We present management's discussion and analysis of financial information to aid the reader in understanding and evaluating our financial condition and results of operations. This discussion provides information about our major components of the results of operations, financial condition, liquidity and capital resources. This discussion should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements presented elsewhere in this report and in the 2007 Form 10-K. Operating results include those of all our operating entities combined for all periods presented.

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

CRITICAL ACCOUNTING POLICIES

General

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. For example, we use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ substantially from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) SFAS No. 5, Accounting for Contingencies, which requires that losses be accrued when their occurrence is probable and estimable, and (ii) SFAS No. 114, Accounting by Creditors for Impairment of a Loan, as amended by FASB Statement No. 118, Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosure which require that losses be accrued based on the differences between the value of the collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

We evaluate non-performing loans individually for impairment as required by SFAS No. 114. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of the impairment. In addition to specific reserves for loans that are individually impaired, we also allocate reserves for non-impaired loans based on inherent risks in the loan portfolio by category of loans in accordance with SFAS No. 5.

For loans without individual measures of impairment, we make estimates of losses for groups of loans as required by SFAS No. 5. Loans are grouped by similar characteristics, including the type of loan, the assigned loan grade and general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is derived based upon historical loss rates for each loan type, the predominant collateral type for the group and the terms of the loan. The resulting estimates of losses for groups of loans are adjusted for relevant environmental factors and other conditions of the portfolio of loans including:
borrower or industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in risk selection; level of experience, ability and depth of lending staff; and national and economic conditions.

The amounts of estimated losses for loans individually evaluated for impairment and groups of loans are added together for a total estimate of loan losses. The estimate of losses is compared to our allowance for loan losses as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional provision to the allowance would be evaluated to determine whether an addition to the allowance is needed. If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether a reduction to the allowance would be necessary. While management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the valuations. Such adjustments would be made in the relevant period and may be material to the Consolidated Financial Statements.

Goodwill and Intangible Assets

SFAS No. 141, Business Combinations, requires the purchase method of accounting be used for all business combinations initiated after June 30, 2001. For purchase acquisitions, we are required to record assets acquired, including identifiable intangible assets, and liabilities at their fair value, which in many instances involves estimates based on third party valuations, such as appraisals, or internal valuations based on discounted cash flow analysis or other valuation techniques. Effective January 1, 2001, we adopted SFAS No. 142 Goodwill and Other Intangible Assets

("SFAS 142") which prescribes the accounting for goodwill and intangible assets subsequent to initial recognition. The provisions of SFAS No. 142 discontinue the amortization of goodwill and intangible assets with indefinite lives, but require at least an annual impairment review and more frequently if certain impairment indicators are in evidence. Additionally, we adopted SFAS No. 147 Acquisitions of Certain Financial Institutions, on January 1, 2002, and determined that core deposit intangibles will continue to be amortized over their estimated useful lives.

Goodwill totaled $16.0 million and $5.7 million as of September 30, 2008 and December 31, 2007, respectively. Based on the testing of goodwill for impairment, no impairment charges have been recorded. As described in Note 12, this increase was due to our acquisition in the first quarter of 2008. Core deposit intangible assets are being amortized over the period of expected benefit, which ranges from 2.39 to 7.0 years. Core deposit intangibles, net of amortization, amounted to $575 thousand and $770 thousand, at September 30, 2008 and December 31, 2007, respectively and are included in other assets.

