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, 1998
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 12, 1999 was approximately $92,463,012.
The number of shares of the registrant's Common Stock outstanding as of March
12, 1999 was 5,136,834.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's 1998 Annual Report to Shareholders are incorporated by
reference into Parts I, II and IV.
Portions of the definitive Proxy Statement dated April 27,1999 to be delivered
to shareholders in connection with the Annual Meeting of Shareholders to be held
May 20,1999 are incorporated by reference into Part III.
<PAGE>
EASTERN VIRGINIA BANKSHARES, INC.
FORM 10-K
For the Year Ended December 31, 1998
INDEX
Part I
Item 1. Business 2
Item 2. Properties 2
Item 3. Legal Proceedings 2
Item 4. Submission of Matters to a Vote of Security Holders 3
Part II
Item 5. Market for Registrants Common Stock and Related
Stockholder Matters 3
Item 6. Selected Financial Data 3
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 3
Item 7a. Quantitative and Qualitative Disclosures
About Market Risk 3
Item 8. Financial Statements and Supplementary Data 3
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosures 3
Part III
Item 10. Directors and Executive Officers of the Registrant 4
Item 11. Executive Compensation 4
Item 12. Security Ownership of Certain Beneficial Owners
and Management 4
Item 13. Certain Relationships and Related Transactions 4
Part IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 5
Signatures 6
<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.
This form 10-K covers the first full year of operations for the period ended
December 31, 1998 and pro forma combined operations of the subsidiary companies
for periods prior to the actual consolidation
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, 1998, the Company had no employees. The subsidiary banks
employed 131 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, 1998. 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 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, 1998, 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 were submitted to a vote of security holders during the fourth
quarter of 1998.
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 52 of the 1998 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 1999 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 9-26 of the 1999 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
The information set forth on pages 13-14 of the 1998 Annual Report to
Shareholders is incorporated herein by reference and is filed herewith as
Exhibit 13.3.
Item 8. Financial Statements and Supplementary Data
The following financial statements for the Company and independent auditors'
report set forth on pages 27-44 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, 1998 and 1999
o Income Statement for the three years ended December 31, 1999
o Cash Flow Statement for the three years ended December 31, 1999
o Statement of Changes in Shareholders' Equity for the three years ended
December 31, 1999
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, 1998, their ages as of December 31, 1998, their current titles and positions
held during the last five years:
Robert L. Covington, 73, 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, 59, 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. 59 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 48 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 44 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 1999 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 1999 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 1999 annual meeting of
shareholders.
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements and Auditors' Report
(a) Financial Statements and Schedules
The financial statements set 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 1998.
(C) Exhibit Listing
Exhibit
Number Description
------- -----------
3.1 Articles of Incorporation (No changes - Articles of
Incorporation filed with 1997 Form 10-K are incorporated
by reference)
3.2 Bylaws (No Changes - Bylaws filed with 1997 Form 10-K are
incorporated by reference)
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 1999 annual meeting of
shareholders.
13 Annual Report for fiscal year ended 12/31/98
21 Subsidiaries of the Registrant Incorporated by Reference
to page 31 of Annual Report
27 Financial Data Schedule
99 Proxy Statement
<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 25, 1999.
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 25, 1999.
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
[EASTERN VIRGINIA BANKSHARES LOGO]
Southside Bank
Bank of Northumberland, Inc.
Index to Annual Report Notes to Financial Statement 31
Financial Data 2 Report of Independent Auditors 44
Chairman and President's
Letter to Stockholders 3 Board of Directors 45
Management's Discussion and
Analysis 9 Officers 46
Financial Statements 27 Bank Locations 47
<PAGE>
SELECTED FINANCIAL DATA
(In thousands except ratios and per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------------------------------------
INCOME STATEMENT DATA: 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Interest income $ 26,670 $ 25,093 $ 23,204 $21,821 $ 19,611
Interest expense 11,846 11,144 10,360 10,315 8,097
--------- -------- -------- -------- --------
Net interest income 14,824 13,949 12,844 11,506 11,514
Provision for loan losses 449 412 437 575 796
--------- -------- -------- -------- --------
Net interest income after provision for loan losses 14,375 13,537 12,407 10,931 10,718
Noninterest income 1,764 1,469 1,330 1,294 1,153
Securities gains (losses) 8 (28) (52) (9) (52)
Noninterest expense 8,442 7,705 6,931 6,774 6,433
--------- -------- -------- ------- --------
Income before income taxes 7,705 7,273 6,754 5,442 5,386
Income taxes 2,088 1,965 1,710 1,317 1,292
--------- -------- -------- ------- --------
Net Income $ 5,617 $ 5,308 $ 5,044 $ 4,125 $ 4,094
========= -------- -------- ------- --------
PER SHARE DATA:
- ------------------------------------------------------------------------------------------------------------------------------------
Net Income $ 1.08 $ 1.02 $ 0.97 $ 0.79 $ 0.79
Cash dividends 0.44 0.34 0.31 0.25 0.24
Book value at period end 8.22 7.57 6.84 6.23 5.48
BALANCE SHEET DATA:
- ------------------------------------------------------------------------------------------------------------------------------------
Assets $ 347,995 $323,430 $308,724 $286,734 $269,832
Loans, net of unearned income 239,664 227,981 206,343 192,894 183,862
Securities 81,332 78,098 82,862 72,708 66,385
Deposits 304,330 280,882 269,903 251,612 238,880
Shareholders' equity 42,257 39,265 35,457 32,393 28,439
Average shares outstanding 5,179 5,188 5,177 5,191 5,192
PERFORMANCE RATIOS
- ------------------------------------------------------------------------------------------------------------------------------------
Return on average assets 1.66% 1.68% 1.72% 1.48% 1.55%
Return on average equity 13.56% 13.97% 14.57% 13.20% 14.83%
Dividend payout 40.52% 32.78% 31.91% 31.70% 30.47%
Efficiency (1) 48.45% 47.26% 46.04% 49.79% 48.60%
Average equity to average assets 12.26% 12.01% 11.79% 11.23% 10.48%
ASSET QUALITY RATIOS:
- ------------------------------------------------------------------------------------------------------------------------------------
Allowance for loan losses to period end loans 1.61% 1.70% 1.77% 1.98% 1.96%
Allowance for loan losses to nonaccrual loans 237.39% 127.99% 94.11% 92.75% 117.00%
Nonperforming assets to period end loans and foreclosed properties 0.79% 1.36% 2.00% 2.44% 1.89%
Net charge-offs to average loans 0.20% 0.09% 0.31% 0.19% 0.11%
CAPITAL AND LIQUIDITY RATIOS:
- ------------------------------------------------------------------------------------------------------------------------------------
Leverage 12.39% 12.87% 11.89% 12.24% 11.12%
Risk-based capital ratios:
Tier 1 capital 19.34% 19.30% 19.59% 16.07% 13.12%
Total capital 20.59% 20.56% 20.85% 17.32% 13.73%
Average loans to average deposits 79.23% 79.01% 76.82% 76.84% 73.64%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE: THE AMOUNTS PREVIOUSLY REPORTED FOR THE PERIODS HAVE BEEN RETROACTIVELY
RESTATED TO REFLECT THE MERGER OF SSB AND BNI TO FORM EVB AS OF DECEMBER
29, 1997.
(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.
2
<PAGE>
Business Profile
Eastern Virginia Bankshares, Incorporated (EVB), established December 29, 1997
is a multi-bank holding company whose subsidiaries, Southside Bank and Bank of
Northumberland, provide financial service to the Central, Middle Peninsula, and
Northern Neck regions of Virginia. Each subsidiary is an independently managed,
state chartered bank offering full banking services, which include commercial
and consumer loans, deposit accounts, credit cards, automated teller machines
and many other service, through a total of twelve offices, Deposits are insured
by the Federal Deposit Insurance Corporation.
To Our Stockholders
company, we are pleased to present the 1998 Annual Report for Eastern
Virginia Bankshares, the parent company for Bank of Northumberland and Southside
Bank. Our two well established banks continue their long time tradition of high
performance by achieving excellent results in each operation as measured by most
often used indicators of performance, which are included on a combined basis in
this report, including return on assets and return on equity, both of particular
interest to our shareholders.
[PHOTO]
Eastern Virginia Bankshares Board of Directors: Seated left to right;
Robert L. Covington, Thomas M. Boyd, Jr.; standing left to right;
L. Edelyn Dawson, Jr., F. Warren Haynie, Lewis R. Reynolds, Eric A. Johnson,
W. Rand Cook, not pitcured F. L. Garrett, III and William L. Lewis.
Eastern Virginia Bankshares 3
<PAGE>
[SOUTHSIDE BANK LOGO]
Balance Sheet as of 12/31/98 (in 000's)
Cash and cash equivalents: $ 6,509
Interest-bearing Deposits-Other Banks 0
Investments 39,605
Loans, Net 146,809
Other Assets 7,486
- -------------------------------------------------------------------------------
Total Assets $200,409
Deposits $187,951
Other Liabilities 625
Shareholders Equity 11,833
- -------------------------------------------------------------------------------
Total Liabilities & Capital $200,409
- -------------------------------------------------------------------------------
Income Statement as of 12/31/98 (in 000's)
Interest Income $ 16,079
Interest Expense 7,307
- -------------------------------------------------------------------------------
Net Interest Income $ 8,772
Provision For Loan Losses 361
Other Income 1,234
Other Expense 5,566
Federal Income Tax 1,140
- -------------------------------------------------------------------------------
Net Income $ 2,939
For EVB, return on assets for 1998 continued strong at 1.66% compared to 1997
at 1.68%. Return on equity for 1998 was 13.56% compared to 13.97% in 1997,
reflecting our exceptionally strong capital base. EVB had total shareholders'
equity of $42.3 million as of December 31, 1998, a 7.62% increase from year-end
1997 total shareholder equity of $39.3 million.
Net income for 1998 was $5,617,000, up 5.8%, from $5,308,000 at the end of
1997. Per share net income at the end of 1998 was $1.08, up from $1.02 at the
end of 1997. Book value per share rose to $8.22 at the end of 1998, from $7.57
at the end of 1997. As a result of our strong performance and strong equity
position, your board raised the dividend for the year 1998 to 44 cents per share
from the 1997 dividend of 34 cents per share, a 10 cents per share , or 29%
increase. Please visit our Selected Financial Data for other results.
We are pleased to report that during 1998 we accomplished a number of the
goals, of our strategic plan which will benefit our performance this year and in
the future. We are continuously reviewing our plans, goals, and targets and
assessing performance, and striving to achieve the desired results as set forth
in our plan, to insure that we are carrying out our mission as a successful
community bank. (See our mission statement.)
4
<PAGE>
[PHOTO]
Southside Bank Board of Directors:
Seated left to right; William L. Lewis, F. L. Garrett, III, T. M. Boyd, Jr.,
E. Gary Ball; standing left to right; W. Rand Cook, W. Gerald Cox,
J. Thomas Newman, Lawrence R. Moter, M.D., William W. Lowery, III,
Emmett Upshaw, Leslie E. Taylor, Eric A. Johnson, not pictured
Charles R. Revere.
The major project for our two banks in 1998 involved consolidation of
operational functions, including data processing. Southside Bank has operated
its in-house system for 12 years, having built a freestanding operations center
in Tappahannock in 1994. Earlier in the year, Southside upgraded its mainframe
computer to a Unisys 4621-31 which provides present and future processing
capabilities for both banks. The new mainframe is also Year 2000 compliant. By
mid-year, Bank of Northumberland had installed a wide-area network. In the
fourth quarter of 1998, Bank of Northumberland converted from a third party
service bureau to Southside's in-house system. While the hardware, software, and
conversion costs were substantial, approximately $650,000, the majority was
expensed in 1998, thereby providing cost savings and enhanced delivery systems
in 1999 and beyond. The board is grateful for the dedication and hard work of
the officers and staff of both banks who made the conversion happen. Many long
hours and much effort went into making it successful.
In 1998 Southside opened its ninth office, a full-service office in
Gloucester County, east of the Gloucester Courthouse area. On June 5, 1998
Commissioner of Banking Joe Face and various state and local dignitaries helped
us celebrate the grand opening. We are very pleased with the reception this
office has received in that market. Assistant Vice President and Manager Rick
Fulk and his staff have achieved good results since open
Eastern Virginia Bankshares 5
<PAGE>
ing. We look for excellent performance at this location, and a solid
contribution to our expanding banking franchise.
During 1998 the EVB board authorized a stock repurchase plan, directing the
company's management to purchase up to 300,000 shares by year end 1999. During
1998, 45,000 shares were purchased and retired. This program obviously benefits
our existing shareholders. Also, by popular demand of our shareholders, EVB will
reinstitute a dividend reinvestment plan in 1999. We plan to announce the
details of this plan shortly.
With the century date change quickly approaching, interest in the Year 2000
readiness of insured depository institutions is certain to intensify. As many
financial institutions have learned, Y2K (Year 2000) assessment is not an easy
or inexpensive task. At EVB's two banks we are committed to honoring our service
goals with special attention given to the arrival of a new century. Project
teams have been established and management has deployed resources to renovate
and test our systems for Year 2000 readiness, much of which has already been
accomplished. The Bank recognizes the seriousness of the Year 2000 issues and
has developed an action plan to update its computer systems and critical
applications. We do not anticipate any material impact on earnings from Year
2000 compliance issues. We want you and our customers to be confident that our
bank has properly addressed this issue, and will be prepared for this event.
[BANK OF NORTHUMBERLAND LOGO]
Balance Sheet as of 12/31/98 (in 000's)
Cash and cash equivalents: $ 4,562
Interest-bearing Deposits-Other Banks 0
Investments 51,446
Loans, Net 88,996
Other Assets 2,493
- -------------------------------------------------------------------------------
Total Assets $147,497
Deposits $136,314
Other Liabilities 495
Shareholders Equity 10,688
- -------------------------------------------------------------------------------
Total Liabilities & Capital $147,497
- -------------------------------------------------------------------------------
Income Statement as of 12/31/98 (in 000's)
Interest Income $ 10,591
Interest Expense 5,013
- -------------------------------------------------------------------------------
Net Interest Income $ 5,578
Provision For Loan Losses 88
Other Income 510
Other Expense 2,373
Federal Income Tax 947
- -------------------------------------------------------------------------------
Net Income $ 2,680
6
<PAGE>
In 1998 the trend of consolidation continued in banking. In Virginia, several
significant banks exited the market by merger with out of state regionals. This
phenomenon has presented the community banks of our state with great
opportunities. Your board and management believe that with this industry
consolidation, and with the many other factors of change within the industry, we
have a great opportunity to increase our franchise value, by well-planned
expansion. However, expansion must be well planned. In 1998, your EVB team took
the opportunity to strengthen its systems first.
Also with respect to the future, in Washington the 106th Congress will once
again address a financial modernization bill. Last year's bill, universally
known as H.B.10, came close to becoming law. Conventional thinking is that
included in these sweeping changes, banks will be allowed to affiliate with
securities and insurance companies, and holding companies will be permitted to
offer any financial products in the future and cross-sell them on bank premises.
Your company wants to be positioned to successfully compete in the financial
services arena of the future. We see many challenges as we assess new
opportunities. This will require major commitments of our company, both in
technology and human resources. And with our strong capital base, we have the
financial resources to be a player in this new environment.
[PHOTO]
Bank of Northumberland Board of Directors: Seated left to right;
W. Leslie Kilduff, Robert L. Covington, Lewis R. Reynolds; standing left
to right; Charles R. Rice, Howard R. Straughn, Jr., William E. Sanford, Jr.,
F. Warren Haynie, L. Edelyn Dawson, Jr., S. Lake Cowart, Sr.
Eastern Virginia Bankshares 7
<PAGE>
Technology will play a large role in the future as we begin to offer more
electronic services. We are striving to be prepared for these changes, and we
firmly believe that the well focused, well run community bank which offers
exceptional service will be highly successful.
EVB is fortunate to have a strong, experienced board of directors, as do each
of its banks, who provide solid leadership to management. While each of the
banks in EVB operate with a great deal of autonomy, which is helpful in the
markets we serve, this board support has been an immeasurable benefit. At the
same time, in 1999 we will see many benefits to our holding company operation,
which convey to our banks. We would also like to recognize the loyalty and
dedication of the staff and officers of our organization. Without their hard
work, the success our companies have enjoyed would have been impossible.
Finally, we wish to thank you, our shareholders, for your support.
