Management's discussion and analysis is intended to assist the reader in evaluating and understanding the consolidated results of operations and our financial condition. The following analysis provides information about the major components of the results of operations, financial condition, liquidity and capital resources of Eastern Virginia Bankshares and attempts to identify trends and material changes that occurred during the reporting periods. The discussion should be read in conjunction with Selected Financial Data (Item 6 above) and the Consolidated Financial Statements and Notes to Consolidated Financial Statements (Item 8 below).

Forward Looking Statements

Certain information contained in this discussion may include "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We caution you to be aware of the speculative nature of "forward-looking statements." These statements are not guarantees of performance or results. Statements that are not historical in nature, including statements that include the words "may," "anticipate," "estimate," "could," "should," "would," "will," "plan," "predict," "project," "potential," "expect," "believe," "intend," "continue," "assume" and similar expressions, are intended to identify forward-looking statements. Although these statements reflect our good faith belief based on current expectations, estimates and projections about (among other things) the industry and the markets in which we operate, they are not guarantees of future performance. Whether actual results will conform to our expectations and predictions is subject to a number of known and unknown risks and uncertainties, including the risks and uncertainties discussed in this form 10-K, including the following:

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

• changes in the quality or composition of our loan or investment portfolios, including adverse developments in borrower industries, decline in real estate values in our markets, or in the repayment ability of individual borrowers or issuers;

• The impact of government intervention in the banking business;

• changes in the interest rates affecting our deposits and our loans;

• the loss of any of our key employees;

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

• an insufficient allowance for loan losses as a result of inaccurate assumptions;

• our ability to manage growth;

• our ability to assess and manage our asset quality;

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

• our ability to maintain internal control over financial reporting;

• our ability to raise capital as needed by our business;

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

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

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

Consequently, all of the forward-looking statements made in this filing are qualified by these cautionary statements 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 the "Risk Factors" section included in this Form 10-K and in our periodic and current reports filed with the Securities and Exchange Commission for specific factors that could cause our actual results to be significantly different from those expressed or implied by our forward-looking statements.

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) Statement of Financial Accounting Standards (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, which requires that losses be accrued based on the differences between the value of the collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

We evaluate non-performing loans individually for impairment, such as nonaccrual loans, loans past due 90 days or more, restructured loans and other loans selected by management as required by 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. If a loan evaluated individually is not impaired, then the loan is assessed for impairment under 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 local economic conditions.

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

Goodwill

Goodwill is evaluated annually to see if there is any impairment associated with its value. Refer to Footnote 1, item goodwill on page 65.

Executive Overview

The year 2008 was not a normal year in the banking industry. It showed the falling domino impact of loan instruments that are used to collateralize investment instruments and then sold to various institutions. Although we did not deal in subprime loans as a matter of direct business, we still were impacted. The year began with the financial industry, not just banks, continuing to deal with the subprime loan fallout. The Federal Reserve continued to lower rates through out the year which put a squeeze on interest margins, the largest contributor to our net income, as variable rate loans and investments re-priced quickly while fixed rate deposits and borrowings re-priced over a longer period of time. Finally in late summer the impact of the decreased value of asset backed securities, the high rate of defaulted mortgages and a liquidity crunch blended to cause massive write downs of securities, the takeover by the U. S. Government of its mortgage agencies FNMA and FHLMC and the buy out or failure of many institutions. This brought in the U. S. Treasury to assist the Federal Reserve and other government supervisory agencies in stabilizing the economy. As we enter 2009, we are operating under a quasi government controlled financial industry that is working hard to right itself.

Eastern Virginia Bankshares was not immune to these impacts. We had to take an impairment charge to write down some securities, primarily preferred stock of FNMA and FHLMC. When the Treasury Secretary acted to place the FNMA and FHLMC Government Sponsored Entities ("GSE's") into conservatorship, banks holding the securities were negatively impacted. Only a few months prior to the Treasury action, banking regulators had encouraged banks to incorporate these securities in the mix of their portfolio holdings to assist in meeting capital needs of these GSE's. The result was that all financial institutions that held investments in the GSE's were forced to take impairment charges that negatively impacted earnings. In addition, we have an increased volume of loans in nonaccrual status and subject to foreclosure risks. However, we have maintained a conservative strategy; risks within our markets are diversified; we are still earning net income and most important we are well capitalized with enough liquidity to meet most turns in the economic markets.

