UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly period ended June 30, 1999
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
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
--- ---
The number of shares of the registrant's Common Stock outstanding as of July 26,
1999 was 5,097,034.
<PAGE>
EASTERN VIRGINIA BANKSHARES, INC.
FORM 10-Q
For the Quarter Ended June 30, 1999
Part I
- ------
Item 1. Financial Statements 2
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Part II
Item 1. Legal Proceedings 13
Item 2. Changes in Securities 13
Item 3. Defaults Upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 14
1
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eastern Virginia Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30 December 31
1999 1998
------- -----------
<S> <C>
Assets:
Cash and due from banks $ 9,754 $ 10,864
Federal funds sold 9,036 10,658
Securities available for sale at fair value 37,210 42,000
Securities held to maturity at amortized cost
fair value of $40,201 and $40,308 40,026 39,333
Loans, net of unearned income 259,336 239,665
Allowance for loan losses (4,028) (3,860)
-------- ---------
Net loans 255,308 235,805
Deferred income taxes 1,206 953
Bank premises and equipment 4,663 4,698
Accrued interest receivable 2,482 2,423
Other real estate 338 267
Other assets 718 994
-------- ---------
Total assets $ 360,741 $ 347,995
-------- ---------
Liabilities and Shareholders' Equity
Liabilities
Noninterest-bearing demand accounts $ 34,299 $ 33,216
Savings accounts and interest bearing deposits 136,396 136,520
Time deposits 139,612 134,594
-------- ---------
Total deposits 310,307 304,330
Federal funds purchased 1,700 -
Long-term debt 3,000 -
Accrued interest payable 775 741
Other liabilities 2,195 667
-------- ---------
Total liabilities 317,977 305,738
Shareholders' Equity
Common stock of $2 par value per share, authorized
50,000,000 shares, issued and outstanding
5,097,034 and 5,142,834 respectively 10,194 10,286
Surplus 3,031 3,729
Retained earnings 29,664 27,877
Accumulated other comprehensive income (125) 365
-------- ---------
Total shareholders' equity 42,764 42,257
Total liabilities and shareholders' equity $ 360,741 $ 347,995
--------- ---------
</TABLE>
See Notes to Consolidated Financial Statements
2
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eastern Virginia Bankshares, Inc. and Subsidiaries
Consolidated Statements of Income (Unaudited)
(Dollars in thousands except share amounts)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
---- ---- ---- ----
<S> <C>
Interest Income:
Loans $ 5,620 $ 5,289 $ 11,024 $ 10,627
Interest on investment securities:
Taxable - 73 - 142
Tax exempt 482 447 963 898
Interest on securities available for sale:
Taxable 607 526 1,245 1,095
Dividends 17 18 31 31
Interest on federal funds sold 61 237 165 341
Interest on deposits in other banks - 1 - 3
-------- -------- -------- --------
Total interest income 6,787 6,591 13,428 13,137
Interest Expense
Deposits 2,842 2,960 5,700 5,830
Borrowings 24 - 24 -
------- -------- -------- --------
Total interest expense 2,866 2,960 5,724 5,830
------- -------- -------- --------
Net interest income 3,921 3,631 7,704 7,307
Provision for loan losses 114 115 228 238
------- -------- -------- --------
Net interest income after provision for loan losses $ 3,807 $ 3,516 $ 7,476 $ 7,069
Other income
Service charges on deposit accounts 346 379 661 678
Gain (loss) on sale of available for sale securities (44) - (44) 8
Other operating income 101 152 199 206
-------- -------- -------- --------
403 531 816 892
-------- -------- -------- --------
Other Expenses
Salaries and benefits 1,164 1,100 2,300 2,018
Net occupancy expense of premises 300 316 644 615
Other operating expenses 645 732 1,274 1,437
-------- -------- -------- --------
2,109 2,148 4,218 4,070
-------- -------- -------- --------
Income before income taxes 2,101 1,815 4,074 3,891
