UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[ ] For the fiscal year ended December 31, 1997
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 No. 333-37225
EASTERN VIRGINIA BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1866052
(State of Incorporation) (I.R.S. Employer Identification No.)
307 Church Lane, Tappahannock, Virginia 22560
(Address of principal executive offices)
Registrant's telephone number (804) 443-4333
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $2 Par Value
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K.
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 13, 1998 was approximately $106,365,808.
The number of shares of the registrant's Common Stock outstanding as of March
13, 1998 was 5,188,576.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's 1997 Annual Report to Shareholders are incorporated by
reference into Parts I, II and IV. Portions of the definitive Proxy Statement
dated April 28,1998 to be delivered to shareholders in connection with the
Annual Meeting of Shareholders to be held May 21,1998 are incorporated by
reference into Part III.
<PAGE>
EASTERN VIRGINIA BANKSHARES, INC.
FORM 10-K
For the Year Ended December 31, 1997
INDEX
Part I
Item 1. Business 1
Item 2. Properties 1
Item 3. Legal Proceedings 1
Item 4. Submission of Matters to a Vote
of Security Holders 2
Part II
Item 5. Market for Registrants Common Stock
and Related Stockholder Matters 2
Item 6. Selected Financial Data 2
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations 2
Item 7a. Quantitative and Qualitative Disclosures
About Market Risk 2
Item 8. Financial Statements and Supplementary Data 4
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 4
Part III
Item 10. Directors and Executive Officers of the Registrant 5
Item 11. Executive Compensation 5
Item 12. Security Ownership of Certain Beneficial
Owners and Management 5
Item 13. Certain Relationships and Related Transactions 5
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 6
Signatures 7
<PAGE>
PART 1
Item 1. Business
General
Eastern Virginia Bankshares, Inc. (the "Company" or "EVB") was organized and
chartered under the laws of the Commonwealth of Virginia on September 5, 1997
and commenced operations on December 29,1997 as a bank holding company. On
December 29, 1997, the effective date, Southside Bank (SSB) a state chartered
nonmember bank and Bank of Northumberland, Inc., (BNI) a state chartered Federal
Reserve member bank, the "Banks" , became wholly-owned subsidiaries of EVB. The
consummation of the affiliation of the Banks was a result of a definitive
agreement entered into on September 26, 1997. The Banks have retained their
respective names, banking offices, executive officers and boards of directors.
On the effective date, each of the common shares of SSB and BNI were exchanged
for 2.5984 and 1.0 shares of EVB respectively. The exchange resulted in the
issuance of 5,188,576 common shares of EVB stock. Former common shareholders of
SSB received their fractional shares in cash totaling $9,130.
The remainder of the response to this Item is incorporated by reference to the
information under the captions "To Our Stockholders" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
EVB's Annual Report to Shareholders.
Employees
As of December 31, 1977, the Company had no employees. The subsidiary banks
employed 121 full-time equivalent employees. EVB's success is highly dependent
on its ability to attract and retain qualified employees. Competition for
employees is intense in the financial services industry. The Company believes it
has been successful in its efforts to recruit qualified employees, but there is
no assurance that it will continue to be successful in the future. None of the
Company's employees are subject to collective bargaining agreements. EVB
believes relations with its employees are excellent.
Item 2. Properties
EVB, the parent company, did not own any property as of December 31, 1997. The
Company's principal executive offices are located at 307 Church Lane,
Tappahannock, Virginia 22560. The corporate office is also the headquarters of
SSB and is adjacent to a 5,400 square foot SSB operations center. The two
subsidiary banks own 12 full service branch buildings including the land on
which 11 of those buildings are located. Northumberland and Middlesex Counties
each are the home to three of the branches, Essex County which houses the
corporate offices is home to two branches while Hanover County, King William
County, Caroline County and Gloucester County each have one full service branch
office. All branches except Gloucester currently provide full service banking.
The Gloucester Office is expected to begin operations in the second quarter of
1998. All properties are in good condition.
Item 3. Legal Proceedings
In the course of its operations, EVB and its subsidiaries are not aware of any
material pending or threatened litigation, unasserted claims and/or assessments
through December 31, 1997, or subsequent thereto. The only litigation in which
EVB and its subsidiaries, the Banks, are involved are collection suits involving
delinquent loan accounts in the normal course of business.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
No matters have been submitted to EVB shareholders for a vote since the Company
commenced operations as a bank holding company, with SSB and BNI becoming wholly
owned subsidiaries on December 29, 1997.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
The information titled "Common Stock Performance and Dividends" set forth on
page 23 of the 1997 Annual Report to Shareholders is incorporated herein by
reference and is filed herewith as Exhibit 13.1.
Item 6. Selected Financial Data
The information set forth on page 2 of the 1997 Annual Report to Shareholders is
incorporated herein by reference and filed herewith as Exhibit 13.2.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information set forth on pages 9-24 of the 1997 Annual Report to
Shareholders is incorporated herein by reference and is filed herewith as
Exhibit 13.3.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
EVB's primary goals in interest rate risk management are to minimize
fluctuations in net interest margin as a percentage of earning assets and to
increase the dollar amount of net interest income at a growth rate consistent
with the growth rate of total assets. These goals are accomplished by managing
the interest sensitivity gap, which is the difference between interest sensitive
assets and interest sensitive liabilities in a specific time interval. Interest
sensitivity gap is managed by balancing the volume of floating-rate liabilities
with a similar volume of floating rate assets, by keeping the average maturity
of fixed rate asset and liability contracts reasonably consistent and short, and
by routinely adjusting pricing to market conditions on a regular basis.
Matching the amount of assets and liabilities maturing in the same time interval
helps to hedge interest rate risk and to minimize the impact on net interest
income in periods of rising or falling interest rates. Interest rate gaps are
managed through investments, loan pricing and deposit pricing. Accordingly, EVB
has developed guidelines that the targeted gap, for the combined Company, should
be between a negative 15% and a positive 15 %.
It is EVB's policy not to engage in activities considered to be derivative in
nature such as futures, option contracts, swaps, caps, floors, collars or
forward commitments. EVB considers derivatives as speculative which is contrary
to the Company's historical or prospective philosophy. EVB does not hold or
issue financial instruments for trading purposes. It does not hold in its loan
and security portfolio investments that adjust or float according to changes in
the "prime" lending rate which is not considered speculative, but necessary for
good asset/liability management.
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, exchange rates and
equity prices. EVB's market risk is composed primarily of interest rate risk.
The Company's Management is responsible for reviewing the interest rate
sensitivity position of EVB's subsidiary banks and establishing policies to
monitor and limit exposure to interest rate risk. Guidelines established by
Management are reviewed by The Board of Directors.
<PAGE>
Interest Rate Risk Measurement: Interest rate risk is monitored through the use
of three complementary measures: static gap analysis, earnings simulation
modeling and net present value estimation. While each of the interest rate risk
measurements has limitations, taken together they represent a reasonably
comprehensive view of the magnitude of interest rate risk in the Corporation,
the distribution of risk along the yield curve, the level of risk through time,
and the amount of exposure to changes in certain interest rate relationships.
Because EVB commenced operations as a combined Company only two days prior to
1997 year end, these measures are available only on an individual bank basis as
of December 31, 1997.
Static Gap: Gap analysis measures the amount of repricing risk embedded in the
balance sheet at a point in time. It does so by comparing the differences in the
repricing characteristics of assets and liabilities. A gap is defined as the
difference between the principal amount of assets and liabilities, adjusted for
off-balance sheet instruments, which reprice within a specific time period. The
cumulative one-year gap, at year-end was -5.43% for Southside Bank and -22.6 %
for Bank of Northumberland, Inc. The policy limit for the one-year gap is plus
or minus 15% of adjusted total assets at a combined Company level.
Core deposits and loans with noncontractual maturities are included in the gap
repricing distributions based upon historical patterns of balance attrition and
pricing behavior which are reviewed at least annually. The gap repricing
distributions include principal cash flows from residential mortgage loans and
mortgage-backed securities in the timeframes in which they are expected to be
received. Mortgage prepayments are estimated by applying industry median
projections of prepayment speeds to portfolio segments based on coupon range and
loan age.
Earnings Simulation: The earnings simulation model forecasts one year net income
under a variety of scenarios that incorporate changes in the absolute level of
interest rates, changes in the shape of the yield curve and changes in interest
rate relationships. Management evaluates the effects on income of alternative
interest rate scenarios against earnings in a stable interest rate environment.
This type of analysis is also most useful in determining the short-run earnings
exposures to changes in customer behavior involving loan payments and deposit
additions and withdrawals.
The most recent earnings simulation model projects net income would decrease
approximately 9.1% for SSB and increase approximately 8.5% for BNI, of
stable-rate net income if rates were to fall immediately by two percentage
points. It projects an increase of approximately 7.7% for SSB and a decrease of
approximately 9.9% for BNI if rates rise by two percentage points. Management
believes this reflects a slight asset-sensitive risk rate for SSB and a
corresponding liability-sensitive rate interest risk for BNI for the one year
horizon. The differing positions of the two banks provides a slight risk which
is within the Company's guideline of 15%.
This dynamic simulation model includes assumptions about how the balance sheet
is likely to evolve through time, in different interest rate environments. Loan
and deposit growth rate assumptions are derived from historical analysis and
management's outlook, as are the assumptions used to project yields and rates
for new loans and deposits. All maturities, calls and prepayments in the
securities portfolio are assumed to be reinvested in like instruments. Mortgage
loan prepayment assumptions are developed from industry median estimates of
prepayment speeds for portfolios with similar coupon ranges and seasoning.
Noncontractual deposit growth rates and pricing are assumed to follow historical
patterns. The sensitivities of key assumptions are analyzed at least annually
and reviewed by management.
Net Present Value: The Net Present Value ("NPV") of the balance sheet, at a
point in time, is defined as the discounted present value of asset cash flows
minus the discounted value of liability cash flows. Interest rate risk analysis
using NPV involves changing the interest rates used in determining the cash
flows and in discounting the cash flows. The resulting percentage change in NPV
is an indication of the longer term repricing risk and options embedded in the
balance sheet.
At year-end, a 200 basis point immediate increase in rates is estimated to
increase NPV by 4.43 % for SSB and 17.8% for BNI. Additionally, NPV is estimated
to decrease by 9.1% for SSB and 20.4% for BNI if rates fall immediately by 200
basis points. Analysis of the average quarterly change in the Treasury yield
curve over the past ten years indicates that a parallel curve shift of 200 basis
points or more is an event that has less that a 0.1% chance of occurrence.
<PAGE>
As with gap analysis and earnings simulation modeling, assumptions about the
timing and variability of balance sheet cash flows are critical in NPV analysis.
Particularly important are the assumptions driving mortgage prepayments and the
assumptions about expected attrition of the core deposit portfolios. These
assumptions are applied consistently across the different rate risk measures.
Summary information about interest-rate risk measures is presented below:
December 31, 1997
-----------------
SSB BNI
--- ---
Static 1-Year Cumulative Gap -5.43% -22.67%
1-Year Net Income Simulation Projection
-200 basis point Shock vs. Stable Rate -9.1% 8.5%
+200 basis point Shock vs. Stable Rate 7.7% -9.9%
Static Net Present Value Change
-200 basis point Shock vs. Stable Rate 4.43% 17.8%
+200 basis point Shock vs. Stable Rate -9.1% -20.4%
Due to borrowers' preferences for floating-rate loans and depositors'
preferences for fixed-rate deposits, EVB's balance sheet tends to move toward
less liability sensitivity with the passage of time. The earnings simulation
model indicates that if all prepayments, calls and maturities of the securities
portfolios expected over the next year were to remain uninvested, then the
current liability sensitive position would be lessened.
Management expects interest rates to be relatively stable during 1998 and
believes that the current modest level of liability sensitivity is appropriate.
Item 8. Financial Statements and Supplementary Data
The following financial statements for the Company and independent auditors'
report set forth on pages 24-41 of the 1997 Annual Report to Shareholders are
incorporated herein by reference and are filed herewith as Exhibit 13.4.
o Balance Sheet as of December 31, 1996 and 1997
o Income Statement for the three years ended December 31, 1997
o Cash Flow Statement for the three years ended December 31, 1997
o Statement of Changes in Shareholders' Equity for the three years
ended December 31, 1997
o Notes to Financial Statements
o Independent Auditors' Report
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
None.
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
The response to this Item required by Item 401 of Regulation S-K, with respect
to directors, is incorporated by reference to the information under the caption
"Election of Directors" on pages 1 through 5 of EVB's Proxy Statement for the
1998 annual meeting of shareholders and with respect to executive officers, is
presented below.
Executive Officers of the Registrant
Following are the persons who were the executive officers of EVB as of December
31, 1997, their ages as of December 31, 1997, their current titles and positions
held during the last five years:
Robert L. Covington, 72, is the Chairman of the Board of Directors of EVB and
has been Chairman of the Board of BNI since 1991.
F. L. Garrett, III, 58, is the Vice-Chairman of the Board of Directors of EVB
and Chairman of the Board of SSB of which he has been a member since 1982. He is
an oysterman and a realtor in Essex County, VA
Thomas M. Boyd, Jr. 58 is the President and Chief Executive Officer of EVB. Mr.
Boyd has served as the President and Chief Executive Officer of SSB since 1982.
Lewis R. Reynolds 47 is the Executive Vice President of EVB. Mr. Reynolds has
served as the President and Chief Executive Officer of BNI since 1991.
Thomas E. Stephenson 43 is Chief Financial Officer of EVB. Mr. Stephenson has
been Vice President and Chief Financial Officer of SSB since 1987.
Item 11. Executive Compensation
The response to this Item is incorporated by reference to the information under
the caption "Executive Compensation" on pages 3 and 4 of EVB's Proxy Statement
for the 1998 annual meeting of shareholders .
Item 12. Security Ownership of Certain Beneficial Owners and Management
The response to this Item is incorporated by reference to the information under
the caption "Security Ownership of Management and Certain Beneficial Owners" on
page 3 of EVB's Proxy Statement for the 1998 annual meeting of shareholders.
Item 13. Certain Relationships and Related Transactions
The response to this Item is incorporated by reference to the information under
the caption "Interest of Directors and Officers in Certain Transactions" on
pages 4 and 5 of EVB's Proxy Statement for the 1998 annual meeting of
shareholders.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements and Auditors' Report
(a) Financial Statements and Schedules
The financial statements set for forth under Item 8 of this report on
Form 10-K are incorporated by reference. Financial statement schedules
have been omitted since they are either not required, not applicable,
or the information is otherwise included.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of 1997.
(C) Exhibit Listing
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation
3.2 Bylaws
10 Employment Contracts of Certain Officers and Directors
is incorporated by Reference to the information under
the caption "Employment Contracts" on page 4 of the
Company's Proxy Statement for the 1998 annual meeting of
shareholders.
13.1 Quarterly Market Information Incorporated by Reference to
page 23 of 1997 Annual Report to Shareholders ("1997
Annual Report")
13.2 Selected Financial Data Incorporated by Reference to Page 2
of 1997 Annual Report
13.3 Management's Discussion and Analysis of Financial Condition
and Results of Operations Incorporated by Reference to Pages 9
through 24 of Annual Report
13.4 Financial Statements Incorporated by Reference to Pages 25
through 41 of Annual Report 21 Subsidiaries of the Registrant
Incorporated by Reference to pages 29 and 31 of Annual Report
21 Subsidiaries of the Registrant Incorporated by References to
pages 29 and 31 of Annual Report
27 Financial Data Schedule
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15 (d) 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, in the town of
Tappahannock, State of Virginia, on March 19, 1998.
Eastern Virginia Bankshares, Inc.
By /s/Thomas E. Stephenson
-------------------------------------
Thomas E. Stephenson
Vice President, Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities indicated on March 19, 1998.
Signature Title
/s/ Robert L. Covington Chairman of the Board of Directors
- ----------------------------
Robert L. Covington
/s/ F. L. Garrett, III Vice Chairman of the Board of Directors
- ----------------------------
F.L. Garrett, III
/s/ Thomas M. Boyd,Jr. President and Chief Executive Officer
- ---------------------------- and Director
Thomas M. Boyd, Jr.
/s/ Lewis R. Reynolds Executive Vice President and Director
- ----------------------------
Lewis R. Reynolds
/s/ L. Edelyn Dawson, Jr. Director and Secretary of the Board
- ----------------------------
L. Edelyn Dawson, Jr.
/s/ Warren Haynie, Jr. Director
- ----------------------------
F. Warren Haynie, Jr.
/s/ W. Rand Cook Director
- ----------------------------
W. Rand Cook
/s/ Eric A. Johnson Director
- -----------------------------
Eric A. Johnson
/s/ William L. Lewis Director
- -----------------------------
William L. Lewis
/s/ Thomas E. Stephenson Vice President, Chief Financial Officer
- ----------------------------- (Principal Financial and Accounting Officer)
Thomas E. Stephenson
ARTICLES OF INCORPORATION
OF
EASTERN VIRGINIA BANKSHARES, INC.
ARTICLE I
NAME
The name of the corporation is Eastern Virginia Bankshares, Inc.
ARTICLE II
CAPITAL STOCK
Paragraph A. The aggregate number of shares of stock which the
Corporation shall have the authority to issue and the par value per share is as
follows:
Number of
Class Shares Par Value
Common Stock 50,000,000 $2.00
Paragraph B. No holders of any class of stock of the Corporation shall
have any preemptive or other preferential right to purchase or subscribe to (i)
any shares of any class of stock of the Corporation, whether now or hereafter
authorized, (ii) any warrants, rights or options to purchase any such stock, or
(iii) any obligations convertible into any such stock or into warrants, rights
or options to purchase any such stock.
Paragraph C. The holders of the Common Stock shall, to the exclusion of
the holders of any other class of stock of the Corporation, have the sole and
full power to vote for the election of directors and for all other purposes
without limitation. The holders of the Common Stock shall have one vote for each
share of Common Stock held by them. The holders of the Common Stock shall be
entitled to receive the net assets of the Corporation upon dissolution.
ARTICLE III
INDEMNIFICATION AND LIMITS ON LIABILITY
OF DIRECTORS AND OFFICERS
Paragraph A. The Corporation shall indemnify any Director or Officer
made a Party to a Proceeding (including without limitation any Proceeding by or
in the right of the Corporation in which the Director or Officer is adjudged
liable to the Corporation) because he or she is or was a Director or Officer of
the Corporation against any Liability incurred in the Proceeding to the fullest
extent permitted by Virginia law, as it may be amended from time to time.
Paragraph B. The Corporation shall not indemnify a Director or Officer
under Paragraph A above (unless authorized or ordered by a court) unless in each
specific case a determination pursuant to Virginia law, as it may be amended
from time to time, has been made that indemnification is permissible under the
circumstances. The termination of a Proceeding by judgment, order, settlement or
conviction is not, of itself, determinative that the Director or Officer is not
entitled to indemnification under this Article III.
Paragraph C. Expenses incurred by a Director or Officer in a Proceeding
shall be paid by the Corporation in advance of the final disposition of the
Proceeding if:
1. The Director or Officer furnishes the Corporation a written
statement of his good faith belief that he or she is entitled
to indemnification pursuant to this Article III.
2. The Director or Officer furnishes the Corporation a written
undertaking, executed personally or on his or her behalf, to
repay the advance if it is ultimately determined that he or
she did not meet the standard for indemnification pursuant to
this Article III; and
3. A determination pursuant to Virginia law, as it may be amended
from time to time, is made that the facts then known to those
making the determination would not preclude indemnification
under this Article III.
The undertaking required by subsection 2 of this Paragraph C shall be
an unlimited general obligation of the Director or Officer but need not be
secured and may be accepted without reference to his or her financial ability to
make repayment.
