<PAGE>
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, $2 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No __
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [_]
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 10, 2000 was approximately $84,054,511.
The number of shares of the registrant's Common Stock outstanding as of March
10, 2000 was 4,944,383.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's 1999 Annual Report to Shareholders are incorporated by
reference into Parts I, II and IV.
Portions of the definitive Proxy Statement dated March 27, 2000 to be delivered
to shareholders in connection with the Annual Meeting of Shareholders to be held
April 20, 2000 are incorporated by reference into Part III.
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES, INC.
<PAGE>
FORM 10-K
For the Year Ended December 31, 1999
INDEX
<TABLE>
<CAPTION>
Part I
- ------
<S> <C> <C>
Item 1. Business 2
Item 2. Properties 2
Item 3. Legal Proceedings 2
Item 4. Submission of Matters to a Vote of Security Holders 3
Part II
- -------
Item 5. Market for Registrants Common Stock and Related Stockholder Matters 3
Item 6. Selected Financial Data 3
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 3
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 3
Item 8. Financial Statements and Supplementary Data 3
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 3
Part III
- --------
Item 10. Directors and Executive Officers of the Registrant 4
Item 11. Executive Compensation 4
Item 12. Security Ownership of Certain Beneficial Owners and Management 4
Item 13. Certain Relationships and Related Transactions 4
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 5
Signatures 6
</TABLE>
PART 1
1
<PAGE>
Item 1. Business
________________________________________________________________________________
General
Eastern Virginia Bankshares, Inc. (the "Company" or "EVB") was organized and
chartered under the laws of the Commonwealth of Virginia on September 5, 1997
and commenced operations on December 29, 1997 as a bank holding company. On
December 29, 1997, the effective date, Southside Bank (SSB) a state chartered
nonmember bank and Bank of Northumberland, Inc., (BNI) a state chartered Federal
Reserve member bank, the "Banks", became wholly-owned subsidiaries of EVB. This
form 10-K covers the first two full years of operations for the periods ended
December 31, 1999 and 1998 and pro forma combined operations of the subsidiary
companies for the year prior to the actual consolidation. Early in January,
2000, the Company filed applications with the FDIC, the Federal Reserve Bank and
the State Corporation Commission for the opening of a new subsidiary named
Hanover Bank. The new subsidiary is to be wholly owned by Eastern Virginia
Bankshares and is scheduled to open in the second quarter of 2000. Hanover Bank
was incorporated in December, 1999, but remained dormant until January, 2000.
The remainder of the response to this Item is incorporated by reference to the
information under the captions "To Our Stockholders" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
EVB's Annual Report to Shareholders.
Employees
As of December 31, 1999, the subsidiary banks employed 137 full-time equivalent
employees. EVB's success is highly dependent on its ability to attract and
retain qualified employees. Competition for employees is intense in the
financial services industry. The Company believes it has been successful in its
efforts to recruit qualified employees, but there is no assurance that it will
continue to be successful in the future. None of the Company's employees are
subject to collective bargaining agreements. EVB believes relations with its
employees are excellent.
Item 2. Properties
________________________________________________________________________________
The Company's principal executive offices are located at 307 Church Lane,
Tappahannock, Virginia 22560. The corporate office is also the headquarters of
SSB and is adjacent to a 5,400 square foot SSB operations center. The two
subsidiary banks own 12 full service branch buildings including the land on
which 11 of those buildings are located. Northumberland and Middlesex Counties
each are the home to three of the branches. Essex County which houses the
corporate offices is home to two branches while Hanover County, King William
County, Caroline County and Gloucester County each have one full service branch
office. All properties are in good condition.
Item 3. Legal Proceedings
________________________________________________________________________________
In the course of its operations, EVB and its subsidiaries are not aware of any
material pending or threatened litigation, unasserted claims and/or assessments
through December 31, 1999, or subsequent thereto. The only litigation in which
EVB and its subsidiaries, the Banks, are involved are collection suits involving
delinquent loan accounts in the normal course of business.
Item 4. Submission of Matters to a Vote of Security Holders
________________________________________________________________________________
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
2
<PAGE>
________________________________________________________________________________
The information titled "Common Stock Performance and Dividends" set forth on
page 44 of the 1999 Annual Report to Shareholders is incorporated herein by
reference and is filed herewith as Exhibit 13.1.
Item 6. Selected Financial Data
________________________________________________________________________________
The information set forth on page 2 of the 1999 Annual Report to Shareholders is
incorporated herein by reference and filed herewith as Exhibit 13.2.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
________________________________________________________________________________
The information set forth on pages 7-21 of the 1999 Annual Report to
Shareholders is incorporated herein by reference and is filed herewith as
Exhibit 13.3.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
________________________________________________________________________________
The information set forth on pages 10-12 of the 1999 Annual Report to
Shareholders is incorporated herein by reference and is filed herewith as
Exhibit 13.3.
Item 8. Financial Statements and Supplementary Data
________________________________________________________________________________
The following financial statements for the Company and independent auditors'
report set forth on pages 22-40 of the 1999 Annual Report to Shareholders are
incorporated herein by reference and are filed herewith as Exhibit 13.4.
. Consolidated Balance Sheets as of December 31, 1998 and 1999
. Consolidated Statements of Income for the three years ended December 31,
1999
. Consolidated Statements of Changes in Shareholders' Equity for the three
years ended December 31, 1999
. Consolidated Statements of Cash Flows for the three years ended December
31, 1999
. Notes to Consolidated Financial Statements
. Independent Auditor's Report
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures
________________________________________________________________________________
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
________________________________________________________________________________
3
<PAGE>
The response to this Item required by Item 401 of Regulation S-K, with respect
to directors, is incorporated by reference to the information under the caption
"Election of Directors" on pages 1 through 5 of EVB's Proxy Statement for the
2000 annual meeting of shareholders and with respect to executive officers, is
presented below.
Executive Officers of the Registrant
- ------------------------------------
Following are the persons who were the executive officers of EVB as of December
31, 1999, their ages as of December 31, 1999, their current titles and positions
held during the last five years:
Robert L. Covington, 74, is the Chairman of the Board of Directors of EVB and
has been Chairman of the Board of BNI since 1991.
F. L. Garrett, III, 60, is the Vice-Chairman of the Board of Directors of EVB
and Chairman of the Board of SSB of which he has been a member since 1982. He
is an oysterman and a realtor in Essex County, VA
Thomas M. Boyd, Jr. 60 is the President and Chief Executive Officer of EVB. Mr.
Boyd has served as the President and Chief Executive Officer of SSB since 1982.
Lewis R. Reynolds 49 is the Executive Vice President of EVB. Mr. Reynolds has
served as the President and Chief Executive Officer of BNI since 1991.
Thomas E. Stephenson 45 is Chief Financial Officer of EVB. Mr. Stephenson has
been Vice President and Chief Financial Officer of SSB since 1987.
Item 11. Executive Compensation
________________________________________________________________________________
The response to this Item is incorporated by reference to the information under
the caption "Executive Compensation" on pages 3 and 4 of EVB's Proxy Statement
for the 2000 annual meeting of shareholders .
Item 12. Security Ownership of Certain Beneficial Owners and Management
________________________________________________________________________________
The response to this Item is incorporated by reference to the information under
the caption "Security Ownership of Management and Certain Beneficial Owners" on
page 3 of EVB's Proxy Statement for the 2000 annual meeting of shareholders.
Item 13. Certain Relationships and Related Transactions
________________________________________________________________________________
The response to this Item is incorporated by reference to the information under
the caption "Interest of Directors and Officers in Certain Transactions" on
page 5 of EVB's Proxy Statement for the 2000 annual meeting of shareholders.
PART IV
Item 14. Exhibits, Financial Statements and Auditors' Report
________________________________________________________________________________
(a) Financial Statements and Schedules
4
<PAGE>
The financial statements set forth under Item 8 of this report on Form
10-K are incorporated by reference. Financial statement schedules have
been omitted since they are either not required, not applicable, or
the information is otherwise included.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during 1999.
(c) Exhibit Listing
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation (No changes - Articles of
Incorporation filed with 1997 Form 10-K are incorporated
by reference)
3.2 Bylaws
10 Employment Contracts of Certain Officers and Directors is
incorporated by Reference to the information under the
caption "Employment Contracts" on page 4 of the Company's
Proxy Statement for the 2000 annual meeting of
shareholders.
13.1 Quarterly Market Information Incorporated by Reference to
page 44 of 1999 Annual Report to Shareholders ("1998
Annual Report")
13.2 Selected Financial Data Incorporated by Reference to Page
2 of 1999 Annual Report
13.3 Management's Discussion and Analysis of Financial
Condition and Results of Operations Incorporated by
Reference to Pages 7 through 21 of Annual Report
13.4 Financial Statements Incorporated by Reference to Pages 22
through 40 of Annual Report
21 Subsidiaries of the Registrant Incorporated by Reference
to page 26 of Annual Report
27 Financial Data Schedule
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the town of
Tappahannock, State of Virginia, on March 16, 2000.
Eastern Virginia Bankshares, Inc.
By /s/ Thomas E. Stephenson
--------------------------
Thomas E. Stephenson
Vice President, Chief Financial Officer
5
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities indicated on March 16, 2000.
Signature Title
/s/ Robert L. Covington Chairman of the Board of Directors
- ---------------------------------
Robert L. Covington
/s/ F. L. Garrett, III Vice Chairman of the Board of Directors
- ---------------------------------
F. L. Garrett, III
/s/ Thomas M. Boyd, Jr. President and Chief Executive Officer
- --------------------------------- and Director
Thomas M. Boyd, Jr.
/s/ Lewis R. Reynolds Executive Vice President and Director
- ---------------------------------
Lewis R. Reynolds
/s/ L. Edelyn Dawson, Jr. Director and Secretary of the Board
- ---------------------------------
L. Edelyn Dawson, Jr.
/s/ Warren Haynie, Jr. Director
- ---------------------------------
Warren Haynie, Jr.
/s/ W. Rand Cook Director
- ---------------------------------
W. Rand Cook
/s/ Eric A. Johnson Director
- ---------------------------------
Eric A. Johnson
/s/ William L. Lewis Director
- ---------------------------------
William L. Lewis
/s/ Leslie E. Taylor Director
- ---------------------------------
Leslie E. Taylor
/s/ Jay T. Thompson Director
- ---------------------------------
Jay T. Thompson
/s/ Thomas E. Stephenson Vice President, Chief Financial Officer
- ---------------------------------
Thomas E. Stephenson (Principal Financial and Accounting
Officer)
6
<PAGE>
A. The annual meeting of the shareholders of the Corporation shall be
held at such a place as may be decided by, the Board of Directors on a date
during the month of March, April or May of each and every year, the exact date,
place and hour to be fixed by the Board of Directors.
B. At the annual meeting of the shareholders of the Corporation,
Directors shall be elected and reports of the affairs of the Corporation shall
be received and considered. Any other business may be transacted which is
within the powers of the shareholders, except that, if any shareholder shall
bring new business before the annual meeting, the shareholder must give advance
notice as set forth in Section 1.6 of these Bylaws.
C. The Board of Directors may designate any place, either within or
without the Commonwealth of Virginia, as the place of meeting for any annual
meeting or for any special meeting. If no place is designated by the Board, the
place of meeting shall be the principal office of the Corporation.
Section 1.2. Special Meetings. A special meeting of the shareholders may
----------------
be called for any purpose or purposes whatsoever at any time, but only by the
President, the Chairman or Vice Chairman of the Board of Directors, or the Board
of Directors.
Section 1.3. Notice of Meetings. Notice of the time and place of every
------------------
annual meeting or special meeting shall be mailed to each Shareholder of record
entitled to vote at the meeting at his address as it appears on the records of
the Corporation not less than ten (10) nor more than sixty (60) days before the
date of such meeting (except as a different time may be specified by law).
Section 1.4. Quorum. A majority of the votes entitled to be cast on a
------
matter by a voting group constitutes a quorum of such voting group for action on
such matter. If there is not a quorum at the time for which a meeting shall
have been called, the meeting may be adjourned from time to time by a majority
of the shareholders present or represented by proxy without notice, other than
by announcement at the meeting, until there is a quorum.
Section 1.5. Voting. Except as the Articles of Incorporation otherwise
------
provide, at any meeting of the shareholders, each outstanding share, regardless
of class, is entitled to one vote on each matter voted on at a shareholders'
meeting.
