Eastern Virginia Bankshares (EVBS) 10-Q 2012 Q1 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2012

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) 443-8400

(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 May 10, 2012 was 6,032,527.

EASTERN VIRGINIA BANKSHARES, INC.

INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of March 31, 2012 (unaudited) and December 31, 2011	2
	Consolidated Statements of Income (unaudited) for the Three Months Ended March  31, 2012 and March 31, 2011	3
	Consolidated Statements of Comprehensive Income (unaudited) for the Three Months Ended March  31, 2012 and March 31, 2011	4
	Consolidated Statements of Shareholders’ Equity (unaudited) for the Three Months Ended March  31, 2012 and March 31, 2011	5
	Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March  31, 2012 and March 31, 2011	6
	Notes to the Interim Consolidated Financial Statements (unaudited)	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	35
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	56
Item 4.	Controls and Procedures	56
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	57
Item 1A.	Risk Factors	57
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	57
Item 3.	Defaults Upon Senior Securities	57
Item 4.	Mine Safety Disclosures	57
Item 5.	Other Information	57
Item 6.	Exhibits	57
	SIGNATURES	59

1

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands, except share and per share amounts)

	March 31, 2012			December 31, 2011
	(unaudited)
Assets:
Cash and due from banks	$	12,755		$	12,676
Interest bearing deposits with banks		20,213			11,890
Federal funds sold		504			—
Securities available for sale, at fair value		254,744			236,820
Restricted securities, at cost		9,762			9,762
Loans, net of allowance for loan losses of $23,141 and $24,102, respectively		698,011			710,428
Deferred income taxes, net		12,058			12,160
Bank premises and equipment, net		20,064			20,054
Accrued interest receivable		3,925			3,761
Other real estate owned, net of valuation allowance of $1,982 and $1,403, respectively		5,950			7,326
Goodwill		15,970			15,970
Other assets		21,838			22,187
Total assets	$	1,075,794		$	1,063,034
Liabilities and Shareholders’ Equity:
Liabilities
Noninterest-bearing demand accounts	$	111,887		$	103,639
Interest-bearing deposits		731,852			726,312
Total deposits		843,739			829,951
Federal funds purchased and repurchase agreements		2,144			4,003
Long-term borrowings		117,500			117,500
Trust preferred debt		10,310			10,310
Accrued interest payable		1,531			1,483
Other liabilities		5,037			4,664
Total liabilities		980,261			967,911
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 6,032,527 and 6,025,478 including 14,500 nonvested shares in 2012 and 2011, respectively		12,036			12,022
Surplus		19,465			19,446
Retained earnings		40,104			39,365
Warrant		1,481			1,481
Discount on preferred stock		(529	)		(604	)
Accumulated other comprehensive (loss), net		(1,024	)		(587	)
Total shareholders’ equity		95,533			95,123
Total liabilities and shareholders’ equity	$	1,075,794		$	1,063,034

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

2

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)

(dollars in thousands, except per share amounts)

	Three Months Ended March 31,
	2012		2011
Interest and Dividend Income
Loans and fees on loans	$	10,184	$	10,856
Interest on investments:
Taxable interest income		934		1,388
Tax exempt interest income		345		382
Dividends		77		66
Interest on deposits with banks		14		6
Total interest and dividend income		11,554		12,698
Interest Expense
Deposits		1,819		2,621
Federal funds purchased and repurchase agreements		7		8
Short-term borrowings		—		6
Long-term borrowings		1,187		1,174
Trust preferred debt		91		81
Total interest expense		3,104		3,890
Net interest income		8,450		8,808
Provision for Loan Losses		2,900		2,000
Net interest income after provision for loan losses		5,550		6,808
Noninterest Income
Service charges and fees on deposit accounts		769		935
Debit/credit card fees		319		324
Gain on sale of available for sale securities, net		2,531		193
Gain on sale of bank premises and equipment		—		256
Other operating income		288		383
Total noninterest income		3,907		2,091
Noninterest Expenses
Salaries and employee benefits		3,900		4,090
Occupancy and equipment expenses		1,271		1,213
Telephone		307		265
FDIC expense		588		497
Consultant fees		174		274
Collection, repossession and other real estate owned		305		453
Marketing and advertising		242		211
Loss on sale of other real estate owned		73		247
Impairment losses on other real estate owned		615		152
Other operating expenses		1,076		1,098
Total noninterest expenses		8,551		8,500
Income before income taxes		906		399
Income Tax Expense (Benefit)		92		(75	)
Net Income	$	814	$	474
Effective dividend on preferred stock		375		374
Net income available to common shareholders	$	439	$	100
Income per common share: basic	$	0.07	$	0.02
diluted	$	0.07	$	0.02
Dividends per share, common	$	—	$	—

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

3

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Comprehensive Income (unaudited)

(dollars in thousands)

	Three Months Ended March 31,
	2012			2011
Net income	$	814		$	474
Other comprehensive income (loss), net of tax:
Unrealized securities gains arising during period (net of tax, $636 and $525, respectively)		1,233			1,020
Less: reclassification adjustment for securities gains included in net income (net of tax, $861 and $66, respectively)		(1,670	)		(127	)
Other comprehensive income (loss)		(437	)		893
Comprehensive income	$	377		$	1,367

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 Three Months Ended March 31, 2012 and 2011

(dollars in thousands)

	Common Stock		Preferred Stock (1)		Surplus		Retained Earnings			Accumulated Other Comprehensive (Loss)			Total
Balance, December 31, 2010	$	11,954	$	24,581	$	19,302	$	37,884		$	(2,303	)	$	91,418
Net income for the three months ended March 31, 2011								474						474
Other comprehensive income											893			893
Preferred stock discount				74				(74	)					—
Stock based compensation						32								32
Issuance of common stock under dividend reinvestment and employee stock plans		10		—		12		—			—			22
Balance, March 31, 2011	$	11,964	$	24,655	$	19,346	$	38,284		$	(1,410	)	$	92,839
Balance, December 31, 2011	$	12,022	$	24,877	$	19,446	$	39,365		$	(587	)	$	95,123
Net income for the three months ended March 31, 2012								814						814
Other comprehensive (loss)											(437	)		(437	)
Preferred stock discount				75				(75	)					—
Stock based compensation						14								14
Issuance of common stock under dividend reinvestment and employee stock plans		14		—		5		—			—			19
Balance, March 31, 2012	$	12,036	$	24,952	$	19,465	$	40,104		$	(1,024	)	$	95,533

(1) For the purposes of this table, preferred stock includes the effect of the warrant issued in connection with the sale of preferred stock to the U.S. Treasury pursuant to the Capital Purchase Program and the discount on such preferred stock.

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)

	Three Months Ended March 31,
	2012			2011
Operating Activities:
Net income	$	814		$	474
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		2,900			2,000
Depreciation and amortization		547			519
Stock based compensation		14			32
Net amortization of premiums and accretion of discounts on securities available for sale		1,006			547
(Gain) realized on securities available for sale transactions, net		(2,531	)		(193	)
(Gain) on sale of bank premises and equipment		—			(256	)
Loss on sale of other real estate owned		73			247
Impairment on other real estate owned		615			152
Loss on LLC investments		15			11
Deferred income taxes		327			(352	)
Net change in:
Accrued interest receivable		(164	)		49
Other assets		334			1,080
Accrued interest payable		48			(62	)
Other liabilities		373			(465	)
Net cash provided by operating activities		4,371			3,783
Investing Activities:
Purchase of securities available for sale		(106,824	)		(13,892	)
Purchases of bank premises and equipment		(557	)		(1,276	)
Improvements to other real estate owned		—			(150	)
Net change in loans		9,286			5,827
Proceeds from:
Maturities, calls, and paydowns of securities available for sale		11,060			28,422
Sales of securities available for sale		78,703			13,021
Sale of bank premises and equipment		—			299
Sale of other real estate owned		919			2,028
Net cash provided by (used in) investing activities		(7,413	)		34,279
Financing Activities:
Net change in:
Demand, interest-bearing demand and savings deposits		20,253			(10,704	)
Time deposits		(6,465	)		(7,913	)
Federal funds purchased and repurchase agreements		(1,859	)		14
Short-term borrowings		—			(19,500	)
Issuance of common stock under dividend reinvestment and employee stock plans		19			22
Net cash provided by (used in) financing activities		11,948			(38,081	)
Net increase (decrease) in cash and cash equivalents		8,906			(19	)
Cash and cash equivalents, January 1		24,566			22,831
Cash and cash equivalents, March 31	$	33,472		$	22,812
Supplemental disclosure:
Interest paid	$	3,056		$	3,952
Supplemental disclosure of noncash investing and financing activities:
Unrealized gains (losses) on securities available for sale	$	(662	)	$	1,352
Loans transferred to other real estate owned	$	(231	)	$	(1,900	)

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 months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ended December 31, 2012. 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, 2011 (the “2011 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. The Company conducts its primary operations through its wholly-owned bank subsidiary, EVB. Two of EVB’s 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-three 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 thousand, 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 the Company 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 2012 presentation. These reclassifications have no effect on previously reported net income.

The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results which may be expected for the year.

Recent Accounting Pronouncements

In April 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 adoption of the new guidance did not have a material impact on the Company’s 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 International Accounting Standards Board 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 International Financial Reporting Standards. The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The Company has adopted ASU 2011-04 and included the required disclosures in 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 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 has adopted ASU 2011-05 and included the required disclosures in its consolidated financial statements.

8

In September 2011, the FASB issued ASU 2011-08,“Intangible – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.” The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11,“Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company does not expect the adoption of ASU 2011-11 to have a material impact on its consolidated financial statements.

In December 2011, the FASB issued ASU 2011-12,“Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” The amendments are being made to allow the FASB time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the FASB is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before ASU 2011-05. All other requirements in ASU 2011-05 are not affected by ASU 2011-12, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company has adopted ASU 2011-12 and included the required disclosures in its consolidated financial statements.

Note 2. Investment Securities

The amortized cost and estimated fair value, with gross unrealized gains and losses, of securities at March 31, 2012 and December 31, 2011 were as follows:

(dollars in thousands)	March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Fair Value
Available for Sale:
SBA Pool securities	$	58,604	$	556	$	190	$	58,970
Agency mortgage-backed securities		50,635		353		87		50,901
Agency CMO securities		84,147		540		160		84,527
Non agency CMO securities		8,794		19		32		8,781
State and political subdivisions		49,756		580		264		50,072
Pooled trust preferred securities		535		174		—		709
FNMA and FHLMC preferred stock		77		101		—		178
Corporate securities		592		14		—		606
Total	$	253,140	$	2,337	$	733	$	254,744

9

(dollars in thousands)	December 31, 2011
	Amortized Cost		Gross Unrealized Gains			Gross Unrealized Losses		Estimated Fair Value
Available for Sale:
SBA Pool securities	$	60,873	$	400		$	191	$	61,082
Agency mortgage-backed securities		40,470		595			2		41,063
Agency CMO securities		61,460		378			104		61,734
Non agency CMO securities		10,908		33			121		10,820
State and political subdivisions*		59,636		1,096			—		60,732
Pooled trust preferred securities		536		66	��		—		602
FNMA and FHLMC preferred stock		77		109			—		186
Corporate securities		594		7			—		601
Total	$	234,554	$	2,684		$	418	$	236,820

* The combined unrealized loss on these securities was less than $1 thousand.

