- -------------------------------------------------------------------------------
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 September 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 November
2, 1999 was 5,050,571.
- --------------------------------------------------------------------------------
<PAGE>
EASTERN VIRGINIA BANKSHARES, INC.
FORM 10-Q
For the Quarter Ended September 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
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30 December 31
1999 1998
---- ----
<S> <C>
ASSETS:
Cash and due from banks $ 8,206 $ 10,864
Interest-bearing deposits, in other banks - -
Federal funds sold 13,540 10,658
Securities available for sale at fair value 40,578 42,000
Securities held to maturity at amortized cost
fair value of $38,758 and $40,308 38,914 39,333
Loans, net of unearned income 267,112 239,665
Allowance for loan losses (4,104) (3,860)
------------ ------------
Net loans 263,008 235,805
Deferred income taxes 1,314 953
Bank premises and equipment 4,512 4,698
Accrued interest receivable 2,493 2,423
Other real estate 243 267
Other assets 706 994
----------- ------------
Total assets $ 373,514 $ 347,995
----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Noninterest-bearing demand accounts $ 34,062 $ 33,216
Savings accounts and interest bearing deposits 137,807 136,520
Time deposits 152,651 134,594
----------- -----------
Total deposits 324,520 304,330
Federal funds purchased - -
Long-term debt 3,000 -
Accrued interest payable 849 741
Other liabilities 2,367 667
----------- ------------
Total liabilities 330,736 305,738
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 10,120 10,286
Surplus 2,474 3,729
Retained earnings 30,520 27,877
Accumulated other comprehensive income (336) 365
----------- ------------
Total shareholders' equity 42,778 42,257
Total liabilities and shareholders' equity $ 373,514 $ 347,995
----------- ------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(Dollars in thousands except share amounts)
Three Months Ended Nine Months Ended
September 30 September 30
------------ ------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C>
INTEREST INCOME:
Loans $ 5,726 $ 5,350 $ 16,750 $ 15,977
Interest on investment securities:
Taxable - 15 - 157
Tax exempt 472 449 1,435 1,347
Interest on securities available for sale:
Taxable 603 652 1,848 1,747
Tax exempt - 14 - 14
Dividends 21 3 52 34
Interest on federal funds sold 182 237 347 577
Interest on deposits in other banks - 1 - 4
------ ------- --------- --------
Total interest income 7,004 6,721 20,432 19,857
INTEREST EXPENSE
Deposits 2,995 3,018 8,695 8,848
Borrowings 44 - 68 -
------ ------- --------- --------
Total interest expense 3,039 3,018 8,763 8,848
------ ------- --------- --------
Net interest income 3,965 3,703 11,669 11,009
PROVISION FOR LOAN LOSSES 144 116 372 354
------ ------- --------- --------
Net interest income after provision
for loan losses $ 3,821 $ 3,587 $ 11,297 $ 10,655
OTHER INCOME
Service charges on deposit accounts 370 347 1,031 1,017
Gain (loss) on sale of available for
sale securities - - (44) 8
Other operating income 105 77 304 291
------ ------- --------- --------
475 424 1,291 1,316
------ ------- --------- --------
OTHER EXPENSES
Salaries and benefits 1,186 1,049 3,486 3,067
Net occupancy expense of premises 387 376 1,031 991
Other operating expenses 649 684 1,923 2,121
------ ------- --------- --------
2,222 2,109 6,440 6,179
------ ------- --------- --------
Income before income taxes 2,074 1,902 6,148 5,792
INCOME TAX EXPENSE 606 577 1,663 1,555
------ ------- --------- --------
Net income $ 1,468 $ 1,325 $ 4,485 $ 4,237
------ ------- --------- --------
Earnings Per Share, basic and assuming
dilution(1) $ 0.29 $ 0.26 $ 0.88 $ 0.82
Dividends per share(1) $ 0.12 $ 0.11 $ 0.36 $ 0.33
</TABLE>
(1) Share and per share amounts for 1997 have been restated to reflect the
December 29, 1997 reorganization whereby Southside Bank and Bank of
Northumberland, Inc. shareholders exchanged their stock in those companies
for stock of the Corporation.