Section 1.6. Notice of Shareholder Business. (a) At an annual meeting of
------------------------------
the shareholders of the Corporation, only such business shall be conducted as
shall have been properly brought before the meeting. To be brought before an
annual meeting, business must be (a) specified in the notice of meeting (or any
supplement thereto) given by or at the direction of the Board of Directors, (b)
otherwise bought before the meeting by or at the direction of the Board of
Directors, or (c) otherwise properly brought before the meeting by a
shareholder. For business to be properly brought before an annual meeting by a
shareholder, the Shareholder must have given timely notice thereof in writing to
the Secretary of the Corporation. To be timely, a shareholder's notice must be
delivered to or mailed and received at the principal executive offices of the
Corporation, not less than sixty (60) days nor more than ninety (90) days prior
to the date of the scheduled annual meeting, regardless of any postponements,
deferrals or adjournments of that meeting to a later date; provided, however,
that in the event that less than seventy (70) days' notice or prior public
disclosure of the date of the scheduled annual meeting is given or made,
7
<PAGE>
notice by a shareholder, to be timely, must be so received not later than the
close of business on the tenth (10th) day following the earlier of the day on
which such notice of the date of the scheduled annual meeting was mailed or the
day on which such public disclosure was made. A shareholder's notice to the
Secretary of the Corporation shall set forth as to each matter the shareholder
proposes to bring before the annual meeting (a) a brief description of the
business desired to be brought before the annual meeting and the reasons for
conducting such business at the annual meeting, (b) the name and address, as
they appear on the Corporation's books of the shareholder proposing such
business and of any other person or entity who is the record or beneficial owner
of any shares of the Corporation and who, to the knowledge of the shareholder
proposing such business, supports such proposal, (c) the class and number of
shares of the Corporation which are beneficially owned and owned of record by
the shareholder proposing such business on the date of his notice to the
Corporation and the number of shares so owned by any person or entity who, to
the knowledge of the shareholder proposing such business, supports such proposal
and (d) any material interest (financial or other) of such shareholder in such
proposal. Notwithstanding anything in these Bylaws to the contrary, no business
shall be conducted at any annual meeting except in accordance with the
procedures set forth in this Section 1.6. The Chairman of an annual meeting
shall, if the facts warrant, determine and declare to the meeting that business
was not properly brought before the meeting and in accordance with the
provisions of this Section 1.6. and if he should so determine, he shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted.
(b) Nothing in Section 1.6(a) shall be interpreted to mean that a
shareholder shall not be permitted to ask pertinent questions or to express his
or her views on any pertinent matter.
Section 1.7. Order of Business. All meetings of shareholders shall be
-----------------
conducted in accordance with such rules as are prescribed by the Chairman of the
meeting and he shall determine the order of business at all meetings of the
shareholders.
Section 1.8. Inspectors. The Board of Directors, in advance of any
----------
meeting of shareholders, may, but shall not be required to, appoint one or more
inspectors to act at such meeting or any adjournment thereof. If any of the
inspectors so appointed shall fail to appear or act, the Chairman of the meeting
may appoint one or more inspectors. The inspectors shall determine the number
of shares of capital stock of the Corporation outstanding and the voting power
of each, the number of shares represented at the meeting, the existence of a
quorum, the validity and effect of proxies, and shall receive votes, ballots or
consents, hear and determine all challenges and questions arising in connection
with the right to vote, count and tabulate all votes, ballots or consents,
determine the results, and do such acts as are proper to conduct the election or
vote with fairness to all shareholders. On request of the Chairman of the
meeting, the inspectors shall make a report of any challenge, request or matter
determined by them and shall execute a certificate of any fact found by them.
No director or candidate for the office of director shall act as an inspector of
an election of directors. Inspectors need not be shareholders.
ARTICLE II
Directors
Section 2.1. General Powers. The business and affairs of the Corporation
--------------
shall be managed under the direction of the Board of Directors and, except as
otherwise expressly
8
<PAGE>
provided by law or by the Articles of Incorporation, or by these Bylaws, all of
the powers of the Corporation shall be exercised by or under the authority of
said Board of Directors.
Section 2.2. Number and Qualification. The Board of Directors shall
------------------------
consist of eleven (11) Directors. Each Director shall be a resident of the
Commonwealth of Virginia. Except for Directors of the Corporation elected in
1997 (who may be reelected one or more times, regardless of age), no one who is
seventy years of age or older shall be eligible to stand for election to the
Board of Directors.
Section 2.3. Election of Directors. The Directors shall be elected at the
---------------------
annual meeting of shareholders, and shall hold their offices until their
successors are elected in accordance with the Articles of Incorporation.
Nominations for the election of Directors shall be given in the manner provided
in Section 2.5.
Section 2.4. Honorary and Advisory Directors. The Board may appoint to
-------------------------------
the position of Honorary Director or the position of Advisory Director such
person or persons as it deems appropriate. Honorary Directors shall be entitled
to receive notice of, and to attend all meetings of the Board, but they shall
not be Directors and shall not be entitled to vote, nor shall they be counted in
determining a quorum of the Board. Advisory Directors shall be entitled only to
notice of meetings of Advisory or other Boards of the Corporation to which they
shall be appointed. Honorary and Advisory Directors shall receive such
compensation as may be authorized by the Board of attendance at meetings of
Advisory or other Boards to which such Advisory or Honorary Directors are
appointed.
Section 2.5. Nominations. (a) Only persons who are nominated in
-----------
accordance with the procedures set forth in this Section 2.5 shall be eligible
for election as Directors. Subject to Section 2.5(b), nominations of persons
for election to the Board of Directors of the Corporation may be made by or at
the direction of the Board of Directors, or by any shareholder of the
Corporation entitled to vote for the election of Directors who complies with the
notice procedures set forth in this Section 2.5(a). Such nominations, other
than those made by or at the direction of the Board of Directors, shall be made
pursuant to timely notice in writing to the Secretary of the Corporation. To be
timely, a shareholder's notice shall be delivered to or mailed and received at
the principal executive offices of the Corporation not less than sixty (60) days
nor more than ninety (90) days prior to the date of the scheduled annual
meeting, regardless of postponements, deferrals, or adjournments of that meeting
to a later date; provided, however, in the event that less than seventy (70)
days' notice or prior public disclosure of the date of the meeting is given or
made, notice by the shareholder to be timely must be so received not later than
the close of business on the 10th day following the earlier of the day on which
such notice of the date of the scheduled annual meeting was mailed or the day on
which such public disclosure was made. Such shareholder's notice shall set
forth (a) as to each person whom the shareholder proposes to nominate for
election as a Director, (i) the name, age, business address and residence
address of such person, (ii) the principal occupation or employment of such
person, (iii) the class and number of shares of the Corporation which are
beneficially owned by such person and (iv) any other information relating to
such person that is required to be disclosed in solicitations of proxies for
election of Directors, or is otherwise required, in each case pursuant to
Regulation 14A under the Securities Exchange Act of 1934, as amended; and (b) as
to the shareholder giving the notice (i) the name and address of such
shareholder and of any other person or entity who is the record or beneficial
owner of shares of the Corporation and who, to
9
<PAGE>
the knowledge of the shareholder giving notice, supports such nominee(s) and
(ii) the class and number of shares of the Corporation which are beneficially
owned and owned of record by such shareholder and by any other person or entity
who is the record or beneficial owner of shares of the Corporation and who, to
the knowledge of the shareholder giving the notice, supports such nominee(s). At
the request of the Board of Directors any person nominated by the Board of
Directors for election as a Director shall furnish to the Secretary of the
Corporation the information required to be set forth in a shareholder's notice
of nomination which pertains to the nominee. Subject to Section 2.5(b), no
person shall be eligible for election as a Director of the Corporation unless in
accordance with the procedures set forth in this Section 2.5(a). The Chairman of
the meeting shall, if the facts warrant, determine and declare to the meeting
that a nomination was not made in accordance with the procedures prescribed by
the Bylaws, and if he should so determine, he shall so declare to the meeting
and the defective nomination shall be disregarded.
(b) In the five annual elections of Directors, beginning with the first
annual election after the Corporation acquires control of Bank of
Northumberland, Incorporated and Southside Bank, the nominations made by the
Board of Directors shall include five individuals designated by Directors of the
Corporation who also are Directors of Southside Bank and four individuals
designated by Directors of the Corporation who also are Directors of Bank of
Northumberland, Incorporated. Additional individuals may be nominated by the
Board of Directors if the Board has more than nine members.
Section 2.6. Vacancies. Subject to applicable law and the Articles of
---------
Incorporation, any vacancy on the Board of Directors shall be filled by the
Board of Directors; provided, however, if a vacancy arises for any reason before
the annual meeting of shareholders in the year 2003, the vacancy shall be filled
by an individual designated by Directors of the Corporation who also are
Directors of Bank of Northumberland, Incorporated or by an individual designated
by Directors of the Corporation who also are Directors of Southside Bank, as the
case may be, if necessary to insure that at all times before the annual meeting
of shareholders in the year 2003, five (5) Directors shall have been designated
by Directors of the Corporation who also are Directors of Southside Bank and
four (4) Directors shall have been designated by Directors of the Corporation
who also are Directors of Bank of Northumberland, Incorporated.
Section 2.7. Meetings of Directors. Meetings of the Board of Directors
---------------------
shall be held at places within or without the Commonwealth of Virginia and at
times fixed by resolution of the Board of Directors, or upon call of the
Chairman or Vice Chairman of the Board of Directors or the President. The
Secretary, or officer performing his duties, shall give at least twenty-four
(24) hours' notice by telegraph, letter, telephone or in person, of all meetings
of the Directors; provided, that notice need not be given of regular meetings
held at times and places fixed by resolution of the Board. Regular meetings of
the Board of Directors shall be held at least once in every calendar quarter.
Meetings may be held at any time without notice if all of the Directors are
present, or if those not present waive notice either before or after the
meeting. Neither the business to be transacted nor the purpose of any annual or
special meeting of the Board of Directors need be specified in the notice or
waiver of notice of such meeting.
Section 2.8. Quorum. A majority of the members of the Board of Directors
------
shall constitute a quorum.
10
<PAGE>
Section 2.9. Compensation. The Board of Directors shall fix the
------------
compensation of the Directors.
Section 2.10. Committees. The Board of Directors may create committees
----------
and appoint members of committees in accordance with Virginia law.
ARTICLE III
Officers
Section 3.1. Election. The Officers of the Corporation shall consist of
--------
the Chairman of the Board of Directors, the Vice Chairman of the Board of
Directors, the President, the Executive Vice President, one or more Senior Vice
Presidents, one or more additional Vice Presidents, a Secretary, a Chief
Financial Officer, one or more Assistant Secretaries, and such other officers as
may be elected as provided in Section 3.3 of this Article. All Officers shall
be elected by the Board of Directors, and shall hold office until their
successors are elected and qualify. Vacancies may be filled at any meeting of
the Board of Directors. Subject to any applicable provision of Virginia law,
more than one office may be combined in the same person as the Board of
Directors may determine.
Section 3.2. Removal of Officers. Subject to Article V, any Officer of
-------------------
the Corporation may be summarily removed with or without cause, at any time, by
a resolution passed by affirmative vote of a majority of all of the Directors;
provided that any such removal shall not affect an Officer's right to any
compensation to which he is entitled under any employment contract between him
and the Corporation.
Section 3.3. Other Officers. Other Officers may from time to time be
--------------
appointed by the Board of Directors, and such Officers shall hold office for
such term as may be designated by the said Board of Directors.
Section 3.4. Chairman of the Board. The Chairman of the Board shall
---------------------
preside at all meetings of the Directors and all meetings of the shareholders.
He shall appoint all standing committees and temporary committees. He shall be
a member ex-officio of all standing committees and shall have all other powers
and duties as may be prescribed by the Board of Directors or by the Bylaws.
Section 3.5. Vice Chairman of the Board. In the absence or disability of
--------------------------
the Chairman of the Board, the Vice Chairman of the Board shall preside at all
meetings of the Directors and all meetings of the shareholders.
Section 3.6. President. The President shall be the Chief Executive
---------
Officer of the Corporation. In the absence or disability of the Chairman of the
Board and the Vice Chairman of the Board, the President shall preside at all
meetings of the Directors and at meetings of the shareholders and in the absence
or disability of the Chairman of the Board and the Vice Chairman of the Board,
the duties and responsibilities of such offices shall devolve upon the
President. The President shall have such other powers and duties as may be
prescribed by the Chairman of the Board of Directors, the Board of Directors or
by the Bylaws.
Section 3.7. Executive Vice President.