There are no securities classified as “Held to Maturity” or “Trading” at March 31, 2012 or December 31, 2011. The Company’s mortgage-backed securities consist entirely of residential mortgage-backed securities. The Company does not hold any commercial mortgage-backed securities. The Company’s mortgage-backed securities are all agency backed and rated Aaa and AA+ by Moody and S&P, respectively, with no subprime issues.

The Company’s pooled trust preferred securities include one senior issue of Preferred Term Securities XXVII which is current on all payments and on which the Company took an impairment charge in the third quarter of 2009 to reduce the Company’s book value to the market value at September 30, 2009. As of March 31, 2012, that security has an estimated fair value that is $174 thousand greater than its amortized cost after impairment. During the second quarter of 2010, the Company recognized an impairment charge in the amount of $77 thousand on the Company’s investment in Preferred Term Securities XXIII mezzanine tranche, thus reducing the book value of this investment to $0. The decision to recognize the other-than-temporary impairment was based upon an analysis of the market value of the discounted cash flow for the security as provided by Moody’s at June 30, 2010, which indicated that the Company was unlikely to recover any of its remaining investment in these securities.

The amortized cost and estimated fair values of securities at March 31, 2012, 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.

	March 31, 2012
(dollars in thousands)	Amortized Cost		Estimated Fair Value
Due in one year or less	$	5,191	$	5,237
Due after one year through five years		167,318		168,138
Due after five years through ten years		74,758		75,280
Due after ten years		5,873		6,089
Total	$	253,140	$	254,744

Proceeds from the sales of securities available for sale for the three months ended March 31, 2012 and 2011 were $78.7 million and $13.0 million, respectively. Net realized gains on the sales of securities available for sale for the three months ended March 31, 2012 and 2011 were $2.5 million and $193 thousand, respectively. Proceeds from maturities, calls and paydowns of securities available for sale for the three months ended March 31, 2012 and 2011 were $11.1 million and $28.4 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 $93.6 million and an aggregate fair value of $94.3 million were pledged at March 31, 2012. Securities with an aggregate book value of $115.8 million and an aggregate fair value of $116.4 million were pledged at December 31, 2011.

10

Securities in an unrealized loss position at March 31, 2012, by duration of the period of the unrealized loss, are shown below:

	March 31, 2012
(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
SBA Pool securities	$	18,685	$	190	$	—	$	—	$	18,685	$	190
Agency mortgage-backed securities		12,383		87		—		—		12,383		87
Agency CMO securities		25,250		160		—		—		25,250		160
Non agency CMO securities*		1,905		—		3,830		32		5,735		32
State and political subdivisions		15,558		264		—		—		15,558		264
Total	$	73,781	$	701	$	3,830	$	32	$	77,611	$	733

* The combined unrealized loss (less than 12 months) on these securities was less than $1 thousand.

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 March 31, 2012, 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 March 31, 2012, there are 45 debt securities with fair values totaling $77.6 million considered temporarily impaired. Of these debt securities, 42 with fair values totaling $73.8 million were in an unrealized loss position of less than 12 months and 3 with fair values totaling $3.8 million 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 March 31, 2012 and no impairment has been recognized. At March 31, 2012, there are no equity securities in an unrealized loss position.

Securities in an unrealized loss position at December 31, 2011, by duration of the period of the unrealized loss, are shown below.

	December 31, 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
SBA Pool securities	$	25,353	$	191	$	—	$	—	$	25,353	$	191
Agency mortgage-backed securities		2,735		2		—		—		2,735		2
Agency CMO securities		16,594		104		—		—		16,594		104
Non agency CMO securities		—		—		5,587		121		5,587		121
State and political subdivisions*		2,168		—		—		—		2,168		—
Total	$	46,850	$	297	$	5,587	$	121	$	52,437	$	418

* The combined unrealized loss on these securities was less than $1 thousand.

As of March 31, 2012 and December 31, 2011, there were no corporate securities in an unrealized loss position.

11

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:

(dollars in thousands)	Three Months Ending March 31, 2012
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 $7.4 million at March 31, 2012 and December 31, 2011, 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 March 31, 2012, the Company does not consider this investment to be other-than-temporarily impaired at March 31, 2012 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.

12

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:

	March 31, 2012						December 31, 2011
(dollars in thousands)	Amount			Percent			Amount			Percent
Commercial, industrial and agricultural	$	53,069			7.36	%	$	57,021			7.76	%
Real estate - one to four family residential:
Closed end first and seconds		251,095			34.82	%		253,465			34.51	%
Home equity lines		103,233			14.32	%		102,297			13.93	%
Total real estate - one to four family residential		354,328			49.14	%		355,762			48.44	%
Real estate - multifamily residential		15,362			2.13	%		13,035			1.77	%
Real estate - construction:
One to four family residential		21,508			2.98	%		21,212			2.89	%
Other construction, land development and other land		36,646			5.08	%		42,208			5.75	%
Total real estate - construction		58,154			8.06	%		63,420			8.64	%
Real estate - farmland		5,535			0.77	%		5,860			0.80	%
Real estate - non-farm, non-residential:
Owner occupied		130,453			18.09	%		135,294			18.42	%
Non-owner occupied		77,508			10.75	%		74,231			10.11	%
Total real estate - non-farm, non-residential		207,961			28.84	%		209,525			28.53	%
Consumer		25,210			3.49	%		28,355			3.86	%
Other		1,533			0.21	%		1,553			0.20	%
Total loans		721,152			100.00	%		734,531			100.00	%
Less unearned income		—						(1	)
Less allowance for loan losses		(23,141	)					(24,102	)
Loans, net	$	698,011					$	710,428

The following table presents the aging of the recorded investment in past due loans as of March 31, 2012 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	$	614	$	45	$	995	$	1,654	$	51,415	$	53,069
Real estate - one to four family residential:
Closed end first and seconds		6,063		1,308		4,102		11,473		239,622		251,095
Home equity lines		1,328		200		359		1,887		101,346		103,233
Total real estate - one to four family residential		7,391		1,508		4,461		13,360		340,968		354,328
Real estate - multifamily residential		—		—		—		—		15,362		15,362
Real estate - construction:
One to four family residential		169		197		476		842		20,666		21,508
Other construction, land development and other land		—		8,167		582		8,749		27,897		36,646
Total real estate - construction		169		8,364		1,058		9,591		48,563		58,154
Real estate - farmland		—		—		199		199		5,336		5,535
Real estate - non-farm, non-residential:
Owner occupied		424		836		1,507		2,767		127,686		130,453
Non-owner occupied		168		451		1,525		2,144		75,364		77,508
Total real estate - non-farm, non-residential		592		1,287		3,032		4,911		203,050		207,961
Consumer		271		27		422		720		24,490		25,210
Other		14		—		—		14		1,519		1,533
Total loans	$	9,051	$	11,231	$	10,167	$	30,449	$	690,703	$	721,152

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

13

The following table presents the aging of the recorded investment in past due loans as of December 31, 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	$	491	$	963	$	677	$	2,131	$	54,890	$	57,021
Real estate - one to four family residential:
Closed end first and seconds		5,045		1,475		5,245		11,765		241,700		253,465
Home equity lines		545		275		514		1,334		100,963		102,297
Total real estate - one to four family residential		5,590		1,750		5,759		13,099		342,663		355,762
Real estate - multifamily residential		—		—		—		—		13,035		13,035
Real estate - construction:
One to four family residential		336		329		315		980		20,232		21,212
Other construction, land development and other land		48		—		3,965		4,013		38,195		42,208
Total real estate - construction		384		329		4,280		4,993		58,427		63,420
Real estate - farmland		—		—		190		190		5,670		5,860
Real estate - non-farm, non-residential:
Owner occupied		603		—		3,545		4,148		131,146		135,294
Non-owner occupied		442		—		1,835		2,277		71,954		74,231
Total real estate - non-farm, non-residential		1,045		—		5,380		6,425		203,100		209,525
Consumer		300		97		484		881		27,474		28,355
Other		—		14		—		14		1,539		1,553
Total loans	$	7,810	$	3,153	$	16,770	$	27,733	$	706,798	$	734,531

* 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)	March 31, 2012		December 31, 2011
Nonaccrual loans	$	22,012	$	30,293
Loans past due 90 days and accruing interest		409		168
Restructured loans (accruing)		3,997		5,517

At March 31, 2012 and December 31, 2011, there were approximately $9.7 million and $13.4 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 March 31, 2012 and December 31, 2011:

					Over 90 Days Past
	Nonaccrual				Due and Accruing
(dollars in thousands)	March 31, 2012		December 31, 2011		March 31, 2012		December 31, 2011
Commercial, industrial and agricultural	$	1,208	$	634	$	42	$	43
Real estate - one to four family residential:
Closed end first and seconds		8,344		9,320		79		—
Home equity lines		639		1,059		49		55
Total real estate - one to four family residential		8,983		10,379		128		55
Real estate - construction:
One to four family residential		735		444		—		—
Other construction, land development and other land		1,755		5,293		—		—
Total real estate - construction		2,490		5,737		—		—
Real estate - farmland		—		190		199		—
Real estate - non-farm, non-residential:
Owner occupied		5,651		6,707		—		—
Non-owner occupied		2,795		5,730		—		—
Total real estate - non-farm, non-residential		8,446		12,437		—		—
Consumer		885		916		40		70
Total loans	$	22,012	$	30,293	$	409	$	168

The following table presents commercial loans by credit quality indicator at March 31, 2012:

(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Impaired		Total
Commercial, industrial and agricultural	$	39,452	$	7,705	$	4,550	$	283	$	1,079	$	53,069
Real estate - multifamily residential		14,221		1,141		—		—		—		15,362
Real estate - construction:
One to four family residential		19,219		678		757		174		680		21,508
Other construction, land development and other land		9,415		1,870		4,136		—		21,225		36,646
Total real estate - construction		28,634		2,548		4,893		174		21,905		58,154
Real estate - farmland		4,178		960		397		—		—		5,535
Real estate - non-farm, non-residential:
Owner occupied		90,666		16,843		13,862		75		9,007		130,453
Non-owner occupied		44,152		16,873		7,454		—		9,029		77,508
Total real estate - non-farm, non-residential		134,818		33,716		21,316		75		18,036		207,961
Total commercial loans	$	221,303	$	46,070	$	31,156	$	532	$	41,020	$	340,081

15

The following table presents commercial loans by credit quality indicator at December 31, 2011:

(dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Impaired		Total
Commercial, industrial and agricultural	$	43,559	$	8,681	$	4,344	$	437	$	—	$	57,021
Real estate - multifamily residential		12,742		293		—		—		—		13,035
Real estate - construction:
One to four family residential		19,802		327		532		—		551		21,212
Other construction, land development and other land		9,934		2,381		16,542		—		13,351		42,208
Total real estate - construction		29,736		2,708		17,074		—		13,902		63,420
Real estate - farmland		4,492		354		1,014		—		—		5,860
Real estate - non-farm, non-residential:
Owner occupied		89,016		20,775		12,546		934		12,023		135,294
Non-owner occupied		45,448		10,511		6,784		2,720		8,768		74,231
Total real estate - non-farm, non-residential		134,464		31,286		19,330		3,654		20,791		209,525
Total commercial loans	$	224,993	$	43,322	$	41,762	$	4,091	$	34,693	$	348,861

At March 31, 2012 and December 31, 2011, the Company did 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 March 31, 2012:

(dollars in thousands)	Performing		Nonperforming		Total
Real estate - one to four family residential:
Closed end first and seconds	$	237,327	$	13,768	$	251,095
Home equity lines		102,874		359		103,233
Total real estate - one to four family residential		340,201		14,127		354,328
Consumer		24,788		422		25,210
Other		1,033		500		1,533
Total consumer loans	$	366,022	$	15,049	$	381,071

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, 2011:

(dollars in thousands)	Performing		Nonperforming		Total
Real estate - one to four family residential:
Closed end first and seconds	$	238,033	$	15,432	$	253,465
Home equity lines		101,783		514		102,297
Total real estate - one to four family residential		339,816		15,946		355,762
Consumer		27,794		561		28,355
Other		1,050		503		1,553
Total consumer loans	$	368,660	$	17,010	$	385,670

The following table summarizes the activity in the Company’s allowance for loan losses for the periods presented:

(dollars in thousands)	Three Months Ended March 31, 2012			Twelve Months Ended December 31, 2011			Three Months Ended March 31, 2011
Balance at beginning of period	$	24,102		$	25,288		$	25,288
Provision charged against income		2,900			8,800			2,000
Recoveries of loans charged off		454			805			233
Loans charged off		(4,315	)		(10,791	)		(1,193	)
Balance at end of period	$	23,141		$	24,102		$	26,328

16

The following table presents a rollforward of the Company’s allowance for loan losses for the three months ended March 31, 2012:

(dollars in thousands)	Beginning Balance January 1, 2012		Charge-offs			Recoveries		Provision			Ending Balance March 31, 2012
Commercial, industrial and agricultural	$	4,389	$	(228	)	$	379	$	(296	)	$	4,244
Real estate - one to four family residential:
Closed end first and seconds		2,856		(350	)		5		215			2,726
Home equity lines		278		(322	)		—		428			384
Total real estate - one to four family residential		3,134		(672	)		5		643			3,110
Real estate - multifamily residential		29		—			—		8			37
Real estate - construction:
One to four family residential		382		(4	)		17		54			449
Other construction, land development and other land		6,861		(1,520	)		—		(845	)		4,496
Total real estate - construction		7,243		(1,524	)		17		(791	)		4,945
Real estate - farmland		15		—			—		(3	)		12
Real estate - non-farm, non-residential:
Owner occupied		4,831		(508	)		1		522			4,846
Non-owner occupied		3,172		(1,135	)		—		2,699			4,736
Total real estate - non-farm, non-residential		8,003		(1,643	)		1		3,221			9,582
Consumer		776		(224	)		39		30			621
Other		513		(24	)		13		13			515
Unallocated		—		—			—		75			75
Total	$	24,102	$	(4,315	)	$	454	$	2,900		$	23,141

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 March 31, 2012:

	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	$	792	$	3,452	$	4,244	$	1,079	$	51,990	$	53,069
Real estate - one to four family residential:
Closed end first and seconds		1,045		1,681		2,726		9,204		241,891		251,095
Home equity lines		—		384		384		462		102,771		103,233
Total real estate - one to four family residential		1,045		2,065		3,110		9,666		344,662		354,328
Real estate - multifamily residential		—		37		37		—		15,362		15,362
Real estate - construction:
One to four family residential		170		279		449		680		20,828		21,508
Other construction, land development and other land		875		3,621		4,496		21,225		15,421		36,646
Total real estate - construction		1,045		3,900		4,945		21,905		36,249		58,154
Real estate - farmland		—		12		12		—		5,535		5,535
Real estate - non-farm, non-residential:
Owner occupied		1,320		3,526		4,846		9,007		121,446		130,453
Non-owner occupied		2,005		2,731		4,736		9,029		68,479		77,508
Total real estate - non-farm, non-residential		3,325		6,257		9,582		18,036		189,925		207,961
Consumer		—		621		621		—		25,210		25,210
Other		367		148		515		500		1,033		1,533
Unallocated		—		75		75		—		—		—
Total	$	6,574	$	16,567	$	23,141	$	51,186	$	669,966	$	721,152

17

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, 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	$	—	$	4,389	$	4,389	$	—	$	57,021	$	57,021
Real estate - one to four family residential:
Closed end first and seconds		1,215		1,641		2,856		10,187		243,278		253,465
Home equity lines		—		278		278		—		102,297		102,297
Total real estate - one to four family residential		1,215		1,919		3,134		10,187		345,575		355,762
Real estate - multifamily residential		—		29		29		—		13,035		13,035
Real estate - construction:
One to four family residential		96		286		382		551		20,661		21,212
Other construction, land development and other land		316		6,545		6,861		13,351		28,857		42,208
Total real estate - construction		412		6,831		7,243		13,902		49,518		63,420
Real estate - farmland		—		15		15		—		5,860		5,860
Real estate - non-farm, non-residential:
Owner occupied		2,990		1,841		4,831		12,023		123,271		135,294
Non-owner occupied		1,311		1,861		3,172		8,768		65,463		74,231
Total real estate - non-farm, non-residential		4,301		3,702		8,003		20,791		188,734		209,525
Consumer		42		734		776		77		28,278		28,355
Other		380		133		513		503		1,050		1,553
Total	$	6,350	$	17,752	$	24,102	$	45,460	$	689,071	$	734,531

The following is a summary of information pertaining to impaired loans as of and for the three months ended March 31, 2012 and as of and for the year ended December 31, 2011:

(dollars in thousands)	March 31, 2012		December 31, 2011
Impaired loans without a specific reserve	$	25,404	$	18,097
Impaired loans with a specific reserve		25,782		27,363
Allowance related to impaired loans	$	6,574	$	6,350
Average balance of impaired loans	$	52,562	$	50,306
Interest income recognized and collected on impaired loans	$	447	$	2,051

18

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2012:

(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	$	1,079	$	1,079	$	—	$	1,079	$	792	$	416	$	8
Real estate - one to four family residential:
Closed end first and seconds		9,204		9,723		1,580		7,624		1,045		9,022		108
Home equity lines		462		662		462		—		—		1,113		3
Total real estate - one to four family residential		9,666		10,385		2,042		7,624		1,045		10,135		111
Real estate - construction:
One to four family residential		680		680		422		258		170		583		1
Other construction, land development and other land		21,225		22,530		19,163		2,062		875		20,840		142
Total real estate - construction		21,905		23,210		19,585		2,320		1,045		21,423		143
Real estate - non-farm, non-residential:
Owner occupied		9,007		11,375		2,361		6,646		1,320		11,237		82
Non-owner occupied		9,029		9,875		1,400		7,629		2,005		8,831		103
Total real estate - non-farm, non-residential		18,036		21,250		3,761		14,275		3,325		20,068		185
Consumer		—		—		—		—		—		19		—
Other		500		500		16		484		367		501		—
Total loans	$	51,186	$	56,424	$	25,404	$	25,782	$	6,574	$	52,562	$	447

The following table presents loans individually evaluated for impairment by class of loans as of December 31, 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	$	—	$	—	$	—	$	—	$	—	$	400	$	—
Real estate - one to four family residential:
Closed end first and seconds		10,187		10,536		3,511		6,676		1,215		9,020		314
Real estate - construction:
One to four family residential		551		551		422		129		96		642		21
Other construction, land development and other land		13,351		15,525		12,249		1,102		316		16,393		709
Total real estate - construction		13,902		16,076		12,671		1,231		412		17,035		730
Real estate - non-farm, non-residential:
Owner occupied		12,023		13,882		1,100		10,923		2,990		12,514		401
Non-owner occupied		8,768		9,585		798		7,970		1,311		11,060		602
Total real estate - non-farm, non-residential		20,791		23,467		1,898		18,893		4,301		23,574		1,003
Consumer		77		77		—		77		42		161		4
Other		503		503		17		486		380		116		—
Total loans	$	45,460	$	50,659	$	18,097	$	27,363	$	6,350	$	50,306	$	2,051

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The following table presents, by class of loans, information related to loans modified as TDRs during the three months ended March 31, 2012:

	Three Months Ended March 31, 2012
(dollars in thousands)	Number of Loans		Pre-Modification Recorded Balance		Post-Modification Recorded Balance*
Real estate - construction:
One to four family residential		1	$	131	$	131
Total		1	$	131	$	131

* The period end balances are inclusive of all partial paydowns and charge-offs since the modification date. Loans modified as TDRs that were fully paid down, charged-off, or foreclosed upon by period end are not reported.

There were no loans modified as TDRs that subsequently defaulted (i.e., 90 days or more past due following a modification) during the three months ended March 31, 2012 and were modified as TDRs within the 12 months prior to default.

Note 4. Deferred Income Taxes

As of March 31, 2012 and December 31, 2011, the Company had recorded net deferred income tax assets of approximately $12.1 million and $12.2 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. Further, management has considered future reversals of existing taxable temporary differences and limited prudent and feasible tax-planning strategies, such as, changes in investment security income (tax-exempt to taxable), additional sales of loans and sales of branches/buildings with an appreciated asset value over the tax basis. 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 March 31, 2012 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.

Due primarily 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 $2.6 million at March 31, 2012 and December 31, 2011, which are included in other assets on the accompanying consolidated balance sheets.

20

Note 5. Bank Premises and Equipment

Bank premises and equipment are summarized as follows:

(dollars in thousands)	March 31, 2012			December 31, 2011
Land and improvements	$	6,009		$	6,009
Buildings and leasehold improvements		20,368			20,556
Furniture, fixtures and equipment		17,898			17,530
Construction in progress		292			94
		44,567			44,189
Less accumulated depreciation		(24,503	)		(24,135	)
Net balance	$	20,064		$	20,054

Depreciation and amortization of bank premises and equipment for the three months ended March 31, 2012 and 2011 amounted to $547 thousand and $519 thousand, 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.

The tables below present selected information on federal funds purchased and repurchase agreements during the three months ended March 31, 2012 and the year ended December 31, 2011:

Federal funds purchased (dollars in thousands)	March 31, 2012			December 31, 2011
Balance outstanding at period end	$	1		$	—
Maximum balance at any month end during the period	$	1		$	2
Average balance for the period	$	338		$	57
Weighted average rate for the period		0.74	%		0.86	%
Weighted average rate at period end		1.00	%		0.00	%

Repurchase agreements (dollars in thousands)	March 31, 2012			December 31, 2011
Balance outstanding at period end	$	2,143		$	4,003
Maximum balance at any month end during the period	$	2,296		$	4,984
Average balance for the period	$	2,446		$	3,072
Weighted average rate for the period		0.99	%		1.11	%
Weighted average rate at period end		0.92	%		1.09	%

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.

