Eastern Virginia Bankshares (EVBS) 10-Q 2009 Q3 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 September 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” 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 November 3, 2009 was 5,930,062.

EASTERN VIRGINIA BANKSHARES, INC.

FORM 10-Q

For the Period Ended September 30, 2009

Part I	Financial Information
Item 1.	Financial Statements	2
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	32
Item 4.	Controls and Procedures	32
Part II	Other Information
Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	33
Item 4.	Submission of Matters to a Vote of Security Holders	33
Item 5.	Other Information	33
Item 6.	Exhibits	33
Signatures		34

1

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(Dollars in thousands)

	September 30, 2009			December 31, 2008
	(unaudited)			(audited)
Assets:
Cash and due from banks	$	13,096		$	13,214
Interest bearing deposits with banks		14,059			—
Securities available for sale, at fair value		171,999			161,879
Loans, net of unearned income		844,113			819,266
Allowance for loan losses		(11,364	)		(10,542	)
Total loans, net		832,749			808,724
Deferred income taxes		7,426			12,930
Bank premises and equipment, net		19,900			20,806
Accrued interest receivable		4,142			4,050
Other real estate		3,713			560
Goodwill		15,970			15,970
Other assets		22,673			13,230
Total assets	$	1,105,727		$	1,051,363
Liabilities and Shareholders’ Equity:
Liabilities
Noninterest-bearing demand accounts	$	94,954		$	90,090
Interest-bearing deposits		756,859			723,443
Total deposits		851,813			813,533
Federal funds purchased and Repurchase Agreements		2,665			3,593
Federal Home Loan Bank advances (FHLB)		123,929			134,643
Trust preferred debt		10,310			10,310
Accrued interest payable		2,103			2,512
Other liabilities		11,442			8,743
Total liabilities		1,002,262			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 5,959,762 and 5,912,553 including 29,700 and 13,500 nonvested shares, respectively		11,860			11,798
Common stock surplus		18,870			18,456
Retained earnings		50,761			62,804
Warrant		1,481			—
Discount on preferred stock		(1,265	)		—
Accumulated other comprehensive (loss), net		(2,242	)		(15,029	)
Total shareholders’ equity		103,465			78,029
Total liabilities and shareholders’ equity	$	1,105,727		$	1,051,363

See Notes to Consolidated Financial Statements

2

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income/(Loss) (Unaudited)

(Dollars in thousands except per share amounts)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2009			2008			2009			2008
Interest and Dividend Income
Loans and fees on loans	$	12,316		$	13,150		$	37,367		$	38,870
Interest on investments:
Taxable interest income		1,159			1,510			3,699			4,459
Tax exempt interest income		510			415			1,413			1,248
Dividends		15			56			55			312
Interest on deposits with banks		44			—			59			—
Interest on federal funds sold		3			46			43			82
Total interest and dividend income		14,047			15,177			42,636			44,971
Interest Expense
Deposits		4,545			5,219			14,458			15,313
Federal funds purchased and repurchase agreements		3			16			7			70
Interest on FHLB advances		1,353			1,437			4,046			4,302
Interest on trust preferred debt		89			144			312			481
Total interest expense		5,990			6,816			18,823			20,166
Net interest income		8,057			8,361			23,813			24,805
Provision for Loan Losses		850			1,050			2,500			2,800
Net interest income after provision for loan losses	$	7,207		$	7,311		$	21,313		$	22,005
Noninterest Income (Loss)
Service charges and fees on deposit accounts		976			1,021			2,858			3,002
Debit/ credit card fees		309			296			893			844
Gain on sale of available for sale securities, net		3			—			40			44
Impairment losses on securities (includes total other-than-temporary impairment losses of $14,980 and $18,902, respectively, for the quarter and nine months ended September 30, 2009 and $4,439 and $4,739, respectively, for the quarter and nine months ended September 30, 2008. No additional amounts were recognized in other comprehensive income.)		(14,980	)		(4,439	)		(18,902	)		(4,739	)
Actuarial gain - pension curtailment		—			—			—			1,328
Gain on sale of fixed assets		—			—			—			128
Gain/(loss) on sale of OREO		107			(229	)		132			(229	)
Other operating income		385			312			1,067			1,174
Total noninterest income (loss)		(13,200	)		(3,039	)		(13,912	)		1,552
Noninterest Expenses
Salaries and benefits		3,602			3,690			11,469			11,266
Occupancy and equipment expense		1,272			1,196			3,807			3,443
Telephone		275			247			715			736
FDIC expense		300			117			1,407			300
Franchise tax expense		135			134			414			388
Marketing and advertising		155			285			531			659
Merger related expenses		218			—			526			—
Other operating expenses		1,373			1,317			3,876			3,848
Total noninterest expenses		7,330			6,986			22,745			20,640
Income (loss) before income taxes		(13,323	)		(2,714	)		(15,344	)		2,917
Income Tax Expense (Benefit)		(4,805	)		355			(5,778	)		2,060
Net income (loss)	$	(8,518	)	$	(3,069	)	$	(9,566	)	$	857
Effective dividend on preferred stock		372			—			1,086			—
Net income (loss) available to common shareholders		(8,890	)		(3,069	)	$	(10,652	)	$	857
Earnings(loss) per share: basic	$	(1.50	)	$	(0.52	)	$	(1.80	)	$	0.15
diluted	$	(1.50	)	$	(0.52	)	$	(1.80	)	$	0.15
Dividends per share, common	$	0.05		$	0.16		$	0.26		$	0.48

See Notes to Consolidated Financial Statements

3

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statement of Cash Flows (Unaudited)

(Dollars in thousands)

	Nine Months Ended September 30
	2009			2008
Cash Flows from Operating Activities
Net income	$	(9,566	)	$	857
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation		1,713			1,628
Investment amortization / (accretion), net		177			21
Provision for loan losses		2,500			2,800
Gain realized on available for sale securities’ transactions, net		(40	)		(44	)
Gain on sale of real estate OREO		(132	)		(128	)
Gain on pension curtailment		—			(1,328	)
Impairment charge on securities		18,902			4,739
Impairment on OREO		—			229
Gain on LLC investment		(10	)		(130	)
Stock based compensation		192			207
Change in assets and liabilities:		—			—
Increase in other assets		(10,991	)		(1,346	)
Increase in other liabilities		2,289			1,129
Net cash provided by operating activities		5,034			8,634
Cash Flows from Investing Activities
Proceeds from sales of securities available for sale		941			5,624
Proceeds from maturities, calls, and paydowns of securities		75,549			69,308
Purchase of debt securities		(86,183	)		(87,604	)
(Purchase)/retirement of restricted stock, net		293			(812	)
Net increase in loans		(32,348	)		(47,094	)
Acquisition of branches (See Note 12)		—			33,995
Sale of fixed assets		—			209
Proceeds from sale of other real estate		2,837			—
Improvement to Other Real Estate		(36	)		(123	)
Purchases of bank premises and equipment		(807	)		(4,130	)
Net cash (used in) investing activities		(39,754	)		(30,627	)
Cash Flows from Financing Activities
Net increase in noninterest bearing and interest bearing demand deposits and savings accounts		75,063			21,325
Net decrease in certificates of deposit		(36,783	)		(6,937	)
Repurchases and retirement of common stock		—			(1,237	)
Issuance of preferred stock under CCP		24,000			—
Issuance of common stock under dividend reinvestment plan		229			324
Director stock grant		54			104
Dividends declared		(2,260	)		(2,834	)
Decrease in federal funds purchased & repurchase agreements		(928	)		(381	)
Increase (decrease) in FHLB advances		(10,714	)		8,286
Net cash provided by financing activities		48,661			18,650
Increase (Decrease) in cash and cash equivalents		13,941			(3,343	)
Cash and cash equivalents
Beginning of period		13,214			18,384
End of period		27,155			15,041
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest on deposits and other borrowings	$	19,232		$	21,164
Income taxes	$	(5,394	)	$	2,370
Unrealized gain/(loss) on securities available for sale	$	1,500		$	(12,833	)
Transfers from loans to foreclosed real estate (OREO)	$	5,822		$	—

See Notes to Consolidated Financial Statements

4

EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. The accompanying unaudited consolidated financial statements, prepared in accordance with instructions for Form 10-Q, do not include all of the information and notes required by accounting principles generally accepted in the United States of America (GAAP) for complete financial statements. However, in the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) considered necessary to present fairly the financial position of Eastern Virginia Bankshares, Inc. (“we”, “us”, “our”, or “Company”) at September 30, 2009 and December 31, 2008, the results of operations for the three and nine months ended September 30, 2009 and 2008, and cash flows for the nine months ended September 30, 2009 and 2008. The statements should be read in conjunction with the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 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, a definitive merger agreement with First Capital Bancorp, Inc (“FCVA”) in the Richmond marketplace was announced. The regulatory process has moved much slower than anticipated with the result that the projected merger closing date will not occur in 2009.