Our balance sheet, the primary driver of income, grew in 2008. Total assets are up $124.7 million from $926.7 at the end of 2007 to $1.05 billion at the end of 2008. Gross loans, our primary earning asset, are up $110.4 million and deposits are up $141.6 million while fed funds purchased are down at year end by $13.5 million. FHLB borrowing increased $7.6 million from a transaction early in the first quarter of 2008. As a result of this growth, if we were in a normal economic market, we start 2009 with the potential to produce a good earnings flow. With the

economic turmoil, the potential might not come to fruition. Our 2008 growth was not just from branch purchases. While our branch purchases provided $49 and $93 million in loans and deposits, respectively, we still had significant growth from our existing markets. Loans increased an additional $61.4 million. The additional $48.6 million in deposits includes the addition of some low rate of brokered deposits. However, the deposit mix started changing with increases in interest checking and money market accounts. In addition, there was little run off from the acquired branches. The limitations on the earnings potential will be similar to those we faced in 2008. We begin the year with an economy still sliding and a hope that it will bottom out sooner than later. We anticipate weakened loan payment flows due to continued unemployment increases, creating a nervous public that is still looking for stability in the markets.

Net income for the year ended December 2008 was $3.1 million or a 64.9% decrease from $8.8 million for the year ended December 2007. This was the result of a number of factors. Our income on earning assets increased as loans and securities income were up while fed funds and dividend income were down. Dividends were impacted by lower payments from the FHLB of Atlanta, including the fourth quarter dividend being deferred to 2009. The infusion of deposits from our purchase of two Millennium bank branches helped fuel our funding needs for much of the second and third quarters, but our loan growth put us in a borrowing position by the end of the year. Rate changes through out the year were the primary cause of the declining interest income. The yield on earning assets dropped 63 basis points for the year while the yield on interest bearing liabilities was down only 32 basis points. This 31 point gap represents the rate change delay banks have in a declining rate environment.

While the rate gap is the major factor in 2008's interest income weakening it is not the only factor in earnings decline. The provision for loan losses increased from $1.2 million in 2007 to $4.0 in 2008, taking an additional $2.8 million out of earnings for 2008. In addition, the competition for deposits has become extremely aggressive. This is pointed out in the trend of our net interest margin. In 2003, our net interest margin was 4.45% while in 2008 it was 3.57%. The rate has declined every year except 2006 when it was up 10 basis points. Management, in an effort to minimize this trend, looks at funding alternatives outside the traditional deposit sources and makes purchases of borrowed funds or brokered deposits when the spreads are significantly better than the normal deposit market.

Noninterest income was $3.0 million for 2008, a decrease of $3.1 million compared to $6.1 million in 2007. The decline was influenced by a number of unusual items that skew the year to year comparison. Our core noninterest income for 2008 was $6.5 million, an increase of 7.1%, compared to 2007. The unusual items that impacted 2008 noninterest income creating a net loss of $3.6 million were a $4.9 million other than temporary impairment, partially offset by a $1.3 million pension curtailment gain. The securities loss resulted primarily from the impairment charge taken on the FNMA and FHLMC preferred stock when the Federal Government took control of the agencies and eliminated the dividend. The economy is still in turmoil, but with the infusion of government money into the economy, we anticipate that it will eventually reverse these negative trends. This should occur as the funds move out to businesses that can then hire employees and start producing goods again and as the consumers move back into the work force and begin to feel more comfortable with spending. Our current view of the economy does not permit us to provide an estimate of when the turn-around is likely to occur.

Noninterest expense rose for the year due to infrastructure changes in the telecommunications system, higher FDIC insurance premiums due to a revised pricing structure but primarily from the acquisition of two new branches in the middle of March 2008. The purchase, as mentioned, helped fund our loan growth during the year, but did add noninterest expense. Our analysis of the performance of the acquired branches indicated that the acquisition was accretive to 2008. With strong expense controls and a freeze on merit increases in 2009, we expect noninterest expense increases in 2009 to only be related to non-controllable items such as FDIC insurance, postage, telecommunications and legal expenses related to loan defaults.