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The table below presents selected information on short-term borrowings during the three months ended March 31, 2012 and the year ended December 31, 2011:

Short-term borrowings (dollars in thousands)	March 31, 2012			December 31, 2011
Balance outstanding at period end	$	—		$	—
Maximum balance at any month end during the period	$	—		$	10,325
Average balance for the period	$	—		$	1,878
Weighted average rate for the period		0.00	%		0.43	%
Weighted average rate at period end		0.00	%		0.00	%

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 March 31, 2012 and December 31, 2011 consisted 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.

The table below shows the year of maturity and potential call dates of long-term FHLB advances as of March 31, 2012. All of the convertible advances have a call provision.

(dollars in thousands)	Maturity Amount		Average Rate			Callable Amount		Average Rate
2012	$	—		—		$	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	%

The Company’s line of credit with the FHLB can equal up to 25% of the Company’s assets or approximately $265.4 million at March 31, 2012. This line of credit totaled $178.0 million with approximately $54.4 million available at March 31, 2012. As of March 31, 2012 and December 31, 2011, loans with a carrying value of $303.5 million and $300.1 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 long-term borrowings outstanding under the FHLB line of credit was $117.5 million at March 31, 2012 and December 31, 2011.

Note 7. Earnings Per Common Share

The following table shows the weighted average number of common shares used in computing earnings per common share and the effect on the weighted average number of shares of potential dilutive common stock for the three months ended March 31, 2012 and 2011. Potential dilutive common stock had no effect on earnings per common share otherwise available to common shareholders for the three months ended March 31, 2012 and 2011.

	Three Months Ended
	March 31, 2012				March 31, 2011
	Shares		Per Share Amount		Shares		Per Share Amount
Basic earnings per common share		6,029,041	$	0.07		5,995,907	$	0.02
Effect of dilutive securities, stock options		—		—		—		—
Diluted earnings per common share		6,029,041	$	0.07		5,995,907	$	0.02

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At March 31, 2012 and 2011, options to acquire 216,442 and 251,137 shares of common stock, respectively were not included in computing diluted earnings per common share because their effects were anti-dilutive.

Note 8. Stock Based Compensation Plans

On September 21, 2000, the Company 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 the Company, thereby stimulating their efforts and strengthening their desire to remain with the Company. 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 97,813 shares still available to be granted as awards under the 2003 Plan.

On April 19, 2007, the Company’s shareholders approved the Eastern Virginia Bankshares, Inc. 2007 Equity Compensation Plan (the “2007 Plan”) to enhance the Company’s 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. The Company’s 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 months ended March 31, 2012 and 2011, stock option compensation expense was $11 thousand and $27 thousand, respectively, and was included in salaries and employee benefits expense in the consolidated statements of income.

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 three months ended March 31, 2012 and 2011.

A summary of the Company’s stock option activity and related information for the three months ended March 31, 2012 is as follows:

	Options Outstanding			Weighted Average Exercise Price		Remaining Contractual Life (in years)		Aggregate Intrinsic Value (in thousands)
Stock options outstanding at January 1, 2012		218,442		$	19.86
Forfeited		(2,000	)		20.30
Stock options outstanding at March 31, 2012		216,442		$	19.86		3.92	$	—
Stock options exercisable at March 31, 2012		189,192		$	20.94		3.40	$	—

* 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 March 31, 2012, there was $19 thousand of unrecognized compensation expense related to stock options that will be recognized over the remaining requisite average service period of approximately 6 months.

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The table below summarizes information concerning stock options outstanding and exercisable at March 31, 2012:

Stock Options Outstanding						Stock Options Exercisable
Exercise Price		Number Outstanding		Weighted Average Remaining Term		Exercise Price		Number Exercisable
$	16.10		17,530		0.00 years	$	16.10		17,530
$	28.60		22,725		1.50 years	$	28.60		22,725
$	19.92		32,200		2.25 years	$	19.92		32,200
$	20.57		42,412		3.25 years	$	20.57		42,412
$	21.16		44,325		4.50 years	$	21.16		44,325
$	19.25		30,000		5.50 years	$	19.25		30,000
$	12.36		27,250		6.50 years	$	—		—
$	19.86		216,442		3.92 years	$	20.94		189,192

For the three months ended March 31, 2012 and 2011, the Company issued no restricted stock. On December 16, 2010, the Company cancelled 8,000 shares of restricted stock previously awarded to its Chief Executive Officer on July 1, 2009 as the award did not contain the terms necessary to comply with the TARP executive compensation limits and therefore prevented the employee from accruing or vesting in any portion of the award to date. In conjunction with this cancellation, the Company granted a TARP compliant restricted stock award to its Chief Executive Officer in an equal amount of shares and in substantially the same form as previously awarded. On July 1, 2009, the Company awarded 18,000 shares of restricted stock to employees. One half of these shares are subject to time vesting at 20% per year over a five year period. The other half of these restricted stock awards is performance based and will vest on June 30, 2012 if, and only if, the year ended December 31, 2011 financial achievements of the Company meet pre-specified targets for earnings per share or return on equity compared to a board compensation committee defined peer group. Performance based vesting is based on a sliding scale at various levels for performance at or above the 50^th percentile of the peer group performance.

For the three months ended March 31, 2012 and 2011, restricted stock compensation expense was $3 thousand and $5 thousand, respectively, and was included in salaries and employee benefits expense in the consolidated statements of income. Restricted stock compensation expense is accounted for using the fair market value of the Company’s common stock on the date the restricted shares were awarded, which was $3.75 per share for the 2010 award and $8.31 per share for the 2009 awards.

A summary of the status of the Company’s nonvested shares in relation to the Company’s restricted stock awards as of March 31, 2012, and changes during the three months ended March 31, 2012 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, 2012		14,500	$	6.35
Granted		—		—
Vested		—		—
Forfeited		—		—
Nonvested as of March 31, 2012		14,500	$	6.35

At March 31, 2012, there was $10 thousand of total unrecognized compensation expense 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.

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Note 9. Employee Benefit Plan – Pension

The Company has historically maintained a defined benefit pension plan. The plan was amended January 28, 2008 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. The plan was again amended on February 28, 2011 to freeze the plan with no additional contributions for grandfathered participants. Benefits for all participants have remained frozen in the plan since such action was taken. Effective January 1, 2012, the plan was amended and restated as a cash balance plan. Under a cash balance plan, participant benefits are stated as an account balance. An opening account balance was established for each participant based on the lump sum value of his or her accrued benefit as of December 31, 2011 in the original defined benefit pension plan. Each participants account will be credited with an “interest” credit each year. The interest rate for each year is determined as the average annual interest rate on the 2 year U.S. Treasury securities for the month of December preceding the plan year. The interest credit for the 2012 plan year will be approximately 0.76%. Components of net periodic pension cost (benefit) related to the Company’s pension plan were as follows for the periods indicated:

	Three Months Ended March 31,
(dollars in thousands)	2012			2011
Components of Net Periodic Pension Cost (Benefit)
Interest cost	$	123		$	151
Expected return on plan assets		(169	)		(224	)
Amortization of prior service cost		2			—
Recognized net actuarial loss		31			—
Net periodic pension cost (benefit)	$	(13	)	$	(73	)

The Company made no contributions to the pension plan during 2011. 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, 2012.

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 March 31, 2012.

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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 the Company’s securities accounting and safekeeping correspondent bank which uses 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 evaluates any substantial changes.

The following table summarizes financial assets measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

		$000000000000		$000000000000		$000000000000		$000000000000
Assets Measured at Fair Value on a Recurring Basis at March 31, 2012 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at March 31, 2012
	(dollars in thousands)
Assets
Securities available for sale
SBA Pool securities	$	—	$	58,970	$	—	$	58,970
Agency mortgage-backed securities		—		50,901		—		50,901
Agency CMO securities		—		84,527		—		84,527
Non agency CMO securities		—		8,781		—		8,781
State and political subdivisions		—		50,072		—		50,072
Pooled trust preferred securities		—		709		—		709
FNMA and FHLMC preferred stock		—		178		—		178
Corporate securities		—		606		—		606
Total securities available for sale	$	—	$	254,744	$	—	$	254,744

26

		$000000000000		$000000000000		$000000000000		$000000000000
Assets Measured at Fair Value on a Recurring Basis at December 31, 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 December 31, 2011
	(dollars in thousands)
Assets
Securities available for sale
SBA Pool securities	$	—	$	61,082	$	—	$	61,082
Agency mortgage-backed securities		—		41,063		—		41,063
Agency CMO securities		—		61,734		—		61,734
Non agency CMO securities		—		10,820		—		10,820
State and political subdivisions		—		60,732		—		60,732
Pooled trust preferred securities		—		602		—		602
FNMA and FHLMC preferred stock		—		186		—		186
Corporate securities		—		601		—		601
Total securities available for sale	$	—	$	236,820	$	—	$	236,820

Assets Measured at Fair Value on a Non-Recurring Basis

Certain assets are measured at fair value on a non-recurring basis in accordance with U.S. GAAP. These adjustments to fair value usually result from the application of lower-of-cost-or-fair value accounting or impairment write-downs of individual assets.

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 Company’s 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 the 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 this third party valuation to determine if any charge-offs are necessary.

The value of business equipment 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 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 estimated fair value is reviewed periodically by management and any write-downs are charged against current earnings. The Company believes that the fair value component in the Company’s valuation of OREO follows the provisions of accounting standards.

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The following table summarizes assets measured at fair value on a non-recurring basis as of March 31, 2012 and December 31, 2011, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value:

		$000000000000		$000000000000		$000000000000		$000000000000
Assets Measured at Fair Value on a Non-Recurring Basis at March 31, 2012 Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at March 31, 2012
	(dollars in thousands)
Assets
Impaired loans	$	—	$	17,932	$	1,276	$	19,208
Other real estate owned	$	—	$	5,413	$	537	$	5,950

		$000000000000		$000000000000		$000000000000		$000000000000
Assets Measured at Fair Value on a Non-Recurring Basis at December 31, 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 December 31, 2011
	(dollars in thousands)
Assets
Impaired loans	$	—	$	20,193	$	820	$	21,013
Other real estate owned	$	—	$	6,541	$	785	$	7,326

For the three months ended March 31, 2012, the changes in Level 3 assets measured at fair value on a non-recurring basis were as follows:

	Fair Value Measurements at March 31, 2012
(dollars in thousands)	Impaired Loans			Other Real Estate Owned
Balance - January 1, 2012	$	820		$	785
Sales proceeds		—			(203	)
Valuation allowance		(162	)		(23	)
(Loss) on disposition		—			(22	)
Transfers into Level 3		618			—
Balance - March 31, 2012	$	1,276		$	537

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The following table displays quantitative information about Level 3 Fair Value Measurements as of March 31, 2012:

Quantitative information about Level 3 Fair Value Measurements at March 31, 2012
	Fair Value		Valuation Technique(s)	Unobservable Input	Range (Weighted Average)
	(dollars in thousands)
Assets
Impaired loans	$	1,276	Discounted appraised value	Selling cost	10% -27% (14%)
				Discount for lack of marketability and age of appraisal	0% - 50% (27%)
Other real estate owned	$	537	Discounted appraised value	Selling cost	0% - 10% (10%)
				Discount for lack of marketability and age of appraisal	13% -35% (16%)

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.

