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 March 31, 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 April
26, 1999 was 5,116,034.
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EASTERN VIRGINIA BANKSHARES, INC.
FORM 10-Q
For the Quarter Ended March 31, 1999
Part I
- ------
Item 1. Financial Statements 2
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Part II
- -------
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
1
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CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)
March 31 December 31
1999 1998
---- ----
ASSETS:
Cash and due from banks $ 9,209 $ 10,864
Interest-bearing deposits, in other banks - -
Federal funds sold 4,497 10,658
Securities available for sale at fair value 40,509 42,000
Securities held to maturity at amortized cost
fair value of $41,566 and $40,308 40,669 39,333
Loans, net 245,708 235,805
Deferred income taxes 1,057 953
Bank premises and equipment 4,591 4,698
Accrued interest receivable 2,390 2,423
Other real estate 243 267
Other assets 752 994
-------- --------
Total assets $349,625 $347,995
-------- --------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing demand accounts $ 31,130 $ 33,216
Savings accounts and interest bearing deposits 138,770 136,520
Time deposits 133,847 134,594
-------- --------
Total deposits 303,747 304,330
Accrued interest payable 787 741
Other liabilities 2,384 667
------- --------
Total liabilities 306,918 305,738
SHAREHOLDERS' EQUITY
Common stock of $2 par value per share,
authorized 50,000,000 shares, issued
and outstanding 5,188,576 and 5,188,576
respectively 10,262 10,286
Surplus 3,544 3,729
Retained earnings 28,738 27,877
Accumulated other comprehensive income 163 365
------- ------
Total shareholders' equity 42,707 42,257
Total liabilities and shareholders' equity $349,625 $347,995
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
2
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CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands except share amounts)
Three Months Ended
March 31
1999 1998
---- ----
INTEREST INCOME:
Loans $ 5,404 $ 5,338
Interest on investment securities:
Taxable - 73
Tax exempt 481 447
Interest on securities available for sale:
Taxable 638 568
Tax exempt - -
Dividends 14 13
Interest on federal funds sold 104 103
Interest on deposits in other banks - 2
------ ------
Total interest income 6,641 6,544
INTEREST EXPENSE
Deposits 2,858 2,870
Short-term borrowings - -
------ -----
Total interest expense 2,858 2,870
------ -----
Net interest income 3,783 3,674
PROVISION FOR LOAN LOSSES 114 123
------ -----
Net interest income after provision for 3,669 3,551
loan losses
OTHER INCOME
Service charges on deposit accounts 315 315
Gain (loss) on sale of available for sale
securities - 8
Other operating income 98 123
------ -----
413 446
OTHER EXPENSES
Salaries and benefits 1,136 917
Net occupancy expense of premises 345 300
Other operating expenses 629 705
------ -----
2,110 1,922
------ -----
Income before income taxes 1,972 2,075
INCOME TAX EXPENSE 494 502
------ -----
Net income $ 1,478 $ 1,573
------ -----
Earnings Per Share, basic and assuming dilution $0.29 $0.30
Dividends per share $0.12 $0.11
SEE NOTES TO FINANCIAL STATEMENTS
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
3
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CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31 March 31
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,478 $ 1,573
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 213 135
Provision for loan losses 114 123
Losses (gains) realized on available for sale securities - (8)
Accretion and amortization, net 7 -
(Increase) decrease in other assets 170 275
Increase (decrease) in other liabilities 1,762 291
------- -------
Net cash provided by operating activities 3,744 2,389
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, calls, paydowns and sales
of available for sale securities 2,544 4,858
Purchase of securities available for sale (1,364) (1,156)
Proceeds from maturities of investment securities 1,191 1,360
Purchase of investment securities (2,538) (453)
Net (increase) decrease in loans (9,903) (3,267)
Purchases of bank premises and equipment (106) (309)
Proceeds from sale of OREO 25 -
------ ------
Net cash (used in) investing activities (10,151) 1,033
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest bearing and interest bearing
demand deposits and savings accounts 164 4,747
Net increase (decrease) in certificates of deposit (747) 2,610
Proceeds from sale of common stock - -
Acquisition of common stock (209) -
Dividends declared (617) (571)
Decrease in other short-term borrowings - (56)
------ ------
Net cash provided by financing activities (1,409) 6,730
