##### Table of Contents





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, 2011

or



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

For the transition period from  to

Commission File Number: 000-23565





EASTERN VIRGINIA BANKSHARES, INC.

(Exact name of registrant as specified in its charter)







|                                                              |  |                                    
|------------------------------------------------------------- |  | -----------------------------------
|VIRGINIA                                                      |  | 54-1866052                         
|(State or other jurisdiction ofincorporation or organization) |  | (I.R.S. EmployerIdentification No.)
|                                                              | 
|330 Hospital Road, Tappahannock, Virginia                     |  | 22560                              
|(Address of principal executive offices)                      |  | (Zip Code)                         

(804)
443-8460

(Registrants telephone number, including area code)

N/A

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





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days.    Yes  x    No   ̈

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈     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, 2011 was 5,998,237.









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##### Table of Contents

EASTERN VIRGINIA BANKSHARES, INC.

INDEX



|         |  |                                                                                                                           |  |  |    | 
|-------- |  | ------------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I.  |  | FINANCIAL INFORMATION                                                                                                     |  |  |    | 
|         |  |                                                                                                                          
|Item 1.  |  | Financial Statements                                                                                                      |  |  |    | 
|         |  |                                                                                                                          
|         |  | Consolidated Balance Sheets as of March 31, 2011 (unaudited) and December 31, 2010                                        |  |  | 2  | 
|         |  |                                                                                                                          
|         |  | Consolidated Statements of Income (unaudited) for the Three Months Ended March 31, 2011 and March 31,
2010                |  |  | 3  | 
|         |  |                                                                                                                          
|         |  | Consolidated Statements of Shareholders Equity (unaudited) for the Three Months Ended March 31, 2011 and
 March 31, 2010 |  |  | 4  | 
|         |  |                                                                                                                          
|         |  | Consolidated Statements of Cash Flows (unaudited) for the Three Months Ended March 31, 2011 and March 31, 2010            |  |  | 5  | 
|         |  |                                                                                                                          
|         |  | Notes to the Interim Consolidated Financial Statements (unaudited)                                                        |  |  | 6  | 
|         |  |                                                                                                                          
|Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of
Operations                                     |  |  | 31 | 
|         |  |                                                                                                                          
|Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                                |  |  | 52 | 
|         |  |                                                                                                                          
|Item 4.  |  | Controls and Procedures                                                                                                   |  |  | 52 | 
|         |  |                                                                                                                          
|PART II. |  | OTHER INFORMATION                                                                                                         |  |  |    | 
|         |  |                                                                                                                          
|Item 1.  |  | Legal Proceedings                                                                                                         |  |  | 52 | 
|         |  |                                                                                                                          
|Item 1A. |  | Risk Factors                                                                                                              |  |  | 52 | 
|         |  |                                                                                                                          
|Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                               |  |  | 53 | 
|         |  |                                                                                                                          
|Item 3.  |  | Defaults Upon Senior Securities                                                                                           |  |  | 53 | 
|         |  |                                                                                                                          
|Item 4.  |  | (Removed and Reserved)                                                                                                    |  |  | 53 | 
|         |  |                                                                                                                          
|Item 5.  |  | Other Information                                                                                                         |  |  | 53 | 
|         |  |                                                                                                                          
|Item 6.  |  | Exhibits                                                                                                                  |  |  | 53 | 
|         |  |                                                                                                                          
|         |  | SIGNATURES                                                                                                                |  |  | 54 | 



1



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##### Table of Contents

PART I - FINANCIAL INFORMATION



|Item 1. | Financial Statements
|------- | --------------------

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Balance Sheets

(dollars in thousands, except per share amounts)



|                                                                                                                                                                              |  |               |           |   |                  |   |           |  
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                              |  | March 31,2011 |           |   | December 31,2010 |  
|                                                                                                                                                                              |  | (unaudited)   |           |   |                  |  
|                                                                                                                                                                              |  |              
|Assets:                                                                                                                                                                       |  |               |           |   |                  |   |           |  
|Cash and due from banks                                                                                                                                                       |  | $             | 11,894    |   |                  | $ | 11,038    |  
|Interest bearing deposits with banks                                                                                                                                          |  |               | 9,957     |   |                  |   | 10,298    |  
|Federal funds sold                                                                                                                                                            |  |               | 961       |   |                  |   | 1,495     |  
|Securities available for sale, at fair value                                                                                                                                  |  |               | 219,567   |   |                  |   | 246,120   |  
|Restricted securities, at cost                                                                                                                                                |  |               | 10,344    |   |                  |   | 10,344    |  
|Loans, net of allowance for loan losses of $26,328 and $25,288, respectively                                                                                                  |  |               | 739,759   |   |                  |   | 749,486   |  
|Deferred income taxes, net                                                                                                                                                    |  |               | 12,493    |   |                  |   | 12,600    |  
|Bank premises and equipment, net                                                                                                                                              |  |               | 21,471    |   |                  |   | 20,757    |  
|Accrued interest receivable                                                                                                                                                   |  |               | 4,232     |   |                  |   | 4,281     |  
|Other real estate owned, net of valuation allowance of $936 and $928, respectively                                                                                            |  |               | 11,240    |   |                  |   | 11,617    |  
|Goodwill                                                                                                                                                                      |  |               | 15,970    |   |                  |   | 15,970    |  
|Other assets                                                                                                                                                                  |  |               | 24,233    |   |                  |   | 25,324    |  
|                                                                                                                                                                              |  |               |           |   |                  |   |           |  
|Total assets                                                                                                                                                                  |  | $             | 1,082,121 |   |                  | $ | 1,119,330 |  
|                                                                                                                                                                              |  |               |           |   |                  |   |           |  
|                                                                                                                                                                              |  |              
|Liabilities and Shareholders Equity:                                                                                                                                         |  |               |           |   |                  |   |           |  
|Liabilities                                                                                                                                                                   |  |               |           |   |                  |   |           |  
|Noninterest-bearing demand accounts                                                                                                                                           |  | $             | 99,036    |   |                  | $ | 97,122    |  
|Interest-bearing deposits                                                                                                                                                     |  |               | 750,493   |   |                  |   | 771,024   |  
|                                                                                                                                                                              |  |               |           |   |                  |   |           |  
|Total deposits                                                                                                                                                                |  |               | 849,529   |   |                  |   | 868,146   |  
|Federal funds purchased and repurchase agreements                                                                                                                             |  |               | 2,478     |   |                  |   | 2,464     |  
|Short-term borrowings                                                                                                                                                         |  |               | 5,500     |   |                  |   | 25,000    |  
|Long-term borrowings                                                                                                                                                          |  |               | 117,500   |   |                  |   | 117,500   |  
|Trust preferred debt                                                                                                                                                          |  |               | 10,310    |   |                  |   | 10,310    |  
|Accrued interest payable                                                                                                                                                      |  |               | 1,389     |   |                  |   | 1,451     |  
|Other liabilities                                                                                                                                                             |  |               | 2,576     |   |                  |   | 3,041     |  
|                                                                                                                                                                              |  |               |           |   |                  |   |           |  
|Total liabilities                                                                                                                                                             |  |               | 989,282   |   |                  |   | 1,027,912 |  
|                                                                                                                                                                              |  |               |           |   |                  |   |           |  
|                                                                                                                                                                              |  |              
|Shareholders Equity                                                                                                                                                          |  |               |           |   |                  |   |           |  
|Preferred stock, $2 par value per share, authorized 10,000,000, issued and outstanding: Series A; $1,000 stated value 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 5,998,237 and 5,993,577 including 16,500
nonvested shares in 2011 and 2010, respectively  |  |               | 11,964    |   |                  |   | 11,954    |  
|Surplus                                                                                                                                                                       |  |               | 19,346    |   |                  |   | 19,302    |  
|Retained earnings                                                                                                                                                             |  |               | 38,284    |   |                  |   | 37,884    |  
|Warrant                                                                                                                                                                       |  |               | 1,481     |   |                  |   | 1,481     |  
|Discount on preferred stock                                                                                                                                                   |  |               | (826      | ) |                  |   | (900      | )
|Accumulated other comprehensive (loss), net                                                                                                                                   |  |               | (1,410    | ) |                  |   | (2,303    | )
|                                                                                                                                                                              |  |               |           |   |                  |   |           |  
|Total shareholders equity                                                                                                                                                    |  |               | 92,839    |   |                  |   | 91,418    |  
|                                                                                                                                                                              |  |               |           |   |                  |   |           |  
|                                                                                                                                                                              |  |              
|Total liabilities and shareholders equity                                                                                                                                    |  | $             | 1,082,121 |   |                  | $ | 1,119,330 |  
|                                                                                                                                                                              |  |               |           |   |                  |   |           |  

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



2



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##### Table of Contents

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Income (unaudited)

(dollars in thousands, except per share amounts)



|                                                     |  |                             |        |   |      |   |        |  
|---------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------ | -
|                                                     |  | Three Months EndedMarch 31, |       
|                                                     |  | 2011                        |        |   | 2010 |  
|Interest and Dividend Income                         |  |                             |        |   |      |   |        |  
|Loans and fees on loans                              |  | $                           | 10,856 |   |      | $ | 12,199 |  
|Interest on investments:                             |  |                             |        |   |      |   |        |  
|Taxable interest income                              |  |                             | 1,388  |   |      |   | 973    |  
|Tax exempt interest income                           |  |                             | 382    |   |      |   | 444    |  
|Dividends                                            |  |                             | 66     |   |      |   | 5      |  
|Interest on deposits with banks                      |  |                             | 6      |   |      |   | 39     |  
|                                                     |  |                             |        |   |      |   |        |  
|Total interest and dividend income                   |  |                             | 12,698 |   |      |   | 13,660 |  
|                                                     |  |                             |        |   |      |   |        |  
|                                                     |  |                            
|Interest Expense                                     |  |                             |        |   |      |   |        |  
|Deposits                                             |  |                             | 2,621  |   |      |   | 3,244  |  
|Federal funds purchased and repurchase agreements    |  |                             | 8      |   |      |   | 19     |  
|Short-term borrowings                                |  |                             | 6      |   |      |   |       |  
|Long-term borrowings                                 |  |                             | 1,174  |   |      |   | 1,306  |  
|Trust preferred debt                                 |  |                             | 81     |   |      |   | 81     |  
|                                                     |  |                             |        |   |      |   |        |  
|Total interest expense                               |  |                             | 3,890  |   |      |   | 4,650  |  
|                                                     |  |                             |        |   |      |   |        |  
|Net interest income                                  |  |                             | 8,808  |   |      |   | 9,010  |  
|Provision for Loan Losses                            |  |                             | 2,000  |   |      |   | 1,850  |  
|                                                     |  |                             |        |   |      |   |        |  
|Net interest income after provision for loan losses  |  |                             | 6,808  |   |      |   | 7,160  |  
|                                                     |  |                             |        |   |      |   |        |  
|Noninterest Income                                   |  |                             |        |   |      |   |        |  
|Service charges and fees on deposit accounts         |  |                             | 935    |   |      |   | 862    |  
|Debit/credit card fees                               |  |                             | 324    |   |      |   | 295    |  
|Gain on sale of available for sale securities, net   |  |                             | 193    |   |      |   | 13     |  
|Gain on sale of bank premises and equipment          |  |                             | 256    |   |      |   |       |  
|Gain on bank owned life insurance                    |  |                             |       |   |      |   | 604    |  
|Other operating income                               |  |                             | 383    |   |      |   | 319    |  
|                                                     |  |                             |        |   |      |   |        |  
|Total noninterest income                             |  |                             | 2,091  |   |      |   | 2,093  |  
|                                                     |  |                             |        |   |      |   |        |  
|Noninterest Expenses                                 |  |                             |        |   |      |   |        |  
|Salaries and employee benefits                       |  |                             | 4,090  |   |      |   | 3,990  |  
|Occupancy and equipment expenses                     |  |                             | 1,213  |   |      |   | 1,278  |  
|Telephone                                            |  |                             | 265    |   |      |   | 274    |  
|FDIC expense                                         |  |                             | 497    |   |      |   | 468    |  
|Consultant fees                                      |  |                             | 274    |   |      |   | 143    |  
|Collection, repossession and other real estate owned |  |                             | 453    |   |      |   | 348    |  
|Marketing and advertising                            |  |                             | 211    |   |      |   | 192    |  
|Loss (gain) on sale of other real estate owned       |  |                             | 247    |   |      |   | (31    | )
|Impairment losses on other real estate owned         |  |                             | 152    |   |      |   |       |  
|Other operating expenses                             |  |                             | 1,098  |   |      |   | 1,192  |  
|                                                     |  |                             |        |   |      |   |        |  
|Total noninterest expenses                           |  |                             | 8,500  |   |      |   | 7,854  |  
|                                                     |  |                             |        |   |      |   |        |  
|Income before income taxes                           |  |                             | 399    |   |      |   | 1,399  |  
|Income Tax Expense (Benefit)                         |  |                             | (75    | ) |      |   | 65     |  
|                                                     |  |                             |        |   |      |   |        |  
|Net Income                                           |  | $                           | 474    |   |      | $ | 1,334  |  
|Effective dividend on preferred stock                |  |                             | 374    |   |      |   | 372    |  
|                                                     |  |                             |        |   |      |   |        |  
|                                                     |  |                            
|Net income available to common shareholders          |  | $                           | 100    |   |      | $ | 962    |  
|                                                     |  |                             |        |   |      |   |        |  
|Income per common share: basic                       |  | $                           | 0.02   |   |      | $ | 0.16   |  
|diluted                                              |  | $                           | 0.02   |   |      | $ | 0.16   |  
|                                                     |  |                            
|Dividends per share, common                          |  | $                           |       |   |      | $ | 0.05   |  

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



3



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##### Table of Contents

Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Shareholders Equity (unaudited)

For the Three Months Ended March 31, 2011 and 2010

(dollars in thousands, except
per share amounts)



|                                                                      |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  |   |       |   |  |   |         |  
|--------------------------------------------------------------------- |  | ----------- | ------ |  | -------------- | - | ------ | ------- |  | - | ---------------- |  |  | ------------------------------------------ | ------ | - | ------------------- | - | ------ | ----- |  | - | ----- | - |  | - | ------- | -
|                                                                      |  | CommonStock |        |  | PreferredStock |   |        | Surplus |  |   | RetainedEarnings |  |  | AccumulatedOtherComprehensiveIncome (Loss) |        |   | ComprehensiveIncome |   |        | Total | 
|Balance, December 31, 2009                                            |  | $           | 11,877 |  |                | $ | 24,289 |         |  | $ | 18,965           |  |  | $                                          | 50,850 |   |                     | $ | (783   | )     |  |   |       |   |  | $ | 105,198 |  
|Comprehensive income:                                                 |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  |   |       |   |  |   |         |  
|Net income for the three months ended March 31, 2010                  |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            | 1,334  |   |                     |   |        |       |  | $ | 1,334 |   |  |   | 1,334   |  
|Other comprehensive income:                                           |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  |   |       |   |  |   |         |  
|Unrealized securities gains arising during period, (net of tax, $353) |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  |   | 625   |   |  |   |         |  
|Reclassification adjustment (net of tax, $5)                          |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  |   | (8    | ) |  |   |         |  
|                                                                      |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  |   |       |   |  |   |         |  
|Other comprehensive income                                            |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   | 617    |       |  |   | 617   |   |  |   | 617     |  
|                                                                      |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  |   |       |   |  |   |         |  
|Total comprehensive income                                            |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  | $ | 1,951 |   |  |   |         |  
|                                                                      |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  |   |       |   |  |   |         |  
|Cash dividends - common ($0.05 per share)                             |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            | (298   | ) |                     |   |        |       |  |   |       |   |  |   | (298    | )
|Cash dividends - preferred                                            |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            | (300   | ) |                     |   |        |       |  |   |       |   |  |   | (300    | )
|Preferred stock discount                                              |  |             |        |  |                |   | 72     |         |  |   |                  |  |  |                                            | (72    | ) |                     |   |        |       |  |   |       |   |  |   |        |  
|Stock based compensation                                              |  |             |        |  |                |   |        |         |  |   | 55               |  |  |                                            |        |   |                     |   |        |       |  |   |       |   |  |   | 55      |  
|Issuance of common stock under dividend reinvestment plan             |  |             | 14     |  |                |   |       |         |  |   | 38               |  |  |                                            |       |   |                     |   |       |       |  |   |       |   |  |   | 52      |  
|                                                                      |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  |   |       |   |  |   |         |  
|Balance, March 31, 2010                                               |  | $           | 11,891 |  |                | $ | 24,361 |         |  | $ | 19,058           |  |  | $                                          | 51,514 |   |                     | $ | (166   | )     |  |   |       |   |  | $ | 106,658 |  
|                                                                      |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  |   |       |   |  |   |         |  
|                                                                      |  |             |        |  |                |   |       
|Balance, December 31, 2010                                            |  | $           | 11,954 |  |                | $ | 24,581 |         |  | $ | 19,302           |  |  | $                                          | 37,884 |   |                     | $ | (2,303 | )     |  |   |       |   |  | $ | 91,418  |  
|Comprehensive income:                                                 |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  |   |       |   |  |   |         |  
|Net income for the three months ended March 31, 2011                  |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            | 474    |   |                     |   |        |       |  | $ | 474   |   |  |   | 474     |  
|Other comprehensive income:                                           |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  |   |       |   |  |   |         |  
|Unrealized securities gains arising during period, (net of tax, $525) |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  |   | 1,020 |   |  |   |         |  
|Reclassification adjustment (net of tax, $66)                         |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  |   | (127  | ) |  |   |         |  
|                                                                      |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  |   |       |   |  |   |         |  
|Other comprehensive income                                            |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   | 893    |       |  |   | 893   |   |  |   | 893     |  
|                                                                      |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  |   |       |   |  |   |         |  
|Total comprehensive income                                            |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  | $ | 1,367 |   |  |   |         |  
|                                                                      |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  |   |       |   |  |   |         |  
|Preferred stock discount                                              |  |             |        |  |                |   | 74     |         |  |   |                  |  |  |                                            | (74    | ) |                     |   |        |       |  |   |       |   |  |   |        |  
|Stock based compensation                                              |  |             |        |  |                |   |        |         |  |   | 32               |  |  |                                            |        |   |                     |   |        |       |  |   |       |   |  |   | 32      |  
|Issuance of common stock under dividend reinvestment plan             |  |             | 10     |  |                |   |       |         |  |   | 12               |  |  |                                            |       |   |                     |   |       |       |  |   |       |   |  |   | 22      |  
|                                                                      |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  |   |       |   |  |   |         |  
|Balance, March 31, 2011                                               |  | $           | 11,964 |  |                | $ | 24,655 |         |  | $ | 19,346           |  |  | $                                          | 38,284 |   |                     | $ | (1,410 | )     |  |   |       |   |  | $ | 92,839  |  
|                                                                      |  |             |        |  |                |   |        |         |  |   |                  |  |  |                                            |        |   |                     |   |        |       |  |   |       |   |  |   |         |  

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



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Eastern Virginia Bankshares, Inc. and Subsidiaries

Consolidated Statements of Cash Flows (unaudited)