OVERVIEW

The third quarter of 2008 turned an already challenging economic environment for the banking industry into an unprecedented challenge. The mortgage agencies, Fannie Mae and Freddie Mac (GSE's), were taken over by the government resulting in severe stress in the financial industry, creating decreased capital adequacy in many financial businesses and the need for a government bailout. While EVB management had been preparing for potential loan problems based on the year long economic uncertainty, we were surprised by the swiftness and harshness of the government take over of the GSE's. These entities had been blessed with implied government protection and their preferred stock issuances were viewed as bank quality investments for years. Obviously the government's conservatorship with its revocation of preferred stock dividends and the devaluing of all stock levels affected our company negatively. Agency preferred stock dropped from an AA rating to a non investment level rating in less than two months. We took a $4.4 million impairment charge on our investments in perpetual preferred stock of these entities. Of that loss, $1.5 million will be recovered in the fourth quarter of 2008 as a deferred tax benefit in conjunction with FASB 109 which defers recognition until the quarter in which the President signed the legislation to change the treatment of the loss to ordinary rather than capital. The President signed the bailout legislation on October 3rd , 2008 making it a fourth quarter item. As noted below, our core earnings flow remains strong.

For the quarter ended September 30, 2008 the Company reported a net loss of $3.1 million, an income decrease of $5.3 million, or 235%, when compared to $2.3 million net income for the same period in 2007. As noted above, the largest single contributor to this decline in earnings was the $4.4 million impairment on securities taken in the third quarter for the devaluation of the GSE perpetual preferred stock. An impairment charge of $229 thousand on our OREO properties and an increase in provision for loan losses of $725 thousand over the same period last year accounted for the remainder of the decrease in quarterly earnings. Loan loss reserves increased as management continued to react to a higher potential risk in the loan portfolio.

Through the third quarter, loans continued growing but at a slower pace while deposits for most of the quarter increased. Management utilized most of its excess funds in new loans and short term fed funds purchased. The FOMC's aggressive lowering of the target federal funds rate early in the year, led to decreased yield on earning assets. We have been able to fund growth from the increased deposits from the first quarter purchases and normal deposit growth from our core retail system. With more deposit volume, interest expense rose. Our noninterest income, excluding the impairment charges, had increases of $100 thousand in deposit fees and $63 thousand in card fees for the quarter. The noninterest expense increase of $555 thousand reflected the operating costs of the Millennium branches purchased in the first quarter of 2008, the relocation in Mechanicsville to the new Windmill location, increased regulatory expense and infrastructure improvements. Towards the end of the third quarter, the Federal Reserve's aggressive cut in the target fed funds rate resulted in further strain on our earning asset income flow.

On a linked quarter basis, net interest income increased 1.5% which in a normal economic business cycle, points to our being positioned to take advantage of lower interest rates in order to maintain a strong income flow and a rising net interest margin. However, with the Federal Reserve lowering interest rates again and the economy teetering on a daily basis, it is not clear what normal is. It may take six months to two years for the markets to settle and some level of normalcy to return. We will continue our strategy of lowering deposit rates as quickly as possible but in the short term, we will continue to deal with the re-pricing lag that we have worked through for most of the year. Our capital position is strong and we are looking at ways to make it stronger, possibly by taking advantage of some of the government opportunities that are part of the government bailout. We grow with the communities in which we operate. We believe our core earnings are strong and if our communities stay stable we will continue growing.

Financial Condition

Return on average assets (ROA) for the third quarter 2008 declined to a 1.19% loss, compared to 1.01% in the same quarter of 2007, and return on average equity (ROE) declined to a 14.30% loss compared to 10.02% for the quarter ended September 30, 2007. For the nine months ended September 30, 2008 ROA was 0.12% compared to 1.02% for the same nine months in 2007. ROE for the nine month period was 1.28% compared to 9.95% for the same period in 2007.

Total assets at September 30, 2008 were $1.03 billion, up $104.3 million, or 11.3%, from $926.7 million at year end 2007 and up $127.8 million, or 14.2% from September 30, 2007, when total assets were $903.2 million. This increase is the result of strong growth and the acquisition of the Millennium branches which added $93.7 million to our footings. New deposits in these two branches have more than replaced any run off from the original deposits. Loan growth for the third quarter of 2008 was $14.4 million. For the quarter, total assets averaged $1.02 billion, 1.6% above the second quarter 2008 average of $1.01 billion. At September 30, 2008, total loans, net of unearned income amounted to $804.7 million an increase of $95.9 million, or 13.5%, from $708.8 million at December 31, 2007. Average loans for the third quarter 2008 increased $101.5 million to $791.1 million compared to $689.6 million for the same period in 2007. At September 30, 2008, net loans as a percent of total assets were 77.1%, as compared to 75.6% at December 31, 2007. Included in this growth is $48.9 million of loans acquired in the Millennium branch acquisitions. While our core earnings are in place and net interest margin should move up, the uncertainty of the economy could result in a drain of funds from the bottom line.

