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 2008 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) 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 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 at both March 31, 2009 and December 31, 2008. Based on the testing of goodwill for impairment, no impairment charges have been recorded. 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 $431 thousand and $503 thousand, at March 31, 2009 and December 31, 2008, respectively, and are included in other assets.

As discussed above in Note 1, subsequent to the filing of an 8-K with our first quarter earnings press release dated April 17, 2009, an accounting rule change was implemented that reduced our net income available to common shareholders. This rule change requires dividends on the cumulative preferred stock issued to the U. S. Treasury in January 2009 to be treated for accounting purposes as a preferred dividend for the full period outstanding in the quarter as opposed to the interim period for which the dividend was declared and payable. This action increased our effective preferred stock dividend from $120 thousand to $343 thousand, decreasing net income available to common shareholders from $603 thousand to $381 thousand and decreasing earnings per common share from $0.10 to $0.06

OVERVIEW

First quarter results for 2009 reflect the impact of continued volatility and uncertainty in the world economic environment. Our financial statements reflect the local impact of this recession with large increases in federal funds sold, a decline in loan growth, a large increase in loan loss provision, increased collection expense, an increase in OREO, increases in deposits as investors look for safe havens to store their cash, lower interest income as a result of the rapid rate declines in 2008, decreasing noninterest income and an increase in noninterest expense primarily as a result of our branch expansion last year. These changes are not limited to just our bank. Community banks including our Company rely primarily on earnings from lending in the local markets that they serve. Community banks are living with the hardship of their customers and neighbors and being impacted by the slowing of loan payments resulting in deterioration in asset quality.

On January 9, 2009 Eastern Virginia Bankshares, Inc. issued 24,000 shares of preferred stock to the U. S. Treasury. The Company had applied for funds under the TARP Capital Purchase Plan ("CPP"). This funding increases the capital level at both the holding company and the bank. The agreement also requires us to pay a 5% dividend on the preferred stock for the first five years, then increases to 9% for all periods after the first five years if we have not redeemed the preferred stock. In addition we issued a warrant to the U. S. Treasury giving them the right to purchase 373,832 shares of our common stock at $9.63 per share for up to 10 years. These funds put an already well capitalized company in a stronger position. Management continues to evaluate the impact to the Company if we repay these funds early.

Subsequent to quarter end, management announced on April 3, 2009, a definitive merger agreement with First Capital Bancorp, Inc. ("FCVA") in the Richmond marketplace This strategic alliance of a strong retail business with a strong commercial business, expected to close in late 2009, should offer the new Company a stronger earnings base as we look forward to 2010. Both Companies are well capitalized.

Net income available to common shareholders for the first quarter of 2009 was $381 thousand compared to $2.7 million in the first quarter of 2008. This decline was the result of a number of factors, some of which were planned for and others that resulted from the rapid descent of the financial markets in the second half of 2008. Interest income and expense decreased, resulting in a net interest income decline of $641 thousand. While average earning assets grew $128.3 million over their 2008 balances, $104.4 million of the growth was in loans that were priced lower than the previous portfolio rate and $35.7 million was in Federal funds sold which earned 0.24% compared to 2.76% at this time in 2008. Average interest bearing liabilities balances increased $138.2 million which was $9.9 million more than loan growth. The rate impact on these balances caused much of the earnings decline in the quarter. In addition loan income was hurt by an average of $15.6 million in nonaccrual loans that lowered our yield on the loan portfolio. Investment income declined partially from lower rates on new investments but more from the Treasury conservatorship of the FNMA and FHLMC which eliminated our agency preferred stock dividends and the cessation of dividends from the Atlanta FHLB. During the first quarter of 2009, management increased the loan loss provision 100% compared to the first quarter of 2008. Management considered this action prudent considering deterioration in asset quality. Noninterest income decreased $1.1 million primarily from a $1.0 million of nonrecurring net gains in the first quarter of 2008. Finally, our branch expansion and some infrastructure changes in 2008 resulted in an increased noninterest expense.

