Eastern Virginia Bankshares (EVBS) 10-Q 2011 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2011

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) 443-8460

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

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

The number of shares of the registrant’s Common Stock outstanding as of August 10, 2011 was 6,009,988.

EASTERN VIRGINIA BANKSHARES, INC.

INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of June 30, 2011 (unaudited) and December 31, 2010	2
	Consolidated Statements of Operations (unaudited) for the Three Months Ended June 30, 2011 and June 30, 2010	3
	Consolidated Statements of Operations (unaudited) for the Six Months Ended June 30, 2011 and June 30, 2010	4
	Consolidated Statements of Shareholders’ Equity (unaudited) for the Six Months Ended June 30, 2011 and June 30, 2010	5
	Consolidated Statements of Cash Flows (unaudited) for the Six Months Ended June 30, 2011 and June 30, 2010	6
	Notes to the Interim Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59
Item 4.	Controls and Procedures	59
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	59
Item 1A.	Risk Factors	60
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3.	Defaults Upon Senior Securities	60
Item 4.	(Removed and Reserved)	60
Item 5.	Other Information	60
Item 6.	Exhibits	60
	SIGNATURES	62

1

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands, except per share amounts)

	June 30, 2011			December 31, 2010
	(unaudited)
Assets:
Cash and due from banks	$	13,987		$	11,038
Interest bearing deposits with banks		13,378			10,298
Federal funds sold		—			1,495
Securities available for sale, at fair value		216,877			246,120
Restricted securities, at cost		10,247			10,344
Loans, net of allowance for loan losses of $26,753 and $25,288, respectively		725,714			749,486
Deferred income taxes, net		11,106			12,600
Bank premises and equipment, net		20,899			20,757
Accrued interest receivable		4,258			4,281
Other real estate owned, net of valuation allowance of $887 and $928, respectively		10,980			11,617
Goodwill		15,970			15,970
Other assets		23,742			25,324
Total assets	$	1,067,158		$	1,119,330
Liabilities and Shareholders’ Equity:
Liabilities
Noninterest-bearing demand accounts	$	101,373		$	97,122
Interest-bearing deposits		733,112			771,024
Total deposits		834,485			868,146
Federal funds purchased and repurchase agreements		4,623			2,464
Short-term borrowings		—			25,000
Long-term borrowings		117,500			117,500
Trust preferred debt		10,310			10,310
Accrued interest payable		1,448			1,451
Other liabilities		2,704			3,041
Total liabilities		971,070			1,027,912
Shareholders’ Equity
Preferred stock, $2 par value per share, authorized 10,000,000, issued and outstanding: Series A; $1,000 stated value per share, 24,000 shares fixed rate cumulative perpetual preferred		24,000			24,000
Common stock, $2 par value per share, authorized 50,000,000, issued and outstanding 6,003,488 and 5,993,577 including 15,400 and 16,500 nonvested shares in 2011 and 2010, respectively		11,976			11,954
Surplus		19,386			19,302
Retained earnings		38,433			37,884
Warrant		1,481			1,481
Discount on preferred stock		(752	)		(900	)
Accumulated other comprehensive income (loss), net		1,564			(2,303	)
Total shareholders’ equity		96,088			91,418
Total liabilities and shareholders’ equity	$	1,067,158		$	1,119,330

The accompanying notes are an integral part of the consolidated financial statements.

2

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Operations (unaudited)

(dollars in thousands, except per share amounts)

	Three Months Ended June 30,
	2011			2010
Interest and Dividend Income
Loans and fees on loans	$	11,048		$	12,143
Interest on investments:
Taxable interest income		1,552			745
Tax exempt interest income		191			412
Dividends		59			57
Interest on deposits with banks		10			37
Total interest and dividend income		12,860			13,394
Interest Expense
Deposits		2,524			3,101
Federal funds purchased and repurchase agreements		9			9
Short-term borrowings		2			—
Long-term borrowings		1,187			1,255
Trust preferred debt		81			82
Total interest expense		3,803			4,447
Net interest income		9,057			8,947
Provision for Loan Losses		1,500			12,625
Net interest income (loss) after provision for loan losses		7,557			(3,678	)
Noninterest Income
Service charges and fees on deposit accounts		845			929
Debit/credit card fees		409			359
Gain on sale of available for sale securities, net		129			1,518
Other-than-temporary impairment losses on securities (no additional amounts were recognized in other comprehensive income)		—			(77	)
Gain on sale of bank premises and equipment		—			17
Other operating income		278			321
Total noninterest income		1,661			3,067
Noninterest Expenses
Salaries and employee benefits		4,022			4,303
Occupancy and equipment expenses		1,419			1,351
Telephone		321			291
FDIC expense		931			553
Consultant fees		319			252
Collection, repossession and other real estate owned		567			347
Marketing and advertising		215			367
Loss (gain) on sale of other real estate owned		48			(49	)
Impairment losses on other real estate owned		77			—
Other operating expenses		1,190			1,307
Total noninterest expenses		9,109			8,722
Income (loss) before income taxes		109			(9,333	)
Income Tax (Benefit)		(114	)		(3,367	)
Net Income (Loss)	$	223		$	(5,966	)
Effective dividend on preferred stock		374			374
Net (loss) available to common shareholders	$	(151	)	$	(6,340	)
(Loss) per common share: basic	$	(0.03	)	$	(1.06	)
diluted	$	(0.03	)	$	(1.06	)
Dividends per share, common	$	—		$	0.05

The accompanying notes are an integral part of the consolidated financial statements.

3

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Operations (unaudited)

(dollars in thousands, except per share amounts)

	Six Months Ended June 30,
	2011			2010
Interest and Dividend Income
Loans and fees on loans	$	21,904		$	24,342
Interest on investments:
Taxable interest income		2,940			1,718
Tax exempt interest income		573			856
Dividends		125			62
Interest on deposits with banks		16			76
Total interest and dividend income		25,558			27,054
Interest Expense
Deposits		5,145			6,345
Federal funds purchased and repurchase agreements		17			28
Short-term borrowings		8			—
Long-term borrowings		2,361			2,561
Trust preferred debt		162			163
Total interest expense		7,693			9,097
Net interest income		17,865			17,957
Provision for Loan Losses		3,500			14,475
Net interest income after provision for loan losses		14,365			3,482
Noninterest Income
Service charges and fees on deposit accounts		1,780			1,791
Debit/credit card fees		733			654
Gain on sale of available for sale securities, net		322			1,531
Other-than-temporary impairment losses on securities (no additional amounts were recognized in other comprehensive income)		—			(77	)
Gain on sale of bank premises and equipment		256			17
Gain on bank owned life insurance		—			604
Other operating income		661			640
Total noninterest income		3,752			5,160
Noninterest Expenses
Salaries and employee benefits		8,112			8,293
Occupancy and equipment expenses		2,632			2,629
Telephone		586			565
FDIC expense		1,428			1,021
Consultant fees		593			395
Collection, repossession and other real estate owned		1,020			695
Marketing and advertising		426			559
Loss (gain) on sale of other real estate owned		295			(80	)
Impairment losses on other real estate owned		229			—
Other operating expenses		2,288			2,499
Total noninterest expenses		17,609			16,576
Income (loss) before income taxes		508			(7,934	)
Income Tax (Benefit)		(189	)		(3,302	)
Net Income (Loss)	$	697		$	(4,632	)
Effective dividend on preferred stock		748			746
Net (loss) available to common shareholders	$	(51	)	$	(5,378	)
(Loss) per common share: basic	$	(0.01	)	$	(0.90	)
diluted	$	(0.01	)	$	(0.90	)
Dividends per share, common	$	—		$	0.10

The accompanying notes are an integral part of the consolidated financial statements.

4

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Shareholders’ Equity (unaudited)

For the Six Months Ended June 30, 2011 and 2010

(dollars in thousands, except per share amounts)

	Common Stock		Preferred Stock		Surplus			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Comprehensive Income (Loss)			Total
Balance, December 31, 2009	$	11,877	$	24,289	$	18,965		$	50,850		$	(783	)				$	105,198
Comprehensive (loss):
Net (loss) for the six months ended June 30, 2010									(4,632	)				$	(4,632	)		(4,632	)
Other comprehensive income:
Unrealized securities gains arising during period, (net of tax $675)															1,313
Reclassification adjustment (net of tax, $521)															(1,010	)
Other comprehensive income												303			303			303
Total comprehensive (loss)														$	(4,329	)
Cash dividends - common ($0.10 per share)									(596	)								(596	)
Cash dividends - preferred									(600	)								(600	)
Preferred stock discount				145					(145	)								—
Stock based compensation						122												122
Restricted common stock vested		6							(6	)								—
Issuance of common stock under dividend reinvestment plan		27		—		74			—			—						101
Balance, June 30, 2010	$	11,910	$	24,434	$	19,161		$	44,871		$	(480	)				$	99,896
Balance, December 31, 2010	$	11,954	$	24,581	$	19,302		$	37,884		$	(2,303	)				$	91,418
Comprehensive income:
Net income for the six months ended June 30, 2011									697					$	697			697
Other comprehensive income:
Unrealized securities gains arising during period, (net of tax $2,106)															4,079
Reclassification adjustment (net of tax, $110)															(212	)
Other comprehensive income												3,867			3,867			3,867
Total comprehensive income														$	4,564
Preferred stock discount				148					(148	)								—
Stock based compensation						65												65
Restricted common stock vested		1				(1	)											—
Issuance of common stock under dividend reinvestment plan		21		—		20			—			—						41
Balance, June 30, 2011	$	11,976	$	24,729	$	19,386		$	38,433		$	1,564					$	96,088

The accompanying notes are an integral part of the consolidated financial statements.

5

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(dollars in thousands)

	Six Months Ended June 30,
	2011			2010
Operating Activities:
Net income (loss)	$	697		$	(4,632	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Provision for loan losses		3,500			14,475
Depreciation and amortization		1,186			1,126
Stock based compensation		65			122
Net amortization of premiums and accretion of discounts on securities available for sale		962			119
(Gain) realized on securities available for sale transactions, net		(322	)		(1,531	)
Impairment charge on securities		—			77
(Gain) on sale of bank premises and equipment		(256	)		(17	)
Loss (gain) on sale of other real estate owned		295			(80	)
Impairment on other real estate owned		229			—
Loss on LLC investments		47			62
Deferred income taxes		(497	)		(2,372	)
Net change in:
Accrued interest receivable		23			416
Other assets		1,535			(1,702	)
Accrued interest payable		(3	)		(140	)
Other liabilities		(337	)		(1,080	)
Net cash provided by operating activities		7,124			4,843
Investing Activities:
Purchase of securities available for sale		(44,213	)		(95,087	)
Purchase of restricted securities		(330	)		(600	)
Purchases of bank premises and equipment		(1,371	)		(2,076	)
Improvements to other real estate owned		(150	)		(141	)
Net change in loans		17,303			16
Proceeds from:
Maturities, calls, and paydowns of securities available for sale		33,135			68,651
Sales of securities available for sale		45,539			47,860
Sales of restricted securities		427			—
Sale of bank premises and equipment		299			17
Sale of other real estate owned		3,232			1,728
Net cash provided by investing activities		53,871			20,368
Financing Activities:
Net change in:
Demand, interest-bearing demand and savings deposits		(17,300	)		21,935
Time deposits		(16,361	)		(16,132	)
Federal funds purchased and repurchase agreements		2,159			(20,036	)
Short-term borrowings		(25,000	)		—
Long-term borrowings		—			(5,714	)
Issuance of common stock under dividend reinvestment plan		41			101
Dividends paid - common		—			(596	)
Dividends paid - preferred		—			(600	)
Net cash used in financing activities		(56,461	)		(21,042	)
Net increase in cash and cash equivalents		4,534			4,169
Cash and cash equivalents, January 1		22,831			28,688
Cash and cash equivalents, June 30	$	27,365		$	32,857
Supplemental disclosure:
Interest paid	$	7,696		$	9,237
Income taxes paid	$	—		$	1,328
Supplemental disclosure of noncash investing and financing activities:
Unrealized gains on securities available for sale	$	5,858		$	467
Loans transferred to other real estate owned	$	2,969		$	2,343

The accompanying notes are an integral part of the consolidated financial statements.

6

EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES

Notes to the Interim Consolidated Financial Statements

(unaudited)

Note 1. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying unaudited consolidated financial statements of Eastern Virginia Bankshares, Inc. (the “Parent”) and its subsidiaries, EVB Statutory Trust I (the “Trust”), and EVB (the “Bank”) and its subsidiaries, are in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q adopted by the Securities and Exchange Commission (“SEC”). Accordingly, these financial statements do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. Operating results for the three and six months ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Form 10-K”).

The accompanying unaudited consolidated financial statements include the accounts of the Parent, the Bank and its subsidiaries, collectively referred to as “the Company.” All significant intercompany balances and transactions have been eliminated in consolidation. In addition, the Parent owns the Trust which is an unconsolidated subsidiary. The subordinated debt owed to this trust is reported as a liability of the Parent.

Nature of Operations

Eastern Virginia Bankshares, Inc. is a bank holding company headquartered in Tappahannock, Virginia that was organized and chartered under the laws of the Commonwealth of Virginia on September 5, 1997 and commenced operations on December 29, 1997. We conduct our primary operations through our wholly-owned bank subsidiary, EVB. Two of our three predecessor banks, Bank of Northumberland, Inc. and Southside Bank, were established in 1910. The third bank, Hanover Bank, was established as a de novo bank in 2000. In April 2006, these three banks were merged and the surviving bank was re-branded as EVB. The Bank provides a full range of banking and related financial services to individuals and businesses through its network of retail branches. With twenty-four retail branches, the Bank serves diverse markets that primarily are in the counties of Caroline, Essex, Gloucester, Hanover, Henrico, King and Queen, King William, Lancaster, Middlesex, New Kent, Richmond, Northumberland, Southampton, Surry, Sussex and the City of Colonial Heights. The Bank operates under a state bank charter and as such is subject to regulation by the Virginia State Corporation Commission-Bureau of Financial Institutions (the “SCC”) and the Board of Governors of the Federal Reserve System (the “Federal Reserve”).

The Bank owns EVB Financial Services, Inc., which in turn has a 100% ownership interest in EVB Investments, Inc. and through March 31, 2011 a 50% ownership interest in EVB Mortgage, LLC. EVB Investments, Inc. is a full-service brokerage firm offering a comprehensive range of investment services. EVB Mortgage, LLC was formed to originate and sell residential mortgages. Due to the uncertainties surrounding potential regulatory pressures regarding the origination and funding of mortgage loans on one to four family residences, the Company decided in March 2011 to cease the operations of EVB Mortgage, LLC as a joint venture with Southern Trust Mortgage, LLC. On April 1, 2011, the Company entered into an Independent Contractor Agreement with Southern Trust Mortgage, LLC. Under the terms of this agreement the Company will advise and consult with Southern Trust Mortgage, LLC and facilitate the marketing and brand recognition of their mortgage business. In addition, the Company will provide Southern Trust Mortgage, LLC with offices at five retail branches in the Company’s market area and access to office equipment at these locations during normal work hours. For its services, the Company shall receive fixed monthly compensation from Southern Trust Mortgage, LLC in the amount of $1,000, which is adjustable on a quarterly basis going forward. The Bank has a 75% ownership interest in EVB Title, LLC, which primarily sells title insurance to the mortgage loan customers of the Bank and EVB Mortgage, LLC. The Bank has a 2.33% ownership in Virginia Bankers Insurance Center, LLC, which primarily sells insurance products to customers of the Bank, and other financial institutions that have an equity interest in the agency. The Bank also has a 100% ownership interest in Dunston Hall LLC, POS LLC, Tartan Holdings LLC and ECU-RE LLC which were formed to hold the title to real estate acquired by the Bank upon foreclosure on property of real estate secured loans. The financial position and operating results of all of these subsidiaries are not significant to us as a whole and are not considered principal activities of the Company at this time. The Company’s stock trades on the NASDAQ Global Market under the symbol EVBS.

7

Basis of Presentation

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, impairment of loans, impairment of securities, the valuation of other real estate owned, the projected benefit obligation under the defined benefit pension plan, the valuation of deferred taxes, goodwill impairment and fair value of financial instruments. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, which are necessary for a fair presentation of the results of operations in these interim financial statements, have been made. Certain prior year amounts have been reclassified to conform to the 2011 presentation. These reclassifications have no effect on previously reported net income.

The results of operations for the three and six months ended June 30, 2011 are not necessarily indicative of the results which may be expected for the year.

Recent Accounting Pronouncements

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2010-06, “Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements.” ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2010, the FASB issued ASU 2010-20, “Receivables (Topic 310) – Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.” The new disclosure guidance significantly expands the existing requirements and will lead to greater transparency into a company’s exposure to credit losses from lending arrangements. The extensive new disclosures of information as of the end of a reporting period became effective for both interim and annual reporting periods ending on or after December 15, 2010. Specific disclosures regarding activity that occurred before the issuance of the ASU, such as the allowance roll forward and modification disclosures, will be required for periods beginning on or after December 15, 2010. The Company has included the required disclosures in its consolidated financial statements.

In December 2010, the FASB issued ASU 2010-28, “Intangible – Goodwill and Other (Topic 350) – When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts.” The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. The amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In December 2010, the FASB issued ASU 2010-29, “Business Combinations (Topic 805) – Disclosure of Supplementary Pro Forma Information for Business Combinations.” The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective for 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, 2010. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

8

The SEC issued Final Rule No. 33-9002, “Interactive Data to Improve Financial Reporting.” The rule requires companies to submit financial statements in extensible business reporting language (XBRL) format with their SEC filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers are required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011. Compliance with this rule did not have a material impact on the Company’s consolidated financial statements.

In March 2011, the SEC issued Staff Accounting Bulletin (“SAB”) 114. This SAB revises or rescinds portions of the interpretive guidance included in the codification of the Staff Accounting Bulletin Series. This update is intended to make the relevant interpretive guidance consistent with current authoritative accounting guidance issued as a part of the FASB’s Codification. The principal changes involve revision or removal of accounting guidance references and other conforming changes to ensure consistency of referencing through the SAB Series. The effective date for SAB 114 is March 28, 2011. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” The amendments in this ASU clarify the guidance on a creditor’s evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulty. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company is currently assessing the impact that ASU 2011-02 will have on its consolidated financial statements.

In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The Company is currently assessing the impact that ASU 2011-03 will have on its consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU is the result of joint efforts by the FASB and IASB to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and IFRSs. The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The Company is currently assessing the impact that ASU 2011-04 will have on its consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years

9

and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company is currently assessing the impact that ASU 2011-05 will have on its consolidated financial statements.