(dollars in thousands)



|                                                                                         |  |                             |         |   |      |   |         |  
|---------------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                         |  | Three Months EndedMarch 31, |        
|                                                                                         |  | 2011                        |         |   | 2010 |  
|Operating Activities:                                                                    |  |                             |         |   |      |   |         |  
|Net income                                                                               |  | $                           | 474     |   |      | $ | 1,334   |  
|Adjustments to reconcile net income to net cash provided by operating activities:        |  |                             |         |   |      |   |         |  
|Provision for loan losses                                                                |  |                             | 2,000   |   |      |   | 1,850   |  
|Depreciation and amortization                                                            |  |                             | 519     |   |      |   | 553     |  
|Stock based compensation                                                                 |  |                             | 32      |   |      |   | 55      |  
|Net amortization of premiums and accretion of discounts on securities available for sale |  |                             | 547     |   |      |   | 61      |  
|(Gain) realized on securities available for sale transactions, net                       |  |                             | (193    | ) |      |   | (13     | )
|(Gain) on sale of bank premises and equipment                                            |  |                             | (256    | ) |      |   |        |  
|Loss (gain) on sale of other real estate owned                                           |  |                             | 247     |   |      |   | (31     | )
|Impairment on other real estate owned                                                    |  |                             | 152     |   |      |   |        |  
|Loss on LLC investment                                                                   |  |                             | 11      |   |      |   | 14      |  
|Deferred income taxes                                                                    |  |                             | (352    | ) |      |   | (16     | )
|Net change in:                                                                           |  |                             |         |   |      |   |         |  
|Accrued interest receivable                                                              |  |                             | 49      |   |      |   | 188     |  
|Other assets                                                                             |  |                             | 1,080   |   |      |   | 1,106   |  
|Accrued interest payable                                                                 |  |                             | (62     | ) |      |   | (110    | )
|Other liabilities                                                                        |  |                             | (465    | ) |      |   | (1,141  | )
|                                                                                         |  |                             |         |   |      |   |         |  
|Net cash provided by operating activities                                                |  |                             | 3,783   |   |      |   | 3,850   |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Investing Activities:                                                                    |  |                             |         |   |      |   |         |  
|Purchase of securities available for sale                                                |  |                             | (13,892 | ) |      |   | (22,540 | )
|Purchases of bank premises and equipment                                                 |  |                             | (1,276  | ) |      |   | (239    | )
|Improvements to other real estate owned                                                  |  |                             | (150    | ) |      |   | (43     | )
|Net change in loans                                                                      |  |                             | 5,827   |   |      |   | (7,101  | )
|Proceeds from:                                                                           |  |                             |         |   |      |   |         |  
|Maturities, calls, and paydowns of securities available for sale                         |  |                             | 28,422  |   |      |   | 32,831  |  
|Sales of securities available for sale                                                   |  |                             | 13,021  |   |      |   | 21,799  |  
|Sale of bank premises and equipment                                                      |  |                             | 299     |   |      |   |        |  
|Sale of other real estate owned                                                          |  |                             | 2,028   |   |      |   | 991     |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Net cash provided by investing activities                                                |  |                             | 34,279  |   |      |   | 25,698  |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Financing Activities:                                                                    |  |                             |         |   |      |   |         |  
|Net change in:                                                                           |  |                             |         |   |      |   |         |  
|Demand, interest-bearing demand and savings deposits                                     |  |                             | (10,704 | ) |      |   | 5,718   |  
|Time deposits                                                                            |  |                             | (7,913  | ) |      |   | (3,613  | )
|Federal funds purchased and repurchase agreements                                        |  |                             | 14      |   |      |   | (21,926 | )
|Short-term borrowings                                                                    |  |                             | (19,500 | ) |      |   |        |  
|Long-term borrowings                                                                     |  |                             |        |   |      |   | (5,000  | )
|Issuance of common stock under dividend reinvestment plan                                |  |                             | 22      |   |      |   | 52      |  
|Dividends paid - common                                                                  |  |                             |        |   |      |   | (298    | )
|Dividends paid - preferred                                                               |  |                             |        |   |      |   | (300    | )
|                                                                                         |  |                             |         |   |      |   |         |  
|Net cash used in financing activities                                                    |  |                             | (38,081 | ) |      |   | (25,367 | )
|                                                                                         |  |                             |         |   |      |   |         |  
|Net (decrease) increase in cash and cash equivalents                                     |  |                             | (19     | ) |      |   | 4,181   |  
|Cash and cash equivalents, January 1                                                     |  |                             | 22,831  |   |      |   | 28,688  |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Cash and cash equivalents, March 31                                                      |  | $                           | 22,812  |   |      | $ | 32,869  |  
|                                                                                         |  |                             |         |   |      |   |         |  
|Supplemental disclosure:                                                                 |  |                             |         |   |      |   |         |  
|Interest paid                                                                            |  | $                           | 3,952   |   |      | $ | 4,760   |  
|Supplemental disclosure of noncash investing and financing activities:                   |  |                             |         |   |      |   |         |  
|Unrealized gains on securities available for sale                                        |  | $                           | 1,352   |   |      | $ | 965     |  
|Loans transferred to other real estate owned                                             |  | $                           | 1,900   |   |      | $ | 519     |  

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



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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, 2011 are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. These interim consolidated financial statements should be read in conjunction with the audited consolidated financial
statements and notes thereto included in the Companys Annual Report on Form 10-K for the year ended December 31, 2010 (the 2010 Form 10-K).

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

Nature of Operations

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

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



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Basis of Presentation

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

The results of operations for the three months ended March 31, 2011 are not necessarily indicative of the results
which may be expected for the year.

Recent Accounting Pronouncements

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

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

In December 2010, the FASB issued ASU 2010-29, Disclosure of Supplementary Pro Forma
Information for Business Combinations. The guidance requires pro forma disclosure for business combinations that occurred in the current reporting period as though the acquisition date for all business combinations that occurred during the
year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma information should be reported as though the acquisition date for all business combinations that occurred during the
current year had been as of the beginning of the comparable prior annual reporting period. ASU 2010-29 is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning
on or after December 15, 2010. Early adoption is permitted. The adoption of the new guidance did not have a material impact on the Companys consolidated financial statements.

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

The SEC has issued Final Rule No. 33-9002, Interactive
Data to Improve Financial Reporting, which requires companies to submit financial statements in XBRL (extensible business reporting language) format with their SEC



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filings on a phased-in schedule. Large accelerated filers and foreign large accelerated filers using U.S. GAAP were required to provide interactive data reports starting with their first
quarterly report for fiscal periods ending on or after June 15, 2010. All remaining filers are required to provide interactive data reports starting with their first quarterly report for fiscal periods ending on or after June 15, 2011.

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

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

Note 2. Investment Securities

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



|                                        |  |                |         |  |            |   |     |            |  |   |            |  |  |   |         | 
|--------------------------------------- |  | -------------- | ------- |  | ---------- | - | --- | ---------- |  | - | ---------- |  |  | - | ------- | 
|(dollars in thousands)                  |  | March 31, 2011 |        
|                                        |  |                |         |  | Gross      |   |     | Gross      |  |   |            | 
|                                        |  | Amortized      |         |  | Unrealized |   |     | Unrealized |  |   | Estimated  | 
|                                        |  | Cost           |         |  | Gains      |   |     | Losses     |  |   | Fair Value | 
|Available for Sale:                     |  |                |         |  |            |   |     |            |  |   |            |  |  |   |         | 
|Obligations of U.S. Government agencies |  | $              | 3,983   |  |            | $ |    |            |  | $ | 203        |  |  | $ | 3,780   | 
|SBA Pool securities                     |  |                | 60,478  |  |            |   | 81  |            |  |   | 655        |  |  |   | 59,904  | 
|Agency mortgage-backed securities       |  |                | 56,688  |  |            |   | 59  |            |  |   | 483        |  |  |   | 56,264  | 
|Agency CMO securities                   |  |                | 41,419  |  |            |   | 71  |            |  |   | 274        |  |  |   | 41,216  | 
|Non agency CMO securities               |  |                | 10,586  |  |            |   | 50  |            |  |   | 92         |  |  |   | 10,544  | 
|State and political subdivisions        |  |                | 45,120  |  |            |   | 171 |            |  |   | 1,004      |  |  |   | 44,287  | 
|Pooled trust preferred securities       |  |                | 542     |  |            |   | 112 |            |  |   |           |  |  |   | 654     | 
|FNMA and FHLMC preferred stock          |  |                | 77      |  |            |   | 209 |            |  |   |           |  |  |   | 286     | 
|Corporate securities                    |  |                | 2,596   |  |            |   | 36  |            |  |   |           |  |  |   | 2,632   | 
|                                        |  |                |         |  |            |   |     |            |  |   |            |  |  |   |         | 
|Total                                   |  | $              | 221,489 |  |            | $ | 789 |            |  | $ | 2,711      |  |  | $ | 219,567 | 
|                                        |  |                |         |  |            |   |     |            |  |   |            |  |  |   |         | 



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|                                        |  |                   |         |  |            |   |     |            |  |   |            |  |  |   |         | 
|--------------------------------------- |  | ----------------- | ------- |  | ---------- | - | --- | ---------- |  | - | ---------- |  |  | - | ------- | 
|(dollars in thousands)                  |  | December 31, 2010 |        
|                                        |  |                   |         |  | Gross      |   |     | Gross      |  |   |            | 
|                                        |  | Amortized         |         |  | Unrealized |   |     | Unrealized |  |   | Estimated  | 
|                                        |  | Cost              |         |  | Gains      |   |     | Losses     |  |   | Fair Value | 
|Available for Sale:                     |  |                   |         |  |            |   |     |            |  |   |            |  |  |   |         | 
|Obligations of U.S. Government agencies |  | $                 | 23,982  |  |            | $ |    |            |  | $ | 153        |  |  | $ | 23,829  | 
|SBA Pool securities                     |  |                   | 62,685  |  |            |   | 39  |            |  |   | 834        |  |  |   | 61,890  | 
|Agency mortgage-backed securities       |  |                   | 46,780  |  |            |   | 32  |            |  |   | 528        |  |  |   | 46,284  | 
|Agency CMO securities                   |  |                   | 41,855  |  |            |   | 26  |            |  |   | 404        |  |  |   | 41,477  | 
|Non agency CMO securities               |  |                   | 12,093  |  |            |   | 62  |            |  |   | 113        |  |  |   | 12,042  | 
|State and political subdivisions        |  |                   | 58,780  |  |            |   | 224 |            |  |   | 1,658      |  |  |   | 57,346  | 
|Pooled trust preferred securities       |  |                   | 545     |  |            |   | 26  |            |  |   |           |  |  |   | 571     | 
|FNMA and FHLMC preferred stock          |  |                   | 77      |  |            |   | 16  |            |  |   | 4          |  |  |   | 89      | 
|Corporate securities                    |  |                   | 2,597   |  |            |   | 30  |            |  |   | 35         |  |  |   | 2,592   | 
|                                        |  |                   |         |  |            |   |     |            |  |   |            |  |  |   |         | 
|Total                                   |  | $                 | 249,394 |  |            | $ | 455 |            |  | $ | 3,729      |  |  | $ | 246,120 | 
|                                        |  |                   |         |  |            |   |     |            |  |   |            |  |  |   |         | 

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

Our pooled trust preferred securities include one senior issue of Preferred Term Securities XXVII which is current on all
payments and on which we took an impairment charge in the third quarter of 2009 to reduce our book value to the market value at September 30, 2009. As of March 31, 2011, that security has an estimated fair value that is $112 thousand
greater than its amortized cost after impairment.

The amortized cost and estimated fair values of securities at March 31, 2011, by the
earlier of contractual maturity or expected maturity, are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.



|                                       |  |                |         |  |                     |   |         | 
|-------------------------------------- |  | -------------- | ------- |  | ------------------- | - | ------- | 
|                                       |  | March 31, 2011 |        
|(dollars in thousands)                 |  | AmortizedCost  |         |  | EstimatedFair Value |  
|                                       |  |               
|Due in one year or less                |  | $              | 3,739   |  |                     | $ | 3,826   | 
|Due after one year through five years  |  |                | 74,132  |  |                     |   | 73,696  | 
|Due after five years through ten years |  |                | 121,874 |  |                     |   | 120,403 | 
|Due after ten years                    |  |                | 21,744  |  |                     |   | 21,642  | 
|                                       |  |                |         |  |                     |   |         | 
|Total                                  |  | $              | 221,489 |  |                     | $ | 219,567 | 
|                                       |  |                |         |  |                     |   |         | 

Proceeds from the sales of securities available for sale for the three months ended March 31, 2011 and 2010 were $13.0
million and $21.8 million, respectively. Net realized gains on the sales of securities available for sale for the three months ended March 31, 2011 and 2010 were $193 thousand and $13 thousand, 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 $100.1 million and an aggregate fair value of $99.1 million were pledged at March 31, 2011. Securities with an aggregate book value of $102.1 million and an aggregate fair value of $100.7 million were pledged at December 31,
2010.

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



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|                                        |  |                     |         |  |                   |   |       |           |  |   |                |  |  |           |     |  |                |   |         |  |  |   |       | 
|--------------------------------------- |  | ------------------- | ------- |  | ----------------- | - | ----- | --------- |  | - | -------------- |  |  | --------- | --- |  | -------------- | - | ------- |  |  | - | ----- | 
|                                        |  | March 31, 2011      |        
|(dollars in thousands)                  |  | Less than 12 months |         |  | 12 months or more |   |       | Total     | 
|Description of Securities               |  | FairValue           |         |  | UnrealizedLoss    |   |       | FairValue |  |   | UnrealizedLoss |  |  | FairValue |     |  | UnrealizedLoss |  
|Obligations of U.S. Government agencies |  | $                   | 3,780   |  |                   | $ | 203   |           |  | $ |               |  |  | $         |    |  |                | $ | 3,780   |  |  | $ | 203   | 
|SBA Pool securities                     |  |                     | 47,778  |  |                   |   | 655   |           |  |   |               |  |  |           |    |  |                |   | 47,778  |  |  |   | 655   | 
|Agency mortgage-backed securities       |  |                     | 42,376  |  |                   |   | 483   |           |  |   |               |  |  |           |    |  |                |   | 42,376  |  |  |   | 483   | 
|Agency CMO securities                   |  |                     | 25,715  |  |                   |   | 274   |           |  |   |               |  |  |           |    |  |                |   | 25,715  |  |  |   | 274   | 
|Non agency CMO securities               |  |                     | 7,661   |  |                   |   | 77    |           |  |   | 444            |  |  |           | 15  |  |                |   | 8,105   |  |  |   | 92    | 
|State and political subdivisions        |  |                     | 28,993  |  |                   |   | 906   |           |  |   | 491            |  |  |           | 98  |  |                |   | 29,484  |  |  |   | 1,004 | 
|                                        |  |                     |         |  |                   |   |       |           |  |   |                |  |  |           |     |  |                |   |         |  |  |   |       | 
|Total                                   |  | $                   | 156,303 |  |                   | $ | 2,598 |           |  | $ | 935            |  |  | $         | 113 |  |                | $ | 157,238 |  |  | $ | 2,711 | 
|                                        |  |                     |         |  |                   |   |       |           |  |   |                |  |  |           |     |  |                |   |         |  |  |   |       | 

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, 2011, represents an other-than-temporary impairment as these unrealized losses are primarily attributable to changes in interest rates and current financial market
conditions, and not credit deterioration. At March 31, 2011, there are 86 debt securities with fair values totaling $157.2 million considered temporarily impaired. Of these debt securities, 83 with fair values totaling $156.3 million were in an
unrealized loss position of less than 12 months and 3 with fair values totaling $935 thousand were in an unrealized loss position of 12 months or more. Because the Company intends to hold these investments in debt securities to maturity and it is
more likely than not that the Company will not be required to sell these investments before a recovery of unrealized losses, the Company does not consider these investments to be other-than-temporarily impaired at March 31, 2011 and no
impairment has been recognized. At March 31, 2011, there are no equity securities in an unrealized loss position.

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



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

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



10



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##### Table of Contents

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 EndingMarch 31, 2011 |    
|Balance, beginning of period                        |  | $                                 | 339 | 
|Additions                                           |  |                                   |     | 
|Initial credit impairments                          |  |                                   |    | 
|Subsequent credit impairments                       |  |                                   |    | 
|Reductions                                          |  |                                   |     | 
|Subsequent chargeoff of previously impaired credits |  |                                   |    | 
|                                                    |  |                                   |     | 
|Balance, end of period                              |  | $                                 | 339 | 
|                                                    |  |                                   |     | 

The Companys investment in Federal Home Loan Bank of Atlanta (FHLB) stock totaled $8.3 million at
March 31, 2011 and December 31, 2010. 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, 2011, the Company does not consider this investment to be
other-than-temporarily impaired at March 31, 2011 and no impairment has been recognized. FHLB stock is included in a separate line item on the consolidated balance sheets (Restricted securities, at cost) and is not part of the Companys
securities available for sale portfolio.



11



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Note 3. Loan Portfolio

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



|                                                    |  |                |         |   |                   |  |        |        |  |   |         |   |  |  |        |  
|--------------------------------------------------- |  | -------------- | ------- | - | ----------------- |  | ------ | ------ |  | - | ------- | - |  |  | ------ | -
|                                                    |  | March 31, 2011 |         |   | December 31, 2010 | 
|(dollars in thousands)                              |  | Amount         |         |   | Percent           |  |        | Amount |  |   | Percent |  
|Commercial, industrial and agricultural             |  | $              | 72,190  |   |                   |  | 9.42   | %      |  | $ | 72,790  |   |  |  | 9.39   | %
|Real estate - one to four family residential:       |  |                |         |   |                   |  |        |        |  |   |         |   |  |  |        |  
|Closed end first and seconds                        |  |                | 259,082 |   |                   |  | 33.82  | %      |  |   | 260,442 |   |  |  | 33.62  | %
|Home equity lines                                   |  |                | 95,750  |   |                   |  | 12.50  | %      |  |   | 93,387  |   |  |  | 12.05  | %
|                                                    |  |                |         |   |                   |  |        |        |  |   |         |   |  |  |        |  
|Total real estate - one to four family residential  |  |                | 354,832 |   |                   |  | 46.32  | %      |  |   | 353,829 |   |  |  | 45.67  | %
|Real estate - multifamily residential               |  |                | 11,270  |   |                   |  | 1.47   | %      |  |   | 11,682  |   |  |  | 1.51   | %
|Real estate - construction:                         |  |                |         |   |                   |  |        |        |  |   |         |   |  |  |        |  
|One to four family residential                      |  |                | 21,393  |   |                   |  | 2.79   | %      |  |   | 25,454  |   |  |  | 3.29   | %
|Other construction, land development and other land |  |                | 49,394  |   |                   |  | 6.45   | %      |  |   | 50,841  |   |  |  | 6.56   | %
|                                                    |  |                |         |   |                   |  |        |        |  |   |         |   |  |  |        |  
|Total real estate - construction                    |  |                | 70,787  |   |                   |  | 9.24   | %      |  |   | 76,295  |   |  |  | 9.85   | %
|Real estate - farmland                              |  |                | 8,953   |   |                   |  | 1.17   | %      |  |   | 8,304   |   |  |  | 1.07   | %
|Real estate - non-farm, non-residential:            |  |                |         |   |                   |  |        |        |  |   |         |   |  |  |        |  
|Owner occupied                                      |  |                | 131,093 |   |                   |  | 17.11  | %      |  |   | 134,186 |   |  |  | 17.32  | %
|Non-owner occupied                                  |  |                | 80,764  |   |                   |  | 10.54  | %      |  |   | 78,396  |   |  |  | 10.12  | %
|                                                    |  |                |         |   |                   |  |        |        |  |   |         |   |  |  |        |  
|Total real estate - non-farm, non-residential       |  |                | 211,857 |   |                   |  | 27.65  | %      |  |   | 212,582 |   |  |  | 27.44  | %
|Consumer                                            |  |                | 32,950  |   |                   |  | 4.31   | %      |  |   | 36,000  |   |  |  | 4.65   | %
|Other                                               |  |                | 3,250   |   |                   |  | 0.42   | %      |  |   | 3,294   |   |  |  | 0.42   | %
|                                                    |  |                |         |   |                   |  |        |        |  |   |         |   |  |  |        |  
|Total loans                                         |  |                | 766,089 |   |                   |  | 100.00 | %      |  |   | 774,776 |   |  |  | 100.00 | %
|                                                    |  |                |         |   |                   |  |        |        |  |   |         |   |  |  |        |  
|Less unearned income                                |  |                | (2      | ) |                   |  |        |        |  |   | (2      | ) |  |  |        |  
|Less allowance for loan losses                      |  |                | (26,328 | ) |                   |  |        |        |  |   | (25,288 | ) |  |  |        |  
|                                                    |  |                |         |   |                   |  |        |        |  |   |         |   |  |  |        |  
|Loans, net                                          |  | $              | 739,759 |   |                   |  |        |        |  | $ | 749,486 |   |  |  |        |  
|                                                    |  |                |         |   |                   |  |        |        |  |   |         |   |  |  |        |  