[PHOTO]
/s/ T. M. Boyd, Jr. /s/ Robert L. Covington
--------------------------- -----------------------------
T. M. Boyd, Jr. R. L. Covington
President and CEO Chairman of the Board
Mission Statement
Our mission is to be the primary financial services source in a broadly-defined
Northern Neck/ Middle Peninsula. Broadly-defined is essentially those counties
west of the Chesapeake Bay that are not parts of the "in close" Richmond,
Tidewater and Washington metropolitan areas and also excludes the immediate
Fredericksburg area. In accomplishing this mission, we expect to deliver quality
service to our customers, produce maximum value for our shareholders, be
exemplary corporate citizens in our communities and provide a good working
environment for our employees.
8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis is intended to assist the reader in
evaluating and understanding the consolidated results of operations and
financial condition of Eastern Virginia Bankshares, Inc. and subsidiaries (the
"Corporation"). The following analysis provides information about the major
components of the results of operations, financial condition, liquidity and
capital resources of Eastern Virginia Bankshares (EVB) and attempts to identify
trends and material changes that occurred during the reporting periods. The
discussion should be read in conjunction with Selected Financial Data and the
Consolidated Financial Statements and Notes to Consolidated Financial
Statements.
OVERVIEW
Eastern Virginia Bankshares, Inc. produced record earnings during 1998,
performing well in a highly complex, competitive business environment. The year
marked a very successful first full year of operations under the EVB umbrella
for the former Bank of Northumberland, Inc. and Southside Bank which were
merged with and into the Corporation on December 29, 1997. The first major
opportunity to achieve operational cost savings while providing consistent high
quality customer service was realized as the two banks consolidated technology
efforts to the same shared in-house data processing system in November.
Consolidated in-house technology provides management with the ability to grow
the Corporation at a much lower incremental processing cost and provides
improved access to management information. Earlier in the year, the Corporation
continued to expand within its market region as Southside Bank opened a new
branch in Gloucester County in June. Gloucester was Southside's second new
branch opened in a seven month period, following the October 1997 opening of
the Deltaville Office.
Despite the changes noted above and the associated cost, the Corporation
reported net income of $5. 6 million or $1.08 per share, up 5.8% from $1.02 in
1997, a return on assets of 1.66%, and an efficiency ratio of 48.45%. This
earnings increase was particularly gratifying in a year when the Corporation
absorbed approximately $300 thousand of non-recurring expenses related to
systems consolidation and merger costs.
RESULTS OF OPERATIONS
Net income increased 5.8% in 1998 to $5.6 million, compared with $5.3 million
in 1997 and $5.0 million in 1996. Earnings per share was $1.08 in 1998,
compared to $1.02 and $0.97 for 1997 and 1996 respectively. The improvement in
net income in 1998 was the result of increases in both net interest income and
noninterest income.
Profitability, as measured by EVB's return on average assets and return on
average equity was a strong 1.66% and 13.56% respectively. These returns remain
strong relative to the Corporation's peer group averages of 1.58% and 12.45%,
respectively (based on latest data available). The return on equity is
particularly gratifying given EVB's high capital level. In November 1998, the
Corporation announced a stock repurchase program that will permit repurchase of
up to 300,000 shares by year end 1999 or slightly over 5% of the Corporation's
outstanding shares at the time of the announcement. The repurchase plan is
intended to reduce high capital levels and to increase return on equity to
shareholders.
Net interest margin, on a tax equivalent basis, declined slightly to 4.83% in
1998, as compared to 4.93% in 1997 and 4.92% in 1996. However, changes in
volume exceeded changes in rates, generating an additional $875 thousand of net
interest income in 1998 and $1.1 million in 1997.
The Corporation experienced declining loan demand for the first half of 1998 as
market demand moved away from adjustable rate mortgages to fixed rate loans.
With a strong marketing program initiated at the end of June and the
introduction of a fixed rate mortgage product in September, loan demand
strengthened and produced an increase of 7% in average loans, compared to 1997.
EVB's efficiency ratio, a measure of performance based upon the relationship
between noninterest expense and income less securities gains, compares very
favorably to other Virginia financial institutions. The Corporation's
efficiency ratio for 1998 and 1997 was 48.45% and 47.26%, respectively despite
over $700 thousand of non recurring expenses. A lower efficiency ratio
represents greater control of noninterest costs. A fluctuation in the
efficiency ratio can be attributed to relative changes in both noninterest
income and net interest income as well as noninterest expense. With the
November 1998 data processing consolidation and other expenditures to achieve
cost savings, it is anticipated that 1999 should bring a sharp decline in the
growth of noninterest expenses which have trended upward at a rate of 9.6% and
11.2% in 1998 and 1997, respectively.
Capital growth of 7.6% from year end 1997 to year end 1998 matched total asset
growth during the same period. As mentioned previously, EVB has initiated a
stock repurchase program in an attempt to manage capital growth and enhance
shareholder return.
EVB is not aware of any current recommendations by any regulatory authorities
which, if they were implemented, would have a material effect on the
registrant's liquidity, capital resources, or results of operations.
The following table sets forth, for the periods indicated, selected quarterly
results of EVB's operations.
EASTERN VIRGINIA BANKSHARES 9
<PAGE>
SUMMARY OF FINANCIAL RESULTS BY QUARTER
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
1998
---------------------------------------------------
Dec. 31 Sep. 30 June 30 Mar. 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income $ 6,812 $ 6,721 $ 6,593 $ 6,544
Interest expense 2,998 3,018 2,960 2,870
-------- -------- -------- --------
Net interest income 3,814 3,703 3,633 3,674
Provision for loan losses 95 116 115 123
-------- -------- -------- --------
Net interest income after
provision for loan losses 3,719 3,587 3,518 3,551
Noninterest income 456 424 445 447
Noninterest expense 2,262 2,109 2,148 1,923
-------- -------- -------- --------
Income before income taxes 1,913 1,902 1,815 2,075
Applicable income taxes 533 577 476 502
-------- -------- -------- --------
Net income $ 1,380 $ 1,325 $ 1,339 $ 1,573
Net income per share,
basic and diluted $ 0.26 $ 0.26 $ 0.26 $ 0.30
<CAPTION>
THREE MONTHS ENDED
---------------------------------------------------
1997
---------------------------------------------------
Dec. 31 Sep. 30 June 30 Mar. 31
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Interest income $ 6,461 $ 6,326 $ 6,247 $ 6,059
Interest expense 2,885 2,832 2,739 2,688
-------- -------- -------- --------
Net interest income 3,576 3,494 3,508 3,371
Provision for loan losses 150 90 88 84
-------- -------- -------- --------
Net interest income after
provision for loan losses 3,426 3,404 3,420 3,287
Noninterest income 400 368 330 342
Noninterest expense 2,594 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>
- --------------------------------------------------------------------------------
NET INTEREST INCOME
Net interest income represents the Corporation's gross profit margin and is
defined as the difference between interest income and interest expense. For
comparative purposes, income from tax-exempt securities is adjusted to a
tax-equivalent basis using the federal statutory tax rate of 34%.
Tax-equivalent securities income is further adjusted by the TEFRA adjustment
for the disallowance as a deduction of a portion of total interest expense
related to the ratio of average tax-exempt securities to average total assets.
This adjustment results in tax-exempt income and yields being presented on a
basis comparable with income and yields from fully taxable earning assets.
Net interest margin represents the Corporation's net interest income divided by
average earning assets. Changes in the volume and mix of earning assets and
interest bearing liabilities, as well as their respective yields and rates,
have a significant impact on the level of net interest income.
The "Average Balances, Income and Expense, Yields and Rates" table presents
average balances, related interest income and expense, and average yield/cost
data for each of the past three years. The "Volume and Rate Analysis" table on
the following page reflects changes in interest income and interest expense
resulting from changes in average volume and average rates.
Tax-equivalent net interest income increased 4.76% in 1998 to $15.6 million
from $14.9 million in 1997. Average loan growth of 7% combined with a 39%
decrease in nonperforming assets were important factors in the increase in net
interest income and in achieving a net interest margin of 4.83%, which was a
ten basis point decline from 4.93% in 1997. The decline in net interest margin
was the result of a 13 basis point decline in yield on earning assets to 8.49%
in 1998 from 8.62% in 1997, combined with a slight increase in the cost of
interest bearing funds from 4.50% in 1997 to 4.51% in 1998.
The growth in average earning assets of 7.0% matched the growth in the loan
portfolio. Average securities decreased 1.9% while average Federal funds sold
increased by 102.8%. This change in the mix of average earning assets resulted
in a decrease in yield from 1997. The year 1998 provided an environment in
which interest rates were generally below those in 1997. EVB was pleased that
the average yield on loans was maintained at 9.21%, matching the 1997 yield,
but was impacted by a decrease in total securities yield from 7.24% in 1997 to
6.94% in 1998 and a decrease in Fed funds yield from 5.63% in 1997 to 5.45% in
1998. Tax-equivalent interest income increased 5.5% in 1998, while interest
expense increased at the slightly higher rate of 6.3%.
During 1997, net interest income, on a tax-equivalent basis, increased 7.9% to
$14.9 million from $13.8 million in 1996. Average loans increased $20 million
(10.1%) from $197.3 million to $217.3 million, funded primarily by an $18.1
million or 7% increase in deposits to $275 million from $256.9 million in 1996.
Net interest margin increased to 4.93% from 4.92% in 1996 as the yield on
earning assets increased to 8.62% from 8.60% and the cost of funds from 4.47%
to 4.50%.
- --------------------------------------------------------------------------------
10
<PAGE>
AVERAGE BALANCE, INCOME AND EXPENSE, YIELDS AND RATES (1)
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31
-----------------------------------------------------------------
1998 1997
-------------------------------- --------------------------------
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 $ 40,885 $ 2,632 6.44% $ 41,432 $ 2,794 6.74%
Tax-exempt (1) 35,961 2,668 7.42% 36,872 2,878 7.81%
-------- ------- -------- -------
Total securities 76,846 5,300 6.90% 78,304 5,672 7.24%
Federal funds sold 14,121 769 5.45% 6,964 392 5.63%
Loans (net of unearned income) (2) 232,605 21,412 9.21% 217,320 20,007 9.21%
Interest-bearing deposits-other banks 64 4 6.25% 8 1 12.50%
-------- ------- -------- -------
Total earning assets 323,636 27,485 8.49% 302,596 26,072 8.62%
Less allowance for loan losses (3,947) (3,777)
Total non-earning assets 18,311 17,488
-------- --------
Total assets $338,000 $316,307
======== --------
LIABILITIES & SHAREHOLDER'S EQUITY
Interest-bearing deposits:
Checking $ 31,608 829 2.62% $ 28,480 782 2.75%
Savings 69,157 2,866 4.14% 61,414 2,504 4.08%
Money market savings 28,518 954 3.35% 29,127 956 3.28%
Certificates of deposit:
$100,000 and over 17,490 970 5.55% 14,469 771 5.33%
Less than $100,000 116,073 6,227 5.36% 114,129 6,125 5.37%
-------- ------- -------- -------
Total interest-bearing deposits 262,846 11,846 4.51% 247,619 11,138 4.50%
Other borrowings -- -- 84 6 7.14%
-------- ------- -------- -------
Total interest-bearing liabilities 262,846 11,846 4.51% 247,703 11,144 4.50%
Non-interest bearing liabilities:
Demand deposits 30,739 27,347
Other liabilities 2,989 3,270
-------- --------
Total liabilities 296,574 278,320
Shareholder's equity 41,426 37,987
-------- --------
Total liabilities & shareholder's equity $338,000 $316,307
======== --------
Net interest income $15,639 $14,928
======= -------
Interest rate spread (3) 3.98% 4.12%
Interest expense as a percent of
average earning assets 3.66% 3.68%
Net interest margin (4) 4.83% 4.93%
<CAPTION>
TWELVE MONTHS ENDED DECEMBER 31
--------------------------------
1996
--------------------------------
Average Income/ Yield/
(DOLLARS IN THOUSANDS) Balance Expense Rate
- -------------------------------------------- ----------- --------- ----------
<S> <C> <C> <C>
ASSETS:
Securities
Taxable $ 40,745 $ 2,702 6.63%
Tax-exempt (1) 36,583 2,911 7.96%
-------- -------
Total securities 77,328 5,613 7.26%
Federal funds sold 6,558 349 5.32%
Loans (net of unearned income) (2) 197,336 18,230 9.24%
Interest-bearing deposits-other banks -- --
-------- -------
Total earning assets 281,222 24,192 8.60%
Less allowance for loan losses (3,726)
Total non-earning assets 16,178
--------
Total assets $293,674
--------
LIABILITIES & SHAREHOLDER'S EQUITY
Interest-bearing deposits:
Checking $ 27,254 751 2.76%
Savings 57,453 2,264 3.94%
Money market savings 27,889 912 3.27%
Certificates of deposit:
$100,000 and over 13,012 713 5.48%
Less than $100,000 106,179 5,720 5.39%
-------- -------
Total interest-bearing deposits 231,787 10,360 4.47%
Other borrowings -- --
-------- -------
Total interest-bearing liabilities 231,787 10,360 4.47%
Non-interest bearing liabilities:
Demand deposits 25,089
Other liabilities 2,186
--------
Total liabilities 259,062
Shareholder's equity 34,612
--------
Total liabilities & shareholder's equity $293,674
--------
Net interest income $13,832
-------
Interest rate spread (3) 4.13%
Interest expense as a percent of
average earning assets 3.68%
Net interest margin (4) 4.92%
</TABLE>
NOTES:
(1) INCOME AND YIELDS ARE REPORTED ON A TAX-EQUIVALENT BASIS ASSUMING A FEDERAL
TAX RATE OF 34%.
(2) NONACCRUING LOANS HAVE BEEN INCLUDED IN THE COMPUTATIONS 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.
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES 11
<PAGE>
VOLUME AND RATE ANALYSIS
<TABLE>
<CAPTION>
1998 vs. 1997 1997 vs. 1996
Increase (Decrease) Due to Changes in: Increase (Decrease) Due to Changes in:
---------------------------------------- --------------------------------------
Volume Rate Total Volume Rate Total
------------ ------------- ------------- ---------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS:
Taxable securities $ (38) $ (124) $ (162) $ 46 $ 46 $ 92
Tax exempt securities (47) (163) (210) 23 (56) (33)
Loans, (net) 1,405 -- 1,405 1,781 (4) 1,777
Federal funds sold 390 (13) 377 22 21 43
Interest-bearing deposits -- other banks 3 -- 3 1 -- 1
------ ------ ------ ------- ------- -------
Total earning assets 1,713 (300) 1,413 1,873 7 1,880
INTEREST-BEARING LIABILITIES:
Interest checking 85 (38) 47 34 (3) 31
Regular savings & clubs 320 42 362 156 84 240
Money market savings (22) 20 (2) 41 3 44
Certificates of deposit:
$100,000 and over 161 38 199 80 (22) 58
Less than $100,000 105 (3) 102 429 (24) 405
Short-term borrowings (6) -- (6) 6 -- 6
--------- -------- --------- ------- ------- -------
Total interest-bearing liabilities 643 59 702 746 38 784
-------- -------- -------- ------- ------- -------
Change in net interest income: $ 1,070 $ (359) $ 711 $ 1,127 $ (31) $ 1,096
-------- -------- -------- ------- ------- -------
</TABLE>
NOTES:
(1) CHANGES CAUSED BY THE COMBINATION OF RATE AND VOLUME ARE ALLOCATED BASED ON
THE PERCENTAGE OF VOLUME CAUSED BY EACH.
(2) INCOME AND YIELDS ARE REPORTED ON A TAX-EQUIVALENT BASIS, ASSUMING A
FEDERAL TAX RATE OF 34%.
- --------------------------------------------------------------------------------
INTEREST 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.
The Corporation generally strives to maintain a position flexible enough to
move to an equality between rate-sensitive assets and rate-sensitive
liabilities, which may be desirable when there are wide and frequent
fluctuations in interest rates. 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. When an unacceptable positive gap within a one-year time frame
occurs, maturities can be extended by selling shorter term investments and
purchasing longer maturities. When an unacceptable negative gap occurs,
variable rate loans can be increased and more investment in shorter term
investments can be made. Interest rate gaps are managed through investments,
loan pricing and deposit pricing.
- --------------------------------------------------------------------------------
12
<PAGE>
MARKET RISK 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.
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.
ASSET/LIABILITY RISK MANAGEMENT: The primary goals of asset/
liability risk management are to maximize net interest income and the net value
of EVB's future cash flows within the interest rate limits set by the
Asset/Liability Committee (ALCO).
INTEREST RATE RISK MEASUREMENT: Interest rate risk is monitored through the use
of three complimentary 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.