At September 30, 2008, the investment portfolio totaled $156.8 million, an increase of $6.9 million from $149.9 million at September 30, 2007 and down $4.1 million, or 2.5%, from $160.9 million at December 31, 2007. While interest rates through most of the third quarter were stable, the Federal Open Market Committee (FOMC) has and will adjust rates as needed, given the unstable economy. During most of the quarter, bond rates have moved up and down within a range and with a more normal slope but in September movement was radical and often a day to day adventure. The unrealized loss in the securities portfolio almost tripled what it was at year end 2007 and September 30, 2007, especially in the corporate categories. As the economy returns to a more normal state, the securities impairment charges that were $4.4 million in the third quarter should decline but the timing of the changes is unclear at this time. Most of the funds that are invested in the investment portfolio are part of management's effort to balance interest rate risk and to provide liquidity. Management, recognizing the potential liquidity impact that the increase in unrealized losses could have, is evaluating other sources of funds such as a capital infusion from opportunities in the government bailout and increasing the availability of short term borrowings. At September 30, 2008, we were in a federal funds purchased position of $16.7 million, while there were $17.1 million in federal funds purchased at December 31, 2007 and a net of $5.3 million federal funds purchased at September 30, 2007. During most of the third quarter, we were in a funds sold position due to an influx of short term deposits. The Millennium branches acquisition in March 2008 funded much of our growth during the first nine months of 2008. We anticipate deposit growth in the fourth quarter but the economy and the public's focus on the economy may impact that growth. Banks, especially community banks, are normally considered safe places to store money. However, in the current economic turmoil the public has lumped all banks, not just investment banks or big regional banks, as the source of the problems. It will take time to calm the public.

Total deposits of $778.2 million at September 30, 2008 represented an increase of $106.3 million, or 15.8%, from $671.9 million at year-end 2007 and an increase of $120.4 million, or 18.3%, from $657.8 million at September 30, 2007. The branch acquisitions in March 2008 added approximately $93.5 million to our deposit base. Year-over-year, all deposit categories were up except noninterest bearing demand and savings deposits. Noninterest-bearing demand deposits of $100.0 million at September 30, 2008 increased $4.1 million when compared to $95.8 million at December 31, 2007 but are down less than 1% compared to $100.7 million at the end of the same quarter in 2007. Interest-bearing deposits at September 30, 2008 increased $102.1 million, or 17.7%, to $678.2 million compared to $576.1 million at December 31, 2007 and up $121.1 million, or 21.8%, compared to $557.0 million at September 30, 2007. While some of the time deposits from the Millennium branches were priced higher than our existing base, the influx of noninterest bearing deposits during the current year and our effort to lower our cost of funds appear to be slowing the decline in the interest margin as we go into the fourth quarter. All deposit prices are evaluated frequently to adjust them to the new rate environment. As an example, our 12 month certificate of deposit was priced at 4.05% in early January 2008 and was 2.85% at the end of June and September 2008, a decline of 120 basis points. The rate since the second quarter also

supports management's desire to keep maturities short in order to re-price them at the market rate in the future. Our primary growth deposit product, Reward Checking, had its rate decreased from 5.01% to a still above market 4.01% at the end of the first quarter and has been set up in a tiered format, so funds over $100,000 earn a lower rate. All these steps were taken to lower our cost of funds and we are starting to see them have an impact. With more blocks of certificates of deposit maturing in the fourth quarter, our margin should come back into a more acceptable level.