The following table presents the aging of the recorded investment in past due loans as of March 31, 2011 by
class of loans:



|                                                    |  |                    |        |  |                    |   |       |                      |  |   |                |  |  |               |        |  |            |   |         |  |  |   |         | 
|--------------------------------------------------- |  | ------------------ | ------ |  | ------------------ | - | ----- | -------------------- |  | - | -------------- |  |  | ------------- | ------ |  | ---------- | - | ------- |  |  | - | ------- | 
|(dollars in thousands)                              |  | 30-59 Days PastDue |        |  | 60-89 Days PastDue |   |       | Over 90 DaysPast Due |  |   | Total Past Due |  |  | TotalCurrent* |        |  | TotalLoans |  
|Commercial, industrial and agricultural             |  | $                  | 601    |  |                    | $ | 57    |                      |  | $ | 393            |  |  | $             | 1,051  |  |            | $ | 71,139  |  |  | $ | 72,190  | 
|Real estate - one to four family residential:       |  |                    |        |  |                    |   |       |                      |  |   |                |  |  |               |        |  |            |   |         |  |  |   |         | 
|Closed end first and seconds                        |  |                    | 6,145  |  |                    |   | 3,169 |                      |  |   | 5,709          |  |  |               | 15,023 |  |            |   | 244,059 |  |  |   | 259,082 | 
|Home equity lines                                   |  |                    | 809    |  |                    |   | 449   |                      |  |   | 893            |  |  |               | 2,151  |  |            |   | 93,599  |  |  |   | 95,750  | 
|                                                    |  |                    |        |  |                    |   |       |                      |  |   |                |  |  |               |        |  |            |   |         |  |  |   |         | 
|Total real estate - one to four family residential  |  |                    | 6,954  |  |                    |   | 3,618 |                      |  |   | 6,602          |  |  |               | 17,174 |  |            |   | 337,658 |  |  |   | 354,832 | 
|Real estate - multifamily residential               |  |                    |       |  |                    |   |      |                      |  |   |               |  |  |               |       |  |            |   | 11,270  |  |  |   | 11,270  | 
|Real estate - construction:                         |  |                    |        |  |                    |   |       |                      |  |   |                |  |  |               |        |  |            |   |         |  |  |   |         | 
|One to four family residential                      |  |                    | 1,145  |  |                    |   |      |                      |  |   | 672            |  |  |               | 1,817  |  |            |   | 19,576  |  |  |   | 21,393  | 
|Other construction, land development and other land |  |                    | 155    |  |                    |   | 259   |                      |  |   | 2,082          |  |  |               | 2,496  |  |            |   | 46,898  |  |  |   | 49,394  | 
|                                                    |  |                    |        |  |                    |   |       |                      |  |   |                |  |  |               |        |  |            |   |         |  |  |   |         | 
|Total real estate - construction                    |  |                    | 1,300  |  |                    |   | 259   |                      |  |   | 2,754          |  |  |               | 4,313  |  |            |   | 66,474  |  |  |   | 70,787  | 
|Real estate - farmland                              |  |                    | 190    |  |                    |   | 52    |                      |  |   |               |  |  |               | 242    |  |            |   | 8,711   |  |  |   | 8,953   | 
|Real estate - non-farm, non-residential:            |  |                    |        |  |                    |   |       |                      |  |   |                |  |  |               |        |  |            |   |         |  |  |   |         | 
|Owner occupied                                      |  |                    | 1,500  |  |                    |   | 194   |                      |  |   | 948            |  |  |               | 2,642  |  |            |   | 128,451 |  |  |   | 131,093 | 
|Non-owner occupied                                  |  |                    | 7,637  |  |                    |   |      |                      |  |   | 3,475          |  |  |               | 11,112 |  |            |   | 69,652  |  |  |   | 80,764  | 
|                                                    |  |                    |        |  |                    |   |       |                      |  |   |                |  |  |               |        |  |            |   |         |  |  |   |         | 
|Total real estate - non-farm, non-residential       |  |                    | 9,137  |  |                    |   | 194   |                      |  |   | 4,423          |  |  |               | 13,754 |  |            |   | 198,103 |  |  |   | 211,857 | 
|Consumer                                            |  |                    | 340    |  |                    |   | 484   |                      |  |   | 795            |  |  |               | 1,619  |  |            |   | 31,331  |  |  |   | 32,950  | 
|Other                                               |  |                    |       |  |                    |   |      |                      |  |   |               |  |  |               |       |  |            |   | 3,250   |  |  |   | 3,250   | 
|                                                    |  |                    |        |  |                    |   |       |                      |  |   |                |  |  |               |        |  |            |   |         |  |  |   |         | 
|Total loans                                         |  | $                  | 18,522 |  |                    | $ | 4,664 |                      |  | $ | 14,967         |  |  | $             | 38,153 |  |            | $ | 727,936 |  |  | $ | 766,089 | 
|                                                    |  |                    |        |  |                    |   |       |                      |  |   |                |  |  |               |        |  |            |   |         |  |  |   |         | 



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



12



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##### Table of Contents

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



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



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

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



|                                             |  |               |        |  |                  |   |        | 
|-------------------------------------------- |  | ------------- | ------ |  | ---------------- | - | ------ | 
|(dollars in thousands)                       |  | March 31,2011 |        |  | December 31,2010 |  
|Nonaccrual loans                             |  | $             | 25,657 |  |                  | $ | 25,858 | 
|Loans past due 90 days and accruing interest |  |               | 951    |  |                  |   | 1,836  | 
|Restructured loans (accruing)                |  |               | 4,016  |  |                  |   | 2,411  | 

At March 31, 2011 and
December 31, 2010, there were approximately $10.5 million and $6.2 million, respectively, in troubled debt restructurings (TDRs) included in nonaccrual loans.

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



13



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##### Table of Contents

|                                                    |  |               |        |  |                                    |   |        |               |  |   |                  |  |  |   |       | 
|--------------------------------------------------- |  | ------------- | ------ |  | ---------------------------------- | - | ------ | ------------- |  | - | ---------------- |  |  | - | ----- | 
|                                                    |  | Nonaccrual    |        |  | Over 90 Days Past Due and Accruing |  
|(dollars in thousands)                              |  | March 31,2011 |        |  | December 31,2010                   |   |        | March 31,2011 |  |   | December 31,2010 | 
|Commercial, industrial and agricultural             |  | $             | 691    |  |                                    | $ | 446    |               |  | $ |                 |  |  | $ |      | 
|Real estate - one to four family residential:       |  |               |        |  |                                    |   |        |               |  |   |                  |  |  |   |       | 
|Closed end first and seconds                        |  |               | 8,581  |  |                                    |   | 8,337  |               |  |   | 318              |  |  |   | 997   | 
|Home equity lines                                   |  |               | 795    |  |                                    |   | 664    |               |  |   | 148              |  |  |   | 190   | 
|                                                    |  |               |        |  |                                    |   |        |               |  |   |                  |  |  |   |       | 
|Total real estate - one to four family residential  |  |               | 9,376  |  |                                    |   | 9,001  |               |  |   | 466              |  |  |   | 1,187 | 
|Real estate - construction:                         |  |               |        |  |                                    |   |        |               |  |   |                  |  |  |   |       | 
|One to four family residential                      |  |               | 651    |  |                                    |   | 564    |               |  |   | 151              |  |  |   | 437   | 
|Other construction, land development and other land |  |               | 6,329  |  |                                    |   | 7,437  |               |  |   |                 |  |  |   | 148   | 
|                                                    |  |               |        |  |                                    |   |        |               |  |   |                  |  |  |   |       | 
|Total real estate - construction                    |  |               | 6,980  |  |                                    |   | 8,001  |               |  |   | 151              |  |  |   | 585   | 
|Real estate - farmland                              |  |               | 187    |  |                                    |   |       |               |  |   |                 |  |  |   |      | 
|Real estate - non-farm, non-residential:            |  |               |        |  |                                    |   |        |               |  |   |                  |  |  |   |       | 
|Owner occupied                                      |  |               | 4,100  |  |                                    |   | 3,981  |               |  |   | 250              |  |  |   |      | 
|Non-owner occupied                                  |  |               | 3,601  |  |                                    |   | 4,030  |               |  |   |                 |  |  |   |      | 
|                                                    |  |               |        |  |                                    |   |        |               |  |   |                  |  |  |   |       | 
|Total real estate - non-farm, non-residential       |  |               | 7,701  |  |                                    |   | 8,011  |               |  |   | 250              |  |  |   |      | 
|Consumer                                            |  |               | 722    |  |                                    |   | 399    |               |  |   | 84               |  |  |   | 64    | 
|                                                    |  |               |        |  |                                    |   |        |               |  |   |                  |  |  |   |       | 
|Total loans                                         |  | $             | 25,657 |  |                                    | $ | 25,858 |               |  | $ | 951              |  |  | $ | 1,836 | 
|                                                    |  |               |        |  |                                    |   |        |               |  |   |                  |  |  |   |       | 

The following table presents commercial loans by credit quality indicator at March 31, 2011.



|                                                    |  |      |         |  |                 |   |        |             |  |   |          |  |  |          |     |  |       |   |        |  |  |   |         | 
|--------------------------------------------------- |  | ---- | ------- |  | --------------- | - | ------ | ----------- |  | - | -------- |  |  | -------- | --- |  | ----- | - | ------ |  |  | - | ------- | 
|(dollars in thousands)                              |  | Pass |         |  | Special Mention |   |        | Substandard |  |   | Doubtful |  |  | Impaired |     |  | Total |  
|Commercial, industrial and agricultural             |  | $    | 55,667  |  |                 | $ | 9,627  |             |  | $ | 6,186    |  |  | $        | 74  |  |       | $ | 636    |  |  | $ | 72,190  | 
|Real estate - multifamily residential               |  |      | 10,186  |  |                 |   | 1,084  |             |  |   |         |  |  |          |    |  |       |   |       |  |  |   | 11,270  | 
|Real estate - construction:                         |  |      |         |  |                 |   |        |             |  |   |          |  |  |          |     |  |       |   |        |  |  |   |         | 
|One to four family residential                      |  |      | 18,581  |  |                 |   | 397    |             |  |   | 1,376    |  |  |          | 80  |  |       |   | 959    |  |  |   | 21,393  | 
|Other construction, land development and other land |  |      | 10,927  |  |                 |   | 10,627 |             |  |   | 10,368   |  |  |          | 137 |  |       |   | 17,335 |  |  |   | 49,394  | 
|                                                    |  |      |         |  |                 |   |        |             |  |   |          |  |  |          |     |  |       |   |        |  |  |   |         | 
|Total real estate - construction                    |  |      | 29,508  |  |                 |   | 11,024 |             |  |   | 11,744   |  |  |          | 217 |  |       |   | 18,294 |  |  |   | 70,787  | 
|Real estate - farmland                              |  |      | 7,112   |  |                 |   | 1,076  |             |  |   | 765      |  |  |          |    |  |       |   |       |  |  |   | 8,953   | 
|Real estate - non-farm, non-residential:            |  |      |         |  |                 |   |        |             |  |   |          |  |  |          |     |  |       |   |        |  |  |   |         | 
|Owner occupied                                      |  |      | 78,099  |  |                 |   | 32,477 |             |  |   | 7,373    |  |  |          | 189 |  |       |   | 12,955 |  |  |   | 131,093 | 
|Non-owner occupied                                  |  |      | 45,090  |  |                 |   | 13,842 |             |  |   | 9,840    |  |  |          |    |  |       |   | 11,992 |  |  |   | 80,764  | 
|                                                    |  |      |         |  |                 |   |        |             |  |   |          |  |  |          |     |  |       |   |        |  |  |   |         | 
|Total real estate - non-farm, non-residential       |  |      | 123,189 |  |                 |   | 46,319 |             |  |   | 17,213   |  |  |          | 189 |  |       |   | 24,947 |  |  |   | 211,857 | 
|                                                    |  |      |         |  |                 |   |        |             |  |   |          |  |  |          |     |  |       |   |        |  |  |   |         | 
|Total commercial loans                              |  | $    | 225,662 |  |                 | $ | 69,130 |             |  | $ | 35,908   |  |  | $        | 480 |  |       | $ | 43,877 |  |  | $ | 375,057 | 
|                                                    |  |      |         |  |                 |   |        |             |  |   |          |  |  |          |     |  |       |   |        |  |  |   |         | 

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



14



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##### Table of Contents

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

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

The following table presents consumer loans, including one to four family residential first and seconds and home equity lines by payment activity at
March 31, 2011.



|                                                   |  |            |         |  |               |   |        |       |  |   |         | 
|-------------------------------------------------- |  | ---------- | ------- |  | ------------- | - | ------ | ----- |  | - | ------- | 
|(dollars in thousands)                             |  | Performing |         |  | Nonperforming |   |        | Total | 
|Real estate - one to four family residential:      |  |            |         |  |               |   |        |       |  |   |         | 
|Closed end first and seconds                       |  | $          | 247,215 |  |               | $ | 11,867 |       |  | $ | 259,082 | 
|Home equity lines                                  |  |            | 94,857  |  |               |   | 893    |       |  |   | 95,750  | 
|                                                   |  |            |         |  |               |   |        |       |  |   |         | 
|Total real estate - one to four family residential |  |            | 342,072 |  |               |   | 12,760 |       |  |   | 354,832 | 
|Consumer                                           |  |            | 32,155  |  |               |   | 795    |       |  |   | 32,950  | 
|Other                                              |  |            | 3,250   |  |               |   |       |       |  |   | 3,250   | 
|                                                   |  |            |         |  |               |   |        |       |  |   |         | 
|Total consumer loans                               |  | $          | 377,477 |  |               | $ | 13,555 |       |  | $ | 391,032 | 
|                                                   |  |            |         |  |               |   |        |       |  |   |         | 

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



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

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



|                                 |  |                    |        |   |                     |   |         |                    |  |   |        |  
|-------------------------------- |  | ------------------ | ------ | - | ------------------- | - | ------- | ------------------ |  | - | ------ | -
|                                 |  | Three Months Ended |        |   | Twelve Months Ended |   |         | Three Months Ended | 
|                                 |  | March 31,          |        |   | December 31,        |   |         | March 31,          | 
|(dollars in thousands)           |  | 2011               |        |   | 2010                |   |         | 2010               | 
|Balance at beginning of period   |  | $                  | 25,288 |   |                     | $ | 12,155  |                    |  | $ | 12,155 |  
|Provision charged against income |  |                    | 2,000  |   |                     |   | 28,930  |                    |  |   | 1,850  |  
|Recoveries of loans charged off  |  |                    | 233    |   |                     |   | 313     |                    |  |   | 83     |  
|Loans charged off                |  |                    | (1,193 | ) |                     |   | (16,110 | )                  |  |   | (626   | )
|                                 |  |                    |        |   |                     |   |         |                    |  |   |        |  
|Balance at end of period         |  | $                  | 26,328 |   |                     | $ | 25,288  |                    |  | $ | 13,462 |  
|                                 |  |                    |        |   |                     |   |         |                    |  |   |        |  



15



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##### Table of Contents

The following table presents a rollforward of our allowance for loan losses for the three months ended
March 31, 2011.



|                                                    |  |                                  |        |  |             |   |        |            |  |   |           |  |  |                              |       |   |  |   |        | 
|--------------------------------------------------- |  | -------------------------------- | ------ |  | ----------- | - | ------ | ---------- |  | - | --------- |  |  | ---------------------------- | ----- | - |  | - | ------ | 
|(dollars in thousands)                              |  | Beginning BalanceJanuary 1,
2011 |        |  | Charge-offs |   |        | Recoveries |  |   | Provision |  |  | Ending BalanceMarch 31,
2011 |      
|Commercial, industrial and agricultural             |  | $                                | 5,981  |  |             | $ | (214   | )          |  | $ | 65        |  |  | $                            | (154  | ) |  | $ | 5,678  | 
|Real estate - one to four family residential:       |  |                                  |        |  |             |   |        |            |  |   |           |  |  |                              |       |   |  |   |        | 
|Closed end first and seconds                        |  |                                  | 3,340  |  |             |   | (334   | )          |  |   | 129       |  |  |                              | 384   |   |  |   | 3,519  | 
|Home equity lines                                   |  |                                  | 587    |  |             |   |       |            |  |   |          |  |  |                              | (31   | ) |  |   | 556    | 
|                                                    |  |                                  |        |  |             |   |        |            |  |   |           |  |  |                              |       |   |  |   |        | 
|Total real estate - one to four family residential  |  |                                  | 3,927  |  |             |   | (334   | )          |  |   | 129       |  |  |                              | 353   |   |  |   | 4,075  | 
|Real estate - multifamily residential               |  |                                  | 23     |  |             |   |       |            |  |   |          |  |  |                              | (1    | ) |  |   | 22     | 
|Real estate - construction:                         |  |                                  |        |  |             |   |        |            |  |   |           |  |  |                              |       |   |  |   |        | 
|One to four family residential                      |  |                                  | 344    |  |             |   | (152   | )          |  |   | 1         |  |  |                              | 147   |   |  |   | 340    | 
|Other construction, land development and other land |  |                                  | 7,837  |  |             |   | (213   | )          |  |   | 1         |  |  |                              | 146   |   |  |   | 7,771  | 
|                                                    |  |                                  |        |  |             |   |        |            |  |   |           |  |  |                              |       |   |  |   |        | 
|Total real estate - construction                    |  |                                  | 8,181  |  |             |   | (365   | )          |  |   | 2         |  |  |                              | 293   |   |  |   | 8,111  | 
|Real estate - farmland                              |  |                                  | 17     |  |             |   |       |            |  |   |          |  |  |                              | 1     |   |  |   | 18     | 
|Real estate - non-farm, non-residential:            |  |                                  |        |  |             |   |        |            |  |   |           |  |  |                              |       |   |  |   |        | 
|Owner occupied                                      |  |                                  | 2,546  |  |             |   | (79    | )          |  |   |          |  |  |                              | 2,255 |   |  |   | 4,722  | 
|Non-owner occupied                                  |  |                                  | 3,072  |  |             |   | (50    | )          |  |   |          |  |  |                              | (479  | ) |  |   | 2,543  | 
|                                                    |  |                                  |        |  |             |   |        |            |  |   |           |  |  |                              |       |   |  |   |        | 
|Total real estate - non-farm, non-residential       |  |                                  | 5,618  |  |             |   | (129   | )          |  |   |          |  |  |                              | 1,776 |   |  |   | 7,265  | 
|Consumer                                            |  |                                  | 905    |  |             |   | (151   | )          |  |   | 37        |  |  |                              | 159   |   |  |   | 950    | 
|Other                                               |  |                                  | 280    |  |             |   |       |            |  |   |          |  |  |                              | (71   | ) |  |   | 209    | 
|Unallocated                                         |  |                                  | 356    |  |             |   |       |            |  |   |          |  |  |                              | (356  | ) |  |   |       | 
|                                                    |  |                                  |        |  |             |   |        |            |  |   |           |  |  |                              |       |   |  |   |        | 
|Total                                               |  | $                                | 25,288 |  |             | $ | (1,193 | )          |  | $ | 233       |  |  | $                            | 2,000 |   |  | $ | 26,328 | 
|                                                    |  |                                  |        |  |             |   |        |            |  |   |           |  |  |                              |       |   |  |   |        | 

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, 2011.