Looking to the rest of the year, we anticipate the federal government's economic stimulus plan will help revive loan demand and we have developed some new loan products to assist customers in bridging the credit crunch. On a linked quarter basis, interest expense on deposits in the first quarter of 2009 was $130 thousand less than in the fourth quarter of 2008. Over the remainder of the year we anticipate net interest margin improvement as repricing of deposits should exceed repricing of loans. The Federal Reserve is focused on reviving the economy and there are some signs of deflation in recent reports, so we do not anticipate any major rate changes unless inflation is rekindled by an economic expansion. The TARP money has enhanced our capital position as the parent infused the bank with $20 million more of

regulatory capital. We anticipate increased loan losses in the short run and have prepared for that expectation. We have quality individuals managing our past due loans and foreclosed properties to minimize our potential losses. As the economy recovers, we are positioned to take advantage of all opportunities that present themselves.

Financial Condition

Return on average assets (ROA) for the first quarter of 2009 declined to 0.14%, compared to 1.15% in the same quarter of 2008, and return on average equity (ROE) declined to 1.56% compared to 11.63% for the quarter ended March 31, 2008. While operating net income was $723 thousand, the subtraction of $342 thousand in effective preferred dividends, further lowered the numerator in this ratio.

Total assets at March 31, 2009 were $1.10 billion, up $46.7 million, or 4.4%, from $1.05 billion at year-end 2008 and up $80.5 million, or 7.9% from March 31, 2008, when total assets were $1.02 billion. This increase is the result of strong deposit growth, particularly in the first quarter of 2009 and the addition of $24 million from the issuance of preferred stock. Loan growth for the first quarter of 2009 was $9.8 million, or 1.2% compared to the 2008 year-end balance. For the quarter, total average assets were $1.08 billion, an increase of 15.6% compared to $931.4 million in the first quarter of 2008. For the quarter ending March 31, 2009, average total loans, net of unearned income were $824.3 million, an increase of $104.4 million, or 14.5%, from $719.9 million in the same quarter of 2008. At March 31, 2009, net loans as a percent of total assets were 74.5%, as compared to 76.9% at December 31, 2008. While this portfolio should be able to generate a strong earnings stream, the current economic uncertainty overshadows our near term earnings.

At March 31, 2009, the investment portfolio totaled $164.3 million, a decrease of $16.6 million from $180.9 million at March 31, 2008 and an increase of $2.4 million from $161.9 million at year-end 2008. Interest rates during the first quarter of 2009 were fairly steady and low compared to the same quarter in the prior year. Our unrealized losses especially in pooled trust preferred and corporate securities increased compared to year-end 2008 balances. We continue to monitor the payment streams of these instruments focusing on the deferred payments and defaulted payments. For more detail, see the securities note earlier in the document. 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, opted to participate in the TARP Capital Purchase Program to assist in our loan growth and provide an extra cushion in the event that we have additional impairment on our securities.

Total deposits of $852.6 million at March 31, 2009 represented an increase of $39.1 million, or 4.8%, from $813.5 million at year-end 2008 and an increase of $89.2 million, or 11.7%, from $763.4 million at March 31, 2008. The cost of deposits continues to decrease, and we anticipate that it will drop more as large blocks of certificates of deposit reprice, bringing the loan to deposit spread back to a more normal level. All deposit prices are evaluated frequently by our asset liability committee and adjusted as needed to reflect the competitive rate environment.

FHLB borrowings at March 31, 2009 totaled $124.6 million, a $10.0 million, or 7.4%, decrease compared to $134.6 million at December 31, 2008 and an $11.4 million decrease from $136.1 million at March 31, 2008. With the large balance in Federal funds sold, we do not anticipate additional borrowing this year. Over the remainder of the year, we expect to cover our funding needs by attracting lower cost deposits and anticipate maturing certificates of deposit will re-price at lower rates.