FHLB borrowings at September 30, 2008 totaled $135.4 million, a $7.6 million, or 5.9%, increase over $127.8 million at September 30, 2007 and up $8.3 million from $127.1 million at December 31, 2007. For the remainder of the current year, we expect to attract lower cost deposits and anticipate maturing certificates of deposit to re-price at lower rates. We do not anticipate additional borrowing this year, but that is dictated by the markets and the economic environment which is currently unstable.

SFAS No. 115, discussed in the 2007 Form 10-K, requires the Company to show the effect of market changes in the value of securities available for sale. The effect of the change in market value of securities, net of income taxes, is reflected in a line titled "Accumulated other comprehensive (loss), net" in the Shareholders' Equity section of the Consolidated Balance Sheets. The securities portion was a $11.9 million loss at September 30, 2008 an increase of $9.0 million from a $2.9 million loss at December 31, 2007 and an increase of $8.4 million from a $3.5 million loss at September 30, 2007. Also included in this line item is a $606 thousand negative amount related to the pension plan (SFAS No. 158). The unrealized loss on securities is presented as a value at one specific point in time but fluctuates significantly over time depending on interest rate changes.

RESULTS OF OPERATIONS

Net Income

As noted earlier, net income decreased to a loss of $3.1 million for the three months ended September 30, 2008, compared to $2.3 million net income for the same period in 2007. Diluted earnings per share decreased 181.67% to a $0.52 loss for the third quarter of 2008, compared to $0.38 net income for the same quarter in 2007 primarily as a result of the impairment write downs and the increase in loan loss provision. Net interest income decreased $22 thousand for the quarter ended September 30, 2008, when compared to the same period in 2007. The decrease in net interest income for third quarter 2008 was the result of interest expense growing faster than loan interest income. For the quarter, interest and fees on loans increased $243 thousand, or 1.9%, while deposit interest grew $422 thousand, or 8.8%. Investment income increased $112 thousand compared to the third quarter of 2007. Interest on FHLB advances increased $63 thousand. The earnings decline in the third quarter was impacted by unusual non-operating costs with a $4.4 million increase in securities impairment, a $725 thousand increase in provision for loan loss and a $229 thousand impairment on OREO property. We anticipate that we will continue to increase the reserve until the economy shows improvement. For the third quarter, noninterest income excluding securities and OREO impairment declined $14 thousand with increases of $100 thousand in deposit service charges and $63 thousand increase in card fees offset by a $118 thousand decrease in investment services income and a $14 thousand decrease in securities gains.

Noninterest expense rose $555 thousand, or 8.6%, for the three months ended September 30, 2008, compared to the comparable period in 2007, as all categories, except salaries and benefits increased. Much of this increase is the result of absorbing the operating expenses of our purchased branches, increased marketing expense and new branch opening costs for the Quinton office. Salaries and benefits decreased $22 thousand as decreases in benefits costs offset the salary increase from the acquisition. Net occupancy expense rose $90 thousand to $1.2 million compared to $1.1 million for the same quarter in 2007. Other expenses increased $487 thousand as telephone expense increased $100 thousand due to infrastructure changes, marketing and advertising increased $141 thousand and other operating expenses rose $245 thousand. Other operating expense was primarily impacted by an $87 thousand increase in FDIC insurance expense.

Net income for the nine months ended September 30, 2008 was $857 thousand, a decrease of $5.8 million from $6.7 million for the same nine month period in 2007. Net interest income rose $41 thousand as interest income increased $1.9 million while interest expense increased $1.8 million. This comparison reflects the sharp impact the rapid rate changes have had on the earnings stream. For the nine months ended September 30, 2008, provision for loan loss increased $2.2 million continuing a year-long pattern. Noninterest income declined $2.9 million as the securities impairment of $4.7 million and an OREO impairment charge of $229 thousand far exceeded a $1.3 million pension plan gain from the changes to our plan. Core noninterest income, excluding extraordinary gains and losses, increased $437

thousand or 9.8% as deposit service charges rose $344 thousand and card fees rose $273 thousand. Noninterest expense increased $1.6 million to $20.6 million for the nine months ended September 30, 2008 compared to $19.1 million for the same period in 2007. All categories grew from their 2007 levels primarily due to our retail expansion, new personnel, infrastructure improvements on the telephone system, an increase in marketing and advertising and higher FDIC expense.