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 the Company’s long-term borrowings are estimated using discounted cash flow analyses based on the Company’s 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.

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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 March 31, 2012 and December 31, 2011, 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:

		$00000000000		$00000000000		$00000000000		$00000000000		$00000000000
			Fair Value Measurements at March 31, 2012 Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Balance at March 31, 2012
			(dollars in thousands)
Assets:
Cash and short-term investments	$	13,259	$	13,259	$	—	$	—	$	13,259
Interest bearing deposits with banks		20,213		20,213		—		—		20,213
Securities available for sale		254,744		—		254,744		—		254,744
Restricted securities		9,762		—		9,762		—		9,762
Loans, net		698,011		—		731,032		1,276		732,308
Accrued interest receivable		3,925		—		3,925		—		3,925
Total	$	999,914	$	33,472	$	999,463	$	1,276	$	1,034,211
Liabilities:
Noninterest-bearing demand deposits	$	111,887	$	—	$	111,887	$	—	$	111,887
Interest-bearing deposits		731,852		—		729,219		—		729,219
Short-term borrowings		2,144		—		2,144		—		2,144
Long-term borrowings		117,500		—		132,715		—		132,715
Trust preferred debt		10,310		—		10,310		—		10,310
Accrued interest payable		1,531		—		1,531		—		1,531
Total	$	975,224	$	—	$	987,806	$	—	$	987,806

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		$00000000000		$00000000000		$00000000000		$00000000000		$00000000000
			Fair Value Measurements at December 31, 2011 Using
	Carrying Amount		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, 2011
			(dollars in thousands)
Assets:
Cash and short-term investments	$	12,676	$	12,676	$	—	$	—	$	12,676
Interest bearing deposits with banks		11,890		11,890		—		—		11,890
Securities available for sale		236,820		—		236,820		—		236,820
Restricted securities		9,762		—		9,762		—		9,762
Loans, net		710,428		—		741,579		820		742,399
Accrued interest receivable		3,761		—		3,761		—		3,761
Total	$	985,337	$	24,566	$	991,922	$	820	$	1,017,308
Liabilities:
Noninterest-bearing demand deposits	$	103,639	$	—	$	103,639	$	—	$	103,639
Interest-bearing deposits		726,312		—		724,638		—		724,638
Short-term borrowings		4,003		—		4,003		—		4,003
Long-term borrowings		117,500		—		133,414		—		133,414
Trust preferred debt		10,310		—		10,310		—		10,310
Accrued interest payable		1,483		—		1,483		—		1,483
Total	$	963,247	$	—	$	977,487	$	—	$	977,487

The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of the Company’s normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. The Company attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. 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 the Company’s 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 expires after 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 the Company’s 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

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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:

Warrant Value	2009
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.

On February 15, 2012, the Company deferred its fifth consecutive dividend on the preferred stock issued to the Treasury. Deferral of dividends on the preferred stock does not constitute an event of default. Dividends on the preferred stock are, however, cumulative, and the Company has accumulated the dividends in accordance with the terms of the preferred stock and U.S. GAAP and reflected as a portion of the effective dividend on preferred stock on the consolidated statements of income. As of March 31, 2012, the Company had accumulated $1.5 million for dividends on the preferred stock. In addition, if dividends on the preferred stock have not been paid for an aggregate of six quarterly dividend periods or more, whether or not consecutive, the authorized number of directors on the Company’s board will automatically increase by two. In such a case, the Treasury (or the then current holders of the preferred stock) will have the right, voting as a class, to elect two directors to the Company’s board at the next annual meeting (or at a special meeting called for that purpose) and at every subsequent annual meeting until all owed and unpaid dividends on the preferred stock have been paid. In April 2012, the Treasury assigned an observer to attend the Company’s board meetings to determine whether and how to exercise this right should the Company defer its sixth consecutive dividend payment. The Company has notified the Treasury that it is deferring the May 15, 2012 dividend on the preferred stock.

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 March 31, 2012 and December 31, 2011, the interest rate was 3.42% and 3.51%, 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.

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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 March 31, 2012 and December 31, 2011, 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.

The Company received regulatory permission to pay the interest payment on its outstanding Junior Subordinated Notes regularly scheduled for March 2011. 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 Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company 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.

As of March 31, 2012, 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 March 31, 2012 and December 31, 2011 capital ratios of the Company and the Bank with minimum regulatory guidelines is as follows:

As of March 31, 2012	Actual Capital			Minimum Capital Requirements			Minimum To Be Well-Capitalized Under Prompt Corrective Action Provisions
Total Risk-Based Capital Ratio:
Company		12.62	%		8.00	%		N/A
Bank		12.07	%		8.00	%		10.00	%
Tier 1 Risk-Based Capital Ratio:
Company		11.38	%		4.00	%		N/A
Bank		10.83	%		4.00	%		6.00	%
Leverage Ratio:
Company		7.73	%		4.00	%		N/A
Bank		7.35	%		4.00	%		5.00	%

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As of December 31, 2011	Actual Capital			Minimum Capital Requirements			Minimum to be Well-Capitalized Under Prompt Corrective Action Provisions
Total Risk-Based Capital Ratio:
Company		12.47	%		8.00	%		N/A
Bank		11.90	%		8.00	%		10.00	%
Tier 1 Risk-Based Capital Ratio:
Company		11.23	%		4.00	%		N/A
Bank		10.66	%		4.00	%		6.00	%
Leverage Ratio:
Company		7.67	%		4.00	%		N/A
Bank		7.27	%		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 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.

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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.

To date, the Company and the Bank have met all of the deadlines for taking actions required by the FRB and SCC under the terms of the Written Agreement. The Company has established a Regulatory Compliance Oversight Committee (the “RCOC”) to oversee the implementation of certain corrective actions necessary to improve the operations and financial results of the Company in light of findings from a prior regulatory examination and to comply with the Written Agreement. On behalf of the Company’s Board of Directors, the RCOC acts to ensure that the Bank cures the noted deficiencies. The RCOC continues to meet at least once a month as the remediation process progresses. Management believes, as of March 31, 2012, that the Company and Bank are in full or substantial compliance with the terms of the Written Agreement.

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.

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 2011 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 athttp://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.

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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, the payment of dividends or the ability to realize deferred tax assets; (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 investment securities or 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;

• 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.

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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 2011 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.

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 (including, without limitation, rate reductions to below-market rates, payment deferrals and, in some cases, forgiveness of principal or interest) 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) the Company intends to sell the security or (ii) it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost basis. If, however, the Company does not intend to sell the security and it is not more likely than not that the Company will be required to sell the security before recovery, the Company 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

37

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 the Company’s 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. The Company regularly reviews each investment security for other-than-temporary impairment based on criteria that include the extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, the Company’s best estimate of the present value of cash flows expected to be collected from debt securities, the Company’s intention with regard to holding the security to maturity and the likelihood that the Company 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 less costs to sell 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. Major assumptions used in the impairment analysis were discounted cash flows, merger and acquisition transaction values (including as compared to tangible book value), and stock market capitalization. The Company completed the annual goodwill impairment test during the fourth quarter of 2011 and determined there was no impairment to be recognized in 2011. 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 historically maintained 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. The plan was again amended on February 28, 2011, to freeze the plan with no additional contributions for grandfathered participants. Benefits for all participants have remained frozen in the plan since such action was taken. Effective January 1, 2012, the plan was amended and restated as a cash balance plan. Under a cash balance plan, participant benefits are stated as an account balance. An opening account balance was established for each participant based on the lump sum value of his or her accrued benefit as of December 31, 2011 in the original defined benefit pension plan. Each participant’s account will be credited with an “interest” credit each year. The interest rate for each year is determined as the average annual interest rate on the 2 year U.S. Treasury securities for the month of December preceding the plan year. The interest credit for the 2012 plan year will be approximately 0.76%. Plan assets, which consist primarily of mutual funds invested in marketable equity securities and corporate 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

Determining the Company’s effective tax rate requires judgment. 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.

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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, 2011.

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. During the first quarter of 2012, the national and local economies showed limited signs of recovery with the main challenges continuing to be persistent unemployment above historical levels and uneven economic growth. In spite of the protracted low-interest rate environment, during the first three months of 2012 the Company was able to maintain and improve its operating profitability with net operating income increasing by 72% when compared to the same period one year earlier. Even with these improvements, the Company’s earnings remain constrained due to credit quality issues and a lack of loan demand resulting from the challenging economic climate. The Company’s number one initiative has been and will continue to be improvement in asset quality. The Company has been extremely aggressive in the liquidation of troubled credits and that approach is even more evident now with the overall reduction of nonperforming assets by 25% in the first quarter of 2012 through a combination of successful workouts and write-downs of previously identified impaired loans. The Company’s Special Assets Division, which was formed in the second quarter of 2011 and works closely with our Executive Management Asset Quality Committee, has worked tirelessly in formulating workout strategies and conducting assets dispositions. The Company’s allowance for loan losses remains quite healthy producing a ratio of allowance for loan losses to nonperforming loans of 103.21% at March 31, 2012 compared to 79.12% at December 31, 2011. Additionally, the Company was able to reduce its ratio of nonperforming loans to total loans at March 31, 2012 to 3.11%, compared to 4.15% at December 31, 2011. With a modest economic outlook consisting of slow growth, elevated unemployment and low interest rates in the near term the Company continues to believe the primary drivers behind our continued improvement include focusing on asset quality issues, containing noninterest expenses and lowering our cost of funding while maintaining adequate levels of liquidity, reserves for credit losses and capital.

The Company’s results for the three months ended March 31, 2012 continue to be driven by the overall compression of its margins, the elevated levels of the provision for loan losses, FDIC insurance premiums, professional and collection/repossession expenses related to past due loans and nonperforming assets, and losses on the sale and valuation adjustments of other real estate owned. In addition, sales of available for sale securities to adjust the composition of the Company’s investment portfolio during the first quarter of 2012 generated gains of $2.5 million. The provision for loan losses during the first three months of 2012 was up from the same period 2011 levels primarily due to higher net charge-offs. The Company believes the investments it has made since 2010 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.

As we first reported in our Quarterly Report on Form 10-Q for March 31, 2011, the Company has taken actions to preserve capital by deferring 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. On February 15, 2012, the Company deferred its fifth consecutive dividend on the preferred stock issued to the Treasury. As of March 31, 2012, the Company had accumulated $1.5 million for dividends on the preferred stock. If dividends on the preferred stock have not been paid for an aggregate of six quarterly dividend periods or more, whether or not consecutive, the authorized number of directors on the Company’s board will automatically increase by two. In such a case, the Treasury (or the then current holders of the preferred stock) will have the right, voting as a class, to elect two directors to the Company’s board at the next annual meeting (or at a special meeting called for that purpose) and at every subsequent annual meeting until all owed and unpaid dividends on the preferred stock have been paid. In April 2012, the Treasury assigned an observer to attend the Company’s board meetings to determine whether and how to exercise this right should the Company defer its sixth consecutive dividend payment. The Company has notified the Treasury that it is deferring the May 15, 2012 dividend on the preferred stock.