Paragraph D. The indemnification provided by this Article III shall not
be exclusive of any other rights to which any Director or Officer may be
entitled, including without limitation rights conferred by applicable law and
any right under policies of insurance that may be purchased and maintained by
the Corporation or others, even as to liabilities against which the Corporation
would not have the power to indemnify such Director or Officer under the
provisions of this Article III.
Paragraph E. The Corporation may purchase and maintain at its sole
expense insurance, in such amounts and on such terms and conditions as the Board
of Directors may deem reasonable, against all liabilities or losses it may
sustain in consequence of the indemnification provided for in this Article III.
Paragraph F. The Board of Directors shall have the power but not the
obligation, generally and in specific cases, to indemnify employees and agents
of the Corporation to the same extent as provided in this Article III with
respect to Directors or Officers. The Board of Directors is hereby empowered by
a majority vote of a quorum of disinterested Directors to contract in advance to
indemnify any Director or Officer. The Board of Directors is further empowered,
by majority vote of a quorum of disinterested Directors, to cause the
Corporation to contract in advance to indemnify any person who is not a Director
or Officer who was or is a party to any Proceeding, by reason of the fact that
he or she is or was an employee or agent of the Corporation, or was serving at
the request of the Corporation as Director, Officer, employee or agent of
another corporation, partnership, joint venture trust, employee benefit plan or
other enterprise, to the same extent as if such person were a Director or
Officer.
Paragraph G. To the full extent that Virginia law, as it exists on the
date hereof or may hereafter be amended, permits the elimination of the
liability of Directors and Officers, a Director or Officer shall not be liable
to the Corporation or its shareholders for any monetary damages.
Paragraph H. In this Article III:
"Director" means an individual who is or was a director of the
Corporation or an individual who, while a director of the Corporation,
is or was serving at the Corporation's request as a director, officer,
partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan,
or other enterprise. A director is considered to be serving an employee
benefit plan at the Corporation's request if his duties to the
corporation also impose duties on, or otherwise involve services by,
him to the plan or to participants in or beneficiaries of the plan.
"Director" includes the estate or personal representative of a
director.
"Officer" means an individual who is or was an officer of the
Corporation or an individual who is or was serving at the Corporation's
written request as a director, officer, partner, trustee, employee or
agent of another foreign or domestic corporation, partnership, joint
venture, trust, employee benefit plan, or other enterprise. An officer
is considered to be serving an employee benefit plan at the
Corporation's request if his duties to the Corporation also impose
duties on, or otherwise involve services by, him to the plan or to
participants in or beneficiaries of the plan. "Officer" includes the
estate or personal representative of an officer. Except as set forth
above "Officer" does not include officers of corporations controlled by
the Corporation.
"Expenses" includes but is not limited to counsel fees.
"Liability" means the obligation to pay a judgment,
settlement, penalty, fine, including without limitation any excise tax
assessed with respect to an employee benefit plan, or reasonable
Expenses incurred with respect to a Proceeding.
"Party" includes an individual who was, is, or is threatened
to be made a named defendant or respondent in any Proceeding.
"Proceeding" means any threatened, pending or completed
action, suit, or proceeding, whether civil, criminal, administrative or
investigative and whether formal or informal.
ARTICLE IV
DIRECTORS
Paragraph A. The initial directors, whose terms shall expire at the
first shareholders' meeting at which directors are elected, shall be:
Thomas M. Boyd, Jr. Robert L. Covington
766 Water Lane 72 Rowes Landing Road
Tappahannock, VA 22560 P. O Box 153
Heathsville, VA 22473
Commencing with the first shareholders' meeting at which directors are
elected, the directors shall be elected at each annual meeting of the
stockholders of the Corporation.
Paragraph B. Advance notice of shareholder nominations for the election
of directors shall be given in the manner provided in the Bylaws of the
Corporation.
Paragraph C. Newly created directorships resulting from any increase in
the number of directors and any vacancies on the Board of Directors resulting
from death, resignation, disqualification, removal or other cause shall be
filled only in accordance with the Bylaws by the affirmative vote of a majority
of the remaining directors then in office, even though less than a quorum of the
Board of Directors. Any director elected in accordance with the preceding
sentence shall hold office for the full term of the new directorship or the
remainder of the full term of the directorship in which the vacancy occurred and
until such director's successor shall have been elected and qualified. No
decrease in the number of directors constituting the Board of Directors shall
shorten the term of any incumbent director.
ARTICLE V
SPECIAL VOTING PROVISIONS
Paragraph A. An amendment to the Articles of Incorporation of the
Corporation shall be approved if:
1. A majority of the votes entitled to be cast by each voting
group entitled to vote on such action are cast in favor of
such action; and,
2. Unless such action shall have been approved by at least
two-thirds of the directors, holders of more than two-thirds
of the issued and outstanding shares of the Corporation's
Common Stock vote in favor of such action.
Paragraph B. Any merger or share exchange to which the Corporation is a
party or any direct or indirect sale, lease, exchange or other disposition of
all or substantially all of the Corporation's property, otherwise than in the
usual and regular course of business, shall be approved if:
1. A majority of the votes entitled to be cast by each voting
group entitled to vote on such action are cast in favor of
such action; and,
2. Unless such action shall have been approved by at least
two-thirds of the directors, at least two-thirds of the issued
and outstanding shares of the Corporation's Common Stock vote
in favor of such action.
This Paragraph B shall not affect the power of the Board of Directors
to condition its submission of any plan of merger, share exchange or direct or
indirect sale, lease, exchange or other disposition of all or substantially all
of the Corporation's property, otherwise than in the usual and regular course of
business, on any basis, including the requirement of a greater vote.
ARTICLE VII
REGISTERED OFFICE AND AGENT
The address of the initial registered office shall be located in the
City of Richmond, Virginia and the post office address of the initial registered
office of the corporation is Two James Center, 1021 East Cary Street, 16th
Floor, P. O. Box 1320, Richmond, VA 23210-1320. The name of the initial
registered agent is Wayne A. Whitham, Jr., who is a resident of Virginia and a
member of the Virginia State Bar, and whose business office is the same as the
registered office of the Corporation.
----------------------------------
Wayne A. Whitham, Jr. Incorporator
Dated: September 5, 1997
BYLAWS
OF
EASTERN VIRGINIA BANKSHARES, INC.
ARTICLE I
Shareholder Matters
Section 1.1. Annual Meetings.
A. The annual meeting of the shareholders of the Corporation shall be
held at such a place as may be decided by, the Board of Directors on a date
during the month of March, April or May of each and every year, the exact date,
place and hour to be fixed by the Board of Directors.
B. At the annual meeting of the shareholders of the Corporation,
Directors shall be elected and reports of the affairs of the Corporation shall
be received and considered. Any other business may be transacted which is within
the powers of the shareholders, except that, if any shareholder shall bring new
business before the annual meeting, the shareholder must give advance notice as
set forth in Section 1.6 of these Bylaws.
C. The Board of Directors may designate any place, either within or
without the Commonwealth of Virginia, as the place of meeting for any annual
meeting or for any special meeting. If no place is designated by the Board, the
place of meeting shall be the principal office of the Corporation.
Section 1.2. Special Meetings. A special meeting of the shareholders may
be called for any purpose or purposes whatsoever at any time, but only by the
President, the Chairman or Vice Chairman of the Board of Directors, or the Board
of Directors.
Section 1.3. Notice of Meetings. Notice of the time and place of every
annual meeting or special meeting shall be mailed to each Shareholder of record
entitled to vote at the meeting at his address as it appears on the records of
the Corporation not less than ten (10) nor more than sixty (60) days before the
date of such meeting (except as a different time may be specified by law).
Section 1.4. Quorum. A majority of the votes entitled to be cast on a
matter by a voting group constitutes a quorum of such voting group for action on
such matter. If there is not a quorum at the time for which a meeting shall have
been called, the meeting may be adjourned from time to time by a majority of the
shareholders present or represented by proxy without notice, other than by
announcement at the meeting, until there is a quorum.
Section 1.5. Voting. Except as the Articles of Incorporation otherwise
provide, at any meeting of the shareholders, each outstanding share, regardless
of class, is entitled to one vote on each matter voted on at a shareholders'
meeting.
Section 1.6. Notice of Shareholder Business. (a) At an annual meeting
of the shareholders of the Corporation, only such business shall be conducted as
shall have been properly brought before the meeting. To be brought before an
annual meeting, business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
otherwise bought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before the meeting by a
shareholder. For business to be properly brought before an annual meeting by a
shareholder, the Shareholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation, not less than sixty (60) days nor more than ninety (90) days prior
to the date of the scheduled annual meeting, regardless of any postponements,
deferrals or adjournments of that meeting to a later date; provided, however,
that in the event that less than seventy (70) days' notice or prior public
disclosure of the date of the scheduled annual meeting is given or made, notice
by a shareholder, to be timely, must be so received not later than the close of
business on the tenth (10th) day following the earlier of the day on which such
notice of the date of the scheduled annual meeting was mailed or the day on
which such public disclosure was made. A shareholder's notice to the Secretary
of the Corporation shall set forth as to each matter the shareholder proposes to
bring before the annual meeting (a) a brief description of the business desired
to be brought before the annual meeting and the reasons for conducting such
business at the annual meeting, (b) the name and address, as they appear on the
Corporation's books of the shareholder proposing such business and of any other
person or entity who is the record or beneficial owner of any shares of the
Corporation and who, to the knowledge of the shareholder proposing such
business, supports such proposal, (c) the class and number of shares of the
Corporation which are beneficially owned and owned of record by the shareholder
proposing such business on the date of his notice to the Corporation and the
number of shares so owned by any person or entity who, to the knowledge of the
shareholder proposing such business, supports such proposal and (d) any material
interest (financial or other) of such shareholder in such proposal.
Notwithstanding anything in these Bylaws to the contrary, no business shall be
conducted at any annual meeting except in accordance with the procedures set
forth in this Section 1.6. The Chairman of an annual meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting and in accordance with the provisions of this Section
1.6. and if he should so determine, he shall so declare to the meeting and any
such business not properly brought before the meeting shall not be transacted.
(b) Nothing in Section 1.6(a) shall be interpreted to mean that a
shareholder shall not be permitted to ask pertinent questions or to express his
or her views on any pertinent matter.
Section 1.7. Order of Business. All meetings of shareholders shall be
conducted in accordance with such rules as are prescribed by the Chairman of the
meeting and he shall determine the order of business at all meetings of the
shareholders.
Section 1.8. Inspectors. The Board of Directors, in advance of any
meeting of shareholders, may, but shall not be required to, appoint one or more
inspectors to act at such meeting or any adjournment thereof. If any of the
inspectors so appointed shall fail to appear or act, the Chairman of the meeting
may appoint one or more inspectors. The inspectors shall determine the number of
shares of capital stock of the Corporation outstanding and the voting power of
each, the number of shares represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive votes, ballots or
consents, hear and determine all challenges and questions arising in connection
with the right to vote, count and tabulate all votes, ballots or consents,
determine the results, and do such acts as are proper to conduct the election or
vote with fairness to all shareholders. On request of the Chairman of the
meeting, the inspectors shall make a report of any challenge, request or matter
determined by them and shall execute a certificate of any fact found by them. No
director or candidate for the office of director shall act as an inspector of an
election of directors.
Inspectors need not be shareholders.
ARTICLE II
Directors
Section 2.1. General Powers. The business and affairs of the
Corporation shall be managed under the direction of the Board of Directors and,
except as otherwise expressly provided by law or by the Articles of
Incorporation, or by these Bylaws, all of the powers of the Corporation shall be
exercised by or under the authority of said Board of Directors.
Section 2.2. Number and Qualification. The Board of Directors shall
consist of nine Directors. Each Director shall be a resident of the Commonwealth
of Virginia. Except for Directors of the Corporation elected in 1997 (who may be
reelected one or more times, regardless of age), no one who is seventy years of
age or older shall be eligible to stand for election to the Board of Directors.
Section 2.3. Election of Directors. The Directors shall be elected at
the annual meeting of shareholders, and shall hold their offices until their
successors are elected in accordance with the Articles of Incorporation.
Nominations for the election of Directors shall be given in the manner provided
in Section 2.5.
Section 2.4. Honorary and Advisory Directors. The Board may appoint to
the position of Honorary Director or the position of Advisory Director such
person or persons as it deems appropriate. Honorary Directors shall be entitled
to receive notice of, and to attend all meetings of the Board, but they shall
not be Directors and shall not be entitled to vote, nor shall they be counted in
determining a quorum of the Board. Advisory Directors shall be entitled only to
notice of meetings of Advisory or other Boards of the Corporation to which they
shall be appointed. Honorary and Advisory Directors shall receive such
compensation as may be authorized by the Board of attendance at meetings of
Advisory or other Boards to which such Advisory or Honorary Directors are
appointed.
Section 2.5. Nominations. (a) Only persons who are nominated in
accordance with the procedures set forth in this Section 2.5 shall be eligible
for election as Directors. Subject to Section 2.5(b), nominations of persons for
election to the Board of Directors of the Corporation may be made by or at the
direction of the Board of Directors, or by any shareholder of the Corporation
entitled to vote for the election of Directors who complies with the notice
procedures set forth in this Section 2.5(a). Such nominations, other than those
made by or at the direction of the Board of Directors, shall be made pursuant to
timely notice in writing to the Secretary of the Corporation. To be timely, a
shareholder's notice shall be delivered to or mailed and received at the
principal executive offices of the Corporation not less than sixty (60) days nor
more than ninety (90) days prior to the date of the scheduled annual meeting,
regardless of postponements, deferrals, or adjournments of that meeting to a
later date; provided, however, in the event that less than seventy (70) days'
notice or prior public disclosure of the date of the meeting is given or made,
notice by the shareholder to be timely must be so received not later than the
close of business on the 10th day following the earlier of the day on which such
notice of the date of the scheduled annual meeting was mailed or the day on
which such public disclosure was made. Such shareholder's notice shall set forth
(a) as to each person whom the shareholder proposes to nominate for election as
a Director, (i) the name, age, business address and residence address of such
person, (ii) the principal occupation or employment of such person, (iii) the
class and number of shares of the Corporation which are beneficially owned by
such person and (iv) any other information relating to such person that is
required to be disclosed in solicitations of proxies for election of Directors,
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended; and (b) as to the shareholder
giving the notice (i) the name and address of such shareholder and of any other
person or entity who is the record or beneficial owner of shares of the
Corporation and who, to the knowledge of the shareholder giving notice, supports
such nominee(s) and (ii) the class and number of shares of the Corporation which
are beneficially owned and owned of record by such shareholder and by any other
person or entity who is the record or beneficial owner of shares of the
Corporation and who, to the knowledge of the shareholder giving the notice,
supports such nominee(s). At the request of the Board of Directors any person
nominated by the Board of Directors for election as a Director shall furnish to
the Secretary of the Corporation the information required to be set forth in a
shareholder's notice of nomination which pertains to the nominee. Subject to
Section 2.5(b), no person shall be eligible for election as a Director of the
Corporation unless in accordance with the procedures set forth in this Section
2.5(a). The Chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
procedures prescribed by the Bylaws, and if he should so determine, he shall so
declare to the meeting and the defective nomination shall be disregarded.
(b) In the five annual elections of Directors, beginning with the first
annual election after the Corporation acquires control of Bank of
Northumberland, Incorporated and Southside Bank, the nominations made by the
Board of Directors shall consist of five individuals designated by Directors of
the Corporation who also are Directors of Southside Bank and four individuals
designated by Directors of the Corporation who also are Directors of Bank of
Northumberland, Incorporated.
Section 2.6. Vacancies. Subject to applicable law and the Articles of
Incorporation, any vacancy on the Board of Directors shall be filled by the
Board of Directors; provided, however, if a vacancy arises for any reason before
the annual meeting of shareholders in the year 2003, the vacancy shall be filled
by an individual designated by Directors of the Corporation who also are
Directors of Bank of Northumberland, Incorporated or by an individual designated
by Directors of the Corporation who also are Directors of Southside Bank, as the
case may be, in order that at all times before the annual meeting of
shareholders in the year 2003, five (5) Directors shall have been designated by
Directors of the Corporation who also are Directors of Southside Bank and four
(4) Directors shall have been designated by Directors of the Corporation who
also are Directors of Bank of Northumberland, Incorporated.
Section 2.7. Meetings of Directors. Meetings of the Board of Directors
shall be held at places within or without the Commonwealth of Virginia and at
times fixed by resolution of the Board of Directors, or upon call of the
Chairman or Vice Chairman of the Board of Directors or the President. The
Secretary, or officer performing his duties, shall give at least twenty-four
(24) hours' notice by telegraph, letter, telephone or in person, of all meetings
of the Directors; provided, that notice need not be given of regular meetings
held at times and places fixed by resolution of the Board. Regular meetings of
the Board of Directors shall be held at least once in every calendar quarter.
Meetings may be held at any time without notice if all of the Directors are
present, or if those not present waive notice either before or after the
meeting. Neither the business to be transacted nor the purpose of any annual or
special meeting of the Board of Directors need be specified in the notice or
waiver of notice of such meeting.
Section 2.8. Quorum. A majority of the members of the Board of Directors
shall constitute a quorum.
Section 2.9. Compensation. The Board of Directors shall fix the
compensation of the Directors.
Section 2.10. Committees. The Board of Directors may create committees
and appoint members of committees in accordance with Virginia law.
ARTICLE III
Officers
Section 3.1. Election. The Officers of the Corporation shall consist of
the Chairman of the Board of Directors, the Vice Chairman of the Board of
Directors, the President, the Executive Vice President, one or more Senior Vice
Presidents, one or more additional Vice Presidents, a Secretary, a Chief
Financial Officer, one or more Assistant Secretaries, and such other officers as
may be elected as provided in Section 3.3 of this Article. All Officers shall be
elected by the Board of Directors, and shall hold office until their successors
are elected and qualify. Vacancies may be filled at any meeting of the Board of
Directors. Subject to any applicable provision of Virginia law, more than one
office may be combined in the same person as the Board of Directors may
determine.
Section 3.2. Removal of Officers. Subject to Article V, any Officer of
the Corporation may be summarily removed with or without cause, at any time, by
a resolution passed by affirmative vote of a majority of all of the Directors;
provided that any such removal shall not affect an Officer's right to any
compensation to which he is entitled under any employment contract between him
and the Corporation.
Section 3.3. Other Officers. Other Officers may from time to time be
appointed by the Board of Directors, and such Officers shall hold office for
such term as may be designated by the said Board of Directors.
Section 3.4. Chairman of the Board. The Chairman of the Board shall
preside at all meetings of the Directors and all meetings of the shareholders.
He shall appoint all standing committees and temporary committees. He shall be a
member ex-officio of all standing committees and shall have all other powers
and duties as may be prescribed by the Board of Directors or by the Bylaws.
Section 3.5. Vice Chairman of the Board. In the absence or disability
of the Chairman of the Board, the Vice Chairman of the Board shall preside at
all meetings of the Directors and all meetings of the shareholders.
Section 3.6. President. The President shall be the Chief Executive
Officer of the Corporation. In the absence or disability of the Chairman of the
Board and the Vice Chairman of the Board, the President shall preside at all
meetings of the Directors and at meetings of the shareholders and in the absence
or disability of the Chairman of the Board and the Vice Chairman of the Board,
the duties and responsibilities of such offices shall devolve upon the
President. The President shall have such other powers and duties as may be
prescribed by the Chairman of the Board of Directors, the Board of Directors or
by the Bylaws.
Section 3.7. Executive Vice President.
In the absence or disability of the President, the Executive Vice
President shall act as the Chief Executive Officer of the Corporation. The
duties and responsibilities of the Executive Vice President are those delegated
to him by the Board of Directors or the President.
Section 3.8. Vice Presidents. Senior Vice Presidents and Vice Presidents
shall perform such duties as may be prescribed for them from time to time by the
President, the Board of Directors or the Bylaws.
Section 3.9. Secretary. The Secretary shall have the duties and
responsibilities prescribed by law for the secretary of a Virginia corporation.