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (Unaudited)
(Dollars in thousands)
Nine Months Ended
-----------------
September 30 September 30
1999 1998
---- ----
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,485 $ 4,237
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 693 463
Provision for loan losses 372 354
Losses (gains) realized on available for sale securities 44 (8)
(Increase) decrease in other assets 77 (328)
Increase (decrease) in other liabilities 1,810 (244)
-------- --------
Net cash provided by operating activities 7,481 4,474
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from maturities, calls, paydowns and sales
of available for sale securities 8,008 25,418
Purchase of securities available for sale (7,301) (22,153)
Proceeds from maturities of investment securities 3,042 3,884
Purchase of investment securities (2,785) (7,986)
(Purchase) sale of FHLB and Federal Reserve Bank stock (143) (132)
Net (increase) decrease in loans (27,203) (6,520)
Purchases of bank premises and equipment (442) (1,170)
Proceeds from sale of OREO - 18
-------- --------
Net cash (used in) investing activities (26,824) (8,641)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest bearing and interest bearing
demand deposits and savings accounts 2,133 12,907
Net increase in certificates of deposit 17,697 6,410
Proceeds from sale of common stock - -
Acquisition of common stock (1,421) (28)
Dividends declared (1,842) (1,709)
Increase (decrease) in borrowings 3,000 -
-------- --------
Net cash provided by financing activities 19,567 17,580
-------- --------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 224 13,413
CASH AND CASH EQUIVALENTS
BEGINNING OF PERIOD 21,522 12,061
-------- --------
END OF PERIOD $ 21,746 $ 25,474
-------- --------
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for:
Interest on deposits and other borrowings $ 8,655 $ 8,848
Income taxes $ 1,245 $ 1,555
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
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 NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(Dollars in thousands)
ACCUMULATED
OTHER
COMPREHENSIVE RETAINED COMPREHENSIVE COMMON CAPITAL
TOTAL INCOME EARNINGS INCOME STOCK SURPLUS
----- ------------- -------- ------------- ------ --------
<S> <C>
Balances - January 1, 1998 $39,265 $ 28,535 $ 132 $ 10,378 $ 220
Comprehensive income:
Net income 4,237 $ 4,237 4,237
Other comprehensive income, net of tax
Unrealized gain/(loss) on securities
available for sale:
Unrealized holding gain/(loss) arising
during period 297 297 297
Less: reclassification adjustment 8 8 (8)
-------- --------
Other comprehensive income, net of tax 289 289
-------- --------
Total comprehensive income 4,526 $ 4,526
--------
Shares purchased and retired -28 -28
Dividends declared (1,709) (1,709) - - -
-------- --------- ------- --------- ------
BALANCES-SEPTEMBER 30, 1998 $42,054 $ 31,063 $ 421 $ 10,350 $ 220
-------- --------- ------- --------- ------
Balances - January 1, 1999 $42,257 $ 27,877 $ 365 $ 10,266 $3,729
Comprehensive income:
Net income 4,485 $ 4,485 4,485
Other comprehensive income, net of tax
Unrealized gain/(loss) on securities
available for sale:
Unrealized holding gain/(loss) arising
during the period (745) (745)
Less: reclassification adjustment (44) (44)
-------- --------
Other comprehensive income, net of tax (701) (701) (701)
-------- --------
Total comprehensive income $ 3,784
--------
Shares purchased and retired (1,421) (166) (1,255)
Dividends declared (1,842) (1,842)
------- --------
BALANCES-SEPTEMBER 30, 1999 $42,778 $ 30,520 $ (336) $ 10,120 $2,474
------- -------- ------- -------- ------
</TABLE>
6
<PAGE>
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 September 30, 1999, the Consolidated
Statements of Income for the three-month and nine month periods ended
September 30, 1999, and September 30, 1998, the Consolidated Statement of
Cash Flows for the nine-month periods ended September 30,1999, and September
30, 1998, and the Consolidated Statement of Changes in Shareholders' Equity
for the nine-month periods ended September 30, 1999, and September 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 September
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 September 30, 1999, the corporation
repurchased 37,000 shares of its common stock in both privately negotiated
and market transactions at an average price of $17.051 per share. This share
repurchase plan announced in November, 1998, follows the repurchase of 45,800
shares in the first six months of 1999 at an average price of $17.258 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 5,183,894 for the
three month periods ended September 30, 1999 and 1998, and were 5,073,144 and
5,174,832 for the nine month periods ended September 30, 1999 and 1998.