|                                                    |  |                                     |       |  |                                     |   |        |       |  |   |                                     |  |  |                                     |        |  |       |   |         |  |  |   |         | 
|--------------------------------------------------- |  | ----------------------------------- | ----- |  | ----------------------------------- | - | ------ | ----- |  | - | ----------------------------------- |  |  | ----------------------------------- | ------ |  | ----- | - | ------- |  |  | - | ------- | 
|                                                    |  | Allowance allocated to loans:       |       |  | Total Loans:                        |  
|(dollars in thousands)                              |  | Individuallyevaluated forimpairment |       |  | Collectivelyevaluated forimpairment |   |        | Total |  |   | Individuallyevaluated forimpairment |  |  | Collectivelyevaluated forimpairment |        |  | Total |  
|Commercial, industrial and agricultural             |  | $                                   | 625   |  |                                     | $ | 5,053  |       |  | $ | 5,678                               |  |  | $                                   | 636    |  |       | $ | 71,554  |  |  | $ | 72,190  | 
|Real estate - one to four family residential:       |  |                                     |       |  |                                     |   |        |       |  |   |                                     |  |  |                                     |        |  |       |   |         |  |  |   |         | 
|Closed end first and seconds                        |  |                                     | 1,517 |  |                                     |   | 2,002  |       |  |   | 3,519                               |  |  |                                     | 8,775  |  |       |   | 250,307 |  |  |   | 259,082 | 
|Home equity lines                                   |  |                                     |      |  |                                     |   | 556    |       |  |   | 556                                 |  |  |                                     |       |  |       |   | 95,750  |  |  |   | 95,750  | 
|                                                    |  |                                     |       |  |                                     |   |        |       |  |   |                                     |  |  |                                     |        |  |       |   |         |  |  |   |         | 
|Total real estate - one to four family residential  |  |                                     | 1,517 |  |                                     |   | 2,558  |       |  |   | 4,075                               |  |  |                                     | 8,775  |  |       |   | 346,057 |  |  |   | 354,832 | 
|Real estate - multifamily residential               |  |                                     |      |  |                                     |   | 22     |       |  |   | 22                                  |  |  |                                     |       |  |       |   | 11,270  |  |  |   | 11,270  | 
|Real estate - construction:                         |  |                                     |       |  |                                     |   |        |       |  |   |                                     |  |  |                                     |        |  |       |   |         |  |  |   |         | 
|One to four family residential                      |  |                                     | 70    |  |                                     |   | 270    |       |  |   | 340                                 |  |  |                                     | 959    |  |       |   | 20,434  |  |  |   | 21,393  | 
|Other construction, land development and other land |  |                                     | 2,798 |  |                                     |   | 4,973  |       |  |   | 7,771                               |  |  |                                     | 17,335 |  |       |   | 32,059  |  |  |   | 49,394  | 
|                                                    |  |                                     |       |  |                                     |   |        |       |  |   |                                     |  |  |                                     |        |  |       |   |         |  |  |   |         | 
|Total real estate - construction                    |  |                                     | 2,868 |  |                                     |   | 5,243  |       |  |   | 8,111                               |  |  |                                     | 18,294 |  |       |   | 52,493  |  |  |   | 70,787  | 
|Real estate - farmland                              |  |                                     |      |  |                                     |   | 18     |       |  |   | 18                                  |  |  |                                     |       |  |       |   | 8,953   |  |  |   | 8,953   | 
|Real estate - non-farm, non-residential:            |  |                                     |       |  |                                     |   |        |       |  |   |                                     |  |  |                                     |        |  |       |   |         |  |  |   |         | 
|Owner occupied                                      |  |                                     | 2,947 |  |                                     |   | 1,775  |       |  |   | 4,722                               |  |  |                                     | 12,955 |  |       |   | 118,138 |  |  |   | 131,093 | 
|Non-owner occupied                                  |  |                                     | 1,594 |  |                                     |   | 949    |       |  |   | 2,543                               |  |  |                                     | 11,992 |  |       |   | 68,772  |  |  |   | 80,764  | 
|                                                    |  |                                     |       |  |                                     |   |        |       |  |   |                                     |  |  |                                     |        |  |       |   |         |  |  |   |         | 
|Total real estate - non-farm, non-residential       |  |                                     | 4,541 |  |                                     |   | 2,724  |       |  |   | 7,265                               |  |  |                                     | 24,947 |  |       |   | 186,910 |  |  |   | 211,857 | 
|Consumer                                            |  |                                     |      |  |                                     |   | 950    |       |  |   | 950                                 |  |  |                                     |       |  |       |   | 32,950  |  |  |   | 32,950  | 
|Other                                               |  |                                     |      |  |                                     |   | 209    |       |  |   | 209                                 |  |  |                                     |       |  |       |   | 3,250   |  |  |   | 3,250   | 
|                                                    |  |                                     |       |  |                                     |   |        |       |  |   |                                     |  |  |                                     |        |  |       |   |         |  |  |   |         | 
|Total                                               |  | $                                   | 9,551 |  |                                     | $ | 16,777 |       |  | $ | 26,328                              |  |  | $                                   | 52,652 |  |       | $ | 713,437 |  |  | $ | 766,089 | 
|                                                    |  |                                     |       |  |                                     |   |        |       |  |   |                                     |  |  |                                     |        |  |       |   |         |  |  |   |         | 



16



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##### Table of Contents

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



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

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



|                                                           |  |               |        |  |                  |   |        | 
|---------------------------------------------------------- |  | ------------- | ------ |  | ---------------- | - | ------ | 
|(dollars in thousands)                                     |  | March 31,2011 |        |  | December 31,2010 |  
|Impaired loans without a specific reserve                  |  | $             | 17,610 |  |                  | $ | 21,872 | 
|Impaired loans with a specific reserve                     |  |               | 35,042 |  |                  |   | 27,585 | 
|                                                           |  |               |        |  |                  |   |        | 
|Allowance related to impaired loans                        |  | $             | 9,551  |  |                  | $ | 6,899  | 
|                                                           |  |               |        |  |                  |   |        | 
|Average balance of impaired loans                          |  | $             | 51,530 |  |                  | $ | 33,558 | 
|                                                           |  |               |        |  |                  |   |        | 
|Interest income recognized and collected on impaired loans |  | $             | 480    |  |                  | $ | 2,033  | 
|                                                           |  |               |        |  |                  |   |        | 

The following table presents loans individually evaluated for impairment by class of loans as of March 31, 2011.



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|                                                    |  |                    |        |  |                        |   |        |                                     |  |   |                                   |  |  |                  |        |  |                           |   |       |                          |  |   |        |  |  |   |     | 
|--------------------------------------------------- |  | ------------------ | ------ |  | ---------------------- | - | ------ | ----------------------------------- |  | - | --------------------------------- |  |  | ---------------- | ------ |  | ------------------------- | - | ----- | ------------------------ |  | - | ------ |  |  | - | --- | 
|(dollars in thousands)                              |  | RecordedInvestment |        |  | UnpaidPrincipalBalance |   |        | RecordedInvestment WithNo
Allowance |  |   | RecordedInvestment 
WithAllowance |  |  | RelatedAllowance |        |  | AverageRecordedInvestment |   |       | InterestIncomeRecognized | 
|Commercial, industrial and agricultural             |  | $                  | 636    |  |                        | $ | 636    |                                     |  | $ |                                  |  |  | $                | 636    |  |                           | $ | 625   |                          |  | $ | 593    |  |  | $ | 4   | 
|Real estate - one to four family residential:       |  |                    |        |  |                        |   |        |                                     |  |   |                                   |  |  |                  |        |  |                           |   |       |                          |  |   |        |  |  |   |     | 
|Closed end first and seconds                        |  |                    | 8,775  |  |                        |   | 8,886  |                                     |  |   | 1,414                             |  |  |                  | 7,361  |  |                           |   | 1,517 |                          |  |   | 9,384  |  |  |   | 80  | 
|Real estate - construction:                         |  |                    |        |  |                        |   |        |                                     |  |   |                                   |  |  |                  |        |  |                           |   |       |                          |  |   |        |  |  |   |     | 
|One to four family residential                      |  |                    | 959    |  |                        |   | 959    |                                     |  |   | 534                               |  |  |                  | 425    |  |                           |   | 70    |                          |  |   | 640    |  |  |   | 7   | 
|Other construction, land development and other land |  |                    | 17,335 |  |                        |   | 19,083 |                                     |  |   | 10,172                            |  |  |                  | 7,163  |  |                           |   | 2,798 |                          |  |   | 18,489 |  |  |   | 145 | 
|                                                    |  |                    |        |  |                        |   |        |                                     |  |   |                                   |  |  |                  |        |  |                           |   |       |                          |  |   |        |  |  |   |     | 
|Total real estate - construction                    |  |                    | 18,294 |  |                        |   | 20,042 |                                     |  |   | 10,706                            |  |  |                  | 7,588  |  |                           |   | 2,868 |                          |  |   | 19,129 |  |  |   | 152 | 
|Real estate - non-farm, non-residential:            |  |                    |        |  |                        |   |        |                                     |  |   |                                   |  |  |                  |        |  |                           |   |       |                          |  |   |        |  |  |   |     | 
|Owner occupied                                      |  |                    | 12,955 |  |                        |   | 13,446 |                                     |  |   | 3,378                             |  |  |                  | 9,577  |  |                           |   | 2,947 |                          |  |   | 10,186 |  |  |   | 121 | 
|Non-owner occupied                                  |  |                    | 11,992 |  |                        |   | 12,272 |                                     |  |   | 2,112                             |  |  |                  | 9,880  |  |                           |   | 1,594 |                          |  |   | 12,238 |  |  |   | 123 | 
|                                                    |  |                    |        |  |                        |   |        |                                     |  |   |                                   |  |  |                  |        |  |                           |   |       |                          |  |   |        |  |  |   |     | 
|Total real estate - non-farm, non-residential       |  |                    | 24,947 |  |                        |   | 25,718 |                                     |  |   | 5,490                             |  |  |                  | 19,457 |  |                           |   | 4,541 |                          |  |   | 22,424 |  |  |   | 244 | 
|                                                    |  |                    |        |  |                        |   |        |                                     |  |   |                                   |  |  |                  |        |  |                           |   |       |                          |  |   |        |  |  |   |     | 
|Total loans                                         |  | $                  | 52,652 |  |                        | $ | 55,282 |                                     |  | $ | 17,610                            |  |  | $                | 35,042 |  |                           | $ | 9,551 |                          |  | $ | 51,530 |  |  | $ | 480 | 
|                                                    |  |                    |        |  |                        |   |        |                                     |  |   |                                   |  |  |                  |        |  |                           |   |       |                          |  |   |        |  |  |   |     | 

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



|                                                    |  |                    |        |  |                        |   |        |                                     |  |   |                                   |  |  |                  |        |  |                           |   |       |                          |  |   |        |  |  |   |       | 
|--------------------------------------------------- |  | ------------------ | ------ |  | ---------------------- | - | ------ | ----------------------------------- |  | - | --------------------------------- |  |  | ---------------- | ------ |  | ------------------------- | - | ----- | ------------------------ |  | - | ------ |  |  | - | ----- | 
|(dollars in thousands)                              |  | RecordedInvestment |        |  | UnpaidPrincipalBalance |   |        | RecordedInvestment WithNo
Allowance |  |   | RecordedInvestment 
WithAllowance |  |  | RelatedAllowance |        |  | AverageRecordedInvestment |   |       | InterestIncomeRecognized | 
|Commercial, industrial and agricultural             |  | $                  | 449    |  |                        | $ | 2,639  |                                     |  | $ | 96                                |  |  | $                | 353    |  |                           | $ | 343   |                          |  | $ | 2,868  |  |  | $ | 7     | 
|Real estate - one to four family residential:       |  |                    |        |  |                        |   |        |                                     |  |   |                                   |  |  |                  |        |  |                           |   |       |                          |  |   |        |  |  |   |       | 
|Closed end first and seconds                        |  |                    | 9,463  |  |                        |   | 9,837  |                                     |  |   | 2,763                             |  |  |                  | 6,700  |  |                           |   | 1,247 |                          |  |   | 9,241  |  |  |   | 304   | 
|Real estate - construction:                         |  |                    |        |  |                        |   |        |                                     |  |   |                                   |  |  |                  |        |  |                           |   |       |                          |  |   |        |  |  |   |       | 
|One to four family residential                      |  |                    | 534    |  |                        |   | 534    |                                     |  |   | 534                               |  |  |                  |       |  |                           |   |      |                          |  |   | 604    |  |  |   | 21    | 
|Other construction, land development and other land |  |                    | 18,278 |  |                        |   | 20,579 |                                     |  |   | 14,110                            |  |  |                  | 4,168  |  |                           |   | 2,032 |                          |  |   | 11,002 |  |  |   | 696   | 
|                                                    |  |                    |        |  |                        |   |        |                                     |  |   |                                   |  |  |                  |        |  |                           |   |       |                          |  |   |        |  |  |   |       | 
|Total real estate - construction                    |  |                    | 18,812 |  |                        |   | 21,113 |                                     |  |   | 14,644                            |  |  |                  | 4,168  |  |                           |   | 2,032 |                          |  |   | 11,606 |  |  |   | 717   | 
|Real estate - non-farm, non-residential:            |  |                    |        |  |                        |   |        |                                     |  |   |                                   |  |  |                  |        |  |                           |   |       |                          |  |   |        |  |  |   |       | 
|Owner occupied                                      |  |                    | 8,410  |  |                        |   | 8,901  |                                     |  |   | 2,444                             |  |  |                  | 5,966  |  |                           |   | 1,013 |                          |  |   | 6,351  |  |  |   | 432   | 
|Non-owner occupied                                  |  |                    | 12,323 |  |                        |   | 12,553 |                                     |  |   | 1,925                             |  |  |                  | 10,398 |  |                           |   | 2,264 |                          |  |   | 3,492  |  |  |   | 573   | 
|                                                    |  |                    |        |  |                        |   |        |                                     |  |   |                                   |  |  |                  |        |  |                           |   |       |                          |  |   |        |  |  |   |       | 
|Total real estate - non-farm, non-residential       |  |                    | 20,733 |  |                        |   | 21,454 |                                     |  |   | 4,369                             |  |  |                  | 16,364 |  |                           |   | 3,277 |                          |  |   | 9,843  |  |  |   | 1,005 | 
|                                                    |  |                    |        |  |                        |   |        |                                     |  |   |                                   |  |  |                  |        |  |                           |   |       |                          |  |   |        |  |  |   |       | 
|Total loans                                         |  | $                  | 49,457 |  |                        | $ | 55,043 |                                     |  | $ | 21,872                            |  |  | $                | 27,585 |  |                           | $ | 6,899 |                          |  | $ | 33,558 |  |  | $ | 2,033 | 
|                                                    |  |                    |        |  |                        |   |        |                                     |  |   |                                   |  |  |                  |        |  |                           |   |       |                          |  |   |        |  |  |   |       | 

Note 4. Deferred Income Taxes

As of March 31, 2011 and December 31, 2010, the Company had recorded net deferred income tax assets of approximately $12.5 million and $12.6 million, respectively. The realization of deferred
income tax assets is assessed and a valuation allowance is recorded if it is more likely than not that all or a portion of the deferred tax asset will not be realized. More likely than not is defined as greater than a 50%
chance. Management considers all available evidence, both positive and negative, to determine whether, based on the weight of that evidence, a valuation allowance is needed. Managements assessment is primarily dependent on historical
taxable income and projections of future taxable income, which are directly related to the Companys core earnings capacity and its prospects to generate core earnings in the future. Projections of core earnings and taxable income are
inherently subject to uncertainty and estimates that may change given the uncertain economic outlook, banking industry conditions and other factors. Based upon an analysis of available evidence, management has determined that it is more
likely than not that the Companys deferred income tax assets as of March 31, 2011 will be fully realized and therefore no valuation allowance to the Companys deferred income tax assets was recorded. However, the Company can
give no assurance that in the future its deferred income tax assets will not be impaired because such determination is based on projections of future earnings and the possible effect of certain transactions, which are subject to uncertainty and
based on estimates that may change due to changing economic conditions and other factors. Due to the uncertainty of estimates and projections, it is possible that the Company will be required to record adjustments to the valuation allowance in
future reporting periods.



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##### Table of Contents

Due to the net operating loss incurred for the years ended December 31, 2010 and 2009, the Company has
recorded income taxes receivable, which have been carried back to prior years, of approximately $3.9 million at March 31, 2011 and $4.1 million at December 31, 2010, which are included in other assets on the accompanying consolidated
balance sheets.

Note 5. Bank Premises and Equipment

Bank premises and equipment are summarized as follows:



|                                     |  |               |         |   |                  |   |         |  
|------------------------------------ |  | ------------- | ------- | - | ---------------- | - | ------- | -
|(dollars in thousands)               |  | March 31,2011 |         |   | December 31,2010 |  
|                                     |  |              
|Land and improvements                |  | $             | 6,009   |   |                  | $ | 5,176   |  
|Buildings and leasehold improvements |  |               | 19,161  |   |                  |   | 19,458  |  
|Furniture, fixtures and equipment    |  |               | 16,118  |   |                  |   | 16,060  |  
|Construction in progress             |  |               | 2,543   |   |                  |   | 2,257   |  
|                                     |  |               |         |   |                  |   |         |  
|                                     |  |               | 43,831  |   |                  |   | 42,951  |  
|Less accumulated depreciation        |  |               | (22,360 | ) |                  |   | (22,194 | )
|                                     |  |               |         |   |                  |   |         |  
|Net balance                          |  | $             | 21,471  |   |                  | $ | 20,757  |  
|                                     |  |               |         |   |                  |   |         |  

Depreciation and amortization of bank premises and equipment for the three months ended March 31, 2011 and 2010
amounted to $519 thousand and $553 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, 2011 and the year ended December 31, 2010:



|                                                   |  |               |       |   |                  |   |       |  
|-------------------------------------------------- |  | ------------- | ----- | - | ---------------- | - | ----- | -
|Federal funds purchased (dollars in thousands)     |  | March 31,2011 |       |   | December 31,2010 |  
|Balance outstanding at period end                  |  | $             |      |   |                  | $ | 15    |  
|Maximum balance at any month end during the period |  | $             |      |   |                  | $ | 6,850 |  
|Average balance for the period                     |  | $             | 222   |   |                  | $ | 2,038 |  
|Weighted average rate for the period               |  |               | 0.85  | % |                  |   | 0.76  | %
|Weighted average rate at period end                |  |               | 0.00  | % |                  |   | 1.02  | %
|                                                   |  |              
|Repurchase agreements (dollars in thousands)       |  | March 31,2011 |       |   | December 31,2010 |  
|Balance outstanding at period end                  |  | $             | 2,478 |   |                  | $ | 2,449 |  
|Maximum balance at any month end during the period |  | $             | 2,478 |   |                  | $ | 4,245 |  
|Average balance for the period                     |  | $             | 2,320 |   |                  | $ | 2,921 |  
|Weighted average rate for the period               |  |               | 1.24  | % |                  |   | 1.33  | %
|Weighted average rate at period end                |  |               | 1.07  | % |                  |   | 1.34  | %



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##### Table of Contents

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

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



|                                                   |  |               |        |   |                  |   |        |  
|-------------------------------------------------- |  | ------------- | ------ | - | ---------------- | - | ------ | -
|Short-term borrowings (dollars in thousands)       |  | March 31,2011 |        |   | December 31,2010 |  
|Balance outstanding at period end                  |  | $             | 5,500  |   |                  | $ | 25,000 |  
|Maximum balance at any month end during the period |  | $             | 10,325 |   |                  | $ | 25,000 |  
|Average balance for the period                     |  | $             | 5,092  |   |                  | $ | 1,767  |  
|Weighted average rate for the period               |  |               | 0.48   | % |                  |   | 0.51   | %
|Weighted average rate at period end                |  |               | 0.36   | % |                  |   | 0.47   | %

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

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



|                       |  |                |         |  |             |  |      |                |  |   |             |  |  |  |      |  
|---------------------- |  | -------------- | ------- |  | ----------- |  | ---- | -------------- |  | - | ----------- |  |  |  | ---- | -
|(dollars in thousands) |  | MaturityAmount |         |  | AverageRate |  |      | CallableAmount |  |   | AverageRate | 
|2011                   |  | $              |        |  |             |  |     |                |  | $ | 94,000      |  |  |  | 4.18 | %
|2013                   |  |                | 10,000  |  |             |  | 2.42 | %              |  |   |            |  |  |  |      |  
|2015                   |  |                | 13,500  |  |             |  | 3.87 | %              |  |   |            |  |  |  |     |  
|2016                   |  |                | 10,000  |  |             |  | 4.85 | %              |  |   |            |  |  |  |     |  
|2017                   |  |                | 75,000  |  |             |  | 4.30 | %              |  |   |            |  |  |  |     |  
|2018                   |  |                | 9,000   |  |             |  | 2.44 | %              |  |   |            |  |  |  |     |  
|                       |  |                |         |  |             |  |      |                |  |   |             |  |  |  |      |  
|                       |  | $              | 117,500 |  |             |  | 4.00 | %              |  | $ | 94,000      |  |  |  | 4.18 | %
|                       |  |                |         |  |             |  |      |                |  |   |             |  |  |  |      |  

Our line of credit with the FHLB can equal up to 25% of our assets or approximately $279.8 million at
March 31, 2011. This line of credit totaled $171.3 million with approximately $43.5 million available at March 31, 2011. As of March 31, 2011 and December 31, 2010, loans with a carrying value of $354.8 million and $353.8
million, respectively, are pledged to the FHLB as collateral for borrowings. Additional loans are available that can be pledged as collateral for future borrowings from the FHLB above the current lendable collateral value. Combined short-term and
long-term borrowings outstanding under the FHLB line of credit was $123.0 million at March 31, 2011 and $142.5 million at December 31, 2010.

Note 7. Earnings Per Share

The following table shows the weighted average number of common
shares used in computing earnings per share and the effect on the weighted average number of shares of potential dilutive common stock. Potential dilutive common stock had no effect on earnings per share otherwise available to common shareholders
for the three months ended March 31, 2011 and 2010.



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##### Table of Contents

|                                             |  |                    |           |  |                 |   |      |        |  |  |                 |  |  |   |      | 
|-------------------------------------------- |  | ------------------ | --------- |  | --------------- | - | ---- | ------ |  |  | --------------- |  |  | - | ---- | 
|                                             |  | Three Months Ended |          
|                                             |  | March 31, 2011     |           |  | March 31, 2010  |  
|                                             |  | Shares             |           |  | Per ShareAmount |   |      | Shares |  |  | Per ShareAmount | 
|Basic earnings per common share              |  |                    | 5,995,907 |  |                 | $ | 0.02 |        |  |  | 5,966,274       |  |  | $ | 0.16 | 
|Effect of dilutive securities, stock options |  |                    |          |  |                 |   |     |        |  |  |                |  |  |   |     | 
|                                             |  |                    |           |  |                 |   |      |        |  |  |                 |  |  |   |      | 
|Diluted earnings per common share            |  |                    | 5,995,907 |  |                 | $ | 0.02 |        |  |  | 5,966,274       |  |  | $ | 0.16 | 
|                                             |  |                    |           |  |                 |   |      |        |  |  |                 |  |  |   |      | 

Options to acquire 251,137 and 272,017 shares of common stock were not included in computing diluted earnings per common
share for the three months ended March 31, 2011 and 2010, respectively, because their effects were anti-dilutive.

