from a $961 thousand balance at June 30, 2008. Of the $8.6 million current balance, $8.5 million is secured by real estate with no losses anticipated. The 90 day past due and still accruing category has been heavily impacted by the slow down in payments on well secured residential mortgages that have little long-term loss exposure.

While our real estate markets have been stable in the past with a very low historical loss experience, the present environment is uncharted ground, presenting a greater challenge to management. The increase in nonaccrual loans is heavily concentrated in the construction loan category and is a management focus.

Loan charge-offs, less recoveries, amounted to $406 thousand for the second quarter of 2009 compared to $332 thousand for the same quarter in 2008. The annualized ratio of net charge-offs to total average loans, net of unearned income, was 0.20% for the second quarter of 2009, compared to 0.24% for the full year 2008 and 0.17% for the second quarter of 2008. For the six months ended June 30, 2009, loan charge-offs, less recoveries, amounted to $705 thousand in 2009 compared to $415 thousand for the same period in 2008, while the annualized ratio of net charge-offs to total average loans, net of unearned income, was 0.17% for the first six months of 2009, compared to 0.24% for the full year 2008 and 0.11% for the first six months of 2008. Credit quality management continues to be our top priority. The lenders and our collection area are maintaining close contact with our troubled customers, but charge-offs are inevitable in this environment. With the high level of real estate secured debt and the large increase in loan loss reserves taken, management is confident that we can successfully manage through the economic downturn. We anticipate larger provision expense as the asset quality dictates the need.

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At June 30, 2009, the allowance for loan losses was $11.5 million, an increase of $1.0 million when compared to $10.5 million at December 31, 2008, and up $1.8 million, compared to $9.7 million at June 30, 2008. The increase in allowance has been dictated by the declining asset quality in our depressed economy. The allowance is a reflection of loss inherent in the loan portfolio and not a forecast of actual current nonperforming loans. The ratio of allowance for loan losses to total loans was 1.38% at June 30, 2009, 1.29% at 2008 year-end and 1.23% at June 30, 2008. The allowance for loan losses at June 30, 2009 included $3.6 million on specific impaired loan reserves.

At June 30, 2009, the Company reported a balance of $21.3 million in impaired loans, a decrease of $2.9 million from $24.2 million at December 31, 2008 and an increase of $15.2 million from $6.1 million at June 30, 2008. At June 30, 2009, impaired loans were composed of $18.6 million with specific reserves assigned and $2.7 million with no specific reserves assigned. The average balance of impaired loans with a specific reserve for the six months ended June 30, 2009 was $18.8 million.

At June 30, 2009 we also had $25.9 million in loans classified as potential problem loans that were excluded from impaired and nonaccrual status. These loans are currently performing and no loss is anticipated at this time based on management’s on-going analysis. Management considers all loans that are adversely risk rated as potential problem loans. These loans are risk rated based on the borrowers’ perceived ability to comply with current repayment terms. These loans are subject to constant management and Board attention, and their status is reviewed on a regular basis. Factors that cause a loan to be adversely risk rated include:

• Failure to provide the bank with current financial statement and tax return

• Declining or negative earnings trends

• Declining or inadequate liquidity

• Concerns about the business that is intended to provide the source of repayment

• Unfavorable competitive comparisons

• High debt to worth ratio

• Lack of well-defined secondary repayment source

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

Nonperforming Assets	June 30			December 31			June 30
(Dollars in thousands)	2009			2008			2008
Nonaccrual loans	$	8,741		$	13,574		$	3,367
Restructured loans		4,216			—			—
Loans past due 90 days and accruing interest		8,605			2,590			961
Total nonperforming loans	$	21,562		$	16,164		$	4,328
Other real estate owned		4,284			560			1,155
Total nonperforming assets	$	25,846		$	16,724		$	5,483
Nonperforming assets to total loans and other real estate		3.09	%		2.04	%		0.70	%
Allowance for loan losses to nonaccrual loans		131.42	%		77.66	%		288.42	%
Net charge-offs to average loans for the year		0.17	%		0.24	%		0.11	%
Allowance for loan losses to period end loans		1.38	%		1.29	%		1.23	%

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.