The results of operations for the three- and nine-month periods ended September 30, 2009 are not necessarily indicative of the results to be expected for the full year.

5

EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

2. Our amortized cost and estimated fair values of securities at September 30, 2009 and December 31, 2008 were as follows:

	September 30, 2009
(dollars in thousands) Available for Sale:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Obligations of U.S. Government agencies	$	19,198	$	548	$	18	$	19,728
Mortgage-backed and CMO securities		79,769		2,166		305		81,630
State and political subdivisions - taxable		877		26		—		903
State and political subdivisions - tax exempt		50,218		1,336		324		51,230
Pooled trust preferred securities		635		—		—		635
FNMA and FHLMC preferred stock		77		207		—		284
Corporate securities		10,814		138		2,304		8,648
Restricted securities		8,941		—		—		8,941
Total	$	170,529	$	4,421	$	2,951	$	171,999

	December 31, 2008
(dollars in thousands) Available for Sale:	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
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 September 30, 2009, investments in an unrealized loss position that were temporarily impaired were as follows:

	September 30, 2009
	Less than 12 months				12 months or more				Total
(dollars in thousands) Description of Securities	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Obligations of U. S. Government agencies	$	980	$	18	$	—	$	—	$	980	$	18
Mortgage-backed and CMO securities		17,455		207		5,541		97		22,996		304
States and political subdivisions - tax exempt		6,409		17		2,310		308		8,719		325
Corporate securities		—		—		6,013		2,304		6,013		2,304
	$	24,844	$	242	$	13,864	$	2,709	$	38,708	$	2,951

Bonds with unrealized loss positions of less than 12 months duration at September 30, 2009 included 1 federal agency, 13 mortgage-backed securities and 4 municipal bonds. Securities with unrealized losses of 12 months or greater duration included 2 mortgage-backed securities, 4 collateralized mortgage securities and 9 corporate bonds. The unrealized loss positions at September 30, 2009 were primarily related to the widened market spreads for mortgage backed and corporate securities. Holdings of GMAC contained

6

EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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 September 30, 2009, we held $3.0 million par value in GMAC bonds with a book value of $2.7 million and an unrealized loss of $638 thousand. 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”). All of our securities with unrealized losses are income producing and do not exhibit credit stress that would lead to OTTI.

The tables that follow provide detail information as of both September 30, 2009 and December 31, 2008 on the corporate bond holdings that have been in a temporarily impaired position for 12 months or greater. These are all senior securities with no subordination.

September 30, 2009	Amortized Cost Basis		Fair Value		Unrealized Loss			Maturity	Current Market Yield		Moodys/S&P Credit Rating
(Dollars in thousands)
Issuer
HSBC CPI Floating CPI + 255 basis points	$	600	$	509	$	(91	)	2013	4.18	%	A3/A
SLM Corp Floating 1 Month CPI + 212.5 bp		1,000		641		(359	)	2013	11.86	%	Baa1/BBB-
SLM Corp Floating 1 Month CPI + 200 bp		1,000		622		(378	)	2014	11.61	%	Baa1/BBB-
SLM Corp Floating 1 Month CPI + 162 bp		1,000		620		(380	)	2014	10.66	%	Baa1/BBB-
Bear Stearns/J P Morgan Floating CPI + 145 bp		1,000		894		(106	)	2014	2.52	%	AA3/A+
Pacific Life Global FNDG Floating CPI +218 bp		1,000		835		(165	)	2016	3.66	%	A1/AA-
GMAC 6.25% Fixed Rate		500		370		(130	)	2013	15.58	%	CCC
GMAC 6.15% Fixed Rate		1,500		930		(570	)	2016	15.73	%	CCC
GMAC 6.875% Fixed Rate		717		592		(125	)	2018	15.35	%	CCC
	$	8,317	$	6,013	$	(2,304	)

December 31, 2008	Amortized Cost Basis		Fair Value		Unrealized Loss			Maturity	Current Book Yield		Moody/S&P Credit Rating
(Dollars in thousands)
Issuer
HSBC CPI Floating CPI + 255 basis points	$	602	$	334	$	(268	)	2013	5.71	%	Aa3/AA-
SLM Corp Floating 1 Month CPI + 212.5 bp		1,000		536		(464	)	2013	7.50	%	Baa2/BBB-
SLM Corp Floating 1 Month CPI + 200 bp		1,000		517		(483	)	2014	7.37	%	Baa2/BBB-
SLM Corp Floating 1 Month CPI + 162 bp		1,000		505		(495	)	2014	6.56	%	Baa2/BBB-
Bear Stearns/J P Morgan Floating CPI + 145 bp		1,000		755		(245	)	2014	5.11	%	AA2/AA-
GMAC 6.25% Fixed Rate		500		225		(275	)	2013	6.25	%	C/CC
GMAC 6.15% Fixed Rate		1,500		675		(825	)	2016	6.15	%	CC
GMAC 6.875% Fixed Rate		704		450		(254	)	2018	12.43	%	C/CC
	$	7,306	$	3,997	$	(3,309	)

Other-Than-Temporarily Impaired Debt Securities

We recognized other-than-temporarily impairment for debt securities classified at available for sale in accordance with Accounting Standards Codification 320-10-65. As required by this ASC, we assess whether we intend to sell or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis less any current period losses. For debt securities that are considered other-than-temporarily impaired, we separate the amount of impairment into the loss that is credit related (credit loss component) and the amount due to all other factors. The credit loss component is recognized in earnings and the difference between the security’s amortized cost basis and the present value of its expected cash flows discounted at the security’s effective yield. The remaining difference between the security’s fair value and present value of future expected cash flows is due to factors that are not credit related, and therefore, is not required to be recognized as losses in the income statement but is recognized in other comprehensive income. We believe that we will fully collect the carrying value of securities on which we have recorded a non-credit-related impairment in other comprehensive income. As of September 30, 2009, after much deliberation and consultation with an independent securities appraisal firm that specializes in valuing illiquid securities and in conjunction with the preparation of the financial statements included in this quarterly report on Form 10-Q, we recognized an impairment through the income statement of

7

EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

$15 million on our “pooled trust preferred” securities, reducing our book value on such securities to $635 thousand. The independent appraiser followed other than temporary impairment (“OTTI”) guidelines in determining that the total lack of an orderly market for pooled trust preferred securities was the result of credit issues in this class of securities. The model used to develop the fair market value 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 and the discounted present value of projected future cash flows. After this impairment, our remaining pooled trust preferred securities no longer have an unrealized loss. This class of securities had an unrealized loss at December 31, 2008 of $15.5 million as shown in the 2008 Securities Losses table below and was subject to $3.9 million of other-than-temporary impairment in the second quarter of 2009.