------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (7,816) 10,152
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD 21,522 11,961
------ ------
END OF PERIOD $13,706 $22,113
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SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION -
Cash paid for:
Interest on deposits and other borrowings $ 2,812 $ 2,870
Income taxes $ - $ 502
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY (Unaudited)
FOR THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998
(Dollars in thousands)
ACCUMULATED
OTHER
COMPREHENSIVE RETAINED COMPREHENSIVE COMMON CAPITAL
TOTAL INCOME EARNINGS INCOME STOCK SURPLUS
----- ------------- -------- ------------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Balances - January 1, 1998 $39,265 $ 28,535 $ 132 $ 10,377 $ 221
Comprehensive income:
Net income 1,573 1,573 1,573
Other comprehensive income, net of tax
Unrealized gain/(loss) on securities
available for sale:
Unrealized holding gain/(loss) arising
during the period (19) (19)
Less: reclassification adjustment 8 8
------ ------
Other comprehensive income, net of tax (11) (11)
------ ------
Total comprehensive income 1,562 1,562
Shares purchased and retired
Dividends declared (571) (571)
------ ------
BALANCES-MARCH 31, 1998 $40,047 $ 29,537 132 $ 10,353 $ 36
------ --------- -------- --------- -------
Balances - January 1, 1999 $42,257 $ 27,877 $ 365 $ 10,286 $ 3,729
Comprehensive income:
Net income 1,478 1,478 1,478
Other comprehensive income, net of tax
Unrealized gain/(loss) on securities
available for sale:
Unrealized holding gain/(loss) arising
during the period (202) (202)
Less: reclassification adjustment - -
------ --------
Other comprehensive income, net of tax (202) - (202)
------ --------
Total comprehensive income $ 1,478
--------
Shares purchased and retired (209) (24) (185)
Dividends declared (617) (617) - - -
------- -------- -------- ------- -------
BALANCES-MARCH 31, 1999 $42,707 $ 28,738 $ 163 $ 10,262 $ 3,544
------- -------- -------- ------- -------
</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 March 31, 1999, the Consolidated
Statements of Income for the three-month periods ended March 31, 1999, and
March 31, 1998, the Consolidated Statement of Cash Flows for the three-month
periods ended March 31,1999, and March 31, 1998, and the Consolidated
Statement of Changes in Shareholders' Equity for the three-month periods
ended March 31, 1999, and March 31, 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 March 31, 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. Eastern Virginia Bankshares (the "Company or EVB") was organized and
chartered under the laws of the Commonwealth of Virginia on September 5,
1997 and commenced operations effective December 29,1997 when Southside Bank
(SSB) and Bank of Northumberland, Inc. (BNI) became wholly owned
subsidiaries of EVB. The transaction was accounted for using the
pooling-of-interest method of accounting. Accordingly, the financial
statements of EVB have been restated for all periods presented to reflect
the consolidation of SSB and BNI into EVB.
3. The results of operations for the three-month periods ended March 31, 1999
and 1998, are not necessarily indicative of the results to be expected for
the full year.
4. 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 5,138,824 and 5,188,576 for the three months
ended March 31, 1999 and 1998.
5. EVB's amortized cost and estimated fair values of securities at March 31,
1999 are as follows:
(in thousands)
<TABLE>
<CAPTION>
March 31, 1999
--------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- -------- ---------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Government obligations $ 9,566 $ 127 $ 10 $ 9,683
Obligations of U.S. Government
agencies 22,884 150 148 22,886
Obligations of state/political
subdivisions 4,589 137 6 4,720
Other securities 3,223 8 10 3,221
------- ------ ----- -------
40,262 422 174 40,510
Held to Maturity:
Obligations of state/political
subdivisions 40,668 1,038 140 41,566
------- ------ ------ ------
Total $80,930 $1,460 $ 314 $82,076
------- ------ ------ ------
</TABLE>
NOTE 6. EVB'S LOAN PORTFOLIO IS COMPOSED OF THE FOLLOWING:
6
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(in thousands)
March 31 December 31
1999 1998
---- ----
Real estate - construction $ 5,938 $ 6,096
Real estate - mortgage 135,703 130,856
Commercial real estate 27,202 23,114
Commercial, industrial and
agricultural loans 30,854 30,649
Installment loans to
individuals 52,625 51,481
All other loans 1,001 961
------ ------
Total loans 253,323 243,157
Less unearned income (3,656) (3,493)
Less allowance for loan losses (3,959) (3,860)
------- -------
Total net loans $ 245,708 $ 235,804
------- -------
EVB has $2.0 million in non-performing loans at March 31, 1999.