Section 3.10. Surety Bonds. All Officers and employees who shall have
charge or possession of money, securities or property of the Corporation must,
before entering upon their duties, be covered by a bond with a surety company
approved by the Board of Directors and state and federal authorities. The costs
of such bond shall be borne by the Corporation.
ARTICLE IV
Capital Stock
Section 4.1. Issues of Certificate of Stock. Certificates of capital
stock shall be in such form as may be prescribed by law and by the Board of
Directors. All certificates shall be signed by the President and by the Chief
Financial Officer or Secretary or an Assistant Secretary, or by any other two
Officers authorized by resolution of the Board of Directors.
Section 4.2. Transfer of Stock. The stock of the corporation shall be
transferable or assignable on the books of the Corporation by the holders in
person or by attorney on surrender of the certificate or certificates for such
shares duly endorsed, and, if sought to be transferred by attorney, accompanied
by a written power of attorney to have such stock transferred on the books of
the Corporation.
Section 4.3. Restrictions on Transfer of Stock. Any restrictions that
may be imposed by law, by the Articles of Incorporation or Bylaws of the
Corporation, or by an agreement among shareholders of the Corporation, or by an
agreement among shareholders of the Corporation, shall be noted conspicuously on
the front or back of all certificates representing shares of stock of the
Corporation.
Section 4.4. Lost, Destroyed or Mutilated Certificates. The holder of
stock of the Corporation shall immediately notify the Corporation of any loss,
destruction, or mutilation of the certificate therefor, and the Corporation may
in its discretion cause one or more new certificates for the same aggregate
number of shares to be issued to such Stockholder upon the surrender of the
mutilated certificate, or upon satisfactory proof of such loss or destruction
accompanied by the deposit of a bond in such form and amount and with such
surety as the Corporation may require.
Section 4.5. Holder of Record. The Corporation shall be entitled to
treat the holder of record of any share or shares of stock as the holder thereof
in fact and shall not be bound to recognize any equitable or other claim to or
interest in such shares of stock on the part of any other person, whether or not
it shall have express or other notice thereof, except as otherwise expressly
provided by law.
Section 4.6. Record Date. The Board of Directors shall fix in advance
the record date in order to make a determination of shareholders for any
purpose, including the determination of shareholders entitled to notice of or to
vote at any shareholders' meeting or entitled to payment of any dividend or
distribution to shareholders. Such record date shall not be more than seventy
(70) days prior to the date on which the particular action requiring such
determination of shareholders is to be taken.
Section 4.7. Control Share Acquisitions. Article 14.1 of the Virginia
Stock Corporation Act shall not apply to the Corporation.
ARTICLE V
Amendments and Special
Voting Provisions
Section 5.1. Voting Generally. Except as otherwise set forth in this
Article V, the Board of Directors shall act by majority vote at any duly held
meeting at which a quorum is present.
Section 5.2. Special Voting Requirements. The affirmative vote of more
than a simple majority of the entire Board of Directors shall be required to:
(a) Amend these Bylaws;
(b) Submit to the shareholders any plan of merger or share exchange or
any proposal to dissolve the Corporation or to sell, lease, exchange or
otherwise dispose of all or substantially all of the Corporation's property,
otherwise than in the usual and regular course of business;
(c) Submit to the shareholders any proposal to change the name of the
Corporation;
(d) Cause Southside Bank or Bank of Northumberland, Incorporated to
change its name or amend its articles of incorporation or bylaws;
(e) Cause Southside Bank or Bank of Northumberland, Incorporated to
appoint, remove or transfer its Chief Executive Officer;
(f) Dispose of any of the stock of Southside Bank or Bank of
Northumberland, Incorporated or cause either of such banks to dissolve or enter
into a plan of merger or share exchange or to sell, lease, exchange or otherwise
dispose of all or substantially all of its property, otherwise than in the usual
and regular cause of business.
(g) Appoint, remove or transfer the Corporation's Chief Executive
Officer.
Section 5.3. Subsidiary Bank Directors. (a) The Directors of Bank of
Northumberland, Incorporated and Southside Bank each shall nominate individuals
for election to their respective Boards each year.
(b) The Corporation shall not remove any Director of Bank of
Northumberland, Incorporated or Southside Bank or refuse to vote its shares of
either of such banks' common stock in favor of the election of those nominated
in accordance with Section 5.3(a) unless (i) a Director of either of such banks
violates a code of conduct that is generally applicable to Directors of the
Corporation and its subsidiaries, (ii) the Corporation's Board of Directors
determines that such a bank is experiencing business, financial or regulatory
difficulties and, as a result, the Corporation determines that a change in the
Board of Directors of such bank is necessary or advisable in order to protect
the Corporation or its investment in such bank or (iii) a director of either
such bank acts in a manner inconsistent with his fiduciary duty to such bank.
ARTICLE VI
Miscellaneous Provisions
Section 6.1. Seal. The seal of the Corporation shall be circular in
shape with the name of the Corporation around the circumference thereof,
and the word "SEAL" in the center thereof.
Section 6.2. Examination of the Books and Records. The books and
records of account of the Corporation, the minutes of the proceedings of the
shareholders, the Board and Committees appointed by the Board of Directors and
the records of the shareholders showing the names and addresses of all
shareholders and the number of shares held by each, shall be subject to
inspection during the normal business hours by any person who is a duly
qualified Director of the Corporation at the time he makes such inspection.
Shareholders shall have such rights to inspect records of the Corporation as are
prescribed by applicable law.
Section 6.3. Checks, Notes and Drafts. Checks, notes, drafts, and other
orders for the payment of money shall be signed by such persons as the Board of
Directors from time to time may authorize.
Section 6.4. Voting of Stock Held. Unless otherwise provided by
resolution of the Board of Directors, the Chairman of the Board of Directors,
the President or any Executive Vice President may from time to time appoint an
attorney or attorneys as agent or agents of the Corporation to cast in the name
of the Corporation the votes which the Corporation may be entitled to cast as a
shareholder or otherwise in any other corporation, any of whose stock or
securities may be held by the Corporation, at meetings of the holders of the
stock or other securities of such other corporation, or to consent in writing to
any action by any such other corporation; and such Officers may instruct the
person or persons so appointed as to the manner of casting such votes or giving
such consent, and may execute or cause to be executed on behalf of the
Corporation and under its corporate seal, or otherwise, such written proxies,
consents, waivers, or other instruments as may be necessary or proper in the
premises; or any of such Officers may himself attend any meeting of the holders
of stock or other securities of any such other corporation and there vote or
exercise any or all other powers of the Corporation as the holder of such stock
or other securities of such other corporation.
[LOGO]
Southside Bank
--------------
Bank of Northumberland, Inc.
<TABLE>
<S> <C>
Index to Annual Report Notes to Financial Statement 29
Financial Data 2 Report of Independent Auditors 41
Chairman and President's Letter to Stockholders 3 Board of Directors 42
Management's Discussion and Analysis 9 Officers 43
Financial Statements 25 Bank Locations 44
</TABLE>
<PAGE>
Selected Financial Data
(In thousands, except ratios and per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
Income Statement Data: 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 24,773 $ 22,913 $ 21,669 $ 19,468 $ 18,613
Interest expense 11,144 10,360 10,315 8,097 7,894
-------- -------- -------- -------- ---------
Net interest income 13,629 12,553 11,354 11,371 10,719
Provision for loan losses 412 437 575 796 944
-------- -------- -------- -------- ---------
Net interest income after
provision for loan losses 13,217 12,116 10,779 10,575 9,775
Non-interest income 1,789 1,621 1,446 1,296 1,183
Securities gains (losses) (28) (52) (9) (52) 159
Non-interest expense 7,705 6,931 6,774 6,433 6,089
-------- -------- --------- -------- ---------
Income before income taxes 7,273 6,754 5,442 5,386 5,028
Income taxes 1,965 1,710 1,317 1,292 1,135
-------- -------- --------- -------- ---------
Net Income $ 5,308 $ 5,044 $ 4,125 $ 4,094 $ 3,893
======== ======== ========= ======== =========
Per Share Data:
- ---------------------------------------------------------------------------------------------------------------------------
Net Income, basic and diluted $ 1.02 $ 0.97 $ 0.79 $ 0.79 $ 0.75
Cash dividends 0.34 0.31 0.25 0.24 0.23
Book value at period end 7.57 6.84 6.23 5.48 5.16
Balance Sheet Data:
- ---------------------------------------------------------------------------------------------------------------------------
Assets $323,430 $308,724 $286,734 $269,832 $ 256,945
Loans, net of unearned income 227,981 206,343 192,894 183,862 166,666
Securities 77,274 82,129 72,561 65,824 71,552
Deposits 280,882 269,903 251,612 238,880 228,077
Shareholders' equity 39,265 35,457 32,393 28,439 26,785
Average shares outstanding 5,188 5,177 5,192 5,192 5,192
Performance Ratios:
- ----------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.68% 1.72% 1.48% 1.55% 1.57%
Return on average equity 13.97% 14.57% 13.20% 14.83% 15.40%
Dividend payout 32.78% 31.91% 31.70% 30.47% 30.09%
Efficiency (1) 47.26% 46.04% 49.79% 48.60% 48.95%
Average equity to average assets 12.01% 11.79% 11.23% 10.48% 10.16%
Asset Quality Ratios:
- ----------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses to period end loans 1.70% 1.77% 1.98% 1.96% 1.80%
Allowance for loan losses to nonaccrual loans 127.99% 94.11% 92.75% 117.00% 129.34%
Nonperforming assets to period end loans
and foreclosed properties 1.36% 2.00% 2.44% 1.89% 1.58%
Net charge-offs to average loans 0.09% 0.31% 0.19% 0.11% 0.18%
Capital and Liquidity Ratios:
- ----------------------------------------------------------------------------------------------------------------------------
Leverage 12.87% 11.89% 12.24% 11.12% 10.48%
Risk-based capital ratios:
Tier 1 capital 19.30% 19.59% 16.07% 13.12% 12.04%
Total capital 20.56% 20.85% 17.32% 13.73% 13.16%
Average loans to average deposits 79.01% 76.82% 76.84% 73.64% 72.92%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Efficiency ratio is computed by dividing non-interest expense by the sum of
net-interest income on a tax equivalent basis and non-interest income, net
of securities gains or losses.
Note: The amounts previously reported for the periods have been retroactively
restated to reflect the merger of Southside Bank and Bank of Northumberland,
Inc. to form Eastern Virginia Bankshares, Inc. as of December 29, 1997.
2
<PAGE>
To Our Stockholders
On behalf of the boards of directors and staffs of Bank of Northumberland Inc.,
Southside Bank, and our newly formed holding company, Eastern Virginia
Bankshares Inc., we are pleased to present our first annual report, for the year
ended December 31, 1997. Your company's two member banks enjoyed outstanding
results in their respective operations for the year. 1997 was an exciting year
for these two successful institutions, as they joined together at year end. It
is with great pleasure and pride that we present this information to you.
As we look at the results on a consolidated basis, Eastern Virginia
Bankshares Inc. experienced an 13.97% return on equity and return on assets of
1.68% for 1997. Total assets grew
[PHOTO]
[PHOTO CAPTION]
- ------------------------------------------------------------------------------
Eastern Virginia Bankshares Board of Directors: Seated left to right; Thomas M.
Boyd, Jr., Robert L. Covington, F.L. Garrett, III, standing left to right; W.
Rand Cook, Lewis R. Reynolds, Eric A. Johnson, L. Edelyn Dawson, Jr., F. Warren
Haynie, Jr., William L. Lewis.
EASTERN VIRGINIA BANKSHARES 3
<PAGE>
4.8%, or $14.7 million, to $323,430,000 as of December 31, 1997. Total loans
grew 10.5%, or $21.6 million, to $227,981,000 at year end, and deposits grew
4.1%, or $11.0 million, to $280,882,000 for the same period. Other ratios for
the holding company also look very favorable when compared to industry averages.
We invite you to review the accompanying "Selected Financial Data."
1997 was a record year for bank merger
[PHOTO]
[PHOTO CAPTION]
Southside Bank Board of Directors: Seated left to right; T.M. Boyd, Jr., F.L.
Garrett III, standing left to right; William W. Lowery, III, Charles R. Revere,
Emmett Upshaw, J. Thomas Newman, Lawrence R. Moter, M.D., E. Gary Ball, Eric A.
Johnson, Leslie E. Taylor, William L. Lewis, W. Gerald Cox, not pictured W. Rand
Cook.
activity, as nationwide $94.9 billion worth of banks and thrifts announced
consolidation plans during the year. In Virginia three of the five largest
independents agreed to sell. This rush for consolidation within the industry has
been viewed by our boards as an enormous opportunity.
There were many reasons why our bank boards of directors and management
felt that this was a good marriage for these two success-
4
<PAGE>
ful institutions at this time, and ultimately for you, our shareholder. Recent
stock trades (NASDAQ) indicate that the market agrees with our assess ment.
Aside from the tremendous opportunity created in our mid-Atlantic market, as the
larger banks are becoming even larger, it was our opinion that, with all of the
technological changes occurring within the industry, it was the appropriate time
to find a strong, like-minded, compatible partner to meet the competitive
challenges arising from recent and anticipated changes in the banking and
financial services industry. The joint proxy statement sent to shareholders of
both institutions in early December outlined the advantages of this merger from
the prospective of each of the boards of our banks in some detail.
Particularly important to both boards during our discussions was the
feeling that both institutions should maintain their names, names which were
built on solid reputations, and names which have excellent franchise value in
their respective markets. In today's changing world, we feel the consumer is
looking for the stability of the strong community bank. At the same time, this
merger presents organizational and management opportunities, which, again
benefit shareholder value. Additionally, we feel that this alliance and our
holding company philosophy of individual bank autonomy may be attractive to
other institutions with a similar philosophy as well.
Southside Bank
Balance Sheet as of 12/31/97 (in 000's)
Cash and cash equivalents: $ 7,855
Investments 30,225
Loans, Net 141,888
Other Assets 7,334
--------
Total Assets $187,302
Deposits $173,590
Other Liabilities 2,428
Shareholders Equity 11,284
--------
Total Liabilities & Capital $187,302
Income Statement as of 12/31/97 (in 000's)
Interest Income $ 14,815
Interest Expense 6,624
--------
Net Interest Income $ 8,191
Provision For Loan Losses 390
Other Income 1,237
Other Expense 5,138
Federal Income Tax 1,105
--------
Net Income $ 2,795
========
- ----------------------------------------------
Deltaville Office with its new atrium addition
While much effort was given to our "merger of equals," both banks were able
to accomplish a great deal during the year. Bank of Northumberland enjoyed yet
another outstanding year by all standards of performance, and continued its
commitment to cost containment controls which have kept its overhead expense
levels below that of its peer group. At the same time, it has continued its role
as the leading
EASTERN VIRGINIA BANKSHARES 5
<PAGE>
banking institution in its Northern Neck market, a market which is becoming
increasingly more competitive.
[PHOTO]
[PHOTO CAPTION]
Heathsville Office
In September, Southside Bank opened an office in Middlesex county in
Deltaville in a facility formerly occupied by another bank. The decision to
reopen this office was based on the bank's success in Middlesex with its two
existing offices, Urbanna and Hartfield, and the opportunity we see in the
eastern end of the county. Kay Snow joined the bank as manager of the Deltaville
office. A native of Middlesex, she has years of retail banking experience. We
are delighted to have her as part of the Southside Bank team.
By mid-year 1998 Southside Bank will add the ninth office to its system by
opening an office in Gloucester County near the courthouse, on U.S. Route 17.
This office was also formerly a full-service banking facility. In addition to
fully renovating the building, we will add an ATM at this location. Gloucester
county is in the midst of rapid growth, particularly in the courthouse area,
which is near this location. We see this newest office as a natural expansion of
our market and its addition to our branch network comes at an opportune time.
Much has been written about the year 2000 and its ramifications for
financial institutions. We can assure you that your company and its two
organizations have established plans which include obtaining confirmation from
our mission critical suppliers and vendors regarding their year 2000 plans. We
are making every effort necessary to prepare our systems for the millennium
change, and every effort to ensure that all vendors and all counterparty
relationships and customers are in compliance. A great deal of management effort
has been expended in the assessment of our year 2000 exposure, and we have
sought legal and regulator guidance on this issue.
6
<PAGE>
[PHOTO]
[PHOTO CAPTION]
Bank of Northumberland Board of Directors: Seated left to right; W. Leslie
Kilduff, Lewis R. Reynolds, Robert L. Covington, standing left to right; Charles
R. Rice, S. Lakes Cowart, Sr., L. Edelyn Dawson, Jr., F. Warren Haynie, Jr.,
Howard R. Straughan, Jr., not pictured William E. Sanford, Jr.
Bank of Northumberland
Balance Sheet as of 12/31/97 (in 000's)
Cash and cash equivalents $ 4,106
Interest-Bearing Deposits-Other Banks 100
Investments 47,048
Loans, Net 82,225
Other Assets 2,649
--------
Total Assets $136,128
Deposits $122,891
Other Liabilities 855
Shareholders Equity 12,382
--------
Total Liabilities & Capital $136,128
--------
Income Statement as of 12/31/97 in (000's)
Interest Income $ 9,958
Interest Expense 4,520
--------
Net Interest Income $ 5,438
Provision For Loan Losses 22
Other Income 523
Other Expense 2,566
Federal Income Tax 860
--------
Net Income $ 2,513
========
Noted bank consultant Arnold Danielson of Danielson Associates, Inc.
recently stated, in his National Banking Report - Winter 1998, article entitled
Battle for Supremacy, "The year just ended may not have matched the `shock
waves' of the monster mergers being announced every other Monday morning
throughout the summer of 1995, but the consolidation process took a major step
forward in 1997 with interindustry financial services mergers being added to the
combining of the banking `goliaths.' No longer are we just waiting to see where
First Union and NationsBank will strike next, but now we also are awaiting the
inevitability of Travelers or some other big nonbank challenging the major
remaining legal constraint within the financial services business by announcing
the acquisition of a large bank." Danielson further stated, "While the big get
bigger, they also will have to deal with the likelihood that much of what they
EASTERN VIRGINIA BANKSHARES 7
<PAGE>
do can be done better by specialized boutiques. Many of the better boutiques
will have disappeared because of the wisdom of selling while the pricing is good
in an industry with considerable future uncertainty, but that does not mean they
did not have an important role to play if they had stayed around. For every
Wal-Mart and Nordstrom success story, there will be a Home Depot and Sports
Authority excelling at its specialty."
Looking ahead, we see many challenges and many opportunities. For Eastern
Virginia Bankshares and the member community banks, we are challenged to use our
resources to gain operational effectiveness in our operations. With our strong
capital base of approximately $39 million , we are positioned well to explore
many opportunities to gain a competitive advantage in our marketplace. As we
have said many times before, and still believe firmly, especially now with our
new partnership in place, we have located in an excellent market for future
growth.
We want to thank the boards of directors of both banks for their loyalty
and dedication and for their hard work this past year. Both boards negotiated
and worked tirelessssly for their institutions, and now have come together with
great enthusiasm as a team. We especially thank officers Lewis Reynolds and Ned
Stephenson for their hard work and dedication during the merger process. We have
in place an excellent team on the holding company level and within both banks.
We are well positioned to meet the challenges of the future.
Finally, we thank you for your support and confidence.
[BOX]
T. M. Boyd, Jr. R. L. Covington
President and CEO Chairman of the Board
8
<PAGE>
Management's Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion provides information about the major components of the
results of operations, financial condition, liquidity and capital resources of
Eastern Virginia Bankshares (EVB). This discussion and analysis should be read
in conjunction with "Selected Financial Data" and the Consolidated Financial
Statements and notes to consolidated Financial Statements presented elsewhere in
this report. Operating results include Southside Bank and Bank of
Northumberland, Inc. combined for all periods presented.