6. EVB's amortized cost and estimated fair values of securities at September 30,
1999 are as follows:
(in thousands)
<TABLE>
<CAPTION>
September 30, 1999
------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---- ----- ------- -----
<S> <C>
Available for Sale:
U.S. Government obligations $ 10,182 $ 35 $ 30 $ 10,187
Obligations of U.S. Government agencies 21,617 43 437 21,223
Obligations of state/political subdivisions 5,249 13 90 5,172
Corporate bonds 2,811 6 50 2,767
Equity securities 1,229 - - 1,229
-------- ------ ----- --------
41,088 97 607 $ 40,578
Held to Maturity:
Obligations of state/political subdivisions 38,914 382 538 38,758
-------- ----- ------ --------
Total $ 80,002 $ 479 $1,145 $ 79,336
-------- ----- ------- --------
</TABLE>
7
<PAGE>
NOTE 7. EVB'S LOAN PORTFOLIO IS COMPOSED OF THE FOLLOWING:
(in thousands)
September 30 December 31
1999 1998
------------ -----------
Real estate - construction $ 7,808 $ 6,096
Real estate - mortgage 149,983 130,856
Commercial real estate 32,113 23,114
Commercial, industrial and
agricultural loans 28,788 30,649
Installment loans to individuals 51,828 51,481
All other loans 347 961
---------- ----------
Total loans 270,867 243,157
Less unearned income (3,755) (3,493)
Less allowance for loan losses (4,104) (3,860)
---------- ----------
Total net loans $ 263,008 $ 235,804
---------- ----------
EVB has $1.69 million in non-performing loans at September 30, 1999.
NOTE 8. ALLOWANCE FOR LOAN LOSSES
September 30 December 31
1999 1998
---- ----
Balance January 1 $ 3,860 $ 3,868
Provision charged against income 372 449
Recoveries of loans charged off 194 210
Loans charged off (322) (667)
-------- --------
Balance at end of period $ 4,104 $ 3,860
-------- --------
NOTE 9. ACCOUNTING RULE CHANGES
There were no new Financial Accounting Standards Board promulgations in the
third 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 Corporation. 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 third quarter of 1999 increased 10.8% from the same period in
1998, fueled by continued strong loan growth. Total loans, net of unearned
income, amounted to $267.1 million at September 30, 1999, an increase of $ 19.7
million or 11.4 % from $ 239.7 million at December 31, 1998. Net loans as a
percent of total assets were 70.4% at September 30, 1999, as compared to 67.8%
at December 31, 1998. Net loan volume for the first nine months of 1999 was
8
<PAGE>
$ 27.2 million as compared to $ 6.5 million for the first nine 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. On September 30, 1999, the securities
portfolio totaled $ 79.5 million, which was $1.8 million or 2.3 % 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 $13.5
million on September 30, 1999, $ 2.9 million or 27.0 % more than the $10.7
million outstanding at December 31, 1998. This increase in Federal Funds Sold is
primarily the result of a $ 3 million loan executed with the Federal Home Loan
Bank of Atlanta in the second quarter of 1999, using the proceeds to fund loan
growth and to enhance liquidity.
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 September 30, 1999,
was $ 40.6 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 $ 336 thousand at September 30, 1999, compared to a
positive $ 365 thousand at 1998 year end. This $701 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 $324.5 million at quarter end represented an increase of $
20.2 million or 6.6 % from $304.3 million at December 31, 1998. EVB offers
attractive, yet competitive rates, to maintain a strong stable deposit base.
Most of the year to date deposit growth occurred in the third quarter as
subsidiary Southside Bank experienced a $12.5 million deposit growth spurred by
a promotion implemented in late June.
RESULTS OF OPERATIONS
Net income increased 10.8% to $ 1,468,000 for the three months ended September
30, 1999 compared to $ 1,325,000 for the same period of 1998. Earnings per share
were $ .29 for the quarter, up 11.5% from $ .26 per share for the same period in
1998. Net income for the nine months ended September 30, 1998 increased 5.9% to
$ 4,485,000 compared to $ 4,237,000 for the first nine months of 1998. Earnings
per share were $ .88 for the nine month period, up 7.3% from
$ .82 per share for the first nine months of 1998. Profitability as measured by
the corporation's annualized return on average assets (ROA) increased to 1.59%
for the quarter ended September 30. 1999, up from 1.52% for the same period of
1998. ROA for the first nine months of 1999 was 1.67% as compared to 1.68% for
the first nine 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 September 30, 1999 increased to 13.76%, up from
12.72% for the third quarter of 1998. ROE for the nine month period ended
September 30,1999, was 14.01%, compared to 13.86% for the first three quarters
of 1998, and 13.56% for the full year 1998.