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 -9.7% which is well within the
policy limit for the one-year gap of 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 time frames 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 increase
approximately 4.80%, of stable-rate net income if rates were to fall
immediately by two percentage points. It projects a decrease of approximately
5.20% if rates rise by two percentage points. Management believes this reflects
a slight liability-sensitive interest risk for the one-year horizon.
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
decrease NPV by 8.78%. Additionally, NPV is estimated to increase by 8.37% if
rates fall immediately by 200 basis points. Analysis of the average quarterly
change in the
EASTERN VIRGINIA BANKSHARES 13
<PAGE>
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.
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:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------
1998 1997
----------- --------------------------
EVB SSB BNI
----------- ----------- ------------
<S> <C> <C> <C>
Static 1-Year Cumulative Gap: -9.66% -5.43% -22.67%
1-year net income simulation projection
-200 basis point Shock vs. Stable Rate 4.80% -9.10% 8.50%
+200 basis point Shock vs. Stable Rate -5.20% 7.70% -9.90%
Static Net Present Value Change:
-200 basis point Shock vs. Stable Rate 8.37% 4.43% 17.80%
+200 basis point Shock vs. Stable Rate -8.78% -9.10% -20.40%
</TABLE>
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 1999 and
believes that the current modest level of liability sensitivity is appropriate.
- --------------------------------------------------------------------------------
NONINTEREST INCOME
Noninterest income increased by $331 thousand (23.0%) from $1.4 million in 1997
to $1.8 million in 1998. Service charges, the largest source of noninterest
income, increased $238 thousand (22.0%) from $1.1 million in 1997 to $1.3
million in 1998. Other operating income increased $57 thousand (14.8%) from
$385 thousand in 1997 to $442 thousand in 1998. Other operating income includes
credit life premiums, ATM fees charged to non-EVB users, safe deposit box fees,
and other miscellaneous income. Realized gain (loss) on sale of securities
improved from a $28 thousand loss in 1997 to an $8 thousand gain in 1998.
Noninterest income increased $163 thousand (12.8%) from 1996 to 1997,
attributable primarily to increases of $89 thousand in other operating income,
$50 thousand in service charges, and a decline of $24 thousand in realized
losses on security sales.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- --------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Service charges $ 1,322 $ 1,084 $ 1,034
Gain (loss) on securities 8 (28) (52)
Other operating income 442 385 296
------- ------- -------
$ 1,772 $ 1,441 $ 1,278
======= ------- -------
</TABLE>
- --------------------------------------------------------------------------------
NONINTEREST EXPENSE
Total noninterest expense increased $737 thousand (9.6%) from $7.7 million in
1997 to $8.4 million in 1998. The largest contributor to this increase was
salaries and benefits which increased $603 thousand or 17% from 1997 resulting
from a $161 thousand increase in employee health, life and dental expense
partially the result of a $121 thousand credit in 1997, normal increases in
salaries and benefits and increased staffing related to Southside Bank's
opening new branches in Deltaville in the fourth quarter of 1997 and Gloucester
in the second quarter of 1998. A second major contributor to an increase in
noninterest expense was a $282 thousand increase in data processing expense as
the Corporation made technology investments projected in the 1997 Annual
Report, implemented Year 2000 compiance enhancements, and exercised a buy-out
option with a vendor. These actions are projected to achieve meaningful
efficiencies in data processing expense in 1999 and future years. Net Occupancy
and equipment expense increased $75 thousand or 6% compared to 1997, again
primarily impacted by the opening of the new Deltaville and Gloucester offices.
Printing, supplies and postage expense increased $70 thousand or 13.8%,
primarily resulting from a one-time forms order for a November consolidation of
data processing systems and initial supplies for a new branch office.
Advertising and public relations increased $40 thousand or 15.6%, again
impacted significantly by the opening of the Gloucester office. Other operating
expenses increased $47 thousand or 3.9% from 1997. These increases were
partially offset by a decrease of $271 thousand in merger related expenses from
$364 thousand in 1997 to $93 thousand in 1998; and a decrease in taxes other
than occupancy from $302 thousand in 1997 to $193 thousand in 1998.
14
<PAGE>
Noninterest expense increased $774 thousand or 11.2% from $6.9 million in 1996
to $7.7 million in 1997, primarily the result of $364 thousand of merger
expenses in 1997 and normal expense increases related to growth and the opening
of a new branch office in Deltaville. 1997 was also impacted by a $29 thousand
increase in FDIC insurance assessment following a reduction in 1996 to reflect
fluctuating FDIC premiums.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ---------------------------------- ---------- ---------- ----------
<S> <C> <C> <C>
Salaries and employee benefits $ 4,145 $ 3,542 $ 3,372
Net occupancy and equipment 1,336 1,261 1,151
Printing supplies and postage 576 506 448
Taxes other than income 193 302 276
Data processing 543 261 276
Advertising and public relations 296 256 183
Merger expenses 93 364
Other operating expenses 1,260 1,213 1,225
------- ------- -------
Total non-interest expense $ 8,442 $ 7,705 $ 6,931
======= ------- -------
</TABLE>
- ---------------------------------------
INCOME TAXES
Income tax expense in 1998 was $2.09 million, up from $1.96 million in 1997 and
$1.71 million in 1996. The increase in income taxes is attributable to
increased taxable earnings at the federal statutory rate of 34%. Income tax
expense corresponds to an effective rate of 27.1%, 27.0% and 25.3% for the
three years ended December 31, 1998, 1997 and 1996, respectively. Note 9 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 9 to the Consolidated
Financial Statements is information regarding deferred taxes for 1998 and 1997.
- ---------------------------------------
LOAN PORTFOLIO
Loans, net of unearned income, increased to $239.7 million at December 31,
1998, up $11.7 million or 5.1% from $228 million at year end 1997. The
Corporation experienced slower loan growth through most of 1998 compared to
1997 as consumers sought secondary market, long-term, fixed rate mortgages
rather than EVB's traditional variable rate mortgage product. With the
Corporation's introduction of a fixed rate mortgage product in the fourth
quarter of 1998, loan demand has again strengthened with 75% of the 1998 loan
growth occurring in the second half of the year and most of that in the fourth
quarter. The almost immediate response to the introduction of the Corporation's
new fixed rate mortgage product is indicative of a healthy economy in its
banking market area. Both of EVB's subsidiary banks offer commercial, real
estate and consumer loans with the greatest concentration of lending being in
residential real estate mortgages. While total loan growth in 1998 was 5.1%,
the continuing expansion of consumer lending was evident as that sector of the
loan portfolio increased 12.6% from $45.7 million to $51.5 million and
accounted for over 49% of total 1998 loan growth. At year end 1997, loans net
of unearned income were $228 million, an increase of $21.6 million over $206.3
million at year end 1996. The loan portfolio in 1997, while comprised primarily
of real estate loans, was highlighted by strong growth in all sectors of the
loan portfolio.
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES 15
<PAGE>
LOAN PORTFOLIO
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------------------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994
- ----------------------------------------------- ------------ ------------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Commercial, industrial and agricultural loans $ 30,649 $ 32,901 $ 29,195 $ 26,533 $ 27,108
Real estate mortgage 130,856 118,639 109,015 105,233 103,808
Real estate construction 6,096 6,430 3,808 3,941 3,586
Commercial real estate 23,114 27,324 25,330 24,464 19,455
Consumer loans 51,481 45,723 41,887 34,746 31,610
All other loans 961 294 496 613 552
-------- --------- -------- -------- --------
Total loans 243,157 231,311 209,731 195,530 186,119
Less unearned income (3,493) (3,330) (3,388) (2,636) (2,257)
-------- --------- -------- -------- --------
LOANS, NET OF UNEARNED INCOME $239,664 $ 227,981 $206,343 $192,894 $183,862
======== --------- -------- -------- --------
</TABLE>
- --------------------------------------------------------------------------------
MATURITY SCHEDULE OF SELECTED LOANS
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------
Commercial and Real Estate
(DOLLARS IN THOUSANDS) Agricultural Construction
- ------------------------ ---------------- -------------
<S> <C> <C>
Within 1 year $ 12,464 $ 5,460
Variable rate:
1 to 5 years 3,947 430
Fixed rate:
1 to 5 years 10,858 206
After 5 years 3,380 --
-------- -------
Total 14,238 206
-------- -------
Total Maturities $ 30,649 $ 6,096
======== =======
</TABLE>
Approximately 66% of EVB's loan portfolio at December 31, 1998 was comprised of
loans secured by real estate. Residential real estate mortgages made up 55% of
the loan portfolio as compared to 52% at year end 1997 and 53% at year end
1996. 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 real estate loans secured by owner-occupied
properties. The Corporation's residential real estate loans are primarily 20
year loans with the rate adjusted every three years. Introduction of the fixed
rate mortgage product in late 1998 is expected to change the makeup of these
loans over time. Real estate construction loans accounted for only 2.5% of
total loans outstanding at year end 1998, and commercial real estate loans
accounted for 9.6% of total loans. The Corporation's losses on loans secured by
real estate have historically been low, averaging less than $6 thousand per
year over the last five years, and accounting for no net charge offs in 1998.
Consumer loans are the second largest and fastest growing component of EVB's
loan portfolio. Consumer loans were 20% of the loan portfolio at year end 1998,
and 19% at year end 1997 and 1996. This portfolio component consists primarily
of installment loans. Total consumer loans for household, family and other
personal expenditures totaled $51.5 million at 1998 year end, up $5.8 million
from $45.7 million at 1997 year end, which was up $3.8 million from $41.9
million at December 31, 1996. 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
small and medium-size business customers. This category of loans decreased
slightly in 1998 to 13% of the total loan portfolio from its historical 14%
position.
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 the sometimes volatile 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 and
letters of credit at 1998 year end totaled $22.9 million, up $3.1 million from
$19.8 million at December 31, 1997. Unfunded loan commitments (excluding $1.1
million in home equity lines) are used in large part to meet seasonal funding
needs which are generally higher from Spring
16
<PAGE>
through Fall than at year end. On December 31, 1998, EVB had no concentration
of loans in any one industry in excess of 10% of its loan portfolio.
Historically, EVB's loan collateral has been primarily real estate because of
the nature of our market region.
- ---------------------------------------
ASSET QUALITY
The Corporation's allowance for loan losses is an estimate of the amount
adequate to provide for potential losses 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.. Because the risk of loan loss
includes general economic trends as well as conditions affecting individual
borrowers, the allowance for loan 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
review loans and assign a classification based on current or perceived credit
risk. Additionally an independent credit review consultant performs a monthly
review of selected loans for Southside Bank and refers those deemed appropriate
to the Bank's Officers' Loan Committee and the Loan Committee of the Bank
Board. Bank of Northumberland, Inc maintains a formal review process 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, regardless of how well the loan may be collateralized. Bank of
Northumberland moves loans to a nonaccrual status when management makes a
determination that 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 1998 and 1997, 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 loan losses to period end
loans, net for 1998, 1997 and 1996 was 1.61%, 1.70%, and 1.77% respectively.
For the same periods the ratio of allowance for loan losses to nonaccrual loans
was 237%, 128% and 94%, indicating that the allowance is adequate with respect
to nonaccrual loans. Both the ratio of nonaccrual loans to total loans and the
actual dollar amount of nonaccrual loans at December 31, 1998 were at their
lowest level in the last five years. 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.
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES 17
<PAGE>
ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans outstanding, net of unearned income $ 232,605 $ 217,320 $ 197,336 $ 188,335 $ 173,012
Allowance for loan losses balance, beginning of year $ 3,868 $ 3,643 $ 3,814 $ 3,599 $ 2,998
Loans charged off:
Commercial and agricultural 213 252 435 278 219
Real estate 2 12 23 17 70
Consumer 452 381 371 196 165
---------- --------- --------- --------- ---------
Total loans charged off 667 645 829 491 454
Recoveries:
Commercial and agricultural 24 279 19 16 112
Real estate 20 6 48 12 11
Consumer 166 173 154 103 136
---------- --------- --------- --------- ---------
Total recoveries 210 458 221 131 259
---------- --------- --------- --------- ---------
Net loans charged off 457 187 608 360 195
Provision for loan losses 449 412 437 575 796
---------- --------- --------- --------- ---------
Balance, end of year $ 3,860 $ 3,868 $ 3,643 $ 3,814 $ 3,599
---------- --------- --------- --------- ---------
RATIOS:
Ratio of allowance for loan losses to total loans
outstanding, end of year 1.61% 1.70% 1.77% 1.98% 1.96%
Ratio of net charge-offs to average loans
outstanding during the year 0.20% 0.09% 0.31% 0.19% 0.11%
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
NONPERFORMING ASSETS
Total nonperforming assets, consisting of nonaccrual loans and foreclosed
properties, decreased 39.1% and 23.6% during 1998 and 1997, respectively, and
are at their lowest level of the past five years. Improvement in nonperforming
assets during the past two years was the result of improved underwriting
standards combined with a strong 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, 1998 were $1.9 million or 0.79% of total
loans and foreclosed real estate, down from $3.1 million or 1.36% at December
31, 1997, and down from $4.1 million or 2.0% at year end 1996. Nonperforming
loans at year end 1998 consisted primarily of residential first 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 placed in a nonaccrual status, and
any unpaid interest previously accrued on such 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 $98 thousand and $308 thousand for
the years 1998 and 1997.
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 1,626 $ 3,022 $ 3,871 $ 4,112 $ 3,076
Restructured loans -- -- -- -- --
Foreclosed property 268 86 196 618 407
-------- --------- -------- -------- --------
Total nonperforming assets $ 1,894 $ 3,108 $ 4,067 $ 4,730 $ 3,483
Loans past due 90 days and accruing interest 1,190 927 597 905 1,222
Nonperforming assets to total loans and other real estate 0.79% 1.36% 2.00% 2.44% 1.89%
Allowance for loan losses to nonaccrual loans 237.39% 127.99% 94.11% 92.75% 117.00%
Net charge-offs to average loans outstanding during the year 0.20% 0.09% 0.31% 0.19% 0.11%
Allowance for loan losses to year end loans 1.61% 1.70% 1.77% 1.98% 1.96%
Foregone interest income on nonaccrual loans $ 98 $ 308 $ 290 $ 198 $ 215
Interest income recorded on nonaccrual loans $ 7 $ 2 $ -- $ -- $ --
</TABLE>
At December 31, 1998, loans past due 90 days or more and still accruing
interest (because they are well secured and in the process of collection) were
$1.19 million. Although trends for credit quality factors continue to improve,
it is likely that EVB will continue modest provisions for loan losses in 1999.
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 in 1997, management 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, 1998, potential problem loans were
approximately $922 thousand, including 4 lending relationships in excess of
$100,000, which had aggregate principal balances outstanding of $453 thousand.
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, 1998 are generally
secured by residential and commercial real estate with appraised values that
exceed the principal balance.
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES 19
<PAGE>
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
----------------------------- ----------------------------- ----------------------------
Percent of loans Percent of loans Percent of loans
in each category in each category in each category
Amount to Total Loans Amount to Total Loans Amount to Total Loans
---------- ------------------ ---------- ------------------ ---------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Commercial and agricultural $ 1,244 12.79% $ 1,346 14.21% $ 496 13.62%
Real estate mortgage 1,209 54.60% 1,207 51.29% 1,894 51.97%
Real estate construction 25 2.54% 65 2.78% 66 1.82%
Commercial real estate 193 9.65% 279 11.82% 433 11.89%
Installment 1,186 20.02% 969 19.77% 739 20.29%
Other loans 3 0.40% 2 0.13% 15 0.41%
------- ------ ------- ------ ------- ------
Total allowance for loan losses $ 3,860 100.00% $ 3,868 100.00% $ 3,643 100.00%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------------- ----------------------------
Percent of Percent of
loans in each loans in each
category category
Amount to Total Loans Amount to Total Loans
---------- ---------------- ---------- ---------------
<S> <C> <C> <C> <C>
Commercial and agricultural $ 486 12.74% $ 495 13.77%
Real estate mortgage 2,053 53.82% 2,032 56.46%
Real estate construction 77 2.02% 70 1.95%
Commercial real estate 485 12.71% 355 9.92%
Installment 701 18.37% 638 17.66%
Other loans 12 0.34% 9 0.24%
------- ------ ------- ------
Total allowance for loan losses $ 3,814 100.00% $ 3,599 100.00%
</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 the 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, 1998, the combined securities portfolio was $81.3 million, a
4.1% increase from $78.1 million at 1997 year end. Book value of the investment
component of this portfolio was $39.3 million compared to $38.4 million at
December 31, 1997. The available for sale portion of the securities portfolio
at 1998 year end, at estimated fair market value, was $42 million, compared to
$39.7 million at year end 1997.