Note 8. Stock Based
Compensation Plans

On September 21, 2000, we adopted the Eastern Virginia Bankshares, Inc. 2000 Stock Option Plan (the 2000
Plan) to provide a means for selected key employees and directors to increase their personal financial interest in our Company, thereby stimulating their efforts and strengthening their desire to remain with us. Under the 2000 Plan, up to
400,000 shares of Company common stock could be granted in the form of stock options. On April 17, 2003, the shareholders approved the Eastern Virginia Bankshares, Inc. 2003 Stock Incentive Plan, amending and restating the 2000 Plan (the
2003 Plan) still authorizing the issuance of up to 400,000 shares of common stock under the plan, but expanding the award types available under the plan to include stock options, stock appreciation rights, common stock, restricted stock
and phantom stock. There are 69,218 shares still available to be granted as awards under the 2003 Plan.

On April 19, 2007, our
shareholders approved the Eastern Virginia Bankshares, Inc. 2007 Equity Compensation Plan (the 2007 Plan) to enhance our ability to recruit and retain officers, directors, employees, consultants and advisors with ability and initiative
and to encourage such persons to have a greater financial interest in the Company. The 2007 Plan authorizes the Company to issue up to 400,000 additional shares of common stock pursuant to grants of stock options, stock appreciation rights, common
stock, restricted stock, performance shares, incentive awards and stock units. No awards have been issued under the 2007 Plan.

Accounting
standards require companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options, based on the fair value of those awards at the date of grant.

Accounting standards also require that new awards to employees eligible for retirement prior to the awards becoming fully vested be recognized as
compensation cost over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award. Our stock options granted to eligible participants are being recognized, as
required, as compensation cost over the vesting period except in the instance where a participant reaches normal retirement age of 65 prior to the normal vesting date. For the three months ended March 31, 2011 and 2010, stock option
compensation expense was $27 thousand and $45 thousand, respectively, and was included in salary 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, 2011 or 2010.



21



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##### Table of Contents

A summary of the Companys stock option activity and related information for the three months ended
March 31, 2011 is as follows:



|                                             |  |                    |         |  |                                |   |       |                                                     |  |  |                                        |  |  |   |   | 
|-------------------------------------------- |  | ------------------ | ------- |  | ------------------------------ | - | ----- | --------------------------------------------------- |  |  | -------------------------------------- |  |  | - | - | 
|                                             |  | OptionsOutstanding |         |  | Weighted AverageExercise Price |   |       | Weighted AverageRemainingContractual Life(in years) |  |  | AggregateIntrinsic Value(in thousands) | 
|Stock options outstanding at January 1, 2011 |  |                    | 251,137 |  |                                | $ | 19.68 |                                                     |  |  |                                        |  |  |   |   | 
|Granted                                      |  |                    |        |  |                                |   |      |                                                     |  |  |                                        |  |  |   |   | 
|Exercised                                    |  |                    |        |  |                                |   |      |                                                     |  |  |                                        |  |  |   |   | 
|Forfeited                                    |  |                    |        |  |                                |   |      |                                                     |  |  |                                        |  |  |   |   | 
|                                             |  |                    |         |  |                                |   |       |                                                     |  |  |                                        |  |  |   |   | 
|Stock options outstanding at March 31, 2011  |  |                    | 251,137 |  |                                | $ | 19.68 |                                                     |  |  | 4.36                                   |  |  | $ |  | 
|                                             |  |                    |         |  |                                |   |       |                                                     |  |  |                                        |  |  |   |   | 
|                                             |  |                    |         | 
|Stock options exercisable at March 31, 2011  |  |                    | 176,887 |  |                                | $ | 21.26 |                                                     |  |  | 3.30                                   |  |  | $ |  | 
|                                             |  |                    |         |  |                                |   |       |                                                     |  |  |                                        |  |  |   |   | 



|* | 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, 2011, there was $92 thousand of unrecognized compensation expense related to stock options that will be
recognized over the remaining requisite average service period of approximately 12 months.

The table below summarizes information concerning
stock options outstanding and exercisable at March 31, 2011.



|                          |       |  |                           |  |         |                              |  |  |               |  |  |                   |       |  |  |  |         | 
|------------------------- | ----- |  | ------------------------- |  | ------- | ---------------------------- |  |  | ------------- |  |  | ----------------- | ----- |  |  |  | ------- | 
|Stock Options Outstanding |       |  | Stock Options Exercisable | 
|ExercisePrice             |       |  | NumberOutstanding         |  |         | WeightedAverageRemainingTerm |  |  | ExercisePrice |  |  | NumberExercisable |      
|$                         | 16.10 |  |                           |  | 18,375  |                              |  |  | 1.00 year     |  |  | $                 | 16.10 |  |  |  | 18,375  | 
|$                         | 28.60 |  |                           |  | 24,525  |                              |  |  | 2.50 years    |  |  | $                 | 28.60 |  |  |  | 24,525  | 
|$                         | 19.92 |  |                           |  | 35,050  |                              |  |  | 3.25 years    |  |  | $                 | 19.92 |  |  |  | 35,050  | 
|$                         | 20.57 |  |                           |  | 47,312  |                              |  |  | 4.25 years    |  |  | $                 | 20.57 |  |  |  | 47,312  | 
|$                         | 21.16 |  |                           |  | 51,625  |                              |  |  | 5.50 years    |  |  | $                 | 21.16 |  |  |  | 51,625  | 
|$                         | 19.25 |  |                           |  | 38,500  |                              |  |  | 6.50 years    |  |  | $                 |      |  |  |  |        | 
|$                         | 12.36 |  |                           |  | 35,750  |                              |  |  | 7.50 years    |  |  | $                 |      |  |  |  |        | 
|                          |       |  |                           |  |         |                              |  |  |               |  |  |                   |       |  |  |  |         | 
|$                         | 19.68 |  |                           |  | 251,137 |                              |  |  | 4.36 years    |  |  | $                 | 21.26 |  |  |  | 176,887 | 
|                          |       |  |                           |  |         |                              |  |  |               |  |  |                   |       |  |  |  |         | 

For the three months ended March 31, 2011 and 2010, restricted stock compensation expense was $5 thousand and $9
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 our common stock on the date the
restricted shares were awarded, which was $3.75 per share for the 2010 award, $8.31 per share for the 2009 awards, and $17.25 per share for the 2007 awards. At March 31, 2011, there are 2,200 shares, 6,300 shares and 8,000 shares related to the
2007, 2009 and 2010 awards, respectively, outstanding and unvested. There were no restricted stock awards granted or which vested in the three months ended March 31, 2011 and 2010.



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A summary of the status of our nonvested shares in relation to our restricted stock awards as of
March 31, 2011, and changes during the three months ended March 31, 2011 is presented below; the weighted average price is the weighted average fair value at the date of grant:



|                                |  |        |        |  |                       |   |      | 
|------------------------------- |  | ------ | ------ |  | --------------------- | - | ---- | 
|                                |  | Shares |        |  | Weighted-AveragePrice |  
|Nonvested as of January 1, 2011 |  |        | 16,500 |  |                       | $ | 7.29 | 
|Granted                         |  |        |       |  |                       |   |     | 
|Vested                          |  |        |       |  |                       |   |     | 
|Forfeited                       |  |        |       |  |                       |   |     | 
|                                |  |        |        |  |                       |   |      | 
|Nonvested as of March 31, 2011  |  |        | 16,500 |  |                       | $ | 7.29 | 
|                                |  |        |        |  |                       |   |      | 

At March 31, 2011, there was $26 thousand of total unrecognized compensation related to restricted
stock awards. This unearned compensation is being amortized over the remaining vesting period for the time based shares, and over the remaining vesting period for 1/3rdof the 2009 performance based shares. The Company assumes that only 1/3rdof the 2009 performance based awards will vest.

Note 9. Employee Benefit Plan  Pension

The Company has a defined benefit pension plan. Effective January 28, 2008, the Company took action to freeze the plan with no additional contributions for a majority of participants. Employees age
55 or greater or with 10 years of credited service were grandfathered in the plan. No additional participants have been added to the plan. Effective February 28, 2011, the Company took action to again freeze the plan with no additional
contributions for grandfathered participants. Benefits for all participants will remain frozen in the plan until such time as further action occurs. Components of net periodic pension cost (benefit) related to the Companys pension plan were as
follows for the periods indicated:



|                                                  |  |                             |      |   |      |   |      |  
|------------------------------------------------- |  | --------------------------- | ---- | - | ---- | - | ---- | -
|                                                  |  | Three Months EndedMarch 31, |     
|(dollars in thousands)                            |  | 2011                        |      |   | 2010 |  
|                                                  |  |                            
|Components of Net Periodic Pension Cost (Benefit) |  |                             |      |   |      |   |      |  
|Service cost                                      |  | $                           |     |   |      | $ | 146  |  
|Interest cost                                     |  |                             | 151  |   |      |   | 195  |  
|Expected return on plan assets                    |  |                             | (224 | ) |      |   | (237 | )
|Amortization of prior service cost                |  |                             |     |   |      |   | 5    |  
|Net loss                                          |  |                             |     |   |      |   | 14   |  
|                                                  |  |                             |      |   |      |   |      |  
|Net periodic pension cost (benefit)               |  | $                           | (73  | ) |      | $ | 123  |  
|                                                  |  |                             |      |   |      |   |      |  

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

Note 10. Fair Value Measurements

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



| |  |  | Level 1  Valuation is based upon quoted prices (unadjusted) for identical instruments traded in active markets.
| | - |  | ----------------------------------------------------------------------------------------------------------------



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



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##### Table of Contents

| |  |  | 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, 2011.

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

Assets Measured at Fair Value on a Recurring Basis

Securities Available For Sale. Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If
quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data.
Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2). The Company obtains a single quote for all
securities. Quotes for most securities are provided by our securities accounting and safekeeping correspondent bank which uses Reuters for securities other than municipals for which they use a pricing matrix. The correspondent also uses securities
trader quotations for a small number of securities. Securities pricing for a single pooled trust preferred senior security is provided through another correspondent by Moodys Analytics. The Company does not adjust any quotes or prices provided
by these third party sources. The Company performs a review of pricing data by comparing prices received from third party vendors to the previous months quote for the same security and evaluate any substantial changes.

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



|                                                                           |  |                                                             |   |  |                                             |   |         |                                        |  |   |                         |  |  |   |         | 
|-------------------------------------------------------------------------- |  | ----------------------------------------------------------- | - |  | ------------------------------------------- | - | ------- | -------------------------------------- |  | - | ----------------------- |  |  | - | ------- | 
|Assets Measured at Fair Value on a
Recurring Basis at March 31, 2011 Using | 
|                                                                           |  | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   |  | Significant 
OtherObservableInputs(Level 2) |   |         | SignificantUnobservableInputs(Level 3) |  |   | Balance atMarch 31,2011 | 
|                                                                           |  | (dollars in thousands)                                      |  
|                                                                           |  |                                                             |   | 
|Assets                                                                     |  |                                                             |   |  |                                             |   |         |                                        |  |   |                         |  |  |   |         | 
|Securities available for sale                                              |  |                                                             |   |  |                                             |   |         |                                        |  |   |                         |  |  |   |         | 
|Obligations of U.S. Government agencies                                    |  | $                                                           |  |  |                                             | $ | 3,780   |                                        |  | $ |                        |  |  | $ | 3,780   | 
|SBA Pool securities                                                        |  |                                                             |  |  |                                             |   | 59,904  |                                        |  |   |                        |  |  |   | 59,904  | 
|Agency mortgage-backed securities                                          |  |                                                             |  |  |                                             |   | 56,264  |                                        |  |   |                        |  |  |   | 56,264  | 
|Agency CMO securities                                                      |  |                                                             |  |  |                                             |   | 41,216  |                                        |  |   |                        |  |  |   | 41,216  | 
|Non agency CMO securities                                                  |  |                                                             |  |  |                                             |   | 10,544  |                                        |  |   |                        |  |  |   | 10,544  | 
|State and political subdivisions                                           |  |                                                             |  |  |                                             |   | 44,287  |                                        |  |   |                        |  |  |   | 44,287  | 
|Pooled trust preferred securities                                          |  |                                                             |  |  |                                             |   | 654     |                                        |  |   |                        |  |  |   | 654     | 
|FNMA and FHLMC preferred stock                                             |  |                                                             |  |  |                                             |   | 286     |                                        |  |   |                        |  |  |   | 286     | 
|Corporate securities                                                       |  |                                                             |  |  |                                             |   | 2,632   |                                        |  |   |                        |  |  |   | 2,632   | 
|                                                                           |  |                                                             |   |  |                                             |   |         |                                        |  |   |                         |  |  |   |         | 
|Total securities available for sale                                        |  | $                                                           |  |  |                                             | $ | 219,567 |                                        |  | $ |                        |  |  | $ | 219,567 | 
|                                                                           |  |                                                             |   |  |                                             |   |         |                                        |  |   |                         |  |  |   |         | 



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##### Table of Contents

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

At March 31, 2011, each security in the Companys securities available for sale portfolio was measured at fair
value on a recurring basis using Level 2 valuations.

Assets Measured at Fair Value on a Non-Recurring Basis

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

Impaired Loans.Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that
some portion of the amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value
of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The vast majority of the
collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed external appraiser using observable market data (Level 2).
However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. If a real estate loan becomes a nonperforming loan, and
the valuation is over one year old, either an evaluation by an officer of the bank or an outside vendor or an appraisal is performed to determine current market value. The Company considers the value of a partially completed project for our loan
analysis. For nonperforming construction loans, the Company obtains a valuation of each partially completed project as is from a third party appraiser. The Company uses 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).



25



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##### Table of Contents

However, if the other real estate is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered
Level 3. The Company believes that the fair value component in our valuation of OREO follows the provisions of accounting standards.

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



|                                                                                  |  |                                                             |   |  |                                             |   |        |                                        |  |   |                            |  |  |   |        | 
|--------------------------------------------------------------------------------- |  | ----------------------------------------------------------- | - |  | ------------------------------------------- | - | ------ | -------------------------------------- |  | - | -------------------------- |  |  | - | ------ | 
|Assets Measured at Fair Value on a
Non-Recurring Basis at March 31, 2011 Using    | 
|                                                                                  |  | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   |  | Significant 
OtherObservableInputs(Level 2) |   |        | SignificantUnobservableInputs(Level 3) |  |   | Balance atMarch 31,2011    | 
|                                                                                  |  | (dollars in thousands)                                      |  
|                                                                                  |  |                                                             |   | 
|Assets                                                                            |  |                                                             |   |  |                                             |   |        |                                        |  |   |                            |  |  |   |        | 
|Impaired loans                                                                    |  | $                                                           |  |  |                                             | $ | 20,771 |                                        |  | $ | 4,720                      |  |  | $ | 25,491 | 
|Other real estate owned                                                           |  | $                                                           |  |  |                                             | $ | 5,067  |                                        |  | $ | 6,173                      |  |  | $ | 11,240 | 
|                                                                                 
|Assets Measured at Fair Value on a
Non-Recurring Basis at December 31, 2010 Using | 
|                                                                                  |  | Quoted Prices inActive Markets forIdentical Assets(Level 1) |   |  | Significant 
OtherObservableInputs(Level 2) |   |        | SignificantUnobservableInputs(Level 3) |  |   | Balance atDecember 31,2010 | 
|                                                                                  |  | (dollars in thousands)                                      |  
|                                                                                  |  |                                                             |   | 
|Assets                                                                            |  |                                                             |   |  |                                             |   |        |                                        |  |   |                            |  |  |   |        | 
|Impaired loans                                                                    |  | $                                                           |  |  |                                             | $ | 18,550 |                                        |  | $ | 2,136                      |  |  | $ | 20,686 | 
|Other real estate owned                                                           |  | $                                                           |  |  |                                             | $ | 7,360  |                                        |  | $ | 4,257                      |  |  | $ | 11,617 | 

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

Fair Value of Financial
Instruments

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

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

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

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



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##### Table of Contents

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

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

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

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

Accrued Interest Receivable and Accrued Interest Payable. The carrying amounts of accrued interest approximate fair value.

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

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



|                                     |  |                |         |  |                     |   |         |                |  |   |                     |  |  |   |         | 
|------------------------------------ |  | -------------- | ------- |  | ------------------- | - | ------- | -------------- |  | - | ------------------- |  |  | - | ------- | 
|                                     |  | March 31, 2011 |         |  | December 31, 2010   |  
|(dollars in thousands)               |  | CarryingAmount |         |  | EstimatedFair Value |   |         | CarryingAmount |  |   | EstimatedFair Value | 
|                                     |  |                |         | 
|Financial Assets:                    |  |                |         |  |                     |   |         |                |  |   |                     |  |  |   |         | 
|Cash and short-term investments      |  | $              | 12,855  |  |                     | $ | 12,855  |                |  | $ | 12,533              |  |  | $ | 12,533  | 
|Interest bearing deposits with banks |  |                | 9,957   |  |                     |   | 9,957   |                |  |   | 10,298              |  |  |   | 10,298  | 
|Securities available for sale        |  |                | 219,567 |  |                     |   | 219,567 |                |  |   | 246,120             |  |  |   | 246,120 | 
|Restricted securities                |  |                | 10,344  |  |                     |   | 10,344  |                |  |   | 10,344              |  |  |   | 10,344  | 
|Loans, net                           |  |                | 739,759 |  |                     |   | 757,149 |                |  |   | 749,486             |  |  |   | 769,510 | 
|Accrued interest receivable          |  |                | 4,232   |  |                     |   | 4,232   |                |  |   | 4,281               |  |  |   | 4,281   | 
|                                     |  |                |         | 
|Financial Liabilities:               |  |                |         |  |                     |   |         |                |  |   |                     |  |  |   |         | 
|Noninterest-bearing demand deposits  |  | $              | 99,036  |  |                     | $ | 99,036  |                |  | $ | 97,122              |  |  | $ | 97,122  | 
|Interest-bearing deposits            |  |                | 750,493 |  |                     |   | 742,767 |                |  |   | 771,024             |  |  |   | 762,844 | 
|Short-term borrowings                |  |                | 7,978   |  |                     |   | 7,978   |                |  |   | 27,464              |  |  |   | 27,464  | 
|Long-term borrowings                 |  |                | 117,500 |  |                     |   | 129,549 |                |  |   | 117,500             |  |  |   | 132,498 | 
|Trust preferred debt                 |  |                | 10,310  |  |                     |   | 10,310  |                |  |   | 10,310              |  |  |   | 10,310  | 
|Accrued interest payable             |  |                | 1,389   |  |                     |   | 1,389   |                |  |   | 1,451               |  |  |   | 1,451   | 

The Company assumes interest rate
risk (the risk that general interest rate levels will change) as a result of our normal operations. As a result, the fair values of our financial instruments will change when interest rate levels change and that change may be either favorable or
unfavorable to us. The Company attempts to match maturities of assets and



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liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment. Conversely,
depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. The Company monitors rates and maturities of assets and liabilities and
attempt to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate our overall interest rate risk.

Note 11. Preferred Stock and Warrant

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

Accounting for the issuance of preferred stock included entries to the
equity portion of our consolidated balance sheet to recognize preferred stock at the full amount of the issuance, the warrant and discount on preferred stock at values calculated by discounting the future cash flows by a prevailing interest rate
that a similar security would receive in the current market environment. At the time of issuance that discount rate was determined to be 12%. The fair value of the warrant of $950 thousand was calculated using the Black-Scholes model with inputs of
7 year volatility, average rate of quarterly dividends, 7 year Treasury strip rate and the exercise price of $9.63 per share exercisable for up to 10 years. The present value of the preferred stock using a 12% discount rate was $14.4 million. The
preferred stock discount determined by the allocation of discount to the warrant is being accreted quarterly over a 5 year period on a constant effective yield method at a rate of approximately 6.4%. Allocation of the preferred stock discount and
the warrant as of January 9, 2009 is provided in the tables below:



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

NPV of Preferred Stock

@ 12% discount rate



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

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



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The Company has notified the Treasury that it will defer the February 2011 payment of its regular quarterly
cash dividend with respect to its Series A Fixed Rate Cumulative Perpetual Preferred Stock which the Company issued to the Treasury in connection with the Companys participation in the Treasurys Capital Purchase Program.