The table below presents a roll forward of the credit loss component recognized in earnings (referred to as “credit-impaired debt securities). The beginning balance represents the credit loss component for debt securities for which OTTI occurred prior to the beginning of the period. OTTI recognized in the first nine months of 2009 for credit-impaired debt securities is presented as additions in two components based upon whether the current period is the first time the debt security was credit impaired or is not the first time the debt security was credit impaired. Changes in the credit loss component of credit -impaired debt securities were:

(in thousands)	Quarter ended September 30, 2009		Nine months ended September 30, 2009
Balance beginning of period	$	3,922	$	—
Additions
Initial credit impairments		7,940		18,902
Subsequent credit impairments		7,040		—
Balance end of period	$	18,902	$	18,902

Of the $15.0 million and $18.9 million of credit-related OTTI included in the income statement for the quarter and the nine months ended September 30, 2009, $15.5 million of the loss was prior to 2008 year end, and was included net of tax as an unrealized loss of $10.1 million in other comprehensive income/(loss) at December 31, 2008. The $18.2 million that was considered a temporary loss at December 31, 2008 because of the lack of an orderly market became a credit-related loss in the second and third quarters of 2009 as defaults and nonperforming collateral in the trust preferred securities increased substantially, particularly in the quarter ended September 30, 2009. The table below presents the additions to nonperforming collateral by quarter in 2009, year-to-date 2009, at year end 2008 and total life-to-date in each impaired security:

Nonperforming collateral additions	Q1 2009		Q2 2009		Q3 2009		Total YTD		Life to Date Y/E 2008		Total Nonperforming Collateral Sep 30, 2009
Preferred Term Securities XXIII, Ltd	2.57	%	4.34	%	4.75	%	11.66	%	5.43	%	17.09	%
Preferred Term Securities XXIV, Ltd	6.33	%	10.79	%	7.91	%	25.03	%	3.47	%	28.50	%
Preferred Term Securities XXV, Ltd	5.42	%	6.90	%	9.80	%	22.12	%	7.98	%	30.10	%
Preferred Term Securities SSVI, Ltd	1.82	%	3.63	%	6.47	%	11.92	%	8.08	%	20.00	%
Preferred Term Securities XXVII, Ltd	6.00	%	3.43	%	8.28	%	17.71	%	2.30	%	20.01	%
SLOSO CDO 2007 B-1L, Ltd	0.88	%	0.00	%	10.62	%	11.50	%	9.22	%	20.72	%

8

EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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) Description of Securities	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized 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:

(Dollars in thousands)	(unaudited) September 30 2009			(audited) December 31 2008			(unaudited) September 30 2008
Commercial, industrial and agricultural loans	$	79,389		$	69,024		$	70,382
Residential real estate mortgage loans		396,943			372,067			357,111
Real estate construction loans		91,957			102,837			109,490
Commercial real estate loans		227,503			221,769			217,189
Consumer loans		43,490			47,226			48,920
All other loans		4,839			6,354			1,654
Total loans		844,121			819,277			804,746
Less unearned income		(8	)		(11	)		(13	)
Total loans net of unearned discount		844,113			819,266			804,733
Less allowance for loan losses		(11,364	)		(10,542	)		(10,613	)
Net loans	$	832,749		$	808,724		$	794,120

We had $28.8 million in non-performing assets at September 30, 2009 that included $6.5 million in loans past due 90 days or more but still accruing, $13.7 million in nonaccrual loans, $4.9 million in restructured loans and $3.7 million classified as OREO.

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

(in thousands)	(unaudited) September 30 2009			(audited) December 31 2008			(unaudited) September 30 2008
Balance at beginning of year	$	10,542		$	7,888		$	7,888
Reserve on loans acquired		—			488			488
Provision charged against income		2,500			4,025			2,800
Recoveries of loans charged off		348			554			441
Loans charged off		(2,026	)		(2,413	)		(1,004	)
Balance at end of year	$	11,364		$	10,542		$	10,613

9

EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Following is a summary pertaining to impaired loans:

	September 30 2009		December 31 2008
	(in thousands)
Impaired loans for which an allowance has been provided	$	17,071	$	14,977
Impaired loans for which no valuation allowance has been provided		10,095		9,264
Allowance related to impaired loans	$	5,018	$	2,881
Average balance of impaired loans	$	19,310	$	8,564

No additional funds are committed to be advanced in connection with impaired loans. Nonaccrual loans excluded from impaired loan disclosure under Accounting Standards Codification 310 (“ASC”) amounted to $666 thousand and $9.3 million at September 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) September 30 2009		(audited) December 31 2008		(unaudited) September 30 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 Amount		Avg Rate		Callable Amount		Avg Rate
2009		715	3.15	%		85,000	4.51	%
2010		5,714	5.57	%		28,500	4.20	%
2011		10,000	5.01	%		9,000	2.44	%
2015		13,500	3.87	%		—
2016		10,000	4.85	%		—
2017		75,000	4.30	%		—
2018		9,000	2.44	%		—
Total	$	123,929	4.26	%	$	122,500	4.29	%

10

EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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 nine-month periods ended September 30, 2009 and 2008.

	Three Months Ended
	September 30, 2009				September 30, 2008
	Shares	Per Share Amount			Shares	Per Share Amount
Basic earnings/(loss) per share	5,926,293	$	(1.50	)	5,882,007	$	(0.52	)
Effect of dilutive securities,
stock options	—		—		—		—
restricted stock	—		—		—		—
Diluted earnings/( loss) per share	5,926,293	$	(1.50	)	5,882,007	$	(0.52	)

	Nine Months Ended
	September 30, 2009				September 30, 2008
	Shares	Per Share Amount			Shares	Per Share Amount
Basic earnings/(loss) per share	5,915,426	$	(1.80	)	5,887,349	$	0.15
Effect of dilutive securities,
stock options	—		—		1,225		—
restricted stock	—		—		—		—
Diluted earnings/(loss) per share	5,915,426	$	(1.80	)	5,888,574	$	0.15

At September 30, 2009 and 2008, respectively, options to acquire 283,167 shares and 257,012 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.

Accounting standards require 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 an accounting standard 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.

Accounting standards also require that new awards to employees eligible for retirement prior to the awards becoming fully vested be recognized as compensation cost over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. Our stock options granted to eligible participants prior to the adoption of a new accounting standard in 2004 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

11

EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

normal retirement age of 65 prior to the normal vesting date. For the three- and nine-month periods ended September 30, 2009 and 2008, stock option compensation expense of $45 thousand and $52 thousand and $171 thousand and $188 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 September 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 nine months ended September 30, 2009 is summarized below:

	Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)	Intrinsic Value of Unexercised In-the Money Options (in thousands)
Outstanding at beginning of year	304,312	$	19.44
Granted	—		—
Exercised	—		—
Forfeited	21,145		20.21
Outstanding at September 30, 2009	283,167		19.44	6.33	none
Options exercisable at September 30, 2009	138,042		21.72	4.62

As of September 30, 2009, there was $321 thousand of unrecognized compensation expense related to stock options that will be recognized over the remaining requisite average service period of approximately 2.00 years. There were no options granted in the three- and nine-month periods ended September 30, 2009 or 2008. There were no shares exercised in the three month or nine month periods ended September 30, 2009 or 2008.

We awarded 18,000 shares of restricted stock to employees on July 1, 2009. One half of these shares are subject to time vesting at 20% per year over a five–year period. The other half of the restricted share award is performance based and will vest on June 30, 2012 if, and only if, 2011 financial achievements of the Company meet pre-specified targets for earnings per share or return on equity compared to a board compensation committee defined peer group. Performance share vesting is based on a sliding scale at various levels for performance at or above the 50^th percentile of the peer group performance. We issued no restricted stock in 2008, but did grant 15,000 shares in December 2007, again with a 50/50 split between time vested and performance vested. In December 2008, 1,500 of the time based shares vested and in April 2009, 800 time-based and 1,000 performance based shares were forfeited.

12

EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

At September 30, 2009 there was $84 thousand of total unrecognized compensation related to restricted stock awards. This unearned compensation is being amortized over the remaining vesting period for the time-based shares, and over the remaining vesting period for ¹/3^rd of the 2009 performance-based shares. The Company does not anticipate the 2007 performance based award to vest and assumes that only ¹/3^rd of the 2009 performance based award will vest. Compensation is accounted for using the fair market value of our common stock on the date the restricted shares were awarded, which was $8.31 per share for the 2009 award and $17.25 per share for the 2007 award. For the three- and nine-month periods ended September 30, 2009 and 2008, restricted stock compensation expense of $4 thousand and $7 thousand and $21 thousand and $22 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 September 30						Nine Months Ended September 30
	2009			2008			2009			2008
	(in thousands)						(in thousands)
Components of Net Periodic Benefit Cost
Service cost	$	165		$	229		$	495		$	687
Interest cost		191			192			573			576
Expected return on plan assets		(179	)		(266	)		(537	)		(799	)
Amortization of prior service cost		5			6			15			17
Amortization of net obligation at transition		—			—			—			1
Recognized net actuarial gain		53			—			159			(1,328	)
Net periodic benefit cost	$	235		$	161		$	705		$	(846	)

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. 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. Accounting standards exclude 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 “Fair Value Measurements” (ASC 820) , on January 1, 2008 to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Accounting standards clarify 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, accounting standards were issued to clarify the application of ASC 820 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. ASC 820 was effective upon issuance, including prior periods for which financial statements were not issued.

13

EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

Accounting standards specify 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 accounting standards 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.