------------------------
11
<PAGE>
In the absence or disability of the President, the Executive Vice President
shall act as the Chief Executive Officer of the Corporation. The duties and
responsibilities of the Executive Vice President are those delegated to him by
the Board of Directors or the President.
Section 3.8. Vice Presidents. Senior Vice Presidents and Vice Presidents
---------------
shall perform such duties as may be prescribed for them from time to time by the
President, the Board of Directors or the Bylaws.
Section 3.9. Secretary. The Secretary shall have the duties and
---------
responsibilities prescribed by law for the secretary of a Virginia corporation.
Section 3.10. Surety Bonds. All Officers and employees who shall have
------------
charge or possession of money, securities or property of the Corporation must,
before entering upon their duties, be covered by a bond with a surety company
approved by the Board of Directors and state and federal authorities. The costs
of such bond shall be borne by the Corporation.
ARTICLE IV
Capital Stock
Section 4.1. Issues of Certificate of Stock. Certificates of capital
------------------------------
stock shall be in such form as may be prescribed by law and by the Board of
Directors. All certificates shall be signed by the President and by the Chief
Financial Officer or Secretary or an Assistant Secretary, or by any other two
Officers authorized by resolution of the Board of Directors.
Section 4.2. Transfer of Stock. The stock of the corporation shall be
-----------------
transferable or assignable on the books of the Corporation by the holders in
person or by attorney on surrender of the certificate or certificates for such
shares duly endorsed, and, if sought to be transferred by attorney, accompanied
by a written power of attorney to have such stock transferred on the books of
the Corporation.
Section 4.3. Restrictions on Transfer of Stock. Any restrictions that may
---------------------------------
be imposed by law, by the Articles of Incorporation or Bylaws of the
Corporation, or by an agreement among shareholders of the Corporation, or by an
agreement among shareholders of the Corporation, shall be noted conspicuously on
the front or back of all certificates representing shares of stock of the
Corporation.
Section 4.4. Lost, Destroyed or Mutilated Certificates. The holder of
-----------------------------------------
stock of the Corporation shall immediately notify the Corporation of any loss,
destruction, or mutilation of the certificate therefor, and the Corporation may
in its discretion cause one or more new certificates for the same aggregate
number of shares to be issued to such Stockholder upon the surrender of the
mutilated certificate, or upon satisfactory proof of such loss or destruction
accompanied by the deposit of a bond in such form and amount and with such
surety as the Corporation may require.
Section 4.5. Holder of Record. The Corporation shall be entitled to treat
----------------
the holder of record of any share or shares of stock as the holder thereof in
fact and shall not be bound to
12
<PAGE>
recognize any equitable or other claim to or interest in such shares of stock on
the part of any other person, whether or not it shall have express or other
notice thereof, except as otherwise expressly provided by law.
Section 4.6. Record Date. The Board of Directors shall fix in advance the
-----------
record date in order to make a determination of shareholders for any purpose,
including the determination of shareholders entitled to notice of or to vote at
any shareholders' meeting or entitled to payment of any dividend or distribution
to shareholders. Such record date shall not be more than seventy (70) days
prior to the date on which the particular action requiring such determination of
shareholders is to be taken.
Section 4.7. Control Share Acquisitions. Article 14.1 of the Virginia
--------------------------
Stock Corporation Act shall not apply to the Corporation.
ARTICLE V
Amendments and Special
Voting Provisions
Section 5.1. Voting Generally. Except as otherwise set forth in this
----------------
Article V, the Board of Directors shall act by majority vote at any duly held
meeting at which a quorum is present.
Section 5.2. Special Voting Requirements. The affirmative vote of at
---------------------------
least eight (8)Directors shall be required to:
(a) Amend these Bylaws;
(b) Submit to the shareholders any plan of merger or share exchange or any
proposal to dissolve the Corporation or to sell, lease, exchange or otherwise
dispose of all or substantially all of the Corporation's property, otherwise
than in the usual and regular course of business;
(c) Submit to the shareholders any proposal to change the name of the
Corporation;
(d) Cause Southside Bank or Bank of Northumberland, Incorporated to change
its name or amend its articles of incorporation or bylaws;
(e) Cause Southside Bank or Bank of Northumberland, Incorporated to
appoint, remove or transfer its Chief Executive Officer;
(f) Dispose of any of the stock of Southside Bank or Bank of
Northumberland, Incorporated or cause either of such banks to dissolve or enter
into a plan of merger or share exchange or to sell, lease, exchange or otherwise
dispose of all or substantially all of its property, otherwise than in the usual
and regular cause of business.
(g) Appoint, remove or transfer the Corporation's Chief Executive Officer.
Section 5.3. Subsidiary Bank Directors. (a) The Directors of Bank of
-------------------------
Northumberland, Incorporated, Southside Bank and Hanover Bank each shall
nominate individuals for election to their respective Boards each year.
13
<PAGE>
(b) The Corporation shall not remove any Director of Bank of
Northumberland, Incorporated, Southside Bank or Hanover Bank or refuse to vote
its shares of either of such banks' common stock in favor of the election of
those nominated in accordance with Section 5.3(a) unless (i) a Director of
either of such banks violates a code of conduct that is generally applicable to
Directors of the Corporation and its subsidiaries, (ii) the Corporation's Board
of Directors determines that such a bank is experiencing business, financial or
regulatory difficulties and, as a result, the Corporation determines that a
change in the Board of Directors of such bank is necessary or advisable in order
to protect the Corporation or its investment in such bank or (iii) a director of
either such bank acts in a manner inconsistent with his fiduciary duty to such
bank.
ARTICLE VI
Miscellaneous Provisions
Section 6.1. Seal. The seal of the Corporation shall be circular in shape
----
with the name of the Corporation around the circumference thereof, and the word
"SEAL" in the center thereof.
Section 6.2. Examination of the Books and Records. The books and records
------------------------------------
of account of the Corporation, the minutes of the proceedings of the
shareholders, the Board and Committees appointed by the Board of Directors and
the records of the shareholders showing the names and addresses of all
shareholders and the number of shares held by each, shall be subject to
inspection during the normal business hours by any person who is a duly
qualified Director of the Corporation at the time he makes such inspection.
Shareholders shall have such rights to inspect records of the Corporation as are
prescribed by applicable law.
Section 6.3. Checks, Notes and Drafts. Checks, notes, drafts, and other
------------------------
orders for the payment of money shall be signed by such persons as the Board of
Directors from time to time may authorize.
Section 6.4. Voting of Stock Held. Unless otherwise provided by
--------------------
resolution of the Board of Directors, the Chairman of the Board of Directors,
the President or any Executive Vice President may from time to time appoint an
attorney or attorneys as agent or agents of the Corporation to cast in the name
of the Corporation the votes which the Corporation may be entitled to cast as a
shareholder or otherwise in any other corporation, any of whose stock or
securities may be held by the Corporation, at meetings of the holders of the
stock or other securities of such other corporation, or to consent in writing to
any action by any such other corporation; and such Officers may instruct the
person or persons so appointed as to the manner of casting such votes or giving
such consent, and may execute or cause to be executed on behalf of the
Corporation and under its corporate seal, or otherwise, such written proxies,
consents, waivers, or other instruments as may be necessary or proper in the
premises; or any of such Officers may himself attend any meeting of the holders
of stock or other securities of any such other corporation and there vote or
exercise any or all other powers of the Corporation as the holder of such stock
or other securities of such other corporation.
14
<PAGE>
[LOGO OF EASTERN VIRGINIA BANKSHARES]
Southside Bank
--------------
Bank of Northumberland, Inc.
______________________________________________________________________________
<TABLE>
<S> <C>
Index to Annual Report Notes to Financial Statement 26
Financial Data 2 Report of Independent Auditors 40
Chairman and President's Letter to Stockholders 3 Board of Directors 41
Management's Discussion and Analysis 7 Officers 42
Financial Statements 22 Bank Locations 43
</TABLE>
<PAGE>
Selected Financial Data
(in thousands except ratios and per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
------------------------------------------------
Income Statement Data:
Interest income $ 27,637 $ 26,670 $ 25,093 $ 23,204 $ 21,821
Interest expense 11,867 11,846 11,144 10,360 10,315
-------- -------- -------- -------- --------
Net interest income 15,770 14,824 13,949 12,844 11,506
Provision for loan losses 510 449 412 437 575
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 15,260 14,375 13,537 12,407 10,931
Noninterest income 1,799 1,764 1,469 1,330 1,294
Securities gains (losses) (76) 8 (28) (52) (9)
Non-interest expense 8,813 8,442 7,705 6,931 6,774
-------- -------- -------- -------- --------
Income before income taxes 8,170 7,705 7,273 6,754 5,442
Income taxes 2,210 2,088 1,965 1,710 1,317
-------- -------- -------- -------- --------
Net Income $ 5,960 $ 5,617 $ 5,308 $ 5,044 $ 4,125
-------- -------- -------- -------- --------
- --------------------------------------------------------------------------------
Per Share Data:
Net Income, basic and
assuming dilution $ 1.17 $ 1.08 $ 1.02 $ 0.97 $ 0.79
Cash dividends 0.48 0.44 0.34 0.31 0.25
Book value at period end 8.50 8.22 7.57 6.84 6.23
- --------------------------------------------------------------------------------
Balance Sheet Data:
Assets 377,839 347,995 323,430 308,724 286,734
Loans, net of unearned
income 273,858 239,664 227,981 206,343 192,894
Securities 88,076 81,333 78,098 82,862 72,708
Deposits 322,647 304,330 280,882 269,903 251,612
Shareholders' equity 42,795 42,257 39,265 35,457 32,393
Average shares outstanding 5,092 5,179 5,188 5,177 5,191
- --------------------------------------------------------------------------------
Performance Ratios
Return on average assets 1.64% 1.66% 1.68% 1.72% 1.48%
Return on average equity 13.95% 13.56% 13.97% 14.57% 13.20%
Dividend payout 41.08% 40.52% 32.78% 31.91% 31.70%
Efficiency (1) 47.83% 48.45% 47.26% 46.04% 49.79%
Average equity to average
assets 11.78% 12.26% 12.01% 11.79% 11.23%
- --------------------------------------------------------------------------------
Asset Quality Ratios:
Allowance for loan losses to
period end loans 1.52% 1.61% 1.70% 1.77% 1.98%
Allowance for loan losses to
nonaccrual loans 227.99% 237.39% 127.99% 94.11% 92.75%
Nonperforming assets to
period end loans and
foreclosed properties 0.75% 0.79% 1.36% 2.00% 2.44%
Net charge-offs to average
loans 0.08% 0.20% 0.09% 0.31% 0.19%
- --------------------------------------------------------------------------------
Capital and Liquidity Ratios:
Leverage 11.98% 12.39% 12.87% 11.89% 12.24%
Risk-based capital ratios:
Tier 1 capital 17.98% 19.34% 19.30% 19.59% 16.07%
Total capital 19.24% 20.59% 20.56% 20.85% 17.32%
Average loans to average
deposits 81.98% 79.23% 79.01% 76.82% 76.84%
- --------------------------------------------------------------------------------
</TABLE>
Note: The amounts previously reported for the periods have been retroactively
restated to reflect the merger of SSB and BNI to form EVB as of
December 29, 1997.
(1) Efficiency ratio is computed by dividing non-interest expense by the sum of
net-interestincome on a tax equivalent basis and non-interest income, net of
securities gains or losses.
2
<PAGE>
Business Profile
The primary mission of Eastern Virginia Bankshares is to produce maximum value
for its shareholders by remaining a well-capitalized, strong independent
financial services provider, delivering quality service to all customers and by
contributing to the economic vitality and quality of life in the communities we
serve, while providing a good work environment for our employees.
To Our Stockholders
As EVBS and its two subsidiaries, Southside Bank and Bank of
Northumberland, usher in the new millennium, I am pleased
to report that your company enjoyed another record year of
increased shareholder value in 1999. The year brought
positive results to challenges in the areas of company
growth, income, and operations consolidation.
Outstanding performance resulted in benchmark achievement.
Some of the highlights for the year include an increase in
return on equity to 13.95% in 1999 from 13.56% in 1998,
and stability in earnings while continuing to grow with a
strong return on average assets of 1.64% in 1999 versus
1.66% in 1998, reflecting strong earnings performance.
Total assets increased to $377.8 million at year-end 1999,
up 8.58% from $347.9 million year-end 1998. Total loans
grew 14.27% to $273.9 million at year-end 1999 from
$239.7 million at the end of 1998, reflecting strong loan
demand in our market, indicative that as truly responsive
community banks we are serving our customers' needs.