At December 31, 1997, the combined securities portfolio was $78.1 million, a
5.7% decline from $82.9 million at 1996 year end. Book value of the investment
component of the portfolio was $38.4 million compared to $39.5 million at
December 31, 1996. The available for sale portion of the portfolio at 1997 year
end was $39.7 million compared to $43.4 million at December 31, 1996.
FASB pronouncement No. 115 effective January 1, 1994, required EVB to show the
effect of market value changes of securities available for sale. The market
value of this portfolio at 1998 year end was $42 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
Accumulated other comprehensive income of $365 thousand at December 31, 1998
and $132 thousand at 1997 year end.
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.
20
<PAGE>
INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE
The following table presents the book value and fair value of securities for
the years 1998, 1997 and 1996.
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------ ------------------------- ------------------------
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 $ 9,567 $ 9,768 $12,900 $ 12,978 $11,632 $11,653
U.S. government agency securities 13,997 14,116 16,538 16,584 23,426 23,360
States and political subdivisions 4,590 4,760 1,109 1,126 411 409
Mortgage-backed securities 10,059 10,097 7,604 7,662 7,044 6,938
Other including equity securities 3,234 3,259 1,386 1,386 1,016 1,016
-------- -------- ------- -------- ------- -------
Total available for sale 41,447 42,000 39,537 39,736 43,529 43,376
======== ======== ------- -------- ------- -------
HELD TO MATURITY:
U.S. government agency securities -- -- -- -- 200 199
States and political subdivisions 39,333 40,308 37,463 38,438 37,650 38,275
Other -- -- 899 912 1,636 1,665
-------- -------- ------- -------- ------- -------
Total held to maturity 39,333 40,308 38,362 39,350 39,486 40,139
-------- -------- ------- -------- ------- -------
Total securities $ 80,781 $ 82,308 $77,899 $ 79,086 $83,015 $83,515
======== ======== ------- -------- ------- -------
</TABLE>
MATURITY DISTRIBUTION AND YIELDS OF SECURITIES
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------------------------------------------------------------------
Due in Due after Due after Due after
1 year 1 through 5 through 10 years and
or less 5 years 10 years equity securities
------------------ ----------------- ---------------- ------------------- Total
(DOLLARS IN THOUSANDS) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
SECURITIES AVAILABLE FOR SALE
U.S. Government securities 4,076 4.77% 14,011 5.08% 11,935 5.90% 3,959 6.22% 33,981 5.47%
Other including equity securities 203 5.20% 3,443 5.54% 2,955 6.21% 1,418 5.12% 8,019 5.71%
----- ------ ------ ----- ------
Total 4,279 4.79% 17,454 5.17% 14,890 5.96% 5,377 6.20% 42,000 5.52%
SECURITIES HELD FOR INVESTMENT
Taxable securities -- -- -- -- -- -- -- -- -- --
Tax exempt municipals (1) 2,901 7.63% 14,112 7.42% 14,649 6.98% 7,671 6.99% 39,333 7.19%
----- ------ ------ ----- ------
Total 2,901 7.63% 14,112 7.42% 14,649 6.98% 7,671 6.99% 39,333 7.19%
----- ---- ------ ---- ------ ---- ----- ---- ------ ----
Total securities $ 7,180 5.94% $31,566 6.18% 29,539 6.47% 13,048 6.71% 81,333 6.34%
======= ==== ======= ==== ====== ==== ====== ==== ====== ====
</TABLE>
(1) YIELDS ON TAX-EXEMPT SECURITIES HAVE BEEN COMPUTED ON A TAX-EQUIVALENT
BASIS.
SEE NOTE 2 TO THE CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 1998,
FOR AN ANALYSIS OF GROSS UNREALIZED GAINS AND LOSSES IN THE SECURITIES
PORTFOLIO.
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES 21
<PAGE>
DEPOSITS
The Corporation is 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, 1998 of $304.3 million reflected an increase of
$23.4 million (8.3%) compared to $280.9 million at 1997 year end. Non-interest
bearing deposits increased $4.1 million (14.2%) to $33.2 million at 1998 year
end compared to $29.1 million at December 31, 1997. During the same period,
interest bearing deposits increased 7.7% to $271.1 million at 1998 year end,
compared to $251.8 million at December 31, 1997. While these figures are as of
a specific day at year end, it is more meaningful to review average deposits
for the year. For 1998, average total deposits of $293.6 million reflected a
6.8% increase over the 1997 average of $275.0 million. All components of
deposits other than money market showed increases in 1998.
Total deposits at 1997 year end of $280.9 million reflected an increase of $11
million (4.1%) compared to $269.9 million at 1996 year end. Average deposits
for 1997 were $275 million, an increase of 7% or $18.1 million compared to 1996
average deposits of $256.9 million. Average non-interest bearing deposit growth
in 1997 was 9.0% while interest bearing deposits increased 6.8%. The trend of a
higher growth rate of non-interest bearing deposits compared to more costly
certificates of deposit has assisted the Corporation in controlling the cost of
funds and managing its net interest margin.
- --------------------------------------------------------------------
AVERAGE DEPOSITS AND RATES PAID
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
-------------------------------------------------------------------------------
1998 1997 1996
----------------------- ------------------------- -------------------------
(DOLLARS IN THOUSANDS) Amount Rate Amount Rate Amount Rate
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Non-interest bearing accounts $ 30,739 $ 27,347 $ 25,089
Interest bearing accounts:
Interest checking 31,608 2.62% 28,480 2.75% 27,254 2.76%
Money market 28,518 3.35% 29,127 3.28% 27,889 3.27%
Regular savings 69,157 4.14% 61,414 4.08% 57,453 3.94%
Certificates of deposit:
Less than $100,000 116,073 5.36% 114,129 5.37% 106,179 5.39%
$100,000 and over 17,490 5.55% 14,469 5.33% 13,012 5.48%
-------- --------- ---------
Total interest bearing 262,846 4.51% 247,619 4.50% 231,787 4.47%
-------- --------- ---------
TOTAL AVERAGE DEPOSITS $293,585 $ 274,966 $ 256,876
======== --------- ---------
</TABLE>
- --------------------------------------------------------------------------------
MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 AND OVER
<TABLE>
<CAPTION>
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, 1998 $ 2,611 $ 12,091 $ 5,183 $ 1,532 $21,417 7.04%
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 6.64%
- ------------------------------------------------------------------------------------------------------
</TABLE>
22
<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 and
borrowed funds.
Regulatory authorities have adopted guidelines to establish minimum capital
standards. Specifically the guidelines classify assets and 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, 1998, EVB had
total capital of 20.59% and a Tier 1 ratio of 19.34%, 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. When the Corporation was formed in 1997, both of the
subsidiary banks had a capital structure that far exceeded regulatory
guidelines and created significant challenges in managing the return on equity.
After evaluating a variety of alternatives to more effectively utilize its
strong capital base and to create additional value to our shareholders,
management transferred $15.6 million from the subsidiary banks to the parent
company at year end 1997 and another $7.0 million at year end 1998. Dividends
are paid out of parent company capital, and in November 1998 the Corporation
announced a stock repurchase program that will permit repurchase of up to
300,000 shares by year end 1999 or slightly over 5% of the Corporation's
outstanding shares at the time of the announcement. The repurchase plan is
intended to reduce high capital levels and to increase return on equity to
shareholders.
The table which follows provides an analysis of the Corporation's capital as of
December 31, 1998, 1997 and 1996. Note 17 in the Consolidated Financial
Statements provides an analysis of the capital position of each of the
subsidiary banks as of year end 1998 and 1997.
- --------------------------------------------------------------------------------
ANALYSIS OF CAPITAL
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------
(DOLLARS IN THOUSANDS) 1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
TIER 1 CAPITAL:
Common stock $ 10,286 $ 10,377 $ 10,374
Additional paid in capital 3,729 221 206
Retained earnings 27,877 28,535 24,977
-------- -------- --------
Total Tier 1 capital 41,892 39,133 35,557
TIER 2 CAPITAL:
Allowable portion of
allowance for loan losses 2,722 2,552 2,281
-------- -------- --------
Total risk based capital 44,614 41,685 37,838
Risk-weighted assets 216,630 202,786 183,390
CAPITAL RATIOS:
Tier 1 risk based capital 19.34% 19.30% 19.59%
Total risk based capital 20.59% 20.56% 20.85%
Tier 1 capital to average
total assets 12.39% 12.87% 11.89%
</TABLE>
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES 23
<PAGE>
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 through 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, 1998, $103.4 million or 31.3% of total earning assets were due to mature
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 $31.5 million at December 31, 1998. There were no outstanding
borrowings at 1998 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 at 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.
- --------------------------------------------------------------------------------
IMPACT OF THE YEAR 2000 ISSUE
THE PROBLEM
The Year 2000 issue (Y2K) involves the risk that computer programs and computer
systems may not be able to perform without interruption into the new
millennium. On older computers, memory and storage space were limited and
expensive. In many cases, only the last two digits of the year (99) were used,
with the century (19) being implied. At the turn of the century, some computers
may recognize the year "00" as 1900 instead of 2000, causing problems ranging
from minor inaccuracies to systems failures. EVB is committed to achieving Year
2000 readiness well in advance of the millennium change. It is EVB's goal to
continue to deliver uninterrupted and unparalleled service into the 21st
century and beyond.
EVB and its subsidiary banks are dependent upon various hardware and software
systems which may be impacted by this century date change. In 1997, the
Corporation initiated a review and assessment of all possible systems which may
be affected, including hardware, software, telecommunications, environmental
systems and security systems. Based on this assessment the Corporation believes
that its mainframe hardware and banking software are currently Y2K compliant.
However testing is required to confirm this. Testing began in early 1998 and
will continue through the second quarter of 1999. For some systems, the
Corporation determined that replacement or modification of certain pieces of
hardware would be required for systems to function properly in the year 2000. A
new mainframe computer was installed in the third quarter of 1998, and
provisions have been made for other equipment that has been determined not to
be year 2000 compliant.
YEAR 2000 PROJECT PHASES
In 1997, EVB developed a comprehensive five step plan to prepare for the
millennium change as outlined below:
PHASE I -- ORGANIZATIONAL AWARENESS -- Management determined that the strategic
importance of Year 2000 as a business objective must be understood by the Board
of Directors, senior management, officers and employees of all affiliates.
PHASE II -- ASSESSING ACTIONS AND DEVELOPING DETAILED PLANS -- Management
created a detailed inventory of centralized and decentralized software,
hardware, and networks as well as equipment that might contain embedded
computer chips, and logic. This inventory went beyond the obvious business
computer processing systems to also include HVAC systems, vaults, and security
equipment.
24
<PAGE>
PHASE III -- RENOVATING SYSTEMS, APPLICATIONS, AND EQUIPMENT -- In this phase,
the necessary upgrading of hardware and operating systems takes place. In
addition, the contingency plans are developed identifying alternative
approaches if renovations of current software, hardware and equipment should
fail to adequately correct any deficiencies.
PHASE IV -- VALIDATING RENOVATED SYSTEMS THROUGH TESTING -- In this phase EVB
has developed and coordinated detailed test schedules with correspondents and
vendors to ensure Year 2000 preparedness.
PHASE V -- IMPLEMENTATION -- Implementation requires careful planning to ensure
that interrelated applications are coordinated as to when they go into
production. This phase also includes monitoring of systems throughout 1999 and
into 2000 to ensure date functions and interdependencies work properly.
MISSION CRITICAL SYSTEM TESTING
Based on the areas identified, the banks have prioritized the systems into
three categories: mission critical, medium risk and low risk. Mission critical
applications have been certified as compliant by the specific vendors. The
banks are currently testing these systems and project that the majority of
testing will be completed by early second quarter 1999. An FDIC review of the
vendor that provides our primary hardware and software has been completed and
the vendor's performance was rated as completely satisfactory. Additionally we
have completed proxy testing these same systems. The banks have also received
verification of compliance from vendors in the medium risk and low risk
categories. All vendors are either compliant or have documented projects with
completion dates prior to June 30, 1999. Corporate management has been working
steadily on all related aspects of business that could be affected, and EVB has
been scrutinized by regulatory authorities to ensure that it is proceeding with
a prudent plan of action for year 2000 readiness and keeping its customers
informed.
As of December 31, 1998, EVB and its subsidiary banks have spent approximately
$100,000 associated with Year 2000 compliance. These costs include testing,
training, hardware and software replacement and upgrades. It is anticipated
that another $75,000 will be expended to complete the Year 2000 changes and
testing. EVB estimates that 1998 cost of addressing this Y2K issue was
approximately 1.3% of 1998 earnings (or 0.29% of assets) which was immaterial
when considering the size of the Corporation. Year 2000 issue costs in 1999 and
2000 are also expected to be immaterial. The projections of total costs of
EVB's Year 2000 project and the expected completion dates are based on EVB's
best estimates, which are necessarily based in part on assumptions of future
events including the availability of adequate resources and completion of third
party modification plans.
Management believes it has taken all reasonable steps to minimize the
operational, regulatory and legal risks associated with the century date
change. Large borrowers have been interviewed to determine applicable risks,
and loan documentation has been amended to address Year 2000 issues. The
Company has followed a recommended regulatory outline for this project, and is
maintaining documentation to address any legal issues. Each of the subsidiary
banks has implemented a written contingency plan which addresses actions to be
taken in the event of problems related to the Year 2000 date change issue.
Management believes that the current staffing levels are sufficient to complete
the project and to administer contingency plans if necessary.
CONTINGENCY PLANS
Simultaneous with its continued testing of mission critical systems, EVB is
preparing alternate solutions through a business resumption contingency plan to
mitigate potential risks on January 1, 2000. This contingency plan is being
developed for all core business functions and their supporting information
technology systems and will include trigger dates for implementation of
alternative solutions. Core business risks are being prioritized based upon
greatest risk to the Corporation. Contingency plans will identify financial and
human resources necessary for their execution.
The risk of failure is not limited to internal technology systems. The
Corporation depends on data provided by its business partners, correspondent
banks, Federal Reserve Bank and other third parties. EVB also depends on
vendors from which telecommunications, software, and other services are
provided. Finally, EVB depends on services provided by the public
infrastructure including power, voice and data communications, water, and
transportation. EVB's contingency plan will address these concerns to ensure
that the Corporation can operate at an acceptable level should infrastructure
problems occur.
WORST-CASE YEAR 2000 SCENARIO
Until the Year 2000 event actually occurs and for a period of time thereafter,
there can be no assurance that there will be no problems related to Year 2000.
The Corporation could face, among other things, business disruptions,
operational problems, financial losses, legal liability and similar risks, and
the Corporation's business, results of operations and financial position could
be materially adversely affected. The Corporation's
EASTERN VIRGINIA BANKSHARES 25
<PAGE>
credit risk associated with borrowers may increase to the extent borrowers fail
to adequately address Year 2000 issues.
While the Corporation has no reason to conclude that a failure will occur, the
most likely worst-case Y2K scenarios entail those items over which EVB has
absolutely no control, (1) the unpredictable actions of illogical public demand
even if the Y2K computer issue presents no problems, and (2) a scenario where a
disruption or failure of the Corporation's power suppliers or voice and data
transmission suppliers impacts the Corporation, its customers, vendors and the
public infrastructure. If such public reaction or a failure were to occur, the
Corporation would implement a contingency plan. While it is impossible to
quantify the impact of such scenarios, the most reasonably likely worst-case
scenario would entail liquidity issues related to increased customer
withdrawals or the diminishment of service levels, resulting in customer
inconvenience, and additional costs associated with the implementation of
contingency plans.
The foregoing Year 2000 discussion contains "forward-looking statements" within
the meaning of the Private Securities Litigation Act of 1995. Such statements
are based on management's best current estimates, which were derived utilizing
numerous assumptions about future events, including the continued availability
of certain resources, representations received from third-party vendors and
other factors. However there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from the Corporation's
current estimates. The inability to control the actions and plans of vendors
and suppliers, customers, government entities, and other third parties with
respect to Year 2000 issues are associated risks. Specific factors that might
cause such material differences include, but are not limited to: results of
Year 2000 testing; adequate resolution of Year 2000 issues by governmental
agencies, businesses or other third parties that are service providers,
borrowers or customers of the Corporation; the adequacy of and ability to
implement contingency plans; and similar uncertainties. The forward-looking
statements made in the foregoing Year 2000 discussion speak only as of the date
on which such statements are made, and the Corporation undertakes no obligation
to update any forward-looking statement to reflect events or circumstances
after the date on which such statement is made or reflect the occurrence of
unanticipated events.