The Company may defer dividend payments, but the dividend is a cumulative dividend that accumulates for payment in the future, and the failure to pay
dividends for six dividend periods would trigger board appointment rights for the Treasury. The amount of the 2011 dividends that have accumulated and are unpaid is $300 thousand.

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, 2011 and December 31, 2010, the interest rate was 3.26% and 3.25%, respectively. The dividends paid to holders of the trust preferred securities, which are recorded as interest expense, are deductible for income tax
purposes. The trust preferred securities have a mandatory redemption date of September 17, 2033, and became subject to varying call provisions beginning September 17, 2008. The Parent has fully and unconditionally guaranteed the trust
preferred securities through the combined operation of the debentures and other related documents. The Parents obligation under the guarantee is unsecured and subordinate to senior and subordinated indebtedness of the Parent.

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

Subject to certain exceptions and limitations, the Company may 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 has yet to defer any of its regularly scheduled interest
payments on its outstanding Junior Subordinated Debentures relating to its trust preferred securities. The Company expects to notify the trustee that it will be deferring its regularly scheduled interest payment during the second quarter of 2011.

Note 13. Capital Requirements

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

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



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



|                                 |  |                |       |   |                            |  |      |                                                                      |  |  |       |  
|-------------------------------- |  | -------------- | ----- | - | -------------------------- |  | ---- | -------------------------------------------------------------------- |  |  | ----- | -
|As of March 31, 2011             |  | Actual Capital |       |   | MinimumCapitalRequirements |  |      | Minimum To BeWell-CapitalizedUnder PromptCorrective ActionProvisions | 
|Total Risk-Based Capital Ratio:  |  |                |       |   |                            |  |      |                                                                      |  |  |       |  
|Company                          |  |                | 11.79 | % |                            |  | 8.00 | %                                                                    |  |  | N/A   |  
|Bank                             |  |                | 11.06 | % |                            |  | 8.00 | %                                                                    |  |  | 10.00 | %
|                                 |  |                |      
|Tier 1 Risk-Based Capital Ratio: |  |                |       |   |                            |  |      |                                                                      |  |  |       |  
|Company                          |  |                | 10.54 | % |                            |  | 4.00 | %                                                                    |  |  | N/A   |  
|Bank                             |  |                | 8.34  | % |                            |  | 4.00 | %                                                                    |  |  | 6.00  | %
|                                 |  |                |      
|Leverage Ratio:                  |  |                |       |   |                            |  |      |                                                                      |  |  |       |  
|Company                          |  |                | 7.33  | % |                            |  | 4.00 | %                                                                    |  |  | N/A   |  
|Bank                             |  |                | 5.79  | % |                            |  | 4.00 | %                                                                    |  |  | 5.00  | %
|                                 |  |                |      
|As of December 31, 2010          |  | Actual Capital |       |   | MinimumCapitalRequirements |  |      | Minimum to beWell-CapitalizedUnder PromptCorrective ActionProvisions | 
|Total Risk-Based Capital Ratio:  |  |                |       |   |                            |  |      |                                                                      |  |  |       |  
|Company                          |  |                | 11.70 | % |                            |  | 8.00 | %                                                                    |  |  | N/A   |  
|Bank                             |  |                | 10.99 | % |                            |  | 8.00 | %                                                                    |  |  | 10.00 | %
|                                 |  |                |      
|Tier 1 Risk-Based Capital Ratio: |  |                |       |   |                            |  |      |                                                                      |  |  |       |  
|Company                          |  |                | 10.51 | % |                            |  | 4.00 | %                                                                    |  |  | N/A   |  
|Bank                             |  |                | 8.36  | % |                            |  | 4.00 | %                                                                    |  |  | 6.00  | %
|                                 |  |                |      
|Leverage Ratio:                  |  |                |       |   |                            |  |      |                                                                      |  |  |       |  
|Company                          |  |                | 7.38  | % |                            |  | 4.00 | %                                                                    |  |  | N/A   |  
|Bank                             |  |                | 5.86  | % |                            |  | 4.00 | %                                                                    |  |  | 5.00  | %

Note 14. Formal Written Agreement

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

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



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

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

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

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

Note 15. Subsequent Events

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

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



|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations
|------- | -------------------------------------------------------------------------------------

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

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

Internet Access to Corporate Documents

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



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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 or the payment of dividends; (iii) statements of future economic performance; (iv) statements regarding the impact of the Written Agreement
on our financial condition, operations and capital strategies; (v) 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 (vi) 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 expectations of our regulatory agencies;
|- |  | ------------------------------------------------------------------------



| |  | changes in laws, regulations and the policies of federal or state regulators and agencies;
|- |  | ------------------------------------------------------------------------------------------



| |  | changes in the interest rates affecting our deposits and our loans;
|- |  | -------------------------------------------------------------------



| |  | the loss of any of our key employees;
|- |  | -------------------------------------



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



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



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



| |  | our ability to maintain internal control over financial reporting;
|- |  | ------------------------------------------------------------------



| |  | our ability to raise capital as needed by our business;
|- |  | -------------------------------------------------------



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



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



| |  | possible changes to our Board of Directors, including in connection with deferred dividends on our Capital Purchase Program Preferred Stock; and
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------



| |  | other circumstances, many of which are beyond our control.
|- |  | ----------------------------------------------------------

All of the forward-looking statements made in this report are qualified by these factors, and there can be no assurance that the actual results anticipated by us will be realized or, even if substantially
realized, that they will have the expected consequences to, or effects on, us or our business or operations. You should refer to risks detailed under Item 1A. Risk Factors included in the 2010 Form 10-K and otherwise included in our
periodic and current reports filed with the SEC for specific factors that could cause our actual results to be significantly different from those expressed or implied by our forward-looking statements.



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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 to the borrower that it would not otherwise consider. For more information see the section titled Asset Quality within
Item 2.

Impairment of Securities

Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net
income if either (i) we intend to sell the security or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If, however, we do not intend to sell the security and it is
not more likely than not that we will be required to sell the security before recovery, we must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost basis of the security exceeds the present
value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in
net income and the remaining portion of impairment must be recognized in other comprehensive income. For equity securities, impairment is considered to be other-than-temporary based on our ability and intent to hold the investment until a recovery
of fair value. Other-than-temporary impairment of an equity security results in a write-down that must be included in net income. We regularly review each investment security for other-than-temporary impairment based on criteria that includes the
extent to which cost exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, our best estimate of the present value of cash flows expected to be collected from debt securities, our
intention with regard to holding the security to maturity and the likelihood that we would be required to sell the security before recovery.



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Other Real Estate Owned

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

Goodwill

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

Retirement Plan

The Company has a
defined benefit pension plan. Effective January 28, 2008, the Company took action to freeze the plan with no additional contributions for a majority of participants. Employees age 55 or greater or with 10 years of credited service were
grandfathered in the plan. No additional participants have been added to the plan. Effective February 28, 2011, the Company took action to again freeze the plan with no additional contributions for grandfathered participants. Benefits for all
participants will remain frozen in the plan until such time as further action occurs. Plan assets, which consist primarily of mutual funds invested in marketable equity securities and corporate and government fixed income securities, are valued
using market quotations. The Companys actuary determines plan obligations and annual pension expense using a number of key assumptions. Key assumptions may include the discount rate, the estimated return on plan assets and the anticipated rate
of compensation increases. Changes in these assumptions in the future, if any, or in the method under which benefits are calculated may impact pension assets, liabilities or expense.

Accounting for Income Taxes

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

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

Executive Overview

Eastern Virginia Bankshares, Inc., is committed to delivering strong long-term earnings using a prudent allocation of capital, in business lines where we have demonstrated the ability to compete
successfully. Over the past three years, our Company has struggled with the challenging economic environment and has focused on credit quality initiatives to position our Company for growth once the economic climate improves. Although constrained by
a weak economy, the Company was able to achieve some positive accomplishments during the first three months of 2011, including a return to profitability and a 3.7% decrease in nonperforming assets. The improvements seen in some of the Companys
credit metrics, and other factors, are reflective of slowly improving economic conditions. Although the first quarter results of 2011 represent a positive trend for the Company, our optimism is tempered with caution as the current economic
environment continues to negatively impact the credit quality of our loan portfolio. General credit quality is not expected to show broad based improvement until all levels of the economy experience a resurgence of positive cash flow. In the near
term, the Company anticipates a continuation of prolonged economic weakness, both locally and nationally, and continued credit issues in the loan portfolio.



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

The primary drivers for the Companys results for the first three months of 2011 continue to be the elevated levels of the provision for loan
losses, higher professional and collection/repossession expenses related to elevated past due loans and nonperforming assets, and losses on the sale of and valuation write downs of other real estate owned. The Company believes the steps it has taken
during 2010 and the first quarter of 2011 will significantly enhance the long term credit quality of our Company and properly position us to deliver stronger earnings as we move forward once the economic climate improves.

During the first quarter of 2011, the Company suspended the payment of its quarterly common stock dividend. Given the prolonged economic downturn and the
impact it has had on the Companys level of profitability, the Companys Board of Directors determined that the retention of capital by suspending dividends best served the long-term interests of our shareholders. With the significant
challenges facing the banking industry, maintaining the Companys well-capitalized status is absolutely critical as we prepare our company for growth once economic conditions improve. In addition to suspending common stock
dividends, the Company also began deferring its regular quarterly cash dividend with respect to its Series A Fixed Rate Cumulative Perpetual 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. As economic conditions improve, and as the Company is able to generate earnings to support its current and future capital needs, the Company plans to
restore its common and preferred stock dividends.

On February 17, 2011, the Company and Bank entered into a Written Agreement with the
FRB and the SCC. The purpose of this agreement is to formally document the common goal of the Company, Bank and the regulatory agencies to maintain the financial soundness of the Company and the Bank. This agreement contains many of the steps that
the Company has already initiated during 2010 and 2011 to address our deteriorating asset quality and associated challenges brought on during the economic recession. The agreement addresses improving oversight and administration of the
Companys operations, including improving credit risk management processes, lending and credit administration processes, the quality of the loan and asset portfolios and processes to manage the quality of these portfolios, and the balance of
and processes related to loan loss reserves. The directors of the Company and the Bank are fully committed to the common goal of improving the financial soundness of the Company. Further, the directors and executive management of the Company are
fully dedicated to diligently working to comply with all requirements of the written agreement. The Company is pleased with the continued support of the regulatory agencies and looks forward to the successful results of our actions. For further
information concerning the Written Agreement, refer to Item 1. Financial Statements, under the heading Note 14. Formal Written Agreement.

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

The Written Agreement requires us to develop and submit for approval formal
plans and strategies to improve procedures and controls over the administration of asset quality, credit administration, capital and liquidity planning, and enhancing elements of the internal audit and information technology programs. The
Company is aggressively working to comply with the Written Agreement and has hired an independent consultant to assist it in these efforts. To date, we are completing the requirements of the Written Agreement on schedule and diligently continue
to work to meet the remaining requirements under the Written Agreement. In addition to the plans mentioned above, the Written Agreement requires us to submit quarterly progress reports to our banking regulators on our asset quality improvement
initiatives and other remediation efforts. We anticipate meeting these requirements as we work closely with our regulatory agencies to improve the Companys financial performance.



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The Bank continues to improve its handling of nonperforming assets and has recently established a Special
Assets Division that reports directly to the Chief Risk Officer. This Division is specifically tasked with formulating workout strategies and conducting asset dispositions to minimize future losses. The establishment of this division will
also allow our loan officers to focus on expanding our lending activities as the economic recovery begins to take hold.

For the three months
ended March 31, 2011, the following key points were significant factors in our reported results:



| |  | Provision expense for the allowance for loan losses of $2.0 million to fund possible losses in the loan portfolio.
|- |  | ------------------------------------------------------------------------------------------------------------------



| |  | Gain on the sale of our former Aylett branch office of $256 thousand.
|- |  | ---------------------------------------------------------------------



| |  | Net charge-offs of $960 thousand to write off uncollectible balances on nonperforming assets.
|- |  | ---------------------------------------------------------------------------------------------



| |  | Gain on sale of available for sale securities of $193 thousand resulting from adjustments in the composition of the investment portfolio.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------



| |  | Decrease in net interest income by $202 thousand over the same period ending in 2010.
|- |  | -------------------------------------------------------------------------------------



| |  | Impairment losses of $152 thousand related to valuation adjustments on other real estate owned.
|- |  | -----------------------------------------------------------------------------------------------



| |  | Losses of $247 thousand on the sale of other real estate owned.
|- |  | ---------------------------------------------------------------



| |  | Expenses related to collection, repossession and other real estate owned of $453 thousand.
|- |  | ------------------------------------------------------------------------------------------

For the three months ended March 31, 2011 and 2010, the reported net income of $474 thousand and $1.3 million, respectively equate to the following
performance metrics:



| |  | On available common income, Annualized Return on Average Assets (ROA) of 0.04% for the three months ended March 31, 2011 which compares to ROA of
0.35% for the three months ended March 31, 2010.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On available common income, Annualized Return on Average Shareholders Equity (ROE) of 0.60% for the three months ended March 31, 2011 which
compares to ROE of 4.74% for the three months ended March 31, 2010.
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | On a per share basis, the diluted and basic earnings per common share (EPS) is $0.02 for the three months ended March 31, 2011 which compares to
an EPS of $0.16 for the three months ended March 31, 2010.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

Results of Operations

As discussed under the caption Executive Overview above,
the Companys results of operations for the three months ended March 31, 2011 were primarily driven by the elevated provision for loan losses, higher professional and collection/repossession expenses related to elevated past due loans and
nonperforming assets, and losses on the sale of and valuation write downs 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



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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 $229 thousand or 2.5% to $9.0 million for the three months ended March 31, 2011,
down from $9.2 million for the three months ended March 31, 2010. Total average earning assets decreased $7.4 million or 0.7% from $1.03 billion for the three months ended March 31, 2010 to $1.02 billion for the same period of 2011. Total
average interest-bearing liabilities increased $2.9 million or 0.3% from $897.5 million for the three months ended March 31, 2010 to $900.4 million for the same period of 2011. The decrease in net interest income was driven by the change in the
mix and pricing of the balance sheet components. These shifts resulted in a decrease of 6 basis points in our net interest margin from 3.63% for the three months ended March 31, 2010 to 3.57% for the same period of 2011. The percentage of
average earning assets to total average assets remained flat at 93.0% for the three months ended March 31, 2011 and 2010, respectively.

Total interest income, on a fully tax equivalent basis, decreased $989 thousand from $13.9 million for the three months ended March 31, 2010 to
$12.9 million for the same period of 2011. This was driven by a decline in the yield on interest earning assets from 5.47% for the three months ended March 31, 2010 to 5.12% for the same period of 2011, and the decrease in average earning
assets during the same periods. These decreases were primarily the result of reduced yields on the investment securities portfolio and a significant decrease in the average loan balances.

Average total loan balances decreased $84.2 million from $855.9 million for the three months ended March 31, 2010 to $771.7 million for the same period of 2011. The yield on loans declined to 5.71%
for the first three months of 2011 compared to 5.78% for the same period of 2010. This resulted in a $1.3 million, or 7 basis points, drop in interest income generated by our largest earning asset category from the prior years income level to
$10.9 million for quarter ended March 31, 2011 compared to $12.2 million for the same period in 2010. Interest income generated by the loan portfolio decreased due to weak loan demand, adjustments to our variable rate loans in the low interest
rate environment, increased charge-offs, payment curtailments on outstanding loans and an increase in nonperforming loans.

Average investment
security balances increased $85.1 million from $151.3 million for the three months ended March 31, 2010 to $236.4 million for the same period in 2011. While the average investment securities balance increased, the yield on securities declined
89 basis points from 4.33% for the first quarter of 2010 to 3.44% for the first quarter of 2011. The lower yield resulted from investing in lower risk, shorter duration investments which had a corresponding



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lower yield in the first quarter of 2011. Average taxable investment securities increased $91.7 million from the first quarter of 2010 to the first quarter of 2011, but the yield declined from
4.05% for the three months ended March 31, 2010 to 2.98% for the same period in 2011, a drop of 107 basis points.

Our excess funds are
invested in short term investments. Average interest bearing deposits in other banks decreased $7.9 million from $19.1 million for the first three months of 2010 to $11.2 million for the same period 2011, while federal funds sold decreased $338
thousand to $435 thousand during the first quarter of 2011 compared to $773 thousand for the same period in 2010. This reflected a change in our overall investment strategy as we began to strategically deploy excess liquidity in short duration,
lower risk securities as investment opportunities were available. In total, our excess funds decreased $8.3 million from the first quarter of 2010 to the first quarter of 2011.

Average interest bearing deposits increased $8.1 million from $756.9 million for the first quarter of 2010 to $765.0 million for the first quarter of 2011. Changes within the mix of these balances and the
corresponding decrease in the rates on deposits were significant drivers for the reduction in interest expense related to interest-bearing deposits and helped to minimize the corresponding decrease in our net interest income. Our overall cost of
funds decreased $760 thousand, as the total rate for average interest bearing deposits fell from 1.74% for the three months ended March 31, 2010 to 1.39% for the same period in 2011, a drop of 35 basis points. Deposits continued to shift from
higher priced certificates of deposit to lower priced checking accounts (or NOW accounts), money market and savings accounts. The largest increase from the first quarter of 2010 to the same period in 2011 was in the money market deposits
with an increase of $27.2 million in average balance and a corresponding rate decrease of 13 basis points from 1.34% to 1.21% from the first quarter of 2010 to the first quarter of 2011. The aggressively priced NOW balance had an increase of $11.1
million in average balance and a corresponding rate decrease of 34 basis points from 1.29% to 0.95% for the same periods. Average large dollar certificates decreased $14.7 million from $168.9 million during the first quarter of 2010 to $154.2
million during the first quarter of 2011 and the rate dropped 29 basis points from 2.27% in the first three months of 2010 to 1.98% for the same period in 2011. Other certificates average balance declined $17.0 million from $192.3 million during the
first quarter of 2010 to $175.3 million for the same period in 2011, with a simultaneous 52 basis point drop in rate. Other interest-bearing liabilities added to the decrease in the cost of funds, primarily because long-term FHLB borrowings cost
declined $132 thousand from $1.3 million for the three months ended March 31, 2010 to $1.2 million for the same period in 2011.