• 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). We use a single quote service through our securities accounting firm that obtains its quotes from a nationally recognized firm. Procedurally we review current quotes to the prior month’s quote and analyze any significant changes.

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 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.

	Balance as of September 30, 2009		Fair Value Measurements at September 30, 2009 Using
Description			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	$	163,058	$	—	$	163,058	$	—

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 some portion of the 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

14

EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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 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 accounting standards.

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

	Balance as of September 30, 2009		Fair Value Measurements at September 30, 2009 Using
Description			Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Impaired loans	$	21,482	$	—	$	16,541	$	4,941
Other real estate owned		3,713		—		—		3,713

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.

15

EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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.

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 September 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:

	September 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	$	27,155	$	27,155	$	13,214	$	13,214
Securities - available for sale		171,999		171,999		161,879		161,879
Loans, net		832,749		891,334		808,724		835,595
Accrued interest receivable		4,142		4,142		4,050		4,050
Financial liabilities:
Noninterest-bearing deposits	$	94,954	$	94,954	$	90,090	$	90,090
Interest-bearing deposits		756,859		726,807		723,443		713,499
Short-term borrowings		2,665		2,665		3,593		3,593
Federal Home Loan Bank advances		123,929		134,801		134,643		139,400
Trust preferred debt		10,310		10,612		10,310		10,868
Accrued interest payable		2,103		2,103		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 December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141(R)) (ASC 805 Business Combinations). The Standard significantly changed the financial accounting and reporting of business combination transactions. SFAS 141(R) establishes principles for how an acquirer recognizes and measures the identifiable assets acquired, liabilities assumed, and any

16

EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for acquisition dates on or after the beginning of an entity’s first year that begins after December 15, 2008. The Company does not expect the implementation of SFAS 141(R) to have a material impact on its consolidated financial statements, at this time.

In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination that Arise from Contingencies” (ASC 805 Business Combinations). FSP FAS 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 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” (ASC 820 Fair Value Measurements and Disclosures). 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. Earlier adoption is permitted for periods ending after March 15, 2009. The Company 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” (ASC 825 Financial Instruments and ASC 270 Interim Reporting). 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, with earlier adoption permitted for periods ending after March 15, 2009. The Company 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” (ASC 320 Investments – Debt and Equity Securities). FSP FAS 115-2 and FAS 124-2 amends 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, with earlier adoption permitted for periods ending after March 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” (ASC 855 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” (ASC 860 Transfers and Servicing). SFAS 166

17

EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

provides guidance to improve the relevance, representational faithfulness, and comparability of the information that a report 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 is effective for interim and annual periods beginning after November 15, 2009. 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)” (ASC 810 Consolidation). SFAS 167 improves financial reporting by enterprises involved with variable interest entities. SFAS 167 is effective for interim and annual periods beginning after November 15, 2009. Early adoption 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 – replacement of FASB Statement No. 162” (ASC 105 Generally Accepted Accounting Principles). 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. SFAS 168 is effective immediately. The Company does not expect the adoption of SFAS 168 to have a material impact on its consolidated financial statements.

In June 2009, the FASB issued EITF Issue No. 09-1, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing” (ASC 470 Debt). EITF Issue No. 09-1 clarifies how an entity should account for an own-share lending arrangement that is entered into in contemplation of a convertible debt offering. EITF Issue No. 09-1 is effective for arrangements entered into on or after June 15, 2009. Early adoption is prohibited. The Company does not expect the adoption of EITF Issue No. 09-1 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 SABs 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.

In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (ASU 2009-05), “Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value.” ASU 2009-05 amends Subtopic 820-10, “Fair Value Measurements and Disclosures – Overall,” and provides clarification for the fair value measurement of liabilities. ASU 2009-05 is effective for the first reporting period including interim period beginning after issuance. The Company does not expect the adoption of ASU 2009-05 to have a material impact on its consolidated financial statements.

In September 2009, the FASB issued Accounting Standards Update No. 2009-12 (ASU 2009-12), “Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” ASU 2009-12 provides guidance on estimating the fair value of alternative investments. ASU 2009-12 is effective for interim and annual periods ending after December 15, 2009. The Company does not expect the adoption of ASU 2009-12 to have a material impact on its consolidated financial statements.

In October 2009, the FASB issued Accounting Standards Update No. 2009-15 (ASU 2009-15), “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing.” ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company does not expect the adoption of ASU 2009-15 to have a material impact on its consolidated financial statements.

In October 2009, the Securities and Exchange Commission issued Release No. 33-99072, “Internal Control over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers.” Release No. 33-99072 delays the requirement for non-accelerated filers to include an attestation report of their independent auditor on internal control over financial reporting with their annual report until the fiscal year ending on or after June 15, 2010.

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EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(UNAUDITED)

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

	Three Months Ended September 30						Nine Months Ended September 30
	2009			2008			2009			2008
Net income (loss)	$	(8,518	)	$	(3,069	)	$	(9,566	)	$	857
Unrealized gains (losses) on securities available for sale, net of tax expense		1,621			(12,781	)		516			(12,947	)
Less: reclassification adjustment, for gain on sale of available for sale securities, net of tax		(2	)		—			(26	)		(29	)
Add: reclassification adjustment for loss on impairment of securities, net of tax		9,737			4,439			12,286			4,634
Total comprehensive income (loss)	$	2,838		$	(11,411	)	$	3,210		$	(7,485	)

12. On January 9, 2009 we issued $24 million in preferred stock to the U. S. Treasury, comprised of 24,000 shares of our Series A Fixed Rate Cumulative Perpetual Preferred with a stated value of $1,000 per share. We had applied for these funds under the TARP Capital Purchase Program (“CPP”). This funding increased our Capital levels. The agreement also requires us to pay a 5% dividend on the preferred stock for the first five years, then increases to 9% for all periods after the first five years if we have not redeemed the preferred stock. In addition we issued a warrant to the U. S. Treasury giving them the right to purchase 373,832 shares of our common stock at $9.63 per share for up to 10 years. Accounting for the issuance of the preferred stock included entries to our balance sheet to recognize preferred stock at the full amount of the $24 million issuance, the warrant and discount on the preferred stock. The fair value of the preferred stock was calculated by discounting the cash flows by a prevailing interest rate that a similar security would have received in the current market environment in January 2009. The preferred stock dividend is being accreted quarterly over a 5 year time frame as an addition described as “effective preferred dividend”. The fair value of the warrants before allocation was $949,533 using the Black Scholes model with inputs of 7 year volatility, average rate of quarterly dividends, 7 year Treasury strip rate and the exercise price of $9.63 per share exercisable for up to 10 years. The net present value of the preferred stock using a 12% discount rate was $14,446,000. The 12% discount rate was determined to be the likely alternative cost of capital based on discussions with our investment banking advisors. Allocation of the discounted present value of the preferred stock and the fair value of the warrant resulted in a discount amount of $1.48 million to be accreted quarterly over a 5 year period on a constant effective yield method at a rate of approximately 6.4%. Accretion of the discount increases the reported effective preferred stock dividend by approximately $72 thousand per quarter.

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 supplement 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) Contingencies (ASC 450), which requires that losses be accrued when their occurrence is probable and estimable and (ii) Receivables (ASC 310) , 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 the accounting standards. 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 the accounting standards.

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 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

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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

The accounting standard (ASC 805)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 Intangibles – Goodwill and Other (ASC 350) which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of the accounting standards 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.

Goodwill totaled $16.0 million at both September 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 $287 thousand and $503 thousand, at September 30, 2009 and December 31, 2008, respectively, and are included in other assets.

OVERVIEW

The third quarter of 2009 presented continued challenges in the management of risks in our earning assets. While broad economic measurements show signs of the beginning of an economic upswing, we are still seeing that our customers are struggling to meet their month to month payments. Our loan quality measures continue to exhibit the difficulties that the economic stress is having on our market. Our investment portfolio has suffered significantly from economic stress and we have experienced an other-than-temporary impairment loss on the portfolio’s holdings of pooled trust preferred securities (“TRUPS”). These securities were purchased in 2006 and 2007 or earlier and were acquired for the sole purpose of mitigating interest rate risks, as they carried an interest rate that floated with LIBOR. TRUPS which consist primarily of debt issued by several hundred bank holdings companies demonstrated outstanding performance for the first 12 years of their existence and were considered investment grade securities until the second quarter of 2009. TRUPS began to experience stress in late 2007 and throughout 2008 and the first six months of 2009 to the point that there is no orderly market for these investments. In the third quarter of 2009 the rapid expansion of bank failures and deferrals by weaker banks impacted the value of TRUPS, decreasing the value of the investments by an amount greater than in the entire prior history of the segment. After much deliberation and consultation with an independent appraiser who specializes in valuing illiquid securities, the Board of Directors made the decision to take an impairment charge of $15 million ($9.8 million after tax) as of September 30, 2009. This charge negatively impacted earnings per share for the quarter by $1.64. We anticipate that with this risk removed from our investment portfolio, our improved capital position, our conservative loan loss reserves and strong core deposit growth, we will be well positioned for a healthy 2010.