Income Tax Expense 563 476 1,057 978
-------- -------- -------- --------
Net income $ 1,538 $ 1,339 $ 3,017 $ 2,913
-------- -------- -------- --------
Earnings Per Share, basic and assuming dilution $ 0.30 $ 0.26 $ 0.59 $ 0.56
Dividends per share $ 0.12 $ 0.11 $ 0.24 $ 0.22
</TABLE>
See Notes to Financial Statements
3
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eastern Virginia Bankshares, Inc. and Subsidiaries
Consolidated Statement of Cash Flows (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Six Months Ended
----------------
June 30 June 30
1999 1998
------- -------
<S> <C>
Cash Flows from Operating Activities
Net income $ 3,017 $ 2,913
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 407 300
Provision for loan losses 228 238
Losses (gains) realized on available for sale securities 44 (8)
(Increase) decrease in other assets (107) 185
Increase (decrease) in other liabilities 1,562 (502)
-------- --------
Net cash provided by operating activities 5,151 3,126
Cash Flows from Investing Activities
Proceeds from maturities, calls, paydowns and sales
of available for sale securities 5,688 9,926
Purchase of securities available for sale (1,587) (15,102)
Proceeds from maturities of investment securities 2,366 2,829
Purchase of investment securities (2,955) (3,364)
(Purchase) sale of FHLB and Federal Reserve Bank stock (108) (66)
Net (increase) decrease in loans (19,671) (3,062)
Purchases of bank premises and equipment (273) (852)
Proceeds from sale of OREO - 43
-------- --------
Net cash (used in) investing activities (16,540) (9,648)
Cash Flows from Financing Activities
Net increase in noninterest bearing and interest bearing
demand deposits and savings accounts 959 14,798
Net increase in certificates of deposit 5,018 (4,155)
Proceeds from sale of common stock - -
Acquisition of common stock (790) -
Dividends declared (1,230) (1,140)
Increase (decrease) in borrowings 4,700 (244)
-------- ---------
Net cash provided by financing activities 8,657 9,259
-------- ---------
Increase (decrease) in cash and cash equivalents (2,732) 2,737
Cash and cash equivalents
Beginning of period 21,522 11,961
-------- --------
End of period $18,790 $14,698
-------- --------
Supplemental Disclosures of Cash Flow Information
Cash paid for:
Interest on deposits and other borrowings $ 5,724 $ 5,830
Income taxes $ 759 $ 978
</TABLE>
See Notes to Consolidated Financial Statements
4
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Eastern Virginia Bankshares, Inc. and Subsidiaries
Consolidated Statement of Changes in Shareholders' Equity (Unaudited)
For the Six Months Ended June 30, 1999 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Retained Comprehensive Common Capital
Total Income Earnings Income Stock Surplus
----- ------------- -------- ------------- ------ -------
<S> <C>
Balances - January 1, 1998 $39,265 $ 28,535 $ 132 $10,377 $ 221
Comprehensive income:
Net income 2,913 $ 2,913 2,913
Other comprehensive income, net of tax
Unrealized gain/(loss) on securities available for sale:
Unrealized holding gain/(loss) arising during
the period 35 35
Less: reclassification adjustment 8 8
------- -----------
Other comprehensive income, net of tax 27 27 27
------- -----------
Total comprehensive income 2,940 $ 2,940
-----------
Shares purchased and retired -27 -27
Dividends declared (1,140) (1,140)
------- -------
Balances-June 30, 1998 $41,038 $ 30,308 $ 159 $ 10,350 $ 221
-------- --------- -------- -------- -------
Balances - January 1, 1999 $42,257 $ 27,877 $ 365 $ 10,286 $ 3,729
Comprehensive income:
Net income 3,017 $ 3,017 3,017
Other comprehensive income, net of tax
Unrealized gain/(loss) on securities available for sale:
Unrealized holding gain/(loss) arising during
the period (534) (534)
Less: reclassification adjustment (44) (44)
-------- -----------
Other comprehensive income, net of tax (490) (490) (490)
-------- -----------