Net income for the quarter was favorably impacted by strong loan growth, and an
improved net interest margin compared to the same period in the prior year.
NET INTEREST INCOME
Net interest income totaled $ 3.97 million for the quarter, a $ 262 thousand or
7.1 % increase over the Company's performance for the third quarter of 1998. The
increase in net interest income is a result of an increase in the average
balance of interest earning assets, partially offset by decreased net interest
margin. For the quarter ended September 30, 1999, the average balance of
interest earning assets increased to $ 354.5 million from $ 329.6 million for
the same quarter in 1998. The increase in average earning assets is a result of
an increase of $28.4 million or 12.1% 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 lower
yielding assets into higher yielding loans.
The net interest margin for the three month period ended September 30, 1999 was
4.71%, compared to 4.73% for the comparable period in the prior year. This
margin decrease resulted from asset mix and the marginally greater impact of a
decreased rate environment on assets than on deposits.
9
<PAGE>
Net interest income for the nine months ended September 30, 1999 was $11.7
million, an increase of $ 660 thousand, or 6.0 % from $ 11.0 million for the
same period in 1998. For the nine months ended September 30, 1999, average loans
increased $23.1 million to $253.8 million from $230.7 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 lower yielding
investments into higher yielding loans. Net interest margin for the nine months
ended September 30, 1999 was 4.79% compared to 4.89% for the same period in 1998
Year-to-date yield on average earning assets has decreased 36 basis points from
1998 while the cost of interest bearing funds has decreased 37 basis points.
This decrease in interest rates had a negative impact on net interest margin
because of the larger total dollar amount of earning assets as compared to
interest bearing deposits and borrowed funds.
NONINTEREST INCOME
Total noninterest income, excluding securities transactions, was $475 thousand
for the quarter, a 12.0% increase from third quarter 1998 noninterest income of
$424 thousand. Service charges on deposit accounts and other miscellaneous
income both increased compared to second quarter 1998. Noninterest income,
excluding securities transactions, for the nine months ended September 30, 1999
increased $ 27 thousand from $1.31 million in 1998 to $ 1.34 million in 1999.
Year-to-date realized losses on securities sales for 1999 are $44 thousand
compared to an $8 thousand gain for the same period in the prior year.
NONINTEREST EXPENSE
Total noninterest expense increased $ 113 thousand or 5.4 % from $2.11 million
for the third quarter of 1998 to $2.22 million in 1999. Salary and benefits
expense increased $137 thousand or 13.1% for the quarter vs. 1998, as the result
of a $64 thousand increase in salaries and a $73 thousand increase in benefits.
The increase in benefits is related to current year expense of the Corporation's
defined benefit pension plan based on market valuation changes in the plan's
assets. Net occupancy expense increased $11 thousand or 2.9 % compared to the
same quarter of 1998 to $387 thousand compared to $376 thousand in the same
period in the prior year. All other noninterest expenses decreased $35 thousand
or 5.1% to $ 649 thousand for the third quarter of 1999 from $684 thousand for
the same period in 1998, primarily the result of a $120 thousand decrease in
data processing expenses as the company reaps the benefit of a late 1998
consolidation of banking systems, partially offset by normal growth in
advertising/marketing, printing and supplies, legal and collection, and postage
expense.
For the nine months ended September 30, 1999, total noninterest expense
increased $261 thousand (4.2%) to $ 6.4 million from $ 6.2 million for the
comparable period of 1998. Salary and benefits expense increased $ 419 thousand
(13.7%) 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 partially offset by a $198 thousand
decrease in All Other Operating Expenses consisting primarily of a decrease of
$195 thousand in data processing expense and a 1998 first quarter $93 thousand
merger expense that was nonrecurring, partially offset by normal growth in
insurance, printing and supplies, legal and collection, courier service, and
postage expense.
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
10
<PAGE>
year "00" as 1900 instead of 2000, causing problems ranging from minor
inaccuracies to systems failures. EVB believes it has achieved 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,
based on the results of extensive testing. 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 was 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
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. 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 September 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
approximately 1.1% of year-to-date 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.