Note 2. Investment Securities

The amortized cost and estimated fair value, with gross unrealized gains and losses, of securities at June 30, 2011 and December 31, 2010 were as follows:

(dollars in thousands)	June 30, 2011
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for Sale:
Obligations of U.S. Government agencies	$	3,983	$	—	$	63	$	3,920
SBA Pool securities		75,975		293		289		75,979
Agency mortgage-backed securities		56,071		563		101		56,533
Agency CMO securities		38,006		1,344		—		39,350
Non agency CMO securities		9,431		43		56		9,418
State and political subdivisions		29,610		640		176		30,074
Pooled trust preferred securities		540		101		—		641
FNMA and FHLMC preferred stock		77		278		—		355
Corporate securities		595		12		—		607
Total	$	214,288	$	3,274	$	685	$	216,877
(dollars in thousands)	December 31, 2010
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for Sale:
Obligations of U.S. Government agencies	$	23,982	$	—	$	153	$	23,829
SBA Pool securities		62,685		39		834		61,890
Agency mortgage-backed securities		46,780		32		528		46,284
Agency CMO securities		41,855		26		404		41,477
Non agency CMO securities		12,093		62		113		12,042
State and political subdivisions		58,780		224		1,658		57,346
Pooled trust preferred securities		545		26		—		571
FNMA and FHLMC preferred stock		77		16		4		89
Corporate securities		2,597		30		35		2,592
Total	$	249,394	$	455	$	3,729	$	246,120

There are no securities classified as “Held to Maturity” or “Trading” at June 30, 2011 or December 31, 2010. Our mortgage-backed securities consist entirely of residential mortgage-backed securities. We do not hold any commercial mortgage-backed securities. Our mortgage-backed securities are all agency backed and AAA-rated with no subprime issues.

Our pooled trust preferred securities include one senior issue of Preferred Term Securities XXVII which is current on all payments and on which we took an impairment charge in the third quarter of 2009 to reduce our book value to the market value at September 30, 2009. As of June 30, 2011, that security has an estimated fair value that is $101 thousand greater than its amortized cost after impairment.

The amortized cost and estimated fair values of securities at June 30, 2011, by the earlier of contractual maturity or expected maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.

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	June 30, 2011
(dollars in thousands)	Amortized Cost		Estimated Fair Value
Due in one year or less	$	4,775	$	4,783
Due after one year through five years		98,554		98,722
Due after five years through ten years		77,816		79,452
Due after ten years		33,143		33,920
Total	$	214,288	$	216,877

Proceeds from the sales of securities available for sale for the six months ended June 30, 2011 and 2010 were $45.5 million and $47.9 million, respectively. Proceeds from maturities, calls and paydowns of securities available for sale for the six months ended June 30, 2011 and 2010 were $33.1 million and $68.7 million, respectively. Net realized gains on the sales of securities available for sale for the six months ended June 30, 2011 and 2010 were $322 thousand and $1.5 million, respectively.

The Company pledges securities to secure public deposits, balances with the Federal Reserve Bank and repurchase agreements. Securities with an aggregate book value of $86.2 million and an aggregate fair value of $86.8 million were pledged at June 30, 2011. Securities with an aggregate book value of $102.1 million and an aggregate fair value of $100.7 million were pledged at December 31, 2010.

Securities in an unrealized loss position at June 30, 2011, by duration of the period of the unrealized loss, are shown below.

	June 30, 2011
(dollars in thousands)	Less than 12 months				12 months or more				Total
Description of Securities	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Obligations of U.S. Government agencies	$	3,920	$	63	$	—	$	—	$	3,920	$	63
SBA Pool securities		31,708		289		—		—		31,708		289
Agency mortgage-backed securities		16,594		101		—		—		16,594		101
Non agency CMO securities		6,964		45		383		11		7,347		56
State and political subdivisions		4,826		109		522		67		5,348		176
Total	$	64,012	$	607	$	905	$	78	$	64,917	$	685

The Company reviews the investment securities portfolio on a quarterly basis to monitor its exposure to other-than-temporary impairment that may result due to the current adverse economic conditions and associated credit deterioration. A determination as to whether a security’s decline in market value is other-than-temporary takes into consideration numerous factors and the relative significance of any single factor can vary by security. Some factors the Company may consider in the other-than-temporary impairment analysis include the length of time the security has been in an unrealized loss position, changes in security ratings, financial condition of the issuer, as well as security and industry specific economic conditions. In addition, with regards to its securities, the Company may also evaluate payment structure, whether there are defaulted payments or expected defaults, prepayment speeds, and the value of any underlying collateral. For certain securities in unrealized loss positions, the Company will enlist independent third-party firms to prepare cash flow analyses to compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security.

Based on the Company’s evaluation, management does not believe any unrealized loss at June 30, 2011, represents an other-than-temporary impairment as these unrealized losses are primarily attributable to changes in interest rates and current financial market conditions, and are not attributable to credit deterioration. At June 30, 2011, there are 28 debt securities with fair values totaling $64.9 million considered temporarily impaired. Of these debt securities, 25 with fair values totaling $64.0 million were in an unrealized loss position of less than 12 months and 3 with fair values totaling $905 thousand were in an unrealized loss position of 12 months or more. Because the Company intends to hold these investments in debt securities to maturity and it is more likely than not that the Company will not be required to sell these investments before a recovery of unrealized losses, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2011 and no impairment has been recognized. At June 30, 2011, there are no equity securities in an unrealized loss position.

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Securities in an unrealized loss position at December 31, 2010, by duration of the period of the unrealized loss, are shown below.

	December 31, 2010
(dollars in thousands)	Less than 12 months				12 months or more				Total
Description of Securities	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
Obligations of U.S. Government agencies	$	23,829	$	153	$	—	$	—	$	23,829	$	153
SBA Pool securities		51,306		834		—		—		51,306		834
Agency mortgage-backed securities		34,422		528		—		—		34,422		528
Agency CMO securities		31,373		404		—		—		31,373		404
Non agency CMO securities		8,604		95		505		18		9,109		113
State and political subdivisions		38,525		1,317		1,658		341		40,183		1,658
FNMA and FHLMC preferred stock		22		4		—		—		22		4
Corporate securities		965		35		—		—		965		35
Total	$	189,046	$	3,370	$	2,163	$	359	$	191,209	$	3,729

As of June 30, 2011 and December 31, 2010, there were no corporate securities in an unrealized loss position for 12 months or more.

The table below presents a roll forward of the credit loss component recognized in earnings (referred to as “credit-impaired debt securities”) on debt securities held by the Company for which a portion of an other-than-temporary impairment was recognized in other comprehensive income during 2009. Changes in the credit loss component of credit-impaired debt securities were:

	Six Months Ending
(dollars in thousands)	June 30, 2011
Balance, beginning of period	$	339
Additions
Initial credit impairments		—
Subsequent credit impairments		—
Reductions
Subsequent chargeoff of previously impaired credits		—
Balance, end of period	$	339

The Company’s investment in Federal Home Loan Bank of Atlanta (“FHLB”) stock totaled $7.9 million and $8.3 million at June 30, 2011 and December 31, 2010, respectively. FHLB stock is generally viewed as a long-term investment and as a restricted investment security, which is carried at cost, because there is no market for the stock other than the FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Despite the FHLB’s temporary suspension of repurchases of excess capital stock for parts of 2010 and because the FHLB generated positive net income for each quarterly period beginning January 1, 2010 and ending June 30, 2011, the Company does not consider this investment to be other-than-temporarily impaired at June 30, 2011 and no impairment has been recognized. FHLB stock is included in a separate line item on the consolidated balance sheets (Restricted securities, at cost) and is not part of the Company’s securities available for sale portfolio.

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Note 3. Loan Portfolio

The following table sets forth the composition of the Company’s loan portfolio in dollar amounts and as a percentage of the Company’s total gross loans at the dates indicated:

	June 30, 2011						December 31, 2010
(dollars in thousands)	Amount			Percent			Amount			Percent
Commercial, industrial and agricultural	$	67,059			8.91	%	$	72,790			9.39	%
Real estate - one to four family residential:
Closed end first and seconds		259,027			34.42	%		260,442			33.62	%
Home equity lines		97,028			12.89	%		93,387			12.05	%
Total real estate - one to four family residential		356,055			47.31	%		353,829			45.67	%
Real estate - multifamily residential		11,285			1.50	%		11,682			1.51	%
Real estate - construction:
One to four family residential		21,355			2.84	%		25,454			3.29	%
Other construction, land development and other land		42,570			5.66	%		50,841			6.56	%
Total real estate - construction		63,925			8.50	%		76,295			9.85	%
Real estate - farmland		8,147			1.08	%		8,304			1.07	%
Real estate - non-farm, non-residential:
Owner occupied		133,309			17.72	%		134,186			17.32	%
Non-owner occupied		77,370			10.28	%		78,396			10.12	%
Total real estate - non-farm, non-residential		210,679			28.00	%		212,582			27.44	%
Consumer		31,386			4.18	%		36,000			4.65	%
Other		3,933			0.52	%		3,294			0.42	%
Total loans		752,469			100.00	%		774,776			100.00	%
Less unearned income		(2	)					(2	)
Less allowance for loan losses		(26,753	)					(25,288	)
Loans, net	$	725,714					$	749,486

The following table presents the aging of the recorded investment in past due loans as of June 30, 2011 by class of loans:

(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Total Current*		Total Loans
Commercial, industrial and agricultural	$	625	$	273	$	927	$	1,825	$	65,234	$	67,059
Real estate - one to four family residential:
Closed end first and seconds		5,766		2,123		5,730		13,619		245,408		259,027
Home equity lines		288		235		475		998		96,030		97,028
Total real estate - one to four family residential		6,054		2,358		6,205		14,617		341,438		356,055
Real estate - multifamily residential		—		—		—		—		11,285		11,285
Real estate - construction:
One to four family residential		93		180		465		738		20,617		21,355
Other construction, land development and other land		62		—		750		812		41,758		42,570
Total real estate - construction		155		180		1,215		1,550		62,375		63,925
Real estate - farmland		35		47		52		134		8,013		8,147
Real estate - non-farm, non-residential:
Owner occupied		2,501		870		763		4,134		129,175		133,309
Non-owner occupied		7,768		325		2,440		10,533		66,837		77,370
Total real estate - non-farm, non-residential		10,269		1,195		3,203		14,667		196,012		210,679
Consumer		441		97		845		1,383		30,003		31,386
Other		—		—		—		—		3,933		3,933
Total loans	$	17,579	$	4,150	$	12,447	$	34,176	$	718,293	$	752,469

* For purposes of this table only, the “Total Current” column includes loans that are 1-29 days past due.

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The following table presents the aging of the recorded investment in past due loans as of December 31, 2010 by class of loans:

(dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Total Current*		Total Loans
Commercial, industrial and agricultural	$	978	$	423	$	474	$	1,875	$	70,915	$	72,790
Real estate - one to four family residential:
Closed end first and seconds		6,262		3,182		6,319		15,763		244,679		260,442
Home equity lines		629		80		854		1,563		91,824		93,387
Total real estate - one to four family residential		6,891		3,262		7,173		17,326		336,503		353,829
Real estate - multifamily residential		—		—		—		—		11,682		11,682
Real estate - construction:
One to four family residential		1,182		202		921		2,305		23,149		25,454
Other construction, land development and other land		638		—		3,435		4,073		46,768		50,841
Total real estate - construction		1,820		202		4,356		6,378		69,917		76,295
Real estate - farmland		—		188		—		188		8,116		8,304
Real estate - non-farm, non-residential:
Owner occupied		1,054		549		810		2,413		131,773		134,186
Non-owner occupied		—		128		3,903		4,031		74,365		78,396
Total real estate - non-farm, non-residential		1,054		677		4,713		6,444		206,138		212,582
Consumer		1,073		91		412		1,576		34,424		36,000
Other		2		—		—		2		3,292		3,294
Total loans	$	11,818	$	4,843	$	17,128	$	33,789	$	740,987	$	774,776

* For purposes of this table only, the “Total Current” column includes loans that are 1-29 days past due.

The following table presents nonaccrual loans, loans past due 90 days and accruing interest, and restructured loans at the dates indicated:

(dollars in thousands)	June 30, 2011		December 31, 2010
Nonaccrual loans	$	22,871	$	25,858
Loans past due 90 days and accruing interest		1,724		1,836
Restructured loans (accruing)		7,896		2,411

At June 30, 2011 and December 31, 2010, there were approximately $8.8 million and $6.2 million, respectively, in troubled debt restructurings (“TDRs”) included in nonaccrual loans.

14

The following table presents the recorded investment in nonaccrual loans and loans past due 90 days and accruing interest by class at June 30, 2011 and December 31, 2010.

	Nonaccrual				Over 90 Days Past Due and Accruing
(dollars in thousands)	June 30, 2011		December 31, 2010		June 30, 2011		December 31, 2010
Commercial, industrial and agricultural	$	1,028	$	446	$	—	$	—
Real estate - one to four family residential:
Closed end first and seconds		7,572		8,337		432		997
Home equity lines		475		664		—		190
Total real estate - one to four family residential		8,047		9,001		432		1,187
Real estate - construction:
One to four family residential		1,032		564		—		437
Other construction, land development and other land		4,788		7,437		—		148
Total real estate - construction		5,820		8,001		—		585
Real estate - farmland		52		—		—		—
Real estate - non-farm, non-residential:
Owner occupied		5,431		3,981		—		—
Non-owner occupied		1,689		4,030		1,203		—
Total real estate - non-farm, non-residential		7,120		8,011		1,203		—
Consumer		804		399		89		64
Total loans	$	22,871	$	25,858	$	1,724	$	1,836

The following table presents commercial loans by credit quality indicator at June 30, 2011.

(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Impaired		Total
Commercial, industrial and agricultural	$	50,882	$	11,474	$	3,694	$	295	$	714	$	67,059
Real estate - multifamily residential		10,208		1,077		—		—		—		11,285
Real estate - construction:
One to four family residential		18,785		138		1,440		132		860		21,355
Other construction, land development and other land		5,359		2,299		19,238		—		15,674		42,570
Total real estate - construction		24,144		2,437		20,678		132		16,534		63,925
Real estate - farmland		5,970		1,414		763		—		—		8,147
Real estate - non-farm, non-residential:
Owner occupied		74,402		32,639		12,057		77		14,134		133,309
Non-owner occupied		45,566		14,237		6,655		—		10,912		77,370
Total real estate - non-farm, non-residential		119,968		46,876		18,712		77		25,046		210,679
Total commercial loans	$	211,172	$	63,278	$	43,847	$	504	$	42,294	$	361,095

15

The following table presents commercial loans by credit quality indicator at December 31, 2010.

(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Impaired		Total
Commercial, industrial and agricultural	$	58,812	$	8,187	$	5,228	$	114	$	449	$	72,790
Real estate - multifamily residential		10,591		1,091		—		—		—		11,682
Real estate - construction:
One to four family residential		22,642		613		1,434		231		534		25,454
Other construction, land development and other land		17,361		4,485		10,561		156		18,278		50,841
Total real estate - construction		40,003		5,098		11,995		387		18,812		76,295
Real estate - farmland		6,915		608		781		—		—		8,304
Real estate - non-farm, non-residential:
Owner occupied		79,335		35,989		10,185		267		8,410		134,186
Non-owner occupied		48,271		12,570		5,232		—		12,323		78,396
Total real estate - non-farm, non-residential		127,606		48,559		15,417		267		20,733		212,582
Total commercial loans	$	243,927	$	63,543	$	33,421	$	768	$	39,994	$	381,653

At June 30, 2011 and December 31, 2010, the Company does not have any loans classified as Loss.

The following table presents consumer loans, including one to four family residential first and seconds and home equity lines by payment activity at June 30, 2011.

(dollars in thousands)	Performing		Nonperforming		Total
Real estate - one to four family residential:
Closed end first and seconds	$	248,072	$	10,955	$	259,027
Home equity lines		96,553		475		97,028
Total real estate - one to four family residential		344,625		11,430		356,055
Consumer		30,537		849		31,386
Other		3,933		—		3,933
Total consumer loans	$	379,095	$	12,279	$	391,374

The following table presents consumer loans, including one to four family residential first and seconds and home equity lines by payment activity at December 31, 2010.

(dollars in thousands)	Performing		Nonperforming		Total
Real estate - one to four family residential:
Closed end first and seconds	$	248,210	$	12,232	$	260,442
Home equity lines		92,533		854		93,387
Total real estate - one to four family residential		340,743		13,086		353,829
Consumer		35,588		412		36,000
Other		3,294		—		3,294
Total consumer loans	$	379,625	$	13,498	$	393,123

The following table summarizes the activity in our allowance for loan losses for the periods presented:

(dollars in thousands)	Six Months Ended June  30, 2011			Twelve Months Ended December  31, 2010			Six Months Ended June  30, 2010
Balance at beginning of period	$	25,288		$	12,155		$	12,155
Provision charged against income		3,500			28,930			14,475
Recoveries of loans charged off		554			313			166
Loans charged off		(2,589	)		(16,110	)		(6,750	)
Balance at end of period	$	26,753		$	25,288		$	20,046

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The following table presents a rollforward of our allowance for loan losses for the six months ended June 30, 2011.

(dollars in thousands)	Beginning Balance January 1, 2011		Charge-offs			Recoveries		Provision			Ending Balance June 30, 2011
Commercial, industrial and agricultural	$	5,981	$	(244	)	$	274	$	(1,044	)	$	4,967
Real estate-one to four family residential:
Closed end first and seconds		3,340		(470	)		133		931			3,934
Home equity lines		587		(160	)		—		79			506
Total real estate-one to four family residential		3,927		(630	)		133		1,010			4,440
Real estate-multifamily residential		23		—			—		(1	)		22
Real estate-construction:
One to four family residential		344		(152	)		2		169			363
Other construction, land development and other land		7,837		(716	)		1		1,056			8,178
Total real estate-construction		8,181		(868	)		3		1,225			8,541
Real estate-farmland		17		—			—		2			19
Real estate-non-farm, non-residential:
Owner occupied		2,546		(79	)		4		2,527			4,998
Non-owner occupied		3,072		(302	)		—		12			2,782
Total real estate-non-farm, non-residential		5,618		(381	)		4		2,539			7,780
Consumer		905		(379	)		105		176			807
Other		280		(87	)		35		(51	)		177
Unallocated		356		—			—		(356	)		—
Total	$	25,288	$	(2,589	)	$	554	$	3,500		$	26,753

The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class based on impairment method as of June 30, 2011.

	Allowance allocated to loans:						Total Loans:
(dollars in thousands)	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Commercial, industrial and agricultural	$	670	$	4,297	$	4,967	$	714	$	66,345	$	67,059
Real estate-one to four family residential:
Closed end first and seconds		1,955		1,979		3,934		7,778		251,249		259,027
Home equity lines		—		506		506		—		97,028		97,028
Total real estate-one to four family residential		1,955		2,485		4,440		7,778		348,277		356,055
Real estate-multifamily residential		—		22		22		—		11,285		11,285
Real estate-construction:
One to four family residential		38		325		363		860		20,495		21,355
Other construction, land development and other land		1,964		6,214		8,178		15,674		26,896		42,570
Total real estate-construction		2,002		6,539		8,541		16,534		47,391		63,925
Real estate-farmland		—		19		19		—		8,147		8,147
Real estate-non-farm, non-residential:
Owner occupied		3,103		1,895		4,998		14,134		119,175		133,309
Non-owner occupied		1,947		835		2,782		10,912		66,458		77,370
Total real estate-non-farm, non-residential		5,050		2,730		7,780		25,046		185,633		210,679
Consumer		104		703		807		414		30,972		31,386
Other		—		177		177		—		3,933		3,933
Total	$	9,781	$	16,972	$	26,753	$	50,486	$	701,983	$	752,469

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The following table presents the balance in the allowance for loan losses and the recorded investment in loans by portfolio class based on impairment method as of December 31, 2010.