Total comprehensive income 2,527 $ 2,527
-----------
Shares purchased and retired (790) (92) (698)
Dividends declared (1,230) (1,230)
-------- ---------
Balances-June 30, 1999 $42,764 $ 29,664 $ (125) $ 10,194 $ 3,031
-------- --------- --------- -------- --------
</TABLE>
5
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PART 1 - FINANCIAL INFORMATION
ITEM 1. Financial Statements
EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. The Consolidated Balance Sheet as of June 30, 1999, the Consolidated
Statements of Income for the three-month and six month periods ended June
30, 1999, and June 30, 1998, the Consolidated Statement of Cash Flows for
the six-month periods ended June 30,1999, and June 30, 1998, and the
Consolidated Statement of Changes in Shareholders' Equity for the six-month
periods ended June 30, 1999, and June 30, 1998, prepared in accordance with
instructions for Form 10-Q, are unaudited and do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. However, in the opinion of
management, the accompanying unaudited consolidated financial statements
contain all adjustments (consisting of normal recurring accruals)
considered necessary to present fairly the financial position as of June
30, 1999. The statements should be read in conjunction with the Notes to
Consolidated Financial Statements included in Eastern Virginia Bankshares'
Annual Report on Form 10-K for the year ended December 31, 1998.
2. The consolidated financial statements include the accounts of Eastern
Virginia Bankshares, Inc ("EVB" or "the corporation") and its subsidiaries
Southside Bank and Bank of Northumberland, Inc., with all significant
intercompany transactions and accounts being eliminated in consolidation.
3. During the three months ended June 30, 1999, the corporation repurchased
34,000 shares of its common stock in both privately negotiated and market
transactions at an average price of $17.1085 per share. This share
repurchase plan announced in November, 1998, follows the repurchase of
11,800 shares in the first quarter of 1999 at an average price of $17.6890
per share.
4. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year.
5. Earnings per share have been computed by dividing net income by the
weighted average number of shares outstanding for the period. Weighted
average shares used for the computation were 5,113,112 and 5,188,424 for
the three month periods ended June 30, 1999 and 1998, and were 5,125,968
and 5,188,500 for the six month periods ended June 30, 1999 and 1998.
6. EVB's amortized cost and estimated fair values of securities at
June 30, 1999 are as follows:
(in thousands)
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------- ---------- ---------- ---------
<S> <C>
Available for Sale:
U.S. Government obligations $ 9,308 $ 52 $ 28 $ 9,332
Obligations of U.S. Government agencies 20,151 152 302 20,001
Obligations of state/political subdivisions 4,919 26 51 4,894
Other securities 3,022 3 42 2,983
-------- ------- ------ --------
37,400 233 423 37,210
Held to Maturity:
Obligations of state/political subdivisions 40,026 568 393 40,201
-------- ------- ------ --------
Total $ 77,426 $ 801 $ 816 $77,411
-------- ------- ------ --------
</TABLE>
6
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Note 7. EVB's loan portfolio is composed of the following:
(in thousands)
June 30 December 31
1999 1998
---- ----
Real estate - construction $ 4,380 $ 6,096
Real estate - mortgage 146,537 130,856
Commercial real estate 29,291 23,114
Commercial, industrial and
agricultural loans 28,203 30,649
Installment loans to individuals 53,190 51,481
All other loans 1,401 961
---------- ----------
Total loans 263,002 243,157
Less unearned income (3,666) (3,493)
Less allowance for loan losses (4,028) (3,860)
---------- ----------
Total net loans $ 255,308 $ 235,804
---------- ----------
EVB has $2.06 million in non-performing loans at June 30, 1999.