The foregoing Year 2000 discussion constitutes a Year 2000 Readiness Disclosure
within the meaning of the Year 2000 Readiness and Disclosure Act of 1998.
- ---------------------------------------
ACCOUNTING RULE CHANGES
FASB No. 133 "Accounting for Derivative Instruments and Hedging Activities" was
issued in June 1998, to provide a uniform approach for the accounting and
reporting of all derivatives and hedging activities, and is effective for
fiscal years beginning after June 15, 1999, but permits institutions to adopt
an earlier effective date. While EVB has no hedging or derivative investments,
this FASB also contained a provision that permitted a FASB 115 reclassification
of securities, effective at the time of initial application of FASB 133. The
Board's of the subsidiary banks adopted this Rule effective October 1, 1998 to
take early advantage of the securities reclassification provision.
- --------------------------------------------------------------------------------
26
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
1998 1997
--------------- ----------------
<S> <C> <C>
ASSETS
Cash and due from banks $ 10,864,363 $ 9,319,359
Interest-bearing deposits, in other banks -- 99,570
Federal funds sold 10,658,000 2,642,000
Securities available for sale at fair value 41,999,579 39,736,304
Securities held to maturity at amortized cost, fair value of $40,308,465
and $39,349,876, respectively 39,332,854 38,361,408
Loans, net 235,804,960 224,113,138
Deferred income taxes 953,228 1,242,428
Bank premises and equipment 4,697,684 4,200,373
Accrued interest receivable 2,422,692 2,479,356
Other real estate 267,551 85,794
Other assets 993,922 1,150,121
------------- -------------
Total assets $ 347,994,833 $ 323,429,851
============= -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing demand accounts $ 33,215,958 $ 29,094,646
Savings accounts and interest-bearing deposits 136,520,757 118,110,797
Time deposits 134,593,761 133,676,261
------------- -------------
Total deposits 304,330,476 280,881,704
Accrued interest payable 740,523 794,507
Other liabilities 667,169 2,488,724
Commitments and contingent liabilities -- --
------------- -------------
Total liabilities 305,738,168 284,164,935
------------- -------------
SHAREHOLDERS' EQUITY
Common stock of $2 par value per share; authorized 50,000,000
shares; issued and outstanding, 5,142,834 and 5,188,576,
respectively 10,285,668 10,377,152
Surplus 3,729,504 220,803
Retained earnings 27,876,655 28,535,343
Accumulated other comprehensive income 364,838 131,618
------------- -------------
Total shareholders' equity 42,256,665 39,264,916
------------- -------------
Total liabilities and shareholders' equity $ 347,994,833 $ 323,429,851
============= -------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES 27
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
--------------------------------------------------
1998 1997 1996
---------------- -------------- --------------
<S> <C> <C> <C>
INTEREST INCOME
Loans and fees on loans $ 21,412,321 $20,007,134 $18,230,869
Interest on investment securities:
Taxable interest income -- 327,679 293,197
Tax exempt interest income 1,852,478 1,899,613 1,921,589
Interest on securities available for sale:
Taxable interest income 2,572,219 2,398,437 2,351,633
Dividends 60,125 67,519 57,554
Interest on Federal funds sold 768,872 391,978 348,736
Interest on deposits in other banks 3,743 510 --
------------ ----------- -----------
Total interest income 26,669,758 25,092,870 23,203,578
------------ ----------- -----------
INTEREST EXPENSE
Deposits 11,845,364 11,138,095 10,360,045
Short-term borrowings 290 5,928 --
------------ ----------- -----------
Total interest expense 11,845,654 11,144,023 10,360,045
------------ ----------- -----------
Net interest income 14,824,104 13,948,847 12,843,533
PROVISION FOR LOAN LOSSES 448,959 412,200 437,186
------------ ----------- -----------
Net interest income after provision for loan losses 14,375,145 13,536,647 12,406,347
OTHER INCOME
Service charges on deposit accounts 1,322,337 1,083,544 1,034,757
Gain (loss) on sale of available for sale securities 8,035 (27,604) (52,327)
Other operating income 441,908 385,323 296,050
------------ ----------- -----------
1,772,280 1,441,263 1,278,480
------------ ----------- -----------
OTHER EXPENSES
Salaries and benefits 4,145,489 3,541,517 3,372,107
Net occupancy expense 1,021,247 989,705 889,652
Equipment expense 315,069 271,480 262,195
Other operating expenses 2,960,571 2,902,429 2,407,385
------------ ----------- -----------
8,442,376 7,705,131 6,931,339
------------ ----------- -----------
Income before income taxes 7,705,049 7,272,779 6,753,488
INCOME TAX EXPENSE 2,087,573 1,964,985 1,709,981
------------ ----------- -----------
Net income $ 5,617,476 $ 5,307,794 $ 5,043,507
============ ----------- -----------
Earnings Per Share, basic and assuming dilution $ 1.08 $ 1.02 $ .97
============ ----------- -----------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
28
<PAGE>
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
--------------------------------------------------------------------------------------------
Accumulated
Other
Common Retained Comprehensive Comprehensive
Stock Surplus Earnings Income Income Total
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995 $ 10,401,827 $ 308,164 $ 21,542,820 $ 140,430 $ 32,393,241
Comprehensive income:
Net income - 1996 -- -- 5,043,507 -- $ 5,043,507 5,043,507
Other comprehensive income:
Unrealized holding losses
arising during period,
(net of tax, $142,031) -- -- -- -- (275,707) --
Reclassification adjustment,
(net of tax, $17,792) -- -- -- -- 34,536 --
Other comprehensive income -----------
(net of tax, $124,239) -- -- -- (241,171) (241,171) (241,171)
Total comprehensive income -- -- -----------
Cash dividends declared -- -- -- -- $ 4,802,336 --
Shares sold under dividend
reinvestment plan 30,110 152,169 -- -- 182,279
Shares purchased and retired (57,497) (254,346) -- -- (311,843)
------------ ----------- ------------ ---------- ------------
BALANCE, DECEMBER 31, 1996 10,374,440 205,987 24,976,854 (100,741) 35,456,540
Comprehensive income:
Net income - 1997 -- -- 5,307,794 -- $ 5,307,794 5,307,794
Other comprehensive income:
Unrealized holding gains
arising during period
(net of tax, $110,315) -- -- -- -- 214,140 --
Reclassification adjustment
(net of tax, $9,398) -- -- -- -- 18,219 --
Other comprehensive income -----------
(net of tax, $119,713) -- -- -- 232,359 232,359 232,359
-----------
Total comprehensive income -- -- -- -- $ 5,540,153 --
===========
Cash dividends declared -- -- (1,740,175) -- (1,740,175)
Shares sold under dividend
reinvestment plan 11,616 62,151 -- -- 73,767
Shares repurchased and retired (8,904) (47,335) -- -- (56,239)
Cash paid in lieu of fractional
shares -- -- (9,130) -- (9,130)
------------ ----------- ------------ ---------- ------------
BALANCE, DECEMBER 31, 1997 10,377,152 220,803 28,535,343 131,618 39,264,916
Comprehensive income:
Net income - 1998 -- -- 5,617,476 -- $ 5,617,476 5,617,476
Other comprehensive income:
Unrealized holding gains
arising during period
(net of tax, $122,875) -- -- -- -- 238,523 --
Reclassification adjustment
(net of tax, $2,732) -- -- -- -- (5,303) --
Other comprehensive income -----------
(net of tax, $120,143) -- -- -- 233,220 233,220 233,220
-----------
Total comprehensive income -- -- -- -- $ 5,850,696 --
===========
Cash dividends declared -- -- (2,276,164) -- (2,276,164)
Shares repurchased and retired (91,484) (491,299) -- -- (582,783)
Discretionary transfer -- 4,000,000 (4,000,000) -- --
------------ ----------- ------------ ---------- ------------
BALANCE, DECEMBER 31, 1998 $ 10,285,668 $ 3,729,504 $ 27,876,655 $ 364,838 $ 42,256,665
============ =========== ============ ========== ============
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES 29
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
------------------------------------------------------
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,617,476 $ 5,307,794 $ 5,043,507
Adjustments to reconcile net income to net cash provided by
operating activities:
Loss from equity investment in partnership 16,868 18,912 8,915
Depreciation and amortization 764,667 710,939 721,662
Deferred tax (benefit) provision 169,071 (40,765) 26,826
Provision for loan losses 448,959 412,200 437,186
Net gain on other real estate (6,587) (28,273) (24,000)
Net gain on sale of bank premises and equipment (9,452) -- (100)
(Gain) loss realized on available for sale securities (8,035) 27,604 52,327
Accretion of discounts and amortization of premiums, net (50,838) (25,738) 44,702
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable 56,664 (77,074) (110,254)
(Increase) decrease in other assets 156,225 (189,907) (168,000)
Increase (decrease) in accrued interest payable (53,984) 47,996 1,672
Increase (decrease) in other liabilities (1,821,555) (129,588) 816,116
------------- ------------- -------------
Net cash provided by operating activities 5,279,479 6,034,100 6,850,559
------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of securities available for sale 986,215 10,775,770 3,024,280
Maturities and principal repayments of securities available for sale 30,365,423 4,300,000 10,828,662
Maturities of securities held to maturity 4,928,700 6,690,050 3,419,292
Purchases of investment securities available for sale (28,683,708) (11,034,811) (20,841,651)
Purchases of investment securities held to maturity (10,436,023) (5,573,394) (6,497,794)
Proceeds from sale of other real estate 49,587 270,128 489,734
Net (increase) in loans (12,365,538) (21,957,554) (14,115,522)
Purchases of bank premises and equipment (1,264,435) (1,307,300) (202,073)
Proceeds from sale of bank premises and equipment 11,909 -- 100
(Increase) decrease in deposits with other banks 99,570 (99,570) --
------------- ------------- -------------
Net cash (used in) investing activities (16,308,300) (17,936,681) (23,894,972)
------------- ------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposit accounts, interest- bearing demand
deposits and savings accounts 22,531,272 8,251,830 8,729,466
Net increase in certificates of deposit 917,500 2,727,212 9,514,100
Proceeds from sale of stock -- 73,767 182,279
Repurchases and retirement of stock (582,783) (56,239) (311,843)
Dividends paid (2,276,164) (1,749,305) (1,609,473)
------------- ------------- -------------
Net cash provided by financing activities 20,589,825 9,247,265 16,504,529
------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents 9,561,004 (2,655,316) (539,884)
CASH AND CASH EQUIVALENTS
Beginning of year 11,961,359 14,616,675 15,156,559
------------- ------------- -------------
End of year $ 21,522,363 $ 11,961,359 $ 14,616,675
============= ------------- -------------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest $ 11,899,638 $ 11,096,028 $ 10,358,373
============= ------------- -------------
Income taxes $ 2,166,398 $ 1,946,176 $ 1,829,247
============= ------------- -------------
SUPPLEMENTAL DISCLOSURES OF NONCASH FINANCING ACTIVITIES, transfers
from loans to foreclosed real estate $ 224,757 $ 131,945 $ 43,000
============= ------------- -------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
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:
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, Northumberland, King & Queen, King William, Middlesex,
Richmond, Lancaster, Hanover, Gloucester and Caroline.
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
consolidated financial statements include the accounts of SSB and BNI.
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.
CASH AND CASH EQUIVALENTS
The Corporation's definition of cash and cash equivalents as shown in the
statements of cash flows includes cash on hand, amounts due from banks, Federal
funds sold and other short-term, highly liquid investments with original
maturities of three months or less.
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.
LOANS
Loans are shown on the 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
EASTERN VIRGINIA BANKSHARES 31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
management's judgment the loan will be paid in full. Loans that meet the
regulatory definitions of doubtful or loss generally qualifies 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.
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.
FORECLOSED PROPERTIES
Property acquired through foreclosure is stated at the lower of the recorded
cost or the estimated fair value of the property. 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.
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.
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.
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.
INVESTMENT SECURITIES
The fair value of investment securities are based on quoted market prices.
LOANS
The estimate of fair value of the loan portfolio is estimated based on present
values using applicable rates currently offered on similar products.
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.
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.
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
32
<PAGE>
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. Weighted average shares were 5,178,700, 5,188,071 and
5,177,428 for the years ended 1998, 1997 and 1996, respectively. The
Corporation had no potential common stock as of December 31, 1998, 1997 and
1996.
DEFINED BENEFIT PLAN
In 1998, the Corporation adopted Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits." This pronouncement does not change the measurement or recognition of
amounts recognized in the Corporation's financial statements applicable to its
defined benefit plan. Statement No. 132 revises the existing disclosure
requirements by standardizing the disclosure requirements for pensions
requiring certain additional information on changes in the benefit obligations
and fair values of plan assets, and eliminating certain disclosures.
COMPREHENSIVE INCOME
As of January 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income". SFAS No.
130 establishes new rules for the reporting and display of comprehensive income
and its components; however, the adoption of this statement had no impact on
the Corporation's net income or shareholders' equity. SFAS No. 130 requires
other comprehensive income to include the unrealized gains or losses on
available for sale securities, which prior to adoption were reported separately
in shareholders' equity. The financial statements for previous periods have
been reclassified to conform to the requirements of SFAS No. 130.
DERIVATIVE FINANCIAL INSTRUMENTS
As of October 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." Statement 133 establishes accounting and reporting
standards for derivative financial instruments and other similar financial
instruments and for hedging activities. The Statement also allowed securities
classified as held to maturity to be transferred to the available for sale
category at the date of initial application of this standard. The Corporation
does not have any derivative instruments and hedging activities as defined
under this Statement.
ADVERTISING
The Corporation practices the policy of charging advertising costs to expense
as incurred.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period balances to conform to
the current year presentation.
- --------------------------------------------------------------------------------
NOTE 2. SECURITIES
The following is a comparison of amortized cost and estimated fair values of
securities at December 31, 1998 and 1997:
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Government obligations $ 9,567,133 $ 202,286 $ (1,965) $ 9,767,454
Obligations of U.S. Government agencies 24,055,904 219,580 (62,048) 24,213,436
Corporate bonds 2,030,220 25,090 -- 2,055,310
Obligations of state/political subdivisions 4,589,780 175,209 (5,367) 4,759,622
Other securities 1,203,757 -- -- 1,203,757
------------ ----------- ----------- ------------
41,446,794 622,165 (69,380) 41,999,579
------------ ----------- ----------- ------------
Held to Maturity:
Obligations of state/political subdivisions 39,332,854 1,069,105 (93,494) 40,308,465
------------ ----------- ----------- ------------
Total $ 80,779,648 $ 1,691,270 $ (162,874) $ 82,308,044
============ =========== =========== ============
</TABLE>
EASTERN VIRGINIA BANKSHARES 33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
<TABLE>
<CAPTION>
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 1,385,748 -- -- 1,385,748
------------ ----------- ----------- ------------
39,536,880 283,820 (84,396) 39,736,304
------------ ----------- ----------- ------------
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 $ 77,898,288 $ 1,370,579 $ (182,687) $ 79,086,180
------------ ----------- ----------- ------------
</TABLE>
The following is a comparison of amortized cost and estimated fair values of
the Corporation's securities by contractual maturity at December 31, 1998:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
- ---------------------------------------------------------------
<S> <C> <C>
Available for Sale:
One year or less $ 4,216,825 $ 4,253,632
1-5 years 16,686,388 17,059,166
5-10 years 9,080,708 9,171,340
After 10 years 1,403,757 1,418,123
Mortgage-backed securities 10,059,116 10,097,318
------------ ------------
41,446,794 41,999,579
------------ ------------
Held to Maturity:
One year or less 3,002,611 3,026,797
1-5 years 12,540,456 12,940,200
5-10 years 16,119,391 16,683,548
After 10 years 7,670,396 7,657,920
------------ ------------
39,332,854 40,308,465
------------ ------------
Total $ 80,779,648 $ 82,308,044
============ ============
</TABLE>
Proceeds from sales of securities available for sale were $986,215 for the year
ended December 31, 1998. Gross gains of $8,035 were realized on those sales.
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. The book value of securities pledged to secure public deposits and other
purposes amounts to $7,769,488 and $4,326,260 at December 31, 1998 and 1997,
respectively.
As permitted under FASB No. 133, the Corporation transferred securities held to
maturity with a book value of $4,466,031 and a market value of $4,608,947 to
securities available for sale as of October 1, 1998.