	Allowance allocated to loans:						Total Loans:
(dollars in thousands)	Individually evaluated for impairment		Collectively evaluated for impairment		Total		Individually evaluated for impairment		Collectively evaluated for impairment		Total
Commercial, industrial and agricultural	$	343	$	5,638	$	5,981	$	449	$	72,341	$	72,790
Real estate - one to four family residential:
Closed end first and seconds		1,247		2,093		3,340		9,463		250,979		260,442
Home equity lines		—		587		587		—		93,387		93,387
Total real estate-one to four family residential		1,247		2,680		3,927		9,463		344,366		353,829
Real estate - multifamily residential		—		23		23		—		11,682		11,682
Real estate - construction:
One to four family residential		—		344		344		534		24,920		25,454
Other construction, land development and other land		2,032		5,805		7,837		18,278		32,563		50,841
Total real estate - construction		2,032		6,149		8,181		18,812		57,483		76,295
Real estate - farmland		—		17		17		—		8,304		8,304
Real estate - non-farm, non-residential:
Owner occupied		1,013		1,533		2,546		8,410		125,776		134,186
Non-owner occupied		2,264		808		3,072		12,323		66,073		78,396
Total real estate - non-farm, non-residential		3,277		2,341		5,618		20,733		191,849		212,582
Consumer		—		905		905		—		36,000		36,000
Other		—		280		280		—		3,294		3,294
Unallocated		—		356		356		—		—		—
Total	$	6,899	$	18,389	$	25,288	$	49,457	$	725,319	$	774,776

The following is a summary of information pertaining to impaired loans as of and for the six months ended June 30, 2011 and the year ended December 31, 2010:

(dollars in thousands)	June 30, 2011		December 31, 2010
Impaired loans without a specific reserve	$	11,855	$	21,872
Impaired loans with a specific reserve		38,631		27,585
Allowance related to impaired loans	$	9,781	$	6,899
Average balance of impaired loans	$	51,352	$	33,558
Interest income recognized and collected on impaired loans	$	995	$	2,033

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The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2011.

(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial, industrial and agricultural	$	714	$	714	$	—	$	714	$	670	$	621	$	7
Real estate - one to four family residential:
Closed end first and seconds		7,778		7,890		282		7,496		1,955		8,844		155
Real estate - construction:
One to four family residential		860		860		422		438		38		763		12
Other construction, land development and other land		15,674		15,674		8,043		7,631		1,964		17,725		264
Total real estate - construction		16,534		16,534		8,465		8,069		2,002		18,488		276
Real estate - non-farm, non-residential:
Owner occupied		14,134		14,624		1,779		12,355		3,103		11,476		276
Non-owner occupied		10,912		11,164		1,329		9,583		1,947		11,746		277
Total real estate - non-farm, non-residential		25,046		25,788		3,108		21,938		5,050		23,222		553
Consumer		414		414		—		414		104		177		4
Total loans	$	50,486	$	51,340	$	11,855	$	38,631	$	9,781	$	51,352	$	995

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 2010.

(dollars in thousands)	Recorded Investment		Unpaid Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Related Allowance		Average Recorded Investment		Interest Income Recognized
Commercial, industrial and agricultural	$	449	$	2,639	$	96	$	353	$	343	$	2,868	$	7
Real estate - one to four family residential:
Closed end first and seconds		9,463		9,837		2,763		6,700		1,247		9,241		304
Real estate - construction:
One to four family residential		534		534		534		—		—		604		21
Other construction, land development and other land		18,278		20,579		14,110		4,168		2,032		11,002		696
Total real estate - construction		18,812		21,113		14,644		4,168		2,032		11,606		717
Real estate - non-farm, non-residential:
Owner occupied		8,410		8,901		2,444		5,966		1,013		6,351		432
Non-owner occupied		12,323		12,553		1,925		10,398		2,264		3,492		573
Total real estate - non-farm, non-residential		20,733		21,454		4,369		16,364		3,277		9,843		1,005
Total loans	$	49,457	$	55,043	$	21,872	$	27,585	$	6,899	$	33,558	$	2,033

Note 4. Deferred Income Taxes

As of June 30, 2011 and December 31, 2010, the Company had recorded net deferred income tax assets of approximately $11.1 million and $12.6 million, respectively. The realization of deferred income tax assets is assessed and a valuation allowance is recorded if it is “more likely than not” that all or a portion of the deferred tax asset will not be realized. “More likely than not” is defined as greater than a 50% chance. Management considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. Management’s assessment is primarily dependent on historical taxable income and projections of future taxable income, which are directly related to the Company’s core earnings capacity and its prospects to generate core earnings in the future. Projections of core earnings and taxable income are inherently subject to uncertainty and estimates that may change given the uncertain economic outlook, banking industry conditions and other factors. Based upon an analysis of available evidence, management has determined that it is “more likely than not” that the Company’s deferred income tax assets as of June 30, 2011 will be fully realized and therefore no valuation allowance to the Company’s deferred income tax assets was recorded. However, the Company can give no assurance that in the future its deferred income tax assets will not be impaired because such determination is based on projections of future earnings and the possible effect of certain transactions, which are subject to uncertainty and based on estimates that may change due to changing economic conditions and other factors. Due to the uncertainty of estimates and projections, it is possible that the Company will be required to record adjustments to the valuation allowance in future reporting periods.

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Due to the net operating loss incurred for the years ended December 31, 2010 and 2009, the Company has recorded income taxes receivable, which have been carried back to prior years, of approximately $3.8 million at June 30, 2011 and $4.1 million at December 31, 2010, which are included in other assets on the accompanying consolidated balance sheets.

Note 5. Bank Premises and Equipment

Bank premises and equipment are summarized as follows:

(dollars in thousands)	June 30, 2011			December 31, 2010
Land and improvements	$	6,009		$	5,176
Buildings and leasehold improvements		20,520			19,458
Furniture, fixtures and equipment		17,379			16,060
Construction in progress		18			2,257
		43,926			42,951
Less accumulated depreciation		(23,027	)		(22,194	)
Net balance	$	20,899		$	20,757

Depreciation and amortization of bank premises and equipment for the six months ended June 30, 2011 and 2010 amounted to $1.2 million and $1.1 million, respectively.

Note 6. Borrowings

Federal funds purchased and repurchase agreements.The Company has unsecured lines of credit with SunTrust Bank, Community Bankers Bank and Pacific Coast Bankers Bank for the purchase of federal funds in the amount of $20.0 million, $15.0 million and $5.0 million, respectively. These lines of credit have a variable rate based on the lending bank’s daily federal funds sold and are due on demand. Repurchase agreements are secured transactions and generally mature the day following the day sold. Customer repurchases are standard transactions that involve a Bank customer instead of a wholesale bank or broker. The Company offers this product as an accommodation to larger retail and commercial customers that request safety for their funds beyond the FDIC deposit insurance limits. The Company does not use or have any open repurchase agreements with broker-dealers.

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The tables below present selected information on federal funds purchased and repurchase agreements during the six months ended June 30, 2011 and the year ended December 31, 2010:

Federal funds purchased (dollars in thousands)	June 30, 2011			December 31, 2010
Balance outstanding at period end	$	—		$	15
Maximum balance at any month end during the period	$	2		$	6,850
Average balance for the period	$	113		$	2,038
Weighted average rate for the period		0.86	%		0.76	%
Weighted average rate at period end		0.00	%		1.02	%

Repurchase agreements (dollars in thousands)	June 30, 2011			December 31, 2010
Balance outstanding at period end	$	4,623		$	2,449
Maximum balance at any month end during the period	$	4,637		$	4,245
Average balance for the period	$	2,779		$	2,921
Weighted average rate for the period		1.14	%		1.33	%
Weighted average rate at period end		1.08	%		1.34	%

Short-term borrowings.Short-term borrowings consist of advances from the FHLB using a daily rate credit and due on demand. These advances are secured by a blanket floating lien on all qualifying closed-end and revolving open-end loans that are secured by 1-4 family residential properties.

The table below presents selected information on short-term borrowings during the six months ended June 30, 2011 and the year ended December 31, 2010:

Short-term borrowings (dollars in thousands)	June 30, 2011			December 31, 2010
Balance outstanding at period end	$	—		$	25,000
Maximum balance at any month end during the period	$	10,325		$	25,000
Average balance for the period	$	3,787		$	1,767
Weighted average rate for the period		0.43	%		0.51	%
Weighted average rate at period end		0.00	%		0.47	%

Long-term borrowings.Long-term borrowings consist of advances from the FHLB, which are secured by a blanket floating lien on all qualifying closed-end and revolving open-end loans that are secured by 1-4 family residential properties. Long-term advances from the FHLB at June 30, 2011 and December 31, 2010 consist of $107.5 million in convertible advances and a $10.0 million fixed rate hybrid advance, respectively. The convertible advances have fixed rates of interest unless the FHLB exercises its option to convert the interest on these advances from fixed rate to variable rate.

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The table below shows the year of maturity and potential call dates of long-term FHLB advances. All of the convertible advances have a call provision.

(dollars in thousands)	Maturity Amount		Average Rate			Callable Amount		Average Rate
2011	$	—		—		$	94,000		4.18	%
2013		10,000		2.42	%		—
2015		13,500		3.87	%		—		—
2016		10,000		4.85	%		—		—
2017		75,000		4.30	%		—		—
2018		9,000		2.44	%		—		—
	$	117,500		4.00	%	$	94,000		4.18	%

Our line of credit with the FHLB can equal up to 25% of our assets or approximately $270.4 million at June 30, 2011. This line of credit totaled $173.4 million with approximately $50.3 million available at June 30, 2011. As of June 30, 2011 and December 31, 2010, loans with a carrying value of $300.1 million and $353.8 million, respectively, are pledged to the FHLB as collateral for borrowings. Additional loans are available that can be pledged as collateral for future borrowings from the FHLB above the current lendable collateral value. Combined short-term and long-term borrowings outstanding under the FHLB line of credit was $117.5 million at June 30, 2011 and $142.5 million at December 31, 2010.

Note 7. (Loss) Per Share

The following table shows the weighted average number of common shares used in computing (loss) per share and the effect on the weighted average number of shares of potential dilutive common stock for the three and six months ended June 30, 2011 and 2010. Potential dilutive common stock had no effect on (loss) per share otherwise available to common shareholders for the three and six months ended June 30, 2011 and 2010.

	Three Months Ended
	June 30, 2011					June 30, 2010
	Shares		Per Share Amount			Shares		Per Share Amount
Basic (loss) per common share		6,000,821	$	(0.03	)		5,970,623	$	(1.06	)
Effect of dilutive securities, stock options		—		—			—		—
Diluted (loss) per common share		6,000,821	$	(0.03	)		5,970,623	$	(1.06	)
	Six Months Ended
	June 30, 2011					June 30, 2010
	Shares		Per Share Amount			Shares		Per Share Amount
Basic (loss) per common share		5,998,377	$	(0.01	)		5,968,460	$	(0.90	)
Effect of dilutive securities, stock options		—		—			—		—
Diluted (loss) per common share		5,998,377	$	(0.01	)		5,968,460	$	(0.90	)

At June 30, 2011 and 2010, options to acquire 239,692 and 251,137 shares of common stock, respectively were not included in computing diluted (loss) per common share because their effects were anti-dilutive.

Note 8. Stock Based Compensation Plans

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 could be granted in the form of stock options. On April 17, 2003, the shareholders approved the Eastern Virginia Bankshares, Inc. 2003 Stock Incentive Plan, amending and restating the 2000 Plan (the “2003 Plan”) still authorizing the issuance of up to 400,000 shares of common stock under the plan, but expanding the award types available under the plan to include stock options, stock appreciation rights, common stock, restricted stock and phantom stock. There are 81,063 shares still available to be granted as awards under the 2003 Plan.

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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, employees, consultants and advisors 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 pursuant to grants of stock options, stock appreciation rights, common stock, restricted stock, performance shares, incentive awards and stock units. 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.

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 are being recognized, as required, as compensation cost over the vesting period except in the instance where a participant reaches normal retirement age of 65 prior to the normal vesting date. For the three and six months ended June 30, 2011, stock option compensation expense was $27 thousand and $55 thousand, respectively, compared to stock option compensation expense of $45 thousand and $91 thousand, respectively, for the three and six months ended June 30, 2010. Stock option compensation expense is included is salary and employee benefits expense in the consolidated statements of operations.

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 option award. There were no stock options granted or exercised in the six months ended June 30, 2011 or 2010.

A summary of the Company’s stock option activity and related information for the six months ended June 30, 2011 is as follows:

	Options Outstanding			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in thousands)
Stock options outstanding at January 1, 2011		251,137		$	19.68
Granted		—			—
Exercised		—			—
Forfeited		(11,445	)		17.56
Stock options outstanding at June 30, 2011		239,692		$	19.79		4.11	$	—
Stock options exercisable at June 30, 2011		172,192		$	21.27		3.05	$	—

* Intrinsic value is the amount by which the fair value of the underlying common stock exceeds the exercise price of a stock option on exercise date.

As of June 30, 2011, there was $66 thousand of unrecognized compensation expense related to stock options that will be recognized over the remaining requisite average service period of approximately 9 months.

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The table below summarizes information concerning stock options outstanding and exercisable at June 30, 2011.

Stock Options Outstanding					Stock Options Exercisable
Exercise Price	Number Outstanding		Weighted Average Remaining Term		Exercise Price		Number Exercisable
$16.10		17,930		0.75 years	$	16.10		17,930
$28.60		24,075		2.25 years	$	28.60		24,075
$19.92		34,100		3.00 years	$	19.92		34,100
$20.57		46,212		4.00 years	$	20.57		46,212
$21.16		49,875		5.25 years	$	21.16		49,875
$19.25		35,750		6.25 years	$	—		—
$12.36		31,750		7.25 years	$	—		—
$19.79		239,692		4.11 years	$	21.27		172,192

For the three and six months ended June 30, 2011, restricted stock compensation expense was $5 thousand and $10 thousand, respectively, compared to restricted stock compensation expense of $22 thousand and $31 thousand, respectively, for the three and six months ended June 30, 2010. Restricted stock compensation expense is included in salaries and employee benefits expense in the consolidated statements of operations. Restricted stock compensation expense is accounted for using the fair market value of our common stock on the date the restricted shares were awarded, which was $3.75 per share for the 2010 award, $8.31 per share for the 2009 awards, and $17.25 per share for the 2007 awards. At June 30, 2011, there are 1,800 shares, 5,600 shares and 8,000 shares related to the 2007, 2009 and 2010 awards, respectively, outstanding and unvested. There were no restricted stock awards granted in the six months ended June 30, 2011 and 2010. During the six months ended June 30, 2011 and 2010, 700 shares and 1,000 shares, respectively, of the time based portion of the 2009 restricted stock awards vested. For the six months ended June 30, 2011, 400 shares of the time based portion of the 2007 restricted stock awards were forfeited when a former officer of the Company retired. For the six months ended June 30, 2010, 9,800 shares of restricted stock awards were forfeited, which included 6,500 performance based shares from the 2007 restricted stock awards, 600 time based shares from the 2007 restricted stock awards, 1,200 time based shares from the 2009 restricted stock awards and 1,500 performance based shares from the 2009 restricted stock awards.

A summary of the status of our nonvested shares in relation to our restricted stock awards as of June 30, 2011, and changes during the six months ended June 30, 2011 is presented below; the weighted average price is the weighted average fair value at the date of grant:

	Shares			Weighted-Average Price
Nonvested as of January 1, 2011		16,500		$	7.29
Granted		—			—
Vested		(700	)		8.31
Forfeited		(400	)		17.25
Nonvested as of June 30, 2011		15,400		$	6.99

At June 30, 2011, there was $21 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 assumes that only 1/3^rd of the 2009 performance based awards will vest.

Note 9. Employee Benefit Plan – Pension

The Company has a defined benefit pension plan. Effective January 28, 2008, the Company took action to freeze the plan with no additional contributions for a majority of participants. Employees age 55 or greater or with 10 years of credited service were grandfathered in the plan. No additional participants have been added to the plan. Effective February 28, 2011, the Company took action to again freeze the plan with no additional contributions for

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grandfathered participants. Benefits for all participants will remain frozen in the plan until such time as further action occurs. Components of net periodic pension cost (benefit) related to the Company’s pension plan were as follows for the periods indicated:

	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2011			2010			2011			2010
Components of Net Periodic Pension Cost (Benefit)
Service cost	$	—		$	146		$	—		$	292
Interest cost		151			195			302			390
Expected return on plan assets		(224	)		(237	)		(448	)		(474	)
Amortization of prior service cost		—			5			—			10
Net loss		—			14			—			28
Net periodic pension cost (benefit)	$	(73	)	$	123		$	(146	)	$	246

The Company made no contributions to the pension plan during 2010. The Company has not determined at this time how much, if any, contributions to the plan will be made for the year ended December 31, 2011.

Note 10. Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. U.S. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs. U.S. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels. These levels are:

— Level 1 – Valuation is based upon quoted prices (unadjusted) for identical instruments traded in active markets.

— Level 2 – Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

— Level 3 – Valuation is determined using model-based techniques with significant assumptions not observable in the market.

U.S. GAAP allows an entity the irrevocable option to elect fair value (the fair value option) for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis. The Company has not made any fair value option elections as of June 30, 2011.

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.

Assets Measured at Fair Value on a Recurring Basis

Securities Available For Sale. Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2). The Company obtains a single quote for all securities. Quotes for most securities are provided by our securities accounting and safekeeping correspondent bank which uses

25

Reuters for securities other than municipals for which they use a pricing matrix. The correspondent also uses securities trader quotations for a small number of securities. Securities pricing for a single pooled trust preferred senior security is provided through another correspondent by Moody’s Analytics. The Company does not adjust any quotes or prices provided by these third party sources. The Company performs a review of pricing data by comparing prices received from third party vendors to the previous month’s quote for the same security and evaluate any substantial changes.