Note 8. Allowance for Loan Losses
June 30 December 31
1999 1998
------- -----------
Balance January 1 $ 3,860 $ 3,868
Provision charged against income 228 449
Recoveries of loans charged off 155 210
Loans charged off (215) (667)
-------- -----------
Balance at end of period $ 4,028 $ 3,860
-------- -----------
Note 9. Accounting Rule Changes
There were no new Financial Accounting Standards Board promulgations in the
second quarter of 1999 that will impact Eastern Virginia Bankshares, Inc.
PART 1 - FINANCIAL INFORMATION
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial information is presented to
aid the reader in understanding and evaluating the financial condition and
results of operations of Eastern Virginia Bankshares, Inc. ("EVB" or "the
Corporation"). This discussion provides information about the major components
of the results of operations, financial condition, liquidity and capital
resources of the Company. This discussion should be read in conjunction with the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
presented elsewhere in this report.
OVERVIEW AND FINANCIAL CONDITION
Net income for the second quarter of 1999 increased 15% from the same period in
1998, fueled by continued strong loan growth. Total loans, net of unearned
income, amounted to $259.34 million at June 30, 1999, an increase of $ 19.7
million or 8.2 % from $ 239.7 million at December 31, 1998. Net loans as a
percent of total assets were 70.8% at June 30, 1999, as compared to 67.8% at
December 31, 1998. Net loan volume for the first six months of 1999 was $ 19.5
million as compared to $ 3.1 million for the first six months of 1998. Increased
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loan growth in 1999 versus 1998 is related primarily to strong consumer demand
for the Company's long-term, fixed rate mortgage product introduced in the third
quarter of 1998. On June 30, 1999, the securities portfolio totaled $ 77.2
million, which was $4.1 million or 5 % less than at December 31, 1998. Funds
that are invested in the securities portfolio are part of the effort to balance
the interest rate risk. Federal funds sold were $9 million on March 31, 1999, $
1.6 million or 15.2 % less than the $10.7 million outstanding at December 31,
1998. This decrease in Federal Funds Sold is primarily the result of strong loan
demand at a time when the deposit base was growing at a slower pace During the
second quarter of 1999, the corporation executed a $ 3 million loan with the
Federal Home Loan Bank of Atlanta, using the proceeds to fund loan growth.
Financial Accounting Standards Board Pronouncement # 115 requires the Company to
show the effect of market changes in the value of securities available for sale
(AFS). The market value of securities available for sale at June 30, 1999, was $
37.2 million as compared to $42.0 million at year end 1998. The effect of the
change in market value of AFS securities, net of income taxes, is reflected in a
line titled Accumulated other comprehensive income in Stockholders' Equity,
which was a negative $ 125 thousand at June 30, 1999, compared to a positive $
365 thousand at 1998 year end. This $490 thousand decrease in the unrealized
gain/(loss) on AFS securities is also reflected under the "Other Comprehensive
Income" category on the Consolidated Statement of Changes in Shareholders'
Equity Statement.
Total deposits of $310.3 million at quarter end represented an increase of $ 6
million or 2 % from $304.3 million at December 31, 1998. EVB offers attractive,
yet competitive rates, to maintain a strong stable deposit base. The quarter
reflected an intentional decrease in brokered deposits as part of the Company's
managed deposit growth policy to enhance its loan to deposit ratio. A deposit
promotion implemented in late June is expected to increase the deposit growth
pace in the third quarter of 1999.
RESULTS OF OPERATIONS
Net income increased 15% to $ 1,538,000 for the three months ended June 30, 1999
compared to $ 1,339,000 for the same period of 1998. Earnings per share were $
.30 for the quarter, up 15% from $ .26 per share for the same period in 1998.