- --------------------------------------------------------------------------------
34
<PAGE>
NOTE 3. LOANS
The following is a comparison of loans by type which were outstanding at
December 31, 1998 and 1997:
<TABLE>
<CAPTION>
(THOUSANDS) 1998 1997
- --------------------------------------------------------------
<S> <C> <C>
Real estate -- construction $ 6,096 $ 6,430
Real estate -- mortgage 130,856 118,639
Commercial real estate 23,114 27,324
Commercial, industrial and
agricultural loans 30,649 32,901
Loans to individuals for
household, family and other
consumer expenditures 51,481 45,723
All other loans 961 294
--------- ---------
Total gross loans 243,157 231,311
Less unearned income and
deferred loan fees (3,493) (3,330)
Less allowance for loan losses (3,860) (3,868)
--------- ---------
Total net loans $ 235,804 $ 224,113
========= ---------
</TABLE>
- --------------------------------------------------------------------------------
NOTE 4. ALLOWANCE FOR LOAN LOSSES
The following is a summary of the activity in the allowance for loan losses:
<TABLE>
<CAPTION>
1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 3,868,433 $ 3,642,753 $ 3,814,699
Provisions charged against income 448,959 412,200 437,186
Recoveries of loans charged off 209,827 458,604 220,199
Loans charged off (667,223) (645,124) (829,331)
----------- ----------- -----------
Balance at end of year $ 3,859,996 $ 3,868,433 $ 3,642,753
=========== ----------- -----------
</TABLE>
Information about impaired loans as of and for the years ended December 31,
1998, 1997 and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans $ 216,031 $ 1,684,877 $1,538,854
Allowance provided for impaired
loans, included in the allowance
or loan losses -- -- 21,228
Average balance in impaired loans 570,069 1,718,165 1,425,194
Interest income recognized 7,170 2,440 --
</TABLE>
Nonaccrual loans excluded from impaired loan disclosure under FASB 114 amounted
to $1,410,770, $1,337,522 and $2,332,134 at December 31, 1998, 1997 and 1996.
If interest on these loans had been accrued such income would have approximated
$78,077, $306,589 and $290,695, respectively.
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES 35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 5. RELATED PARTY TRANSACTIONS
Loans to directors and officers totaled $5,362,631 and $6,180,622 at December
31, 1998 and 1997, respectively. New advances to directors and officers totaled
$2,216,212 and repayments totaled $3,034,203 in the year ended December 31,
1998.
- --------------------------------------------------------------------------------
NOTE 6. BANK PREMISES AND EQUIPMENT
The detail of bank premises and equipment is as follows:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------
<S> <C> <C>
Land $ 1,110,174 $ 1,110,174
Buildings 4,309,223 4,002,265
Furniture, fixtures and equipment 5,085,269 4,384,858
----------- -----------
10,504,666 9,497,297
Less accumulated depreciation 5,806,982 5,296,924
----------- -----------
Book value $ 4,697,684 $ 4,200,373
=========== -----------
</TABLE>
The depreciation charged to expense for the years ended December 31, 1998, 1997
and 1996, amounted to $764,667, $710,939 and $601,856, respectively.
- --------------------------------------------------------------------------------
NOTE 7. DEPOSITS
The aggregate amount of certificates of deposit with a minimum denomination of
$100,000, was approximately $21,417,002 and $17,635,887 in 1998 and 1997,
respectively.
At December 31, 1998, the scheduled maturities of time deposits were as
follows:
<TABLE>
<S> <C>
1999 $ 92,394,203
2000 33,987,888
2001 8,063,685
2002 --
2003 --
2004 and thereafter 147,985
-------------
Total $ 134,593,761
-------------
</TABLE>
- --------------------------------------------------------------------------------
NOTE 8. 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 14 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, 1998 and 1997, the aggregate
amounts of daily average required balances were approximately $669,000 and
$520,000.
The Corporation is conducting a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 Issue, and is
developing a remediation plan to resolve the Issue. The Issue is whether
computer systems will properly recognize date-sensitive information when the
year changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail. The Corporation is
heavily dependent on computer processing in the conduct of its business
activities. Failure of these systems could have a significant impact on the
Corporation's operations.
- --------------------------------------------------------------------------------
36
<PAGE>
NOTE 9. INCOME TAXES
Income taxes applicable to net income for the years ended December 31, 1998,
1997 and 1996, were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable $ 1,918,502 $ 2,005,750 $ 1,683,155
Deferred tax (benefit) 169,071 (40,765) 26,826
----------- ----------- -----------
$ 2,087,573 $ 1,964,985 $ 1,709,981
=========== ----------- -----------
</TABLE>
The following is a reconciliation of the expected tax expense with the reported
expense for the years ended December 31, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected tax expense at statutory rate $ 2,619,717 $ 2,473,952 $ 2,296,185
Increase (decrease) in taxes resulting from:
Tax-exempt interest (541,405) (581,277) (585,052)
Other (22,267) (51,567) (1,152)
Merger expenses 31,528 123,877 --
----------- ----------- -----------
$ 2,087,573 $ 1,964,985 $ 1,709,981
=========== ----------- -----------
</TABLE>
The components of the deferred income tax asset are as follows:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Depreciation and amortization $ 148,944 $ 140,737
Deferred loan fees 27,188 60,994
Allowance for loan losses 1,097,916 1,100,810
Interest on nonaccrual loans 33,153 72,260
Pension liability 1,353 59,941
Other 4,264 41,584
---------- -----------
1,312,818 1,476,326
---------- -----------
Deferred tax liabilities:
Net unrealized gain on available for sale securities 187,946 67,817
Deferred loan costs 163,756 158,193
FHLB dividend 7,888 7,888
---------- -----------
359,590 233,898
---------- -----------
Net deferred tax asset $ 953,228 $ 1,242,428
========== -----------
</TABLE>
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES 37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 10. 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. Information about the plan follows:
<TABLE>
<CAPTION>
1998 1997
- --------------------------------------------------------------------------------------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation, beginning $ 3,458,415 $ 2,754,328
Service cost 222,583 194,090
Interest cost 257,668 204,861
Actuarial loss 402,697 352,743
Benefits paid (78,727) (47,607)
----------- -----------
Benefit obligation, ending 4,262,636 3,458,415
----------- -----------
CHANGE IN PLAN ASSETS
Fair value of plan assets, beginning 3,700,705 2,837,030
Actual return on plan assets (48,988) 736,906
Employer contributions 321,550 174,376
Benefits paid (78,727) (47,607)
----------- -----------
Fair value of plan assets, ending 3,894,540 3,700,705
----------- -----------
Funded status (368,096) 242,290
Unrecognized net actual (gain) loss 112,210 (688,435)
Unrecognized net obligation at transition 36,762 40,556
Unrecognized prior service cost 164,667 178,811
----------- -----------
Accrued benefit cost included in other liabilities $ (54,457) $ (226,778)
=========== -----------
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost $ 222,583 $ 194,090 $ 172,497
Interest cost 257,668 204,861 191,124
Expected return on plan assets (331,006) (253,276) (236,098)
Amortization of prior service cost 14,144 14,144 14,144
Amortization of net obligation at transition 3,794 3,794 3,794
Recognized net actuarial gain (17,954) (14,274) (15,783)
---------- ---------- ----------
Net periodic benefit cost $ 149,229 $ 149,339 $ 129,678
========== ---------- ----------
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31
Discount rate 7.5% 7.5% 7.5%
Expected return on plan assets 9.0 9.0 9.0
Rate of compensation increase 5.0 5.0 6.0
</TABLE>
38
<PAGE>
401(K) PLAN
Southside Bank 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 Southside Bank 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 $41,593, $71,800 and $110,000 were
included in expenses for the years ended December 31, 1998, 1997 and 1996,
respectively.
Bank of Northumberland, Inc. has a 401(k) defined contribution plan applicable
to all eligible employees. Contributions to the Plan are at the employees'
election; however, the Bank of Northumberland, Inc. does not contribute to the
Plan.
- --------------------------------------------------------------------------------
NOTE 11. OTHER OPERATING EXPENSES
For the years ended December 31, 1998, 1997 and 1996, other operating expenses
included the following:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Data processing $ 542,873 $ 261,080 $ 276,015
Printing supplies and postage 575,713 505,620 447,674
Taxes other than income 192,957 302,132 276,212
Merger costs 92,726 364,285 --
Other 1,556,302 1,469,312 1,407,484
---------- ---------- ----------
$2,960,571 $2,902,429 $2,407,385
========== ---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
NOTE 12. 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, 1998, there were no unrestricted
funds which could be transferred from the banking subsidiaries to the parent
corporation without regulatory approval.
- --------------------------------------------------------------------------------
NOTE 13. 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, 1998.
The Corporation has unused lines of credit totaling $11,500,000 with
nonaffiliated banks as of December 31, 1998.
- --------------------------------------------------------------------------------
NOTE 14. 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 statement of financial position. 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
EASTERN VIRGINIA BANKSHARES 39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
Corporation's exposure to off-balance-sheet risk as of December 31, 1998 and
1997, is as follows:
<TABLE>
<CAPTION>
(THOUSANDS) 1998 1997
- --------------------------------------------------------------
<S> <C> <C>
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $22,151 $18,963
Standby letters of credit 740 865
</TABLE>
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.
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 15. CREDIT RISK
As of December 31, 1998, the Corporation had $5,539,450 in deposits in
financial institutions in excess of amounts insured by the Federal Deposit
Insurance Corporation (FDIC).
- --------------------------------------------------------------------------------
NOTE 16. FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair values of the Corporation's financial instruments at:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
------------------------ -----------------------
Estimated Estimated
Carrying Fair Carrying Fair
(THOUSANDS) Amount Value Amount Value
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS:
Cash and short-term investments $21,522 $21,522 $12,061 $12,061
Securities - available for sale 42,000 42,000 39,736 39,736
Securities - held to maturity 39,333 40,308 38,361 39,350
Loans 235,805 244,182 224,113 227,113
FINANCIAL LIABILITIES:
Noninterest-bearing deposits 33,216 33,216 29,095 29,095
Interest-bearing deposits 271,114 271,969 251,787 253,401
</TABLE>
- --------------------------------------------------------------------------------
NOTE 17. 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.
40
<PAGE>
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, 1998, that
the Corporation meets all capital adequacy requirements to which it is subject.
As of the most recent notification from the Federal Deposit Insurance
Corporation 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.
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, 1998:
- -------------------------
Total Capital (to Risk
Weighted Assets)
Consolidated $44,614 20.59% -$17,330 -8.00% N/A
SSB $13,308 9.94% -$10,716 -8.00% -$-13,395 -10.00%
BNI $11,568 14.01% -$6,606 -8.00% -$8,257 -10.00%
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $41,892 19.34% -$8,665 -4.00% N/A
SSB $11,623 8.68% -$5,358 -4.00% -$8,037 -6.0%
BNI $10,533 12.76% -$3,303 -4.00% -$4,954 -6.0%
Tier 1 Capital (to
Average Assets)
Consolidated $41,892 12.39% -$13,520 -4.00% N/A
SSB $11,623 5.91% -$7,865 -4.00% -$9,831 -5.00%
BNI $10,533 7.56% -$5,572 -4.00% -$6,965 -5.00%
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%
</TABLE>
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES 41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
NOTE 18. CONDENSED FINANCIAL INFORMATION -- PARENT CORPORATION ONLY
EASTERN VIRGINIA BANKSHARES, INC.
(PARENT CORPORATION ONLY)
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------
1998 1997
- ----------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash on deposit with subsidiary banks $ 19,726,946 $ 15,598,521
Investment in subsidiaries 22,521,378 23,666,395
Other assets 60,028 --
------------ ------------
Total assets $ 42,308,352 $ 39,264,916
============ ------------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES, other liabilities $ 51,687 $ --
------------ ------------
SHAREHOLDERS' EQUITY
Common stock 10,285,668 10,377,152
Capital surplus 3,729,504 220,803
Retained earnings 27,876,655 28,535,343
Accumulated other comprehensive income 364,838 131,618
------------ ------------
Total shareholders' equity 42,256,665 39,264,916
------------ ------------
Total liabilities and shareholders' equity $ 42,308,352 $ 39,264,916
============ ------------
</TABLE>
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
--------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Income:
Dividends from subsidiaries $ 6,995,376 $ 15,607,651
Interest from subsidiaries 474,353 --
Miscellaneous income 29,650 --
------------ -------------
7,499,379 15,607,651
------------ -------------
Expenses:
Management fees 332,800 --
Miscellaneous 170,866 --
------------ -------------
503,666 --
------------ -------------
Net income before distributions in excess of earnings of
subsidiary 6,995,713 15,607,651
Distributions in excess of earnings of subsidiaries (1,378,237) (10,299,857)
------------ -------------
Net income $ 5,617,476 $ 5,307,794
============ -------------
</TABLE>
42
<PAGE>
EASTERN VIRGINIA BANKSHARES, INC.
(PARENT CORPORATION ONLY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
-----------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,617,476 $ 5,307,794
Adjustments to reconcile net income to net cash provided by
operating activities:
Distributions in excess of earnings of subsidiaries 1,378,237 10,299,857
(Increase) in other assets (60,028) --
Increase in other liabilities 51,687 --
------------ ------------
Net cash provided by operating activities 6,987,372 15,607,651
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash paid in lieu of fractional shares -- (9,130)
Dividends paid (2,276,164) --
Shares repurchased and retired (582,783) --
------------ ------------
Net cash (used in) financing activities (2,858,947) (9,130)
------------ ------------
Increase in cash and cash equivalents 4,128,425 15,598,521
CASH AND CASH EQUIVALENTS, beginning of year 15,598,521 --
------------ ------------
CASH AND CASH EQUIVALENTS, end of year $ 19,726,946 $ 15,598,521
============ ------------
</TABLE>
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES 43
<PAGE>
INDEPENDENT AUDITOR'S REPORT
[LOGO]
Yount, Hyde & Barbour, P.C.
Certified Public Accountants
and Consultants
The Shareholders and Board of Directors
Eastern Virginia Bankshares, Inc. and Subsidiaries
Tappahannock, Virginia
We have audited the accompanying consolidated balance sheets of Eastern
Virginia Bankshares, Inc. and Subsidiaries as of December 31, 1998 and 1997,
and the related consolidated statements of income, shareholders' equity and
cash flows for the years ended December 31, 1998 and 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 audits. We did not audit the financial statements of the Bank of
Northumberland, Inc., a consolidated subsidiary for the two years ended
December 31, 1997, which statements reflect total assets and revenue
constituting 42.1% and 39.5%, respectively in 1997, and 40.5% of revenue in
1996, 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 year 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 audits 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 audits and the report of the other
auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits 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, 1998 and 1997, and the results of their
operations and their cash flows for the years then ended, in conformity with
generally accepted accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 7, 1999
- --------------------------------------------------------------------------------
[LOGO]
GOODMAN & COMPANY, L.L.P.
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITOR'S REPORT
The Shareholders and Board of Directors
Bank of Northumberland, Inc.
We have audited the balance sheet of Bank of Northumberland, Inc. (the "Bank")
as of December 31, 1997, and the related statements of income, changes in
shareholders' equity and cash flows for each of the two 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 the results of its operations and its cash flows
for each of the two 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
- --------------------------------------------------------------------------------
44
<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
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES 45
<PAGE>
OFFICERS
EASTERN VIRGINIA BANKSHARES
THOMAS M. BOYD, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
ROBERT L. COVINGTON
CHAIRMAN OF THE BOARD
L. EDELYN DAWSON, JR.
SECRETARY
F.L. GARRETT, III
VICE CHAIRMAN
LEWIS R. REYNOLDS
EXECUTIVE VICE PRESIDENT
NED STEPHENSON
CHIEF FINANCIAL OFFICER
- -------------------------
OFFICERS
BANK OF NORTHUMBERLAND
SYLVIA O. BARTLETT
ASSISTANT VICE PRESIDENT
LISA K. BAUGHAN
ASSISTANT VICE PRESIDENT
ROBERT L. COVINGTON
CHAIRMAN OF THE BOARD
L. EDELYN DAWSON, JR.
SENIOR VICE PRESIDENT
JOYCE W. HALL
ASSISTANT CASHIER
REBEKAH H. HAYNIE
ASSISTANT CASHIER
W. LESLIE KILDUFF
VICE PRESIDENT
DOROTHY C. REYNOLDS
CASHIER & ASSISTANT SECRETARY
LEWIS R. REYNOLDS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
CHARLES R. THRIFT, JR.