Overview
Late in December, 1997, EVB brought together into one holding company two
88-year-old independent community banks, Southside Bank and Bank of
Northumberland, Inc. Both institutions have a long history of being
customer-oriented, financial service providers in their respective communities,
while providing consistent superior returns to their shareholders. Combined
assets of $323 million produced consolidated net income of $5.3 million,
resulting in return on stockholders' average assets of 1.68%. Total capital
exceeded $39 million, resulting in a risk-based capital ratio in excess of 20%,
and a return on shareholders' average equity of 13.97%.
The two subsidiary banks collectively serve 10 counties though 11 offices in the
central, middle peninsula, and northern-neck regions of Virginia. Shareholders
of both banks became shareholders in the holding company in a tax-free exchange,
resulting in 5.2 million shares outstanding. Simultaneous with the share
exchange was the listing of the stock on the NASDAQ Small Cap market, and the
engagement of three independent market makers. Although consummated in late
December, this combination provides unprecedented opportunities among the
subsidiary banks for operational efficiencies, expense reduction, and expansion
of modern technological financial services to a rural market in the new
millenium.
Results of Operations
It is important to note at the outset of this discussion that the two
subsidiaries, although presented on a consolidated basis with
pooling-of-interests accounting, actually operated in combination for only 2
days in 1997. As a result, merger expenses of $364,285 were incurred without the
corresponding opportunity to benefit from operational efficiencies inherent in
the combination. Nevertheless, net income increased from $5.0 million in 1996 to
$5.3 million in 1997, a record high for the consolidated entity. On a per share
basis, net income was $1.02, up from $0.97 in 1996 and $0.79 in 1995.
The improvement in net income in 1997 was the result of improvement in both net
interest income, and non-interest income. Net interest income, after provision
for loan losses, was up 9.1% to $13.2 million and non-interest income was up
10.3% to $1.8 million. The improvement in net interest income can be attributed
to both volume and rate. Average earning assets increased 7.6% to $302.6 million
while the yield on these assets increased from 8.50% to 8.51%. While
interest-bearing liabilities also increased by 6.9% to $247.7 million, the cost
of these liabilities increased only modestly from 4.47% to 4.50%.
Loan demand remained strong in 1997, with total loans increasing 10.5% over 1996
levels. The securities portfolio actually declined 5.9% from $82.1 million to
$77.2 million as maturing securities were used to fund loan demand throughout
the year. At the end of 1997, the loan-to-deposit ratio stood at 81.2%, up from
76.5% at the end of 1996.
The Corporation's efficiency ratio, a measure of the control of
non-interest-related costs, deteriorated slightly from 46.04% in 1996 to 47.26%
in 1997, but remained below the Corporation's own five year average. Expenses of
the merger were included in the computation of the efficiency ratio.
Non-interest expenses for the Corporation have trended upward at the rate of
11.2% in 1997, 2.3% in 1996 and 5.3% in 1995. It is anticipated that the
Corporation will have the opportunity to economize certain functions by the
elimination of duplicate systems in the two subsidiary banks. Non-interest
expense such as data processing, bank franchise taxes, and insurance costs are
examples of these opportunities.
Overall asset growth and earnings improvement have followed a steady trend for
several years. Assets grew 4.8% in 1997, 7.7% in 1996, and 6.3% in 1995. This
trend in asset growth has been fueled primarily by branch expansion into new
markets, such as Hanover County and Middlesex County. Such growth trends are
likely to continue for several years as these new markets approach maturity.
Existing, more mature markets are growing less rapidly than the Corporation as a
whole. The trend toward increased net income has been evident for each year in
the last five. Net interest margins have moved from 4.59% in the year ending
December, 1995, to 4.82% in 1996, and 4.83% in 1997. This increased margin has
resulted from falling interest rates in the market in recent years. Falling
rates caused almost immediate reductions in liability cost, while asset returns
were not as interest sensitive. The result has been increased margins, however,
this trend is changing as rates stabilize and asset yields adjust to lower
rates. Any significant increase in market interest rates would reverse this
trend.
EASTERN VIRGINIA BANKSHARES 9
<PAGE>
Summary of Financial Results by Quarter
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------
1997
---------------------------------------------------
(Dollars in thousands) Dec. 31 Sep. 30 June 30 Mar. 31
- ---------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income $ 6,377 $ 6,252 $ 6,165 $ 5,979
Interest expense 2,885 2,832 2,739 2,688
-------- -------- -------- --------
Net interest income 3,492 3,420 3,426 3,291
Provision for loan losses 150 90 88 84
-------- -------- -------- --------
Net interest income after
provision for loan losses 3,342 3,330 3,338 3,207
Non-interest income 485 442 412 422
Non-interest expense 2,595 1,724 1,787 1,599
-------- -------- -------- --------
Income before income taxes 1,232 2,048 1,963 2,030
Applicable income taxes 424 544 495 502
-------- -------- -------- --------
Net income $ 808 $ 1,504 $ 1,468 $ 1,528
Net income per share,
basic and diluted $ 0.16 $ 0.29 $ 0.28 $ 0.29
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------
1996
---------------------------------------------------
(Dollars in thousands) Dec. 31 Sep. 30 June 30 Mar. 31
- ---------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income $ 5,922 $ 5,746 $ 5,729 $ 5,516
Interest expense 2,656 2,546 2,544 2,614
-------- -------- -------- --------
Net interest income 3,266 3,200 3,185 2,902
Provision for loan losses 210 92 68 67
-------- -------- -------- --------
Net interest income after
provision for loan losses 3,056 3,108 3,117 2,835
Non-interest income 414 362 417 376
Non-interest expense 2,092 1,602 1,708 1,529
-------- -------- -------- --------
Income before income taxes 1,378 1,868 1,826 1,682
Applicable income taxes 401 469 417 423
-------- -------- -------- --------
Net income $ 977 $ 1,399 $ 1,409 $ 1,259
Net income per share,
basic and diluted $ 0.19 $ 0.27 $ 0.27 $ 0.24
</TABLE>
Net Interest Income
Net interest income represents the principal source of earnings for EVB. Net
interest income equals the amount by which interest income exceeds interest
expense and represents the Corporation's gross profit margin. Changes in the
volume and mix of interest-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.
Net interest income, on a taxable-equivalent basis, for the year ended December
31, 1997, increased to $14.6 million, up 7.9% over the $13.5 million reported
for 1996, and up 10.8% in 1996 over the $12.2 million reported for 1995. Net
interest income in 1997 was affected by a strong economy increasing loan demand.
Average loans increased $20.0 million (10.1%) to $217.3 million in 1997 from
$197.3 million in 1996, and increased $9.0 million (4.8%) in 1996 from $188.3
million in 1995. Loan growth was funded primarily by average deposits which
increased to $275.0 million, up $18.1 million (7.0%) from $256.9 million in
1996. The Corporation's net interest margin increased to 4.83% in 1997 compared
to 4.82% in 1996 and 4.59% in 1995. The yield on earning assets increased to
8.51% in 1997, up slightly from 8.50% in 1996, while the cost of interest
bearing deposits increased only 3 basis points to 4.50% from 4.47% in 1996. As a
result, EVB was able to realize an increase of $1.1 million in net interest
income compared to 1996 (see Volume and Rate Analysis table). Strong deposit and
loan growth was the result of offering attractive market rates coupled with
customer desire to place deposits in a strong, well capitalized institution.
During 1996, net interest income, on a taxable-equivalent basis, increased 10.8%
to $13.5 million from $12.2 million in 1995. EVB's net interest margin increased
to 4.82% in 1996, from 4.59% in 1995. Net interest income in 1996 was affected
by increasing loan demand, resulting attractive market rates and an expanding
economy. Loans increased $9.0 million (4.8%) to $197.3 million in 1996, from
$188.3 million in 1995. Loan growth was funded by an $11.8 million (4.8%)
increase in deposits to $256.9 million from $245.1 million in 1995. The yield on
earning assets in 1996 increased 4 basis points to 8.50% from 8.46% in 1995,
while the cost of interest bearing deposits decreased 15 basis points to 4.47%
in 1996, from 4.62% in 1995. As a result, EVB was able to realize an increase of
$1.3 million in net interest income compared to 1995.
The following table depicts interest income on average earning assets, and
related average yields, as well as interest expense on average interest-bearing
liabilities and related average rates paid for the periods indicated.
10
<PAGE>
Average Balances, Income and Expense, Yields and Rates (1)
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
-----------------------------------------------------------------------
1997 1996
------------------------------------ ----------------------------------
Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate
- ---------------------------------------------- ------------- ----------- ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Assets:
Securities
Taxable $ 41,432 $ 2,794 6.74% $ 40,745 $ 2,702 6.63%
Tax exempt (1) 36,872 2,878 7.81% 36,583 2,911 7.96%
--------- -------- -------- --------
Total securities 78,304 5,672 7.24% 77,328 5,613 7.26%
Federal funds sold 6,964 392 5.63% 6,558 349 5.32%
Loans (net of unearned income) (2)(5) 217,320 19,687 9.06% 197,336 17,940 9.09%
Interest-bearing deposits in other banks 8 1 12.50% -- -- --
--------- -------- -------- --------
Total earning assets 302,596 25,752 8.51% 281,222 23,902 8.50%
Less allowance for loan losses (3,777) (3,726)
Total non-earning assets 17,488 16,178
--------- --------
Total assets $ 316,307 $293,674
========= ========
Liabilities & Shareholders' Equity
Interest bearing deposits
Checking $ 28,480 $ 782 2.75% $ 27,254 $ 751 2.76%
Savings 61,414 2,504 4.08% 57,453 2,264 3.94%
Money market savings 29,127 956 3.28% 27,889 912 3.27%
Certificates of deposit
$100,000 and over 14,469 771 5.33% 13,012 713 5.48%
Less than $100,000 114,129 6,125 5.37% 106,179 5,720 5.39%
--------- -------- ----- -------- -------- ----
Total interest-bearing deposits 247,619 11,138 4.50% 231,787 10,360 4.47%
Other borrowings 84 6 7.14% -- -- --
--------- -------- ----- -------- -------- ----
Total interest-bearing liabilities 247,703 11,144 4.50% 231,787 10,360 4.47%
Non-interest-bearing liabilities
Demand deposits 27,347 25,089
Other liabilities 3,270 2,186
--------- --------
Total liabilities 278,320 259,062
Shareholders' equity 37,987 34,612
--------- --------
Total liabilities and shareholders' equity $ 316,307 $293,674
========= ========
Net interest income $ 14,608 $ 13,542
======== ========
Interest rate spread (3) 4.01% 4.03%
Interest expense as a percent of average
earnings assets 3.68% 3.68%
Net interest margin (4) 4.83% 4.82%
</TABLE>
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
----------------------------------
1995
----------------------------------
Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate
- ---------------------------------------------- ----------- ----------- ----------
<S> <C> <C> <C>
Assets:
Securities
Taxable $ 38,966 $ 2,520 6.47%
Tax exempt (1) 31,179 2,542 8.15%
-------- --------
Total securities 70,145 5,062 7.22%
Federal funds sold 7,882 455 5.77%
Loans (net of unearned income) (2)(5) 188,335 17,016 9.03%
Interest-bearing deposits in other banks -- -- --
-------- --------
Total earning assets 266,362 22,533 8.46%
Less allowance for loan losses (3,713)
Total non-earning assets 15,793
--------
Total assets $278,442
========
Liabilities & Shareholders' Equity
Interest bearing deposits
Checking $ 25,907 $ 820 3.17%
Savings 53,325 2,259 4.24%
Money market savings 29,130 1,083 3.72%
Certificates of deposit
$100,000 and over 12,073 663 5.49%
Less than $100,000 102,746 5,490 5.34%
-------- -------- ----
Total interest-bearing deposits 223,181 10,315 4.62%
Other borrowings --
--------
Total interest-bearing liabilities 223,181 10,315 4.62%
Non-interest-bearing liabilities
Demand deposits 21,919
Other liabilities 2,081
--------
Total liabilities 247,181
Shareholders' equity 31,261
--------
Total liabilities and shareholders' equity $278,442
========
Net interest income $ 12,218
========
Interest rate spread (3) 3.84%
Interest expense as a percent of average
earnings assets 3.87%
Net interest margin (4) 4.59%
</TABLE>
Notes:
(1) Income and yields are reported on a tax equivalent basis assuming a federal
tax rate of 34%.
(2) Nonaccrual loans have been included in the computation of average loan
balances.
(3) 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.
(4) Net interest margin is the net interest income, calculated on a fully
taxable basis assuming a federal income tax rate of 34%, expressed as a
percentage of average earning assets.
(5) Income on loans includes loan fees (in thousands) of $667, $593, and $459
for 1997, 1996, and 1995 respectively.
EASTERN VIRGINIA BANKSHARES 11
<PAGE>
The following table analyzes changes in net interest income attributable to the
volume of interest-bearing assets and liabilities compared to changes in
interest rates. Nonaccruing loans are included in average loans outstanding.
Volume and Rate Analysis
Tax equivalent basis
<TABLE>
<CAPTION>
1997 vs. 1996 1996 vs. 1995
Increase (Decrease) Due to Changes in: Increase (Decrease) Due to Changes in:
-------------------------------------- --------------------------------------
(Dollars in thousands) Volume Rate Total Volume Rate Total
- ------------------------------------------ ---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Taxable securities $ 46 $ 46 $ 92 $ 117 $ 65 $ 182
Tax exempt securities 23 (56) (33) 435 (66) 369
Loans, (net) 1,781 (34) 1,747 807 117 924
Federal funds sold 22 21 43 (72) (34) (106)
Interest-bearing deposits -- other banks 1 -- 1 -- -- --
------- ----- ------- ------ ------ -------
Total earning assets $ 1,873 $ (23) $ 1,850 $1,287 $ 82 $ 1,369
Interest-Bearing Liabilities:
Interest checking 34 (3) 31 43 (112) (69)
Savings 156 84 240 170 (165) 5
Money market savings 41 3 44 (46) (125) (171)
Certificates of deposit:
$100,000 and over 80 (22) 58 51 (1) 50
Less than $100,000 429 (24) 405 180 50 230
Short-term borrowings 6 -- 6 -- -- --
------- ------- ------- ------ ------- -------
Total interest-bearing liabilities 746 38 784 398 (353) 45
------- ------- ------- ------ ------- -------
Change in net interest income: $ 1,127 $ (61) $ 1,066 $ 889 $ 435 $ 1,324
------- ------- ------- ------ ------- -------
</TABLE>
Notes: Changes caused by the combination of rate and volume are allocated
based on the percentage of volume caused by each.
Liquidity and Interest Sensitivity Analysis
Liquidity measures the ability to meet customer demands for loans and deposit
withdrawals without impairing profitability. To meet these needs, EVB maintains
cash reserves and readily marketable securities in addition to funds provided
from loan repayments and maturing securities. Funds can also be obtained by
borrowing privileges at the Federal Reserve Bank and through the Federal Home
Loan Bank. In addition the Corporation also has lines of credit available.
A related concern of liquidity management is interest rate sensitivity. EVB's
primary goals in interest rate risk management are to minimize fluctuations in
net interest margin as a percentage of earning assets and to increase the
dollar amount of net interest income at a growth rate consistent with the
growth rate of total assets. These goals are accomplished by managing the
interest sensitivity gap, which is the difference between interest sensitive
assets and interest sensitive liabilities in a specific time interval. Interest
sensitivity gap is managed by balancing the volume of floating-rate liabilities
with a similar volume of floating-rate assets, by keeping the average maturity
of fixed rate asset and liability contracts reasonably consistent and short,
and by routinely adjusting pricing to market conditions on a regular basis.
Matching the amount of assets and liabilities maturing in the same time
interval helps to hedge interest rate risk and to minimize the impact on net
interest income in periods of rising or falling interest rates. Interest rate
gaps are managed through investments, loan pricing and deposit pricing.
Accordingly, EVB has developed guidelines that the targeted gap should be
between a negative 15% and a positive 15%. The one year income statement gap at
December 31, 1997 was (3.6%) which is well within the targeted gap.
At December 31, 1997, EVB had $11.0 million more in interest sensitive
liabilities than interest sensitive assets subject to repricing within one year
and was, therefore, in a liability-sensitive position. A liability-sensitive
institution's net interest margin and net interest income generally will be
impacted favorably by decreasing interest rates, while that of an asset-
sensitive institution generally will be impacted favorably by increasing
interest rates.
12
<PAGE>
Interest Rate Sensitivity Analysis
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------------------
Within 91-365 1 to 5 Over
(Dollars in thousands) 90 Days Days Years 5 Years Total
- ------------------------------------------------- ------------- ----------- -------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
Earning Assets:
Loans, net of unearned income (1) (2) $ 51,064 $ 34,330 $ 119,527 $ 20,119 $ 225,040
Investment securities
U.S. Treasury and agencies 1,801 5,495 21,389 8,539 37,224
State, county and municipal 1,060 2,359 14,281 20,889 38,589
Other securities 400 -- 499 562 1,461
Federal funds sold and other 2,642 -- -- -- 2,642
--------- --------- ---------- --------- ----------
Total rate sensitive assets 56,967 42,184 155,696 50,109 304,956
Interest-Bearing Liabilities:
Deposits
Money market deposit accounts (3) 5,221 3,731 50,046 -- 58,998
Savings deposits (3) 4,318 3,029 51,766 -- 59,113
Certificates of deposit $100,000 and over 2,855 8,045 6,736 -- 17,636
All other time deposits 26,642 56,268 33,014 116 116,040
--------- --------- ---------- --------- ----------
Total rate sensitive liabilities 39,036 71,073 141,562 116 251,787
Rate sensitivity gap 17,931 (28,889) 14,134 49,993 53,169
Cumulative gap 17,931 (10,958) 3,176 53,169 53,169
Ratio of cumulative gap to total earning assets 5.88% -3.59% 1.04% 17.43% 17.43%
</TABLE>
Notes:
(1) Repricing dates may differ from maturity dates for certain assets due to
prepayment assumptions and variable rate adjustments
(2) Excludes nonaccrual loans
(3) The Corporation has found that interest-bearing money market deposits and
regular savings deposits are not sensitive to changes in related market
rates and therefore, it has placed them predominantly in the "1-5 year"
column.
Non-interest Income
Non-interest income increased by $192 thousand (12.2%) from $1.6 million in
1996 to $1.8 million in 1997. Service charges, the largest source of
non-interest income, increased $49 thousand from $939 thousand in 1996, to $988
thousand in 1997. Other operating income increased $118 thousand from $682
thousand in 1996 to $800 thousand in 1997. Other operating income includes
credit life premiums, ATM fees charged to non EVB users, safe deposit box fees,
late charges and gain on sale of foreclosed real estate. Realized loss on sale
of securities declined from $52 thousand in 1996 to $28 thousand in 1997.
Other income increased by $133 thousand (9.2%) from 1995 to 1996, attributable
to increases of $38 thousand in service charges and $137 thousand in other
income. Those increases were partially offset by an increase of $43 thousand in
realized losses on sale of securities.
Year ended December 31,
-----------------------------------------
(Dollars in thousands) 1997 1996 1995
- ----------------------------- ----------- ----------- -------------
Service Charges $ 988 $ 939 $ 901
Gain (loss) on securities (28) (52) (9)
Other operating income 801 682 545
------- ------- --------
Total non-interest income $ 1,761 $ 1,569 $ 1,437
======= ======= ========
EASTERN VIRGINIA BANKSHARES 13
<PAGE>
Non-interest Expense
Total non-interest expense increased $774 thousand (11.2%) from $6.9 million in
1996, to $7.7 million in 1997. The largest contributor to this increase was
$364 thousand of non-recurring merger expenses. Other than merger expenses, the
increase in non-interest expense was a more modest 5.8%. Salaries and benefits
increased $170 thousand or 5.0%. Net occupancy expense, including depreciation
on furniture and fixtures, increased $92 thousand or 10.5% due in large part to
the opening of a new office in Deltaville. Printing, supplies and postage
increased $58 thousand or 12.9%, and FDIC insurance assessment increased $29
thousand following a reduction in 1996 to reflect the FDIC achieving a proper
funding status. Other operating expenses increased $33 thousand or 2.4%;
equipment expenses increased $17 thousand or 6.4%, and data processing expenses
saw a decline of $15 thousand or 5.4%. As the Corporation strives to take
advantage of its December merger, it expects to make further investments in
technology to achieve efficiencies in the areas of personnel, taxes other than
occupancy, and printing, supplies and postage.