Net income for the six months ended June 30, 1998 increased 4% to $ 3,017,000
compared to $ 2,913,000 for the first half of 1998. Earnings per share were $
.59 for the six month period, up 5% from $ .56 per share for the first six
months of 1998. Profitability as measured by the corporation's annualized return
on average assets (ROA) increased to 1.74% for the quarter ended June 30. 1999,
up from 1.64% for the same period of 1998. ROA for the first six months of 1999
was 1.72% as compared to 1.76% for the first six months of 1998 and 1.66% for
the year ended December 31, 1998. A second key indicator of performance, the
annualized return on average equity (ROE) for the three months ended June 30,
1999 increased to 14.36%, up from 13.03% for the second quarter of 1998. ROE for
the six month period ended June 30,1999, was 14.14%, compared to 14.41% for the
first half of 1998, and 13.56% for the full year 1998.
Net income for the quarter was favorably impacted by strong loan growth and an
increasing net interest margin as funds were shifted from lower yielding
investments and by enhanced expense control.
Net Interest Income
Net interest income totaled $ 3.9 million for the quarter, a $ 290 thousand or 8
% increase over the Company's performance for the second quarter of 1998. The
increase in net interest income is a result of an increase in the average
balance of interest earning assets combined with an improved net interest
margin. For the quarter ended June 30, 1999, the average balance of interest
earning assets increased to $ 340.1 million from $ 322.3 million for the same
quarter in 1998. The increase in average earning assets is a result of an
increase of $23.3 million or 10% in the average balance of loans held in the
corporation's loan portfolio. The increase in average loans is the result of
increased loan demand and management's effort to redirect a portion of its
excess cash reserves (Fed Funds Sold) into higher yielding loans.
The net interest margin for the three month period ended June 30, 1999 was
4.86%, compared to 4.56% for the comparable period in the prior year. The
improvement in net interest margin results from a 36 basis point decrease in the
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cost of interest bearing funds from 4.53% in 1998 to 4.17% for the second
quarter of 1999, while the yield on interest bearing assets on a taxable
equivalent basis was down by only 1 basis point, from 8.24% to 8.23% for the
same periods. While loan yields were down 17 basis points, the redeployment of
more than $12 million of low yielding Fed Funds Sold into higher yielding loans
and securities helped to maintain the total earning asset yield. The positive
impact of a lower interest rate environment for the quarter ended June 30, 1999
as compared to the same quarter of 1998 on loan refinancings and on deposit
costs more than offset the negative impact of decreased loan yield.
Net interest income for the six months ended June 30, 1999 was $7.7 million, an
increase of $ 397 thousand, or 5% from $ 7.3 million for the same period in
1998. For the six months ended June 30, 1999, average loans increased $18.9
million to $249.5 million from $230.6 million for the same period in 1998. The
increase in average loans is the result of increased loan demand and
management's effort to redirect a portion of its excess cash reserves (Fed Funds
Sold) into higher yielding loans. The improvement in net interest margin results
from a 33 basis point decrease in the cost of interest bearing funds from 4.52%
in 1998 to 4.19% for the first six months of 1999, while the yield on interest
bearing assets on a taxable equivalent basis was down by only 11 basis points,
from 8.33% to 8.22% for the same periods. While loan yields were down 23 basis
points, the redeployment of more than $ 5 million of low yielding Fed Funds Sold
into higher yielding loans and securities helped to maintain the total earning
asset yield.
Noninterest Income
Total noninterest income, excluding securities transactions, was $447 thousand
for the quarter, a 15.8% decrease from second quarter 1998 noninterest income of
$531 thousand. Realized losses on securities sales during the quarter were $44
thousand compared to no securities transactions in the second quarter of 1998.
Service charges on deposit accounts and other miscellaneous income both
decreased compared to second quarter 1998 as the corporation continued to
experience a decrease in overdraft charges following its 1998 implementation of
an overdraft protection product feature. Noninterest income, excluding
securities transactions, for the six months ended June 30, 1999 decreased $ 24
thousand from $884 thousand in 1998 to $ 860 thousand in 1999, again the result
of decreased overdraft charges.