Community banks including our Company rely primarily on earnings from lending in the local markets that they serve. Community banks are sharing the hardship of their customers and neighbors, as slowing loan payments have resulted in deteriorating asset quality. In the third quarter, our foreclosed real estate (“OREO”), nonaccrual assets and past due loan balances have risen and fallen as we deal with each new issue that arises. We have implemented special loan programs which assist our struggling customers by refinancing their debt, with the bank often absorbing the closing costs.

One of our major challenges in 2009 has been the minimal earnings on the large pool of cash created from rapid core deposit growth as consumers sought a “safe haven” and from the Treasury Capital Purchase Program (“CPP”) funds. With interest rates at historic lows, these funds were invested in fed funds or other short-term instruments with yields of less than 0.25%. Over the year, and especially in the third quarter, we have restructured our balance sheet by decreasing the amount in short term investments and allowing higher cost brokered deposits and some of our highly interest-sensitive certificates of deposit to roll off the liability side of our balance sheet. This has allowed us to maximize our earning asset yield, while positioning us to lend money that has a lower funding cost. In the current low interest rate environment, this allows use to improve our interest spread and margin moving forward by better matching earning rates to funding rates to get a consistent spread.

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On April 3, 2009, a definitive merger agreement with First Capital Bancorp, Inc. (“FCVA”) in the Richmond marketplace was announced. Both companies received shareholder approval of the merger in August 2009. The regulatory approval process has moved much slower than anticipated and is still pending with the result that the projected closing date will not be in 2009. 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 decreased earnings in 2009.

Third quarter 2009 earnings were negatively impacted by the securities impairment taken, resulting in a loss available to common shareholders of $8.9 million, compared to a loss of $3.1 million in the third quarter of 2008. In both periods, the loss was the result of securities impairments. In 2008, it was for the government service entity (“GSE”) investments which lost their value when the government seized the mortgage giants FNMA and FHLMC. In 2009, it was from the TRUPS discussed above. Net interest income was $8.1 million in the third quarter of 2009, compared to $8.4 million in the third quarter 2008, and down slightly from $8.2 million in the second quarter of 2009. Noninterest income/(loss), including the impairment charge, was ($13.2) million for the third quarter, a $10.2 million decline from ($3.0) million for the three months ended September 30, 2008. Noninterest expense increased $327 thousand from $7.0 million in the third quarter of 2008 to $7.3 million for the third quarter of 2009. This increase was primarily from a $183 thousand increase in FDIC expense and $218 thousand of merger-related expense. Net interest margin for the third quarter was 3.20% compared to 3.59% for the third quarter of 2008. Since March 2007, the net interest margin has followed a downward trend which we believe will be reversed beginning in the fourth quarter of 2009. Average earning assets for the third quarter of 2009 were $79.7 million above that of the third quarter of 2008. Average loans were $47.1 million above the average loans for the third quarter of 2008. Federal funds sold decreased to $5.5 million compared to $9.5 million in the same quarter of the prior year while the average yield decreased from 1.94% to 0.22%. Average interest-bearing deposit balances increased $84.8 million, or $37.7 million, more than loan growth in the third quarter of 2009.

Investment income declined from the combination of lower rates on new investments, from the Treasury conservatorship of FNMA and FHLMC which eliminated our agency preferred stock dividends, a decline in the TRUPS earnings and the temporary suspension of dividends from the Atlanta FHLB for the first two quarters of 2009 before the FHLB resumed dividend payments in the third quarter of 2009. Loan loss provision for the third quarter was $850 thousand compared to $1.1 million in the third quarter of 2008. For the year, the provision is $2.5 million compared to $2.8 million through the first nine months of 2008. Management still sees risk in the loan portfolio and expects to continue higher provision expense through the end of 2010.

Looking to the rest of the year, we are still waiting for the federal government’s economic stimulus plan to revive loan demand. Our special loan program, started late in the second quarter to relieve some of the payment pressure on our customers, has booked $13.6 million in loans, and we have paid $94 thousand in closing costs related to these loans. We continue to explore other loan products to assist our customers. Over the remainder of the year we anticipate $110 million in certificates of deposit repricing at lower rates which should further enhance our 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 Company infused EVB with $20 million more of regulatory capital earlier in the year. We anticipate continued higher than historical loan losses in the short run and have prepared for that possibility. 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 third quarter of 2009 declined to (3.17%), compared to (1.19%) in the same quarter of 2008, and return on common average equity (“ROE”) declined to (44.83%) compared to (14.30%) for the quarter ended September 30, 2008. For the first nine months of 2009, ROA declined to (1.30%), compared to 0.12% for the same period in 2008, and ROE declined to (18.59%) compared to 1.28% for the period ended September 30, 2008. For the third quarter of 2009 the net loss was $8.5 million, and the net loss after $372 thousand effective preferred dividend was $8.9 million compared to a net loss of $3.1 million in the third quarter of 2008. For the nine months ended September 30, 2009, the net loss was $9.6 million and the net loss after effective preferred dividend was $10.7 million compared to net income of $857 thousand for the first nine months of 2008.

Total assets at September 30, 2009 were $1.11 billion, up $54.4 million, or 5.2%, from $1.05 billion at year-end 2008 and up $74.7 million, or 7.3% from September 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

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preferred stock under the Treasury CPP. Loan growth through September 30, 2009 was $24.8 million, or 3.0% compared to the 2008 year-end balance. Actual loan growth in the third quarter of 2009 was $11.3 million or 1.4% which would project to an annualized growth of 5.6%. For the quarter, total average assets were $1.1 billion, an increase of 8.69% compared to $1.02 billion in the third quarter of 2008. For the quarter ended September 30, 2009, average total loans, net of unearned income, were $838.2 million, an increase of $47.1 million, or 6.0%, from $791.1 million for the same period in 2008. For the nine months ended September 30, 2009, total average assets were $1.1 billion, an increase of $109.9 million compared to $987.8 million for the same period in 2008. At September 30, 2009, net loans as a percent of total assets were 75.3%, 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 September 30, 2009, the investment portfolio totaled $171.9 million, an increase of $10.1 million from $161.9 million at December 31, 2008 and an increase of $15.2 million compared to $156.8 million at September 30, 2008. Yield during the first nine months of 2009 was down compared to the same quarter in the prior year. This was the result of the lack of FNMA and FHLMC income in 2009 and elimination of trust preferred income as we have gone through the year. As a result of the impairment taken in the third quarter, our unrealized gain or loss (MTM) in the investment portfolio improved $19.7 million to $1.5 million at September 30, 2009 compared to year-end 2008. The reported balances for 2009 are after the $15.0 million and $3.9 million impairments taken in the third and second quarters, respectively. By taking these impairments, we have substantially lowered the risk profile of our balance sheet. For more detail, see securities Note 2 to the consolidated financial statements earlier in the document. The investment portfolio is designed to balance interest rate risk and provide liquidity. It is an active tool in balance sheet management.

Total deposits continue to grow. At September 30, 2009 deposits were $851.8 million, an increase of $73.7 million, or 9.5%, from $778.2 million at the same point in 2008 and up $38.3 million from the year-end 2008 balance of $813.5 million. Over 92 % of the increase was in core deposits - $48.8 million in NOW accounts and $23.8 million in MMDA. Certificates of deposit increased $3.4 million. Cost of deposits is down $855 thousand compared to the first nine months of 2008 with $674 thousand of that decrease occurring in the third quarter, and our cost of deposits is projected to continue to decrease as $110 million in certificates of deposit reprice over the next three months. Average interest-bearing deposits increased $111.6 million from $645.2 million in the third quarter of 2008 to $756.7 million for the same period in 2009. Average demand deposits declined $5.3 million to $92.2 million at September 30, 2009.