Management's announced strategy of growing net income annually by 10% is primarily dependent on growth of our existing markets and positioning the Company to grow in new markets. This strategy is emphasized by the progression over the last six years but in an economy that we are facing now, an economy never seen by most bankers in their careers, that goal takes a secondary position to our focus to help and work with our customers and our communities. Until the economy reverses direction, growth will probably be limited. However, while we do not plan any new branch openings in 2009, we are open to opportunities that may present themselves. If these opportunities arise, we will evaluate them and will act to enhance shareholder value. In light of the current economic conditions, our primary goal in 2009 is to maintain the stability of our company and assist our customers and communities.

Results of Operations

The table below lists our quarterly performance for the years ended December 31, 2008 and 2007.

SUMMARY OF FINANCIAL RESULTS BY QUARTER



                                                                          Three Months Ended
                                                           2008                                          2007
(dollars in thousands)                 Dec. 31      Sep. 30      June 30    Mar. 31    Dec. 31    Sep. 30    June 30    Mar. 31
Interest income                        $ 14,415     $ 15,177     $ 15,031   $ 14,763   $ 15,090   $ 14,822   $ 14,374   $ 13,915
Interest expense                          6,642        6,816        6,792      6,558      6,615      6,439      6,107      5,801

Net interest income                       7,773        8,361        8,239      8,205      8,475      8,383      8,267      8,114
Provision for loan losses                 1,225        1,050        1,300        450        611        325        150        153

Net interest income after provision
for loan losses                           6,548        7,311        6,939      7,755      7,864      8,058      8,117      7,961
Noninterest income                        1,418       (3,039 )      1,934      2,657      1,642      1,643      1,477      1,349
Noninterest expense                       7,305        6,986        7,059      6,595      6,791      6,431      6,374      6,278

Income before applicable income
taxes                                       661       (2,714 )      1,814      3,817      2,715      3,270      3,220      3,032
Applicable income taxes                  (1,553 )        355          560      1,145        649      1,005        905        924

Net Income                             $  2,214     $ (3,069 )   $  1,254   $  2,672   $  2,066   $  2,265   $  2,315   $  2,108

Net income per share, basic and
diluted                                $   0.38     $  (0.52 )   $   0.21   $   0.45   $   0.35   $   0.38   $   0.38   $   0.35

Net Interest Income

The primary source of income for our company is net interest income which represents our gross profit margin and is defined as the difference between interest income and interest expense. For comparative purposes, income from tax-exempt securities is adjusted to a tax-equivalent basis using the federal statutory tax rate of 35%. Tax-exempt securities income is further adjusted by the Tax Equity and Fiscal Responsibility Act ("TEFRA") adjustment 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. Net interest margin is a ratio based on the formula of net interest income divided by average earning assets that represents the profits left over after paying for deposits and borrowed funds. Changes in the volume and mix of earning assets and interest bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income. Below, the "Average Balances, Income and Expense, Yields and Rates" table presents average balances, interest income on earning assets and related average yields, as well as interest expense on interest-bearing liabilities and related average rates paid, for each of the past three years.

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



                                                                                 Year Ended December 31
                                                   2008                                   2007                                   2006
                                      Average       Income/     Yield/       Average       Income/     Yield/       Average       Income/     Yield/
(dollars in thousands)                Balance       Expense      Rate        Balance       Expense      Rate        Balance       Expense      Rate
Assets:
Securities
Taxable                              $ 114,507      $  6,273      5.48 %    $ 104,116      $  5,522      5.30 %    $  95,315      $  4,809      5.05 %
Tax exempt (1)                          40,482         2,388      5.90 %       34,325         2,038      5.94 %       34,120         2,023      5.93 %