Noninterest Expense
Total noninterest expense decreased $ 39 thousand or 1.7 % from $2.15 million
for the second quarter of 1998 to $2.11 million in 1999. Salary and benefits
expense increased $64 thousand or 5.8% for the quarter vs. 1998, as the result
of increases in salaries and benefits. Net occupancy expense decreased $16
thousand or 4 % compared to the same quarter of 1998 to $300 thousand compared
to $316 thousand in the same period in the prior year. All other noninterest
expenses decreased $87 thousand or 11.9% to $ 645 thousand for the second
quarter of 1999 from $732 thousand for the same period in 1998, primarily the
result of a $71 thousand decrease in data processing expenses as the company
begins to reap the benefit of a late 1998 consolidation of banking systems.
For the six months ended June 30, 1999, total noninterest expense increased $148
thousand (3.6%) to $ 4.2 million from $ 4.1 million for the comparable period of
1998. Salary and benefits expense increased $ 282 thousand (14 %) resulting from
increased staffing compared to 1998 for a new branch opened in Gloucester County
in the second quarter of 1998, and from increased employee benefit expense
related to pension plan and insurance costs. The increase in salary and benefit
expense was largely offset by a $163 thousand decrease in All Other Operating
Expenses consisting primarily of a decrease of $75 thousand in data processing
expense and a 1998 first quarter $93 thousand merger expense that was
nonrecurring.
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
9
<PAGE>
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 mission-critical hardware and software are currently Y2K compliant.
However testing is required to confirm this. Testing began in early 1998 and
will continue through year end 1999. Scheduled testing of all mission critical
systems was completed in June, 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
subsidiary banks completed testing of these systems in June, 1999 with no
significant issues. 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 of
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 September
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 June 30, 1999, EVB and its subsidiary banks have spent approximately
$150,000 associated with Year 2000 compliance. These costs include testing,
training, hardware and software replacement and upgrades. It is anticipated that
another $25,000 will be expended to complete the Year 2000 changes and testing.
EVB estimates that 1999 year to date cost of addressing this Y2K issue was
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approximately 1.7% of first half earnings (or 0.014% of assets) which was
immaterial when considering the size of the Corporation. Year 2000 issue costs
for the remainder of 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 has
prepared alternate solutions through a business resumption contingency plan to
mitigate potential risks on January 1, 2000. This contingency plan has been
developed for all core business functions and their supporting information
technology systems and includes 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 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
11
<PAGE>
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.
ASSET QUALITY
Asset quality continues to be good based on management review. Loan quality is
the result of management employing conservative loan underwriting standards
while meeting the needs of customers. Total nonperforming assets, which consist
of nonaccrual loans and foreclosed properties were $2.4 million at June 30,
1999, compared to $1.9 million at year end 1998, reflecting an 18.2 % increase
from 1998 year end. Although the first six months of 1999 saw an increase in
nonperforming assets, the total of such assets is still close to a six year
historical low as a percentage of total loans and foreclosed property.
Nonperforming assets are composed largely of real estate mortgage loans secured
by real estate in the Corporation's market area. Based on estimated fair values
of the related real estate, management considers these amounts recoverable, with
any individual deficiency well covered by the allowance for loan losses.
Nonperforming Assets
June 30 December 31
------- -----------
1999 1998
---- ----
Nonaccrual loans $ 2,060 $ 1,626
Restructured loans - -
Other real estate owned 338 268
--------- ---------
Total nonperforming assets $ 2,398 $ 1,894
--------- ---------
Loans past due 90 days and
accruing interest $ 1,308 $ 1,190
Nonperforming assets to total loans
and other real estate 0.92% 0.79%
Allowance for loan losses to
nonaccrual loans 195.53% 237.39%
Allowance for loan losses to
period end loans 1.55% 1.61%
Total loan charge-offs, less recoveries, amounted to $ 46 thousand for the
quarter and $60 thousand for the first six months of 1999, representing an
annualized ratio of net charge-offs to total average loans, net of unearned
income, of 0.07 % and 0.05% for the three and six month periods ended June 30,
1999. This compares to 1998 full year charge-offs of $457 thousand or 0.20% of
average loans.