38



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Table 1: Average Balance Sheet and Net Interest Margin Analysis

(dollars in thousands)



|                                                        |  |                              |           |   |                |   |        |                |  |  |                |   |  |                |           |   |                |   |        |  |  |  |      |  
|------------------------------------------------------- |  | ---------------------------- | --------- | - | -------------- | - | ------ | -------------- |  |  | -------------- | - |  | -------------- | --------- | - | -------------- | - | ------ |  |  |  | ---- | -
|                                                        |  | Three Months Ended March 31, |          
|                                                        |  | 2011                         |           |   | 2010           |  
|                                                        |  | AverageBalance               |           |   | Income/Expense |   |        | Yield/Rate (1) |  |  | AverageBalance |   |  | Income/Expense |           |   | Yield/Rate (1) |  
|Assets:                                                 |  |                              |           |   |                |   |        |                |  |  |                |   |  |                |           |   |                |   |        |  |  |  |      |  
|Securities                                              |  |                              |           |   |                |   |        |                |  |  |                |   |  |                |           |   |                |   |        |  |  |  |      |  
|Taxable, available for sale                             |  | $                            | 189,101   |   |                | $ | 1,388  |                |  |  | 2.98           | % |  | $              | 97,374    |   |                | $ | 973    |  |  |  | 4.05 | %
|Restricted securities                                   |  |                              | 10,344    |   |                |   | 66     |                |  |  | 2.59           | % |  |                | 8,941     |   |                |   | 5      |  |  |  | 0.23 | %
|Tax exempt, available for sale (2)                      |  |                              | 36,922    |   |                |   | 550    |                |  |  | 6.04           | % |  |                | 44,963    |   |                |   | 639    |  |  |  | 5.76 | %
|                                                        |  |                              |           |   |                |   |        |                |  |  |                |   |  |                |           |   |                |   |        |  |  |  |      |  
|Total securities                                        |  |                              | 236,367   |   |                |   | 2,004  |                |  |  | 3.44           | % |  |                | 151,278   |   |                |   | 1,617  |  |  |  | 4.33 | %
|Interest bearing deposits with banks                    |  |                              | 11,204    |   |                |   | 6      |                |  |  | 0.22           | % |  |                | 19,145    |   |                |   | 39     |  |  |  | 0.83 | %
|Federal funds sold                                      |  |                              | 435       |   |                |   |       |                |  |  | 0.00           | % |  |                | 773       |   |                |   |       |  |  |  | 0.00 | %
|Loans, net of unearned income (3)                       |  |                              | 771,684   |   |                |   | 10,856 |                |  |  | 5.71           | % |  |                | 855,873   |   |                |   | 12,199 |  |  |  | 5.78 | %
|                                                        |  |                              |           |   |                |   |        |                |  |  |                |   |  |                |           |   |                |   |        |  |  |  |      |  
|Total earning assets                                    |  |                              | 1,019,690 |   |                |   | 12,866 |                |  |  | 5.12           | % |  |                | 1,027,069 |   |                |   | 13,855 |  |  |  | 5.47 | %
|Less allowance for loan losses                          |  |                              | (26,535   | ) |                |   |        |                |  |  |                |   |  |                | (12,450   | ) |                |   |        |  |  |  |      |  
|Total non-earning assets                                |  |                              | 102,812   |   |                |   |        |                |  |  |                |   |  |                | 90,319    |   |                |   |        |  |  |  |      |  
|                                                        |  |                              |           |   |                |   |        |                |  |  |                |   |  |                |           |   |                |   |        |  |  |  |      |  
|Total assets                                            |  | $                            | 1,095,967 |   |                |   |        |                |  |  |                |   |  | $              | 1,104,938 |   |                |   |        |  |  |  |      |  
|                                                        |  |                              |           |   |                |   |        |                |  |  |                |   |  |                |           |   |                |   |        |  |  |  |      |  
|                                                        |  |                              |           |   |                |  
|Liabilities & Shareholders Equity:                     |  |                              |           |   |                |   |        |                |  |  |                |   |  |                |           |   |                |   |        |  |  |  |      |  
|Interest-bearing deposits                               |  |                              |           |   |                |   |        |                |  |  |                |   |  |                |           |   |                |   |        |  |  |  |      |  
|Checking                                                |  | $                            | 231,386   |   |                | $ | 542    |                |  |  | 0.95           | % |  | $              | 220,284   |   |                | $ | 698    |  |  |  | 1.29 | %
|Savings                                                 |  |                              | 78,228    |   |                |   | 120    |                |  |  | 0.62           | % |  |                | 76,789    |   |                |   | 116    |  |  |  | 0.61 | %
|Money market savings                                    |  |                              | 125,868   |   |                |   | 374    |                |  |  | 1.21           | % |  |                | 98,643    |   |                |   | 327    |  |  |  | 1.34 | %
|Large dollar certificates of deposit (4)                |  |                              | 154,176   |   |                |   | 754    |                |  |  | 1.98           | % |  |                | 168,894   |   |                |   | 947    |  |  |  | 2.27 | %
|Other certificates of deposit                           |  |                              | 175,342   |   |                |   | 831    |                |  |  | 1.92           | % |  |                | 192,334   |   |                |   | 1,156  |  |  |  | 2.44 | %
|                                                        |  |                              |           |   |                |   |        |                |  |  |                |   |  |                |           |   |                |   |        |  |  |  |      |  
|Total interest-bearing deposits                         |  |                              | 765,000   |   |                |   | 2,621  |                |  |  | 1.39           | % |  |                | 756,944   |   |                |   | 3,244  |  |  |  | 1.74 | %
|Federal funds purchased and repurchase agreements       |  |                              | 2,543     |   |                |   | 8      |                |  |  | 1.28           | % |  |                | 7,871     |   |                |   | 19     |  |  |  | 0.98 | %
|Short-term borrowings                                   |  |                              | 5,092     |   |                |   | 6      |                |  |  | 0.48           | % |  |                |          |   |                |   |       |  |  |  | 0.00 | %
|Long-term borrowings                                    |  |                              | 117,500   |   |                |   | 1,174  |                |  |  | 4.05           | % |  |                | 122,381   |   |                |   | 1,306  |  |  |  | 4.33 | %
|Trust preferred debt                                    |  |                              | 10,310    |   |                |   | 81     |                |  |  | 3.19           | % |  |                | 10,310    |   |                |   | 81     |  |  |  | 3.19 | %
|                                                        |  |                              |           |   |                |   |        |                |  |  |                |   |  |                |           |   |                |   |        |  |  |  |      |  
|Total interest-bearing liabilities                      |  |                              | 900,445   |   |                |   | 3,890  |                |  |  | 1.75           | % |  |                | 897,506   |   |                |   | 4,650  |  |  |  | 2.10 | %
|Noninterest-bearing liabilities                         |  |                              |           |   |                |   |        |                |  |  |                |   |  |                |           |   |                |   |        |  |  |  |      |  
|Demand deposits                                         |  |                              | 99,448    |   |                |   |        |                |  |  |                |   |  |                | 94,919    |   |                |   |        |  |  |  |      |  
|Other liabilities                                       |  |                              | 4,432     |   |                |   |        |                |  |  |                |   |  |                | 6,314     |   |                |   |        |  |  |  |      |  
|                                                        |  |                              |           |   |                |   |        |                |  |  |                |   |  |                |           |   |                |   |        |  |  |  |      |  
|Total liabilities                                       |  |                              | 1,004,325 |   |                |   |        |                |  |  |                |   |  |                | 998,739   |   |                |   |        |  |  |  |      |  
|Shareholders equity                                    |  |                              | 91,642    |   |                |   |        |                |  |  |                |   |  |                | 106,199   |   |                |   |        |  |  |  |      |  
|                                                        |  |                              |           |   |                |   |        |                |  |  |                |   |  |                |           |   |                |   |        |  |  |  |      |  
|Total liabilities and shareholders equity              |  | $                            | 1,095,967 |   |                |   |        |                |  |  |                |   |  | $              | 1,104,938 |   |                |   |        |  |  |  |      |  
|                                                        |  |                              |           |   |                |   |        |                |  |  |                |   |  |                |           |   |                |   |        |  |  |  |      |  
|                                                        |  |                              |           |   |                |  
|Net interest income (2)                                 |  |                              |           |   |                | $ | 8,976  |                |  |  |                |   |  |                |           |   |                | $ | 9,205  |  |  |  |      |  
|                                                        |  |                              |           |   |                |   |        |                |  |  |                |   |  |                |           |   |                |   |        |  |  |  |      |  
|                                                        |  |                              |           |   |                |  
|Interest rate spread (2)(5)                             |  |                              |           |   |                |   |        |                |  |  | 3.37           | % |  |                |           |   |                |   |        |  |  |  | 3.37 | %
|Interest expense as a percent of average earning assets |  |                              |           |   |                |   |        |                |  |  | 1.55           | % |  |                |           |   |                |   |        |  |  |  | 1.84 | %
|Net interest margin (2)(6)                              |  |                              |           |   |                |   |        |                |  |  | 3.57           | % |  |                |           |   |                |   |        |  |  |  | 3.63 | %

Notes:

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

|(2) | Income and yields are reported on a taxable equivalent basis assuming a federal tax rate of 34%, with a $168 adjustment for 2011 and a $195 adjustment in 2010.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------

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

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

|(5) | Interest rate spread is the average yield on earning assets, calculated on a fully taxable basis, less the average rate incurred on interest-bearing liabilities.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

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



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Noninterest Income

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

The following table depicts noninterest income for the three months ended March 31, 2011 and 2010.

Table 2: Noninterest Income



|                                                   |  |                              |       |  |      |   |       | 
|-------------------------------------------------- |  | ---------------------------- | ----- |  | ---- | - | ----- | 
|                                                   |  | Three Months Ended March 31, |      
|(dollars in thousands)                             |  | 2011                         |       |  | 2010 |  
|Service charges and fees on deposit accounts       |  | $                            | 935   |  |      | $ | 862   | 
|Debit/credit card fees                             |  |                              | 324   |  |      |   | 295   | 
|Gain on sale of available for sale securities, net |  |                              | 193   |  |      |   | 13    | 
|Gain on sale of fixed assets                       |  |                              | 256   |  |      |   |      | 
|Gain on bank owned life insurance                  |  |                              |      |  |      |   | 604   | 
|Other operating income                             |  |                              | 383   |  |      |   | 319   | 
|                                                   |  |                              |       |  |      |   |       | 
|Total noninterest income                           |  | $                            | 2,091 |  |      | $ | 2,093 | 
|                                                   |  |                              |       |  |      |   |       | 

Noninterest income for the three months ended March 31, 2011 and 2010 was flat at $2.1 million for both periods.
Changes in the components of noninterest income were caused by the following events:



| |  | Service charges and fees on deposit accounts were $935 thousand in the first quarter of 2011, an increase of $73 thousand or 8.5% over the $862
thousand in the first quarter of 2010 and were driven by a 9.5% increase in NSF charges;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Debit/credit card fees were $324 thousand in the first quarter of 2011, an increase of $29 thousand or 9.8% over the $295 thousand in the first quarter
of 2010 and were driven by a 12.7% increase in debit card income;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Sales of available for sale securities generated gains of $193 thousand in the first quarter of 2011, an increase of $180 thousand or 1,384.6% over
gains of $13 thousand in the first quarter of 2010;
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | 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 2010;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Bank owned life insurance proceeds resulting from the death of a former officer generated a gain of $604 thousand in the first quarter of 2010, while
no such gains were generated during the first quarter of 2011; and
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Other operating income was $383 thousand in the first quarter of 2011, an increase of $64 thousand or 20.1% over the $319 thousand in the first quarter
of 2010 and was driven by a 66.8% increase in safe deposit box fees, a 21.1% increase in investment services income, $16 thousand in loan servicing fees that were not present in the first quarter of 2010, and a 19.4% decrease 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.



40



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##### Table of Contents

The following table depicts noninterest expense for the three months ended March 31, 2011 and 2010.

Table 3: Noninterest Expense



|                                                     |  |                              |       |  |      |   |       |  
|---------------------------------------------------- |  | ---------------------------- | ----- |  | ---- | - | ----- | -
|                                                     |  | Three Months Ended March 31, |      
|(dollars in thousands)                               |  | 2011                         |       |  | 2010 |  
|Salaries and employee benefits                       |  | $                            | 4,090 |  |      | $ | 3,990 |  
|Occupancy and equipment expenses                     |  |                              | 1,213 |  |      |   | 1,278 |  
|Telephone                                            |  |                              | 265   |  |      |   | 274   |  
|FDIC expense                                         |  |                              | 497   |  |      |   | 468   |  
|Consultant fees                                      |  |                              | 274   |  |      |   | 143   |  
|Collection, repossession and other real estate owned |  |                              | 453   |  |      |   | 348   |  
|Marketing and advertising                            |  |                              | 211   |  |      |   | 192   |  
|Loss (gain) on sale of other real estate owned       |  |                              | 247   |  |      |   | (31   | )
|Impairment losses on other real estate owned         |  |                              | 152   |  |      |   |      |  
|Other operating expenses                             |  |                              | 1,098 |  |      |   | 1,192 |  
|                                                     |  |                              |       |  |      |   |       |  
|Total noninterest expense                            |  | $                            | 8,500 |  |      | $ | 7,854 |  
|                                                     |  |                              |       |  |      |   |       |  

Noninterest expense for the three months ended March 31, 2011 was $8.5 million, an increase of $646 thousand or 8.2%
over the noninterest expense of $7.9 million for the same period of 2010. Significant contributors to the increase in these expenses are as follows:



| |  | Salaries and employee benefits were $4.1 million for the first quarter of 2011, an increase of $100 thousand or 2.5% over the $4.0 million for the
first quarter of 2010. Salaries expense has increased as we have added additional positions to strengthen our management team. The increased regulatory burden resulting from recently enacted financial regulatory reforms will likely necessitate
hiring additional personnel to meet increased regulatory compliance requirements, which could cause salaries and employee benefits expense to continue to increase in future periods. Salaries expense is also impacted by the application of an
accounting standard to defer certain salary amounts over the life of our loan originations to better match income and expense from those assets. Decreased loan demand during the first quarter of 2011 has resulted in lower originations that, on a
comparative basis, have increased the period expense associated with salaries;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Consultant fees were $274 thousand for the first quarter of 2011, an increase of $131 thousand or 91.6% over the $143 thousand for the first quarter of
2010. The elevation of these expenses were primarily due to added costs related to working out problem loans;
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Collection, repossession and other real estate owned expenses were $453 thousand for the first quarter of 2011, an increase of $105 thousand or 30.2%
over the $348 thousand for the first quarter of 2010. The elevation of these expenses was due to the larger number of past due loans and nonperforming assets comparatively for the first quarter of 2011 as well as the larger number of other real
estate owned properties during the first quarter of 2011;
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Losses on the sale of other real estate owned were $247 thousand in the first quarter of 2011, an increase of $278 thousand over the gains of $31
thousand in the first quarter of 2010;
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Impairment losses related to valuation adjustments on other real estate owned were $152 thousand in the first quarter of 2011, while no such impairment
losses were recognized in the first quarter of 2010; and
|- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Other operating expenses were $1.1 million for the first quarter of 2011, a decrease of $94 thousand or 7.9% over the $1.2 million for the first
quarter of 2010. Within this category, most controllable expenses (i.e. office supplies, printing, etc.) saw reductions from the same period of the prior year, however these were offset by increases in legal and other professional fees.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Income Taxes

The Company recorded an income tax benefit of $75 thousand for the three months ended March 31, 2011, compared to income tax expense of $65 thousand for the same period in 2010, a $140 thousand
decrease in income tax expense. The decrease in income tax expense from the first three months of 2010 to the same period in 2011 was primarily the result of the Companys pretax income decreasing by approximately 71.5%.



41



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##### Table of Contents

Asset Quality

Provision and Allowance for Loan Losses

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

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

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

Pass Grades



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



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



| |  | Risk Grade 3 loans are satisfactory loans with strong borrowers and secondary sources of repayment;
|- |  | ---------------------------------------------------------------------------------------------------



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



| |  | 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;
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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



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

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

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



43



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##### Table of Contents

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

Table 4: Allowance for Loan Losses



|                                                                             |  |                              |        |   |      |   |        |  
|---------------------------------------------------------------------------- |  | ---------------------------- | ------ | - | ---- | - | ------ | -
|                                                                             |  | Three Months Ended March 31, |       
|(dollars in thousands)                                                       |  | 2011                         |        |   | 2010 |  
|Allowance for loan losses, beginning of period                               |  | $                            | 25,288 |   |      | $ | 12,155 |  
|Charge-offs:                                                                 |  |                              |        |   |      |   |        |  
|Commercial, industrial and agricultural                                      |  |                              | (214   | ) |      |   | (82    | )
|Real estate - one to four family residential:                                |  |                              |        |   |      |   |        |  
|Closed end first and seconds                                                 |  |                              | (334   | ) |      |   | (120   | )
|Real estate - construction:                                                  |  |                              |        |   |      |   |        |  
|One to four family residential                                               |  |                              | (152   | ) |      |   | (117   | )
|Other construction, land development and other land                          |  |                              | (213   | ) |      |   |       |  
|Real estate - non-farm, non-residential:                                     |  |                              |        |   |      |   |        |  
|Owner occupied                                                               |  |                              | (79    | ) |      |   |       |  
|Non-owner occupied                                                           |  |                              | (50    | ) |      |   |       |  
|Consumer                                                                     |  |                              | (151   | ) |      |   | (307   | )
|                                                                             |  |                              |        |   |      |   |        |  
|Total loans charged-off                                                      |  |                              | (1,193 | ) |      |   | (626   | )
|Recoveries:                                                                  |  |                              |        |   |      |   |        |  
|Commercial, industrial and agricultural                                      |  |                              | 65     |   |      |   | 27     |  
|Real estate - one to four family residential:                                |  |                              |        |   |      |   |        |  
|Closed end first and seconds                                                 |  |                              | 129    |   |      |   | 6      |  
|Real estate - construction:                                                  |  |                              |        |   |      |   |        |  
|One to four family residential                                               |  |                              | 1      |   |      |   | 6      |  
|Other construction, land development and other land                          |  |                              | 1      |   |      |   |       |  
|Consumer                                                                     |  |                              | 37     |   |      |   | 44     |  
|                                                                             |  |                              |        |   |      |   |        |  
|Total recoveries                                                             |  |                              | 233    |   |      |   | 83     |  
|                                                                             |  |                              |        |   |      |   |        |  
|Net charge-offs                                                              |  |                              | (960   | ) |      |   | (543   | )
|Provision for loan losses                                                    |  |                              | 2,000  |   |      |   | 1,850  |  
|                                                                             |  |                              |        |   |      |   |        |  
|Allowance for loan losses, end of period                                     |  | $                            | 26,328 |   |      | $ | 13,462 |  
|                                                                             |  |                              |        |   |      |   |        |  
|Ratios:                                                                      |  |                              |        |   |      |   |        |  
|Ratio of allowance for loan losses to total loans outstanding, end of period |  |                              | 3.44   | % |      |   | 1.57   | %
|Ratio of net charge-offs to average loans outstanding during the period      |  |                              | 0.50   | % |      |   | 0.26   | %

As a result of the historical challenges
continuing to face the financial markets today, the Company made provisions for loan losses of $2.0 million for the first three months of 2011 compared to $1.9 million for the same period of 2010. Net charge-offs for the three months ended
March 31, 2011 were $960 thousand, compared to $543 thousand for the same three month period in 2010. This represents 0.50% of average loans outstanding for the three months ending March 31, 2011 and 0.26% of average loans outstanding for
the same period in 2010. The contribution to the provision and the related increase in the allowance in the first quarters of 2011 and 2010 was made in response to continued deterioration of credit quality 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.

The allowance for loan losses at March 31, 2011 was $26.3 million, compared with $25.3 million at December 31, 2010. This represented 3.44% of period end loans at March 31, 2011 compared
with 3.26% of year end loans at December 31, 2010.



44



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##### Table of Contents

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, | 
|                                                    |  | 2011         |        |  | 2010            | 
|(dollars in thousands)                              |  | Allowance    |        |  | Percent         |  |        | Allowance |  |   | Percent | 
|Commercial, industrial and agricultural             |  | $            | 5,678  |  |                 |  | 9.42   | %         |  | $ | 5,981   |  |  |  | 9.39   | %
|Real estate - one to four family residential:       |  |              |        |  |                 |  |        |           |  |   |         |  |  |  |        |  
|Closed end first and seconds                        |  |              | 3,519  |  |                 |  | 33.82  | %         |  |   | 3,340   |  |  |  | 33.62  | %
|Home equity lines                                   |  |              | 556    |  |                 |  | 12.50  | %         |  |   | 587     |  |  |  | 12.05  | %
|Real estate - multifamily residential               |  |              | 22     |  |                 |  | 1.47   | %         |  |   | 23      |  |  |  | 1.51   | %
|Real estate - construction:                         |  |              |        |  |                 |  |        |           |  |   |         |  |  |  |        |  
|One to four family residential                      |  |              | 340    |  |                 |  | 2.79   | %         |  |   | 344     |  |  |  | 3.29   | %
|Other construction, land development and other land |  |              | 7,771  |  |                 |  | 6.45   | %         |  |   | 7,837   |  |  |  | 6.56   | %
|Real estate - farmland                              |  |              | 18     |  |                 |  | 1.17   | %         |  |   | 17      |  |  |  | 1.07   | %
|Real estate - non-farm, non-residential:            |  |              |        |  |                 |  |        |           |  |   |         |  |  |  |        |  
|Owner occupied                                      |  |              | 4,722  |  |                 |  | 17.11  | %         |  |   | 2,546   |  |  |  | 17.32  | %
|Non-owner occupied                                  |  |              | 2,543  |  |                 |  | 10.54  | %         |  |   | 3,072   |  |  |  | 10.12  | %
|Consumer                                            |  |              | 950    |  |                 |  | 4.31   | %         |  |   | 905     |  |  |  | 4.65   | %
|Other loans and overdrafts                          |  |              | 209    |  |                 |  | 0.42   | %         |  |   | 280     |  |  |  | 0.42   | %
|                                                    |  |              |        |  |                 |  |        |           |  |   |         |  |  |  |        |  
|Total allowance for balance sheet loans             |  |              | 26,328 |  |                 |  | 100.00 | %         |  |   | 24,932  |  |  |  | 100.00 | %
|                                                    |  |              |        |  |                 |  |        |           |  |   |         |  |  |  |        |  
|Unallocated                                         |  |              |       |  |                 |  |        |           |  |   | 356     |  |  |  |        |  
|                                                    |  |              |        |  |                 |  |        |           |  |   |         |  |  |  |        |  
|Total allowance for loan losses                     |  | $            | 26,328 |  |                 |  |        |           |  | $ | 25,288  |  |  |  |        |  
|                                                    |  |              |        |  |                 |  |        |           |  |   |         |  |  |  |        |  

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

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

Nonperforming Assets

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

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

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



45



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##### Table of Contents

interest. Any excess of cost over the estimated fair market value at the time of acquisition is charged to the allowance for loan losses. The estimated fair market value is reviewed periodically
by management and any write-downs are charged against current earnings. Development and improvement costs relating to property are capitalized. Net operating income or expenses of such properties are included in collection, repossession and other
real estate owned expenses.