The following table summarizes financial assets measured at fair value on a recurring basis as of June 30, 2011 and December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Assets Measured at Fair Value on a Recurring Basis at June 30, 2011 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant  Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level  3)		Balance at June 30, 2011
	(dollars in thousands)
Assets
Securities available for sale
Obligations of U.S. Government agencies	$	—	$	3,920	$	—	$	3,920
SBA Pool securities		—		75,979		—		75,979
Agency mortgage-backed securities		—		56,533		—		56,533
Agency CMO securities		—		39,350		—		39,350
Non agency CMO securities		—		9,418		—		9,418
State and political subdivisions		—		30,074		—		30,074
Pooled trust preferred securities		—		641		—		641
FNMA and FHLMC preferred stock		—		355		—		355
Corporate securities		—		607		—		607
Total securities available for sale	$	—	$	216,877	$	—	$	216,877

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Assets Measured at Fair Value on a Recurring Basis at December 31, 2010 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant  Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level  3)		Balance at December 31, 2010
			(dollars in thousands)
Assets
Securities available for sale
Obligations of U.S. Government agencies	$	—	$	23,829	$	—	$	23,829
SBA Pool securities		—		61,890		—		61,890
Agency mortgage-backed securities		—		46,284		—		46,284
Agency CMO securities		—		41,477		—		41,477
Non agency CMO securities		—		12,042		—		12,042
State and political subdivisions		—		57,346		—		57,346
Pooled trust preferred securities		—		571		—		571
FNMA and FHLMC preferred stock		—		89		—		89
Corporate securities		—		2,592		—		2,592
Total securities available for sale	$	—	$	246,120	$	—	$	246,120

At June 30, 2011, each security in the Company’s securities available for sale portfolio was measured at fair value on a recurring basis using Level 2 valuations.

Assets Measured at Fair Value on a Non-Recurring Basis

Certain assets are measured at fair value on a non-recurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment of a financial asset).

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 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. If a real estate loan becomes a nonperforming loan, and the valuation is over one year old, either an evaluation by an officer of the bank or an outside vendor or an appraisal is performed to determine current market value. The Company considers the value of a partially completed project for our loan analysis. For nonperforming construction loans, the Company obtains a valuation of each partially completed project “as is” from a third party appraiser. The Company uses these third party valuations to determine if any charge-offs are necessary.

The value of business equipment pledged as collateral is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’s financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable 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 non-recurring 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. The fair value of other real estate owned is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed external appraiser using observable market data (Level

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2). However, if the other real estate 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 Company believes that the fair value component in our valuation of OREO follows the provisions of accounting standards.

The following table summarizes assets measured at fair value on a non-recurring basis as of June 30, 2011 and December 31, 2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

Assets Measured at Fair Value on a Non-Recurring Basis at June 30, 2011 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant  Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at June 30, 2011
	(dollars in thousands)
Assets
Impaired loans	$	—	$	22,784	$	6,066	$	28,850
Other real estate owned	$	—	$	5,115	$	5,865	$	10,980
Assets Measured at Fair Value on a Non-Recurring Basis at December 31, 2010 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant  Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at December 31, 2010
	(dollars in thousands)
Assets
Impaired loans	$	—	$	18,550	$	2,136	$	20,686
Other real estate owned	$	—	$	7,360	$	4,257	$	11,617

As of June 30, 2011 and December 31, 2010, the Company had no liabilities measured at fair value on a non-recurring basis.

Fair Value of Financial Instruments

U.S. GAAP requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies and assumptions for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies and assumptions for other financial assets and financial liabilities are discussed below:

Cash and Short-Term Investments. For those short-term instruments, the carrying amount is a reasonable estimate of fair value.

Investment 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.

Restricted Securities.The carrying amount approximates fair value based on the redemption provisions of the correspondent banks.

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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.

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

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

Long-Term Borrowings.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 Receivable and Accrued Interest Payable. The carrying amounts of accrued interest approximate fair value.

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

The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At June 30, 2011 and December 31, 2010, the fair value of loan commitments and standby letters of credit are not significant and are not included in the table below.

The estimated fair value and the carrying value of the Company’s recorded financial instruments are as follows:

	June 30, 2011				December 31, 2010
(dollars in thousands)	Carrying Amount		Estimated Fair Value		Carrying Amount		Estimated Fair Value
Financial Assets:
Cash and short-term investments	$	13,987	$	13,987	$	12,533	$	12,533
Interest bearing deposits with banks		13,378		13,378		10,298		10,298
Securities available for sale		216,877		216,877		246,120		246,120
Restricted securities		10,247		10,247		10,344		10,344
Loans, net		725,714		750,520		749,486		769,510
Accrued interest receivable		4,258		4,258		4,281		4,281
Financial Liabilities:
Noninterest-bearing demand deposits	$	101,373	$	101,373	$	97,122	$	97,122
Interest-bearing deposits		733,112		729,260		771,024		762,844
Short-term borrowings		4,623		4,623		27,464		27,464
Long-term borrowings		117,500		130,510		117,500		132,498
Trust preferred debt		10,310		10,310		10,310		10,310
Accrued interest payable		1,448		1,448		1,451		1,451

The Company assumes 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. The Company attempts to match maturities of assets and

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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. The Company monitors 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.

Note 11. Preferred Stock and Warrant

On January 9, 2009, the Company signed a definitive agreement with the U.S. Department of the Treasury (the “Treasury”) under the Emergency Economic Stabilization Act of 2008 to participate in the Treasury’s Capital Purchase Program. Pursuant to this agreement, the Company sold 24,000 shares of its Series A Fixed Rate Cumulative Perpetual Preferred Stock to the Treasury for an aggregate purchase price of $24 million. This preferred stock pays a cumulative dividend at a rate of 5% for the first five years, and if not redeemed, pays a rate of 9% starting at the beginning of the sixth year. As part of its purchase of the preferred stock, the Treasury was also issued a warrant to purchase up to 373,832 shares of the Company’s common stock at an initial exercise price of $9.63 per share. If not exercised, the warrant terminates at the expiration of ten years. Under the agreement with the Treasury, the Company is subject to restrictions on its ability to increase the dividend rate on its common stock and to repurchase its common stock without Treasury consent.

Accounting for the issuance of preferred stock included entries to the equity portion of our consolidated balance sheet to recognize preferred stock at the full amount of the issuance, the warrant and discount on preferred stock at values calculated by discounting the future cash flows by a prevailing interest rate that a similar security would receive in the current market environment. At the time of issuance that discount rate was determined to be 12%. The fair value of the warrant of $950 thousand was calculated 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 present value of the preferred stock using a 12% discount rate was $14.4 million. The preferred stock discount determined by the allocation of discount to the warrant is being accreted quarterly over a 5 year period on a constant effective yield method at a rate of approximately 6.4%. Allocation of the preferred stock discount and the warrant as of January 9, 2009 is provided in the tables below:

	2009
Warrant Value
Preferred	$	24,000,000
Price	$	9.63
Warrant - shares		373,832
Value per warrant	$	2.54
Fair value of warrant	$	949,533

NPV of Preferred Stock

@12% discount rate

	(dollars in thousands)
	Fair Value		Relative Value %			Relative Value
$24 million 1/09/2009
NPV of preferred stock (12% discount rate)	$	14,446		93.8	%	$	22,519
Fair value of warrant		950		6.2	%		1,481
	$	15,396		100.0	%	$	24,000

On February 17, 2011, the Company entered into a written agreement with the Federal Reserve Bank of Richmond (“FRB”) and SCC. Under the terms of this written agreement, the Parent and the Bank are subject to additional limitations and regulatory restrictions and may not declare or pay dividends to its shareholders (including payments by the Parent related to trust preferred securities) without prior regulatory approval. See Note 14 – Formal Written Agreement.

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The Company has notified the Treasury that it is deferring the August 2011 payment of its regular quarterly cash dividend with respect to its Series A Fixed Rate Cumulative Perpetual Preferred Stock which the Company issued to the Treasury in connection with the Company’s participation in the Treasury’s Capital Purchase Program. The Company has previously deferred the February and May 2011 payments of its regular quarterly cash dividend with respect to the preferred stock.

The Company is permitted to defer dividend payments, with respect to the preferred stock but the dividend is a cumulative dividend that accumulates for payment in the future, and the failure to pay dividends for six dividend periods would trigger board appointment rights for the Treasury. The amount of the 2011 dividends that have accumulated and are unpaid and in arrears is $600 thousand as of June 30, 2011.

Note 12. Trust Preferred Debt

On September 17, 2003, $10 million of trust preferred securities were placed through EVB Statutory Trust I in a pooled underwriting totaling approximately $650 million. The trust issuer has invested the total proceeds from the sale of the Trust Preferred in Floating Rate Junior Subordinated Deferrable Interest Debentures (the “Junior Subordinated Debentures”) issued by the Parent. The trust preferred securities pay cumulative cash distributions quarterly at a variable rate per annum, reset quarterly, equal to the 3-month LIBOR plus 2.95%. As of June 30, 2011 and December 31, 2010, the interest rate was 3.20% and 3.25%, respectively. The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax purposes. The trust preferred securities have a mandatory redemption date of September 17, 2033, and became subject to varying call provisions beginning September 17, 2008. The Parent has fully and unconditionally guaranteed the trust preferred securities through the combined operation of the debentures and other related documents. The Parent’s obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Parent.

The trust preferred securities may be included in Tier 1 capital for regulatory capital adequacy determination purposes up to 25% of Tier 1 capital after its inclusion. The portion of the securities not considered as Tier 1 capital will be included in Tier 2 capital. At June 30, 2011 and December 31, 2010, all of the trust preferred securities qualified as Tier 1 capital.

Subject to certain exceptions and limitations, the Company is permitted to elect from time to time to defer regularly scheduled interest payments on its outstanding Junior Subordinated Debentures relating to its trust preferred securities. If the Company defers interest payments on the Junior Subordinated Debentures for more than 20 consecutive quarters, the Company would be in default under the governing agreements for such notes and the amount due under such agreements would be immediately due and payable.

On February 17, 2011, the Company entered into a written agreement with the FRB and SCC. Under the terms of this written agreement, the Company may not make payments on its outstanding Junior Subordinated Debentures relating to the trust preferred securities without prior regulatory approval. See Note 14 – Formal Written Agreement.

In June 2011, the Company began deferring its regularly scheduled interest payments on its outstanding Junior Subordinated Debentures relating to its trust preferred securities.

Note 13. Capital Requirements

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Parent’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Parent and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

On February 17, 2011, the Company entered into a written agreement with the FRB and SCC. Under the terms of this written agreement, the Parent and the Bank are subject to additional limitations and regulatory restrictions and may not declare or pay dividends to its shareholders (including payments by the Parent on its trust preferred securities) and may not purchase or redeem shares of its stock without prior regulatory approval. See Note 14 – Formal Written Agreement.

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As of June 30, 2011, the most recent notification from the FRB categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category. A comparison of the June 30, 2011 and December 31, 2010 capital ratios of the Company and the Bank with minimum regulatory guidelines is as follows:

As of June 30, 2011	Actual Capital			Minimum Capital Requirements			Minimum To Be Well-Capitalized Under Prompt Corrective Action Provisions
Total Risk-Based Capital Ratio:
Company		12.24	%		8.00	%		N/A
Bank		11.50	%		8.00	%		10.00	%
Tier 1 Risk-Based Capital Ratio:
Company		10.99	%		4.00	%		N/A
Bank		10.25	%		4.00	%		6.00	%
Leverage Ratio:
Company		7.60	%		4.00	%		N/A
Bank		7.09	%		4.00	%		5.00	%
As of December 31, 2010	Actual Capital			Minimum Capital Requirements			Minimum to be Well-Capitalized Under Prompt Corrective Action Provisions
Total Risk-Based Capital Ratio:
Company		11.70	%		8.00	%		N/A
Bank		10.99	%		8.00	%		10.00	%
Tier 1 Risk-Based Capital Ratio:
Company		10.51	%		4.00	%		N/A
Bank		8.36	%		4.00	%		6.00	%
Leverage Ratio:
Company		7.38	%		4.00	%		N/A
Bank		5.86	%		4.00	%		5.00	%

Note 14. Formal Written Agreement

Effective February 17, 2011, the Company and the Bank entered into a Written Agreement (the “Written Agreement”) with the FRB and the SCC.

Under the terms of the Written Agreement, the Bank has agreed to develop and submit for approval within the time periods specified therein written plans to: (a) strengthen board oversight of management and the Bank’s operation; (b) strengthen credit risk management practices; (c) enhance lending and credit administration; (d) enhance the grading of the Bank’s loan portfolio; (e) improve the Bank’s position with respect to loans, relationships, or other assets in excess of $900 thousand which are now or in the future become past due more than 90 days, which are on the Bank’s problem loan list, or which are adversely classified in any report of examination of the Bank; (f) review and

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revise the Bank’s methodology for determining the allowance for loan and lease losses (“ALLL”) and maintain an adequate ALLL; (g) enhance the Bank’s written internal audit program; (h) enhance management of the Bank’s liquidity position and funds management practices; (i) establish a revised contingency funding plan; (j) establish a revised investment policy; and (k) strengthen information technology.

In addition, the Bank has agreed that it will: (a) not extend, renew, or restructure any credit that has been criticized by the FRB or the SCC absent prior board of directors approval in accordance with the restrictions in the Written Agreement; and (b) eliminate all assets or portions of assets classified as “loss” and thereafter charge off all assets classified as “loss” in a federal or state report of examination, unless otherwise approved by the FRB.

Under the terms of the Written Agreement, both the Company and the Bank have agreed to submit capital plans to maintain sufficient capital at the Company, on a consolidated basis, and the Bank, on a stand-alone basis, and to refrain from declaring or paying dividends without prior regulatory approval. The Company has agreed that it will not take any other form of payment representing a reduction in the Bank’s capital or make any distributions of interest, principal, or other sums on subordinated debentures or trust preferred securities without prior regulatory approval. The Company may not incur, increase or guarantee any debt without prior regulatory approval and has agreed not to purchase or redeem any shares of its stock without prior regulatory approval.

See Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” under the heading “Executive Overview” for more information on the Company’s efforts to comply with the terms of the Written Agreement.

Note 15. Subsequent Events

The Company evaluated subsequent events that have occurred after the balance sheet date, but before the financial statements are issued. There are two types of subsequent events: (1) recognized, or those that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, and (2) nonrecognized, or those that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.

Based on the evaluation, the Company did not identify any recognized or nonrecognized subsequent events that would have required adjustment to or disclosure in the financial statements.

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

We present management’s discussion and analysis of financial information to aid the reader in understanding and evaluating our financial condition and results of operations. This discussion provides information about the major components of our results of operations, financial condition, liquidity and capital resources. This discussion should be read in conjunction with the Unaudited Consolidated Financial Statements and Notes to the Interim Consolidated Financial Statements presented elsewhere in this report and the Consolidated Financial Statements and Notes to Consolidated Financial Statements presented in the 2010 Form 10-K. Operating results include those of all our operating entities combined for all periods presented.

The Company provides a broad range of personal and commercial banking services including commercial, consumer and real estate loans. We complement our lending operations with an array of retail and commercial deposit products and fee-based services. Our services are delivered locally by well-trained and experienced bankers, whom we empower to make decisions at the local level, so they can provide timely lending decisions and respond promptly to customer inquiries. Having been in many of our markets for over 100 years, we have established relationships with and an understanding of our customers. 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.

Internet Access to Corporate Documents

Information about the Company can be found on the Company’s investor relations website at http://www.evb.org. The Company posts its annual reports, quarterly reports, current reports, definitive proxy materials and any amendments to those documents as soon as reasonably practicable after they are electronically filed with or furnished to the SEC. All such filings are available at no charge. The information on the Company’s website is not, and shall not be deemed to be, a part of this Quarterly Report on Form 10-Q or incorporated into any other filings the Company makes with the SEC.

Forward Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q that are not historical facts may constitute “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. In addition, certain statements may be contained in the Company’s future filings with the SEC, in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or Board of Directors, including those relating to products or services or the payment of dividends; (iii) statements of future economic performance; (iv) statements regarding the impact of the Written Agreement on our financial condition, operations and capital strategies, including strategies related to payment of dividends on the Company’s outstanding common and preferred stock and to payment of interest on the Company’s outstanding Junior Subordinated Debentures related to the Company’s trust preferred debt; (v) statements regarding the adequacy of the allowance for loan losses; (vi) statements regarding the effect of future sales of foreclosed properties; (vii) statements regarding the Company’s liquidity; (viii) statements of management’s expectations regarding future trends in interest rates, real estate values, and economic conditions generally and in the Company’s markets; and (ix) statements of assumptions underlying such statements. Words such as “believes”, “anticipates,” “expects,” “intends,” “targeted,” “continue,” “remain,” “will,” “should,” “may” and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

• our ability to assess, manage and improve our asset quality;

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

• 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;

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• the impact of government intervention in the banking business;

• an insufficient allowance for loan losses;

• our ability to meet the capital requirements of our regulatory agencies;

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

• adverse reactions in financial markets related to the budget deficit of the United States government;

• 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;

• 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;

• 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;

• our ability to comply with the Written Agreement, which requires us to designate a significant amount of resources to complying with the agreement and may have a material adverse effect on our operations and the value of our securities;

• possible changes to our Board of Directors, including in connection with deferred dividends on our Capital Purchase Program preferred stock; and

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

All of the forward-looking statements made in this report 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 refer to risks detailed under Item 1A. “Risk Factors” included in the 2010 Form 10-K and otherwise included in our periodic and current reports filed with the SEC for specific factors that could cause our actual results to be significantly different from those expressed or implied by our forward-looking statements.

We caution you that the above list of important factors is not all inclusive. These forward-looking statements are made as of the date of this report, and we may not undertake steps to update these forward-looking statements to reflect the impact of any circumstances or events that arise after the date the forward-looking statements are made.

Critical Accounting Policies

The preparation of financial statements requires us to make estimates and assumptions. Those accounting policies with the greatest uncertainty and that require our most difficult, subjective or complex judgments affecting the application of these policies, and the likelihood that materially different amounts would be reported under different conditions, or using different assumptions, are described below.

Allowance for Loan Losses

The Company establishes the allowance for loan losses through charges to earnings in the form of a provision for loan losses. Loan losses are charged against the allowance when we believe that the collection of the principal is unlikely. Subsequent recoveries of losses previously charged against the allowance are credited to the allowance. The allowance represents an amount that, in our judgment, will be adequate to absorb any losses on existing loans that may become uncollectible. Our judgment in determining the level of the allowance is based on evaluations of the collectability of loans while taking into consideration such factors as trends in delinquencies and charge-offs, changes in the nature and volume of the loan portfolio, current economic conditions that may affect a borrower’s ability to repay and the value of collateral, overall portfolio quality and review of specific potential losses. This evaluation is inherently subjective because it requires estimates that are susceptible to significant revision as more information becomes available. For more information see the section titled “Asset Quality” within Item 2.

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Impairment of Loans

The Company considers a loan impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal and interest when due, according to the contractual terms of the loan agreement. The Company does not consider a loan impaired during a period of insignificant payment shortfalls if we expect the ultimate collection of all amounts due. Impairment is measured on a loan by loan basis for real estate (including multifamily residential, construction, farmland and non-farm, non-residential) and commercial loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans, representing consumer, one to four family residential first and seconds and home equity lines, are collectively evaluated for impairment. The Company maintains a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment. Troubled debt restructurings (“TDRs”) are also considered impaired loans. A TDR occurs when the Company, for economic or legal reasons related to the borrower’s financial condition, grants a concession to the borrower that it would not otherwise consider. For more information see the section titled “Asset Quality” within Item 2.