As previously disclosed, on February 17, 2011, the Company and the 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, the 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 its deteriorating asset quality and associated challenges brought on during the economic recession. Among other things, the agreement

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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. To date, the Company and the Bank have met all of the deadlines for taking actions required by the FRB and the SCC under the terms of the Written Agreement. The Company has established the RCOC to oversee the implementation of certain corrective actions necessary to improve the operations and financial results of the Company in light of findings from a prior regulatory examination and to comply with the Written Agreement. On behalf of the Company’s Board of Directors, the RCOC acts to ensure that the Bank cures the noted deficiencies. The RCOC continues to meet at least once a month as the remediation process progresses. Management believes, as of March 31, 2012, that the Company and Bank are in full or substantial compliance with the terms of the Written Agreement. For further information concerning the Written Agreement, refer to Item 1. “Financial Statements,” under the heading “Note 14. Formal Written Agreement.”

For the three months ended March 31, 2012, the following key points were significant factors in our reported results:

• Provision expense for the allowance for loan losses of $2.9 million compared to $2.0 million for the same period in 2011.

• Net charge-offs of $3.9 million to write off uncollectible balances on nonperforming assets.

• Decrease in nonperforming assets by $9.4 million during the first quarter of 2012.

• Gain on the sale of available for sale securities of $2.5 million 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 $358 thousand from the same period in 2011.

• Impairment losses of $615 thousand related to valuation adjustments on other real estate owned.

• Losses of $73 thousand on the sale of other real estate owned.

• Expenses related to FDIC insurance premiums of $588 thousand, compared to $497 thousand for the same period in 2011.

• Expenses related to collection, repossession and other real estate owned of $305 thousand, compared to $453 thousand for the same period in 2011.

For the three months ended March 31, 2012 and 2011, the reported net income of $814 thousand and $474 thousand, respectively equate to the following performance metrics:

• On net income available to common shareholders, Annualized Return on Average Assets (ROA) of 0.17% for the three months ended March 31, 2012 which compares to ROA of 0.04% for the three months ended March 31, 2011.

• On net income available to common shareholders, Annualized Return on Average Shareholders’ Equity (ROE) of 2.44% for the three months ended March 31, 2012 which compares to ROE of 0.60% for the three months ended March 31, 2011.

• On a per share basis, the diluted and basic income per common share (EPS) is $0.07 for the three months ended March 31, 2012 which compares to an EPS of $0.02 for the three months ended March 31, 2011.

Although the Company’s operating results improved for the three months ended March 31, 2012 as compared to the same period of 2011, the Company’s performance still lags behind its strong earnings history. The Company remains unsatisfied with these financial results and continues to focus on credit quality initiatives. The Company believes that these initiatives will ultimately result in an improvement in our asset quality and allow the Company to focus greater resources on growing its franchise and delivering financial results more consistent with its 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 its 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 three months of 2012 should be sufficient to cover its known credit issues under current economic conditions. Any further deterioration of economic conditions or credit quality could possibly require the adjustment of its 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 months ended March 31, 2012 were primarily driven by the overall compression of its margins, as yields on most segments of earning assets decreased, the elevated level of the provision for loan losses, gains generated by sales of

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available for sale securities, FDIC insurance premiums, professional and collection/repossession expenses related to past due loans and nonperforming assets, and losses on the sale and valuation adjustments of 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 indicated periods.

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, decreased $374 thousand or 4.2% to $8.6 million for the three months ended March 31, 2012, down from $9.0 million for the three months ended March 31, 2011. Total average earning assets decreased $18.4 million or 1.8% from $1.02 billion for the three months ended March 31, 2011 to $1.00 billion for the same period of 2012. Total average interest-bearing liabilities decreased $41.6 million or 4.6% from $900.4 million for the three months ended March 31, 2011 to $858.9 million for the same period of 2012. The decrease in net interest income was driven by the change in the mix and pricing of the balance sheet components including the impact of declining loan balances, decreasing yields on the Company’s loan and investment portfolios and the Company’s desire to deploy excess liquidity through the expansion of its investment portfolio. The impact of these changes was partially offset by decreases to the cost of all categories of interest-bearing liabilities other than long-term borrowings. These shifts resulted in a decrease of 11 basis points in our net interest margin from 3.57% for the three months ended March 31, 2011 to 3.46% for the same period of 2012. The percentage of average earning assets to total average assets increased slightly to 93.6% for the three months ended March 31, 2012, as compared to 93.0% for the same period in 2011.

Total interest income, on a fully tax equivalent basis, decreased $1.2 million from $12.9 million for the three months ended March 31, 2011 to $11.7 million for the same period of 2012. This was driven by a decline in the yield on interest earning assets from 5.12% for the three months ended March 31, 2011 to 4.70% for the same period of 2012, and the decrease in average earning assets over the same periods. These decreases were primarily the result of reduced yields on the investment securities and loan portfolios, and a significant decrease in the average loan balances.

Average total loan balances decreased $41.5 million from $771.7 million for the three months ended March 31, 2011 to $730.2 million for the same period of 2012. The yield on loans declined to 5.61% for the first three months of 2012 compared to 5.71% for the same period of 2011. This resulted in a $672 thousand drop in interest income generated by our largest earning asset category from the prior year’s income level to $10.2 million for quarter ended March 31,

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2012 compared to $10.9 million for the same period in 2011. 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 and payment curtailments on outstanding loans.

Average investment security balances increased $10.9 million from $236.4 million for the three months ended March 31, 2011 to $247.2 million for the same period in 2012. While the average investment securities balance increased, the yield on securities declined 99 basis points from 3.44% for the first quarter of 2011 to 2.45% for the first quarter of 2012. The lower yield resulted from investing in lower risk, shorter duration investments which had a corresponding lower yield in the first quarter of 2012. Average taxable investment securities increased $4.1 million from the first quarter of 2011 to the first quarter of 2012, but the yield declined from 2.98% for the three months ended March 31, 2011 to 1.94% for the same period in 2012, a drop of 104 basis points.

Our excess funds are invested in short term investments. Average interest bearing deposits in other banks increased $12.5 million from $11.2 million for the first three months of 2011 to $23.7 million for the same period 2012, while federal funds sold decreased $254 thousand to $181 thousand during the first quarter of 2012 compared to $435 thousand for the same period in 2011. This increase in excess funds was due to the difficulty in the low rate environment of strategically deploying excess liquidity including difficulty funding new loans to creditworthy borrowers and identifying investment securities with suitable rates of return. In total, our excess funds increased $12.3 million from the first quarter of 2011 to the first quarter of 2012.

Average interest bearing deposits decreased $36.7 million from $765.0 million for the first quarter of 2011 to $728.3 million for the first quarter of 2012. 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 partially offset the corresponding decrease in our interest income. Our overall cost of funds decreased $786 thousand, as the total rate for average interest bearing deposits fell from 1.39% for the three months ended March 31, 2011 to 1.00% for the same period in 2012, a drop of 39 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 first quarter of 2011 to the same period in 2012 was in the money market deposits with an increase of $9.5 million in average balance and a corresponding rate decrease of 63 basis points from 1.21% to 0.58% from the first quarter of 2011 to the first quarter of 2012. The aggressively priced checking accounts (or “NOW accounts”) had a decrease of $9.5 million in average balance and a corresponding rate decrease of 38 basis points from 0.95% to 0.57% for the same periods. Average large dollar certificates decreased $18.9 million from $154.2 million during the first quarter of 2011 to $135.3 million during the first quarter of 2012 and the rate dropped 18 basis points from 1.98% in the first three months of 2011 to 1.80% for the same period in 2012. Other certificates average balance declined $23.0 million from $175.3 million during the first quarter of 2011 to $152.4 million for the same period in 2012, with a simultaneous 23 basis point drop in rate from 1.92% in the first three months of 2011 to 1.69% for the same period in 2012.

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Table 1: Average Balance Sheet and Net Interest Margin Analysis

(dollars in thousands)

	Three Months Ended March 31,
	2012								2011
	Average			Income/		Yield/			Average			Income/		Yield/
	Balance			Expense		Rate (1)			Balance			Expense		Rate (1)
Assets:
Securities
Taxable, available for sale	$	193,249		$	934		1.94	%	$	189,101		$	1,388		2.98	%
Restricted securities		9,762			77		3.17	%		10,344			66		2.59	%
Tax exempt, available for sale (2)		44,220			497		4.52	%		36,922			550		6.04	%
Total securities		247,231			1,508		2.45	%		236,367			2,004		3.44	%
Interest bearing deposits in other banks		23,725			14		0.24	%		11,204			6		0.22	%
Federal funds sold		181			—		0.00	%		435			—		0.00	%
Loans, net of unearned income (3)		730,159			10,184		5.61	%		771,684			10,856		5.71	%
Total earning assets		1,001,296			11,706		4.70	%		1,019,690			12,866		5.12	%
Less allowance for loan losses		(24,540	)							(26,535	)
Total non-earning assets		93,231								102,812
Total assets	$	1,069,987							$	1,095,967
Liabilities & Shareholders’ Equity:
Interest-bearing deposits
Checking	$	221,898		$	316		0.57	%	$	231,386		$	542		0.95	%
Savings		83,348			62		0.30	%		78,228			120		0.62	%
Money market savings		135,366			194		0.58	%		125,868			374		1.21	%
Large dollar certificates of deposit (4)		135,289			607		1.80	%		154,176			754		1.98	%
Other certificates of deposit		152,368			640		1.69	%		175,342			831		1.92	%
Total interest-bearing deposits		728,269			1,819		1.00	%		765,000			2,621		1.39	%
Federal funds purchased and repurchase agreements		2,784			7		1.01	%		2,543			8		1.28	%
Short-term borrowings		—			—		0.00	%		5,092			6		0.48	%
Long-term borrowings		117,500			1,187		4.06	%		117,500			1,174		4.05	%
Trust preferred debt		10,310			91		3.55	%		10,310			81		3.19	%
Total interest-bearing liabilities		858,863			3,104		1.45	%		900,445			3,890		1.75	%
Noninterest-bearing liabilities
Demand deposits		108,176								99,448
Other liabilities		6,442								4,432
Total liabilities		973,481								1,004,325
Shareholders’ equity		96,506								91,642
Total liabilities and shareholders’ equity	$	1,069,987							$	1,095,967
Net interest income (2)				$	8,602							$	8,976
Interest rate spread (2)(5)							3.25	%							3.37	%
Interest expense as a percent of average earning assets							1.25	%							1.55	%
Net interest margin (2)(6)							3.46	%							3.57	%

Notes:

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

(2) Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 34%, with a $152 adjustment for 2012 and a $168 adjustment in 2011.