VICE PRESIDENT
- -------------------------
SOUTHSIDE BANK
PATRICIA H. BARRETT
ASSISTANT VICE PRESIDENT
TRAINING AND HUMAN RESOURCES OFFICER
TAPPAHANNOCK
T. M. BOYD, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
PATSY C. CLOW
BRANCH MANAGER
BOWLING GREEN
SHIRLEY M. DANIEL
ASSISTANT BRANCH MANAGER
GLOUCESTER
CAROLYN H. ELLIOTT
ASSISTANT OPERATIONS OFFICER
TAPPAHANNOCK
DENNIS W. ELMORE
VICE PRESIDENT
BRANCH OPERATIONS
TAPPAHANNOCK
RICK A. FULK
ASSISTANT VICE PRESIDENT
GLOUCESTER
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
SHEILAH E. SEAL
ASSISTANT BRANCH MANAGER
AYLETT
MAE W. STATON
BRANCH MANAGER
ESSEX SQUARE
CLAY S. SMITH
ASSISTANT BRANCH MANAGER
BOWLING GREEN
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
- ----------------------------------------------------
46
<PAGE>
[MAP OF THE LOCATIONS LISTED BELOW]
Callao
Heathsville
Bowling
Green
Tappahannock
Burgess
Essex Square
Aylett
Hartfield
Hanover
Urbanna
Deltaville
Gloucester
RICHMOND
<TABLE>
<CAPTION>
Southside Bank Northumberland
- -------------- --------------
<S> <C> <C>
TAPPAHANNOCK DELTAVILLE BURGESS
Main Office U. S. Routes 33 & 1101 14953 Northumberland Hwy.
307 Church Lane P. O. Box 188 P. O. Box 81
P. O. Box 1005 Deltaville, VA 23043 Burgess, VA 22432
Tappahannock, VA 22560 (804) 776-0777 (804) 453-7003
(804) 443-4333
TAPPAHANNOCK GLOUCESTER CALLAO
Essex Square Office 7132 George Washington 110 Northumberland Hwy.
Essex Square Shopping Center Memorial Highway P. O. Box 1040
P. O. Box 2128 P.O. Box 1820 Callao, VA 22435
Tappahannock, VA 22560 Gloucester, VA 23061 (804) 529-6158
(804) 443-9381 (804) 694-4700
HARTFIELD HEATHSVILLE
AYLETT U. S. Routes 3 & 33 6358 Northumberland Hwy.
8270 Richmond/Tappahannock Hwy. P. O. Box 250 P. O. Box 9
P. O. Box 123 Hartfield, VA 23071 Heathsville, VA 22473
Aylett, VA 23009 (804) 776-7677 (804) 580-3621
(804) 769-3001
BOWLING GREEN HANOVER
202 N. Main Street 4241 Mechanicsville Turnpike
P. O. Box 1009 P. O. Box 397
Bowling Green, VA 22427 Mechanicsville, VA 23111
(804) 633-5075 (804) 779-3232
URBANNA
291 Virginia Street
P. O. Box 817
Urbanna, VA 23175
(804) 758-3096
</TABLE>
Eastern Virginia Bankshares 47
<PAGE>
Bank of Northumberland, Inc.
[PHOTO]
HEATHSVILLE
[PHOTO]
BURGESS
[photo]
CALLAO
48
<PAGE>
Southside Bank
[PHOTO]
TAPPAHANNOCK
[PHOTO]
ESSEX SQUARE
[PHOTO]
AYLETT
Eastern Virginia Bankshares 49
<PAGE>
Southside Bank
[PHOTO]
BOWLING GREEN
[PHOTO]
DELTAVILLE
[PHOTO]
HARTFIELD
[PHOTO]
HANOVER
50
<PAGE>
[PHOTO]
URBANNA
[PHOTO]
GLOUCESTER
[PHOTO]
OPERATION CENTER
Eastern Virginia Bankshares 51
<PAGE>
Stockholder Information
Corporate Headquarters
- -------------------------------------------------------------------------------
Eastern Virginia Bankshares, Inc.
307 Church Lane
P.O. Box 1005
Tappahannock, VA 22560-1005
Annual Meeting
- -------------------------------------------------------------------------------
The Annual Meeting of Stockholders will be held Thursday, May 20, 1999, at 9:30
a.m. at Saint Margaret's School, 444 Water Lane, Tappahannock, Virginia. All
shareholders are cordially invited to attend.
Common Stock
- -------------------------------------------------------------------------------
Eastern Virginia Bankshares common stock is traded on the NASDAQ Small Cap
Market under the symbol EVBS. On December 31, 1998 there were approximately
2,000 shareholders. The CUSIP number is 277196101.
Common Stock Performance
and Dividends
- -------------------------------------------------------------------------------
Eastern Virginia Bankshares, Inc. commenced operations on December 29, 1997,
with the acquisition of Southside Bank and Bank of Northumberland, Inc., and its
common stock began trading on the NASDAQ Small Cap market on January 5, 1998.
Prior to the commencement of operations by 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 prior to January 5, 1998, that
providing trading history for the predecessor companies would not be
appropriate.
Investor Relations
- -------------------------------------------------------------------------------
Eastern Virginia Bankshares' Annual Report, Form 10-K and other corporate
publications are available to shareholders on request without charge, by
writing:
Ned Stephenson, Vice President
and Chief Financial Officer
Eastern Virginia Bankshares
P. O. Box 1005
Tappahannock, VA 22560
Phone: (804) 443-4333
Fax: (804) 443-1271
Transfer Agent
- -------------------------------------------------------------------------------
Shareholders requiring information on stock transfer requirements, lost
certificates, dividends and other shareholder matters should contact our
transfer agent:
Southside Bank
Stock Transfer Department
P. O. Box 1005
Tappahannock, VA 22560
Phone: (804) 443-4333
Independent Auditors
- -------------------------------------------------------------------------------
Yount, Hyde & Barbour, P.C.
50 South Cameron Street
Winchester, Virginia 22604
- -------------------------------------------------------------------------------
[EASTERN VIRGINIA BANKSHARES LOGO]
Common Stock Price Dividends Declared
- -------------------------------------------------------------------------------
High 1998 Low 1998 1998 1997 1996
First Quarter $ 22.50 $ 17.50 $ 0.11 -- --
Second Quarter 22.00 20.50 0.11 0.120 0.027
Third Quarter 21.75 16.50 0.11 -- --
Fourth Quarter 20.00 15.75 0.11 0.215 0.283
Year ended
December 31 $ 17.50 $ 17.50 $ 0.44 0.34 0.310
52
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE 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> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 10,864
<INT-BEARING-DEPOSITS> 271,115
<FED-FUNDS-SOLD> 10,658
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 42,000
<INVESTMENTS-CARRYING> 39,333
<INVESTMENTS-MARKET> 40,308
<LOANS> 239,665
<ALLOWANCE> 3,860
<TOTAL-ASSETS> 347,995
<DEPOSITS> 304,330
<SHORT-TERM> 0
<LIABILITIES-OTHER> 1,408
<LONG-TERM> 0
0
0
<COMMON> 10,286
<OTHER-SE> 31,971
<TOTAL-LIABILITIES-AND-EQUITY> 347,995
<INTEREST-LOAN> 21,412
<INTEREST-INVEST> 4,485
<INTEREST-OTHER> 773
<INTEREST-TOTAL> 26,670
<INTEREST-DEPOSIT> 11,846
<INTEREST-EXPENSE> 11,846
<INTEREST-INCOME-NET> 14,824
<LOAN-LOSSES> 449
<SECURITIES-GAINS> 8
<EXPENSE-OTHER> 8,442
<INCOME-PRETAX> 7,705
<INCOME-PRE-EXTRAORDINARY> 5,617
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,617
<EPS-PRIMARY> 1.08
<EPS-DILUTED> 1.08
<YIELD-ACTUAL> 4.39
<LOANS-NON> 1,626
<LOANS-PAST> 1,190
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 922
<ALLOWANCE-OPEN> 3,868
<CHARGE-OFFS> 667
<RECOVERIES> 210
<ALLOWANCE-CLOSE> 3,860
<ALLOWANCE-DOMESTIC> 3,860
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
EASTERN VIRGINIA BANKSHARES, INC.
307 CHURCH LANE
TAPPAHANNOCK, VIRGINIA 22560-1005
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD
THURSDAY, MAY 20, 1999
The second Annual Meeting of Shareholders of Eastern Virginia Bankshares, Inc.
(the "Company" or "EVB") will be held at Saint Margaret's School, 444 Water
Lane, Tappahannock, Virginia on Thursday, May 20, 1999, at 9:30 A.M. for the
following purposes:
1. To elect directors to serve for the ensuing year and until their successors
are elected and qualified;
2. To ratify the appointment by the Board of Directors of Yount, Hyde and
Barbour, P.C., independent certified public accountants, as auditors for
the Company for the ensuing year; and
3. To act upon such other matters as may properly come before the meeting or
any adjournment thereof.
Only shareholders of record at the close of business on April 9, 1999, will be
entitled to vote at the Annual Meeting.
Attendance at the Annual Meeting will be limited to shareholders of record,
persons holding proxies from shareholders, and certain representatives of the
press and financial community. If you wish to attend the Annual Meeting, but
your shares are held in the name of a broker, bank or other nominee, you should
bring with you written confirmation from such nominee of your beneficial
ownership.
You are invited to attend the Annual Meeting in person. Whether you plan to
attend or not, it is important that your shares be represented. Please
complete, sign, date and return the enclosed proxy card promptly in the
enclosed self-addressed, postage-paid envelope. If you attend the meeting, you
may vote in person even if you have previously returned a Proxy Card.
Directors and Officers of the Company as well as a representative of Yount,
Hyde & Barbour, P.C., certified public accountants, will be present at the
meeting to answer any questions that shareholders may have. DUE TO LIMITED
SEATING SPACE, LUNCH WILL NOT BE SERVED.
By Order of the Board of Directors
/s/ L. E. Dawson, Jr.
---------------------
L. Edelyn Dawson, Jr.
Corporate Secretary
PLEASE COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT PROMPTLY
IN THE ENCLOSED ENVELOPE. IF YOU ATTEND THE MEETING, YOU MAY VOTE EITHER IN
PERSON OR THROUGH YOUR PROXY.
Tappahannock, Virginia
April 27, 1999
<PAGE>
EASTERN VIRGINIA BANKSHARES, INC.
PROXY STATEMENT
This Proxy Statement and the enclosed proxy card ("Proxy") are furnished in
connection with the SOLICITATION OF PROXIES BY THE BOARD OF DIRECTORS OF
EASTERN VIRGINIA BANKSHARES, INC. to be voted at the 1999 Annual Meeting of
Shareholders to be held Thursday, May 20, 1999, at 9:30 a.m. at Saint
Margaret's School, 444 Water Lane, Tappahannock, Virginia, and any adjournment
thereof. The distribution of this Proxy Statement and related proxy material
will commence on or about April 27, 1999.
VOTING AND REVOCATION OF PROXIES
All properly executed proxies delivered pursuant to this solicitation will be
voted at the Annual Meeting in accordance with instructions noted thereon or,
if no direction is indicated, they will be voted in favor of the proposals set
forth in the Notice of Annual Meeting. Any shareholder giving a proxy has the
right to revoke it at any time before the proxy is voted by giving written
notice to the Secretary of the Company, by executing or delivering a substitute
proxy or by attending the Annual Meeting and revoking the proxy at the meeting.
VOTING RIGHTS OF SHAREHOLDERS
Only Shareholders of record at the close of business on April 9, 1999, will be
entitled to notice of and to vote at the Annual Meeting or any adjournment
thereof. As of the close of business on the record date, 5,131,034 shares of
Common Stock, par value $2.00 per share, were outstanding and entitled to vote
at the Annual Meeting. The Company has no other class of stock outstanding.
Each share of Common Stock will entitle the holder thereof to one vote on all
matters to come before the Annual Meeting. A majority of the votes entitled to
be cast, represented in person or by proxy, will constitute a quorum for the
transaction of business.
SOLICITATION OF PROXIES
The cost of the solicitation of proxies will be borne by the Company. In
addition to solicitation by use of the mail, certain officers and employees of
the Company (who will not be compensated in addition to their regular salaries)
may solicit proxies personally or by telephone. The Company will, upon written
request, reimburse brokerage firms and other custodians, nominees and
fiduciaries, for reasonable expenses incurred by them in forwarding proxy
material to beneficial owners of EVB Common Stock.
PROPOSAL 1. ELECTION OF DIRECTORS
The nine individuals named below, each of whom currently serves on the Board of
Directors, will be nominated to serve as directors until the 2000 Annual
Meeting of Shareholders. A majority vote is required for their election.
Company bylaws provide that at the first five annual elections of Directors of
EVB, beginning in 1998, nominations made by the Board of EVB will consist of
five individuals designated by Directors of EVB who are also Directors of
Southside Bank and four individuals designated by Directors of EVB who are also
Directors of Bank of Northumberland, Inc. The persons named in the proxy will
vote for the election of nominees named below unless authority is withheld. If
for any reason any of the persons named below should become unavailable to
serve, an event which management does not anticipate, proxies will be voted for
the remaining nominees and such other person or persons as the Board of
Directors may designate.
1
<PAGE>
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THE NOMINEES SET
FORTH BELOW. The nine nominees receiving the greatest number of affirmative
votes cast at the Annual Meeting will be elected.
<TABLE>
<CAPTION>
NAME (AGE) DATE FIRST
OF DIRECTOR ELECTED PRINCIPAL OCCUPATION DURING PAST 5 YEARS
- ----------------------- ----------- ----------------------------------------------------------
<S> <C> <C>
Thomas M. Boyd, Jr. 1997 President and Chief Executive Officer of EVB since its
Age 59 formation in December, 1997, and President and Chief
Executive Officer and a Director of Southside Bank
since 1982
W. Rand Cook 1997 Attorney with McCaul, Martin, Evans & Cook, P.C. in
Age 45 Mechanicsville, Virginia and a Director of Southside
Bank since 1996
Robert L. Covington 1997 Chairman of the Board of EVB since its formation in
Age 73 December 1997, and Chairman of the Board of Bank of
Northumberland, Inc. since 1991 and a Director of Bank
of Northumberland, Inc. since 1968. He was the President
and Chief Executive Officer of Bank of Northumberland,
Inc. prior to 1991
L. Edelyn Dawson, Jr. 1997 Secretary of the Board of EVB and Senior Vice President
Age 58 and Secretary of the Bank of Northumberland, Inc. since
1991 and a Director of the Bank of Northumberland, Inc.
since 1997
F. L. Garrett, III 1997 Vice Chairman of the Board of EVB and Chairman of the
Age 59 Board of Southside Bank, and a director of Southside
Bank since 1982. Oysterman and realtor in Essex County,
Virginia
F. Warren Haynie, Jr. 1997 Attorney with F. Warren Haynie, Jr., P.C. in Heathsville,
Age 60 Virginia and a Director of Bank of Northumberland, Inc.
since 1987
Eric A. Johnson 1997 General Manager of Mason Realty, Inc. in Urbanna,
Age 45 Virginia, and a Director of Southside Bank since 1988
William L. Lewis 1997 Attorney with Lewis & Ware, P.C. in Tappahannock,
Age 48 Virginia and a Director of Southside Bank since 1989
Lewis R. Reynolds 1997 Executive Vice President of EVB, and President and
Age 48 Chief Executive Officer of Bank of Northumberland, Inc.
since 1991, and a Director of Bank of Northumberland,
Inc. since 1994
</TABLE>
BOARD OF DIRECTORS AND COMMITTEES
During 1998, the Board of Directors held twelve regular monthly meetings, and
one special meeting. All incumbent directors attended at least 75% of such
meetings. The full Board acts on all matters and has appointed no standing
committees other than the Audit Committee.
AUDIT COMMITTEE. The Audit Committee, whose members are Messrs. Johnson, Cook
and Haynie, recommends the independent auditors to be selected by the Board,
discusses with the independent auditors the scope of their proposed audit,
reviews the audit reports, discusses with management the implementation of the
auditor's recommendations, reviews the fee of the independent auditors for
audit and non-audit services, reviews the adequacy of the Company's system of
internal controls and reviews reports of audit activities performed by the
Company's internal auditor. The Committee met once in 1998.
2
<PAGE>
DIRECTORS FEES. Directors fees of $38,200 were paid by the Company in 1998.
Each director receives an annual retainer of $2,400 plus a fee of $400 per
meeting attended. Members of the Board who also serve as salaried officers of
subsidiary banks do not receive director's fees.
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The following table sets forth information, as of April 9, 1999, relating to
beneficial ownership of Company Common Stock held by each director and director
nominee and each executive officer named in the Summary Compensation Table
below, and by the directors and all executive officers as a group.
As of April 9, 1999, no person beneficially owned 5% or more of the Company's
Common Stock. Mr. Covington is the only director who beneficially owned more
than 1% of the Company's Common Stock. His percentage ownership as of April 9,
1999 was 1.63%, and the directors and all executive officers as a group
beneficially owned as of that date 4.05% of the outstanding shares of Common
Stock.