Earnings per share increased 8.33% to $1.17 from $1.08 a
year earlier and dividends per share increased 9.09% to
$.48 from $.44 per share in 1998. At the same time, book
value per share increased from $8.22 to $8.50. Eastern
Virginia Bankshares (EVBS on NASDAQ) stock price
appreciated from $17.50 to year-end 1998 to $19.00 at
year-end 1999, an increase of 8.57% in a year in which
most of our peer group community bank share prices
decreased.
For the year 1999 "Other Operating Expenses" were down
11.14% from $2.96 million to $2.63 million, as the company
continued to reap the benefits of the late 1998
consolidation of operations. Data processing expenses made
up nearly all of the savings with a $319,000 decrease from
$543,000 to $224,000. Another industry benchmark of
performance is the efficiency ratio, which improved to
47.83% for the year, from 48.45% in 1998. Our performance
in this measure continues to be among the best in the
industry, as the target benchmark is below 60.0%.
It should be noted that net charge offs decreased from
.20% to .08% from 1998 to 1999, with 1999 figures being an
historic low, looking back seven years. Also,
non performing assets to period end loans and foreclosed
properties decreased from .79% in 1998 to .75% at year-end
1999, also an historic low, looking back seven years.
EASTERN VIRGINIA BANKSHARES
3
<PAGE>
[PHOTO]
EVB Board of Directors: front row: (left to right) F. L. Garrett III, Robert L.
Covington, Thomas M. Boyd, Jr., back row (left to right) Lewis R. Reynolds,
Eric A. Johnson, J. T. Thompson III, F. Warren Haynie, Jr., Leslie E. Taylor,
L. Edelyn Dawson, Jr., William L. Lewis, W. Rand Cook
We are pleased that your company's performance received recognition during 1999
from several sources. "U S Banker" in its July 1999 issue ranked Eastern
Virginia Bankshares the top banking organization in overall performance in the
state and 27th nationwide in a listing of the 200 top performing, publicly
traded or registered community bank holding companies with assets of less than
$432 million for the calendar year 1998. "Virginia Business" also recognized
Eastern Virginia Bankshares in its November 1999 issue as "a small fish in the
banking world, but it is getting attention..." Also, the nationally recognized
Bauer Financial Group give our company an excellent rating.
Eastern Virginia Bankshares continues to be among the best-capitalized banking
organizations in our market, with a total capital to risk-based asset ratio of
19.24%. This strong capital base presents a unique challenge to your company's
management as we strive to keep our return on equity at acceptable levels.
However this also presents us with excellent opportunities.
4
<PAGE>
In the last quarter of 1999 your company began plans to establish a third bank
in its holding company. With the opening of its Hanover County office at Old
Church three years ago, Southside Bank's expansion into Hanover County has been
very successful. However, it was felt that the timing was excellent for a new
community bank in that market. By teaming with a group of very successful
businessmen in that area who had prior community bank experience, our company
has ready-made franchise value from which to begin a new operation. Regulatory
applications have been filed, and preparations are being made for a May opening.
We are pleased that Jay T. "Tommy" Thompson of Hanover County has joined us as a
director of Eastern Virginia Bankshares. He will become the chairman of Hanover,
now in formation. We are very encouraged and confident that this will be a
successful expansion for our company.
In 1999 Southside Bank appointed Harry Morris, a successful attorney in
Gloucester County, to its Board of Directors. We are pleased to have the wise
counsel of Mr. Morris, and we are pleased with the results of our move into that
market.
Bank of Northumberland has long been recognized for its strong performance. In
1999 this affiliate of EVB continued to contribute solid earnings to the holding
company.
In 1999 the two major national events that occurred which could have had the
most impact on banking were the Y2K event and the passage of major new
financial modernization legislation. The first, which received as much national
media attention, regulatory attention as well as attention from your management
and staff, turned out to be a "non-event." The second, which by comparison,
passed with little attention outside the industry, will have major long-lasting
impact, changing our industry forever. Some would even say that without it,
banking would have gone the way of the railroads! The Gramm-Leach-Bliley Act
repeals the 1933 Glass-Steagall Act, opening many areas of opportunity for
bankers and basically knocks down the barriers in law that separates banking
from insurance and securities. We see great opportunities for our company in
the year ahead.
In April of 1999 Southside Bank offering various investment services through an
affiliation with Compulife, including mutual funds, annuities and life
insurance. What will happen to
Southside Bank
<TABLE>
<CAPTION>
Balance Sheet as of 12/31/99 (in 000's)
<S> <C>
Cash and cash equivalents $ 6,789
Investments 44,374
Loans, net 168,277
Other assets 7,125
---------
Total assets $226,565
Deposits $200,887
Borrowed funds 12,468
Other liabilities 1,622
Shareholders' equity 11,588
---------
Total liabilities and capital $226,565
- -----------------------------------------
<CAPTION>
Income Statement for year ended
12/31/1999 (in 000's)
<S> <C>
Interest income $ 16,988
Interest expense 7,344
---------
Net interest income 9,644
Provision for loan losses 399
Other income 1,145
Other expense 5,962
Federal income tax 1,249
---------
Net income $ 3,179
</TABLE>
Bank of Northumberland
<TABLE>
<CAPTION>
Balance Sheet as of 12/31/99
(in 000's)
<S> <C>
Cash and cash equivalents $ 3,469
Investments 43,701
Loans, net 101,427
Other assets 2,642
--------
Total assets $151,239
Deposits $137,449
Borrowed funds 4,000
Other liabilities 934
Shareholders' equity 8,856
--------
Total liabilities and capital $151,239
- ---------------------------------------
<CAPTION>
Income Statement for year ended
12/31/1999
(in 000's)
<S> <C>
Interest income $ 10,649
Interest expense 4,961
Net interest income 5,688
Provision for loan losses 111
Other income 571
Other expense 2,407
Federal income tax 961
--------
Net income $ 2,780
</TABLE>
EASTERN VIRGINIA BANKSHARES
5
<PAGE>
arrangements banks have with third party providers to offer non-traditional
financial services now that laws have changed is yet to be determined. Some
will probably continue to exist where it makes sense. But we believe that in
the future, banking offers the best platform for sales of many types of
financial services, and that we are in the first step of a major evolution for
financial service providers.
Looking ahead, technology is another major challenge for us. Your holding
company is using resources and talents to keep its member banks on the leading
edge in this changing environment. We feel confident that we can compete in
this arena.
At the beginning of 2000, we were saddened by the loss of Mr. Franklin Y.
Hundley, a former chairman and long-time director of Southside Bank. He was a
great supporter of management, that institution, and of the formation of the
EVB holding company. He will be missed in this institution and in his
community.
Much has been said about the great opportunity community banks have with so
much consolidation in the industry. Your company has been and is looking at
many expansion opportunities to increase its value. We are confident as we look
ahead.
We wish to thank your dedicated boards of directors, our staffs and management
teams who created the excellent results we bring to you, and we also thank you
our shareholder for your confidence.
<TABLE>
<S> <C>
/s/ T.M. Boyd, Jr. /s/ Robert L. Covington
T.M. Boyd, Jr. R.L. Covington
President and CEO Chairman of the Board
</TABLE>
6
<PAGE>
Management's Discussion and Analysis of
Financial Condition and Results of Operations
Management's discussion and analysis is intended to assist the reader in
evaluating and understanding the consolidated results of operations and
financial condition of Eastern Virginia Bankshares, Inc. and subsidiaries (the
"Corporation"). The following analysis provides information about the major
components of the results of operations, financial condition, liquidity and
capital resources of Eastern Virginia Bankshares (EVB) and attempts to identify
trends and material changes that occurred during the reporting periods. The
discussion should be read in conjunction with Selected Financial Data and the
Consolidated Financial Statements and Notes to Consolidated Financial
Statements.
Overview
Eastern Virginia Bankshares, Inc. reported record earnings for the year ended
December 31, 1999, as it began to reap the benefits of the 1998 consolidation
of technology functions for its Southside Bank and Bank of Northumberland, Inc.
subsidiaries. Consolidated in-house data processing systems position the
Corporation for future growth while permitting the officers and staff to focus
on consistent high quality customer service. The focus on technology continues
as the Corporation contracted in 1999 for installation of an imaging system to
be implemented in January, 2000. With EVB's December announcement that it would
be opening a newly organized third banking subsidiary, Hanover Bank, in mid
2000, Management is pleased to have the systems decisions and implementation
projects completed.
Record setting performance in 1999 included an increase in net income to $5.96
million from $5.62 million in 1998, an increase in Return on Shareholder Equity
to 13.95% from 13.56% in 1998, loan growth of over 14%, and an improvement in
its already outstanding efficiency ratio from 48.45% to 47.83%.
Results of Operations
Net income was up 6.1% in 1999 to $5.96 million, compared with $5.62 million in
1998 and $5.31 million in 1997. This earning increase combined with the success
of a share buyback program announced in late 1998 resulted in earnings per
share increasing 8.33% to $1.17, compared to $1.08 and $1.02 for 1998 and 1997
respectively. The improvement in net income in 1999 was the result of increased
net interest income combined with a decrease in other operating expenses.
Profitability, as measured by EVB's return on average equity improved to 13.95%
from 1998's 13.56%. Return on average assets was a strong 1.64%, a slight
decrease from the prior year's 1.66%. These returns remain strong relative to
the Corporation's peer group averages of 13.25% and 1.25%, respectively (based
on latest data available). The return on equity is particularly gratifying given
EVB's high capital level. The Corporation repurchased 110 thousand shares of its
common stock in 1999. This repurchase combined with 32 thousand shares purchased
in late 1998 brings the repurchase program to 47% of the share repurchase
approved by the Board and announced in November 1998. The repurchase plan is
intended to reduce high capital levels and to increase return on equity to
shareholders.
Net interest margin, on a tax equivalent basis, declined slightly to 4.78% in
1999, as compared to 4.83% in 1998 and 4.93% in 1997. However, changes in
volume exceeded changes in rates, generating an additional $946 thousand of net
interest income in 1999 and $875 thousand in 1998.
The Corporation experienced strong loan demand throughout 1999, particularly in
the various components of its real estate loan portfolio with net loans
outstanding at year end being up 14.4% compared to 1998 year end and average
loans outstanding for the year increasing 10.9% from the 1998 average.
EVB's efficiency ratio, a measure of performance based upon the relationship
between noninterest expense and income net of securities gains and losses,
compares favorably to other Virginia financial institutions. The Corporation's
efficiency ratio for 1999 improved to 47.83% compared to 1998's excellent
48.45%. A lower efficiency ratio represents greater control of noninterest
costs. Fluctuation in the efficiency ratio can be attributed to relative
changes in both noninterest income and net interest income as well as
noninterest expense. Based largely on cost savings from the late 1998 data
processing consolidation, total noninterest expense which had trended upward at
a rate of 9.6% and 11.2% in 1998 and 1997 was held to a 4.4% increase.
Capital growth from year end 1998 to year end 1999 was held to 1.3% as the
Corporation repurchased shares in an attempt to manage capital growth and
enhance shareholder return.
EVB is not aware of any current recommendations by any regulatory authorities
which, if they were implemented, would have a material effect on the
registrant's liquidity, capital resources, or results of operations.
The following table sets forth, for the periods indicated, selected quarterly
results of EVB's operations.
EASTERN VIRGINIA BANKSHARES
7
<PAGE>
Summary of Financial Results by Quarter
<TABLE>
<CAPTION>
Three Months Ended
---------------------------------------------------------------
1999 1998
------------------------------- -------------------------------
Dec. 31 Sep. 30 June 30 Mar. 31 Dec. 31 Sep. 30 June 30 Mar. 31
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $7,205 $7,004 $6,787 $6,641 $6,812 $6,721 $6,593 $6,544
Interest expense 3,104 3,039 2,866 2,858 2,998 3,018 2,960 2,870
------ ------ ------ ------ ------ ------ ------ ------
Net interest income 4,101 3,965 3,921 3,783 3,814 3,703 3,633 3,674
Provision for loan
losses 138 144 114 114 95 116 115 123
------ ------ ------ ------ ------ ------ ------ ------
Net interest income
after
provision for loan
losses 3,963 3,821 3,807 3,669 3,719 3,587 3,518 3,551
Noninterest income 425 482 403 413 456 424 445 447
Noninterest expense 2,366 2,228 2,109 2,110 2,262 2,109 2,148 1,923
------ ------ ------ ------ ------ ------ ------ ------
Income before income
taxes 2,022 2,075 2,101 1,972 1,913 1,902 1,815 2,075
Applicable income taxes 547 606 563 494 533 577 476 502
------ ------ ------ ------ ------ ------ ------ ------
Net income $1,475 $1,469 $1,538 $1,478 $1,380 $1,325 $1,339 $1,573
Net income per share,
basic and diluted $ 0.29 $ 0.29 $ 0.30 $ 0.29 $ 0.26 $ 0.26 $ 0.26 $ 0.30
</TABLE>
- --------------------------------------------------------------------------------
Net Interest Income
Net interest income represents the Corporation's gross profit margin and is
defined as the difference between interest income and interest expense. For
comparative purposes, income from tax-exempt securities is adjusted to a tax-
equivalent basis using the federal statutory tax rate of 34%. Tax-equivalent
securities income is further adjusted by the TEFRA adjustment for the
disallowance as a deduction of a portion of total interest expense related to
the ratio of average tax-exempt securities to average total assets. This
adjustment results in tax-exempt income and yields being presented on a basis
comparable with income and yields from fully taxable earning assets.