NOTE 7. ALLOWANCE FOR LOAN LOSSES
March 31 December 31
1999 1998
-------- -----------
Balance January 1 $ 3,860 $ 3,868
Provision charged against income 114 449
Recoveries of loans charged off 87 210
Loans charged off (102) (667)
------- -------
Balance at end of period $ 3,959 $ 3,860
------- -------
NOTE 8. ACCOUNTING RULE CHANGES
There were no new Financial Accounting Standards Board promulgations in the
first 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
Company"). 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. Operating results include Southside Bank and
Bank of Northumberland, Inc. combined for all periods presented.
OVERVIEW AND FINANCIAL CONDITION
On December 29, 1997, EVB brought together into one holding company two
independent community banks, Southside Bank and Bank of Northumberland, Inc.
Total assets on March 31, 1999 were $349.6 million, up $ 1.6 million or 0.5%
from $ 348.0 million at December 31, 1998. For the first three months of 1998,
total assets averaged $348.4 million, 6.5 % above the first three months of 1998
average of $327.0 million.
Total loans, net of unearned income, amounted to $249.7 million at March 31,
1999, an increase of $ 10.0 million or 4.2 % from $ 239.7 million at December
31, 1998. At March 31, 1999, total loans, net of unearned income and allowance
for loan losses, were $245.7 million. Net loans as a percent of total assets
were 70.3% at March 31, 1999, as compared to 67.8% at December 31, 1998. Net
loan volume for the first three months of 1999 was $ 9.9 million as compared to
7
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$ 3.3 million for the first three months of 1998. Increased 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.
Also the Company has three branches still in start up mode, with one of those in
an area of very high residential growth, resulting in high construction loan
demand.
On March 31, 1999, the securities portfolio totaled $ 81.2 million, which was
$155 thousand or 0.2 % 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 $4.5 million on March 31, 1999, $ 6.2 million or
42.2 % 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 basically flat.
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 March 31, 1999, was
$40.5 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 $ 163 thousand at March 31, 1999, a decrease of $ 202 thousand from
1998 year end. This $202 thousand decrease in the unrealized gain 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 $303.7 million at quarter end represented a decrease of $ 583
thousand or 0.2 % 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.
RESULTS OF OPERATIONS
Eastern Virginia Bankshares, Inc. reported lower earnings for the first quarter
of 1999. Net income for the quarter was $ 1.47 million, a decrease of $ 95
thousand from first quarter 1998 earnings of $1.57 million. Net income for the
first quarter was negatively impacted by decreasing net interest margin, a
salary and benefit expense increase of $89 thousand and differences in the
timing of expense recognition compared to 1998 by $51 thousand. The yield on
earning assets was 8.21% for the quarter, as compared to 8.65% for the same
period in 1998. The cost of interest bearing liabilities for the three month
period ended March 31, 1999 was 4.21% as compared to 4.51% for the comparable
period in 1998. Return on average assets was 1.70% for the quarter, compared
with 1.93% for the same period in 1998, but reflected an improvement from 1.66%
for the year ended December 31, 1998. EVB's return on average equity was 13.91%
for the quarter, compared to 15.82% for the same period in 1998, yet again was
an improvement over the 13.56% for the full year 1998.
NET INTEREST INCOME
Net interest income totaled $ 3.8 million for the quarter, a $ 109 thousand
increase over the Company's performance for the first quarter of 1998. The net
interest margin for the three month period ended March 31, 1999 was 4.78%,
compared to 4.97% for the comparable period in the prior year.. The
deterioration in net interest margin results from a 44 basis point decrease in
yield on average earning assets which is only partially offset by a 30 basis
point decrease in the cost of interest bearing funds. Loan yield was negatively
impacted industry trends that have reflected larger decreases in loan yields
than in deposit rates.