SFAS No. 115 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 $14.1 million loss at March 31, 2009 an increase of $2.3 million from an $11.8 million loss at December 31, 2008 and an increase of $9.6 million from a $4.5 million loss at March 31, 2008. 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. Also included in this line item is a $3.2 million loss related to the market decrease in the value of the pension plan (SFAS No. 158).

RESULTS OF OPERATIONS

Net Income

With the addition of the preferred stock on our balance sheet, we need to analyze income on two levels: income from operations and income available to common shareholders. Preferred dividends and accretion of discount on the preferred stock are recorded before any dividends can be paid to the common stock holders.

As noted earlier, net income available to common shareholders was $381 thousand compared to $2.7 million in the first quarter of 2008. Diluted earnings per common share decreased 86.7% to $0.06, compared to $0.45 for the same quarter in 2008. Approximately $1.03 million (pretax), or $0.11 per share after tax, of the 2008 first quarter net income was the result of nonrecurring items. Net interest income decreased $641 thousand for the quarter ended March 31, 2009, when compared to the same period in 2008. The decrease in net interest income for the first quarter 2009 was the result of loan interest income declining $550 thousand, securities income down $185 thousand and dividend income decreasing $111 thousand. These declines were the result of loans repricing in a lower rate environment, the loss of FNMA and FHLMC securities income and the loss of the FHLB dividend. Interest on interest bearing liabilities declined $189 thousand to offset some of the interest income decline. The impact of the material decline in interest income with less decline in deposit expense compressed the loan deposit interest spread. The final major earning asset, Federal funds sold, had average balances of $36.6 million with a yield of only 0.24%, earned $22 thousand in the first quarter. As we invest this large pool of funds in higher earning assets and as deposit expense continues to fall with deposit funds repricing at lower rates, the squeeze on our margin in the first quarter should relax as we go through the remainder of the year. In addition to the margin contraction, management added $450 thousand more provision for loan loss expense to end the first quarter 2009 at $900 thousand compared to $450 thousand in 2008 first quarter.

Noninterest income for the first quarter 2009 was $1.6 million, compared to $2.7 million in 2008's first quarter, a decline of $1.1 million, or 41.4%. Excluding the impact of the 2008 nonrecurring gain mentioned above, noninterest income was down $72 thousand at $1.6 million for the first quarter 2009 compared to an adjusted $1.6 million for the same period in 2008. Deposit fees declined $31 thousand and investment fees were down $31 thousand. Securities impairment declined $284 thousand, as we had a $16 thousand impairment charge in the first quarter of 2009.

Noninterest expense rose $784 thousand, or 11.9%, to $7.4 million for the three months ended March 31, 2009, compared to $6.6 million in the comparable period of 2008, as all categories, except marketing and advertising, increased. Part of this increase is caused by the impact of a full quarter of operating expense from the Millennium branches purchased in the first quarter of 2008. Salary expenses increased $307 thousand to $4.0 million at March 31, 2009 compared to $3.7 million in 2008. FDIC expense increased $225 thousand, or 300%, compared to the same period in 2008.

Net Interest Income

Our primary source of income is net interest income which on a fully tax equivalent basis totaled $7.7 million for the first quarter of 2009, a $637 thousand decrease from $8.4 million in the first quarter of 2008. Average earning assets for the quarter ended March 31, 2009 were $1.0 billion an increase of $128.3 million compared to $877.7 million for the same period in 2008. Average loans increased $104.4 million, or 14.5%. Average securities decreased $11.8 million, or 7.5%. Average federal funds sold increased $35.7 million, or over 4,000%, for the first quarter of 2009, reflecting the increase in deposits, the slowing of loan growth and the influx of the TARP money. The fully tax equivalent net interest margin for the three-month period ended March 31, 2009 was 3.12% compared to 3.84% for the same quarter in 2008. For the quarter ended March 31 2009, the yield on earning assets declined 116 basis points to 5.69%, compared to 6.85% for the first quarter of 2008, and the cost of interest bearing liabilities was down 63 basis points to 2.95% from 3.58% in the same period in 2008. This 72 basis point decrease in earnings in our net interest margin equates to approximately $7.2 million on an annualized basis, or over $1.8 million in the first quarter. In addition, we had an increased balance in nonaccruing loans which further lowered interest income. Our decrease in funding costs is across the board with decreases in all interest bearing deposit categories. For the three months ended March 31, 2009, 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.