Net interest margin represents the Corporation's net interest income divided by
average earning assets. Changes in the volume and mix of earning assets and
interest bearing liabilities, as well as their respective yields and rates,
have a significant impact on the level of net interest income.
The "Average Balances, Income and Expense, Yields and Rates" table presents
average balances, related interest income and expense, and average yield/cost
data for each of the past three years. The "Volume and Rate Analysis" table on
the following page reflects changes in interest income and interest expense
resulting from changes in average volume and average rates.
Tax-equivalent net interest income increased 6.3% in 1999 to $16.6 million from
$15.6 million in 1998. Average loan growth of 10.9% was the primary factor in
the increase in net interest income and in achieving a net interest margin of
4.78%, which was a five basis point decline from 4.83% in 1998. Management's
focus on matching changes in its earning asset yield and cost of funds was
successful as yield and cost decreased by 30 and 32 basis points, respectively.
Yield on earning assets declined 30 basis points to 8.19% in 1999 from 8.49% in
1998, while the cost of interest bearing funds decreased 32 basis points from
4.51% in 1998 to 4.19% in 1999. Although the cost of funds actually decreased
two basis points more than the yield decrease on earning assets, the net
interest margin declined slightly because of the greater volume of earning
asset growth as compared to interest bearing liabilities. This small decrease
resulted from net interest income growth of 6.3% on average earning asset
growth of 7.6%.
Average earning asset growth of 7.6% resulted from increases in average loans
outstanding of 10.9% and average securities of 5.6%. Growth in the loan and
securities portfolios was partially funded by a 35.3% decrease in federal funds
sold. This change in the mix of average earning assets would have resulted in
an increased yield in a stable interest rate environment. However 1999 provided
an environment in which interest rates were generally well below those in 1998
for most of the year, with that trend beginning to reverse in the fourth
quarter.
During 1998, net interest income, on a tax-equivalent basis, increased 4.8% to
$15.6 million from $14.9 million in 1997. Average loans increased $15.3 million
(7.0%) from $217.3 million to $232.6 million, funded by a 15.2 million or 6.1%
increase in interest bearing deposits to $262.8 million from $247.6 million in
1997. Net interest margin decreased from 4.93% in 1997 to 4.83% in 1998 as the
yield on earning assets decreased 13 basis points to 8.49% from 8.62% while the
cost of funds increased one basis point from 4.50% to 4.51%.
- --------------------------------------------------------------------------------
8
<PAGE>
Average Balance, Income and Expense, Yields and Rates
<TABLE>
<CAPTION>
Twelve Months Ended December 31
--------------------------------------------------------------------------
1999 1998 1997
------------------------ ------------------------ ------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------ ---------------------- -----------------------
Assets:
Securities
Taxable $ 40,574 $ 2,626 6.47% $ 40,885 $ 2,632 6.44% $ 41,432 $ 2,794 6.74%
Tax-exempt (1) 40,571 2,804 6.91% 35,961 2,668 7.42% 36,872 2,878 7.81%
-------- ------- -------- ------- -------- -------
Total securities 81,145 5,430 6.69% 76,846 5,300 6.90% 78,304 5,672 7.24%
Federal funds sold 9,137 455 4.98% 14,121 769 5.45% 6,964 392 5.63%
Loans (net of unearned
income) (2) 257,876 22,612 8.77% 232,605 21,412 9.21% 217,320 20,007 9.21%
Interest-bearing
deposits-other banks -- -- n/a 64 4 6.25% 8 1 12.50%
-------- ------- -------- ------- -------- -------
Total earning assets 348,158 28,497 8.19% 323,636 27,485 8.49% 302,596 26,072 8.62%
Less allowance for loan
losses (4,020) (3,947) (3,777)
Total non-earning assets 18,584 18,311 17,488
-------- -------- --------
Total assets $362,722 $338,000 $316,307
-------- -------- --------
Liabilities &
Shareholder's equity
Interest-bearing
deposits:
Checking $ 36,546 $ 902 2.47% $ 31,608 829 2.62% $ 28,480 782 2.75%
Savings 72,953 2,696 3.70% 69,157 2,866 4.14% 61,414 2,504 4.08%
Money market savings 27,402 866 3.16% 28,518 954 3.35% 29,127 956 3.28%
Certificates of
deposit:
$100,000 and over 24,801 1,300 5.24% 17,490 970 5.55% 14,469 771 5.33%
Less than $100,000 118,938 5,970 5.02% 116,073 6,227 5.36% 114,129 6,125 5.37%
-------- ------- -------- ------- -------- -------
Total interest-bearing
deposits 280,640 11,734 4.18% 262,846 11,846 4.51% 247,619 11,138 4.50%
Short-term borrowings 409 23 5.62% -- -- -- 84 6 7.14%
Long-term debt 1,923 110 5.72% -- --
-------- ------- -------- ------- -------- -------
Total interest-bearing
liabilities 282,972 11,867 4.19% 262,846 11,846 4.51% 247,703 11,144 4.50%
Non-interest bearing
liabilities:
Demand deposits 33,903 30,739 27,347
Other liabilities 3,127 2,989 3,270
-------- -------- --------
Total liabilities 320,002 296,574 278,320
Shareholder's equity 42,720 41,426 37,987
-------- -------- --------
Total liabilities &
shareholder's equity $362,722 $338,000 $316,307
-------- -------- --------
Net interest income $16,630 $15,639 $14,928
------- ------- -------
Interest rate spread (3) 4.00% 3.98% 4.12%
Interest expense as a
percent of
average earning assets 3.41% 3.66% 3.68%
Net interest margin (4) 4.78% 4.83% 4.93%
</TABLE>
Notes:
(1) Income and yields are reported on a tax equivalent basis assuming a federal
tax rate of 34%.
(2) Nonaccruing loans have been included in the computations of average loan
balances
(3) Interest rate spread is the average yield on earning assets, calculated on
a fully taxable basis, less the average rate incurred on interest-bearing
liabilities.
(4) Net interest margin is the net interest income, calculated on a fully
taxable basis assuming a federal income tax rate
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES
9
<PAGE>
Volume and Rate Analysis
<TABLE>
<CAPTION>
1999 vs. 1998 1998 vs. 1997
Increase (Decrease) Due to Changes in: Increase (Decrease) Due to Changes in:
------------------------------------------ -----------------------------------------
Volume Rate Total Volume Rate Total
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------- -----------------------------------------
Earning Assets:
Taxable securities $ (19) $ 13 $ (6) $ (38) $ (124) $ (162)
Tax exempt securities 347 (211) 136 (47) (163) (210)
Loans, (net) 2,333 (1,133) 1,200 1,405 -- 1,405
Federal funds sold (271) (43) (314) 390 (13) 377
Interest-bearing
deposits-other banks (4) -- (4) 3 -- 3
------------- ------------- ------------ ------------- ------------ ------------
Total earning assets 2,386 (1,374) 1,012 1,713 (300) 1,413
Interest-Bearing
Liabilities:
Interest checking 128 (55) 73 85 (38) 47
Regular savings & clubs 157 (327) (170) 320 42 362
Money market savings (37) (51) (88) (22) 20 (2)
Certificates of
deposit:
$100,000 and over 407 (77) 330 161 38 199
Less than $100,000 154 (411) (257) 105 (3) 102
Borrowings 133 -- 133 (6) -- (6)
------------- ------------- ------------ ------------- ------------ ------------
Total interest-bearing
liabilities 942 (921) 21 643 59 702
------------- ------------- ------------ ------------- ------------ ------------
Change in net interest
income: $ 1,444 $ (453) $ 991 $ 1,070 $ (359) $ 711
------------- ------------- ------------ ------------- ------------ ------------
</TABLE>
Notes:
(1) Changes caused by the combination of rate and volume are allocated based on
the percentage of volume caused by each.
(2) Income and yields are reported on a tax-equivalent basis, assuming a
federal tax rate of 34%.
- --------------------------------------------------------------------------------
Interest Sensitivity
EVB's primary goals in interest rate risk management are to minimize
fluctuations in net interest margin as a percentage of earning assets and to
increase the dollar amount of net interest income at a growth rate consistent
with the growth rate of total assets. These goals are accomplished by managing
the interest sensitivity gap, which is the difference between interest
sensitive assets and interest sensitive liabilities in a specific time
interval. Interest sensitivity gap is managed by balancing the volume of
floating-rate liabilities with a similar volume of floating-rate assets, by
keeping the average maturity of fixed rate asset and liability contracts
reasonably consistent and short, and by routinely adjusting pricing to market
conditions on a regular basis.
The Corporation generally strives to maintain a position flexible enough to move
to an equality between rate-sensitive assets and rate-sensitive liabilities,
which may be desirable when there are wide and frequent fluctuations in interest
rates. Matching the amount of assets and liabilities maturing in the same time
interval helps to hedge interest rate risk and to minimize the impact on net
interest income in periods of rising or falling interest rates. When an
unacceptable positive gap within a one-year time frame occurs, maturities can be
extended by selling shorter term investments and purchasing longer maturities.
When an unacceptable negative gap occurs, variable rate loans can be increased
and more investment in shorter term investments can be made. Interest rate gaps
are managed through investments, loan pricing and deposit pricing.
- --------------------------------------------------------------------------------
Market Risk Management
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, exchange rates and
equity prices. EVB's market risk is composed primarily of interest rate risk.
The Company's Management is responsible for reviewing the interest rate
sensitivity position of EVB's subsidiary banks and establishing policies to
monitor and limit exposure to interest rate risk. Guidelines established by
Management are reviewed by The Board of Directors.
10
<PAGE>
It is EVB's policy not to engage in activities considered to be derivative in
nature such as futures, option contracts, swaps, caps, floors, collars or
forward commitments. EVB considers derivatives as speculative which is contrary
to the Company's historical or prospective philosophy. EVB does not hold or
issue financial instruments for trading purposes. It does not hold in its loan
and security portfolio investments that adjust or float according to changes in
the "prime" lending rate which is not considered speculative, but necessary for
good asset/liability management.
Asset/Liability Risk Management: The primary goals of asset/liability risk
management are to maximize net interest income and the net value of EVB's
future cash flows within the interest rate limits set by the Asset/Liability
Committee (ALCO).
Interest Rate Risk Measurement: Interest rate risk is monitored through the use
of three complimentary measures, static gap analysis, earnings simulation
modeling and net present value estimation. While each of the interest rate risk
measurements has limitations, taken together they represent a reasonably
comprehensive view of the magnitude of interest rate risk in the Corporation,
the distribution of risk along the yield curve, the level of risk through time,
and the amount of exposure to changes in certain interest rate relationships.
Static Gap: Gap analysis measures the amount of repricing risk embedded in the
balance sheet at a point in time. It does so by comparing the differences in
the repricing characteristics of assets and liabilities. A gap is defined as
the difference between the principal amount of assets and liabilities, adjusted
for off-balance sheet instruments, which reprice within a specific time period.
The cumulative one-year gap, at year-end was -6.9% which is well within the
policy limit for the one-year gap of plus or minus 15% of adjusted total assets
at a combined Company level.
Core deposits and loans with noncontractual maturities are included in the gap
repricing distributions based upon historical patterns of balance attrition and
pricing behavior which are reviewed at least annually. The gap repricing
distributions include principal cash flows from residential mortgage loans and
mortgage-backed securities in the time frames in which they are expected to be
received. Mortgage prepayments are estimated by applying industry median
projections of prepayment speeds to portfolio segments based on coupon range
and loan age.