Impairment of Securities

Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) we intend to sell the security or (ii) 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 and it is not more likely than not that we will be required 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 net 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 a recovery of fair value. Other-than-temporary impairment of an equity security results in a write-down that must be included in net income. We regularly review each investment security for other-than-temporary impairment based on criteria that includes the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, our best estimate of the present value of cash flows expected to be collected from debt securities, our intention with regard to holding the security to maturity and the likelihood that we would be required to sell the security before recovery.

Other Real Estate Owned

Real estate acquired through, or in lieu of, foreclosure is held for sale and is stated at the lower of cost or estimated fair market value of the property, less estimated disposal costs, if any. Any excess of cost over the estimated fair market value at the time of acquisition is charged to the allowance for loan losses. The estimated fair market value is reviewed periodically by management and any write-downs are charged against current earnings.

Goodwill

Goodwill is not amortized but is subject to impairment tests on at least an annual basis or earlier whenever an event occurs indicating that goodwill may be impaired. In assessing the recoverability of the Company’s goodwill, all of which was recognized in connection with the acquisition of branches in 2003 and 2008, we must make assumptions in order to determine the fair value of the respective assets. The Company completed the annual goodwill impairment test during the fourth quarter of 2010 and determined there was no impairment to be recognized in 2010. If the underlying estimates and related assumptions change in the future, the Company may be required to record impairment charges.

Retirement Plan

The Company has a defined benefit pension plan. Effective January 28, 2008, the Company took action to freeze the plan with no additional contributions for a majority of participants. Employees age 55 or greater or with 10 years of credited service were grandfathered in the plan. No additional participants have been added to the plan. Effective February 28, 2011, the Company took action to again freeze the plan with no additional contributions for grandfathered participants. Benefits for all participants will remain frozen in the plan until such time as further action occurs. Plan assets, which consist primarily of mutual funds invested in marketable equity securities and corporate

36

and government fixed income securities, are valued using market quotations. The Company’s actuary determines plan obligations and annual pension expense using a number of key assumptions. Key assumptions may include the discount rate, the estimated return on plan assets and the anticipated rate of compensation increases. Changes in these assumptions in the future, if any, or in the method under which benefits are calculated may impact pension assets, liabilities or expense.

Accounting for Income Taxes

In the ordinary course of business, there are transactions and calculations for which the ultimate tax outcomes are uncertain. In addition, the Company’s tax returns are subject to audit by various tax authorities. Although we believe that the estimates are reasonable, no assurance can be given that the final tax outcome will not be materially different than that which is reflected in the income tax provision and accrual.

For further information concerning accounting policies, refer to Item 8. “Financial Statements and Supplementary Data,” under the heading “Note 1. Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Executive Overview

Eastern Virginia Bankshares, Inc., is committed to delivering strong long-term earnings using a prudent allocation of capital, in business lines where we have demonstrated the ability to compete successfully. Over the past three years, our Company has struggled with the challenging economic environment and has focused on credit quality initiatives to position our Company for growth once the economic climate improves. Although constrained by a weak economy, the Company was able to achieve some positive accomplishments during the first six months of 2011, including a return to operating profitability and a 9.5% decrease in nonperforming assets. The improvements seen in some of the Company’s credit metrics, and other factors, are reflective of slowly improving economic conditions. Although the results for the second quarter of 2011 represent a continuation of a positive trend which began in the first quarter of this year, our optimism continues to be tempered with caution as the current economic environment continues to negatively impact the credit quality of our loan portfolio requiring additional charge-offs and provisions for loan losses. General credit quality is not expected to show broad based improvement until the economy shows more robust growth, improved consumer confidence and stabilized real estate prices. In the near term, the Company anticipates a continuation of prolonged economic weakness, both locally and nationally, and continued credit issues in the loan portfolio.

In spite of the operating profit reported for the first half of 2011, earnings remained constrained due to credit quality issues and a lack of loan demand resulting from the challenging economic climate, the high level of unemployment and depressed real estate markets. While the Company experienced some improvement in the number of loans that were negatively impacted by the continued weak economic conditions within our markets, we continue to see declining real estate values in our markets and increased stress on our customers’ ability to pay their loans as agreed. The Company’s provision for loan losses remains elevated compared to historical levels as we continue to experience historically high levels of nonperforming assets and charge-offs. While the elevated level of provision for loan losses expense recorded during the first half of 2011 negatively impacts our operating results, the Company believes these loan loss provisions are necessary as the economic growth seen in some national statistics has not been realized in the local markets we serve. The Company continues to proactively manage its problem assets and is aggressively charging-off loans and increasing our allowance for potential future loan losses as necessary. The Company is diligently managing through these challenging times and remains focused on profitable balance sheet growth, timely resolution of our nonperforming assets and other financial strategies the Company believes will return us to the level of profitability to which our shareholders are accustomed.

The primary drivers for the Company’s results for the first six months of 2011 continue to be the elevated levels of the provision for loan losses, higher FDIC insurance premiums, higher professional and collection/repossession expenses related to elevated past due loans and nonperforming assets, and losses on the sale and valuation adjustments of other real estate owned. The provision for loan losses during the first half of 2011 dropped sharply from 2010 levels primarily due to lower net charge-offs and a continued decrease in the level of past due loans and nonperforming assets. The Company believes the investments it has made during 2010 and the first half of 2011 to reduce nonperforming assets and enhance our internal monitoring systems will significantly enhance the long-term credit quality of our loan portfolio and properly position us to deliver stronger earnings as we move forward once the economic climate improves.

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As we reported in our Quarterly Report on Form 10-Q for March 31, 2011, the Company has taken actions to preserve capital including the suspension of its quarterly common stock dividend and to defer its regular quarterly cash dividend with respect to its Series A Fixed Rate Cumulative Perpetual Preferred Stock (the “Preferred Stock”) which the Company issued to the United States Department of Treasury in connection with the Company’s participation in the Treasury’s Capital Purchase Program in January 2009.

During the second quarter of 2011, the Company began deferring its regularly scheduled interest payments on its outstanding Junior Subordinated Debentures relating to its trust preferred securities. While the interest expense associated with this source of regulatory capital continues to be reflected in the Company’s earnings, the deferred payments represent a subordinated liability to other creditors of the Parent. In addition, during the second quarter of 2011 the Company took action to improve two key regulatory ratios of the Bank. This was accomplished by the Bank repaying an $11.0 million subordinated debt due to the Parent. In conjunction with this repayment, the Parent used the proceeds to reinvest a like amount of Tier 1 qualifying capital into the Bank. The net result of this transaction was to reclassify $11.0 million of the Bank’s Tier 2 qualifying regulatory capital as Tier 1 qualifying regulatory capital, which in turn improved the Bank’s Leverage Ratio and Tier 1 Risk-Based Capital Ratio by approximately 100 basis points and 150 basis points, respectively, and more closely aligned these regulatory ratios between the Company and the Bank.

The actions to suspend and defer dividend and interest payments to preserve capital, while difficult, are necessary to ensure the financial strength of the Company. Despite our significant challenges over the last several years, the Company has maintained its regulatory well capitalized status and we believe that maintaining this status is critically important for the long-term value of our Company. As economic conditions improve, and as the Company is able to generate earnings to support its current and future capital needs, the Company plans to restore its common and Preferred Stock dividends as well as interest payments on its Junior Subordinated Debentures.

On February 17, 2011, the Company and Bank entered into a Written Agreement with the FRB and the SCC. The purpose of this agreement is to formally document the common goal of the Company, Bank and the regulatory agencies to maintain the financial soundness of the Company and the Bank. This agreement contains many of the steps that the Company had already initiated during 2010 and 2011 to address our deteriorating asset quality and associated challenges brought on during the economic recession. Among other things the agreement addresses improving board oversight of the management and administration of the Company’s operations, including improving credit risk management processes, lending and credit administration processes, the quality of the loan and asset portfolios and processes to manage the quality of these portfolios, and the balance of and processes related to loan loss reserves. The directors of the Company and the Bank are fully committed to the common goal of improving the financial soundness of the Company. Further, the directors and executive management of the Company are fully dedicated to diligently working to comply with all requirements of the Written Agreement. The Company is pleased with the continued support of the regulatory agencies and looks forward to the successful results of our actions.

As of the filing of this Quarterly Report on Form 10-Q, the Company has met all deadlines for delivering plans, policies and reports under the Written Agreement and we are encouraged with the initial feedback we have received from the regulatory agencies. We also believe that the improvements in our nonperforming asset levels during the first six months of 2011 are an indication that the actions we have taken are beginning to yield positive results. The Written Agreement requires us to submit quarterly progress reports to our banking regulators on our asset quality improvement initiatives and other remediation efforts. We anticipate meeting the Written Agreement’s requirements and timely submitting the quarterly progress reports as we work closely with our regulatory agencies to improve the Company’s financial performance. For further information concerning the Written Agreement, refer to Item 1. “Financial Statements,” under the heading “Note 14. Formal Written Agreement.”

As previously disclosed in our 2011 Proxy Statement, during August 2010 the Company established a Regulatory Compliance Oversight Committee to oversee the implementation of certain corrective actions necessary to improve the operations and financial results of the Company in light of findings of a recent regulatory examination and to comply with the Written Agreement. On behalf of the Board, this committee acts to ensure that the Bank cures the noted deficiencies. The committee continues to meet at least once a month as the remediation process progresses.

The Bank continues to improve its handling of nonperforming assets and has recently established a Special Assets Division that reports directly to the Chief Risk Officer. This Division is specifically tasked with formulating workout strategies and conducting asset dispositions to minimize future losses. The establishment of this division will also allow our loan officers to focus on expanding our lending activities when loan demand and economic conditions improve. The Company continues to make progress on this key function and was successful in recruiting a seasoned special assets manager during the second quarter of 2011 to further this initiative.

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For the three months ended June 30, 2011, the following key points were significant factors in our reported results:

• Provision expense for the allowance for loan losses of $1.5 million to fund possible losses in the loan portfolio as compared to a provision of $12.6 million for the three months ended June 30, 2010.

• Net charge-offs of $1.1 million to write off uncollectible balances on nonperforming assets.

• Gain on sale of available for sale securities of $129 thousand resulting from adjustments in the composition of the investment portfolio as part of our overall asset/liability management strategy.

• Increase in net interest income by $110 thousand over the same period in 2010.

• Impairment losses of $77 thousand related to valuation adjustments on other real estate owned.

• Losses of $48 thousand on the sale of other real estate owned.

• Expenses related to FDIC insurance premiums of $931 thousand, as compared to $553 thousand in the same period of 2010.

• Expenses related to collection, repossession and other real estate owned of $567 thousand.

For the three months ended June 30, 2011 and 2010, the reported net income (loss) of $223 thousand and ($6.0) million, respectively equate to the following performance metrics:

• On net (loss) available to common shareholders, Annualized Return on Average Assets (ROA) of (0.06%) for the three months ended June 30, 2011 which compares to ROA of (2.30%) for the three months ended June 30, 2010.

• On net (loss) available to common shareholders, Annualized Return on Average Shareholders’ Equity (ROE) of (0.86%) for the three months ended June 30, 2011 which compares to ROE of (30.63%) for the three months ended June 30, 2010.

• On a per share basis, the diluted and basic (loss) per common share (EPS) is ($0.03) for the three months ended June 30, 2011 which compares to an EPS of ($1.06) for the three months ended June 30, 2010.

For the six months ended June 30, 2011, the following key points were significant factors in our reported results:

• Provision expense for the allowance for loan losses of $3.5 million to fund possible losses in the loan portfolio as compared to $14.5 million for the same period in 2010.

• Gain on the sale of our former Aylett branch office of $256 thousand.

• Net charge-offs of $2.0 million to write off uncollectible balances on nonperforming assets.

• Gain on sale of available for sale securities of $322 thousand resulting from adjustments in the composition of the investment portfolio as part of our overall asset/liability management strategy.

• Decrease in net interest income by $92 thousand from the same period in 2010.

• Impairment losses of $229 thousand related to valuation adjustments on other real estate owned.

• Losses of $295 thousand on the sale of other real estate owned.

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• Expenses related to FDIC insurance premiums of $1.4 million, compared to $1.0 million for the six months ended June 30, 2010.

• Expenses related to collection, repossession and other real estate owned of $1.0 million, compared to $695 thousand for the same period in 2010.

For the six months ended June 30, 2011 and 2010, the reported net income (loss) of $697 thousand and ($4.6) million, respectively equate to the following performance metrics:

• On net (loss) available to common shareholders, Annualized Return on Average Assets (ROA) of (0.01%) for the six months ended June 30, 2011 which compares to ROA of (0.98%) for the six months ended June 30, 2010.

• On net (loss) available to common shareholders, Annualized Return on Average Shareholders’ Equity (ROE) of (0.15%) for the six months ended June 30, 2011 which compares to ROE of (13.13%) for the six months ended June 30, 2010.

• On a per share basis, the diluted and basic (loss) per common share (EPS) is ($0.01) for the six months ended June 30, 2011 which compares to an EPS of ($0.90) for the six months ended June 30, 2010.

Although the Company’s operating results improved substantially for the three and six months ended June 30, 2011 as compared to the same periods of 2010, the Company remains unsatisfied with these financial results and continues to focus on credit quality initiatives that we believe will ultimately result in an improvement in our asset quality and allow us to focus greater resources on growing our franchise and delivering financial results more consistent with our long-term history. As detailed later in this Quarterly Report on Form 10-Q under the caption “Asset Quality”, the Company continues to work on the timely resolution of our nonperforming assets but expects that additional charge-offs will be likely. However, the Company believes that the loan loss reserves set aside during the first six months of 2011 should be sufficient to cover our known credit issues under current economic conditions. Any further deterioration of economic conditions or credit quality could require the adjustment of our provision for loan losses to reserve against additional charge-offs.

Results of Operations

As discussed under the caption “Executive Overview” above, the Company’s results of operations for the three and six months ended June 30, 2011 were primarily driven by an elevated provision for loan losses over historical levels (although the provision showed significant improvement against the comparable 2010 periods), higher FDIC insurance premiums, higher professional and collection/repossession expenses related to elevated past due loans and nonperforming assets, and losses on the sale of and valuation adjustments on other real estate owned. Credit quality continues to receive significant management attention to ensure that we continue to identify credit problems and improve the quality of our asset portfolio. The Company remains very diligent and focused on the management of our credit quality and is fully committed to quickly and aggressively addressing our problem credits. Additional analysis and breakout of our nonperforming assets are presented later in this Quarterly Report on Form 10-Q under the caption “Asset Quality”. The remainder of this analysis discusses the results of operations under the component sections of net interest income and net interest margin, noninterest income, noninterest expense and income taxes.

Net Interest Income and Net Interest Margin

Net interest income, the fundamental source of the Company’s earnings, is defined as the difference between income on earning assets and the cost of funds supporting those assets. Significant categories of earning assets are loans and investment securities, while deposits and long-term borrowings represent the major portion of interest bearing liabilities. The level of net interest income is impacted primarily by variations in the volume and mix of these assets and liabilities, as well as changes in interest rates when compared to previous periods of operations and the yield of our interest earning assets compared to our cost of funding these assets.

Table 1 presents the average interest earning assets and average interest bearing liabilities, the average yields earned on such assets (on a tax equivalent basis) and rates paid on such liabilities, and the net interest margin for the three and six months ended June 30, 2011 and 2010.

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For comparative purposes, income from tax-exempt securities is adjusted to a tax-equivalent basis using the federal statutory tax rate of 34% and adjusted by the Tax Equity and Fiscal Responsibility Act (“TEFRA”) adjustment. This latter adjustment is for the disallowance as a deduction of a portion of total interest expense related to the ratio of average tax-exempt securities to average total assets. By making these adjustments, tax-exempt income and their yields are presented on a comparable basis with income and yields from fully taxable earning assets. The net interest margin is calculated by expressing tax-equivalent net interest income as a percentage of average interest earning assets, and represents the Company’s net yield on its earning assets. Net interest margin is an indicator of the Company’s effectiveness in generating income from its earning assets. The net interest margin is affected by the structure of the balance sheet as well as by competitive pressures, Federal Reserve Board policies and the economy. The spread that can be earned between interest earning assets and interest bearing liabilities is also dependent to a large extent on the slope of the yield curve.

Net interest income, on a fully tax equivalent basis, increased $12 thousand or 0.1% to remain at $9.1 million for both the three months ended June 30, 2011 and 2010. Total average earning assets decreased $25.7 million or 2.5% from $1.03 billion for the three months ended June 30, 2010 to $999.9 million for the same period of 2011. Total average interest-bearing liabilities decreased $15.6 million or 1.8% from $889.1 million for the three months ended June 30, 2010 to $873.5 million for the same period of 2011. The minimal increase in net interest income was driven by the change in the mix and pricing of the balance sheet components. These shifts resulted in an increase of 10 basis points in our net interest margin from 3.57% for the three months ended June 30, 2010 to 3.67% for the same period of 2011. The percentage of average earning assets to total average assets increased slightly to 93.1% for the three months ended June 30, 2011, as compared to 92.9% for the same period of 2010.

Total interest income, on a fully tax equivalent basis, decreased $632 thousand from $13.6 million for the three months ended June 30, 2010 to $12.9 million for the same period of 2011. This was driven by a decline in the yield on interest earning assets from 5.31% for the three months ended June 30, 2010 to 5.19% for the same period of 2011, and the decrease in the amount of average earning assets during the same periods. These decreases were primarily the result of reduced yields on the investment securities portfolio and a significant decrease in the average loan balances, which was partially offset by an increase in the yield on the loan portfolio.

Average total loan balances decreased $93.4 million from $856.6 million for the three months ended June 30, 2010 to $763.3 million for the same period of 2011. The yield on loans increased to 5.81% for the second quarter of 2011 compared to 5.69% for the same period of 2010 primarily due to an estate settlement on a nonperforming loan which resulted in the collection of approximately $300 thousand in interest, fees and late charges. Combined, this resulted in a $1.1 million drop in interest income generated by our largest earning asset category from the prior year’s income level to $11.0 million for the quarter ended June 30, 2011 compared to $12.1 million for the same period in 2010. Interest income generated by the loan portfolio decreased due to weak loan demand, adjustments to our variable rate loans in the low interest rate environment, increased charge-offs, payment curtailments on outstanding loans and an increase in nonperforming loans.

Average investment security balances increased $96.3 million from $125.1 million for the three months ended June 30, 2010 to $221.4 million for the same period in 2011. While the average investment securities balance increased, the yield on securities declined 106 basis points from 4.48% for the second quarter of 2010 to 3.42% for the second quarter of 2011. The lower yield resulted from investing in lower risk, shorter duration investments which had a corresponding lower yield in the second quarter of 2011. Average taxable investment securities increased $118.3 million from the second quarter of 2010 to the second quarter of 2011, but the yield declined from 4.01% for the three months ended June 30, 2010 to 3.23% for the same period in 2011, a drop of 78 basis points.