Tables that disclose fully tax equivalent net interest income calculations for the three-month period ended March 31, 2009 and 2008 follow:

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



                                                             Three Months Ended March 31,
                                                       2009                                 2008
                                           Average       Income/    Yield/      Average      Income/    Yield/
                                           Balance       Expense     Rate       Balance      Expense     Rate
Assets:
Securities
Taxable                                  $   104,194     $  1,278     4.97 %   $ 115,657     $  1,581     5.50 %
Tax exempt (1)                                40,909          602     5.97 %      41,233          591     5.76 %

Total securities                             145,103        1,880     5.25 %     156,890        2,172     5.57 %
Federal funds sold                            36,578           22     0.24 %         875            6     2.76 %
Loans, net of unearned income (2)            824,339       12,215     6.01 %     719,924       12,765     7.13 %

Total earning assets                       1,006,020       14,117     5.69 %     877,689       14,943     6.85 %
Less allowance for loan losses               (10,727 )                            (8,139 )
Total non-earning assets                      81,425                              61,809

Total assets                             $ 1,076,718                           $ 931,359


Liabilities & Shareholders' Equity:
Interest bearing deposits
Checking                                 $   161,749     $    718     1.80 %   $ 127,831     $    627     1.97 %
Savings                                       71,801          148     0.84 %      75,851          185     0.98 %
Money market savings                          71,244          419     2.39 %      42,800          259     2.43 %
Large dollar certificates of deposit
(3)                                          182,472        1,647     3.66 %     127,431        1,485     4.69 %
Other certificates of deposit                250,396        1,962     3.18 %     217,819        2,340     4.32 %

Total interest-bearing deposits              737,662        4,894     2.69 %     591,732        4,896     3.33 %
Federal funds purchased                          573            1     0.71 %       4,413           36     3.28 %
Other borrowings                             137,397        1,474     4.35 %     141,337        1,626     4.63 %

Total interest-bearing liabilities           875,632        6,369     2.95 %     737,482        6,558     3.58 %
Noninterest-bearing liabilities
Demand deposits                               90,866                              94,145
Other liabilities                             11,350                               7,556

Total liabilities                            977,848                             839,183
Shareholders' equity                          98,870                              92,176

Total liabilities and shareholders'
equity                                   $ 1,076,718                           $ 931,359


Net interest income                                      $  7,748                            $  8,385


Interest rate spread (4)                                              2.74 %                              3.27 %
Interest expense as a percent of
average earning assets                                                2.57 %                              3.01 %
Net interest margin (5)                                               3.12 %                              3.84 %

Notes:

(1) Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 34%.

The tax equivalent adjustment for the quarter is $184 thousand, compared to $181 thousand in the prior year.

(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.

Noninterest Income

This category includes all income not related to interest on investments and interest and fees on loans. Noninterest income excluding net realized gains or losses on securities sales was $1.6 million for the first quarter of 2009 compared to $2.6 million income for the same quarter in 2008. Prior year noninterest income was aided by a nonrecurring $1.3 million actuarial gain from our pension plan conversion partially offset by a $300 thousand securities impairment. Core noninterest earning categories showed a decline mostly related to the economic environment. Service charges on deposit accounts for the quarter ended March 31, 2009 were $934 thousand, a decline of $31 thousand compared to $965 thousand for the comparable period in 2008. Overdraft and NSF fees decreased $37 thousand from the first quarter 2008 reflecting a change of customer attitude in this depressed economy. Debit and credit card fees . . .