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At June 30, 2009 our Federal funds sold balance was $3.3 million compared to $34.3 million at March 31, 2009. Late in the quarter, we moved some funds to short term investments shrinking a balance that averaged $38.6 million for the quarter. We continue to be in a strong liquidity position. Our FHLB borrowings declined $10 million in the first quarter of 2009. These were the only changes to our contractual obligations that would impact liquidity since the 2008 Form 10-K disclosure. At June 30, 2009, we had immediate available credit with the FHLB of $24.9 million and with nonaffiliated banks of $40.0 million. See Note 5 to the Consolidated Financial Statements in the 2008 Form 10-K for further FHLB information.

There have been no material changes in off-balance sheet arrangements since the 2008 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

For Tier 1 capital, our risk-based capital position at June 30, 2009 was $105.1 million, or 10.99% of risk-weighted assets, and $110.4 million, or 11.54%, for total risk based capital. Our Tier 1 leverage ratio at March 31, 2009 was 9.72%. Our year-end 2008 ratios were 10.51%, 11.56% and 8.62%, respectively. Enhancing our capital ratios to support future growth is a major goal of management. While a stock offering in December 2006 allowed us to grow and maintain reasonable capital ratios over the last two years, the infusion of the TARP funds puts us in a position to handle the challenges in the near future. At June 30, 2008, these ratios were 11.09%, 12.13% and 9.69%, respectively.

Tier 1 capital consists primarily of common and preferred shareholders’ equity, while total risk based capital includes 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:

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

• 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;

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• 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;

• 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 2008 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 2008 year end as disclosed in the 2008 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 June 30, 2009 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 continues to have 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.

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Item 1A. Risk Factors

Other than those identified below, there have been no material changes in our risk factors from those disclosed in the 2008 Form 10-K.

• a substantial decline in the value of our Federal Home Loan Bank of Atlanta common stock may result in an other than temporary impairment charge;

• increases in FDIC insurance premiums may cause our earnings to decrease;

• declines in value may adversely impact the investment securities portfolio.

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 31of the preceding year. This authority has been reaffirmed each year and was most recently reaffirmed in June of 2007. There have been no repurchases of common stock since early 2008. There is no stated expiration date for the Plan. No shares were repurchased in the first six months of 2009. A stipulation of the TARP agreement restricts the company from repurchasing common stock without first obtaining Treasury approval.

Item 3. Defaults Upon Senior Securities (not applicable)

Item 4. Submission of Matters to a Vote of Security Holders

The Company held its annual meeting of shareholders on May 21, 2009. At this meeting, the shareholders approved the following proposal by the margins indicated

1. To elect 10 directors to serve for terms of one year each, expiring at the 2010 annual meeting of shareholders.

	Number of Shares
	For	Withhold Authority
W. Rand Cook	4,617,031	238,929
F. L. Garrett, III	4,615,639	240,321
Ira C. Harris	4,610,298	245,662
F. Warren Haynie, Jr.	4,617,129	238,831
William L. Lewis	4,313,097	542,863
Charles R. Revere	4,568,749	287,211
Joe A. Shearin	4,608,465	247,495
Howard R. Straughan, Jr.	4,614,539	241,421
Leslie E. Taylor	4,430,656	425,304
J. T. Thompson, III	4,551,742	304,218

2. Approve Compensation Proposal

For	Withold Authority
4,502,389	289,770

3. Approve Bylaws Amendment

For	Withold Authority
4,452,784	304,672

Item 5. Other Information(not applicable)

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Item 6. Exhibits

Exhibit 2.1 –	Agreement and plan of merger, dated as of April 3, 2009, by and between Eastern Virginia Bankshares, Inc. and First Capital Bancorp, Inc. (incorporated by reference to Exhibit 2.1 of Form 8-K, filed April 6, 2009).
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

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: August 7, 2009

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Exhibit Index

Exhibit 2.1 –	Agreement and plan of merger, dated as of April 3, 2009, by and between Eastern Virginia Bankshares, Inc. and First Capital Bankcorp, Inc. (incorporated by reference to Exhibit 2.1 of Form 8-K, filed April 6, 2009).
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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