Our excess funds are invested in short term investments. Average interest bearing deposits in other banks decreased $28.0 million from $43.1 million for the second quarter of 2010 to $15.1 million for the same period 2011, while average federal funds sold decreased $673 thousand to $176 thousand during the second quarter of 2011 compared to $849 thousand for the same period in 2010. This reflected a change in our overall investment strategy as we began to strategically deploy excess liquidity in short duration, lower risk securities as investment opportunities were available. In total, our excess funds decreased $28.6 million from the second quarter of 2010 to the second quarter of 2011.

Average interest bearing deposits decreased $18.5 million from $758.4 million for the second quarter of 2010 to $739.9 million for the second quarter of 2011. Changes within the mix of these balances and the corresponding decrease in the rates on deposits were significant drivers for the reduction in interest expense related to interest-bearing deposits and helped to minimize the decrease in our interest income. Our overall cost of funds decreased $644 thousand, as the total rate for average interest-bearing deposits fell from 1.64% for the three months ended June 30, 2010 to 1.37% for the same period in 2011, a drop of 27 basis points. Deposits continued to shift from higher priced certificates of deposit to lower priced money market and savings accounts. The largest increase from the second

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quarter of 2010 to the same period in 2011 was in the money market deposits with an increase of $27.2 million in average balance and a corresponding rate decrease of 12 basis points from 1.32% to 1.20% from the second quarter of 2010 to the second quarter of 2011. The aggressively priced checking accounts (or “NOW accounts”) had a decrease of $4.0 million in average balance and a corresponding rate decrease of 30 basis points from 1.28% to 0.98% for the same periods. Average large dollar certificates decreased $21.5 million from $169.5 million during the second quarter of 2010 to $148.1 million during the second quarter of 2011 and the rate dropped 31 basis points from 2.20% in the second quarter of 2010 to 1.89% for the same period in 2011. Other certificates average balance declined $22.5 million from $192.6 million during the second quarter of 2010 to $170.1 million for the same period in 2011, with a simultaneous 26 basis point drop in rate. Other interest-bearing liabilities added to the decrease in the cost of funds, primarily because long-term FHLB borrowings cost declined $68 thousand from $1.3 million for the three months ended June 30, 2010 to $1.2 million for the same period in 2011.

Net interest income, on a fully tax equivalent basis, decreased $217 thousand or 1.2% to $18.1 million for the six months ended June 30, 2011, down from $18.3 million for the six months ended June 30, 2010. Total average earning assets decreased $16.6 million or 1.6% from $1.03 billion for the six months ended June 30, 2010 to $1.01 billion for the same period of 2011. Total average interest-bearing liabilities decreased $6.4 million or 0.7% from $893.3 million for the six months ended June 30, 2010 to $886.9 million for the same period of 2011. The decrease in net interest income was driven by the change in the mix and pricing of the balance sheet components. These shifts resulted in an increase of 2 basis points in our net interest margin from 3.60% for the six months ended June 30, 2010 to 3.62% for the same period of 2011. The percentage of average earning assets to total average assets increased slightly to 93.1% for the six months ended June 30, 2011, as compared to 92.9% for the same period in 2010.

Total interest income, on a fully tax equivalent basis, decreased $1.6 million from $27.4 million for the six months ended June 30, 2010 to $25.8 million for the same period of 2011. This was driven by a decline in the yield on interest earning assets from 5.39% for the six months ended June 30, 2010 to 5.15% for the same period of 2011, and the decrease in average earning assets over the same periods. These decreases were primarily the result of reduced yields on the investment securities portfolio and a significant decrease in the average loan balances, partially offset by a slight increase in the yield on loans.

Average total loan balances decreased $88.8 million from $856.3 million for the six months ended June 30, 2010 to $767.5 million for the same period of 2011. The yield on loans increased to 5.76% for the first six months of 2011 compared to 5.73% for the same period of 2010 primarily due to the aforementioned estate settlement. Combined, this resulted in a $2.4 million drop in interest income generated by our largest earning asset category from the prior year’s income level to $21.9 million for the six months ended June 30, 2011 compared to $24.3 million for the same period in 2010. Interest income generated by the loan portfolio decreased due to weak loan demand, adjustments to our variable rate loans in the low interest rate environment, increased charge-offs, payment curtailments on outstanding loans and an increase in nonperforming loans.

Average investment security balances increased $90.7 million from $138.1 million for the six months ended June 30, 2010 to $228.8 million for the same period in 2011. While the average investment securities balance increased, the yield on securities declined 97 basis points from 4.40% for the first six months of 2010 to 3.43% for the first six months of 2011. The lower yield resulted from investing in lower risk, shorter duration investments which had a corresponding lower yield in the first half of 2011. Average taxable investment securities increased $105.1 million from the first six months of 2010 to the first six months 2011, but the yield declined from 4.04% for the six months ended June 30, 2010 to 3.10% for the same period in 2011, a drop of 94 basis points.

Our excess funds are invested in short term investments. Average interest bearing deposits in other banks decreased $18.0 million from $31.2 million for the first six months of 2010 to $13.2 million for the same period 2011, while federal funds sold decreased $506 thousand to $305 thousand during the first six months of 2011 compared to $811 thousand for the same period in 2010. This reflected a change in our overall investment strategy as we began to strategically deploy excess liquidity in short duration, lower risk securities as investment opportunities were available. In total, our excess funds decreased $18.5 million from the first six months of 2010 to the first six months of 2011.

Average interest bearing deposits decreased $5.3 million from $757.7 million for the first six months of 2010 to $752.4 million for the first six months of 2011. Changes within the mix of these balances and the corresponding decrease in the rates on deposits were significant drivers for the reduction in interest expense related to interest-bearing deposits and helped to minimize the corresponding decrease in our net interest income. Our overall cost of funds decreased $1.4 million, as the total rate for average interest-bearing deposits fell from 1.69% for the six months ended June 30, 2010 to 1.38% for the same period in 2011, a drop of 31 basis points. Deposits continued to shift from

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higher priced certificates of deposit to NOW accounts, money market and savings accounts. The largest increase from the first six months of 2010 to the same period in 2011 was in the money market deposits with an increase of $27.2 million in average balance and a corresponding rate decrease of 13 basis points from 1.33% to 1.20% from the first six months of 2010 to the first six months of 2011. The aggressively priced NOW balance had an increase of $3.5 million in average balance and a corresponding rate decrease of 32 basis points from 1.28% to 0.96% for the same periods. Average large dollar certificates decreased $18.1 million from $169.2 million during the first six months of 2010 to $151.1 million during the first six months of 2011 and the rate dropped 29 basis points from 2.23% in the first six months of 2010 to 1.94% for the same period in 2011. Other certificates average balance declined $19.7 million from $192.5 million during the first half of 2010 to $172.7 million for the same period in 2011, with a simultaneous 39 basis point drop in rate. Other interest-bearing liabilities added to the decrease in the cost of funds, primarily because long-term FHLB borrowings cost declined $200 thousand from $2.6 million for the six months ended June 30, 2010 to $2.4 million for the same period in 2011.

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Table 1: Average Balance Sheet and Net Interest Margin Analysis

(dollars in thousands)

	Three Months Ended June 30,
	2011								2010
	Average Balance			Income/ Expense		Yield/ Rate (1)			Average Balance			Income/ Expense		Yield/ Rate (1)
Assets:
Securities
Taxable, available for sale	$	192,792		$	1,552		3.23	%	$	74,454		$	745		4.01	%
Restricted securities		10,181			59		2.32	%		9,455			57		2.42	%
Tax exempt, available for sale (2)		18,425			275		5.99	%		41,202			594		5.78	%
Total securities		221,398			1,886		3.42	%		125,111			1,396		4.48	%
Interest bearing deposits with banks		15,093			10		0.27	%		43,045			37		0.34	%
Federal funds sold		176			—		0.00	%		849			—		0.00	%
Loans, net of unearned income (3)		763,261			11,048		5.81	%		856,636			12,143		5.69	%
Total earning assets		999,928			12,944		5.19	%		1,025,641			13,576		5.31	%
Less allowance for loan losses		(26,786	)							(13,402	)
Total non-earning assets		100,546								91,265
Total assets	$	1,073,688							$	1,103,504
Liabilities & Shareholders’ Equity:
Interest-bearing deposits
Checking	$	219,561		$	536		0.98	%	$	223,574		$	712		1.28	%
Savings		78,595			121		0.62	%		76,356			116		0.61	%
Money market savings		123,586			371		1.20	%		96,361			318		1.32	%
Large dollar certificates of deposit (4)		148,065			697		1.89	%		169,540			928		2.20	%
Other certificates of deposit		170,126			799		1.88	%		192,580			1,027		2.14	%
Total interest-bearing deposits		739,933			2,524		1.37	%		758,411			3,101		1.64	%
Federal funds purchased and repurchase agreements		3,237			9		1.12	%		2,592			9		1.39	%
Short-term borrowings		2,496			2		0.32	%		—			—		0.00	%
Long-term borrowings		117,500			1,187		4.05	%		117,739			1,255		4.28	%
Trust preferred debt		10,310			81		3.15	%		10,310			82		3.19	%
Total interest-bearing liabilities		873,476			3,803		1.75	%		889,052			4,447		2.01	%
Noninterest-bearing liabilities
Demand deposits		102,098								101,830
Other liabilities		4,081								5,620
Total liabilites		979,655								996,502
Shareholders’ equity		94,033								107,002
Total liabilities and shareholders’ equity	$	1,073,688							$	1,103,504
Net interest income (2)				$	9,141							$	9,129
Interest rate spread (2)(5)							3.44	%							3.30	%
Interest expense as a percent of average earning assets							1.53	%							1.74	%
Net interest margin (2)(6)							3.67	%							3.57	%

Notes:

(1) Yields are annualized and based on average daily balances.

(2) Income and yields are reported on a taxable equivalent basis assuming a federal tax rate of 34%, with a $84 adjustment for 2011 and a $182 adjustment in 2010.

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

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

(5) 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.

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

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(dollars in thousands)	Six Months Ended June 30,
	2011								2010
	Average Balance			Income/ Expense		Yield/ Rate (1)			Average Balance			Income/ Expense		Yield/ Rate (1)
Assets:
Securities
Taxable, available for sale	$	190,957		$	2,940		3.10	%	$	85,851		$	1,718		4.04	%
Restricted securities		10,262			125		2.46	%		9,199			62		1.36	%
Tax exempt, available for sale (2)		27,622			825		6.02	%		43,072			1,233		5.77	%
Total securities		228,841			3,890		3.43	%		138,122			3,013		4.40	%
Interest bearing deposits with banks		13,159			16		0.25	%		31,161			76		0.49	%
Federal funds sold		305			—		0.00	%		811			—		0.00	%
Loans, net of unearned income (3)		767,450			21,904		5.76	%		856,257			24,342		5.73	%
Total earning assets		1,009,755			25,810		5.15	%		1,026,351			27,431		5.39	%
Less allowance for loan losses		(26,661	)							(12,929	)
Total non-earning assets		101,672								90,795
Total assets	$	1,084,766							$	1,104,217
Liabilities & Shareholders’ Equity:
Interest-bearing deposits
Checking	$	225,441		$	1,078		0.96	%	$	221,938		$	1,410		1.28	%
Savings		78,412			240		0.62	%		76,571			232		0.61	%
Money market savings		124,721			745		1.20	%		97,496			645		1.33	%
Large dollar certificates of deposit (4)		151,103			1,451		1.94	%		169,219			1,875		2.23	%
Other certificates of deposit		172,720			1,631		1.90	%		192,457			2,183		2.29	%
Total interest-bearing deposits		752,397			5,145		1.38	%		757,681			6,345		1.69	%
Federal funds purchased and repurchase agreements		2,892			17		1.19	%		5,217			28		1.08	%
Short-term borrowings		3,787			8		0.43	%		—			—		0.00	%
Long-term borrowings		117,500			2,361		4.05	%		120,047			2,561		4.30	%
Trust preferred debt		10,310			162		3.17	%		10,310			163		3.19	%
Total interest-bearing liabilities		886,886			7,693		1.75	%		893,255			9,097		2.05	%
Noninterest-bearing liabilities
Demand deposits		100,780								98,394
Other liabilities		4,256								5,965
Total liabilites		991,922								997,614
Shareholders’ equity		92,844								106,603
Total liabilities and shareholders’ equity	$	1,084,766							$	1,104,217
Net interest income (2)				$	18,117							$	18,334
Interest rate spread (2)(5)							3.40	%							3.34	%
Interest expense as a percent of average earning assets							1.54	%							1.79	%
Net interest margin (2)(6)							3.62	%							3.60	%

Notes:

(1) Yields are annualized and based on average daily balances.

(2) Income and yields are reported on a taxable equivalent basis assuming a federal tax rate of 34%, with a $252 adjustment for 2011 and a $377 adjustment in 2010.

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

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

(5) 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.

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

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Noninterest Income

Noninterest income is comprised of all sources of income other than interest income on our earning assets. Significant revenue items include fees collected on certain deposit account transactions, debit and credit card fees, other general services, earnings from other investments we own in part or in full, gains or losses from investments, and gains or losses on sales of investments, loans, and fixed assets.

The following table depicts noninterest income for the three and six months ended June 30, 2011 and 2010.

Table 2: Noninterest Income

	Three Months Ended June 30,
(dollars in thousands)	2011		2010
Service charges and fees on deposit accounts	$	845	$	929
Debit/credit card fees		409		359
Gain on sale of available for sale securities, net		129		1,518
Other-than-temporary impairment losses on securities		—		(77	)
Gain on sale of bank premises and equipment		—		17
Other operating income		278		321
Total noninterest income	$	1,661	$	3,067
	Six Months Ended June 30,
(dollars in thousands)	2011		2010
Service charges and fees on deposit accounts	$	1,780	$	1,791
Debit/credit card fees		733		654
Gain on sale of available for sale securities, net		322		1,531
Other-than-temporary impairment losses on securities		—		(77	)
Gain on sale of bank premises and equipment		256		17
Gain on bank owned life insurance		—		604
Other operating income		661		640
Total noninterest income	$	3,752	$	5,160

Noninterest income for the three months ended June 30, 2011 was $1.7 million, a decrease of $1.4 million or 45.8% over the noninterest income of $3.1 million for the same period of 2010. Changes in the components of noninterest income were caused by the following events:

• Service charges and fees on deposit accounts were $845 thousand in the second quarter of 2011, a decrease of $84 thousand or 9.0% over the $929 thousand in the second quarter of 2010 and were driven by a 9.2% decrease in non-sufficient funds (or “NSF”);

• Debit/credit card fees were $409 thousand in the second quarter of 2011, an increase of $50 thousand or 13.9% over the $359 thousand in the second quarter of 2010 and were driven by a 18.9% increase in debit card income;

• Sales of available for sale securities generated gains of $129 thousand in the second quarter of 2011, a decrease of $1.4 million or 91.5% from gains of $1.5 million in the second quarter of 2010;

• Other-than-temporary impairment losses on trust preferred securities owned by the Company were $77 thousand in the second quarter of 2010, while no such losses were recognized in 2011; and

• Other operating income was $278 thousand in the second quarter of 2011, a decrease of $43 thousand or 13.4% from $321 thousand in the second quarter of 2010 and was driven by a 42.6% decrease in investment services income, a 77.7% decrease in mortgage services income, a 287.1% increase in OREO rental income, $15 thousand in loan servicing fees that were not present in the second quarter of 2010, and a 24.7% decrease in write downs of our investments in community and housing development funds.

Noninterest income for the six months ended June 30, 2011 was $3.8 million, a decrease of $1.4 million or 27.3% over the noninterest income of $5.2 million for the same period of 2010. Changes in the components of noninterest income were caused by the following events:

• Debit/credit card fees were $733 thousand in the first six months of 2011, an increase of $79 thousand or 12.1% over the $654 thousand in the first six months of 2010 and were driven by a 16.1% increase in debit card income;

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• Sales of available for sale securities generated gains of $322 thousand in the first six months of 2011, a decrease of $1.2 million or 79.0% over gains of $1.5 million in the first six months of 2010;

• Other-than-temporary impairment losses on trust preferred securities owned by the Company were $77 thousand in the first six months of 2010, while no such losses were recognized in 2011;

• Gains on the sale of bank premises and equipment increased $239 thousand in the first six months of 2011 as compared to the same period in 2010 due to the sale of our former Aylett branch office during the first quarter of 2011 which generated a gain of $256 thousand; and

• Bank owned life insurance proceeds resulting from the death of a former officer generated a gain of $604 thousand in the first six months of 2010, while no such gains were generated during the first six months of 2011.

Noninterest Expense

Noninterest expense includes all expenses with the exception of those paid for interest on borrowings and deposits. Significant expense items included in this component are salaries and employee benefits, occupancy and operating expenses.

The following table depicts noninterest expense for the three and six months ended June 30, 2011 and 2010.

Table 3: Noninterest Expense

	Three Months Ended June 30,
(dollars in thousands)	2011		2010
Salaries and employee benefits	$	4,022	$	4,303
Occupancy and equipment expenses		1,419		1,351
Telephone		321		291
FDIC expense		931		553
Consultant fees		319		252
Collection, repossession and other real estate owned		567		347
Marketing and advertising		215		367
Loss (gain) on sale of other real estate owned		48		(49	)
Impairment losses on other real estate owned		77		—
Other operating expenses		1,190		1,307
Total noninterest expense	$	9,109	$	8,722
	Six Months Ended June 30,
(dollars in thousands)	2011		2010
Salaries and employee benefits	$	8,112	$	8,293
Occupancy and equipment expenses		2,632		2,629
Telephone		586		565
FDIC expense		1,428		1,021
Consultant fees		593		395
Collection, repossession and other real estate owned		1,020		695
Marketing and advertising		426		559
Loss (gain) on sale of other real estate owned		295		(80	)
Impairment losses on other real estate owned		229		—
Other operating expenses		2,288		2,499
Total noninterest expense	$	17,609	$	16,576

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Noninterest expense for the three months ended June 30, 2011 was $9.1 million, an increase of $387 thousand or 4.4% over the noninterest expense of $8.7 million for the same period of 2010. Significant contributors to the increase in these expenses are as follows:

• Salaries and employee benefits were $4.0 million for the second quarter of 2011, a decrease of $281 thousand or 6.5% over the $4.3 million for the second quarter of 2010. The decrease in these expenses was due to a decrease in employee-related benefits, which was partially offset by an increase in salaries and wages due to the Company’s efforts to strengthen the Company’s management team and to increase staffing to deal effectively with our nonperforming assets. The increased regulatory burden resulting from recently enacted financial regulatory reforms will likely necessitate hiring additional personnel to meet increased regulatory compliance requirements, which could cause salaries and employee benefits expense to continue to increase in future periods. Salaries expense is also impacted by the application of an accounting standard to defer certain salary amounts over the life of our loan originations to better match income and expense from those assets. Decreased loan demand during the second quarter of 2011 has resulted in lower originations that, on a comparative basis, have increased the period expense associated with salaries;

• FDIC insurance expense was $931 thousand for the second quarter of 2011, an increase of $378 thousand or 68.4% over the $553 thousand for the second quarter of 2010 and was due to our lower performance rating;

• Collection, repossession and other real estate owned expenses were $567 thousand for the second quarter of 2011, an increase of $220 thousand or 63.4% over the $347 thousand for the second quarter of 2010. The elevation of these expenses was due to the larger number of past due loans and nonperforming assets comparatively for the second quarter of 2011 as well as the larger number of other real estate owned properties during the second quarter of 2011;

• Marketing and advertising expenses were $215 thousand for the second quarter of 2011, a decrease of $152 thousand or 41.4% over the $367 thousand for the second quarter of 2010. This decrease was primarily due to the Company engaging in increased media ads and other programs during 2010 to celebrate our 100^th anniversary; and

• Other operating expenses were $1.2 million for the second quarter of 2011, a decrease of $117 thousand or 9.0% over the $1.3 million for the second quarter of 2010. Within this category, most controllable expenses (i.e. office supplies, printing, etc.) saw reductions from the same period of the prior year as the Company focused on operational efficiency, however these were partially offset by increases in legal and other professional fees.