FHLB borrowings at September 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 September 30, 2008.

Accounting standards require the Company to show the effect of market changes in the value of securities available for sale. The valuation is particularly erratic in these stressed economic times. 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 $955 thousand gain at September 30, 2009 compared to an $11.8 million loss at December 31, 2008 and an increase of $11.4 million compared to a $10.4 million loss at June 30, 2009. Also included in this line item is a $3.2 million loss related to the prior year market decrease in the value of the pension plan.

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.

For the third quarter 2009, net income/(loss) available to common shareholders was a loss of $8.9 million compared to a loss of $3.0 million in the third quarter of 2008. Diluted and basic earnings per common share decreased $0.98 to a loss of $1.50, compared to a loss of $0.52 for the same quarter in 2008. Without the $10.6 million increase in securities impairment and the merger-related expense of $218 thousand, the Company would have had positive pretax income. Net interest income for the third quarter 2009 was $8.1 million compared to $8.4 million for the same quarter in 2008. The third quarter decrease of $304 thousand is less than the decline in the second quarter of 2009 of $594 thousand as the interest spread decreased. Interest and fees on loans were down $834 thousand, or 6.3 %, while deposit costs were down $674 thousand, or 12.9 % compared to third quarter 2008. An encouraging aspect of this decline is the third quarter deposit interest expense decrease which is approximately 79% of the total year over year change and indicates that the net interest margin should be adjusting upward.

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Interest income on investments declined by $296 thousand compared to the third 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, the decline in trust preferred income and a decreased FHLB dividend. Federal funds sold, with an average balance of $5.5 million and a yield of only 0.22%, earned $3 thousand during the third quarter, a decline of $43 thousand compared to 2008. Our investment in deposits at other banks, with an average balance of $26.1 million, earned $44 thousand for the quarter which offset the fed funds decline. We have clearly benefited from shifting funds out of traditional fed funds category. We continue to explore other higher earning investment alternatives to improve earnings on our excess funds. Interest bearing liabilities expense decreased $826 thousand for the third quarter compared to the same period in 2008. With the decreasing deposit costs, we are anticipating more improvement in our net interest margin over the next twelve months due to continued deposit repricing. Loan loss provision for the third quarter 2009 was $850 thousand, a decline of $200 thousand from $1.1 million in the third quarter 2008. Over the last six quarters, we have set aside $6.1 million in provision and anticipate continuing this higher than usual provision for the near term.

Noninterest income for the third quarter 2009 was ($13.2) million, compared to ($3.0) million in 2008’s third quarter. Excluding the impact of the securities impairment for both periods, mentioned above, noninterest income would have increased $363 thousand to $1.8 million for the third quarter 2009 compared to $1.4 million for the same period in 2008. Deposit fees declined $45 thousand while other noninterest income increased $56 thousand primarily from insurance fees, and card fees increased $13 thousand. An OREO gain of $107 thousand compared to a loss in 2008 of $229 thousand was the largest increase in noninterest income before impairments. Without the OREO item, there was still a $24 thousand increase in noninterest income period-to-period.

Noninterest expense for the third quarter of 2009 increased $327 thousand, or 4.7% compared to 2008 from $7.0 million in 2008 to $7.3 million in third quarter 2009. This increase was primarily from a $183 thousand increase in the regular FDIC assessment and the $218 thousand in merger related expenses. Occupancy expense increased $76 thousand due to annual changes in building insurance, rent and service contracts. Management continues to monitor controllable expenses closely.

For the nine months ended September 30, 2009, net income/(loss) available to common shareholders was ($10.7) million, a decrease of ($11.5) million compared to $857 thousand at the same date in 2008. Net interest income decreased $992 thousand, with a decrease of $2.3 million in interest income offset by a decrease in interest expense of $1.3 million. Loan loss provision expense was $2.5 million through September 30, 2009 down $300 thousand from $2.8 million in 2008. Noninterest income for the first nine months of 2009 was ($13.9) million, a decrease of $15.5 million compared to 2008’s $1.6 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 would have increased $27 thousand as a result of higher card fees. (See table below.) Noninterest expense increased $2.1 million from $20.6 million in 2008 to $22.7 million for the period ended September 30, 2009. Of that increase, $1.6 million is from a $1.1 million increase in FDIC expense and 526 thousand of merger-related expenses. The remainder of the increase is from $203 thousand in salaries and benefits as group insurance and pension costs rose and $364 thousand in occupancy and equipment as a result of our branch purchases in 2008 and annual increases in the third quarter.

	YTD through September 30						YTD Change
Dollars in thousands	2009			2008			Amount			Percent
Total noninterest income/(loss) reported (GAAP)	$	(13,929	)	$	1,552		$	(15,481	)	-997.5	%
Less Impairment - securities		(18,919	)		(4,739	)		(14,180	)	299.2	%
Less Actuarial gain - pension curtailment		—			1,328			(1,328	)	-100.0	%
Total noninterest income without unusual items	$	4,990		$	4,963		$	27		0.5	%

Net Interest Income

Net interest income is our primary source of income and for the third quarter of 2009, net interest income on a fully tax equivalent basis decreased $263 thousand to $8.3 million, compared to $8.5 million in the third quarter of 2008. Average earning assets for the quarter ended September 30, 2009 were $1.04 billion, an increase of $79.7 million compared to $957 million for the same period in 2008. Average loans increased $47.1 million, or 6.0%. Average securities increased $10.6 million, or 6.8%. Average federal funds sold decreased $4.0 million, or 42.4%, for the third quarter of 2009, reflecting the redistribution of our excess funds to other short term earning assets. Fully tax equivalent

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net interest margin for the three-month period ended September 30, 2009 was 3.20% compared to 3.59% for the same quarter in 2008. The third quarter 2009 margin was impacted by the early repricing of some loans as well as the loss of income from the devalued investments and an increased level of nonaccrual loans. For the third quarter of 2009, the yield on earning assets declined 93 basis points to 5.52%, compared to 6.45% for the third quarter of 2008, and the cost of interest bearing liabilities was down 64 basis points to 2.66% from 3.30% in the same period in 2008. Interest expense continues its downward trend, partially relieving the margin squeeze, with decreases in all the deposit categories. For the three months ended September 30, 2009, the average balances for money market savings and interest checking increased $40.1 million and $29.7 million respectively, while jumbo certificates grew $30.0 million and certificates less than $100 thousand declined $14.4 million, all compared to the average balances for the third quarter of 2008.

For the nine months ended September 30, 2009, net interest income on a fully tax equivalent basis was down $919 thousand from $25.4 million in 2008 to $24.4 million in 2009. Of this decline, $637 thousand occurred in the first quarter of 2009. The yield on earning assets was 5.64% for the nine months ended September 30, 2009 compared to 6.57% for the same period in 2008. The cost of interest-bearing liabilities was 2.82% for the first nine months of 2009 compared to 3.40% for the same period in 2008. On a year to date basis, average balances for interest-bearing deposits grew $111.6 million, or 17.3%, with increases in all categories except savings. The other interest bearing liabilities (borrowings) average balances were down $11.5 million.

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Going into the fourth quarter of 2009 and the year 2010, management’s objective in the margin measure is to find better investments for the excess funds on our balance sheet, grow loans and deposits, while managing the deposit cost in order to maintain a reasonable spread. 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 nine month periods ended September 30, 2009 and 2008:

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

	Three Months Ended September 30,
	2009							2008
	Average Balance			Income/ Expense		Yield/ Rate		Average Balance			Income/ Expense		Yield/ Rate
Assets:
Securities
Taxable	$	116,333		$	1,175	4.05	%	$	116,395		$	1,566	5.41	%
Tax exempt (1)		50,866			733	5.78	%		40,220			598	5.98	%
Total securities		167,199			1,908	4.58	%		156,615			2,164	5.56	%
Interest bearing deposits with banks		26,088			44	0.68	%		—			—	0.00	%
Federal funds sold		5,486			3	0.22	%		9,529			46	1.94	%
Loans, net of unearned income (2)		838,237			12,316	5.89	%		791,119			13,150	6.69	%
Total earning assets		1,037,010			14,271	5.52	%		957,263			15,360	6.45	%
Less allowance for loan losses		(11,256	)						(10,202	)
Total non-earning assets		86,877							76,654
Total assets	$	1,112,631						$	1,023,715
Liabilities & Shareholders’ Equity:
Interest bearing deposits
Checking	$	190,549		$	632	1.33	%	$	150,469		$	756	2.02	%
Savings		74,581			133	0.72	%		75,135			156	0.84	%
Money market savings		85,676			293	1.37	%		56,002			334	2.40	%
Large dollar certificates of deposit (3)		179,478			1,512	3.38	%		149,487			1,688	4.54	%
Other certificates of deposit		236,891			1,974	3.34	%		251,262			2,285	3.66	%
Total interest-bearing deposits		767,175			4,544	2.38	%		682,355			5,219	3.08	%
Federal funds purchased & REPO’s		1,248			3	0.96	%		2,938			16	2.19	%
Other borrowings		134,239			1,443	4.31	%		145,667			1,581	4.37	%
Total interest-bearing liabilities		902,662			5,990	2.66	%		830,960			6,816	3.30	%
Noninterest-bearing liabilities
Demand deposits		93,068							99,107
Other liabilities		14,226							8,281
Total liabilities		1,009,956							938,348
Shareholders’ equity		102,675							85,367
Total liabilities and shareholders’ equity	$	1,112,631						$	1,023,715
Net interest income				$	8,281						$	8,544
Interest rate spread (4)						2.86	%						3.15	%
Interest expense as a percent of average earning assets						2.31	%						2.86	%
Net interest margin (5)						3.20	%						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 $224 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)

	Nine Months ended September 30,
	2009							2008
	Average Balance			Income/ Expense		Yield/ Rate		Average Balance			Income/ Expense		Yield/ Rate
Assets:
Securities
Taxable	$	110,021		$	3,754	4.56	%	$	118,030		$	4,771	5.40	%
Tax exempt (1)		46,210			2,035	5.89	%		41,031			1,797	5.85	%
Total securities		156,231			5,789	4.95	%		159,061			6,568	5.52	%
Interest bearing deposits with banks		10,793			59	0.73	%		—			—	0.00	%
Federal funds sold		26,774			43	0.21	%		5,389			82	2.03	%
Loans, net of unearned income (2)		831,193			37,367	6.01	%		761,649			38,870	6.82	%
Total earning assets		1,024,991			43,258	5.64	%		926,099			45,520	6.57	%
Less allowance for loan losses		(11,133	)						(9,086	)
Total non-earning assets		83,903							70,793
Total assets	$	1,097,761						$	987,806
Liabilities & Shareholders’ Equity:
Interest bearing deposits
Checking	$	176,778		$	2,103	1.59	%	$	141,255		$	2,128	2.01	%
Savings		73,367			418	0.76	%		75,440			517	0.92	%
Money market savings		81,946			1,075	1.75	%		49,250			882	2.39	%
Large dollar certificates of deposit (5)		181,197			4,765	3.52	%		140,170			4,840	4.61	%
Consumer certificates of deposit		243,460			6,097	3.35	%		239,065			6,946	3.88	%
Total interest-bearing deposits		756,748			14,458	2.55	%		645,180			15,313	3.17	%
Federal funds purchased & REPO’s		810			7	1.16	%		3,305			70	2.83	%
Other borrowings		135,357			4,358	4.30	%		144,306			4,783	4.43	%
Total interest-bearing liabilities		892,915			18,823	2.82	%		792,791			20,166	3.40	%
Noninterest-bearing liabilities
Demand deposits		92,184							97,514
Other liabilities		12,061							8,171
Total liabilities		997,160							898,476
Shareholders’ equity		100,601							89,330
Total liabilities and shareholders’ equity	$	1,097,761						$	987,806
Net interest income				$	24,435						$	25,354
Interest rate spread (3)						2.82	%						3.17	%
Interest expense as a percent of average earning assets						2.46	%						2.91	%
Net interest margin (4)						3.19	%						3.66	%

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 nine months is $622 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 September 30, 2009 was ($13.2) million, a decrease of $10.2 million from $3.0 million for the same three months of 2008. Most of this decline was the result of the $15.0 million securities impairment taken in the third quarter of 2009. This impairment was taken to remove the other-than-temporary loss on trust preferred investments from the balance sheet. While it creates a loss for the Company in 2009, it enhances the balance sheet strength and improves our risk based capital ratios. The three recurring lines in this income section are deposit fees, card fees and other operating income. For the third quarter of 2009, these totaled $1.7 million compared to $1.6 million for the same period in 2008, an increase of $41 thousand in the core noninterest income categories. Deposit fees for the quarter were $976 thousand compared to $1.0 million in the same period in 2008, down $45 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 $5.0 million from September 2008.

Many of these balances are moving into other no service charge products. We have a number of products where service charges are waived if certain account rules are followed. A number of those accounts are in our NOW and MMDA products which are our fastest growing deposit balances. Card fees were $309 thousand for the quarter ended September 30, 2009, an increase of $13 thousand from $296 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 increased $56 thousand from $312 thousand for the three months ended September 30, 2008 to $368 thousand in 2009. Most of the income in this category is from small business lines that we are in such as insurance sales, title insurance investment services and mortgage referral. The third quarter increase was generated by higher title insurance income, higher insurance commissions and a net OREO gain for the quarter.

For the nine months ended September 30, 2009, noninterest income/(loss) was ($13.9) million compared to $1.6 million for the same period in 2008, a decrease of $15.5 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 in the second quarter and $15.0 million in the third quarter compared to a $4.7 million impairment for the first nine months of 2008, a decrease of $14.2 million when comparing the two periods. In 2009, there were no gains to match the $1.3 million actuarial gain from our pension plan taken in the first quarter of 2008, resulting in a net reduction of $1.3 million for the comparable period. Also, there was an OREO gain of $132 thousand compared to a loss of $229 thousand in the first nine months of 2009. The remaining balance represents small increases or decreases that net each other out. Core noninterest earnings excluding the impairments and the 2008 pension gain increased $99 thousand.

Noninterest Expense

This category includes all expenses other than interest paid on deposits and borrowings. Total noninterest expense was $7.3 million for the quarter ended September 30, 2009, an increase of $327 thousand, or 4.7%, compared to $7.0 million in the same quarter of 2008. The increase is the result of a $183 thousand increase in FDIC expense and $218 thousand in merger-related expense in the third quarter of 2009. Merger-related expenses include legal, marketing and other expenses related to bringing the companies together and are accumulated as a separate account. Salary and benefits decreased $88 thousand from $3.7 million in 2008 to $3.6 million in 2009. Occupancy and equipment increased $76 thousand due to annual increases in operating expense for rent, service contracts and building insurance. Marketing expense decreased $130 thousand from decreased branch opening and public relations expense in 2009. Other operating expense increased $39 thousand from special lending program closing costs of $94 thousand.

For the nine months ended September 30, 2009 total noninterest expense increased $2.1 million from $20.6 million in 2008 to $22.7 million in 2009. Again, $1.6 million of this increase is the result of a $1.1 million increase in FDIC expense and the $526 thousand in merger-related expense. Salaries and benefits are up $203 thousand, or 1.8%, due to increases in our group insurance expense and pension plan expense. Occupancy expense is up $364 thousand as a result of branch expansion in 2008 and annual increases in contracted services.

Income Taxes

Income tax expense for the quarter ended September 30, 2009 was a benefit of $4.8 million compared to an expense of $355 thousand in the same quarter of the prior year, a $5.2 million decrease with the benefit driven by the securities impairment. Income tax expense for the nine months ended September 30, 2009 was a benefit of $5.8 million compared to $2.1 million expense for the same period in 2008, a decrease of $7.8 million. Again, the decrease 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 $28.8 million at September 30, 2009, $16.7 million at December 31, 2008 and $10.1 million at September 30, 2008. This number continues to increase as a 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. Loans have moved in and out of this account all year as borrowers have brought them up to date or they have moved to OREO or property is sold. The OREO balances have also turned over, even with a weak real estate market. Nonperforming assets are composed largely of loans secured by real estate (98.3%) in the Company’s market area and repossessed properties in our OREO balances. At the end of the third quarter OREO was $3.7 million compared to $560 thousand at year-end 2008 and $950 thousand at September 30, 2008. At September 30, 2009, the OREO balance included two lots from one builder which included $100 thousand in mechanics liens, nine lots from another developer with $9,300 in improvements and five residential homes. As these properties are sold, they are removed from OREO and any excess or shortfall goes to the “gain/(loss) on sale of OREO” account. As more foreclosures occur in our markets, we expect that our September 30, 2009 OREO balance may increase in coming months. The depressed economy has affected our real estate markets causing deflation in property values.