Non-interest expense increased $158 thousand, or 2.3% from $6.8 million in 1995
to $6.9 million in 1996. This increase was primarily due to an $80 thousand
(2.4%) increase in salaries and benefits, a $44 thousand (10.9%) increase in
printing, supplies and postage and a $429 thousand increase in other operating
expenses, largely offset by a $272 thousand decrease in FDIC insurance. The
increase in other operating expenses, while most other non-interest expense
categories are shown as flat, is partially the result of reclassification of
various expense items beginning in 1996.
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------
(Dollars in thousands) 1997 1996 1995
- -------------------------------- ---------- ---------- ----------
<S> <C>
Salaries and employee benefits $ 3,542 $ 3,372 $ 3,292
Net occupancy expense 972 880 995
Equipment expense 289 271 262
Printing, supplies and postage 506 448 404
Taxes other than income 302 276 285
Data processing 261 276 284
FDIC assessment 33 4 276
Merger expenses 364 -- --
Other operating expenses 1,436 1,404 975
------- ------- -------
Total non-interest expense $ 7,705 $ 6,931 $ 6,773
======= ======= =======
</TABLE>
Income Taxes
Income tax expense for 1997 was $1.96 million, up from $1.71 million in 1996,
and up from $1.32 million in 1995. The increase in income taxes is attributable
to increased taxable earnings at the federal statutory income tax rate of 34%.
Income tax expense corresponds to an effective rate of 27.0%, 25.3% and 24.2%
for the three years ended December 31, 1997, 1996 and 1995, respectively. Note
10 to the Consolidated Financial Statements provides a reconciliation between
the amount of income tax expense computed using the federal statutory income
tax rate and EVB's actual income tax expense. Also included in Note 10 to the
Consolidated Financial Statements is information regarding deferred taxes for
1997 and 1996.
Loan Portfolio
Loans, net of unearned income, increased to $228 million at December 31, 1997,
up $21.6 million or 10.5% from $206.3 million at year end 1996. The year 1997
saw strong demand in all sectors of EVB's loan portfolio. This loan demand is
indicative of a healthy economy in the Corporation's banking market area. Both
of EVB's subsidiary banks offer commercial, real estate and consumer loans with
the greatest focus being in the residential real estate mortgage business
within the banks' respective market areas. Southside Bank's increasing market
share in consumer loans is expected to mesh well with Bank of Northumberland
Inc.'s strength in commercial lending.
At year end 1996, loans net of unearned income were $206.3 million, an increase
of $13.4 million or 7.0% over $192.9 million at 1995 year end. The loan
portfolio in 1996, while comprised primarily of real estate loans, was
highlighted by a 20% growth in consumer lending and a 10% growth in commercial
lending.
14
<PAGE>
Loan Portfolio
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
- ----------------------------------------------- ------------- ----------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Commercial, industrial and agricultural loans $ 32,901 $ 29,195 $ 26,533 $ 27,108 $ 26,656
Real estate mortgage 118,639 109,015 105,233 103,808 92,640
Real estate construction 6,430 3,808 3,941 3,586 2,547
Commercial real estate 27,324 25,330 24,464 19,455 15,969
Consumer loans 45,723 41,887 34,746 31,610 30,434
All other loans 294 496 613 552 449
--------- -------- -------- --------- ---------
Total loans 231,311 209,731 195,530 186,119 168,695
Less unearned income (3,330) (3,388) (2,636) (2,257) (2,029)
--------- -------- -------- --------- ---------
Loans, net of unearned income $ 227,981 $206,343 $192,894 $ 183,862 $ 166,666
========= ======== ======== ========= =========
</TABLE>
Maturity Schedule of Selected Loans
December 31, 1997
--------------------------------
Commercial and Real Estate
(Dollars in thousands) Agricultural Construction
- ------------------------ ---------------- -------------
Within 1 year $24,632 $5,919
------- ------
Variable rate:
1 to 5 years 5,098 173
After 5 years 1,626 38
------- ------
Total 6,724 211
Fixed rate:
1 to 5 years 868 114
After 5 years 677 186
------- ------
Total 1,545 300
------- ------
Total Maturities $32,901 $6,430
======= ======
Approximately 67% of EVB's combined loan portfolio at December 31, 1997 was
comprised of loans secured by real estate. Residential real estate mortgages
made up 52% of the loan portfolio as compared to 53% at year end 1996 and 55%
at year end 1995. The Corporation attempts to limit its exposure to the risk of
local real estate markets by controlling the size of its commercial real estate
loan portfolio, and by focusing on making real estate loans on owner-occupied
properties. The Corporation's residential real estate mortgage loans are
primarily 20 year loans with the rate adjusted every three years. Real estate
construction loans accounted for only 2.8% of total loans outstanding at year
end 1997, and commercial real estate loans accounted for 12% of total loans.
The Corporation's losses on loans secured by real estate have historically been
low, averaging $20 thousand per year over the past five years, and accounting
for only $6 thousand of net charge offs in 1997.
Consumer loans are the second largest and fastest growing component of EVB's
loan portfolio. Consumer loans were 20% of the combined loan portfolio at year
end 1997 and 1996, and 18% at 1995 year end. This portfolio consists
principally of installment loans. Total consumer loans to individuals for
household, family and other personal expenditures totaled $45.7 million at 1997
year end, up $3.8 million from $41.9 million at 1996 year end. Loans at
December 31, 1996 were up $7.1 million from $34.7 million at 1995 year end.
Performance of the consumer loan portfolio is closely tied to the general
economic conditions in our market region. Commercial and industrial loans are
designed specifically to meet the needs of our small and medium-size business
customers. This category of loans has consistently comprised approximately 14%
of our total loan portfolio.
Consistent with its focus on providing community-based financial services, EVB
generally does not make loans outside of its principal market region. The
Corporation does not engage in foreign lending activities, consequently our
loan portfolio is not exposed to risk from foreign credits. EVB further
maintains a policy not to originate or purchase loans classified by regulators
as highly leveraged transactions or loans to foreign entities or individuals.
The Corporation's unfunded loan commitments (excluding credit card lines) and
standby letters of credit at 1997 year end totaled $19.8 million, up $2.9
million from $16.9 million at December 31, 1996. Unfunded loan commitments are
used in large part to meet seasonal funding needs which are generally heavier
from Spring through Fall than at year end. On December 31, 1997, EVB had no
concentration of loans in any one industry in excess of 10% of its loan
portfolio. Historically, EVA's loan collateral has been primarily real estate
because of the nature of our market region.
EASTERN VIRGINIA BANKSHARES 15
<PAGE>
Asset Quality
The allowance for loan losses is an estimate of the amount adequate to provide
for potential losses inherent in the loan portfolio. In determining adequacy of
the allowance, management considers the Corporation's historical loss
experience, the size and composition of the loan portfolio, specific impaired
loans, and the overall level of nonaccrual loans, the value and adequacy of
collateral and guarantors, and economic conditions. The allowance is increased
by a provision for loan losses, which is charged to expense and reduced by
charge-offs, net of recoveries. Changes in the allowance are charged to or
credited to the provision for loan losses. Because the risk of loan loss
includes general economic trends as well as conditions affecting individual
borrowers, the allowance for loans losses can only be an estimate.
Both of EVB's subsidiary banks have a formal loan review function consisting of
a committee of bank officers and board members that regularly reviews loans and
assigns a classification based on current or perceived credit risk. Additionally
an independent credit review consultant at Southside Bank performs a monthly
review of selected loans and refers those deemed appropriate to the Bank's
Officers' Loan Committee and the Loan Committee of the Southside Bank Board.
Bank of Northumberland, Inc.(BNI) has a formal review process on a quarterly
basis by senior credit personnel. As a matter of policy, Southside Bank
generally places loans on a nonaccrual status when a loan becomes 90 days past
due as to principal and interest. BNI is only slightly less aggressive in moving
past due loans to nonaccrual status. BNI makes a management determination as to
when the borrower can no longer meet the contractual terms of the loan
agreement. For the Corporation, this detailed management analysis forms the
basis for determining the amount needed in the allowance for loan losses.
Management believes the allowance for loan losses to be adequate based on this
loan review process and analysis.
In 1997 and 1996, improved loan quality, declining levels of nonperforming
assets and improved loan underwriting standards allowed EVB to maintain a lower
allowance for loan losses. The ratio of allowance for loans losses to period end
loans, net for 1997, 1996 and 1995 was 1.70%, 1.77% and 1.98%, respectively. For
the same periods the ratio of allowance for loan losses to nonaccrual loans was
128%, 94% and 93%, indicating that the allowance is adequate with respect to
nonaccrual loans. The allowance for loan losses amount and methodology are
subject to regulatory examinations and determinations as to adequacy, which may
take into account such factors as methodology used to calculate the allowance
and the size of the allowance in comparison to peer companies identified by
regulatory agencies.
16
<PAGE>
Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
- -------------------------------------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Average loans outstanding, net of unearned
income $ 217,320 $ 197,336 $ 188,335 $ 173,012 $ 158,958
Allowance for loan losses balance, beginning of
year $ 3,643 $ 3,814 $ 3,599 $ 2,998 $ 2,339
Loans charged off:
Commercial and agricultural 252 435 278 219 204
Real Estate 12 23 17 70 58
Consumer 381 371 196 165 175
--------- --------- --------- --------- ---------
Total loans charged off 645 829 491 454 437
Recoveries:
Commercial and agricultural 279 19 16 112 21
Real estate 6 48 12 11 1
Consumer 173 154 103 136 130
--------- --------- --------- --------- ---------
Total recoveries 458 221 131 259 152
--------- --------- --------- --------- ---------
Net loans charged off 187 608 360 195 285
Provision for loan losses 412 437 575 796 944
--------- --------- --------- --------- ---------
Balance, end of year $ 3,868 $ 3,643 $ 3,814 $ 3,599 $ 2,998
Ratios:
Ratio of allowance for loan losses to total loans
outstanding at end of year 1.70% 1.77% 1.98% 1.96% 1.80%
Ratio of net charge-offs to average loans
outstanding during the year 0.09% 0.31% 0.19% 0.11% 0.18%
=======================================================================================================================
</TABLE>
EASTERN VIRGINIA BANKSHARES 17
<PAGE>
Nonperforming Assets
Total nonperforming assets, consisting of nonaccrual loans and foreclosed
properties, decreased 24.6% and 12.8% during 1997 and 1996, respectively,
following an increasing trend in 1995 and 1994. The improvement in nonperforming
assets during the past two years was due to improved underwriting standards
combined with an improving economy that reduced levels of new nonperforming
loans, and management's focus on identifying deteriorating assets early enough
to ensure prompt resolution.
Nonperforming assets at December 31, 1997, were $3.1 million, or 1.36% of total
loans, down from $4.1 million or 2.0% at December 31, 1996, and down from $4.7
million or 2.4% at December 31, 1995. Nonperforming loans at year end 1997,
consisted primarily of commercial real estate mortgage loans secured by real
estate in the Corporation's market area. Based on estimated fair values of the
related real estate, management considers these amounts recoverable, with any
individual deficiency well covered by the allowance for loan losses. No interest
is accrued on loans past due 90 days or greater, and any unpaid interest
previously accrued on past due loans is reversed when a loan is placed in
nonaccrual status. If interest on nonaccrual loans had been accrued, such income
would have approximated $308 thousand, and $290 thousand for the years 1997 and
1996.
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
(Dollars in thousands) 1997 1996 1995 1994 1993
- ---------------------------------------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 3,022 $ 3,871 $ 4,112 $ 3,076 $ 2,318
Restructured loans -- -- -- -- --
Foreclosed property 86 196 618 407 325
--------- -------- -------- --------- ---------
Total nonperforming assets $ 3,108 $ 4,124 $ 4,730 $ 3,483 $ 2,643
Loans past due 90 days and accruing interest 927 597 905 1,222 1,201
Nonperforming assets to total loans and
other real estate 1.36% 2.00% 2.44% 1.89% 1.58%
Allowance for loan losses to nonaccrual
loans 127.99% 94.11% 92.75% 117.00% 129.34%
Net charge-offs to average loans outstanding
during the year 0.09% 0.31% 0.19% 0.11% 0.18%
Allowance for loan losses to year end loans 1.70% 1.77% 1.98% 1.96% 1.80%
Foregone interest income on nonaccrual
loans $ 308 $ 290 $ 198 $ 215 $ 131
Interest income recorded on nonaccrual
loans $ -- $ -- $ -- $ -- $ --
</TABLE>
At December 31, 1997, loans past due 90 days or more and still accruing interest
because they are both well secured and in the process of collection were $927
thousand. Although trends for credit quality factors continue to improve, it is
likely that EVB will continue modest provisions for loan losses in 1998. The
primary factor for additional provisions is growth in the loan portfolio as the
result of continued improvement in the region's economy. The Corporation has
historically reflected a high level of nonaccrual real estate loans, but has had
minimal losses from those loans because of the well collateralized position.
Therefore, effective with 1997, management has revised its formula for
allocation of the allowance to reflect current net loans and nonaccrual loans
plus the five year history for net charge offs by loan category. That allocation
appears on the following page.
Potential Problem Loans. At December 31, 1997, potential problem loans were
approximately $1.8 million, including 8 lending relationships with principal
balances in excess of $100,000, which had aggregate principal balance
outstanding of $1.4 million. Loans are viewed as potential problem loans
according to the ability of such borrowers to comply with current repayment
terms. These loans are subject to constant management attention, and their
status is reviewed on a regular basis. The potential problem loans identified at
December 31, 1997 are generally secured by residential and commercial real
estate with appraised values that exceed the principal balance.
18
<PAGE>
Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 December 31, 1995
----------------------------- ----------------------------- ----------------------------
Percent of loans Percent of loans Percent of loans
in each category in each category in each category
(Dollars in thousands) Amount to Total loans Amount to Total loans Amount to Total loans
- ---------------------------------- ---------- ------------------ ---------- ------------------ ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and agricultural $ 1,346 14.21% $ 496 13.62% $ 486 12.74%
Real estate mortgage 1,207 51.29% 1,894 51.98% 2,053 53.82%
Real estate construction 65 2.78% 66 1.82% 77 2.02%
Commercial real estate 279 11.82% 433 11.89% 485 12.71%
Installment 969 19.77% 739 20.29% 701 18.37%
Other loans 2 0.13% 15 0.41% 12 0.34%
------- ------ ------- ------ ------- ------
Total allowance for loan losses $ 3,868 100.00% $ 3,643 100.00% $ 3,814 100.00%
</TABLE>
<TABLE>
<CAPTION>
December 31, 1994 December 31, 1993
------------------------------- ------------------------------
Percent of loans Percent of loans
in each category in each category
(Dollars in thousands) Amount to Total loans Amount to Total loans
- ---------------------------------- ---------- ------------------ ---------- -----------------
<S> <C> <C> <C> <C>
Commercial and agricultural $ 495 13.77% $ 439 14.64%
Real estate mortgage 2,032 56.46% 1,646 54.92%
Real estate construction 70 1.95% 45 1.51%
Commercial real estate 355 9.92% 286 9.51%
Installment 638 17.66% 573 19.11%
Other loans 9 0.24% 9 0.31%
------- ------ ------- ------
Total allowance for loan losses $ 3,599 100.00% $ 2,998 100.00%
=====================================================================================================
</TABLE>
Securities
The securities portfolio consists of two components, investment securities and
securities available for sale. Securities are classified as investment
securities when management has the intent and the Corporation has the ability,
at time of purchase, to hold such securities to maturity. Investment securities
are carried at cost adjusted for amortization of premiums and accretion of
discounts. Securities available for sale include those securities that may be
sold in response to changes in market interest rates, changes in the security's
prepayment risk, increases in loan demand, general liquidity needs, and other
similar factors, and are carried at estimated fair market value. Generally EVB
utilizes tax exempt securities for its investment portfolio and taxable
securities in its available for sale portfolio.
At December 31, 1997, the combined securities portfolio was $77.3 million, a
5.9% decline from $82.1 million at year end 1996. Book value of the investment
component of this portfolio was $38.4 million compared to $39.5 million at
December 31, 1996. The available for sale portion of the securities portfolio at
1997 year end, at estimated fair market value, was $38.9 million compared to
$42.6 million at December 31, 1996.
At December 31, 1996, the combined securities portfolio was $82.1 million, a
13.0% increase from $72.7 million at year end 1995. Book value of the investment
component of the portfolio was $39.5 million compared to $36.4 million at
December 31, 1995. The available for sale portion of the portfolio at 1996 year
end was $42.6 million compared to $36.3 million at 1995 year end.
FASB Pronouncement No. 115 effective January 1, 1994, required EVB to show the
effect of market value changes in the value of securities available for sale.
The market value of this portfolio at 1997 year end was $38.9 million. The
effect of valuing the available for sale portfolio at market net of income
taxes, is reflected as a line in the Shareholders' Equity section of the Balance
Sheet as an unrealized gain of $132 thousand at December 31, 1997, and an
unrealized loss of $101 thousand at December 31, 1996.
EVB follows a policy of not engaging in activities considered to be derivative
in nature such as options, futures, swaps or forward commitments. The
Corporation considers derivatives to be speculative in nature and contrary to
EVB's historical philosophy. EVB does not hold or issue financial instruments
for trading purposes.
EASTERN VIRGINIA BANKSHARES 19
<PAGE>
Investment Securities and Securities Available For Sale
The following table presents the book value and fair value of investment
securities for the years ended December 31, 1997, 1996, and 1995.
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996 December 31, 1995
------------------------- ------------------------- ------------------------
Amortized Fair Amortized Fair Amortized Fair
(Dollars in thousands) Cost Value Cost Value Cost Value
- ----------------------------------- ----------- ----------- ----------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Available for sale
U.S. Treasury securities $ 12,900 $ 12,978 $ 11,632 $ 11,653 $ 8,846 $ 8,984
U.S. government agency securities 16,538 16,584 23,426 23,360 21,500 21,613
States and political subdivisions 1,109 1,126 411 409 204 210
Mortgage-backed securities 7,604 7,662 7,044 6,938 5,175 5,128
Other 562 562 283 283 338 341
-------- -------- -------- -------- ------- --------
Total available-for-sale 38,713 38,912 42,796 42,643 36,063 36,276
======== ======== ======== ======== ======= ========
Held-to-maturity
U.S. government agency securities -- -- 200 199 -- --
States and political subdivisions 37,463 38,438 37,650 38,275 34,793 35,971
Other 899 912 1,636 1,665 1,638 1,699
-------- -------- -------- -------- ------- --------
Total held-to-maturity 38,362 39,350 39,486 40,139 36,431 37,670
-------- -------- -------- -------- ------- --------
Total securities $ 77,075 $ 78,262 $ 82,282 $ 82,782 $72,494 $ 73,946
======== ======== ======== ======== ======= ========
</TABLE>
Maturity Distribution and Yields of Securities
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------
Due in Due after
1 year 1 through
or less 5 years
---------------------- ----------------------
(Dollars in thousands) Amount Yield Amount Yield
- ------------------------------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Securities held for investment
Taxable securities $ 700 6.57% $ 800 7.50%
Tax exempt municipals (1) 2,969 8.40% 13,820 7.66%
-------- --------
Total 3,669 8.06% 14,620 7.65%
Securities available for sale
U.S. Government securities 6,931 5.79% 22,251 6.01%
Other taxable securities -- -- 215 7.91%
-------- --------
Total 6,931 5.79% 22,466 6.03%
-------- ---- -------- ----
Total securities $ 10,600 6.54% $ 37,086 6.68%
======== ==== ======== ====
<CAPTION>
December 31, 1997
-----------------------------------------------------------------
Due after Due after
5 through 10 years and
10 years equity securities Total
--------------------- --------------------- ---------------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield
- ------------------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Securities held for investment
Taxable securities $ 1,833 7.31% $ -- -- $ 3,333 7.20%
Tax exempt municipals (1) 15,304 8.32% 2,936 7.88% 35,029 8.03%
-------- ------- --------
Total 17,137 8.21% 2,936 7.88% 38,362 7.96%
Securities available for sale
U.S. Government securities 5,141 6.36% 2,901 6.55% 37,224 6.05%
Other taxable securities 1,002 7.88% 471 8.92% 1,688 8.18%
-------- ------- --------
Total 6,143 6.61% 3,372 6.88% 38,912 6.15%
-------- ---- ------- ---- -------- ----
Total securities $ 23,280 7.78% $ 6,308 7.34% $ 77,274 7.05%
======== ==== ======= ==== ======== ====
</TABLE>
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.