Noninterest expense for the six months ended June 30, 2011 was $17.6 million, an increase of $1.0 million or 6.2% over the noninterest expense of $16.6 million for the same period of 2010. Significant contributors to the increase in these expenses are as follows:

• Salaries and employee benefits were $8.1 million for the first six months of 2011, a decrease of $181 thousand or 2.2% over the $8.3 million for the first six months of 2010 and was due to the factors mentioned in the quarterly analysis above;

• FDIC insurance expense was $1.4 million for the first six months of 2011, an increase of $407 thousand or 39.9% over the $1.0 million for the first six months of 2010 and was due to the factor mentioned in the quarterly analysis;

• Consultant fees were $593 thousand for the first six months of 2011, an increase of $198 thousand or 50.1% over the $395 thousand for the first six months of 2010. The elevation of these expenses was due to added costs related to working out problem loans as well as addressing and correcting deficiencies noted in our Written Agreement;

• Collection, repossession and other real estate owned expenses were $1.0 million for the first six months of 2011, an increase of $325 thousand or 46.8% over the $695 thousand for the first six months of 2010 and was due to the factors mentioned in the quarterly analysis;

• Marketing and advertising expenses were $426 thousand for the first six months of 2011, a decrease of $133 thousand or 23.8% over the $559 thousand for the first six months of 2010 and was due to the aforementioned factors mentioned in the quarterly analysis;

• Losses on the sale of other real estate owned were $295 thousand in the first six months of 2011, an increase of $375 thousand over the gains of $80 thousand in the first six months of 2010; and

• Impairment losses related to valuation adjustments on other real estate owned were $229 thousand in the first six months of 2011, while no such impairment losses were recognized in the first six months of 2010, as real estate values in the Company’s markets continue to decline in the challenging economic environment.

Income Taxes

The Company recorded an income tax benefit of $114 thousand for the three months ended June 30, 2011, compared to an income tax benefit of $3.4 million for the same period in 2010, reflecting a $3.3 million increase in income tax expense. The increase in income tax expense from the second quarter of 2010 to the same period in 2011 was primarily the result of the Company’s moving from a pretax loss to pretax income, an increase in pretax income of approximately $9.4 million.

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The Company recorded an income tax benefit of $189 thousand for the six months ended June 30, 2011, compared to an income tax benefit of $3.3 million for the same period in 2010, reflecting a $3.1 million increase in income tax expense. The increase in income tax expense for the first six months of 2010 to the same period in 2011 was primarily the result of the Company’s moving from a pretax loss to pretax income, an increase in pretax income of approximately $8.4 million.

Asset Quality

Provision and Allowance for Loan Losses

The allowance for loan losses is a reserve for estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the loan portfolio, and is based on periodic evaluations of the collectability and historical loss experience of loans. A provision for loan losses, which is a charge against earnings, is recorded to bring the allowance for loan losses to a level that, in management’s judgment, is appropriate to absorb probable losses in the loan portfolio. Actual credit losses are deducted from the allowance for loan losses for the difference between the carrying value of the loan and the estimated net realizable value or fair value of the collateral, if collateral dependent. Subsequent recoveries, if any, are credited to the allowance for loan losses.

The allocation methodology applied by the Company, designed to assess the appropriateness of the allowance for loan losses, includes management’s ongoing review and grading of the loan portfolio into criticized loan categories (defined as specific loans warranting either specific allocation, or a classified status of substandard, doubtful or loss). The allocation methodology focuses on evaluation of several factors, including but not limited to: evaluation of facts and issues related to specific loans, management’s ongoing review and grading of the loan portfolio, consideration of historical loan loss experience (rolling five year average with weighting factors applied to more recent experience) and delinquency experience on each portfolio category, trends in past due and nonaccrual loans, the level of classified loans, the risk characteristics of the various classifications of loans, changes in the size and character of the loan portfolio, concentrations of loans to specific borrowers or industries, existing economic conditions, the fair value of underlying collateral, and other qualitative and quantitative factors which could affect potential credit losses. Because each of the criteria used is subject to change, the allocation of the allowance for loan losses is made for analytical purposes and is not necessarily indicative of the trend of future loan losses in any particular loan category. The total allowance is available to absorb losses from any segment of the portfolio. In determining the allowance for loan losses, the Company considers its portfolio segments and loan classes to be the same.

The allowance for loan losses is comprised of a specific allowance for identified problem loans and a general allowance representing estimations done pursuant to either FASB ASC Topic 450 “Accounting for Contingencies”, or FASB ASC Topic 310“Accounting by Creditors for Impairment of a Loan.”The specific component relates to loans that are classified as impaired, and is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. For collateral dependent loans, an updated appraisal will be ordered if a current one is not on file. Appraisals are performed by independent third-party appraisers with relevant industry experience. Adjustments to the appraised value may be made based on recent sales of like properties or general market conditions when deemed appropriate. The general component covers non-classified or performing loans and those loans classified as substandard, doubtful or loss that are not impaired. The general component is based on historical loss experience adjusted for qualitative factors, such as economic conditions, interest rates and unemployment rates. The Company uses a risk grading system for real estate (including multifamily residential, construction, farmland and non-farm, non-residential) and commercial loans. Loans are graded on a scale from 1 to 9. Non-impaired real estate and commercial loans are assigned an allowance factor which increases with the severity of risk grading. A general description of the characteristics of the risk grades is as follows:

Pass Grades

• Risk Grade 1 loans have little or no risk and are generally secured by cash or cash equivalents;

• Risk Grade 2 loans have minimal risk to well qualified borrowers and no significant questions as to safety;

• Risk Grade 3 loans are satisfactory loans with strong borrowers and secondary sources of repayment;

• Risk Grade 4 loans are satisfactory loans with borrowers not as strong as risk grade 3 loans but may exhibit a higher degree of financial risk based on the type of business supporting the loan; and

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• Risk Grade 5 loans are loans that warrant more than the normal level of supervision and have the possibility of an event occurring that may weaken the borrower’s ability to repay.

Special Mention

• Risk Grade 6 loans have increasing potential weaknesses beyond those at which the loan originally was granted and if not addressed could lead to inadequately protecting the Company’s credit position.

Classified Grades

• Risk Grade 7 loans are substandard loans and are inadequately protected by the current sound worth or paying capacity of the obligor or the collateral pledged. These have well defined weaknesses that jeopardize the liquidation of the debt with the distinct possibility the Company will sustain some loss if the deficiencies are not corrected;

• Risk Grade 8 loans are doubtful of collection and the possibility of loss is high but pending specific borrower plans for recovery, its classification as a loss is deferred until its more exact status is determined; and

• Risk Grade 9 loans are loss loans which are considered uncollectable and of such little value that their continuance as a bank asset is not warranted.

The Company uses a past due grading system for consumer loans, including one to four family residential first and seconds and home equity lines. The past due status of a loan is based on the contractual due date of the most delinquent payment due. The consumer loans are segregated between performing and nonperforming loans. Performing loans are those that have made timely payments in accordance with the terms of the loan agreement and are not past due 90 days or more. Nonperforming loans are those that do not accrue interest or are greater than 90 days past due and accruing interest. The past due grading of consumer loans is based on the following categories: current, 1-29 days past due, 30-59 days past due, 60-89 days past due and over 90 days past due. Non-impaired consumer loans are assigned an allowance factor which increases with the severity of past due status. This component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the loan portfolio.

Management believes that the level of the allowance for loan losses is appropriate. While management uses available information to recognize losses on loans, future additions to the allowance for loan losses may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance for loan losses or may require that certain loan balances be charged-off or downgraded into classified loan categories when their credit evaluations differ from those of management based on their judgments about information available to them at the time of their examinations.

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The following table summarizes the allowance activity for the periods indicated:

Table 4: Allowance for Loan Losses

	Six Months Ended June 30,
(dollars in thousands)	2011			2010
Allowance for loan losses, beginning of period	$	25,288		$	12,155
Charge-offs:
Commercial, industrial and agricultural		(244	)		(3,360	)
Real estate - one to four family residential:
Closed end first and seconds		(470	)		(1,060	)
Home equity lines		(160	)		—
Real estate - construction:
One to four family residential		(152	)		(140	)
Other construction, land development and other land		(716	)		(879	)
Real estate - non-farm, non-residential:
Owner occupied		(79	)		(17	)
Non-owner occupied		(302	)		(200	)
Consumer		(379	)		(612	)
Other		(87	)		(482	)
Total loans charged-off		(2,589	)		(6,750	)
Recoveries:
Commercial, industrial and agricultural		274			32
Real estate - one to four family residential:
Closed end first and seconds		133			10
Real estate - construction:
One to four family residential		2			12
Other construction, land development and other land		1			—
Real estate - non-farm, non-residentail:
Owner occupied		4			—
Consumer		105			86
Other		35			26
Total recoveries		554			166
Net charge-offs		(2,035	)		(6,584	)
Provision for loan losses		3,500			14,475
Allowance for loan losses, end of period	$	26,753		$	20,046
Ratios:
Ratio of allowance for loan losses to total loans outstanding, end of period		3.56	%		2.37	%
Ratio of net charge-offs to average total loans outstanding during the period		0.53	%		1.55	%

As a result of the historical challenges continuing to face the financial markets today, the Company made provisions for loan losses of $1.5 million and $3.5 million, respectively for the three and six months ended June 30, 2011, as compared to $12.6 million and $14.5 million, respectively for the same periods of 2010. Net charge-offs for the three and six months ended June 30, 2011 were $1.1 million and $2.0 million, respectively as compared to $6.0 million and $6.6 million, respectively for the same three and six month periods in 2010. This represents 0.57% and 0.53%, respectively of average loans outstanding for the three and six months ending June 30, 2011 and 2.83% and 1.55%, respectively of average loans outstanding for the same periods in 2010. The contribution to the provision and the related increase in the allowance in the first two quarters of 2011 and 2010 was made in response to sustained credit quality issues in our loan portfolio as well as current market conditions and the current economic climate, all of which indicate that credit quality issues may continue to adversely impact our loan portfolio and our earnings in future periods.

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The allowance for loan losses at June 30, 2011 was $26.8 million, compared with $25.3 million at December 31, 2010. This represented 3.56% of period end loans at June 30, 2011 compared with 3.26% of year end loans at December 31, 2010.

The following table shows the allocation of the allowance for loan losses at the dates indicated. Notwithstanding these allocations, the entire allowance for loan losses is available to absorb charge-offs in any category of loan.

Table 5: Allocation of Allowance for Loan Losses

	At June 30,					At December��31,
	2011					2010
(dollars in thousands)	Allowance		Percent			Allowance		Percent
Commercial, industrial and agricultural	$	4,967		8.91	%	$	5,981		9.39	%
Real estate - one to four family residential:
Closed end first and seconds		3,934		34.42	%		3,340		33.62	%
Home equity lines		506		12.89	%		587		12.05	%
Real estate - multifamily residential		22		1.50	%		23		1.51	%
Real estate - construction:
One to four family residential		363		2.84	%		344		3.29	%
Other construction, land development and other land		8,178		5.66	%		7,837		6.56	%
Real estate - farmland		19		1.08	%		17		1.07	%
Real estate - non-farm, non-residential:
Owner occupied		4,998		17.72	%		2,546		17.32	%
Non-owner occupied		2,782		10.28	%		3,072		10.12	%
Consumer		807		4.18	%		905		4.65	%
Other loans and overdrafts		177		0.52	%		280		0.42	%
Total allowance for balance sheet loans		26,753		100.00	%		24,932		100.00	%
Unallocated		—					356
Total allowance for loan losses	$	26,753				$	25,288

(Percent is portfolio loans in category divided by total loans)

A tabular presentation(s) of commercial loans by credit quality indicator and consumer loans, including one to four family residential first and seconds and home equity lines by payment activity at June 30, 2011 and December 31, 2010 can be found under Item 1. “Financial Statements,” under the heading “Note 3. Loan Portfolio.”

Nonperforming Assets

The past due status of a loan is based on the contractual due date of the most delinquent payment due. Loans, including impaired loans, are generally classified as nonaccrual if they are past due as to maturity or payment of principal or interest for a period of more than 90 days, unless such loans are well-secured and in the process of collection. Loans greater than 90 days past due may remain on an accrual status if management determines it has adequate collateral to cover the principal and interest. If a loan or a portion of a loan is adversely classified, or is partially charged off, the loan is generally classified as nonaccrual. Additionally, whenever management becomes aware of facts or circumstances that may adversely impact the collectability of principal or interest on loans, it is management’s practice to place such loans on a nonaccrual status immediately, rather than delaying such action until the loans become 90 days past due.

When a loan is placed on nonaccrual status, previously accrued and uncollected interest is reversed, and the amortization of related deferred loan fees or costs are suspended. While a loan is classified as nonaccrual and the future collectability of the recorded loan balance is doubtful, collections of interest and principal are generally applied as a reduction to principal outstanding. When the future collectability of the recorded loan balance is expected, interest income may be recognized on a cash basis. In the case where a nonaccrual loan has been partially charged off, recognition of interest on a cash basis is limited to that which would have been recognized on the recorded loan balance at the contractual interest rate. Cash interest receipts in excess of that amount are recorded as recoveries to the allowance for loan losses until prior charge-offs have been fully recovered. These policies are applied consistently across our loan portfolio.

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Loans may be returned to accrual status when all principal and interest amounts contractually due (including arrearages) are reasonably assured of repayment within an acceptable period of time, and there is a sustained period of repayment performance by the borrower, in accordance with the contractual terms of interest and principal.

Real estate acquired through, or in lieu of, foreclosure is held for sale and is stated at the lower of cost or estimated fair market value of the property, less estimated disposal costs, if any. Cost includes loan principal and accrued interest. Any excess of cost over the estimated fair market value at the time of acquisition is charged to the allowance for loan losses. The estimated fair market value is reviewed periodically by management and any write-downs are charged against current earnings. Development and improvement costs relating to property are capitalized. Net operating income or expenses of such properties are included in collection, repossession and other real estate owned expenses.

The following table presents information concerning nonperforming assets as of and for the six months ended June 30, 2011 and the year ended December 31, 2010.

Table 6: Nonperforming Assets

	June 30,			December 31,
(dollars in thousands)	2011			2010
Nonaccrual loans*	$	22,871		$	25,858
Loans past due 90 days and accruing interest		1,724			1,836
Total nonperforming loans		24,595			27,694
Other real estate owned, net of valuation allowance		10,980			11,617	��
Total nonperforming assets	$	35,575		$	39,311
Nonperforming assets to total loans and other real estate owned		4.66	%		5.00	%
Allowance for loan losses to nonaccrual loans		116.97	%		97.80	%
Net charge-offs to average total loans for the period		0.53	%		1.89	%
Allowance for loan losses to period end loans		3.56	%		3.26	%

* Includes $8.8 million and $6.2 million in nonaccrual TDRs at June 30, 2011 and December 31, 2010, respectively.

The following table presents the change in the OREO balance for the six months ended June 30, 2011 and 2010.

Table 7: OREO Changes

	June 30,
(dollars in thousands)	2011			2010
Balance at the beginning of period, gross	$	12,545		$	4,136
Transfers from loans		2,969			2,343
Capitalized costs		150			141
Sales proceeds		(3,232	)		(1,728	)
Previously recognized impairment losses on disposition		(270	)		—
Gain (loss) on disposition		(295	)		80
Balance at the end of period, gross		11,867			4,972
Less valuation allowance		(887	)		—
Balance at the end of period, net	$	10,980		$	4,972

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The following table presents the change in the valuation allowance for OREO for the six months ended June 30, 2011 and 2010.

Table 8: OREO Valuation Allowance Changes

	June 30,
(dollars in thousands)	2011			2010
Balance at the beginning of period	$	928		$	—
Valuation allowance		229			—
Charge-offs		(270	)		—
Recoveries		—			—
Balance at the end of period	$	887		$	—

Nonperforming assets were $35.6 million or 4.66% of total loans and other real estate owned at June 30, 2011 compared to $39.3 million or 5.00% at December 31, 2010. Although nonperforming assets have begun to trend downward during the first six months of 2011, this number has otherwise increased since 2008 as a result of the continued economic downturn which has significantly increased unemployment, reduced profitability of local businesses, and reduced the ability of many of our customers to keep their loans current. The sluggish economy and the increasing number of weaker loans have prompted the Company to raise the allowance for loan losses, which is 116.97% of nonaccrual loans at June 30, 2011, compared to 97.80% at December 31, 2010. Nonperforming loans decreased $3.1 million or 11.2% during the six months ended June 30, 2011 to $24.6 million.

Nonaccrual loans were $22.9 million at June 30, 2011, a decrease of $3.0 million or 11.6% from $25.9 million at December 31, 2010. Of the current $22.9 million in nonaccrual loans, $21.0 million or 92.0% is secured by real estate in our market area. Of these real estate secured loans, $8.0 million are residential real estate, $5.8 million are real estate construction, $52 thousand is farmland and $7.1 million are commercial properties.

Loans past due 90 days and still accruing interest were $1.7 million at June 30, 2011, a decrease of $112 thousand or 6.1% from $1.8 million at December 31, 2010. As of June 30, 2011, all of these loans, except for $89 thousand in credit card loans, are secured by real estate in our market area. Of these real estate secured loans, $432 thousand are residential real estate and $1.2 million are commercial properties.

Other real estate owned, net of valuation allowance at June 30, 2011 was $11.0 million, a decrease of $637 thousand or 5.5% from $11.6 million at December 31, 2010. The balance at June 30, 2011 was comprised of 26 properties of which $1.5 million are secured by residential real estate, $6.2 million are secured by real estate construction and $3.3 million are secured by commercial properties. During the six months ended June 30, 2011, new foreclosures included twelve properties totaling $3.0 million transferred from loans. Sales of sixteen other real estate owned properties for the six months ended June 30, 2011 resulted in a net loss of $295 thousand. At June 30, 2011, there were six properties totaling $2.5 million under contract for sale. Subsequent to June 30, 2011, one of the properties under contract for sale at June 30, 2011 has sold resulting in a loss of approximately $27 thousand that will be recognized in the third quarter of 2011. The remaining properties are being actively marketed and the Company does not anticipate any material losses associated with these properties. As a direct result of the continued decline in the real estate market, the Company recorded losses of $229 thousand in its consolidated statement of operations for the six months ended June 30, 2011, due to valuation adjustments on other real estate owned properties as compared to no such losses for the same period in 2010. Asset quality continues to be a top priority for the Company. We continue to allocate significant resources to the expedient disposition and collection of non-performing and other lower quality assets.