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

Table 6: Nonperforming Assets



|                                                                |  |               |        |   |                  |   |        |  
|--------------------------------------------------------------- |  | ------------- | ------ | - | ---------------- | - | ------ | -
|(dollars in thousands)                                          |  | March 31,2011 |        |   | December 31,2010 |  
|Nonaccrual loans*                                               |  | $             | 25,657 |   |                  | $ | 25,858 |  
|Loans past due 90 days and accruing interest                    |  |               | 951    |   |                  |   | 1,836  |  
|                                                                |  |               |        |   |                  |   |        |  
|Total nonperforming loans                                       |  |               | 26,608 |   |                  |   | 27,694 |  
|Other real estate owned, net of valuation allowance             |  |               | 11,240 |   |                  |   | 11,617 |  
|                                                                |  |               |        |   |                  |   |        |  
|Total nonperforming assets                                      |  | $             | 37,848 |   |                  | $ | 39,311 |  
|                                                                |  |               |        |   |                  |   |        |  
|                                                                |  |              
|Nonperforming assets to total loans and other real estate owned |  |               | 4.87   | % |                  |   | 5.00   | %
|Allowance for loan losses to nonaccrual loans                   |  |               | 102.61 | % |                  |   | 97.80  | %
|Net charge-offs to average loans for the period                 |  |               | 0.50   | % |                  |   | 1.89   | %
|Allowance for loan losses to period end loans                   |  |               | 3.44   | % |                  |   | 3.26   | %



|* | Includes $10.5 million and $6.2 million in nonaccrual TDRs at March 31, 2011 and December 31, 2010, respectively.
|- | -----------------------------------------------------------------------------------------------------------------

The following table presents the change in the OREO balance for the three months ended March 31, 2011 and 2010.

Table 7: OREO Changes



|                                                       |  |           |        |   |      |   |       |  
|------------------------------------------------------ |  | --------- | ------ | - | ---- | - | ----- | -
|                                                       |  | March 31, |       
|(dollars in thousands)                                 |  | 2011      |        |   | 2010 |  
|Balance at the beginning of period, gross              |  | $         | 12,545 |   |      | $ | 4,136 |  
|Transfers from loans                                   |  |           | 1,900  |   |      |   | 519   |  
|Capitalized costs                                      |  |           | 150    |   |      |   | 43    |  
|Sales proceeds                                         |  |           | (2,028 | ) |      |   | (991  | )
|Previously recognized impairment losses on disposition |  |           | (144   | ) |      |   |      |  
|Gain (loss) on disposition                             |  |           | (247   | ) |      |   | 31    |  
|                                                       |  |           |        |   |      |   |       |  
|Balance at the end of period, gross                    |  |           | 12,176 |   |      |   | 3,738 |  
|Less valuation allowance                               |  |           | (936   | ) |      |   |      |  
|                                                       |  |           |        |   |      |   |       |  
|Balance at the end of period, net                      |  | $         | 11,240 |   |      | $ | 3,738 |  
|                                                       |  |           |        |   |      |   |       |  



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The following table presents the change in the valuation allowance for OREO for the three months ended
March 31, 2011 and 2010.

Table 8: OREO Valuation Allowance Changes



|                                   |  |           |      |   |      |   |   | 
|---------------------------------- |  | --------- | ---- | - | ---- | - | - | 
|                                   |  | March 31, |     
|(dollars in thousands)             |  | 2011      |      |   | 2010 |  
|Balance at the beginning of period |  | $         | 928  |   |      | $ |  | 
|Valuation allowance                |  |           | 152  |   |      |   |  | 
|Charge-offs                        |  |           | (144 | ) |      |   |  | 
|Recoveries                         |  |           |     |   |      |   |  | 
|                                   |  |           |      |   |      |   |   | 
|Balance at the end of period       |  | $         | 936  |   |      | $ |  | 
|                                   |  |           |      |   |      |   |   | 

Nonperforming assets were $37.8 million or 4.87% of total loans and other real estate owned at March 31, 2011 compared
to $39.3 million or 5.00% at December 31, 2010. Although slightly down during the first three months of 2011, this number has steadily increased since 2008 as a result of the continued economic downturn which has significantly increased
unemployment, reduced profitability of local businesses, and reduced the ability of many of our customers to keep their loans current. The sluggish economy and the increasing number of weaker loans have prompted the Company to raise the allowance
for loan losses, which is 102.61% of nonaccrual loans at March 31, 2011, compared to 97.80% at December 31, 2010. Nonperforming loans decreased $1.1 million or 3.9% during the three months ended March 31, 2011 to $26.6 million.

Nonaccrual loans were $25.7 million at March 31, 2011, a decrease of $201 thousand or 0.8% from $25.9 million at December 31, 2010.
Of the current $25.7 million in nonaccrual loans, $24.2 million or 94.5% is secured by real estate in our market area. Of these real estate secured loans, $9.4 million are residential real estate, $7.0 million are real estate construction, $187
thousand is farmland and $7.7 million are commercial properties.

Loans past due 90 days and still accruing interest were $951 thousand at
March 31, 2011, a decrease of $885 thousand or 48.2% from $1.8 million at December 31, 2010. As of March 31, 2011, all of these loans, except for $84 thousand in credit card loans, are secured by real estate in our market area. Of
these real estate secured loans, $466 thousand are residential real estate, $151 thousand are real estate construction and $250 thousand are commercial properties.

Other real estate owned, net of valuation allowance at March 31, 2011 was $11.2 million, a decrease of $377 thousand or 3.2% from $11.6 million at December 31, 2010. The balance at
March 31, 2011 was comprised of 26 properties of which $1.8 million are secured by residential real estate, $6.5 million are secured by real estate construction and $2.9 million are secured by commercial properties. During the three months
ended March 31, 2011, new foreclosures included five properties totaling $1.9 million transferred from loans. Sales of nine other real estate owned properties for the three months ended March 31, 2011 resulted in a net loss of $247
thousand. At March 31, 2011, there were ten properties totaling $3.2 million under contract for sale. Subsequent to March 31, 2011, one of the properties under contract for sale at March 31, 2011 has sold resulting in a loss of
approximately $19 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 $152 thousand in its consolidated statement of income for the three months ended March 31, 2011, due to valuation adjustments on other real estate owned properties as compared to no such losses for the same period in
2010. Asset quality continues to be a top priority for the Company. We continue to allocate significant resources to the expedient disposition and collection of non-performing and other lower quality assets.

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

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



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At March 31, 2011, the balance of impaired loans was $52.7 million, for which there were specific
valuation allowances of $9.6 million. At December 31, 2010, the balance of impaired loans was $49.5 million, for which there were specific valuation allowances of $6.9 million. The average balance of impaired loans was $51.5 million for the
three months ended March 31, 2011, compared to $33.6 million for the year ended December 31, 2010. The Companys balance of impaired loans has 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, 2011 and December 31, 2010.

Table 9: Troubled Debt Restructurings
(TDRs)



|                       |  |               |        |  |                  |   |       | 
|---------------------- |  | ------------- | ------ |  | ---------------- | - | ----- | 
|(dollars in thousands) |  | March 31,2011 |        |  | December 31,2010 |  
|Performing TDRs        |  | $             | 4,016  |  |                  | $ | 2,411 | 
|Nonaccrual TDRs*       |  |               | 10,543 |  |                  |   | 6,177 | 
|                       |  |               |        |  |                  |   |       | 
|Total TDRs             |  | $             | 14,559 |  |                  | $ | 8,588 | 
|                       |  |               |        |  |                  |   |       | 



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

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

Financial Condition

Summary

At March 31, 2011, the Company had total assets of $1.08 billion compared to $1.12 billion at December 31, 2010. The
decrease was principally a result of decreases in loans, securities available for sale, deposits and borrowings as detailed in the following schedule.

Table 10: Balance Sheet Changes



|                              |  |               |           |  |                  |   |           |          |  |   |          |   |  |  |       |  
|----------------------------- |  | ------------- | --------- |  | ---------------- | - | --------- | -------- |  | - | -------- | - |  |  | ----- | -
|(dollars in thousands)        |  | March 31,2011 |           |  | December 31,2010 |   |           | Change $ |  |   | Change % |  
|Total assets                  |  | $             | 1,082,121 |  |                  | $ | 1,119,330 |          |  | $ | (37,209  | ) |  |  | -3.3  | %
|Securities available for sale |  |               | 219,567   |  |                  |   | 246,120   |          |  |   | (26,553  | ) |  |  | -10.8 | %
|Total loans                   |  |               | 766,087   |  |                  |   | 774,774   |          |  |   | (8,687   | ) |  |  | -1.1  | %
|Deposits                      |  |               | 849,529   |  |                  |   | 868,146   |          |  |   | (18,617  | ) |  |  | -2.1  | %
|Borrowings                    |  |               | 135,788   |  |                  |   | 155,274   |          |  |   | (19,486  | ) |  |  | -12.5 | %

Investment Securities

The investment portfolio plays a primary role in the management of the Companys interest rate sensitivity. In addition, the
portfolio serves as a source of liquidity and is used as needed to meet collateral requirements, such as those related to secure public deposits, balances with the FRB and repurchase agreements. The investment portfolio consists of securities
available for sale, which may be sold in response to changes in market interest rates, changes in prepayment risk, increases in loan demand, general liquidity needs and other similar factors. These securities are carried at estimated fair value.
Total investment securities were $219.6 million at March 31, 2011, reflecting a decrease of $26.6 million or 10.8% from $246.1 million at December 31, 2010. The valuation allowance for the available for sale portfolio had an unrealized
loss, net of tax benefit, of $1.3 million at March 31, 2011 compared with an unrealized loss, net of tax benefit, of $2.2 million at December 31, 2010.



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

Loans

The Company offers an array of lending and credit services to customers including mortgage, commercial and consumer loans. A substantial portion of the
loan portfolio is represented by commercial and residential mortgage loans in our market area. The ability of our debtors to honor their contracts is dependent upon the real estate markets and general economic conditions in our market area. The loan
portfolio is the largest component of earning assets and accounts for the greatest portion of total interest income. Total loans were $766.1 million at March 31, 2011, a decrease of $8.7 million or 1.1% from $774.8 million at December 31,
2010. As previously mentioned our loan portfolio continues to decrease as a result of weak loan demand, increased charge-offs, and payment curtailments on outstanding credits.

Deposits

The Companys predominant source of funds is depository accounts. The
Companys deposit base, which is provided by individuals and businesses located within the communities served, is comprised of demand deposits, savings and money market accounts, and time deposits. The Company augments its deposit base through
conservative use of brokered deposits, including through the Certificate of Deposit Account Registry Service program (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 $849.5 million as of March 31, 2011, a decrease of 2.1% or $18.6 million from $868.1 million as of December 31, 2010. The following table sets forth the composition of the
Companys deposits at the dates indicated.

Table 11: Deposits



|                                |  |               |         |  |                  |   |         |          |  |   |          |   |  |  |      |  
|------------------------------- |  | ------------- | ------- |  | ---------------- | - | ------- | -------- |  | - | -------- | - |  |  | ---- | -
|(dollars in thousands)          |  | March 31,2011 |         |  | December 31,2010 |   |         | Change $ |  |   | Change % |  
|Noninterest-bearing deposits    |  | $             | 99,036  |  |                  | $ | 97,122  |          |  | $ | 1,914    |   |  |  | 2.0  | %
|                                |  |               |         | 
|Interest-bearing deposits:      |  |               |         |  |                  |   |         |          |  |   |          |   |  |  |      |  
|Demand deposits                 |  | $             | 222,376 |  |                  | $ | 240,330 |          |  | $ | (17,954  | ) |  |  | -7.5 | %
|Money market deposits           |  |               | 124,593 |  |                  |   | 120,322 |          |  |   | 4,271    |   |  |  | 3.5  | %
|Savings deposits                |  |               | 78,241  |  |                  |   | 77,176  |          |  |   | 1,065    |   |  |  | 1.4  | %
|Time deposits                   |  |               | 325,283 |  |                  |   | 333,196 |          |  |   | (7,913   | ) |  |  | -2.4 | %
|                                |  |               |         |  |                  |   |         |          |  |   |          |   |  |  |      |  
|Total interest-bearing deposits |  | $             | 750,493 |  |                  | $ | 771,024 |          |  | $ | (20,531  | ) |  |  | -2.7 | %
|                                |  |               |         |  |                  |   |         |          |  |   |          |   |  |  |      |  

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



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Borrowings

The Companys ability to borrow funds through nondeposit sources provides additional flexibility in meeting the liquidity needs of customers while enhancing its cost of funds structure. Total
borrowings were $135.8 million at March 31, 2011, down $19.5 million or 12.5% from $155.3 million at December 31, 2010. The decrease in borrowings was primarily derived through our short-term borrowings in which we repaid a $25.0 million
short-term advance with the FHLB that was taken during December 2010, and was offset by a $5.5 million short-term advance taken with the FHLB at March 31, 2011 to meet our funding needs due to the decrease in deposits during the first quarter
of 2011.

Off-Balance Sheet Arrangements

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

Contractual Obligations

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

Liquidity

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

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

Cash, cash equivalents and federal funds sold totaled $22.8 million as of March 31, 2011 and December 31, 2010.
At March 31, 2011, cash, cash equivalents, federal funds sold and unpledged securities available for sale were $143.3 million or 13.24% of total assets, compared to $168.2 million or 15.03% of total assets at December 31, 2010.

As disclosed in the Companys consolidated statement of cash flows, net cash provided by operating activities was $3.8 million, net cash provided by
investing activities was $34.3 million and net cash used in financing activities was $38.1 million for the three months ended March 31, 2011. Combined, this contributed to a $19 thousand decrease in liquidity for the three months ended
March 31, 2011.

The Company maintains access to short-term funding sources as well, including federal funds lines of credit with three
correspondent banks up to $40.0 million and the ability to borrow up to $171.3 million from the FHLB. The Company has no reason to believe these arrangements will not be renewed at maturity. Additional loans and securities are available that can be
pledged as collateral for future borrowings from the FHLB above the current lendable collateral value.

Certificates of deposit of $100,000 or
more, maturing in one year or less, totaled $83.6 million at March 31, 2011. Certificates of deposit of $100,000 or more, maturing in more than one year, totaled $73.7 million at March 31, 2011.

As of March 31, 2011, the Company was not aware of any known trends, events or uncertainties that have or are reasonably likely to have a material
impact on our liquidity. As of March 31, 2011, the Company has no material commitments or long-term debt for capital expenditures.



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Capital Resources

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

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

Quantitative
measures established by regulation to ensure capital adequacy require that the Bank maintain minimum amounts and ratios of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes, as of March 31, 2011, the Bank meets all capital adequacy requirements to which it is subject.

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

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

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, 2011 and 2010,
no cash dividends have been paid from the Bank to the Company.

For the three months ended March 31, 2011, the Company paid out no cash
dividends to common shareholders as compared to $0.05 per share for the same period of 2010. For the three months ended March 31, 2011, the Company paid out no cash dividends to preferred shareholders as compared to $300 thousand for the same
period of 2010.

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

The Company has notified the Treasury that it will defer the February 2011 payment of its regular quarterly cash
dividend with respect to its Series A Fixed Rate Cumulative Perpetual Preferred Stock which the Company issued to the Treasury in connection with the Companys participation in the Treasurys Capital Purchase Program.

The Company may defer dividend payments by the terms of the Preferred Stock, but the dividend is a cumulative dividend that accumulates for payment in
the future, and the failure to pay dividends for six dividend periods would trigger board appointment rights for the holder of the Preferred Stock. The amount of the 2011 dividends that have accumulated and are unpaid is $300 thousand.



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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.

Effects of Inflation

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



|Item 3. | Quantitative and Qualitative Disclosures About Market Risk
|------- | ----------------------------------------------------------

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



|Item 4. | Controls and Procedures
|------- | -----------------------

The
Companys management, including the Companys Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the Companys disclosure controls and procedures (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and the Chief Financial Officer have concluded that the
Companys disclosure controls and procedures were effective as of March 31, 2011 to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to the Companys management, including the Companys principal executive and principal financial
officers, as appropriate to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that the Companys disclosure controls and
procedures will detect or uncover every situation involving the failure of persons within the Company or its subsidiary to disclose material information required to be set forth in the Companys periodic reports.

Management of the Company is also responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act). There were no changes in the Companys internal control over financial reporting during the Companys first quarter ended March 31, 2011 that have materially affected, or are reasonably likely to
materially affect, the Companys internal control over financial reporting.

PART II - OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

In the ordinary course
of operations, the Company and its subsidiaries may become a party to legal proceedings, or property of the Company or its subsidiaries may become subject to legal proceedings. As of March 31, 2011 and based on information currently available,
there are no pending legal proceedings to which the Company, or any of its subsidiaries, is a party or to which the property of the Company or any of its subsidiaries is subject that, in the opinion of management, may materially impact the financial
condition of the Company.



|Item 1A. | Risk Factors
|-------- | ------------

Except as discussed below,
there has been no material changes in the risk factors faced by the Company from those disclosed under Part I, Item 1A. Risk Factors in the Companys Annual Report on Form 10-K for the year ended December 31, 2010. 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.



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Holders of the Series A Fixed Rate Cumulative Perpetual Preferred Stock may, under certain
circumstances, have the right to elect two directors to our Board of Directors.

In the event that we fail to pay dividends on the
Series A Fixed Rate Cumulative Perpetual Preferred Stock for an aggregate of six quarterly dividend periods or more (whether or not consecutive), the authorized number of directors then constituting our Board of Directors will be increased by two.
Holders of the Series A Fixed Rate Cumulative Perpetual Preferred Stock , together with the holders of any outstanding parity stock with like voting rights voting as a single class, will then be entitled to elect the two additional members of our
Board of Directors at the next annual meeting (or at a special meeting called for the purpose of electing such directors prior to the next annual meeting) and at each subsequent annual meeting until all accrued and unpaid dividends for all past
dividend periods have been paid in full.



|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, 2011, 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 such time, the Company generally may not purchase any of its common stock without the consent of the Treasury.

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



|Item 3. | Defaults Upon Senior Securities
|------- | -------------------------------

None.



|Item 4. | (Removed and Reserved)
|------- | ----------------------



|Item 5. | Other Information
|------- | -----------------

None.



|Item 6. | Exhibits
|------- | --------



|      |  |                                                                                                                                                                                                                                                                                                                                       
|----- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1   |  | Amended and Restated Articles of Incorporation of Eastern Virginia Bankshares, Inc., effective December 29, 2008 (incorporated by reference to Exhibit 3.1 to the Companys
Annual Report on Form 10-K filed March 10, 2009).                                                                                                         
|      | 
|3.2   |  | Articles of Amendment to the Articles of Incorporation of Eastern Virginia Bankshares, Inc., effective January 6, 2009 (incorporated by reference to Exhibit 3.1 to the
Companys Current Report on Form 8-K filed January 13, 2009).                                                                                                 
|      | 
|3.3   |  | Bylaws of Eastern Virginia Bankshares, Inc., as amended May 21, 2009 (incorporated by reference to Exhibit 3.3 to the Companys Annual Report on Form 10-K filed March 11,
2010).                                                                                                                                                     
|      | 
|10.12 |  | Written Agreement, dated February 17, 2011, by and among Eastern Virginia Bankshares, Inc., EVB, the Federal Reserve Bank of Richmond and the Virginia State Corporation Commission
Bureau of Financial Institutions (incorporated by reference to Exhibit 10.12 of the Companys Current Report on Form 8-K filed February 22, 2011).
|      | 
|10.13 |  | Eastern Virginia Bankshares, Inc. Supplemental Executive Retirement Plan (effective January 1, 2008). #                                                                                                                                                                                                                               
|      | 
|31.1  |  | Rule 13a-14(a) Certification of Chief Executive Officer.                                                                                                                                                                                                                                                                              
|      | 
|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.                                                                                                                                                                                                                                                          



|# | Filed herewith.
|- | ---------------



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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 16, 2011 |  |  |  |  |  | /s/ Joe A. Shearin                                  
|                   |  |  |  |  |  | Joe A. Shearin                                      
|                   |  |  |  |  |  | President and Chief Executive Officer               
|                   |  |  |  |  |  | (Principal Executive Officer)                       
|                   |  |  | 
|Date: May 16, 2011 |  |  |  |  |  | /s/ Douglas C. Haskett II                           
|                   |  |  |  |  |  | Douglas C. Haskett II                               
|                   |  |  |  |  |  | Executive Vice President and Chief Financial Officer
|                   |  |  |  |  |  | (Principal Financial and Accounting Officer)        



54