Nonperforming loans at June 30, 1999 were $ 2.1 million, or 0.79 % of total
loans, compared to $1.6 million or 0.67% at 1998 year end. Also included in
nonperforming loans are loans considered impaired on which management is
concerned about the ability of the customer to repay the loan and related
interest at the original contractual terms. At June 30, 1999, impaired loans
totaled $4 thousand upon which an allowance is included in the total loan
portfolio allowance for loan losses. Interest income recognized on impaired
loans as of June 30, 1999, was less than $ 1 thousand. The average balance of
impaired loans for the first six months of 1998 was $6 thousand. Loans past due
90 days or more and still accruing interest because they were well secured and
in the process of collection were $ 1.31 million at June 30, 1999, and $1.19
million at December 31, 1998.
12
<PAGE>
The allowance for loan losses has increased to $4.03 million at June 30, 1999,
as compared to $3.86 million at December 31, 1998. The allowance increased $ 168
thousand in the first six months of 1999 as compared to $ 120 thousand for the
first six months of 1998. The increase in the allowance for loan losses during
both periods was the result of increased lending activity in the loan portfolio.
The ratio of allowance for loan losses to total loans was 1.55 % at June 30,
1999, and 1.61% at year end 1998.
EVB closely monitors those loans that are deemed to be potential problem loans.
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 June 30, 1999 are generally secured by
residential and commercial real estate with appraised values that exceed the
principal balance. At June 30, 1999, potential problem loans were approximately
$ 1.51 million including 7 lending relationships with principal balances in
excess of $100,000 which had an aggregate principal balance outstanding of $999
thousand.
LIQUIDITY
Liquidity represents the Company's ability to meet present and future deposit
withdrawals, to fund loans, to maintain reserve requirements and to operate the
organization. To meet its liquidity needs, EVB maintains cash reserves,
primarily as federal funds sold and has an adequate flow of funds from maturing
loans, securities and short-term investments. In addition, EVB's subsidiary
banks maintain borrowing arrangements with major regional banks, the Federal
Reserve Bank and with the Federal Home Loan Bank. Management considers its
sources of liquidity to be ample to meet its estimated liquidity needs.
CAPITAL RESOURCES
EVB's strong capital position provides the resources and flexibility to support
asset growth, absorb potential losses and to expand the Company's franchise when
appropriate. The Company's risk-based capital position at June 30, 1999 was
$42.89 million, or 18.77% of risk-weighted assets, for Tier 1 capital and $45.75
million, or 20.12% for total risk based capital.
Tier 1 capital consists primarily of common shareholders' equity, while total
risk based capital adds a portion of the allowance for loan losses to Tier 1.
Risk weighted assets are determined by assigning various levels of risk to
different categories of assets and off-balance sheet activities. Under current
risk based capital standards, all banks are required to have Tier 1 Capital of
at least 4% and total capital of 8%.
Inflation
In financial institutions, unlike most other industries, 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. While interest rates are significantly impacted by
inflation, neither the timing nor the magnitude of the changes are directly
related to price level movements. The impact of inflation on interest rates,
loan demand, and deposits are reflected in the consolidated financial
statements.
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 statements that
are not historical facts are based upon reasonable assumptions within the bounds
of its knowledge of its business and operations, these forward-looking
statements are subject to uncertainties which could cause actual results to
differ materially from historical results or those anticipated. Therefore
readers are cautioned not to place undue reliance on forward-looking statements.
PART I - FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in market risk since 1998 year end.
13
<PAGE>
FORM 10-Q PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no material legal proceedings to which the registrant or any of its
subsidiaries, directors or officers is a party or by which they, or any of them,
are threatened. The only litigation in which EVB and its subsidiaries are
involved are collection suits involving delinquent loan accounts in the normal
course of business.