11
<PAGE>
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 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 addresses 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
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
12
<PAGE>
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 $1.93 million at September
30, 1999, a 2.1% increase from $1.89 million at 1998 year end. Although the
first nine months of 1999 saw a marginal increase in nonperforming assets, the
total of such assets is at 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
SEPTEMBER 30 DECEMBER 31
------------ -----------
1999 1998
---- ----
Nonaccrual loans $ 1,690 $ 1,626
Restructured loans - -
Other real estate owned 243 268
--------- ---------
Total nonperforming assets $ 1,933 $ 1,894
--------- ---------
Loans past due 90 days and
accruing interest $ 1,356 $ 1,190
Nonperforming assets to total loans
and other real estate 0.72% 0.79%
Allowance for loan losses to
nonaccrual loans 242.84% 237.39%
Allowance for loan losses to
period end loans 1.54% 1.61%
Total loan charge-offs, less recoveries, amounted to $ 68 thousand for the
quarter and $128 thousand for the first nine months of 1999, representing an
annualized ratio of net charge-offs to total average loans, net of unearned
income, of 0.10 % and 0.07% for the three and nine month periods ended September
30, 1999. This compares to 1998 full year charge-offs of $457 thousand or 0.20%
of average loans.
Nonperforming loans at September 30, 1999 were $ 1.69 million, or 0.63 % of
total loans, compared to $1.63 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 September 30, 1999, impaired
loans totaled $50 thousand upon which an allowance is included in the total loan
portfolio allowance for loan losses. Interest income recognized on impaired
loans as of September 30, 1999, was $1.2 thousand. The average balance of
impaired loans for the first nine months of 1998 was $13 thousand. Loans past
due 90 days or more and still accruing interest because they were well secured
and in the process of collection were $ 1.36 million at September 30, 1999, and
$1.19 million at December 31, 1998.
The allowance for loan losses has increased to $4.10 million at September 30,
1999, as compared to $3.86 million at December 31, 1998. The allowance increased
$ 244 thousand in the first nine months of 1999 as compared to $ 143 thousand
for the first nine 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 1.54% at
September 30, 1999, and 1.61% at year end 1998.
13
<PAGE>
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 September 30, 1999 are generally
secured by residential and commercial real estate with appraised values that
exceed the principal balance. At September 30, 1999, potential problem loans
were approximately $ 1.48 million including 7 lending relationships with
principal balances in excess of $100,000 which had an aggregate principal
balance outstanding of $925 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 September 30, 1999 was
$43.1 million, or 18.34% of risk-weighted assets for Tier 1 capital,and $46.1
million, or 19.69% 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.
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.
14
<PAGE>
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 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 third 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: November 8, 1999
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
BALANCE SHEET AND CONSOLIDATED INCOME STATEMENT AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1999
<PERIOD-END> SEP-30-1999 SEP-30-1999
<CASH> 8,206 8,206
<INT-BEARING-DEPOSITS> 0 0
<FED-FUNDS-SOLD> 13,540 13,540
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 40,578 40,578
<INVESTMENTS-CARRYING> 38,914 38,914
<INVESTMENTS-MARKET> 38,758 38,758
<LOANS> 267,112 267,112
<ALLOWANCE> 4,104 4,104
<TOTAL-ASSETS> 373,514 373,514
<DEPOSITS> 324,520 324,520
<SHORT-TERM> 0 0
<LIABILITIES-OTHER> 3,216 3,216
<LONG-TERM> 3,000 3,000
0 0
0 0
<COMMON> 10,120 10,120
<OTHER-SE> 32,658 32,658
<TOTAL-LIABILITIES-AND-EQUITY> 373,514 373,514
<INTEREST-LOAN> 16,750 5,726
<INTEREST-INVEST> 3,345 1,096
<INTEREST-OTHER> 347 182
<INTEREST-TOTAL> 20,432 7,004
<INTEREST-DEPOSIT> 8,695 2,995
<INTEREST-EXPENSE> 8,763 3,039
<INTEREST-INCOME-NET> 11,669 3,965
<LOAN-LOSSES> 372 144
<SECURITIES-GAINS> (44) 0
<EXPENSE-OTHER> 6,440 2,222
<INCOME-PRETAX> 6,148 2,074
<INCOME-PRE-EXTRAORDINARY> 6,148 2,074
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 4,485 1,468
<EPS-BASIC> 0.88 0.29
<EPS-DILUTED> 0.88 0.29
<YIELD-ACTUAL> 4.54 4.47
<LOANS-NON> 1,690 1,690
<LOANS-PAST> 1,356 1,356
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 1,477 1,477
<ALLOWANCE-OPEN> 3,860 4,028
<CHARGE-OFFS> 322 107
<RECOVERIES> 194 39
<ALLOWANCE-CLOSE> 4,104 4,104
<ALLOWANCE-DOMESTIC> 4,104 4,104
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
</TABLE>