<TABLE>
<CAPTION>
Name Stock Ownership
- --------------------------------------------- ----------------
<S> <C>
Thomas M. Boyd, Jr. 23,682
W. Rand Cook 1,172
Robert L. Covington 83,534
L. Edelyn Dawson, Jr. 16,256
F. L. Garrett, III 23,224
F. Warren Haynie, Jr. 4,000
Eric A. Johnson 5,442
William L. Lewis 20,335
Lewis R. Reynolds 18,238
All present executive officers and directors
as a group (10 persons) 207,913
</TABLE>
EXECUTIVE COMPENSATION
Executive Officers of EVB receive no compensation from EVB. At present, all
executive officers of EVB also are executive officers of either Southside Bank
or Bank of Northumberland, Inc. which do compensate their executive officers.
The table below, sets forth certain information concerning the annual and
long-term compensation earned by the Chief Executive Officer and all other
executive officers of the Company whose total compensation exceeded $100,000,
for each of the three fiscal years ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION (1)
------------------------
NAME AND ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION 401 (k) (2)
- ---------------------- ------ ----------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Thomas M. Boyd, Jr. 1998 $120,000 $ 100 $3,600
President and Chief 1997 $114,000 $ 100 $4,560
Executive Officer 1996 $108,000 $ 100 $ 6,696 $6,480
Lewis R. Reynolds 1998 $ 87,200 $21,420 --
Executive Vice 1997 $ 83,900 $19,371 --
President 1996 $ 77,428 $17,710 --
</TABLE>
- ----------
(1) The value of perquisites and other personal benefits did not exceed the
lesser of $50,000 or ten percent of total annual salary and bonus.
(2) These amounts represent contributions to a 401 (k) Plan and Profit Sharing
Plan.
3
<PAGE>
EMPLOYMENT CONTRACTS
The Company's subsidiary Bank of Northumberland, Inc. has employment agreements
with certain Bank executive officers, including Mr. Reynolds and Mr. Dawson to
serve as officers of Bank of Northumberland, Inc. Both contracts are for
five-year terms and expire on November 13, 2001. Each contract also provides
for automatic renewals for successive terms on one year at a time, unless the
contract is terminated by Bank of Northumberland, Inc. or the employee. Both
officers' salary are determined at the sole discretion of Bank of
Northumberland, Inc's. Board of Directors, with a minimum 1996 salary of
$72,628 for Mr. Reynolds and $67,450 for Mr. Dawson. In the event that either
officer's employment is terminated under this agreement within six months
before or 18 months after a change of control of Bank of Northumberland, Inc.,
the officer is entitled to receive the greater of (i) his current salary and
benefits or (ii) the level of such salary and benefits in effect over the most
recent 12 months preceding the date of his termination of employment. Each
officer would be eligible to receive this compensation subsequent to his
termination in these circumstances over the longer of (i) an additional 12
months, or (ii) the remainder of his unexpired original term.
SHAREHOLDER RETURN ON INVESTMENT
The Company is subject to the rules of the Securities and Exchange Commission
(the "SEC") that require all public companies to present a graph of total
investment return in their annual proxy statements. The rules require a line
graph which compares the Corporation's cumulative shareholder return on its
Common Stock with the Standard & Poor's 500 Stock Index ("S&P 500 Stock Index")
and either a published industry index or an index of peer companies selected by
the Corporation. The graph below presents a comparison of the Corporation's
performance with the S&P 500 Stock Index and the SNL Securities $250 to $500
million Bank Index ("the SNL $250m-$500m Bank Asset Size Index"), assuming that
investments of $100 were made on January 2, 1998, and that divdidends were
reinvested. SNL Securities, based in Charlottesville, Virginia is a research
and publishing firm specializing in the collection and dissemination of data on
the financial securities industry. This graph covers the period of time from
the beginning of trading in EVBS stock in January, 1998 through December 31,
1998.
[GRAPH]
E. VA S&P 500 SNL
------- -------- -----
1/12/98 100 100 100
3/31/98 124.64 113.41 106.01
6/30/98 126.73 117.15 106.38
9/30/98 104.64 105.50 90
12/31/98 103.76 127.96 89.85
<TABLE>
<CAPTION>
PERIOD ENDING
-------------------------------------------------------------------
INDEX 1/2/98 3/31/98 6/30/98 9/30/98 12/31/98
- --------------------------------------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Eastern Virginia Bankshares, Inc. 100.00 124.64 126.73 104.64 103.76
S&P 500 100.00 113.41 117.15 105.50 127.96
SNL $250M-$500M Bank Asset-Size Index 100.00 106.01 106.38 90.00 89.85
</TABLE>
While the growth in the Corporation's stock price since its inception a year
ago has lagged behind the S&P 500 Stock Index, the Coporation outperformed its
peer group.
4
<PAGE>
INTEREST OF DIRECTORS AND OFFICERS IN CERTAIN TRANSACTIONS
The Company's banking subsidiaries extended credit to directors and officers of
the Company and its subsidiaries during 1998. All such loans (i) were made in
the ordinary course of business, (ii) were made on substantially the same terms
including interest rates and collateral requirements as those of comparable
loans to other customers, and (iii) did not involve more than the normal risk
of collectibility nor do they present other unfavorable features.
The banking subsidiaries of the Company, pursuant to the Company's employee
loan policy, make individual general purpose loans on a nondiscriminatory basis
to employees of subsidiaries at interest rates below those for comparable
transactions with other persons. This policy does not extend to executive
officers, principal officers or directors. The subsidiary banks are prohibited
from making loans, with the exception of residential mortgages and educational
loans, to executive officers in excess of certain dollar limits fixed by
banking laws.
F. Warren Haynie, Jr., a director of the Company, is a principal in the
Heathsville law firm of F. Warren Haynie, Jr. P.C., which serves as legal
counsel for Bank of Northumberland, Inc. William L. Lewis, a director of the
Company, is a principal in the Tappahannock law firm of Lewis and Ware, P.C.,
which serves as legal counsel for Southside Bank
COMPLIANCE WITH STOCK OWNERSHIP REPORTING REQUIREMENTS
Pursuant to Section 16(a) of the Securities Exchange Act of 1934, as amended,
directors and executive officers of the Company are required to file reports
with the SEC indicating their holdings of and transactions in the Company's
stock. To the Company's knowledge, based on the December 29, 1997 formation
date of the Company, review of stock transfer records and oral representations
that no other reports were required, insiders of the Company complied with all
filing requirements during 1998.
PROPOSAL 2. INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors has appointed Yount, Hyde & Barbour, P.C., as the
Company's independent public accountants for the year 1999, and has further
directed that management submit the selection of independent public accountants
for ratification by the shareholders at the Annual Meeting. Yount, Hyde &
Barbour, P.C. has served as the Company's independent public accountants since
the Company's formation in 1997. The firm has advised the Company that neither
the firm nor any member of the firm now has, or has held during the past five
years, any direct or indirect financial interest in the Company or any of its
subsidiaries. Representatives of the firm are expected to be present at the
Annual Meeting and will be given an opportunity to make a statement if they
desire to do so and will be available to respond to appropriate questions.
OTHER MATTERS
As of the date of this Proxy Statement, management of the Company has no
knowledge of any matters to be presented for consideration at the Annual
Meeting other than those referred to above. If any other matter properly comes
before the Annual Meeting, the persons named in the accompanying proxy intend
to vote such proxy, to the extent entitled, in accordance with their best
judgment.
PROPOSALS FOR THE 2000 ANNUAL MEETING
SEC Reg. 240.14a-8.(a)(3)(i) provides that, in addition to any other applicable
requirements, for business to be properly brought before the Annual Meeting by
a shareholder (including shareholder nominations of Director candidates), the
shareholder must give timely notice to the Secretary of the Company at least
120 days prior to the proxy statement date for the Annual Meeting. As to each
matter, the notice must comply with certain informational requirements set
forth in the Bylaws.
In order for a shareholder proposal to be considered for possible inclusion in
the 2000 Proxy Statement, it must be received by the Secretary of the Company
no later than November 30, 1999.
5
<PAGE>
IMPACT OF THE YEAR 2000 ISSUE
THE PROBLEM
The Year 2000 issue (Y2K) involves the risk that computer programs and computer
systems may not be able to perform without interruption into the new
millennium. On older computers, memory and storage space were limited and
expensive. In many cases, only the last two digits of the year (99) were used,
with the century (19) being implied. At the turn of the century, some computers
may recognize the year "00" as 1900 instead of 2000, causing problems ranging
from minor inaccuracies to systems failures. EVB is committed to achieving Year
2000 readiness well in advance of the millennium change. It is EVB's goal to
continue to deliver uninterrupted and unparalleled service into the 21st
century and beyond.
EVB and its subsidiary banks are dependent upon various hardware and software
systems which may be impacted by this century date change. In 1997, the
Corporation initiated a review and assessment of all possible systems which may
be affected, including hardware, software, telecommunications, environmental
systems and security systems. Based on this assessment the Corporation believes
that its mainframe hardware and banking software are currently Y2K compliant.
However testing is required to confirm this. Testing began in early 1998 and
will continue through the second quarter of 1999. For some systems, the
Corporation determined that replacement or modification of certain pieces of
hardware would be required for systems to function properly in the year 2000. A
new mainframe computer was installed in the third quarter of 1998, and
provisions have been made for other equipment that has been determined not to
be year 2000 compliant.
YEAR 2000 PROJECT PHASES
In 1997, EVB developed a comprehensive five step plan to prepare for the
millennium change as outlined below:
PHASE I - ORGANIZATIONAL AWARENESS - Management determined that the strategic
importance of Year 2000 as a business objective must be understood by the Board
of Directors, senior management, officers and employees of all affiliates.
PHASE II - ASSESSING ACTIONS AND DEVELOPING DETAILED PLANS - Management created
a detailed inventory of centralized and decentralized software, hardware, and
networks as well as equipment that might contain embedded computer chips, and
logic. This inventory went beyond the obvious business computer processing
systems to also include HVAC systems, vaults, and security equipment.
PHASE III - RENOVATING SYSTEMS, APPLICATIONS, AND EQUIPMENT - In this phase,
the necessary upgrading of hardware and operating systems takes place. In
addition, the contingency plans are developed identifying alternative
approaches if renovations of current software, hardware and equipment should
fail to adequately correct any deficiencies.
PHASE IV - VALIDATING RENOVATED SYSTEMS THROUGH TESTING - In this phase EVB has
developed and coordinated detailed test schedules with correspondents and
vendors to ensure Year 2000 preparedness.
PHASE V - IMPLEMENTATION - Implementation requires careful planning to ensure
that interrelated applications are coordinated as to when they go into
production. This phase also includes monitoring of systems throughout 1999 and
into 2000 to ensure date functions and interdependencies work properly.
MISSION CRITICAL SYSTEM TESTING
Based on the areas identified, the banks have prioritized the systems into
three categories: mission critical, medium risk and low risk. Mission critical
applications have been certified as compliant by the specific vendors. The
banks are currently testing these systems and project that the majority of
testing will be completed by early second quarter 1999. An FDIC review of the
vendor that provides our primary hardware and software has been completed and
the vendor's performance was rated as completely satisfactory. Additionally we
have completed proxy testing these same systems. The banks have also received
verification of compliance from vendors in the medium risk and low risk
categories. All vendors are either compliant or have documented projects with
completion dates prior to June 30, 1999. Corporate management has been working
steadily on all related aspects of
6
<PAGE>
business that could be affected, and EVB has been scrutinized by regulatory
authorities to ensure that it is proceeding with a prudent plan of action for
year 2000 readiness and keeping its customers informed.
As of December 31, 1998, EVB and its subsidiary banks have spent approximately
$100,000 associated with Year 2000 compliance. These costs include testing,
training, hardware and software replacement and upgrades. It is anticipated
that another $75,000 will be expended to complete the Year 2000 changes and
testing. EVB estimates that 1998 cost of addressing this Y2K issue was
approximately 1.3% of 1998 earnings (or 0.29% of assets) which was immaterial
when considering the size of the Corporation. Year 2000 issue costs in 1999 and
2000 are also expected to be immaterial. The projections of total costs of
EVB's Year 2000 project and the expected completion dates are based on EVB's
best estimates, which are necessarily based in part on assumptions of future
events including the availability of adequate resources and completion of third
party modification plans.
Management believes it has taken all reasonable steps to minimize the
operational, regulatory and legal risks associated with the century date
change. Large borrowers have been interviewed to determine applicable risks,
and loan documentation has been amended to address Year 2000 issues. The
Company has followed a recommended regulatory outline for this project, and is
maintaining documentation to address any legal issues. Each of the subsidiary
banks has implemented a written contingency plan which addresses actions to be
taken in the event of problems related to the Year 2000 date change issue.
Management believes that the current staffing levels are sufficient to complete
the project and to administer contingency plans if necessary.
CONTINGENCY PLANS
Simultaneous with its continued testing of mission critical systems, EVB is
preparing alternate solutions through a business resumption contingency plan to
mitigate potential risks on January 1, 2000. This contingency plan is being
developed for all core business functions and their supporting information
technology systems and will include trigger dates for implementation of
alternative solutions. Core business risks are being prioritized based upon
greatest risk to the Corporation. Contingency plans will identify financial and
human resources necessary for their execution.
The risk of failure is not limited to internal technology systems. The
Corporation depends on data provided by its business partners, correspondent
banks, Federal Reserve Bank and other third parties. EVB also depends on
vendors from which telecommunications, software, and other services are
provided. Finally, EVB depends on services provided by the public
infrastructure including power, voice and data communications, water, and
transportation. EVB's contingency plan will address these concerns to ensure
that the Corporation can operate at an acceptable level should infrastructure
problems occur.
WORST-CASE YEAR 2000 SCENARIO
Until the Year 2000 event actually occurs and for a period of time thereafter,
there can be no assurance that there will be no problems related to Year 2000.
The Corporation could face, among other things, business disruptions,
operational problems, financial losses, legal liability and similar risks, and
the Corporation's business, results of operations and financial position could
be materially adversely affected. The Corporation's credit risk associated with
borrowers may increase to the extent borrowers fail to adequately address Year
2000 issues.
While the Corporation has no reason to conclude that a failure will occur, the
most likely worst-case Y2K scenarios entail those items over which EVB has
absolutely no control, (1) the unpredictable actions of irrational public
demand even if the Y2K computer issue presents no problems, and (2) a scenario
where a disruption or failure of the Corporation's power suppliers or voice and
data transmission suppliers impacts the Corporation, its customers, vendors and
the public infrastructure. If such public reaction or a failure were to occur,
the Corporation would implement a contingency plan. While it is impossible to
quantify the impact of such scenarios, the most reasonably likely worst-case
scenario would entail liquidity issues related to increased customer
withdrawals or the diminishment of service levels, resulting in customer
inconvenience, and additional costs associated with the implementation of
contingency plans.
The foregoing Year 2000 discussion contains "forward-looking statements" within
the meaning of the Private Securities Litigation Act of 1995. Such statements
are based on management's best current estimates, which
7
<PAGE>
were derived utilizing numerous assumptions about future events, including the
continued availability of certain resources, representations received from
third-party vendors and other factors. However there can be no guarantee that
these estimates will be achieved, and actual results could differ materially
from the Corporation's current estimates. The inability to control the actions
and plans of vendors and suppliers, customers, government entities, and other
third parties with respect to Year 2000 issues are associated risks. Specific
factors that might cause such material differences include, but are not limited
to: results of Year 2000 testing; adequate resolution of Year 2000 issues by
governmental agencies, businesses or other third parties that are service
providers; borrowers or customers of the Corporation: the adequacy of and
ability to implement contingency plans; and similar uncertainties. The
forward-looking statements made in the foregoing Year 2000 discussion speak
only as of the date on which such statements are made, and the Corporation
undertakes no obligation to update any forward-looking statement to reflect
events or circumstances after the date on which such statement is made or
reflect the occurrence of unanticipated events.
The foregoing Year 2000 discussion constitutes a Year 2000 Readiness Disclosure
within the meaning of the Year 2000 Readiness and Disclosure Act of 1998.
ANNUAL REPORT ON FORM 10-K
A copy of the Company's Annual Report on Form 10-K for 1998, filed with the
SEC, excluding exhibits, can be obtained without charge by writing to Ned
Stephenson, Vice President and Chief Financial Officer; Eastern Virginia
Bankshares, Inc.; P.O. Box 1005; Tappahannock, Virginia 22560.
By Order of the Board of Directors
L. Edelyn Dawson, Jr.
Corporate Secretary
8