As discussed earlier in Item 2, the Company measures impaired loans based on the present value of expected future cash flows discounted at the effective interest rate of the loan or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The Company maintains a valuation allowance to the extent that the measure of the impaired loan is less than the recorded investment. TDRs occur when we agree to modify the original terms of a loan by granting a concession due to the deterioration in the financial condition of the borrower. TDRs are considered impaired loans. These concessions can be temporary and are done in an attempt to improve the paying capacity of the borrower and in some cases avoid foreclosure and are made with the intent to restore the loan to a performing status once sufficient payment history can be demonstrated. These concessions could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions.

A tabular presentation(s) of loans individually evaluated for impairment by class of loans at June 30, 2011 and December 31, 2010 can be found under Item 1. “Financial Statements,” under the heading “Note 3. Loan Portfolio.”

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At June 30, 2011, the balance of impaired loans was $50.5 million, for which there were specific valuation allowances of $9.8 million. At December 31, 2010, the balance of impaired loans was $49.5 million, for which there were specific valuation allowances of $6.9 million. The average balance of impaired loans was $51.4 million for the six months ended June 30, 2011, compared to $33.6 million for the year ended December 31, 2010. The Company’s balance of impaired loans has generally increased since 2008 as a result of the economic downturn which has significantly increased unemployment, reduced profitability of local businesses, and reduced the ability of many of our customers to keep their loans current.

The following table presents the balances of TDRs at June 30, 2011 and December 31, 2010.

Table 9: Troubled Debt Restructurings (TDRs)

	June 30,		December 31,
(dollars in thousands)	2011		2010
Performing TDRs	$	7,896	$	2,411
Nonaccrual TDRs*		8,846		6,177
Total TDRs	$	16,742	$	8,588

* Included in nonaccrual loans in Table 6: Nonperforming Assets.

At the time of a TDR, the loan is placed on nonaccrual status. A loan may be returned to accrual status if the borrower has demonstrated a sustained period of repayment performance (typically six months) in accordance with the contractual terms of the loan and there is reasonable assurance the borrower will continue to make payments as agreed.

Financial Condition

Summary

At June 30, 2011, the Company had total assets of $1.07 billion compared to $1.12 billion at December 31, 2010. The decrease was principally a result of decreases in loans, securities available for sale, deposits and borrowings as detailed in the following schedule.

Table 10: Balance Sheet Changes

	June 30,		December 31,
(dollars in thousands)	2011		2010		Change $			Change %
Total assets	$	1,067,158	$	1,119,330	$	(52,172	)		-4.7	%
Securities available for sale		216,877		246,120		(29,243	)		-11.9	%
Total loans		752,467		774,774		(22,307	)		-2.9	%
Deposits		834,485		868,146		(33,661	)		-3.9	%
Borrowings		132,433		155,274		(22,841	)		-14.7	%

Investment Securities

The investment portfolio plays a primary role in the management of the Company’s interest rate sensitivity. In addition, the portfolio serves as a source of liquidity and is used as needed to meet collateral requirements, such as those related to secure public deposits, balances with the FRB and repurchase agreements. The investment portfolio consists of securities available for sale, which may be sold in response to changes in market interest rates, changes in prepayment risk, increases in loan demand, general liquidity needs and other similar factors. These securities are carried at estimated fair value. Total investment securities were $216.9 million at June 30, 2011, reflecting a decrease of $29.2 million or 11.9% from $246.1 million at December 31, 2010. The valuation allowance for the available for sale portfolio had an unrealized gain, net of tax expense, of $1.7 million at June 30, 2011 compared with an unrealized loss, net of tax benefit, of $2.2 million at December 31, 2010.

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The decrease in the investment portfolio during the first six months of 2011 was the result of our continued effort to restructure its composition, not fully reinvesting the maturity proceeds of the $20 million short-term U.S. government agency security that was acquired at the end of December 2010 and the sale of securities to meet our liquidity needs due to the overall decrease in deposits during the first six months of 2011. As part of our overall asset/liability management strategy, we are targeting our investment portfolio to be approximately 20% of our total assets. As of June 30, 2011 and December 31, 2010, our investment portfolio was 20.3% and 22.0% respectively of total assets.

Loans

The Company offers an array of lending and credit services to customers including mortgage, commercial and consumer loans. A substantial portion of the loan portfolio is represented by commercial and residential mortgage loans in our market area. The ability of our debtors to honor their contracts is dependent upon the real estate markets and general economic conditions in our market area. The loan portfolio is the largest component of earning assets and accounts for the greatest portion of total interest income. Total loans were $752.5 million at June 30, 2011, a decrease of $22.3 million or 2.9% from $774.8 million at December 31, 2010. As previously mentioned our loan portfolio continues to decrease as a result of weak loan demand, increased charge-offs, and payment curtailments on outstanding credits.

Deposits

The Company’s predominant source of funds is depository accounts. The Company’s deposit base, which is provided by individuals and businesses located within the communities served, is comprised of demand deposits, savings and money market accounts, and time deposits. The Company augments its deposit base through conservative use of brokered deposits, including through the Certificate of Deposit Account Registry Service program (or “CDARS”). The Company’s balance sheet growth is largely determined by the availability of deposits in its markets, the cost of attracting the deposits and the prospects of profitably utilizing the available deposits by increasing the loan or investment portfolios.

Total deposits were $834.5 million as of June 30, 2011, a decrease of 3.9% or $33.7 million from $868.1 million as of December 31, 2010. The following table sets forth the composition of the Company’s deposits at the dates indicated.

Table 11: Deposits

	June 30,		December 31,
(dollars in thousands)	2011		2010		Change $			Change %
Noninterest-bearing deposits	$	101,373	$	97,122	$	4,251			4.4	%
Interest-bearing deposits:
Demand deposits	$	215,141	$	240,330	$	(25,189	)		-10.5	%
Money market deposits		122,789		120,322		2,467			2.1	%
Savings deposits		78,347		77,176		1,171			1.5	%
Time deposits		316,835		333,196		(16,361	)		-4.9	%
Total interest-bearing deposits	$	733,112	$	771,024	$	(37,912	)		-4.9	%

During the first six months of 2011, the Company continued to see a shift from interest-bearing time deposits to lower cost non-maturity interest-bearing deposits as our consumers are willing to forego the higher yield on longer-term products in order to have more readily available access to their funds. The Company believes the overall decrease in total deposits, which in general occurred in our interest-bearing demand deposits and time deposits, during the six months ended June 30, 2011 is primarily the result of the weak economy and the prolonged economic downturn. The Company continues to observe customers, including counties and municipalities, accessing their liquid cash reserves in order to deleverage, keep their debts current and make up operating shortfalls. In addition, while the Company believes that it offers competitive interest rates on all deposits products, the continued weak loan demand, coupled with our ongoing deposit re-pricing strategy, have allowed for some deposit attrition particularly from depositors seeking higher yields at our competitors or from other investment vehicles. At June 30, 2011 and December 31, 2010, the Company had $38.3 million and $38.4 million in broker certificates of deposits.

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Borrowings

The Company’s ability to borrow funds through nondeposit sources provides additional flexibility in meeting the liquidity needs of customers while enhancing its cost of funds structure. Total borrowings were $132.4 million at June 30, 2011, down $22.8 million or 14.7% from $155.3 million at December 31, 2010. The decrease in borrowings was primarily derived through our short-term borrowings in which we repaid a $25.0 million short-term advance with the FHLB that was taken during December 2010, and was partially offset by a $2.2 million or 87.6% increase in repurchase agreements during the first six months of 2011.

Off-Balance Sheet Arrangements

As of June 30, 2011, there have been no material changes to the off-balance sheet arrangements disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Contractual Obligations

As of June 30, 2011, there have been no material changes outside the ordinary course of business to the contractual obligations disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Liquidity

Liquidity represents an institution’s ability to meet present and future financial obligations, including through the sale of existing assets or the acquisition of additional funds through short-term borrowings. Our liquidity is provided from cash and due from banks, interest bearing deposits with other banks, federal funds sold, repayments from loans, sales of loans, increases in deposits, lines of credit from the FHLB and three correspondent banks, sales of investments, interest and dividend payments received from investments and maturing investments. As a result of our management of liquid assets and our ability to generate liquidity through liability funding, we believe that we maintain overall liquidity to satisfy our depositors’ requirements and to meet customers’ credit needs. We also take into account any liquidity needs generated by off-balance sheet transactions such as commitments to extend credit, commitments to purchase securities and standby letters of credit.

We monitor and plan our liquidity position for future periods. Liquidity strategies are implemented and monitored by our Asset/Liability Committee (“ALCO”).

Cash, cash equivalents and federal funds sold totaled $27.4 million as of June 30, 2011 compared to $22.8 million at December 31, 2010. At June 30, 2011, cash, cash equivalents, federal funds sold and unpledged securities available for sale were $157.4 million or 14.8% of total assets, compared to $168.2 million or 15.0% of total assets at December 31, 2010.

As disclosed in the Company’s consolidated statement of cash flows, net cash provided by operating activities was $7.1 million, net cash provided by investing activities was $53.9 million and net cash used in financing activities was $56.5 million for the six months ended June 30, 2011. Combined, this contributed to a $4.5 million increase in liquidity during the six months ended June 30, 2011.

The Company maintains access to short-term funding sources as well, including federal funds lines of credit with three correspondent banks up to $40.0 million and the ability to borrow up to $173.4 million from the FHLB. The Company has no reason to believe these arrangements will not be renewed at maturity. Additional loans and securities are available that can be pledged as collateral for future borrowings from the FHLB above the current lendable collateral value.

Certificates of deposit of $100,000 or more, maturing in one year or less, totaled $76.8 million at June 30, 2011. Certificates of deposit of $100,000 or more, maturing in more than one year, totaled $76.6 million at June 30, 2011.

As of June 30, 2011, the Company was not aware of any known trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity. As of June 30, 2011, the Company has no material commitments or long-term debt for capital expenditures.

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Capital Resources

The Company reviews the adequacy of its capital on an ongoing basis with reference to the size, composition, and quality of our resources and consistent with regulatory requirements and industry standards. We seek to maintain a capital structure that will assure an adequate level of capital to support anticipated asset growth and absorb potential losses.

The Company and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, banks must meet specific capital guidelines that involve quantitative measures of the bank’s assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. Capital amounts and classification are also subject to qualitative judgments by the regulators about components (such as interest rate risk), risk weighting, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require that the Bank maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of June 30, 2011, the Bank meets all capital adequacy requirements to which it is subject.

As of June 30, 2011, the Bank was categorized as “well capitalized,” the highest level of capital adequacy. To be categorized as well capitalized, the Bank must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios. The Company’s and the Bank’s actual capital amounts and ratios as of June 30, 2011 and December 31, 2010 are presented under Item 1. “Financial Statements,” under the heading “Note 13. Capital Requirements.”

On February 17, 2011, the Company entered into a Written Agreement with the FRB and SCC. Under the terms of this Written Agreement, the Parent and the Bank are subject to additional limitations and regulatory restrictions and may not declare or pay dividends to its shareholders (including payments by the Parent on its trust preferred securities) and may not purchase or redeem shares of its stock without prior regulatory approval. Additional information about the Written Agreement can be found under Item 1. “Financial Statements,” under the heading “Note 14. Formal Written Agreement” and under “Executive Overview” of this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Cash Dividends

The Bank, as a Virginia banking corporation, may pay dividends only out of retained earnings. In addition, regulatory authorities may limit payment of dividends by any bank, when it is determined that such limitation is in the public interest and necessary to ensure financial soundness of the bank. Regulatory agencies place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The amount of dividends the Bank may pay to the Company, without prior approval, is limited to current year earnings plus retained net profits for the two preceding years. For the three and six months ended June 30, 2011 and 2010, no cash dividends have been paid from the Bank to the Company.

For the three and six months ended June 30, 2011, the Company paid out no cash dividends to common shareholders as compared to $0.05 and $0.10 per share, respectively for the same periods of 2010. For the three and six months ended June 30, 2011, the Company paid out no cash dividends to preferred shareholders as compared to $300 thousand and $600 thousand, respectively for the same periods of 2010.

The Company’s Board of Directors determines the amount of and whether or not to declare dividends. Such determinations by the Board take into account the Company’s financial condition, results of operations and other relevant factors, including any relevant regulatory restrictions. In connection with the Company’s participation in the Treasury’s Capital Purchase Program, there are also limitations on the Company’s ability to pay quarterly common stock cash dividends in excess of $0.16 per share prior to the earlier of January 9, 2012 or the date on which Treasury no longer holds any of the Preferred Stock.

The Company has notified the Treasury that it is deferring the August 2011 payment of its regular quarterly cash dividend with respect to the Preferred Stock which the Company issued to the Treasury in connection with the Company’s participation in the Treasury’s Capital Purchase Program. The Company has previously deferred the February and May 2011 payments of its regular quarterly cash dividend with respect to the Preferred Stock.

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The Company is permitted to defer dividend payments by the terms of the Preferred Stock, but the dividend is a cumulative dividend that accumulates for payment in the future, and the failure to pay dividends for six dividend periods would trigger board appointment rights for the holder of the Preferred Stock. The amount of the 2011 dividends that have accumulated and are unpaid and in arrears is $600 thousand as of June 30, 2011.

On February 17, 2011, the Company entered into a Written Agreement with the FRB and SCC. Under the terms of this written agreement, the Parent and the Bank are subject to additional limitations and regulatory restrictions and may not declare or pay dividends to its shareholders (including payments by the Parent on its trust preferred securities) and may not purchase or redeem shares of its stock without prior regulatory approval. Additional information about the Written Agreement can be found under Item 1. “Financial Statements,” under the heading “Note 14. Formal Written Agreement” and under “Executive Overview” of this Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Effects of Inflation

The effect of changing prices on financial institutions is typically different from other industries as the Company’s assets and liabilities are monetary in nature. Interest rates are significantly impacted by inflation, but neither the timing nor the magnitude of the changes is directly related to price level indices. The effects of inflation on interest rates, loan demand and deposits are reflected in the consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

There have been no significant changes from the quantitative and qualitative disclosures made in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Item 4. Controls and Procedures

The Company’s management, including the Company’s Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective as of June 30, 2011 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Company’s management, including the Company’s principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Company’s disclosure controls and procedures will detect or uncover every situation involving the failure of persons within the Company or its subsidiary to disclose material information required to be set forth in the Company’s periodic reports.

Management of the Company is also responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). There were no changes in the Company’s internal control over financial reporting during the Company’s second quarter ended June 30, 2011 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of operations, the Company and its subsidiaries may become a party to legal proceedings, or property of the Company or its subsidiaries may become subject to legal proceedings. As of June 30, 2011 and based on information currently available, there are no pending legal proceedings to which the Company, or any of its subsidiaries, is a party or to which the property of the Company or any of its subsidiaries is subject that, in the opinion of management, may materially impact the financial condition of the Company.

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Item 1A. Risk Factors

Except as discussed below, there have been no material changes in the risk factors faced by the Company from those disclosed under Part I, Item 1A. “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 and disclosed under Part II – Other Information, Item 1A. “Risk Factors” in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2011. These risk factors could materially affect our business, financial condition or future results. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations.

A downgrade of the United States’ credit rating could have a material adverse effect on our business, financial condition and results of operations.

In recent months, each of Moody’s Investors Service, Standard & Poor’s Corp. and Fitch Ratings has publicly warned of the possibility of a downgrade to the United States’ credit rating. On August 5, 2011, S&P downgraded its rating of the United States’ debt to AA+. Each of Moody’s and Fitch has maintained its rating of U.S. debt at AAA. Any credit downgrade (whether by S&P, Moody’s, or Fitch), and the attendant perceived risk that the United States may not pay its debt obligations when due, could have a material adverse effect on financial markets and economic conditions in the United States and throughout the world. In turn, this could have a material adverse effect on our business, financial condition and results of operations. In particular, these events could have a material adverse effect on the value and liquidity of financial assets, including assets in our investment portfolio. Our investment portfolio at June 30, 2011 is described under Item 1. “Financial Statements,” under the heading “Note 2. Investment Securities” and included $175.8 million of U.S. government agency securities, SBA Pool securities, agency mortgage-backed securities and agency CMO securities.

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

In January 2001, the Company announced a stock repurchase program by which management was authorized to repurchase up to 300,000 shares of the Company’s common stock. This plan was amended in 2003 and the number of shares by which management is authorized to repurchase is up to 5% of the outstanding shares of the Company’s common stock on January 1 of each year. There is no stated expiration date for the program. During the three and six months ended June 30, 2011, the Company did not repurchase any of its common stock.

In connection with the Company’s sale to the Treasury of its Preferred Stock under the Capital Purchase Program, as previously described, there are certain limitations on the Company’s ability to purchase its common stock prior to the earlier of January 9, 2012 or the date on which Treasury no longer holds any of the Preferred Stock. Prior to such time, the Company generally may not purchase any of its common stock without the consent of the Treasury.

In connection with the Company entering into a Written Agreement with the FRB and the SCC, as previously described, the Company is subject to additional limitations and regulatory restrictions and may not purchase or redeem shares of its stock without prior regulatory approval.

Item 3. Defaults Upon Senior Securities

None.

Item 4. (Removed and Reserved)

Item 5. Other Information

None.

Item 6. Exhibits

3.1	Amended and Restated Articles of Incorporation of Eastern Virginia Bankshares, Inc., effective December 29, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed March 10, 2009).
3.2	Articles of Amendment to the Articles of Incorporation of Eastern Virginia Bankshares, Inc., effective January 6, 2009 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed January 13, 2009).
3.3	Bylaws of Eastern Virginia Bankshares, Inc., as amended May 21, 2009 (incorporated by reference to Exhibit 3.3 to the Company’s Annual Report on Form 10-K filed March 11, 2010).
31.1	Rule 13a-14(a) Certification of Chief Executive Officer.
31.2	Rule 13a-14(a) Certification of Chief Financial Officer.

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32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
101	The following materials from Eastern Virginia Bankshares, Inc.’s quarterly report on Form 10-Q for the quarter ended June 30, 2011, formatted in XBRL (Extensible Business Reporting Language), furnished herewith: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Operations (unaudited), (iii) Consolidated Statements of Changes in Shareholders’ Equity (unaudited), (iv) Consolidated Statements of Cash Flows (unaudited), and (v) Notes to Consolidated Financial Statements (unaudited).

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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. (Registrant)
Date: August 15, 2011	/s/    JOE A. SHEARIN
	Joe A. Shearin
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: August 15, 2011	/s/    DOUGLAS C. HASKETT II
	Douglas C. Haskett II
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

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