Total securities                       154,989         8,661      5.59 %      138,441         7,560      5.46 %      129,435         6,832      5.28 %
Federal funds sold                       4,416            84      1.90 %       12,382           638      5.15 %        5,994           299      4.99 %
Loans (net of unearned income)
(2)                                    773,838        51,371      6.64 %      681,456        50,626      7.43 %      614,330        44,503      7.24 %
Total earning assets                   933,243        60,116      6.44 %      832,279        58,824      7.07 %      749,759        51,634      6.89 %
Less allowance for loan losses          (9,489 )                               (7,296 )                               (5,815 )
Total non-earning assets                72,659                                 58,920                                 55,165

Total assets                         $ 996,413                              $ 883,903                              $ 799,109

Liabilities & Shareholders'
Equity:
Interest bearing deposits
Checking                             $ 144,558      $  2,925      2.02 %    $ 105,494      $  1,864      1.77 %    $  80,962      $    432      0.53 %
Savings                                 74,667           671      0.90 %       81,843           950      1.16 %       99,509         1,239      1.25 %
Money market savings                    52,321         1,256      2.40 %       40,817           983      2.41 %       45,006           936      2.08 %
Large dollar certificates of
deposit (3)                            143,115         6,376      4.46 %      120,735         5,799      4.80 %      103,789         4,505      4.34 %
Other certificates of deposit          242,184         9,109      3.76 %      212,967         9,525      4.47 %      204,440         8,018      3.92 %

Total interest-bearing deposits        656,845        20,337      3.10 %      561,856        19,121      3.40 %      533,706        15,130      2.83 %
Federal Funds Purchased                  3,817            91      2.38 %        1,353            73      5.40 %        1,799            88      4.89 %
Other borrowings                       144,529         6,381      4.42 %      121,378         5,768      4.75 %       92,656         4,226      4.56 %
Total interest-bearing
liabilities                            805,191        26,809      3.33 %      684,587        24,962      3.65 %      628,161        19,444      3.10 %

Noninterest-bearing liabilities
Demand deposits                         96,874                                 98,282                                 99,213
Other liabilities                        7,770                                 11,375                                  6,564
Total liabilities                      909,835                                794,244                                733,938
Shareholders' equity                    86,578                                 89,659                                 65,171

Total liabilities and
shareholders' equity                 $ 996,413                              $ 883,903                              $ 799,109

Net interest income                                 $ 33,307                               $ 33,862                               $ 32,190

Interest rate spread (4)                                          3.11 %                                 3.42 %                                 3.79 %
Interest expense as a percent of
average earning assets                                            2.87 %                                 3.00 %                                 2.59 %
Net interest margin (5)                                           3.57 %                                 4.07 %                                 4.29 %

Notes:

(1) Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 35%.

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

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

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

(5) Net interest margin is the net interest income, calculated on a fully taxable basis assuming a federal income tax rate of 35%, expressed as a percentage of average earning assets.

Tax-equivalent net interest income decreased 1.6% to $33.3 million in 2008 from $33.9 million in 2007. Average earning assets grew 12.1%, or $101.0 million, while interest-bearing liabilities grew 17.6%, or $120.6 million. Despite growth on both sides of the balance sheet, the 2008 yield on earning assets was 6.44% a decline of 63 basis points compared to a cost of 3.33% on interest bearing liabilities which was down 32 basis points. In spite of the growth, the earnings on the loan portfolio were unable to hold pace with the rapid interest decreases throughout 2008 and the spread declined 31 basis points. This displays the re-pricing gap that existed most of the year as the Federal Reserve's rapid price cuts to fight economic problems created a disparity by re-pricing variable rate loans right away while not impacting fixed rate liabilities until their maturity. All categories of earning assets grew except Federal Funds sold. Average securities were up $16.5 million with a $10.4 million increase in taxable securities and a $6.2 million increase in tax exempt securities. Taxable securities income went up contributing $750 thousand more to interest income, while tax exempt income was up $350 thousand. This increase of $1.1 million more than offset the decline of $554 thousand in federal funds sold earnings. The yield on the largest earning asset category, loans, was down 79 basis points at 6.64% compared to 7.43% in 2007.

Total average deposits grew $93.6 million, or 14.2%, with increases in all . . .