Nonaccrual loans are $13.7 million at September 30, 2009, a increase of $100 thousand from $13.6 million at year-end 2008 and an increase of $9.3 million from $4.4 million at September 30, 2008. The increase shows the impact of the addition of a $5.3 million well-secured credit in late September. Of the current balance of $13.7 million in nonaccrual loans, $13.5 million is secured. Within these secured loans, $13.3 million are secured by real estate, $252 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, $2.7 million are residential real estate and $6.8 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 September 30, 2009, loans past due 90 days and still accruing interest, were $6.5 million, an increase of $4.0 million from year end 2008 and an increase of $1.7 million from a $4.8 million balance at September 30, 2008. All of these loans are 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. At September 30, 2009 our restructured loans totaled $4.9 million, compared to no restructured loans at the same date in 2008.

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 $972 thousand for the third quarter of 2009 compared to $148 thousand for the same quarter in 2008. The annualized ratio of net charge-offs to total average loans, net of unearned income, was 0.46% for the third quarter of 2009, compared to 0.24% for the full year 2008 and 0.07% for the third quarter of 2008. For the nine months ended September 30, 2009, loan charge-offs, less recoveries, amounted to $1.7 million compared to $563 thousand for the same period in 2008, while the annualized ratio of net charge-offs to total average loans, net of unearned income, was 0.27% for the first nine months of 2009, compared to 0.24% for the full year 2008 and 0.10% for the first nine 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 September 30, 2009, the allowance for loan losses was $11.4 million, an increase of $900 thousand when compared to $10.5 million at December 31, 2008, and up $751 thousand, compared to $10.6 million at September 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 1.35% at September 30, 2009, 1.29% at 2008 year-end and 1.32% at September 30, 2008. The allowance for loan losses at September 30, 2009 included $5.0 million on specific impaired loan reserves.

At September 30, 2009, the Company reported a balance of $27.2 million in impaired loans, an increase of $2.9 million from $24.2 million at December 31, 2008. At September 30, 2009, impaired loans were composed of $17.2 million with specific reserves assigned and $10.1 million with no specific reserves assigned. The average balance of impaired loans with a specific reserve for the nine months ended September 30, 2009 was $19.3 million.

At September 30, 2009 we also had $28.1 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 (Dollars in thousands)	September 30 2009			December 31 2008			September 30 2008
Nonaccrual loans	$	13,680		$	13,574		$	4,361
Restructured loans		4,852			—			—
Loans past due 90 days and accruing interest		6,525			2,590			4,831
Total nonperforming loans	$	25,057		$	16,164		$	9,192
Other real estate owned		3,713			560			950
Total nonperforming assets	$	28,770		$	16,724		$	10,142
Nonperforming assets to total loans and other real estate		3.39	%		2.04	%		1.26	%
Allowance for loan losses to nonaccrual loans		83.07	%		77.66	%		243.36	%
Net charge-offs to average loans for the year		0.27	%		0.24	%		0.10	%
Allowance for loan losses to period end loans		1.35	%		1.29	%		1.32	%

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.

At both September 30, 2009 and December 31, 2008, our Federal funds sold balance was zero. Late in the second quarter, we moved some funds to short term investments and continued the approach in the third quarter. We still have $14 million in interest bearing deposits with other banks which matures in less than a year. In this lower interest rate environment, we feel we can attract deposits with minimal changes in interest rates and are willing to borrow at low short term rates, if necessary, in order to maximize the yield on earning assets. Our investment portfolio now has several segments, CMO’s and nontaxable municipals, with strong gains in them which makes them more marketable in an emergency. Our FHLB borrowings declined $11.4 million with a $10 million block maturing in the first quarter of

30

2009. These were the only changes to our contractual obligations that would impact liquidity since the 2008 Form 10-K disclosure. At September 30, 2009, we had immediate available credit with the FHLB of $42.0 million and with nonaffiliated banks of $37.8 million. We continue to be in a strong liquidity position. 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 September 30, 2009 was $96.2 million, or 11.49% of risk-weighted assets, and $101.6 million, or 12.14%, for total risk based capital. Our Tier 1 leverage ratio at September 30, 2009 was 8.81%. Our year-end 2008 ratios were 10.51%, 11.56% and 8.62%, respectively. By enhancing our capital ratios, management fulfills a major goal of growth and to position the Company to grow capital at a faster pace in a better earnings environment. While a stock offering in December 2006 allowed us to grow and maintain strong capital ratios over the last two years, the infusion of the TARP funds has allowed us to handle the challenges we have faced over the last year. At September 30, 2008, these ratios were 10.60%, 11.65% and 8.54%, respectively. The capital ratios are higher than the ratios at year end 2008 and at September 30, 2008.

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. 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;

• 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;

31

• 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 September 30, 2009 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

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

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.

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

The Emergency Economic Stabilization Act of 2008 temporarily increased the limit on FDIC coverage to $250,000 for all accounts through December 31, 2009. As a result, the FDIC almost doubled its assessment rate on well-capitalized institutions by raising the assessment rate 7 basis points at the beginning of 2009. The FDIC has adopted another final rule effective April 1, 2009, to change the way that the FDIC’s assessment system differentiates for risk, make corresponding changes to assessment rates beginning with the second quarter of 2009, as well as other changes to the deposit assessment rules. In May 2009, the Board of Directors of the FDIC voted to levy a special assessment of five basis points on an FDIC –insured depository institution’s assets, minus Tier 1 capital, as of June 30, 2009. The special assessment was capped at 10 basis points of an institution’s domestic deposits. We are also participating in the FDIC’s Temporary Liquidity Guarantee Program, or TLB, for noninterest-bearing transaction deposit accounts. Banks that participate in the TLG’s noninterest-bearing transaction account guarantee will pay the FDIC an annual assessment of 10 basis

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points on the amounts in such accounts above the amounts covered by FDIC insurance. To the extent that these TLG assessments are insufficient to cover any loss or expenses arising from the TLB program, the FDIC is authorized to impose an emergency special assessment on FDIC-insured depository institutions. Legislation has been proposed to give the FDIC authority to impose charges for the TLG program upon depository institution holding companies, as well. These changes, along with the full utilization of our FDIC insurance assessment credit in early 2009, will cause the premiums and TLG assessments charged by the FDIC to increase. These actions could significantly increase our noninterest expense for the remainder of 2009 and for the foreseeable future.

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

We may be required to record other-than-temporary impairment charges on our investment securities if they suffer a decline in value that is considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information for certain investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on our securities portfolio in future periods. An other-than-temporary impairment charge could have a material adverse effect on our results of operations and financial condition.

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

In January 2001, the Board of Directors gave the authority to management to repurchase up to 5% of the outstanding shares of the company’s stock per calendar year based on the number of shares outstanding on December 31 of the preceding year. This authority has been reaffirmed each year and was most recently reaffirmed in June of 2007. There 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 nine 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 a meeting of shareholders on August 20, 2009. At this meeting, the shareholders approved the following proposal by the margins indicated.

To approve the proposed merger of First Capital Bancorp, Inc. into Eastern Virginia Bankshares, Inc.

For	Against	Abstained	Total
3,593,289	180,014	22,909	3,796,212

Item 5. Other Information(not applicable)

Item 6. Exhibits

Exhibit 31.1 –	Rule 13a-14(a) Certification of Chief Executive Officer
Exhibit 31.2 –	Rule 13a-14(a) Certification of Chief Financial Officer
Exhibit 32.1 –	Section 906 Certification of Chief Executive Officer
Exhibit 32.2 –	Section 906 Certification of Chief Financial Officer

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SIGNATURES

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

Eastern Virginia Bankshares, Inc.

/S/    JOE A. SHEARIN        

Joe A. Shearin

President and Chief Executive Officer

/S/    RONALD L. BLEVINS        

Ronald L. Blevins

Chief Financial Officer

Date: November 5, 2009

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Exhibit Index

Exhibit 31.1 –	Rule 13a-14(a) Certification of Chief Executive Officer
Exhibit 31.2 –	Rule 13a-14(a) Certification of Chief Financial Officer
Exhibit 32.1 –	Section 906 Certification of Chief Executive Officer
Exhibit 32.2 –	Section 906 Certification of Chief Financial Officer

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