Earnings Simulation: The earnings simulation model forecasts one year net income
under a variety of scenarios that incorporate changes in the absolute level of
interest rates, changes in the shape of the yield curve and changes in interest
rate relationships. Management evaluates the effects on income of alternative
interest rate scenarios against earnings in a stable interest rate environment.
This type of analysis is also most useful in determining the short-run earnings
exposures to changes in customer behavior involving loan payments and deposit
additions and withdrawals.
The most recent earnings simulation model projects net income would increase
approximately 5.8%, of stable-rate net income if rates were to fall immediately
by two percentage points. It projects a decrease of approximately 6.8% if rates
rise by two percentage points. Management believes this reflects a slight
liability-sensitive interest risk for the one-year horizon.
This dynamic simulation model includes assumptions about how the balance sheet
is likely to evolve through time, in different interest rate environments. Loan
and deposit growth rate assumptions are derived from historical analysis and
management's outlook, as are the assumptions used to project yields and rates
for new loans and deposits. All maturities, calls and prepayments in the
securities portfolio are assumed to be reinvested in like instruments. Mortgage
loan prepayment assumptions are developed from industry median estimates of
prepayment speeds for portfolios with similar coupon ranges and seasoning.
Noncontractual deposit growth rates and pricing are assumed to follow
historical patterns. The sensitivities of key assumptions are analyzed at least
annually and reviewed by management.
Net Present Value: The Net Present Value ("NPV") of the balance sheet, at a
point in time, is defined as the discounted present value of asset cash flows
minus the discounted value of liability cash flows. Interest rate risk analysis
using NPV involves changing the interest rates used in determining the cash
flows and in discounting the cash flows. The resulting percentage change in NPV
is an indication of the longer term repricing risk and options embedded in the
balance sheet.
At year-end, a 200 basis point immediate increase in rates is estimated to
decrease NPV by 9.9%. Additionally, NPV is estimated to increase by 8.1% if
rates fall immediately by 200 basis points. Analysis of the average quarterly
change in the Treasury yield curve over the past ten years indicates that a
parallel curve shift of 200 basis points or more is an event that has less that
a 0.1% chance of occurrence.
As with gap analysis and earnings simulation modeling, assumptions about the
timing and variability of balance sheet cash flows are critical in NPV
analysis. Particularly important are the assumptions driving mortgage
prepayments and the assumptions about expected attrition of the core deposit
portfolios. These assumptions are applied consistently across the different
rate risk measures.
EASTERN VIRGINIA BANKSHARES
11
<PAGE>
Summary information about interest-rate risk measures is presented below:
<TABLE>
<CAPTION>
December
31
-----------
1999 1998
- -------------------------------------------
<S> <C> <C>
Static 1-Year Cumulative Gap: -6.9% -9.66%
1-year net income simulation
projection
-200 basis point Shock vs.
Stable Rate 5.8% 4.80%
+200 basis point Shock vs.
Stable Rate -6.8% -5.20%
Static Net Present Value
Change:
-200 basis point Shock vs.
Stable Rate 8.1% 8.37%
+200 basis point Shock vs.
Stable Rate -9.9% -8.78%
</TABLE>
The earnings simulation model indicates that if all prepayments, calls and
maturities of the securities portfolios expected over the next year were to
remain uninvested, then the current liability sensitive position would be
lessened.
Management projects interest rates to continue a moderate upward trend during
the first half of 2000 to a level 50 to 75 basis points above that at 1999 year
end and believes that the current modest level of liability sensitivity is
appropriate.
- --------------------------------------------------------------------------------
Noninterest Income
Noninterest income decreased by $49 thousand (2.8%) from $1.77 million in 1998
to $1.72 million in 1999. Service charges, the largest source of noninterest
income, increased $90 thousand (6.8%) from $1.32 million in 1998 to $1.41
million in 1999. Other operating income decreased $55 thousand (12.5%) from
$441 thousand in 1998 to $386 thousand in 1999. Other operating income includes
credit life premiums, ATM fees charged to non-EVB users, safe deposit box fees,
and other miscellaneous income. Realized gain/(loss) on sale of securities was
the primary factor in the decrease in noninterest income as the Corporation
reported a $76 thousand loss in 1999, compared to an $8 thousand gain in 1998.
Noninterest income increased $331 thousand (23.0%) from 1997 to 1998,
attributable primarily to increases of $239 thousand in service charges, and
$56 thousand in other operating income.
<TABLE>
<CAPTION>
Year Ended December
31
---------------------
(Dollars in
thousands) 1999 1998 1997
- --------------------------------------------
<S> <C> <C> <C>
Service charges $1,413 $1,323 $1,084
Gain (loss) on
securities (76) 8 (28)
Other operating
income 386 441 385
------ ------ ------
$1,723 $1,772 $1,441
------ ------ ------
</TABLE>
- --------------------------------------------------------------------------------
Noninterest Expense
Total noninterest expense increased $371 thousand (4.4%) from $8.44 million in
1998 to $8.81 million in 1999. The largest contributor to this increase was
salaries and benefits which increased $584 thousand or 14.1% from 1998. Salary
and benefit expense growth was spread primarily among three categories. Actual
salary expense increased $304 thousand (8.8%) resulting from normal salary
increases and a modest volume-based increase in staff. Employee retirement
expense more than doubled to $310 thousand in 1999 compared to $149 thousand in
1998, based on market fluctuations in pension plan assets at the prior fiscal
year end. Health, life and dental expense increased $140 thousand (56%) caused
primarily by a one-time life insurance expense adjustment.
Net Occupancy and equipment expense increased $117 thousand or 8.7% compared to
1998, the result of increased depreciation for technology investments and full
year depreciation on the Gloucester branch opened in mid-1998. The increases in
salary/benefit and occupancy/equipment expense were partially offset by a $319
thousand decrease in data processing expense resulting from cost savings
related to technology investments and the 1998 consolidation of operations.
Noninterest expense for 1998 included a $93 thousand merger expense while that
category had no expense in 1999.
Noninterest expense increased $737 thousand or 9.6% from $7.7 million in 1997
to $8.4 million in 1998, primarily the result of salary and benefit expense
growth of $603 thousand from normal increases related to growth and the opening
of new branches in Deltaville in late 1997 and Gloucester in mid 1998, and from
a $282 thousand increase in data processing expense related to a consolidation
of systems in late 1998 and expenses related to Year 2000 compliance.
<TABLE>
<CAPTION>
Years Ended December
31
--------------------
(Dollars in thousands) 1999 1998 1997
- ------------------------------------------------------
<S> <C> <C> <C>
Salaries and employee benefits $4,729 $4,145 $3,542
Net occupancy and equipment 1,453 1,336 1,261
Printing supplies and postage 584 576 506
Taxes other than income 204 193 302
Data processing 224 543 261
Advertising and public relations 284 296 256
Merger expenses -- 93 364
Other operating expenses 1,335 1,260 1,213
------ ------ ------
Total non-interest expense $8,813 $8,442 $7,705
------ ------ ------
</TABLE>
- --------------------------------------------------------------------------------
12
<PAGE>
Income Taxes
Income tax expense in 1999 was $2.21 million, up from $2.09 million in 1998 and
$1.96 million in 1997. The increase in income taxes is attributable to
increased taxable earnings at the federal statutory rate of 34%. Income tax
expense corresponds to an effective rate of 27.1%, 27.1% and 27.0% for the
three years ended December 31, 1999, 1998 and 1997, respectively. Note 9 to the
Consolidated Financial Statements provides a reconciliation between the amount
of income tax expense computed using the federal statutory income tax rate and
EVB's actual income tax expense. Also included in Note 9 to the Consolidated
Financial Statements is information regarding deferred taxes for 1999 and 1998.
- --------------------------------------------------------------------------------
Loan Portfolio
Loans, net of unearned income, increased to $273.9 million at December 31, 1999,
up $34.2 million or 14.3% from $239.7 million at year end 1998. The Corporation
experienced strong loan growth throughout 1999, continuing a trend that started
in the fourth quarter of 1998 which otherwise had been a slow loan growth year.
Most of the loan growth in 1999 was in the various components of the real estate
portfolio which increased $34.2 million or 21.4% from 1998 year end. Growth in
the different real estate loan portfolio components included $22 million (16.8%)
in residential mortgages, $10 million (43.2%) in commercial real estate, and
$2.2 million (35.6%) in construction loans. Other loan categories experienced
much slower growth as commercial loans increased 354 thousand or 1.2% and
consumer loans increased $132 thousand or 0.3%.
At year end 1998, loans net of unearned income were $239.7 million, an increase
of $11.7 million over $228 million at year end 1997. The loan portfolio in
1998, while comprised primarily of real estate loans, was highlighted by strong
growth of $5.6 million (13.2%) in consumer loans. Loan demand in the real
estate sector was weak through much of 1998, increasing substantially late in
the year as the Corporation introduced its fixed rate mortgage product in the
4th quarter.
<TABLE>
<CAPTION>
December 31
------------------------------------------------
(Dollars in thousands) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Commercial, industrial and
agricultural loans $ 31,003 $ 30,649 $ 32,901 $ 29,195 $ 26,533
Real estate mortgage 152,905 130,856 118,639 109,015 105,233
Real estate construction 8,267 6,096 6,430 3,808 3,941
Commercial real estate 33,103 23,114 27,324 25,330 24,464
Consumer loans 51,890 51,481 45,723 41,887 34,746
All other loans 460 961 294 496 613
-------- -------- -------- -------- --------
Total loans 277,628 243,157 231,311 209,731 195,530
Less unearned income (3,770) (3,493) (3,330) (3,388) (2,636)
-------- -------- -------- -------- --------
Loans, net of unearned
income $273,858 $239,664 $227,981 $206,343 $192,894
-------- -------- -------- -------- --------
</TABLE>
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES
13
<PAGE>
Maturity Schedule of Selected Loans
<TABLE>
<CAPTION>
December 31, 1999
---------------------------
(Dollars in Commercial and Real Estate
thousands) Agricultural Construction
- ---------------------------------------------
<S> <C> <C>
Within 1 year $22,541 $6,975
Variable rate:
1 to 5 years 2,863 1,021
After 5 years -- --
------- ------
Total 2,863 1,021
Fixed rate:
1 to 5 years 4,654 157
After 5 years 945 114
------- ------
Total 5,599 271
------- ------
Total Maturities $31,003 $8,267
------- ------
</TABLE>
Approximately 71% of EVB's loan portfolio at December 31, 1999 was comprised of
loans secured by real estate. Residential real estate mortgages made up 55.8%
of the loan portfolio as compared to 54.6% at year end 1998 and 52.0% at year
end 1997. The Corporation attempts to limit its exposure to the risk of local
real estate markets by controlling the size of its commercial real estate loan
portfolio, and by focusing on real estate loans secured by owner-occupied
properties. Commercial real estate loans were increased from 9.6% of the total
loan portfolio at year end 1998 to 12.1% at 1999 year end. Real estate
construction loans accounted for only 3.0% of total loans outstanding at year
end 1999, and 2.5% of total loans at 1998 year end. The Corporation's losses on
loans secured by real estate have historically been low, averaging zero net
charges offs per year over the last five years, and accounting for $20 thousand
of net charge offs in 1999.
Consumer loans are the second largest and historically fastest growing
component of EVB's loan portfolio. Consumer loans were 17.6% of the loan
portfolio at year end 1999, 20.0% and 18.6% at year end 1998 and 1997
respectively. This portfolio component consists primarily of installment loans.
Net consumer loans for household, family and other personal expenditures
totaled $48.1 million at 1999 year end, basically flat with $48.0 million at
1998 year end, which was up $5.6 million from $42.4 million at December 31,
1997.
Performance of the consumer loan portfolio is closely tied to the general
economic conditions in our market region and is impacted by intense competition
for automobile loans by other financial institutions and by low rates offered
by the automotive industry as a sales incentive. Commercial and industrial
loans are designed specifically to meet the needs of small and medium-size
business customers. While this category of loans increased $354 thousand in
total loans outstanding at year end 1999 compared to 1998, the percentage to
total loans decreased to 11.3% of the total loan portfolio from 12.8% at year
end 1998 and a historical 14% share of total loans.
Consistent with its focus on providing community-based financial services, EVB
generally does not make loans outside of its principal market region. The
Corporation does not engage in foreign lending activities; consequently our
loan portfolio is not exposed to the sometimes volatile risk from foreign
credits. EVB further maintains a policy not to originate or purchase loans
classified by regulators as highly-leveraged transactions or loans to foreign
entities or individuals. The Corporation's unfunded loan commitments, excluding
credit card lines and letters of credit, at 1998 year end totaled $29.9
million, up $7.0 million from $22.9 million at December 31, 1998. Unfunded loan
commitments (excluding $1.3 million in home equity lines) are used in large
part to meet seasonal funding needs which are generally higher from Spring
through Fall than at year end. On December 31, 1999, EVB had no concentration
of loans in any one industry in excess of 10% of its loan portfolio.