(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 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, calculated on a fully taxable basis, 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 months ended March 31, 2012 and 2011:

Table 2: Noninterest Income

	Three Months Ended March 31,
(dollars in thousands)	2012		2011
Service charges and fees on deposit accounts	$	769	$	935
Debit/credit card fees		319		324
Gain on sale of available for sale securities, net		2,531		193
Gain on sale of bank premises and equipment		—		256
Other operating income		288		383
Total noninterest income	$	3,907	$	2,091

Noninterest income for the three months ended March 31, 2012 was $3.9 million, an increase of $1.8 million or 86.8% over the noninterest income of $2.1 million for 2011. The increase in this component was caused by the following events:

• Sales of available for sale securities generated gains of $2.5 million in the first quarter of 2012, an increase of $2.3 million or 1,211.4% over gains of $193 thousand in the first quarter of 2011. During the first quarter of 2012 the Company strategically adjusted the composition of its investment portfolio by reducing its holdings of tax-exempt securities in an effort to increase the Company’s sources of taxable income. To implement this strategy the Company sold securities issued by state and political subdivisions during the first quarter of 2012. The Company will strategically evaluate opportunities to further adjust the composition of its investment portfolio through the balance of 2012;

• Service charges and fees on deposit accounts were $769 thousand in the first quarter of 2012, a decrease of $166 thousand or 17.8% over the $935 thousand in the first quarter of 2011, and were driven by a 23.6% decrease in non-sufficient funds (or “NSF”) fees;

• The sale of our former Aylett branch office during the first quarter of 2011 generated a gain of $256 thousand, while no such gains were generated during the first quarter of 2012; and

• Other operating income was $288 thousand in the first quarter of 2012, a decrease of $95 thousand or 24.8% over the $383 thousand in the first quarter of 2011, and was driven by a 33.7% decrease in title service income, a 24.4% decrease in investment services income, a 100% decrease in mortgage services income, a 100% decrease in OREO rental income and a 39.8% increase in write downs of our investments in community and housing development funds.

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.

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The following table depicts noninterest expense for the three months ended March 31, 2012 and 2011:

Table 3: Noninterest Expense

	Three Months Ended March 31,
(dollars in thousands)	2012		2011
Salaries and employee benefits	$	3,900	$	4,090
Occupancy and equipment expenses		1,271		1,213
Telephone		307		265
FDIC expense		588		497
Consultant fees		174		274
Collection, repossession and other real estate owned		305		453
Marketing and advertising		242		211
Loss on sale of other real estate owned		73		247
Impairment losses on other real estate owned		615		152
Other operating expenses		1,076		1,098
Total noninterest expenses	$	8,551	$	8,500

Noninterest expense for the three months ended March 31, 2012 was $8.6 million, an increase of $51 thousand or 0.6% over the noninterest expense of $8.5 million for the same period of 2011. The increase in this component was caused by the following events:

• Telephone expenses were $307 thousand for the first three months of 2012, an increase of $42 thousand or 15.8% over the $265 thousand for the same period of 2011. This increase was primarily driven by an increase in data circuit expenses;

• FDIC expense, the Company’s cost for deposit insurance, was $588 thousand for the first three months of 2012, an increase of $91 thousand or 18.3% over the $497 thousand for the same period of 2011;

• Consultant fees were $174 thousand for the first quarter of 2012, a decrease of $100 thousand or 36.5% over the $274 thousand for the first quarter of 2011. The decrease in these expenses was primarily due to lower costs in addressing weaknesses related to the Written Agreement;

• Collection, repossession and other real estate owned expenses were $305 thousand for the first quarter of 2012, a decrease of $148 thousand or 32.7% over the $453 thousand for the first quarter of 2011. The decrease in these expenses was primarily due to the overall decrease in the carrying balance of OREO;

• Marketing and advertising expenses were $242 thousand for the first quarter of 2012, an increase of $31 thousand or 14.7% over the $211 thousand for the first quarter of 2011. The increase in these expenses was primarily due to the timing of TV, newspaper and radio ads;

• Losses on the sale of other real estate owned were $73 thousand in the first quarter of 2012, a decrease of $174 thousand over the losses of $247 thousand in the first quarter of 2011; and

• Impairment losses related to valuation adjustments on other real estate owned were $615 thousand in the first quarter of 2012, an increase of $463 thousand over the losses of $152 thousand for the first three months of 2011, as real estate values in the Company’s market continue to remain depressed in the challenging economic environment and the Company continues to aggressively address other real estate owned as part of its overall credit quality initiative.

Income Taxes

The Company recorded income tax expense of $92 thousand for the three months ended March 31, 2012, compared to an income tax benefit of $75 thousand for the same period in 2011, reflecting a $167 thousand increase in income tax expense. The increase in income tax expense from the first three months of 2011 to the same period in 2012 was primarily the result of the Company’s pretax income increasing by approximately $507 thousand.

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

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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 Company assesses the appropriateness of the allowance for loan losses through management’s ongoing review and grading of the loan portfolio into criticized categories (defined as specific loans warranting either specific allocation, or a classified status of substandard, doubtful or loss), as well as an allocation methodology. 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

• 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.

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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 in light of the credit quality and anticipated risk of loss in the loan portfolio. 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 through increased provisions 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 presents the Company’s loan loss experience for the periods indicated:

Table 4: Allowance for Loan Losses

	Three Months Ended March 31,
(dollars in thousands)	2012			2011
Average loans outstanding*	$	730,159		$	771,684
Allowance for loan losses, January 1	$	24,102		$	25,288
Charge-offs:
Commercial, industrial and agricultural		(228	)		(214	)
Real estate - one to four family residential:
Closed end first and seconds		(350	)		(334	)
Home equity lines		(322	)		—
Real estate - construction:
One to four family residential		(4	)		(152	)
Other construction, land development and other land		(1,520	)		(213	)
Real estate - non-farm, non-residential:
Owner occupied		(508	)		(79	)
Non-owner occupied		(1,135	)		(50	)
Consumer		(224	)		(151	)
Other		(24	)		—
Total loans charged-off		(4,315	)		(1,193	)
Recoveries:
Commercial, industrial and agricultural		379			65
Real estate - one to four family residential:
Closed end first and seconds		5			129
Real estate - construction:
One to four family residential		17			1
Other construction, land development and other land		—			1
Real estate - non-farm, non-residential:
Owner occupied		1			—
Consumer		39			37
Other		13			—
Total recoveries		454			233
Net charge-offs		(3,861	)		(960	)
Provision for loan losses		2,900			2,000
Allowance for loan losses, March 31	$	23,141		$	26,328
Ratios:
Ratio of allowance for loan losses to total loans outstanding, end of period		3.21	%		3.44	%
Ratio of net charge-offs to average loans outstanding during the period		2.13	%		0.50	%

* Net of unearned income and includes nonaccrual loans.

As a result of the challenges continuing to face the economy and the real estate and financial markets today, the Company made provisions for loan losses of $2.9 million for the first three months of 2012 compared to $2.0 million for the same period of 2011. Net charge-offs for the three months ended March 31, 2012 were $3.9 million compared to $960 thousand for the same three month period in 2011. This represents 2.13% of average loans outstanding for the three months ending March 31, 2012 and 0.50% of average loans outstanding for the same period in 2011. The contribution to the provision in the first quarters of 2012 and 2011 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. Net charge-offs increased $2.9 million, or 302.2%, from the three months ended March 31, 2011 to the same period in 2012 as the Company aggressively focused on credit quality initiatives to improve its asset quality and resolve nonperforming assets.

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The allowance for loan losses at March 31, 2012 was $23.1 million, compared with $24.1 million at December 31, 2011. This represented 3.21% of period end loans at March 31, 2012 compared with 3.28% of year end loans at December 31, 2011.

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 March 31,					At December 31,
	2012					2011
(dollars in thousands)	Allowance		Percent			Allowance		Percent
Commercial, industrial and agricultural	$	4,244		7.36	%	$	4,389		7.76	%
Real estate - one to four family residential:
Closed end first and seconds		2,726		34.82	%		2,856		34.51	%
Home equity lines		384		14.32	%		278		13.93	%
Real estate - multifamily residential		37		2.13	%		29		1.77	%
Real estate - construction:
One to four family residential		449		2.98	%		382		2.89	%
Other construction, land development and other land		4,496		5.08	%		6,861		5.75	%
Real estate - farmland		12		0.77	%		15		0.80	%
Real estate - non-farm, non-residential:
Owner occupied		4,846		18.09	%		4,831		18.42	%
Non-owner occupied		4,736		10.75	%		3,172		10.11	%
Consumer		621		3.49	%		776		3.86	%
Other		515		0.21	%		513		0.20	%
Total allowance for balance sheet loans		23,066		100.00	%		24,102		100.00	%
Unallocated		75					—
Total allowance for loan losses	$	23,141				$	24,102

(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 March 31, 2012 and December 31, 2011 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. As of March 31, 2012, management is not aware of any potential problem loans to place immediately on nonaccrual status.

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 is 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,

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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.

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 less costs to sell 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 three months ended March 31, 2012 and the year ended December 31, 2011:

Table 6: Nonperforming Assets

(dollars in thousands)	March 31, 2012			December 31, 2011
Nonaccrual loans*	$	22,012		$	30,293
Loans past due 90 days and accruing interest		409			168
Total nonperforming loans		22,421			30,461
Other real estate owned		5,950			7,326
Total nonperforming assets	$	28,371		$	37,787
Nonperforming assets to total loans and other real estate owned		3.90	%		5.09	%
Allowance for loan losses to nonaccrual loans		105.13	%		79.56	%
Net charge-offs to average loans for the period		2.13	%		1.32	%
Allowance for loan losses to period end loans		3.21	%		3.28	%

* Includes $9.7 million and $13.4 million in nonaccrual TDRs at March 31, 2012 and December 31, 2011, respectively.

The following table presents the change in the OREO balance for the three months ended March 31, 2012 and 2011:

Table 7: OREO Changes

	March 31,
(dollars in thousands)	2012			2011
Balance at the beginning of period, gross	$	8,729		$	12,545
Transfers from loans		231			1,900
Capitalized costs		—			150
Sales proceeds		(919	)		(2,028	)
Previously recognized impairment losses on disposition		(36	)		(144	)
(Loss) on disposition		(73	)		(247	)
Balance at the end of period, gross		7,932			12,176
Less valuation allowance		(1,982	)		(936	)
Balance at the end of period, net	$	5,950		$	11,240

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The following table presents the change in the valuation allowance for OREO for the three months ended March 31, 2012 and 2011:

Table 8: OREO Valuation Allowance Changes

	March 31,
(dollars in thousands)	2012			2011
Balance at the beginning of period	$	1,403		$	928
Valuation allowance		615			152
Charge-offs		(36	)		(144	)
Recoveries		—			—
Balance at the end of period	$	1,982		$	936

Nonperforming assets were $28.4 million or 3.90% of total loans and other real estate owned at March 31, 2012 compared to $37.8 million or 5.09% at December 31, 2011. Although nonperforming assets began to trend downward during 2011 and decreased by $9.4 million during the first three months of 2012, this number increased from 2007 through 2010 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 economic recovery and continuing asset quality issues in the Company’s loan portfolio have prompted the Company to maintain the heightened level of the allowance for loan losses as compared to historical levels, which is 105.13% of nonaccrual loans at March 31, 2012, compared to 79.56% at December 31, 2011. Nonperforming loans decreased $8.0 million or 26.4% during the three months ended March 31, 2012 to $22.4 million.