NONINTEREST INCOME
Total noninterest income was $413 thousand for the quarter, a 7.5% decrease from
the first quarter 1998 noninterest income of $446 thousand. There were no gains
or losses on securities sales during the quarter compared to an $ 8 thousand
gain in 1998. Service charges on deposit accounts of $315 thousand were flat
compared to 1998 as the Company experienced the results of its 1998
implementation of an automatic overdraft protection plan. Other miscellaneous
operating income decreased $25 thousand from $123 thousand to $98 thousand.
8
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NONINTEREST EXPENSE
Total noninterest expense increased $188 thousand or 9.8 % from $1.92 million
for the first quarter of 1998 to $2.11 million in 1999. Salary expense increased
$219 thousand or 23.9% for the quarter vs. 1998, as the result of increases in
salaries and benefits, increased staffing for a new branch opened in Gloucester
by Southside Bank in the second quarter of 1998, and a timing difference of $51
thousand related to anticipated incentive compensation for one of the subsidiary
banks. Net occupancy expense increased $45 thousand or 15.1 % compared to the
same quarter of 1998 to $345 thousand for the first quarter of 1999, again
primarily impacted by the opening of the new Gloucester office, and by
depreciation expense related to investments in technology. All other noninterest
expenses decreased $77 thousand or 10.9% to $ 629 thousand for the first quarter
of 1999 from $705 thousand for the same period in 1998, primarily related to a
$93 thousand merger expense charge in 1998 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
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 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.
9
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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 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 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 March 31, 1999, EVB and its subsidiary banks have spent approximately
$125,000 associated with Year 2000 compliance. These costs include testing,
training, hardware and software replacement and upgrades. It is anticipated that
another $50,000 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
approximately 1.7% of first quarter earnings (or 0.007% 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 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.
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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.
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 $2.2 million at March 31,
1999, compared to $1.9 million at year end 1998, reflecting an 18.2 % increase
from 1998 year end. Although the first quarter 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 commercial real estate mortgage
loans secured by real estate in the Company'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
MARCH 31 DECEMBER 31
-------- -----------
1999 1998
---- ----
Nonaccrual loans $ 1,995 $ 1,626
Restructured loans - -
Other real estate owned 243 268
--------- ---------
Total nonperforming assets $ 2,238 $ 1,894
--------- ---------
Loans past due 90 days and
accruing interest $ 1,537 $ 1,190
Nonperforming assets to total loans
and other real estate 0.90% 0.79%
Allowance for loan losses to
nonaccrual loans 198.50% 237.39%
Allowance for loan losses to
period end loans 1.59% 1.61%
Total loan charge-offs, less recoveries, amounted to $ 14 thousand for the
quarter, representing an annualized ratio of net charge-offs to total average
loans, net of unearned income, of 0.02 %. This compares to 1998 full year
charge-offs of $457 thousand or 0.20% of average loans.
Nonperforming loans at March 31, 1999 were $ 2.0 million, or 0.80 % of total
loans, compared to $1.6 million or 0.79% 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
11
<PAGE>
interest at the original contractual terms. At March 31, 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 March 31, 1999, was $ 1 thousand. The average balance of impaired
loans for the first three months of 1998 was $9 thousand. Loans past due 90 days
or more and still accruing interest because they were well secured and in the
process of collection were $ 1.54 million at March 31, 1999, and $1.19 million
at December 31, 1998.
The allowance for loan losses has increased to $3.96 million at March 31, 1999,
as compared to $3.86 million at December 31, 1998. The allowance increased $ 100
thousand in the first three months of 1999 as compared to $33 thousand for the
first three months of 1997. 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 1.59 % at March 31,
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 March 31, 1999 are generally secured
by residential and commercial real estate with appraised values that exceed the
principal balance. At March 31, 1999, potential problem loans were approximately
$ 1.25 million including 6 lending relationships with principal balances in
excess of $100,000 which had an aggregate principal balance outstanding of $761
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 March 31, 1999 was
$42.54 million, or 19.12% of risk-weighted assets, for Tier 1 capital and $45.34
million, or 20.37% 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
12
<PAGE>
There have been no material changes in market risk since 1998 year end.
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 (not applicable)
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 4 of this Form 10-Q.
27 Financial Data Schedule - Included herein as Exhibit 27 on
page 14
(b) No reports on Form 8-K were filed during the first quarter of 1999.
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: April 27, 1999
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 9,209
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<INVESTMENTS-CARRYING> 40,668
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<DEPOSITS> 305,398
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0
0
<COMMON> 10,262
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