Historically, EVB's loan collateral has been primarily real estate because of
the nature of our market region.
- --------------------------------------------------------------------------------
Asset Quality
The Corporation's allowance for loan losses is an estimate of the amount
adequate to provide for potential losses in the loan portfolio. In determining
adequacy of the allowance, management considers the Corporation's historical
loss experience, the size and composition of the loan portfolio, specific
impaired loans, and the overall level of nonaccrual loans, the value and
adequacy of collateral and guarantors, and economic conditions. The allowance
is increased by a provision for loan losses, which is charged to expense and
reduced by charge-offs, net of recoveries. Because the risk of loan loss
includes general economic trends as well as conditions affecting individual
borrowers, the allowance for loan losses can only be an estimate. In an
environment of generally rising interest rates as forecast for 2000, the level
of past due loans usually shows a moderate increase.
Both of EVB's subsidiary banks have a formal loan review function consisting of
a committee of bank officers and board members that regularly review loans and
assign a classification based on current or perceived credit risk. Additionally
an independent credit review consultant performs a monthly review of selected
loans for Southside Bank and refers those deemed appropriate to the Bank's
Officers' Loan Committee and the Loan Committee of the Bank Board. Bank of
Northumberland, Inc maintains a formal review
14
<PAGE>
process by senior credit personnel. As a matter of policy, Southside Bank
generally places loans on a nonaccrual status when a loan becomes 90 days past
due as to principal and interest, regardless of how well the loan may be
collateralized. Bank of Northumberland moves loans to a nonaccrual status when
management makes a determination that the borrower can no longer meet the
contractual terms of the loan agreement. For the Corporation, this detailed
management analysis forms the basis for determining the amount needed in the
allowance for loan losses. Management believes the allowance for loan losses to
be adequate based on this loan review process and analysis.
In 1999 and 1998, improved loan quality, declining levels of nonperforming
assets and improved loan underwriting standards allowed EVB to maintain a lower
allowance for loan losses. The ratio of allowance for loan losses to period end
loans, net for 1999, 1998 and 1997 was 1.52%, 1.61%, and 1.70% respectively. For
the same periods the ratio of allowance for loan losses to nonaccrual loans was
228%, 237% and 128%, indicating that the allowance is adequate with respect to
nonaccrual loans. Both the ratio of nonaccrual loans to total loans and the
actual dollar amount of nonaccrual loans at December 31, 1999 were close to
their lowest level in the last five years. The allowance for loan losses amount
and methodology are subject to regulatory examinations and determinations as to
adequacy, which may take into account such factors as methodology used to
calculate the allowance and the size of the allowance in comparison to peer
companies identified by regulatory agencies.
- --------------------------------------------------------------------------------
Allowance for Loan Losses
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Average loans outstanding, net of unearned income $257,876 $232,605 $217,320 $197,336 $188,335
Allowance for loan losses balance, beginning of year $ 3,860 $ 3,868 $ 3,643 $ 3,814 $ 3,599
Loans charged off:
Commercial and agricultural 71 213 252 435 278
Real estate 37 2 12 23 17
Consumer 358 452 381 371 196
-------- -------- -------- -------- --------
Total loans charged off 466 667 645 829 491
Recoveries:
Commercial and agricultural 46 24 279 19 16
Real estate 17 20 6 48 12
Consumer 187 166 173 154 103
-------- -------- -------- -------- --------
Total recoveries 250 210 458 221 131
-------- -------- -------- -------- --------
Net loans charged off 216 457 187 608 360
Provision for loan losses 510 449 412 437 575
-------- -------- -------- -------- --------
Balance, end of year $ 4,154 $ 3,860 $ 3,868 $ 3,643 $ 3,814
-------- -------- -------- -------- --------
Ratios:
Ratio of allowance for loan losses to total loans outstanding,
end of year 1.52% 1.61% 1.70% 1.77% 1.98%
Ratio of the charge-offs to average loans outstanding during
the year 0.08% 0.20% 0.09% 0.31% 0.19%
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
EASTERN VIRGINIA BANKSHARES
15
<PAGE>
Nonperforming Assets
Total nonperforming assets, consisting of nonaccrual loans and foreclosed
properties, increased 9.0% in 1999 after a 39.1% decrease during 1998. While
the total dollar amount of nonperforming assets increased in 1999, the increase
was less than the growth rate of the loan portfolio resulting in nonperforming
assets as a percentage of total loans and foreclosed properties being at their
lowest level of the past five years. Improvement in nonperforming assets during
the past two years was the result of improved underwriting standards combined
with a strong economy that reduced levels of new nonperforming loans, and
management's focus on identifying deteriorating assets early enough to ensure
prompt resolution.
Nonperforming assets at December 31, 1999 were $2.1 million or 0.75% of total
loans and foreclosed real estate, up from $1.9 million at 1998 year end, but
down from the 0.79% of total loans and foreclosed properties at December 31,
1998, and down from $3.1 million or 1.36% at year end 1997. Nonperforming loans
at year end 1999 consisted primarily (85%) of residential first mortgage loans
secured by real estate in the Corporation's market area. Based on estimated
fair values of the related real estate, management considers these amounts
recoverable, with any individual deficiency well covered by the allowance for
loan losses. No interest is accrued on loans placed in a nonaccrual status, and
any unpaid interest previously accrued on such past due loans is reversed when
a loan is placed in nonaccrual status. If interest on nonaccrual loans had been
accrued, such income would have approximated $151 thousand and $98 thousand for
the years 1999 and 1998.
<TABLE>
<CAPTION>
(Dollars in thousands) 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nonaccrual loans $ 1,822 $ 1,626 $ 3,022 $3,871 $4,112
Restructured loans -- -- -- -- --
Foreclosed property 243 268 86 196 618
-------- -------- -------- ------ ------
Total nonperforming assets $ 2,065 $ 1,894 $ 3,108 $4,067 $4,730
Loans past due 90 days and
accruing interest 1,345 1,190 927 597 905
Nonperforming assets to total
loans and other real estate 0.75% 0.79% 1.36% 2.00% 2.44%
Allowance for loan losses to
nonaccrual loans 227.99% 237.39% 127.99% 94.11% 92.75%
Net charge-offs to average loans
outstanding during the year 0.08% 0.20% 0.09% 0.31% 0.19%
Allowance for loan losses to
year end loans 1.52% 1.61% 1.70% 1.77% 1.98%
Foregone interest income on
nonaccrual loans $ 151 $ 98 $ 308 $ 290 $ 198
Interest income recorded on
nonaccrual loans $ -- $ 7 $ 2 $ -- $ --
</TABLE>
At December 31, 1999, loans past due 90 days or more and still accruing interest
(because they are well secured and in the process of collection) were $1.35
million. Although trends for credit quality factors continue to improve, it is
likely that EVB will continue modest provisions for loan losses in 2000. The
primary factor for additional provisions is growth in the loan portfolio as the
result of continued improvement in the region's economy. The Corporation has
historically reflected a high level of nonaccrual real estate loans, but has had
minimal losses from those loans because of the well collateralized position.
Therefore, effective in 1997, management revised its formula for allocation of
the allowance to reflect current net loans and nonaccrual loans plus the five
year history for net charge offs by loan category, and in 1999 added off-balance
sheet credit risk. That allocation appears on the following page.
Potential Problem Loans: At December 31, 1999, potential problem loans were
approximately $1.12 million, including six lending relationships in excess of
$100,000, which had aggregate principal balances outstanding of $647 thousand.
Loans are viewed as potential problem loans according to the ability of such
borrowers to comply with current repayment terms. These loans are subject to
constant management attention, and their status is reviewed on a regular basis.
The potential problem loans identified at December 31, 1999 are generally
secured by residential and commercial real estate with appraised values that
exceed the principal balance.
- --------------------------------------------------------------------------------
16
<PAGE>
Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
----------------------- ----------------------- -----------------------
Percent of loans Percent of loans Percent of loans
in each category in each category in each category
Amount to Total Loans Amount to Total Loans Amount to Total Loans
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------- ------------- -------------
Commercial and agricul-
tural $1,233 11.32% $1,244 12.79% $1,346 14.21%
Real estate mortgage 1,429 55.83% 1,209 54.60% 1,207 51.29%
Real estate construction 30 3.02% 25 2.54% 65 2.78%
Commercial real estate 133 12.09% 193 9.65% 279 11.82%
Consumer 1,191 17.57% 1,186 20.02% 969 19.77%
Other loans 2 0.17% 3 0.40% 2 0.13%
------ ------ ------ ------ ------ ------
Total allowance for
balance sheet loans 4,018 100.00% $3,860 100.00% $3,868 100.00%
Allowance for off-bal-
ance sheet risk 136
------
Total allowance for
loan losses $4,154
<CAPTION>
December 31, 1996 December 31, 1995
----------------------- -----------------------
Percent of Percent of
loans in each loans in each
category category
Amount to Total Loans Amount to Total Loans
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------- -------------
Commercial and agricul-
tural $ 496 13.62% $ 486 12.74%
Real estate mortgage 1,894 51.97% 2,053 53.82%
Real estate construction 66 1.82% 77 2.02%
Commercial real estate 433 11.89% 485 12.71%
Consumer 739 20.29% 701 18.37%
Other loans 15 0.41% 12 0.34%
------ ------ ------ ------
Total allowance for
loan losses $3,643 100.00% $3,814 100.00%
- -------------------------------------------------------------------------------------------------
</TABLE>
Securities
The securities portfolio consists of two components, investment securities and
securities available for sale. Securities are classified as investment
securities when management has the intent and the Corporation has the ability,
at the time of purchase, to hold such securities to maturity. Investment
securities are carried at cost adjusted for amortization of premiums and
accretion of discounts. Securities available for sale include those securities
that may be sold in response to changes in market interest rates, changes in
the security's prepayment risk, increases in loan demand, general liquidity
needs, and other similar factors, and are carried at estimated fair market
value. Generally, EVB utilizes tax-exempt securities for its investment
portfolio and taxable securities in its available for sale portfolio.
At December 31, 1999, the combined securities portfolio was $88.08 million, an
8.3% increase from $81.3 million at 1998 year- end. Book value of the
investment component of this portfolio was $44.8 million compared to $39.3
million at December 31, 1998. The available for sale portion of the securities
portfolio at 1999 year-end, at estimated fair market value, was $43.3 million,
compared to $42.0 million at year-end 1998.
At December 31, 1998, the combined securities portfolio was $81.3 million, a
4.1% increase from $78.1 million at 1997 year
end. Book value of the investment component of the portfolio was $39.3 million
compared to $38.4 million at December 31, 1997. The available for sale portion
of the portfolio at 1998 year end was $42.0 million compared to $39.7 million
at December 31, 1997.
FASB pronouncement No. 115 effective January 1, 1994, required EVB to show the
effect of market value changes of securities available for sale. The market
value of this portfolio at 1998 year end was $43.3 million. The effect of
valuing the available for sale portfolio at market, net of income taxes, is
reflected as a line in the Shareholders' Equity section of the Balance Sheet
as Accumulated other comprehensive income/(loss) of ($671 thousand) at
December 31, 1999 and $365 thousand at 1998 year end.
EVB follows a policy of not engaging in activities considered to be derivative
in nature such as options, futures, swaps or forward commitments. The
Corporation considers derivatives to be speculative in nature and contrary to
EVB's historical philosophy. EVB does not hold or issue financial instruments
for trading purposes.
EASTERN VIRGINIA BANKSHARES
17
<PAGE>
Investment Securities and Securities Available for Sale
The following table presents the book value and fair value of securities for
the years 1999, 1998 and 1997.