See Note 3 to the Consolidated Financial Statements as of December 31, 1997,
for an analysis of gross unrealized gains and losses in the securities
portfolio.
20
<PAGE>
Deposits
In recent years EVB has focused on increasing core deposits to reduce the need
for other borrowings to fund growth in earning assets. Core deposits provide a
low cost stable source of funding for the Corporation's asset growth. Interest
rates paid on deposits are carefully managed to provide an attractive market
rate while at the same time not adversely affecting the net interest margin.
Total deposits at December 31, 1997, of $280.9 million reflected an increase of
$11.0 million (4.1%) compared to $269.9 million at 1996 year end.
Non-interest-bearing demand deposits increased $3.7 million (14.6%) to $29.1
million at 1997 year end compared to $25.4 million at December 31, 1996. During
the same period, interest bearing deposits increased a more modest 3.0% to
$251.8 million at December 31, 1997, compared to $244.5 million at 1996 year
end. While these figures are as of as a specific day at year end, it is more
meaningful to review average deposits for the entire year. For 1997, average
total deposits of $275.0 million reflected a 7.0% increase over the 1996 average
total deposits of $256.9 million. All components of deposits showed increases in
1997 demonstrating that the Corporation has not had to rely on higher cost jumbo
certificates of deposit to fund its growth of earning assets.
Total deposits at 1996 year end of $269.9 million reflected a 7.3% increase over
December 31, 1995 deposits of $251.6 million. Average deposits for 1996 were
$256.9 million, an increase of 4.8% compared to 1995 average deposits of $245.1
million. Average non-interest-bearing deposit growth in 1996 was 14.5% while
interest bearing deposits increased 3.9%. The trend of a higher growth rate of
non-interest bearing deposits compared to more costly certificates of deposit
has permitted the Corporation to control the cost of funds and to increase its
net interest margin.
Average Deposits and Rates Paid
<TABLE>
<CAPTION>
For the Year Ended December 31
-----------------------------------------------------------------------------
1997 1996 1995
------------------------ ------------------------ -----------------------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
- ------------------------------- ----------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Non-interest-bearing accounts $ 27,347 $ 25,089 $ 21,919
Interest-bearing accounts:
Interest checking 28,480 2.75% 27,254 2.76% 25,907 3.17%
Money market 29,127 3.28% 27,889 3.27% 29,130 3.72%
Regular savings 61,414 4.08% 57,453 3.94% 53,325 4.24%
Certificates of deposit:
Less than $100,000 114,129 5.37% 106,179 5.39% 102,746 5.34%
$100,000 and over 14,469 5.33% 13,012 5.48% 12,073 5.49%
--------- ---- --------- ---- -------- ----
Total interest-bearing 247,619 4.50% 231,787 4.47% 223,181 4.62%
--------- --------- --------
Total average deposits $ 274,966 $ 256,876 $245,100
========= ========= ========
</TABLE>
Maturities of Certificates of Deposit of $100,000 and Over
<TABLE>
<CAPTION>
December 31, 1997
-------------------------------------------------------------------------
Percent
Within 3-12 1-3 Over 3 of Total
(Dollars in thousands) 3 Months Months Years Years Total Deposits
- ------------------------ ---------- ---------- ---------- -------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
At December 31, 1997 $ 2,855 $ 8,045 $ 5,847 $ 889 $ 17,636 6.28%
At December 31, 1996 3,576 8,692 5,650 -- $ 17,918 6.98%
At December 31, 1995 2,798 6,841 4,494 $ 14,133 5.77%
</TABLE>
EASTERN VIRGINIA BANKSHARES 21
<PAGE>
Capital Resources
Capital resources are managed to maintain a capital structure that provides the
Corporation the ability to support asset growth, absorb potential losses and to
expand EVB's franchise when appropriate. Capital represents original investment
by shareholders along with retained earnings and provides financial resources
over which management can exercise greater control as compared to deposits or
borrowed funds.
Regulatory authorities have adopted guidelines to establish minimum capital
standards. Specifically the guidelines classify assets and off balance sheet
items into four risk-weighted categories. The minimum regulatory total capital
to risk-weighted assets is 8.0% of which at least 4.0% must be Tier 1 capital,
defined as common equity and retained earnings. At December 31, 1997, EVB had a
total capital ratio of 20.56% and a Tier 1 ratio of 19.3%, both far in excess of
regulatory guidelines and the amount needed to support each subsidiary's banking
business.
Capital represents a double-edged sword to management as the financial
opportunities of a high capital base are weighed against the impact of the
return on equity ratio. Both of the subsidiary banks had a capital structure
that far exceeded regulatory guidelines and created significant challenges in
managing the ratio of return on equity. After evaluating a variety of
alternatives to more effectively utilize its strong capital base and to create
additional value for our shareholders, management transferred $15.6 million from
the subsidiary banks to the parent company at year end 1997. After this transfer
the subsidiary banks remain "well capitalized", which is the highest capital
classification under regulatory standards. Management and the Board are
developing a strategy to best utilize this excess capital in the Corporation to
maximize return on shareholders' investment.
The table which follows provides an analysis of the Corporation's capital as of
December 31, 1997, 1996 and 1995. Note 17 in the Consolidated Financial
Statements provides an analysis of the capital position of each of the
subsidiary banks as of year end 1997 and 1996.
Analysis of Capital
<TABLE>
<CAPTION>
December 31
---------------------------------------------
(Dollars in thousands) 1997 1996 1995
- ------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Tier 1 capital:
Common stock $ 10,377 $ 10,374 $ 10,402
Additional paid-in capital 221 206 308
Retained earnings 28,535 24,977 21,543
-------- -------- --------
Total Tier 1 capital 39,133 35,557 32,253
Tier 2 capital:
Allowable portion of
allowance
for loan losses 2,552 2,281 2,510
Total risk-based capital 41,685 37,838 34,763
Risk-weighted assets -- total 204,103 184,724 200,728
Risk-weighted assets -- net 202,786 183,390 199,304
Capital ratios:
Tier 1 risk-based capital
ratio 19.30% 19.59% 16.07%
Total risk-based capital
ratio 20.56% 20.85% 17.44%
Tier 1 capital to average
total assets 12.87% 11.89% 11.30%
</TABLE>
22
<PAGE>
Common Stock Performance and Dividends
Subsequent to the December 31, 1997 effective date of this report, Eastern
Virginia Bankshares, Inc common stock began trading on the NASDAQ Small Cap
Market on January 5, 1998, under the symbol EVBS. Prior to the effective date of
the merger of the banks into EVB, shares of the banks traded in private
transactions. There was no known market in the Corporation's common stock from
the December 29, 1997 effective date until January 5, 1998. The SEC's Office of
the Chief Accountant has advised EVB management that based on the lack of a
market for the Corporation's common stock in 1997, that providing trading
history for the predecessor companies would not be appropriate. On December 31,
1997, there were approximately 1,863 shareholders of record. Dividends were paid
during the second and fourth quarters of 1997 by each of the subsidiary banks at
a rate that would have totaled $0.34 and $0.31 per share for the years 1997 and
1996 respectively had EVB been in existence and paid the same dividends. The
most recent trades at March 13, 1998, were at $20.50.
Liquidity
Liquidity represents an institution's ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds though liability management. Liquid assets
include cash, deposits with other banks, federal funds sold, investments and
loans maturing within one year. EVB's management of liquid assets combined with
the ability to generate liquidity through liability funding provides a liquidity
level which management believes is sufficient to satisfy its depositors'
requirements and to meet its customers' credit needs. At December 31, 1997,
$99.2 million or 32.5% of total earning assets were due to mature or reprice
within the next year.
EVB also maintains additional sources of liquidity through a variety of
borrowing arrangements. Federal funds borrowing arrangements with major regional
banks combined with lines of credit with the Federal Home Loan Bank totaled $20
million at December 31, 1997. There were no outstanding borrowings at 1997 year
end, and the average of outstanding borrowings for the year was less than $100
thousand.
Inflation
In financial institutions, unlike most manufacturing companies, virtually all of
the assets and liabilities are monetary in nature. As a result, interest rates
have a more significant impact on a bank's performance than the effects of
general levels of inflation. Interest rate movement is not necessarily tied to
movements in the same direction or with the same magnitude as the prices of
goods and services, since such prices are affected by inflation to a larger
extent than interest rates.
Forward-Looking Statements
Certain statements in this report may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Although EVB believes that its expectations concerning certain forward-looking
statements are based upon reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results and performance achievements of the Corporation will not differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements.
EASTERN VIRGINIA BANKSHARES 23
<PAGE>
Impact of the Year 2000 Issue
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Corporation's
computer programs that have data-sensitive software may recognize a date using
"00" as the year 1900 rather that the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including among
other things, a temporary inability to process transactions or engage in normal
business activities.
Based on a recent assessment, the Corporation determined that it will be
required to modify or replace some portions of its software so that its computer
systems will properly utilize dates beyond December 31, 1999. The Corporation
presently believes that with modifications to existing software, the Year 2000
issue can be mitigated. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a material
impact on operations of the Corporation.
The Corporation has initiated formal communications with all of its significant
vendors to determine the extent to which EVB is vulnerable to those third
parties' failure to remediate their own Year 2000 Issue. The Corporation's
action plan to update computer systems and critical applications includes plans
that are appropriate to specific situations. Some systems will be upgraded to
new systems (or to new releases of existing systems) which are year 2000
compliant. The Corporation plans to complete the Year 2000 project not later
than December 31, 1998. The cost of the project and the date on which the
Corporation plans to complete the Year 2000 modifications and testing are based
on management's best estimates, which were derived utilizing numerous
assumptions of future events, including third party modification plans and other
factors. However there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those plans.
The project cost is being expensed as incurred and is not anticipated to have a
material impact on earnings.
Accounting Rule Changes
In June 1996, the FASB issued FASB No. 125 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities." This
Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Those
standards are based on consistent application of a financial components approach
that focuses on control of the affected asset or liability that it controls or
surrenders. This Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively.
In October 1996, the FASB issued FASB Statement No. 127 which deferred for one
year paragraphs 9-12 (Accounting for Transfers and Servicing of Financial
Assets) under FASB No. 125 for securities lending, repurchase agreements, dollar
rolls, and other secured transactions. The FASB also agreed to defer for one
year paragraph 15 (Secured Borrowings and Collateral) under FASB No. 125 for all
transactions.
During June 1997, the FASB issued FASB No. 130 "Reporting Comprehensive Income."
This pronouncement established standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. FASB No. 130 is effective
for financial statements beginning after December 31, 1997.
Additionally during June of 1997, the FASB issued FASB No. 131, "Disclosures
about Segments of an Enterprise and Related Information." FASB No. 131
establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement becomes effective for financial statements for periods
beginning after December 31, 1997.
24
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
---------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Assets
Cash and due from banks $ 9,319,359 $ 9,089,675
Interest-bearing deposits, in other banks 99,570 --
Federal funds sold 2,642,000 5,527,000
Securities available for sale at fair value 38,912,154 42,643,042
Securities held to maturity at amortized cost, fair value of $39,349,876
and $40,138,530, respectively 38,361,408 39,486,191
Loans, net 224,113,138 202,699,729
Deferred income taxes 1,242,428 1,321,363
Bank premises and equipment 4,200,373 3,604,012
Accrued interest receivable 2,479,356 2,402,283
Other real estate 85,794 195,704
Federal Home Loan Bank and Federal Reserve stock, at cost 824,150 732,950
Other assets 1,150,121 1,022,078
------------ ------------
Total assets $323,429,851 $308,724,027
============ ============
Liabilities and Shareholders' Equity
Liabilities
Noninterest-bearing demand accounts $ 29,094,646 $ 25,394,787
Savings accounts and interest-bearing deposits 118,110,797 113,558,827
Time deposits 133,676,261 130,949,049
------------ ------------
Total deposits 280,881,704 269,902,663
Accrued interest payable 794,507 746,512
Other liabilities 2,488,724 2,618,312
Commitments and contingent liabilities -- --
------------ ------------
Total liabilities 284,164,935 273,267,487
------------ ------------
Shareholders' Equity
Common stock of $2 par value per share; authorized 50,000,000
shares; issued and outstanding 5,188,576 and 5,187,220,
respectively 10,377,152 10,374,440
Surplus 220,803 205,987
Retained earnings 28,535,343 24,976,854
Net unrealized gain (loss) on securities available for sale, net 131,618 (100,741)
------------ ------------
Total shareholders' equity 39,264,916 35,456,540
------------ ------------
Total liabilities and shareholders' equity $323,429,851 $308,724,027
============ ============
</TABLE>
See Notes to Consolidated Financial Statements.
EASTERN VIRGINIA BANKSHARES 25
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
For the Years Ended December 31
------------------------------------------------
1997 1996 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Interest Income
Loans $19,687,318 $17,940,274 $17,016,479
Interest on investment securities:
Taxable interest income 327,679 293,197 298,878
Tax exempt interest income 1,899,613 1,921,589 1,677,719
Interest on securities available for sale:
Taxable interest income 2,398,437 2,351,633 2,170,320
Dividends 67,519 57,554 51,168
Interest on Federal funds sold 391,978 348,736 454,873
Interest on deposits in other banks 510 -- --
----------- ----------- -----------
Total interest income 24,773,054 22,912,983 21,669,437
----------- ----------- -----------
Interest Expense
Deposits 11,138,095 10,360,045 10,315,222
Short-term borrowings 5,928 -- --
----------- ----------- -----------
Total interest expense 11,144,023 10,360,045 10,315,222
----------- ----------- -----------
Net interest income 13,629,031 12,552,938 11,354,215
Provision for Loan Losses 412,200 437,186 575,473
----------- ----------- -----------
Net interest income after provision for loan losses 13,216,831 12,115,752 10,778,742
----------- ----------- -----------
Other Income
Service charges on deposit accounts 988,406 939,012 901,312
Loss on sale of available for sale securities (27,604) (52,327) (9,127)
Other operating income 800,277 682,390 544,489
----------- ----------- -----------
1,761,079 1,569,075 1,436,674
----------- ----------- -----------
Other Expenses
Salaries and benefits 3,541,517 3,372,107 3,291,883
Net occupancy expense of premises 972,334 880,367 995,671
Other operating expenses 3,191,280 2,678,865 2,485,842
----------- ----------- -----------
7,705,131 6,931,339 6,773,396
----------- ----------- -----------
Income before income taxes 7,272,779 6,753,488 5,442,020
Income Tax Expense 1,964,985 1,709,981 1,316,763
----------- ----------- -----------
Net income $ 5,307,794 $ 5,043,507 $ 4,125,257
=========== =========== ===========
Earnings Per Share, basic and assuming dilution $ 1.02 $ .97 $ .79
=========== =========== ===========
</TABLE>
See Notes to Consolidated Financial Statements.
26
<PAGE>
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
For the Three Years in the Period Ended December 31, 1997
----------------------------------------------------------------------------------
Net Unrealized
Gain (Loss)
on Securities
Common Retained Available
Stock Surplus Earnings for Sale Total
-------------- ------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995 $10,383,139 $ 226,047 $ 18,725,246 $ (895,538) $ 28,438,894
Net income -- -- 4,125,257 -- 4,125,257
Cash dividends declared -- -- (1,307,683) -- (1,307,683)
Shares sold under dividend
reinvestment plan 41,188 175,401 -- -- 216,589
Shares purchased and retired (22,500) (93,284) -- -- (115,784)
Change in net unrealized gain (loss)
on securities available for sale, net
of deferred income taxes of
$533,680 -- -- -- 1,035,968 1,035,968
----------- ---------- ------------ ---------- ------------
Balance, December 31, 1995 10,401,827 308,164 21,542,820 140,430 32,393,241
Net income -- -- 5,043,507 -- 5,043,507
Cash dividends declared -- -- (1,609,473) -- (1,609,473)
Shares sold under dividend
reinvestment plan 30,110 152,169 -- -- 182,279
Shares purchased and retired (57,497) (254,346) -- -- (311,843)
Change in net unrealized gain (loss)
on securities available for sale, net
of deferred income taxes of
$(124,239) -- -- -- (241,171) (241,171)
----------- ---------- ------------ ---------- ------------
Balance, December 31, 1996 10,374,440 205,987 24,976,854 (100,741) 35,456,540
Net income -- -- 5,307,794 -- 5,307,794
Cash dividends declared -- -- (1,740,175) -- (1,740,175)
Shares sold under dividend
reinvestment plan 11,616 62,151 -- -- 73,767
Shares purchased and retired (8,904) (47,335) -- -- (56,239)
Cash paid in lieu of fractional shares -- -- (9,130) -- (9,130)
Change in net unrealized gain (loss)
on securities available for sale, net
of deferred income taxes of
$119,713 -- -- -- 232,359 232,359
----------- ---------- ------------ ---------- ------------
Balance, December 31, 1997 $10,377,152 $ 220,803 $ 28,535,343 $ 131,618 $ 39,264,916
=========== ========== ============ ========== ============
</TABLE>
See Notes to Consolidated Financial Statements.
EASTERN VIRGINIA BANKSHARES 27
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended December 31
------------------------------------------------------
1997 1996 1995
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 5,307,794 $ 5,043,507 $ 4,125,257
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss from equity investment in partnership 18,912 8,915 7,874
Depreciation and amortization 710,939 721,662 686,804
Deferred tax (benefit) provision (40,765) 26,826 (112,174)
Provision for loan losses 412,200 437,186 575,473
Net gain on other real estate (28,273) (24,000) (37,932)
Net gain on sale of bank premises and equipment -- (100) (750)
Losses realized on available for sale securities 27,604 52,327 9,127
Accretion of discounts and amortization of premiums, net (25,738) 44,702 (12,172)
Changes in assets and liabilities:
(Increase) in accrued interest receivable (77,074) (110,254) (272,564)
(Increase) in other assets (189,907) (168,000) (184,194)
Increase in accrued interest payable 47,996 1,672 190,638
Increase (decrease) in other liabilities (129,588) 816,116 (111,252)
------------- ------------- -------------
Net cash provided by operating activities 6,034,100 6,850,559 4,864,135
------------- ------------- -------------
Cash Flows from Investing Activities
Proceeds from sales of securities available for sale 10,775,770 3,024,280 4,758,785
Maturities of securities available for sale 4,300,000 10,828,662 9,233,944
Maturities of securities held to maturity 6,690,050 3,419,292 5,633,265
Proceeds from sale of other real estate 270,128 489,734 244,682
Purchases of investment securities available for sale (10,943,611) (20,830,851) (13,569,694)
Purchases of investment securities held to maturity (5,573,394) (6,497,794) (11,374,904)
Purchases of Federal Home Loan Bank stock (91,200) (10,800) (64,800)
Purchases of other real estate -- -- (358,439)
Net (increase) in loans (21,957,554) (14,115,522) (9,501,047)
Purchases of bank premises and equipment (1,307,300) (202,073) (788,551)
Proceeds from sale of bank premises and equipment -- 100 750
(Increase) in deposits with other banks (99,570) -- --
------------- ------------- -------------
Net cash (used in) investing activities (17,936,681) (23,894,972) (15,786,009)
------------- ------------- -------------
Cash Flows from Financing Activities
Net increase in demand deposit accounts, interest-bearing
demand deposits and savings accounts 8,251,830 8,729,466 4,627,105
Net increase in certificates of deposit 2,727,212 9,514,100 8,110,561
Proceeds from sale of stock 73,767 182,279 216,589
Repurchases and retirement of stock (56,239) (311,843) (115,784)
Dividends paid (1,749,305) (1,609,473) (1,307,683)
------------- ------------- -------------
Net cash provided by financing activities 9,247,265 16,504,529 11,530,788
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents (2,655,316) (539,884) 608,914
Cash and Cash Equivalents
Beginning of year 14,616,675 15,156,559 14,547,645
------------- ------------- -------------
End of year $ 11,961,359 $ 14,616,675 $ 15,156,559
============= ============= =============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 11,096,028 $ 10,358,373 $ 10,124,584
============= ============= =============
Income taxes $ 1,946,176 $ 1,829,247 $ 1,140,078
============= ============= =============
Supplemental Disclosures of Noncash Financing Activities,
transfers from loans to foreclosed real estate $ 131,945 $ 43,000 $ 418,439
============= ============= =============
</TABLE>
See Notes to Consolidated Financial Statements.