Item 2. Changes in Securities (not applicable)
Item 3. Defaults Upon Senior Securities (not applicable)
Item 4. Submission of Matters to a Vote of Security Holders
At the annual meeting of shareholders held on May 20, 1999, the following
proposals were adopted by the margins indicated.
1. To elect a Board of Directors to hold office until the next annual meeting of
shareholders and until their successors are elected and qualified.
Number of Shares
For Against Abstain
--- ------- -------
Thomas M. Boyd, Jr. 3,600,265 14,774 60,717
W. Rand Cook 3,600,265 14,774 60,717
Robert L. Covington 3,600,265 14,774 60,717
L. Edelyn Dawson,Jr. 3,600,265 14,774 60,717
Lewis R. Reynolds 3,600,265 14,774 60,717
F. L. Garrett, III 3,600,265 14,774 60,717
G. Warren Haynie, Jr. 3,600,265 14,774 60,717
Eric A. Johnson 3,600,265 14,774 60,717
William L. Lewis 3,600,265 14,774 60,717
2. To ratify the appointment by the Board of Directors of Yount, Hyde &
Barbour, P.C. as the Corporation's independent auditors for the ensuing
year.
For 3,598,709
Against 7,601
Abstain 69,446
Item 5. Other Information (not applicable)
Item 6. Exhibits and Reports on Form 8-K
Exhibit No. Exhibit Name
- ----------- --------------------------------------------------------------
11 Statement re: Computation of Per Share Earnings - Included
under Part I, Item I, Note 5 of this Form 10-Q.
27 Financial Data Schedule - Included herein as Exhibit 27 on
page 15
(b) No reports on Form 8-K were filed during the second quarter of 1999.
14
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
Eastern Virginia Bankshares, Inc.
- ----------------------------
/s/ Thomas M. Boyd, Jr. President and Chief Executive Officer
- -----------------------------
/s/ Thomas E. Stephenson Vice President, Chief Financial Officer
Date: July 30, 1999
15
<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> 1000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-END> JUN-30-1999 JUN-30-1999
<CASH> 9,754 9,754
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 9,036 9,036
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 37,210 37,210
<INVESTMENTS-CARRYING> 40,026 40,026
<INVESTMENTS-MARKET> 40,021 40,021
<LOANS> 255,308 255,308
<ALLOWANCE> 4,028 4,028
<TOTAL-ASSETS> 360,741 360,741
<DEPOSITS> 310,307 310,307
<SHORT-TERM> 1,700 1,700
<LIABILITIES-OTHER> 2,970 2,970
<LONG-TERM> 3,000 3,000
0 0
0 0
<COMMON> 10,194 10,194
<OTHER-SE> 32,570 32,570
<TOTAL-LIABILITIES-AND-EQUITY> 360,741 360,741
<INTEREST-LOAN> 11,024 5,620
<INTEREST-INVEST> 2,239 1,106
<INTEREST-OTHER> 165 61
<INTEREST-TOTAL> 13,248 6,787
<INTEREST-DEPOSIT> 5,700 2,842
<INTEREST-EXPENSE> 5,724 2,866
<INTEREST-INCOME-NET> 7,704 3,921
<LOAN-LOSSES> 228 114
<SECURITIES-GAINS> (44) (44)
<EXPENSE-OTHER> 4,218 2,109
<INCOME-PRETAX> 4,074 2,101
<INCOME-PRE-EXTRAORDINARY> 4,074 2,101
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,017 1,538
<EPS-BASIC> 0.59 0.30
<EPS-DILUTED> 0.59 0.30
<YIELD-ACTUAL> 4.61 4.57
<LOANS-NON> 2,060 2,060
<LOANS-PAST> 1,308 1,308
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 1,510 1,510
<ALLOWANCE-OPEN> 3,860 3,860
<CHARGE-OFFS> 215 114
<RECOVERIES> 155 68
<ALLOWANCE-CLOSE> 4,028 4,028
<ALLOWANCE-DOMESTIC> 4,028 4,028
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