Nonaccrual loans were $22.0 million at March 31, 2012, a decrease of $8.3 million or 27.3% from $30.3 million at December 31, 2011. Of the current $22.0 million in nonaccrual loans, $19.9 million or 90.5% is secured by real estate in our market area. Of these real estate secured loans, $9.0 million are residential real estate, $2.5 million are real estate construction, and $8.4 million are commercial properties.

Loans past due 90 days and still accruing interest were $409 thousand at March 31, 2012, an increase of $241 thousand or 143.5% from $168 thousand at December 31, 2011. Of the current $409 thousand in loans past due 90 days and still accruing interest, $327 thousand or 80.0% is secured by real estate in our market area. Of these real estate secured loans, $128 thousand are residential real estate and $199 thousand is farmland.

Other real estate owned, net of valuation allowance at March 31, 2012 was $5.9 million, a decrease of $1.4 million or 18.8% from $7.3 million at December 31, 2011. The balance at March 31, 2012 was comprised of 17 properties of which $682 thousand are residential real estate, $4.7 million are real estate construction and $597 thousand are commercial properties. During the three months ended March 31, 2012, new foreclosures included two properties totaling $231 thousand transferred from loans. Sales of four other real estate owned properties for the three months ended March 31, 2012 resulted in a net loss of $73 thousand. At March 31, 2012, there were three properties totaling $1.0 million under contract for sale. Subsequent to March 31, 2012, one of the properties not under contract for sale at March 31, 2012 sold resulting in a loss of approximately $8 thousand. 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 $615 thousand in its consolidated statement of income for the three months ended March 31, 2012, due to valuation adjustments on other real estate owned properties as compared to $152 thousand for the same period in 2011. Asset quality continues to be a top priority for the Company. The Company continues to allocate significant resources to the expedient disposition and collection of nonperforming and other lower quality assets, as demonstrated by the $5.3 million, or 47.1%, decrease in other real estate owned from March 31, 2011 to March 31, 2012.

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 made in an attempt to avoid foreclosure and 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 stated interest rate, payment extensions, forgiveness of principal, forbearance or other actions.

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A tabular presentation(s) of loans individually evaluated for impairment by class of loans at March 31, 2012 and December 31, 2011 can be found under Item 1. “Financial Statements,” under the heading “Note 3. Loan Portfolio.”

At March 31, 2012, the balance of impaired loans was $51.2 million, for which there were specific valuation allowances of $6.6 million. At December 31, 2011, the balance of impaired loans was $45.5 million, for which there were specific valuation allowances of $6.4 million. The average balance of impaired loans was $52.6 million for the three months ended March 31, 2012, compared to $50.3 million for the year ended December 31, 2011. 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 March 31, 2012 and December 31, 2011:

Table 9: Troubled Debt Restructurings (TDRs)

	March 31,		December 31,
(dollars in thousands)	2012		2011
Performing TDRs	$	3,997	$	5,517
Nonaccrual TDRs*		9,702		13,378
Total TDRs	$	13,699	$	18,895

* 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 March 31, 2012, the Company had total assets of $1.08 billion compared to $1.06 billion at December 31, 2011. The slight increase was principally the result of increases in interest bearing deposits with banks, securities available for sale and deposits, and was partially offset by decreases in loans and borrowings as detailed in the following schedule.

Table 10: Balance Sheet Changes

(dollars in thousands)	March 31, 2012		December 31, 2011		Change $			Change %
Total assets	$	1,075,794	$	1,063,034	$	12,760			1.2	%
Securities available for sale		254,744		236,820		17,924			7.6	%
Total loans		721,152		734,530		(13,378	)		-1.8	%
Deposits		843,739		829,951		13,788			1.7	%
Borrowings		129,954		131,813		(1,859	)		-1.4	%

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

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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 $254.7 million at March 31, 2012, reflecting an increase of $17.9 million or 7.6% from $236.8 million at December 31, 2011. The valuation allowance for the available for sale portfolio had an unrealized gain, net of tax expense, of $1.1 million at March 31, 2012 compared with an unrealized gain, net of tax expense, of $1.5 million at December 31, 2011.

The increase in the investment portfolio during the first three months of 2012 was the result of our continued effort to restructure its composition, and to strategically deploy excess cash into investment securities as investment opportunities are available. In the first three months of 2012, management continued to allocate a greater portion of the investment portfolio to Agency mortgage-backed and Agency CMO securities which provide frequent, stable cash flows as well as a low risk weighting for regulatory capital adequacy. Additionally, in an effort to increase the Company’s sources of taxable income, management began to reduce the Company’s holdings of tax-exempt investment securities issued by state and political subdivisions, and deployed the proceeds into taxable investment securities issued by state and political subdivisions as well as Agency mortgage-backed and Agency CMO securities. 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 March 31, 2012 and December 31, 2011, our investment portfolio was 23.7% and 22.3% 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 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 $721.1 million at March 31, 2012, a decrease of $13.4 million or 1.8% from $734.5 million at December 31, 2011. 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 (“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 $843.7 million as of March 31, 2012, an increase of 1.7% or $13.7 million from $830.0 million as of December 31, 2011. The following table sets forth the composition of the Company’s deposits at the dates indicated.

Table 11: Deposits

	March 31,		December 31,
(dollars in thousands)	2012		2011		Change $			Change %
Noninterest-bearing deposits	$	111,887	$	103,639	$	8,248			8.0	%
Interest-bearing deposits:
Demand deposits	$	230,280	$	222,622	$	7,658			3.4	%
Money market deposits		134,235		131,159		3,076			2.3	%
Savings deposits		83,832		82,562		1,270			1.5	%
Time deposits		283,505		289,969		(6,464	)		-2.2	%
Total interest-bearing deposits	$	731,852	$	726,312	$	5,540			0.8	%

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During the first three months of 2012, the Company continued to see a shift from interest-bearing time deposits to lower cost non-maturity interest-bearing and noninterest-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 increase in total deposits, which occurred in all deposit products with the exception of time deposits, during the three months ended March 31, 2012, is primarily the result of the weak economic recovery. The Company has observed its customers, including counties and municipalities, maintaining significant liquid cash reserves in order to deleverage and prevent operating shortfalls. 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 other investment vehicles. At March 31, 2012 and December 31, 2011, the Company had $31.4 million and $31.5 million in broker certificates of deposits.

Borrowings

The Company’s ability to borrow funds through non-deposit sources provides additional flexibility in meeting the liquidity needs of customers while enhancing its cost of funds structure. Total borrowings were $130.0 million at March 31, 2012, down $1.8 million or 1.4% from $131.8 million at December 31, 2011. The decrease in borrowings was due to a decrease in customer repurchase agreements during the first three months of 2012.

Off-Balance Sheet Arrangements

As of March 31, 2012, 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, 2011.

Contractual Obligations

As of March 31, 2012, 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, 2011.

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 $33.5 million as of March 31, 2012 compared to $24.6 million as of December 31, 2011. At March 31, 2012, cash, cash equivalents, federal funds sold and unpledged securities available for sale were $193.9 million or 18.0% of total assets, compared to $145.0 million or 13.6% of total assets at December 31, 2011.

As disclosed in the Company’s consolidated statement of cash flows, net cash provided by operating activities was $4.4 million, net cash used in investing activities was $7.4 million and net cash provided by financing activities was $11.9 million for the three months ended March 31, 2012. Combined, this contributed to an $8.9 million increase in liquidity for the three months ended March 31, 2012.

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 from the FHLB up to $178.0 million. 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.

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Certificates of deposit of $100,000 or more, maturing in one year or less, totaled $68.8 million at March 31, 2012. Certificates of deposit of $100,000 or more, maturing in more than one year, totaled $69.8 million at March 31, 2012.

As of March 31, 2012, the Company was not aware of any trends, events or uncertainties that have or are reasonably likely to have a material impact on our liquidity. As of March 31, 2012, the Company has no material commitments or long-term debt for capital expenditures.

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 March 31, 2012, the Bank meets all capital adequacy requirements to which it is subject.

As of March 31, 2012, 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 March 31, 2012 and December 31, 2011 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 months ended March 31, 2012 and 2011, no cash dividends have been paid from the Bank to the Company.

For the three months ended March 31, 2012 and 2011, the Company paid out no cash dividends to common shareholders.

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 were limitations on the Company’s ability to pay quarterly common stock cash dividends in excess of $0.16 per share.

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On February 15, 2012, the Company deferred its fifth consecutive dividend on the preferred stock issued to the Treasury. Deferral of dividends on the preferred stock does not constitute an event of default. Dividends on the preferred stock are, however, cumulative, and the Company has accumulated the dividends in accordance with the terms of the preferred stock and U.S. GAAP. These accumulated dividends are reflected as a portion of the effective dividend on preferred stock on the consolidated statements of income. As of March 31, 2012, the Company had accumulated $1.5 million for dividends on the preferred stock. In addition, if dividends on the preferred stock have not been paid for an aggregate of six quarterly dividend periods or more, whether or not consecutive, the authorized number of directors on the Company’s board will automatically increase by two. In such a case, the Treasury (or the then current holders of the preferred stock) will have the right, voting as a class, to elect two directors to the Company’s board at the next annual meeting (or at a special meeting called for that purpose) and at every subsequent annual meeting until all owed and unpaid dividends on the preferred stock have been paid. In April 2012, the Treasury assigned an observer to attend the Company’s board meetings, in part to determine whether and how to exercise this right should the Company defer its sixth consecutive dividend payment. The Company has notified the Treasury that it is deferring the May 15, 2012 dividend on the preferred stock.

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, 2011.

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 March 31, 2012 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 first quarter ended March 31, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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 March 31, 2012 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.

Item 1A. Risk Factors

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, 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.

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 months ended March 31, 2012, the Company did not repurchase any of its common stock.

In connection with the Company’s sale to the Treasury of its Series A 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 Series A Preferred Stock. Prior to January 9, 2012, the Company generally could 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. Mine Safety Disclosures

None.

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.

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31.2	Rule 13a-14(a) Certification of Chief Financial Officer.
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 March 31, 2012, formatted in XBRL (Extensible Business Reporting Language), furnished herewith: (i) Consolidated Balance Sheets (unaudited), (ii) Consolidated Statements of Income (unaudited), (iii) Consolidated Statements of Comprehensive Income (unaudited), (iv) Consolidated Statements of Shareholders’ Equity (unaudited), (v) Consolidated Statements of Cash Flows (unaudited), and (vi) 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: May 15, 2012	/s/ Joe A. Shearin
	Joe A. Shearin
	President and Chief Executive Officer
	(Principal Executive Officer)
Date: May 15, 2012	/s/ J. Adam Sothen
	J. Adam Sothen
	Executive Vice President and Chief Financial Officer
	(Principal Financial and Accounting Officer)

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