28
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1997, 1996 and 1995
Note 1. Summary of Significant Accounting Policies
The accounting and reporting policies of Eastern Virginia Bankshares, Inc. and
Subsidiaries (the "Corporation") conform to generally accepted accounting
principles and general practices within the banking industry. The following is a
description of the more significant of those policies:
(a) Nature of Operations
Eastern Virginia Bankshares, Inc. is a bank holding company that provides full
banking services, including commercial and consumer demand and time deposit
accounts, commercial and consumer loans, Visa and Mastercard revolving credit
accounts, drive-in banking services and automated teller machine transactions
through its wholly-owned subsidiaries, Southside Bank ("SSB") and Bank of
Northumberland, Inc. ("BNI"). The area served by the Corporation is primarily
the counties of Essex, Richmond, Northumberland, Lancaster, King & Queen, King
William, Middlesex, Hanover and Caroline.
(b) Principles of Consolidation
The consolidated statements of Eastern Virginia Bankshares, Inc. and its
wholly-owned subsidiaries, Southside Bank and Bank of Northumberland, Inc.
include the accounts of all companies. All material intercompany balances and
transactions have been eliminated in consolidation. SSB and BNI were merged with
and into the Corporation on December 29, 1997. The mergers were accounted for as
pooling of interest and, accordingly, the amounts in the 1996 and 1995
consolidated financial statements include the accounts of SSB and BNI.
(c) Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles 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.
(d) Cash and Cash Equivalents
The Corporation's definition of cash and cash equivalents as shown in the
Consolidated Statements of Cash Flows includes Federal funds sold.
(e) Securities
The Corporation has classified securities as either held to maturity or
available for sale. The Corporation does not have any securities classified as
trading securities. Securities classified as held to maturity are accounted for
at amortized cost, and require the Corporation to have both the positive intent
and ability to hold those securities to maturity. All other securities are
classified as available for sale and are carried at fair value with unrealized
gains and losses included in shareholders' equity on an after tax basis.
Realized gains or losses on the sale of investments are recognized at the time
of sale using the specific identification method.
(f) Loans
Loans are shown on the consolidated balance sheets net of unearned discounts and
the allowance for loan losses. Interest is computed by methods which result in
level rates of return on principal. Loans are charged off when in the opinion of
management they are deemed to be uncollectible after taking into consideration
such factors as the current financial condition of the customer and the
underlying collateral and guarantees.
The Corporation adopted FASB No. 114, "Accounting by Creditors for Impairment of
a Loan." This Statement has been amended by FASB No. 118, "Accounting by
Creditors for Impairment of a Loan - Income Recognition and Disclosures."
Statement 114, as amended, requires that the impairment of loans that have been
separately identified for evaluation is to be measured based on the present
value of expected future cash flows or, alternatively, the observable market
price of the loans or the fair value of the collateral. However, for those loans
that are collateral dependent (that is, if repayment of those loans is expected
to be provided solely by the underlying collateral) and for which management has
determined foreclosure is probable, the measure of impairment of those loans is
to be based on the fair value of the collateral. Statement 114, as amended, also
requires certain disclosures about investments in impaired loans and the
allowance for credit losses and interest income recognized on loans.
The Corporation considers all consumer installment loans and residential
mortgage loans to be homogeneous loans. These loans are not subject to
impairment under FASB 114. A loan is considered impaired when it is probable
that the Corporation will be unable to collect all principal and interest
amounts according to the contractual terms of the loan agreement. Factors
involved in determining impairment include, but are not limited to, expected
future cash flows, financial condition of the borrower, and the current economic
conditions. A performing loan may be considered impaired, if the factors above
indicate a need for impairment. A loan on nonaccrual status may not be impaired
if in the process of collection or there is an insignificant shortfall in
payment. An insignificant delay of less than 30 days or a shortfall of less than
5% of the required principal and interest payment generally does not indicate an
impairment situation, if in management's judgment the loan will be paid in full.
Loans that meet the regulatory definitions of doubtful or loss generally
EASTERN VIRGINIA BANKSHARES 29
<PAGE>
Notes to Consolidated Financial Statements--Continued
qualify as an impaired loan under FASB 114. Charge-offs for impaired loans occur
when the loan or portion of the loan is determined to be uncollectible, as is
the case for all loans.
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more. Any
unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other nonaccrual loans is recognized only to the extent of interest payments
received.
(g) Allowance for Loan Losses
An allowance is maintained for losses on loans. Loan losses, net of recoveries
on loans previously charged off, are charged to the allowance. The allowance for
loan losses is based upon management's periodic evaluation of the portfolio with
consideration given to the overall loss experience, delinquency data, financial
condition of the borrowers, and such other factors that, in management's
judgment, warrant recognition in providing an adequate allowance.
(h) Foreclosed Properties
Property acquired through foreclosure is stated at the lower of the recorded
cost or the estimated fair value of the property less estimated costs to sell.
At the time of foreclosure, any excess of cost over estimated fair value is
charged to the allowance for loan losses. Subsequent declines in the fair value
are recorded in a valuation account and are reflected in operations in the year
in which the decline occurred.
(i) Bank Premises and Equipment
Bank premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is charged to expense over the estimated useful lives of the assets
and is computed using the straight-line or declining-balance method for
financial reporting purposes. Depreciation for tax purposes is computed based
upon accelerated methods. The costs of major renewals or improvements are
capitalized while the costs of ordinary maintenance and repairs are charged to
expense as incurred.
(j) Disclosure Concerning the Fair Value of Financial Instruments
Disclosure of the estimated fair value of financial instruments is made in
accordance with the requirements of SFAS No. 107, "Disclosures About Fair Value
of Financial Instruments." The estimated fair value amounts have been determined
by the Corporation using available market information and appropriate valuation
methodologies. Loan commitments are conditional and subject to market pricing
and therefore do not reflect a gain or loss of market value. 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. However, considerable
judgment is required to interpret market data to develop the estimates of fair
value. Accordingly, the estimates presented herein are not necessarily
indicative of the amounts the Corporation could realize in a current market
exchange. The use of different market assumptions and/or estimation
methodologies may have a material effect on the estimated fair value amounts.
(k) Cash and Short-Term Investments
The nature of these instruments and their relatively short maturities provides
for the reporting of fair value equal to the historical cost.
(l) Investment Securities
The fair value of investment securities are based on quoted market prices.
(m) Loans
The estimate of fair value of the loan portfolio is estimated based on present
values using applicable rates currently offered on similar products.
(n) Deposits
The fair value of all demand accounts is the amount payable at the report date.
For all other deposits, the fair value is determined using the discounted cash
flow method. The discount rate was equal to the rate currently offered on
similar products.
(o) Income Taxes
The Corporation uses an asset and liability approach to financial accounting and
reporting for income taxes. Deferred income tax assets and liabilities are
computed annually for differences between the financial statement and tax bases
of assets and liabilities that will result in taxable or deductible amounts in
the future based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income. Income tax expense
is the tax payable or refunded for the period plus or minus the change during
the period in deferred tax assets and liabilities.
(p) Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No. 128,
"Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share.
30
<PAGE>
Weighted average shares were 5,188,071, 5,177,428 and 5,192,288 for the years
ended 1997, 1996 and 1995, respectively, adjusted for the share exchange on
December 29, 1997. The Corporation had no potential common stock as of December
31, 1997, 1996 and 1995.
(q) Pension Costs
Pension costs are charged to salaries and employee benefits as accrued.
(r) Advertising
The Corporation practices the policy of charging advertising costs to expense as
incurred.
(s) Reclassifications
Certain reclassifications have been made to prior period balances to conform to
the current year presentation.
Note 2. Business Combination
On December 29, 1997, the Reorganization was completed whereby each outstanding
share of SSB Common Stock was exchanged for 2.5984 shares of the Corporation
Common Stock and each outstanding share of BNI Common Stock was exchanged for
1.0 share of the Corporation Common Stock. The Corporation serves as the parent
bank holding company for both SSB and BNI, both of which continues to carry on
their respective banking business in substantially the same manner as before the
Reorganization and with no change in their respective names or management. A
total of 5,188,576 shares of the Corporation's Common Stock was issued in the
transaction which was accounted for as a pooling of interests and, accordingly,
all prior consolidated financial statements have been restated. Total assets and
results of operations of the separate companies for 1997, 1996 and 1995 are
summarized as follows:
Total Total Net
Assets Income Income
---------------- --------------- --------------
1997 SSB $ 187,301,989 $ 16,052,845 $ 2,794,623
1997 BNI 136,127,862 10,481,288 2,513,171
------------- ------------ -----------
Consolidated $ 323,429,851 $ 26,534,133 $ 5,307,794
============= ============ ===========
1996 SSB $ 177,182,353 $ 14,557,637 $ 2,548,543
1996 BNI 131,541,674 9,924,421 2,494,964
------------- ------------ -----------
Consolidated $ 308,724,027 $ 24,482,058 $ 5,043,507
============= ============ ===========
1995 SSB $ 164,321,242 $ 13,695,208 $ 2,139,133
1995 BNI 122,282,163 9,410,903 1,986,124
------------- ------------ -----------
Consolidated $ 286,603,405 $ 23,106,111 $ 4,125,257
============= ============ ===========
Note 3. Securities
The following is a comparison of amortized cost and estimated fair values of
securities at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
December 31, 1997
--------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Government obligations $ 12,899,856 $ 84,261 $ (5,419) $ 12,978,698
Obligations of U.S. Government agencies 24,142,611 181,711 (78,381) 24,245,941
Obligations of state/political subdivisions 1,108,665 17,848 (596) 1,125,917
Other securities 561,598 -- -- 561,598
------------ ----------- ----------- ------------
38,712,730 283,820 (84,396) 38,912,154
------------ ----------- ----------- ------------
Held to Maturity:
Obligations of state/political subdivisions 37,462,871 1,073,246 (98,291) 38,437,826
Corporate bonds 898,537 13,513 -- 912,050
------------ ----------- ----------- ------------
38,361,408 1,086,759 (98,291) 39,349,876
------------ ----------- ----------- ------------
Total $ 77,074,138 $ 1,370,579 $ (182,687) $ 78,262,030
============ =========== =========== ============
</TABLE>
continued on page 32
EASTERN VIRGINIA BANKSHARES 31
<PAGE>
Notes to Consolidated Financial Statements--Continued
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------- ------------ -------------- ---------------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Government obligations $ 11,632,463 $ 42,278 $ (22,210) $ 11,652,531
Obligations of U.S. Government agencies 30,469,455 115,884 (287,187) 30,298,152
Obligations of state/political subdivisions 410,549 1,702 (3,104) 409,147
Other securities 283,212 -- -- 283,212
------------ --------- ----------- ------------
42,795,679 159,864 (312,501) 42,643,042
------------ --------- ----------- ------------
Held to Maturity:
Obligations of U.S. Government agencies 200,000 -- (1,125) 198,875
Obligations of state/political subdivision 37,650,058 775,047 (150,271) 38,274,834
Corporate bonds 1,636,133 28,688 -- 1,664,821
------------ --------- ----------- ------------
39,486,191 803,735 (151,396) 40,138,530
------------ --------- ----------- ------------
Total $ 82,281,870 $ 963,599 $ (463,897) $ 82,781,572
============ ========= =========== ============
</TABLE>
The following is a comparison of amortized cost and estimated fair values of the
Corporation's securities by contractual maturity at December 31, 1997:
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
------------- -------------
<S> <C>
Available for Sale:
One year or less $ 6,945,631 $ 6,930,671
1-5 years 20,693,352 20,792,998
5-10 years 2,808,542 2,858,120
After 10 years 661,598 667,892
Mortgage-backed securities 7,603,607 7,662,473
----------- -----------
38,712,730 38,912,154
----------- -----------
Held to Maturity:
One year or less 3,669,415 3,689,625
1-5 years 14,618,042 14,893,224
5-10 years 17,137,708 17,777,869
After 10 years 2,936,243 2,989,158
----------- -----------
38,361,408 39,349,876
----------- -----------
Total $77,074,138 $78,262,030
=========== ===========
</TABLE>
Proceeds from sales of securities available for sale were $10,775,770 for the
year ended December 31, 1997. Gross losses of $27,604 were realized on those
sales. Proceeds from sales of securities available for sale were $3,024,280 for
the year ended December 31, 1996. Gross gains of $8,193 and gross losses of
$60,510 were realized on those sales. The book value of securities pledged to
secure public deposits and other purposes amounts to $4,326,260 and $5,945,146
at December 31, 1997 and 1996, respectively.
32
<PAGE>
Note 4. Loans
The following is a comparison of loans by type which were outstanding at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
(Thousands) 1997 1996
- -------------------------------- ----------- -----------
<S> <C>
Real estate -- construction $ 6,430 $ 3,808
Real estate -- mortgage 118,639 109,015
Commercial real estate 27,324 25,330
Commercial, industrial and
agricultural loans 32,901 29,195
Loans to individuals for
household, family and other
consumer expenditures 45,723 41,887
All other loans 294 496
-------- --------
Total gross loans 231,311 209,731
Less unearned income (2,492) (2,919)
Less deferred loan fee (838) (469)
Less allowance for loan losses (3,868) (3,643)
-------- --------
Total net loans $224,113 $202,700
======== ========
</TABLE>
Note 5. Allowance for Loan Losses
The following is a summary of the activity in the allowance for loan losses:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Balance at beginning of year $3,642,753 $3,814,699 $3,599,260
Provisions charged against income 412,200 437,186 575,473
Recoveries of loans charged off 458,604 220,199 131,343
Loans charged off (645,124) (829,331) (491,377)
---------- ---------- ----------
Balance at end of year $3,868,433 $3,642,753 $3,814,699
========== ========== ==========
</TABLE>
Information about impaired loans as of and for the years ended December 31,
1997 and 1996 is as follows:
1997 1996
------------- -------------
Impaired loans $1,684,877 $1,538,854
Allowance provided for impaired loans,
included in the allowance for loan losses -- 21,228
Average balance in impaired loans 1,718,165 1,425,194
Interest income recognized 2,440 --
Nonaccrual loans excluded from impaired loan disclosure under FASB 114 amounted
to $1,337,522 and $2,332,134 at December 31, 1997 and 1996. If interest on these
loans had been accrued such income would have approximated $97,688 and $290,695,
respectively.
EASTERN VIRGINIA BANKSHARES 33
<PAGE>
Notes to Consolidated Financial Statements--Continued
Note 6. Related Party Transactions
Loans to directors and officers totaled $6,180,622 and $6,420,693 at December
31, 1997 and 1996, respectively. New advances to directors and officers totaled
$3,554,659 and repayments totaled $3,794,730 in the year ended December 31,
1997.
Note 7. Bank Premises and Equipment
The detail of bank premises and equipment is as follows:
1997 1996
------------- ------------
Cost:
Land $1,110,174 $ 970,174
Buildings 4,002,265 3,453,701
Furniture, fixtures and equipment 4,384,858 3,766,121
---------- ----------
9,497,297 8,189,996
Less accumulated depreciation 5,296,924 4,585,984
---------- ----------
Book value $4,200,373 $3,604,012
========== ==========
The depreciation charged to expense for the years ended December 31, 1997, 1996
and 1995, amounted to $710,939, $601,856 and $655,556, respectively.
- --------------------------------------------------------------------------------
Note 8. Deposits
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000, was approximately $17,635,887 and $17,917,840 in 1997 and 1996,
respectively.
At December 31, 1997, the scheduled maturities of certificates of deposit were
as follows:
Within three months $ 29,497,487
Three to twelve months 64,312,964
One to five years 39,749,928
Over five years 115,882
------------
Total $133,676,261
============
Note 9. Commitments and Contingent Liabilities
In the normal course of business, there are outstanding various commitments and
contingent liabilities, which are not reflected in the accompanying financial
statements. The Corporation does not anticipate any material loss as a result of
these transactions.
See Note 15 with respect to financial instruments with off-balance-sheet risk.
To comply with Federal Reserve Regulations, the Corporation's subsidiary banks
are required to maintain certain average reserve balances. For the final weekly
reporting period in the years ended December 31, 1997 and 1996, the aggregate
amounts of daily average required balances were approximately $520,000 and
$626,000.
34
<PAGE>
Note 10. Income Taxes
Income taxes applicable to net income for the years ended December 31, 1997,
1996 and 1995, were as follows:
1997 1996 1995
------------- ------------- -------------
Currently payable $2,005,750 $1,683,155 $1,428,937
Deferred tax (benefit) (40,765) 26,826 (112,174)
---------- ---------- ----------
$1,964,985 $1,709,981 $1,316,763
========== ========== ==========
The following is a reconciliation of the expected tax expense with the reported
expense for the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C>
Expected tax expense at statutory rate $2,473,952 $2,296,185 $1,850,287
Increase (decrease) in taxes resulting from:
Tax-exempt interest (581,277) (585,052) (517,971)
Other (51,567) (1,152) (15,553)
Merger expenses 123,877 -- --
---------- ---------- ----------
$1,964,985 $1,709,981 $1,316,763
========== ========== ==========
</TABLE>
The components of the deferred income tax asset are as follows:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Deferred tax assets:
Depreciation and amortization $ 140,737 $ 79,230
Deferred loan fees 60,994 86,240
Allowance for loan losses 1,100,810 1,024,077
Interest on nonaccrual loans 72,260 104,227
Other real estate owned -- 42,500
Pension liability 59,941 40,916
Other 41,584 66,296
Net unrealized loss on available for sale securities -- 51,896
---------- ----------
1,476,326 1,495,382
---------- ----------
Deferred tax liabilities:
Net unrealized gain on available for sale securities 67,817 --
Deferred loan costs 158,193 166,131
FHLB dividend 7,888 7,888
---------- ----------
233,898 174,019
---------- ----------
Net deferred tax asset $1,242,428 $1,321,363
========== ==========
</TABLE>
EASTERN VIRGINIA BANKSHARES 35
<PAGE>
Notes to Consolidated Financial Statements--Continued
Note 11. Employee Benefit Plans
Pension Plan
The Banks have defined benefit pension plans covering substantially all of the
employees. Benefits are based on years of service and the employee's
compensation during the last five years of employment. The Bank's funding policy
is to contribute annually the maximum amount that can be deducted for federal
income tax purposes. Contributions are intended to provide not only for benefits
attributable to service to date but also for those expected to be earned in the
future.