Net Interest Income

Our primary source of income is net interest income which on a fully tax equivalent basis totaled $8.5 million for the third quarter of 2008, a $4 thousand decrease from the third quarter of 2007. Average earning assets for the quarter ended September 30, 2008 were $957.3 million an increase of $116.7 million compared to $840.6 for the same period in 2007. Average loans increased $101.5 million, or 14.7%. Average securities increased $11.4 million, or 7.9%. Average federal funds sold increased $3.8 million, or 65.3%, reflecting the availability of funds during most of the third quarter. The fully tax equivalent net interest margin for the three-month period ended September 30, 2008 was 3.59% compared to 4.03% for the same quarter ended in 2007. For the quarter ended September 30 2008, the yield on earning assets declined 62 basis points to 6.45%, compared to 7.07% for the third quarter of 2007, and the cost of interest bearing liabilities was down 40 basis points to 3.30% from 3.70% in the same period in 2007. While the earning asset yield continued to decline, the decline in the cost of interest bearing liabilities accelerated which should help our interest spread and our margin. This accelerated decline should mean that we have absorbed most of the impact of multiple rate cuts by the Federal Reserve beginning in the second half of 2007. Our decrease in funding costs is across the board with decreases in all interest bearing deposit categories except interest checking which slowed to a 12 basis point increase when compared to third quarter 2007. For the three months ended September 30, 2008, the average balances for all interest bearing liabilities, except savings and fed funds purchased, increased. The notes in the following schedule show the derivation of the tax equivalent amount which is added to GAAP net interest income.

The continued decline in the cost of funds is encouraging, pointing to the impact that our rate re-pricing has had on the cost of funds. Depositors are still undecided on where to place their money since they want yield and security. With the collapse of some mortgage centered banks, they are even more worried about the economy, their jobs and the future. We continue to reassure them that our products meet their needs and if they do not, then we develop products that will. We anticipate that as the markets settle down over an extended period of time, a positively sloping yield curve will enhance the margin. Monitoring the markets, listening to our customers and utilizing our market models should help us adjust quickly to all challenges.

Tables that disclose fully tax equivalent net interest income calculations for the three-month and nine month periods ended September 30, 2008 and 2007 follow:

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



                                                           Three Months Ended September 30,
                                                       2008                                 2007
                                           Average       Income/    Yield/      Average      Income/    Yield/
                                           Balance       Expense     Rate       Balance      Expense     Rate
Assets:
Securities
Taxable                                  $   116,395     $  1,566     5.41 %   $ 109,151     $  1,468     5.34 %
Tax exempt (1)                                40,220          598     5.98 %      36,026          539     5.94 %

Total securities                             156,615        2,164     5.56 %     145,177        2,007     5.48 %
Federal funds sold                             9,529           46     1.94 %       5,763           73     5.03 %
Loans, net of unearned income (2)            791,119       13,150     6.69 %     689,645       12,907     7.43 %

Total earning assets                         957,263       15,360     6.45 %     840,585       14,987     7.07 %
Less allowance for loan losses               (10,202 )                            (7,300 )
Total non-earning assets                      76,654                              59,317

Total assets                             $ 1,023,715                           $ 892,602


Liabilities & Shareholders' Equity:
Interest bearing deposits
Checking                                 $   150,469     $    756     2.02 %   $ 109,677     $    526     1.90 %
Savings                                       75,135          156     0.84 %      81,218          244     1.19 %
Money market savings                          56,002          334     2.40 %      40,562          250     2.45 %
Large dollar certificates of deposit
(3)                                          149,487        1,688     4.54 %     117,164        1,426     4.83 %
. . .