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Net pension cost included the following components:
Service cost - benefits earned during the period $ 194,090 $ 172,497 $ 166,755
Interest cost on projected benefit obligations 204,861 191,124 184,232
Actual return on plan assets (income) (736,906) (337,023) (451,383)
Net amortization and deferral 487,294 103,080 282,809
---------- ---------- ----------
Net periodic pension cost $ 149,339 $ 129,678 $ 182,413
========== ========== ==========
</TABLE>
The following table sets forth the plan's funded status and amounts recognized
in the Corporation's financial statements at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---------------- ----------------
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation $ (2,086,157) $ (1,707,463)
============ ============
Accumulated benefit obligations $ (2,133,300) $ (1,744,709)
============ ============
Projected benefit obligation for service rendered to date $ (3,458,415) $ (2,754,328)
Plan assets at fair value 3,700,705 2,837,030
------------ ------------
Projected benefit obligation under plan assets 242,290 82,702
Unrecognized net gain from past experience different from that
assumed and effects of changes in assumptions 40,556 44,350
Unrecognized prior service cost 178,811 192,955
Unrecognized net (gain) (688,435) (571,722)
------------ ------------
Accrued pension cost $ (226,778) $ (251,715)
============ ============
</TABLE>
The weighted-average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefits
obligation were 7.5% and 5%, respectively for the year ended December 31, 1997.
The weighted-average discount rate and rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefits
obligation were 7.5% and 6%, respectively for the year ended December 31, 1996.
The expected long-term rate of return on assets was 9.0% for both years.
401(k) Plan
SSB has a 401(k) defined contribution plan applicable to all eligible employees.
Contributions to the Plan are made in accordance with proposals set forth and
approved by the SSB Board of Directors. Beginning with the year ended December
31, 1997, employees may also elect to contribute to the Plan an amount not to
exceed 4% of salary, in addition to the contribution made by the Bank.
Contributions to this Plan by the Bank of $71,800, $110,000 and $110,000 were
included in expenses for the years ended December 31, 1997, 1996 and 1995,
respectively.
BNI has a 401(k) defined contribution plan applicable to all eligible employees.
Contributions to the Plan are at the employees' election; however, the BNI does
not contribute to the Plan.
36
<PAGE>
Note 12. Other Expenses
For the years ended December 31, 1997, 1996 and 1995, other expenses included
the following:
<TABLE>
<CAPTION>
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Data processing $ 261,080 $ 276,015 $ 283,859
Equipment expense 288,851 271,480 262,195
Printing supplies and postage 505,620 447,674 403,604
Taxes other than income 302,132 276,212 285,010
FDIC assessment 32,739 4,000 276,148
Merger costs 364,285 -- --
Other (includes no items in excess of 1% of total revenue) 1,436,573 1,403,484 975,026
---------- ---------- ----------
$3,191,280 $2,678,865 $2,485,842
========== ========== ==========
</TABLE>
Note 13. Restrictions on Transfers to Parent
Transfers of funds from banking subsidiaries to the Parent Corporation in the
form of loans, advances and cash dividends, are restricted by federal and state
regulatory authorities. As of December 31, 1997, the aggregate amount of
unrestricted funds which could be transferred from the Corporation's
subsidiaries to the Parent Corporation, without regulatory approval, totaled
$2,663,000 or 6.78% of the consolidated net assets.
Note 14. Federal Home Loan Bank Advances and Available Lines of Credit
The Corporation has available a $20,000,000 line of credit with the Federal Home
Loan Bank of Atlanta. Borrowings are secured by a blanket lien on the loan
portfolio of SSB. There were no outstanding borrowings as of December 31, 1997.
The Corporation has unused lines of credit totaling $14,000,000 with
nonaffiliated banks as of December 31, 1997.
Note 15. Financial Instruments with Off-Balance-Sheet Risk
The Corporation is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers and
to reduce its own exposure to fluctuations in interest rates. The financial
instruments include commitments to extend credit and standby letters of credit.
These instruments involve elements of credit and interest rate risk in excess of
the amount recognized in the consolidated balance sheets. The contract amounts
of these instruments reflect the extent of involvement the Corporation has in
particular classes of financial instruments.
The Corporation's exposure to credit loss in the event of nonperformance by the
other party to the financial instruments for commitments to extend credit and
standby letters of credit is represented by the contractual amount of these
instruments. The Corporation uses the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
Unless noted otherwise, the Corporation does not require collateral or other
security to support financial instruments with credit risk. A summary of the
contract or notional amount of the Corporation's exposure to off-balance-sheet
risk as of December 31, 1997 and 1996, is as follows:
(Thousands) 1997 1996
- ------------------------------------- ---------- ----------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $18,963 $15,704
Standby letters of credit $ 865 $ 1,228
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without being
completely drawn upon, the total commitment amounts do not necessarily represent
future cash requirements. The Corporation evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
it is deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral held varies but
may include accounts receivable, inventory, property and equipment, and
income-producing properties.
continued on page 38
EASTERN VIRGINIA BANKSHARES 37
<PAGE>
Notes to Consolidated Financial Statements--Continued
Standby letters of credit are conditional commitments issued by the Corporation
and Subsidiaries to guarantee the performance of a customer to a third party.
Those guarantees are primarily issued to support public and private borrowing
arrangements, including commercial paper, bond financing, and similar
transactions. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
Note 16. Credit Risk
As of December 31, 1997, the Corporation had $3,420,274 in deposits in financial
institutions in excess of amounts insured by the Federal Deposit Insurance
Corporation (FDIC).
Note 17. Fair Value of Financial Instruments
The estimated fair values of the Corporation's financial instruments at:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------------ -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
(Thousands) Amount Value Amount Value
- ---------------------------------- ---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $12,061 $12,061 $14,617 $14,617
Securities - available for sale 38,912 38,912 42,643 42,643
Securities - held to maturity 38,361 39,350 39,486 40,139
FHLB and FRB stock 824 824 733 733
Loans 227,982 227,331 206,343 202,525
Less allowance for loan losses 3,868 3,643
Financial liabilities:
Noninterest-bearing deposits 29,095 29,095 25,395 25,395
Interest-bearing deposits 251,787 269,000 244,508 243,720
</TABLE>
Note 18. Regulatory Requirements
The Corporation is 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 Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
table below) 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 December 31, 1997, that the
Corporation meets all capital adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal Deposit
Insurance Corporation and the Federal Reserve Bank categorized the Corporation
as well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, the Corporation must maintain minimum
total risk-based. Tier 1 risk-based, and Tier 1 leverage ratios as set forth in
the table. There are no conditions or events since that notification that
management believes have changed the institution's category.
38
<PAGE>
The Corporation's actual capital amounts and ratios are also presented in the
table.
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
------------------------ ------------------------- --------------------------
(Amounts in Thousands) Amount Ratio Amount Ratio Amount Ratio
- ------------------------- ---------- ----------- ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
- -------------------------
Total Capital (to Risk
Weighted Assets)
Consolidated $41,685 20.56% >$16,223 >8.00% N/A
SSB $12,775 10.11% >$10,112 >8.00% >$12,639 >10.00%
BNI $13,273 18.11% >$5,863 >8.00% >$7,329 >10.00%
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $39,133 19.30% >$8,112 >4.00% N/A
SSB $11,182 8.85% >$5,056 >4.00% >$7,584 >6.00%
BNI $12,357 16.86% >$2,932 >4.00% >$4,397 >6.00%
Tier 1 Capital (to
Average Assets)
Consolidated $39,133 12.87% >$12,953 >4.00% N/A
SSB $11,182 6.85% >$7,460 >4.00% >$9,325 >5.00%
BNI $12,357 9.28% >$5,325 >4.00% >$6,656 >5.00%
As of December 31, 1996:
- -------------------------
Total Capital (to Risk
Weighted Assets)
Consolidated $37,838 20.85% >$14,519 >8.00% N/A
SSB $18,224 16.08% >$9,068 >8.00% >$11,336 >10.00%
BNI $19,614 28.79% >$5,451 >8.00% >$6,813 >10.00%
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $35,557 19.59% >$7,259 >4.00% N/A
SSB $16,795 14.81% >$4,534 >4.00% >$6,802 >6.00%
BNI $18,762 27.54% >$2,725 >4.00% >$4,088 >6.00%
Tier 1 Capital (to
Average Assets)
Consolidated $35,557 11.89% >$11,963 >4.00% N/A
SSB $16,795 9.70% >$6,924 >4.00% >$8,655 >5.00%
BNI $18,762 14.89% >$5,039 >4.00% >$6,299 >5.00%
</TABLE>
EASTERN VIRGINIA BANKSHARES 39
<PAGE>
Notes to Consolidated Financial Statements--Continued
Note 19. Condensed Financial Information -- Parent Company Only
EASTERN VIRGINIA BANKSHARES, INC.
(Parent Corporation Only)
Balance Sheet
December 31, 1997
Assets
Cash on deposit with subsidiary banks $15,598,521
Investment in subsidiaries 23,666,395
-----------
Total assets $39,264,916
===========
Shareholders' Equity
Common stock $10,377,152
Surplus 220,803
Retained earnings 28,535,343
Unrealized gain on securities
available for sale, net 131,618
-----------
Total shareholders' equity $39,264,916
===========
Statement of Income
For the Year Ended December 31, 1997
Revenue, dividends from subsidiaries $ 15,607,651
Distributions in excess of earnings of
subsidiaries (10,299,857)
-------------
Net income $ 5,307,794
=============
Statement of Cash Flows
For the Year Ended December 31, 1997
Cash Flows from Operating Activities
Net income $ 5,307,794
Adjustments to reconcile net income to
net cash provided by operating
activities, distributions in excess of
earnings of subsidiaries 10,299,857
-----------
Net cash provided by operating
activities 15,607,651
Cash Flows from Financing Activities, cash
paid in lieu of fractional shares (9,130)
-----------
Increase in cash and cash equivalents 15,598,521
Cash and Cash Equivalents, beginning of
year --
-----------
Cash and Cash Equivalents, end of year $15,598,521
===========
40
<PAGE>
[YOUNT, HYDE & BARBOUR logo]
Independent Auditor's Report
The Shareholders and Board of Directors
Eastern Virginia Bankshares, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Eastern Virginia
Bankshares, Inc. and Subsidiaries as of December 31, 1997, and the related
consolidated statements of income, retained earnings, and cash flows for the
year ended December 31, 1997. These financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audit. We did not audit the financial
statements of the Bank of Northumberland, Inc., a consolidated subsidiary, which
statements reflect total assets and revenue constituting 42.1% and 39.5%,
respectively in 1997, and 42.6% and 40.5%, respectively in 1996, and 40.7% of
revenue in 1995, of the related consolidated totals. Those statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for the Bank of
Northumberland, Inc., is based solely on the report of the other auditors. In
addition, the financial statements of Southside Bank for the two years ended
December 31, 1996 were audited by other auditors whose report dated January 13,
1997, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audit and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Eastern Virginia Bankshares, Inc.
and Subsidiaries as of December 31, 1997, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 19, 1998
- --------------------------------------------------------------------------------
[GOODMAN, & COMPANY, L.L.P. logo]
Independent Auditor's Report
The Shareholders and Board of Directors
Bank of Northumberland, Inc.
We have audited the balance sheets of Bank of Northumberland, Inc. (the "Bank")
as of December 31, 1997 and 1996, and the related statements of income, changes
in shareholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Bank's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion the financial statements referred to above present fairly, in all
material respects, the financial position of Bank of Northumberland, Inc. as of
December 31, 1997 and 1996, and the results of its operations and its cash flows
for each of the three years in the period ended December 31, 1997, in conformity
with generally accepted accounting principles.
/s/ Goodman & Company, L.L.P.
Richmond, Virginia
January 9, 1998
EASTERN VIRGINIA BANKSHARES 41
<PAGE>
Directors
- ---------
Eastern Virginia Bankshares
Robert L. Covington
Chairman of the Board
F. L. Garrett, III
Vice Chairman
Thomas M. Boyd, Jr.
President and Chief Executive Officer
Lewis R. Reynolds
Executive Vice President
L. Edelyn Dawson, Jr.
Secretary
Eric A. Johnson
General Manager,
Mason Realty
William L. Lewis
Attorney,
Lewis & Ware, P.C.
W. Rand Cook
Attorney,
McCaul, Martin, Evans & Cook, P.C.
F. Warren Haynie, Jr.
Attorney,
F. Warren Haymie, Jr., P.C.
Bank of Northumberland
- ----------------------
Robert L. Covington
Chairman of the Board of the Bank
S. Lake Cowart, Sr.
President,
Cowart Seafood, Inc.,
Lake Packing Company, Inc.,
and Lake Farms, Inc.
L. Edelyn Dawson, Jr.
Senior Vice President of the Bank
F. Warren Haynie, Jr.
Attorney,
F. Warren Haynie, Jr., P.C.
Lewis R. Reynolds
President and Chief Executive Officer
Charles R. Rice
Retired Petroleum Products Distributor
William E. Sanford, Jr.
Real Estate Developer and Retired Farmer
Howard R. Straughan, Jr.
Retired Banker
W. Leslie Kilduff
Retired Petroleum Products Distributor
Southside Bank
- --------------
E. Gary Ball
Vice President,
Ball Lumber Company
T. M. Boyd, Jr.
President and CEO,
Southside Bank
W. Rand Cook
Attorney,
McCaul, Martin, Evans & Cook, P.C.
W. Gerald Cox
President,
Twin Rivers Realty, Inc.
F. L. Garrett, III
Oysterman and Realtor
Eric A. Johnson
General Manager,
Mason Realty
William L. Lewis
Attorney,
Lewis & Ware, P.C.
William W. Lowery
Part Owner,
Lowery's Restaurant
Lawrence R. Moter, M. D.
Physician
J. Thomas Newman
Retired Sr. Vice President,
Southside Bank
Charles R. Revere
President,
Revere Gas & Appliance
Leslie E. Taylor
President,
Leslie E. Taylor, C.P.A., P.C.
Emmett Upshaw
Clerk, Circuit Court
King William County
42
<PAGE>
Officers
Eastern Virginia Bankshares
- ----------------------------
Robert L. Covington
Chairman of the Board
Thomas M. Boyd, Jr.
President and Chief Executive Officer
Lewis R. Reynolds
Executive Vice President
L. Edelyn Dawson, Jr.
Secretary
Ned Stephenson
Chief Financial Officer
Bank of Northumberland
- ----------------------
Robert L. Covington
Chairman of the Board
Lewis R. Reynolds
President and Chief Executive Officer
L. Edelyn Dawson, Jr.
Senior Vice President
W. Leslie Kilduff
Vice President
Charles R. Thrift, Jr.
Vice President
Dorothy C. Reynolds
Cashier & Assistant Secretary
Lisa K. Baughan
Assistant Vice President
Sylvia O. Bartlett
Assistant Vice President
Rebekah H. Haynie
Assistant Cashier
Joyce W. Hall
Assistant Cashier
Southside Bank
- --------------
Patricia H. Barrett
Training and Human Resources Officer
Tappahannock
T. M. Boyd, Jr.
President and CEO
Eileen T. Brooks
Assistant Cashier
Tappahannock
Patsy C. Clow
Branch Manager
Bowling Green
Carolyn H. Elliott
Assistant Operations Officer
Tappahannock
Dennis W. Elmore
Vice President
Branch Operations
Tappahannock
F. L. Garrett, III
Chairman
Patricia H. Gallagher
Administrative Officer
Tappahannock
Gertrude C. Hand
Teller Coordination Officer
Tappahannock
Virginia S. Hogge
Assistant Branch Manager
Assistant Cashier
Urbanna
Betsy G. Hudgins
Assistant Branch Manager
Assistant Cashier
Hartfield
C. Tony Hudson
Vice President/Sr. Loan Officer
Branch Administrator
Tappahannock
Edwin P. Jones
Assistant Vice President
Branch Manager
Aylett
Celita S. Lane
Assistant Branch Manager
Hanover
Larry L. Lucas
Assistant Vice President
Branch Manager
Hartfield
Thomas J. McKittrick, III
Assistant Vice President
Branch Manager
Hanover
Betty R. Miller
Assistant Vice President
Branch Manager
Urbanna
John L. Muller
Vice President/Manager
Tappahannock Region
Marketing Direcctor
Tappahannock
William E. Saunders, Jr.
Vice President Operations
Tappahannock
Barbara C. Scott
Assistant Cashier
Tappahannock
Sheilah E. Seal
Assistant Branch Manager
Aylett
Mae W. Staton
Branch Manager
Essex Square
Ned Stephenson
Vice President/Cashier
Chief Financial Officer
Tappahannock
Betty M. Vaughan
Assistant Vice President
Loan Officer
Tappahannock
Cheryl F. Wilson
Assistant Branch Manager
Essex Square
EASTERN VIRGINIA BANKSHARES 43
[MAP OF BANK LOCATIONS]
O Southside Bank
--------------
TAPPAHANNOCK
Main Office
307 Church Lane
P. O. Box 105
Tappahannock, VA 22560
(804) 443-4333
TAPPAHANNOCK
Essex Square Office
Essex Square Shopping Center
P. O. Box 2128
Tappahannock, VA 22560
(804) 443-9381
AYLETT
8270 Richmond/Tappahannock Hwy.
P. O. Box 123
Aylett, VA 23009
(804) 769-7677
BOWLING GREEN
202 N. Main Street
P. O. Box 1009
Bowling Green, VA 22427
(804) 633-5075
DELTAVILLE
U. S. Routes 33 & 1101
P. O. Box 188
Deltaville, VA 23043
(804) 776-0777
HARTFIELD
U. S. Routes 3 & 33
P. O. Box 250
Hartfield, VA 23071
(804) 776-7677
HANOVER
4241 Mechanicsville Turnpike
P. O. Box 397
Mechanicsville, VA 23111
(804) 779-3232
URBANNA
291 Virginia Street
P. O. Box 817
Urbanna, VA 23175
(804) 758-3096
[] Bank of
Northumberland
BURGESS
14953 Northumberland Hwy.
P. O. Box 81
Burgess, VA 22432
(804) 453-7003
CALLAO
110 Northumberland Hwy.
P. O. Box 1040
Callao, VA 22435
(804) 529-6158
HEATHSVILLE
Route 360
Box 9
Heathsville, VA 22473
(804) 580-3621
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 9,319
<INT-BEARING-DEPOSITS> 251,787
<FED-FUNDS-SOLD> 2,642
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 38,912
<INVESTMENTS-CARRYING> 38,361
<INVESTMENTS-MARKET> 39,350
<LOANS> 227,981
<ALLOWANCE> 3,868
<TOTAL-ASSETS> 323,430
<DEPOSITS> 280,882
<SHORT-TERM> 0
<LIABILITIES-OTHER> 3,283
<LONG-TERM> 0
0
0
<COMMON> 10,377
<OTHER-SE> 28,888
<TOTAL-LIABILITIES-AND-EQUITY> 323,430
<INTEREST-LOAN> 19,688
<INTEREST-INVEST> 4,693
<INTEREST-OTHER> 392
<INTEREST-TOTAL> 24,773
<INTEREST-DEPOSIT> 11,138
<INTEREST-EXPENSE> 11,144
<INTEREST-INCOME-NET> 13,629
<LOAN-LOSSES> 412
<SECURITIES-GAINS> 28
<EXPENSE-OTHER> 7,705
<INCOME-PRETAX> 7,273
<INCOME-PRE-EXTRAORDINARY> 5,308
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,308
<EPS-PRIMARY> 1.02
<EPS-DILUTED> 1.02
<YIELD-ACTUAL> 4.50
<LOANS-NON> 3,022
<LOANS-PAST> 927
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,800
<ALLOWANCE-OPEN> 3,643
<CHARGE-OFFS> 645
<RECOVERIES> 458
<ALLOWANCE-CLOSE> 3,868
<ALLOWANCE-DOMESTIC> 3,868
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