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998 December 31, 1997
----------------- ----------------- -----------------
Amortized Fair Amortized Fair Amortized Fair
(Dollars in thousands) Cost Value Cost Value Cost Value
<S> <C> <C> <C> <C> <C> <C>
- ------------------------------------------- ----------------- -----------------
Available for sale:
U.S. Treasury securities $ 8,517 $ 8,457 $ 9,567 $ 9,768 $12,900 $12,978
U.S. government agency
securities 16,157 15,624 13,997 14,116 16,538 16,584
States and political
subdivisions 7,034 6,853 4,590 4,760 1,109 1,126
Mortgage-backed
securities 7,124 6,962 10,059 10,097 7,604 7,662
Other including equity
securities 5,480 5,400 3,234 3,259 1,386 1,386
------- ------- ------- ------- ------- -------
Total available for
sale 44,312 43,296 41,447 42,000 39,537 39,736
------- ------- ------- ------- ------- -------
Held to maturity:
States and political
subdivisions 44,780 44,451 39,333 40,308 37,463 38,438
Other -- -- -- -- 899 912
------- ------- ------- ------- ------- -------
Total held to maturity 44,780 44,451 39,333 40,308 38,362 39,350
------- ------- ------- ------- ------- -------
Total securities $89,092 $87,747 $80,780 $82,308 $77,899 $79,086
------- ------- ------- ------- ------- -------
</TABLE>
Maturity Distribution and Yields of Securities
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------------------------------
Due in Due after Due after Due after
1 year 1 through 5 through 10 years and
or less 5 years 10 years equity securities
------------ ------------- ------------- ------------------
Total
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities available for
sale
U.S. Government
securities 3,441 5.90% 18,536 6.16% 9,066 6.58% -- 0.00% 31,043 6.26%
Other including equity
securities 815 6.83% 5,801 6.51% 4,239 7.26% 1,398 6.35% 12,253 6.77%
------ ------- ------- --------- -------
Total 4,256 6.08% 24,337 6.24% 13,305 6.80% 1,398 6.35% 43,296 6.40%
Securities held for
investment
Tax exempt municipals
(1) 4,174 7.33% 14,261 7.22% 21,439 6.89% 4,906 7.18% 44,780 7.07%
------ ---- ------- ---- ------- ---- --------- ------- ------- ----
Total securities $8,430 6.70% $38,598 6.61% $34,744 6.85% $ 6,304 6.99% $88,076 6.74%
------ ---- ------- ---- ------- ---- --------- ------- ------- ----
</TABLE>
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.
See Note 2 to the Consolidated Financial Statements as of December 31, 1999,
for an analysis of gross unrealized gains and losses on securities.
- --------------------------------------------------------------------------------
18
<PAGE>
Deposits
The Corporation is focused on increasing core deposits to reduce the need for
other borrowings to fund growth in earning assets. Core deposits provide a low
cost, stable source of funding for the Corporation's asset growth. Interest
rates paid on deposits are carefully managed to provide an attractive market
rate while at the same time not adversely affecting the net interest margin.
Borrowing through the Federal Home Loan Bank of Atlanta is utilized for funding
when the cost of borrowed funds falls below the cost of new interest bearing
deposits.
Total deposits at December 31, 1999 of $322.6 million reflected an increase of
$18.3 million (6.0%) compared to $304.3 million at 1998 year end. Non-interest
bearing deposits decreased $400 thousand (1.2%) to $32.8 million at 1999 year
end compared to $33.2 million at December 31, 1998. During the same period,
interest bearing deposits increased 6.9% to $289.8 million at 1999 year end,
compared to $271.1 million at December 31, 1998.
While these figures are as of a specific day at year end, it is
more meaningful to review average deposits for the year. For 1999, average
total deposits of $314.5 million reflected a 7.1% increase over the 1997
average of $293.6 million. All components of deposits other than money market
showed increases in 1998.
Total deposits at 1998 year end of $304.3 million reflected an increase of
$23.4 million (8.3%) compared to $280.9 million at 1996 year end. Average
deposits for 1998 were $293.6 million, an increase of 6.8% or $18.6 million
compared to 1997 average deposits of $275.0 million. Average non-interest
bearing deposit growth in 1998 was 12.4% while interest bearing deposits
increased 6.1%. The trend of a higher growth rate of non-interest bearing
deposits compared to more costly certificates of deposit assisted the
Corporation in controlling the cost of funds and managing its net interest
margin in 1998.
- --------------------------------------------------------------------------------
Average Deposits and Rates Paid
<TABLE>
<CAPTION>
For the Year Ended December 31
-------------------------------------------
1999 1998 1997
------------- ------------- -------------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------- ------------- -------------
Non-interest bearing accounts $ 33,903 $ 30,739 $ 27,347
Interest bearing accounts:
Interest checking 36,546 2.47% 31,608 2.62% 28,480 2.75%
Money market 27,402 3.16% 28,518 3.35% 29,127 3.28%
Regular savings 72,953 3.70% 69,157 4.14% 61,414 4.08%
Certificates of deposit:
Less than $100,000 118,938 5.02% 116,073 5.36% 114,129 5.37%
$100,000 and over 24,801 5.24% 17,490 5.55% 14,469 5.33%
-------- -------- --------
Total interest bearing 280,640 4.18% 262,846 4.51% 247,619 4.50%
-------- -------- --------
Total average deposits $314,543 $293,585 $274,966
-------- -------- --------
</TABLE>
- --------------------------------------------------------------------------------
Maturities of Certificates of Deposit of $100,000 and Over
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Percent
Within 3-12 1-3 Over 3 of Total
(Dollars in thousands) 3 months Months Years Years Total Deposits
- ------------------------------------------------------------------------
At December 31, 1999 $4,437 $15,128 $5,821 $3,800 $29,186 9.05%
At December 31, 1998 2,611 12,091 5,183 1,532 21,417 7.04%
At December 31, 1997 2,855 8,045 5,847 889 17,636 6.28%
</TABLE>
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES
19
<PAGE>
Capital Resources
Capital resources are managed to maintain a capital structure that provides the
Corporation the ability to support asset growth, absorb potential losses and to
expand EVB's franchise when appropriate. Capital represents original investment
by shareholders along with retained earnings and provides financial resources
over which management can exercise greater control as compared to deposits and
borrowed funds.
Regulatory authorities have adopted guidelines to establish minimum capital
standards. Specifically the guidelines classify assets and balance sheet items
into four risk-weighted categories. The minimum regulatory total capital to
risk-weighted assets is 8.0% of which at least 4.0% must be Tier 1 capital,
defined as common equity and retained earnings. At December 31, 1999, EVB had
total capital of 19.24% and a Tier 1 ratio of 17.98%, both far in excess of
regulatory guidelines and the amount needed to support each subsidiary's
banking business.
Capital represents a double-edged sword to management as the financial
opportunities of a high capital base are weighed against the impact of the
return on equity ratio. When the Corporation was formed in 1997, both of the
subsidiary banks had a capital structure that far exceeded regulatory guidelines
and created significant challenges in managing the return on equity. After
evaluating a variety of alternatives to more effectively utilize its strong
capital base and to create additional value to our shareholders, management
transferred $15.6 million from the subsidiary banks to the parent company at
year end 1997 and another $7.0 million at both year end 1998 and 1999. Dividends
are paid out of parent company capital, and in November 1998 the Corporation
announced a stock repurchase program intended to reduce high capital levels and
to increase return on equity to shareholders. The Corporation repurchased 110
thousand shares in 1999, following the repurchase of 32 thousand shares in late
1998. It is likely that EVB will continue with periodic repurchase transactions
in 2000.
The table which follows provides an analysis of the Corporation's capital as of
December 31, 1999, 1998 and 1997. Note 16 in the Consolidated Financial
Statements provides an analysis of the capital position of each of the
subsidiary banks as of year end 1999 and 1998.
Analysis of Capital
<TABLE>
<CAPTION>
December 31
----------------------------
(Dollars in thousands) 1999 1998 1997
- ---------------------------------------------------------
<S> <C> <C> <C>
Tier 1 capital:
Common stock $ 10,065 $ 10,286 $ 10,377
Additional paid in capital 2,014 3,729 221
Retained earnings 31,388 27,877 28,535
-------- -------- --------
Total Tier 1 capital 43,467 41,892 39,133
Tier 2 capital:
Allowable portion of
allowance for loan losses 3,036 2,722 2,552
-------- -------- --------
Total risk-based capital 46,503 44,614 41,685
Risk-weighted assets 241,734 216,630 202,786
Capital ratios:
Tier 1 risk based capital 17.98% 19.34% 19.30%
Total risk based capital 19.24% 20.59% 20.56%
Tier 1 capital to average
total assets 11.98% 12.39% 12.87%
</TABLE>
- --------------------------------------------------------------------------------
20
<PAGE>
Liquidity
Liquidity represents an institution's ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds through liability management. Liquid assets
include cash, deposits with other banks, federal funds sold, investments and
loans maturing or repricing within one year. EVB's management of liquid assets
combined with the ability to generate liquidity through liability funding
provides a liquidity level which management believes is sufficient to satisfy
its depositors' requirements and to meet its customers' credit needs. At
December 31, 1999, $100.0 million or 27.8% of total earning assets were due to
mature or reprice within the next year.
EVB also maintains additional sources of liquidity through a variety of
borrowing arrangements. Federal funds borrowing arrangements with major
regional banks combined with lines of credit with the Federal Home Loan Bank
totaled $41 million at December 31, 1999. At year end 1999, the Corporation had
$8 million of FHLB borrowings outstanding, a $3 million fixed rate three year
loan executed in June 1999 and a $5 million floating rate one year loan
executed in December in preparation for possible Year 2000 cash needs. Also
outstanding at December 31, 1999, was $1.468 million of federal funds
purchased.
- --------------------------------------------------------------------------------
Inflation
In financial institutions, unlike most manufacturing companies, virtually all of
the assets and liabilities are monetary in nature. As a result, interest rates
have a more significant impact on a bank's performance than the effects of
general levels of inflation. Interest rate movement is not necessarily tied to
movements in the same direction or with the same magnitude at the prices of
goods and services, since such prices are affected by inflation to a larger
extent than interest rates.
- --------------------------------------------------------------------------------
Forward-Looking Statements
Certain statements in this report may constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
Although EVB believes that its expectations concerning certain forward-looking
statements are based upon reasonable assumptions within the bounds of its
knowledge of its business and operations, there can be no assurance that actual
results and performance achievements of the Corporation will not differ
materially from any future results, performance or achievements expressed or
implied by such forward-looking statements.
- --------------------------------------------------------------------------------
Impact of the Year 2000 Issue
EVB encountered no problems related to the Year 2000 date change. The
Corporation's total expenditures associated with Year 2000 compliance were
approximately $175,000. Those costs included testing, training, hardware and
software replacements and upgrades. The 1999 portion of this expense
approximated 0.9% of pretax income or 0.020% of assets which was immaterial
when considering the size of the Corporation.
- --------------------------------------------------------------------------------
Accounting Rule Changes
There were no accounting rule changes during 1999 that will impact EVB.
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES
21
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31
<S> <C> <C>
--------------------------
<CAPTION>
1999 1998
- -----------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 10,258,340 $ 10,864,363
Federal funds sold -- 10,658,000
Securities available for sale at fair value 43,295,192 41,999,579
Securities held to maturity at amortized
cost, fair value of $44,451,379
and $40,308,465, respectively 44,780,367 39,332,854
Loans, net of allowance for loan losses of
$4,153,813 in 1999 and $3,859,996 in 1998 269,704,195 235,804,960
Deferred income taxes 1,641,339 953,228
Bank premises and equipment 4,568,324 4,697,684
Accrued interest receivable 2,581,879 2,422,692
Other real estate 242,801 267,551
Other assets 766,307 993,922
------------ ------------
Total assets $377,838,744 $347,994,833
------------ ------------
Liabilities and Shareholders' Equity
Liabilities
Noninterest-bearing deposits $ 32,815,516 $ 33,215,958
Interest-bearing deposits 289,831,431 271,114,518
------------ ------------
Total deposits 322,646,947 304,330,476
Federal funds purchased 1,468,000 --
Federal Home Loan Bank advances 5,000,000 --
Long-term debt 3,000,000 --
Accrued interest payable 795,446 740,523
Other liabilities 2,132,984 667,169
Commitments and contingent liabilities -- --
------------ ------------
Total liabilities 335,043,377 305,738,168
------------ ------------
Shareholders' Equity
Common stock of $2 par value per share;
authorized 50,000,000 shares; issued and
outstanding, 5,032,263 and 5,142,834,
respectively 10,064,526 10,285,668
Surplus 2,013,760 3,729,504
Retained earnings 31,388,237 27,876,655
Accumulated other comprehensive income
(loss) (671,156) 364,838
------------ ------------
Total shareholders' equity 42,795,367 42,256,665
------------ ------------
Total liabilities and shareholders' equity $377,838,744 $347,994,833
------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
22
<PAGE>
Consolidated Statements of Income
<TABLE>
<CAPTION>
For the Years Ended December 31
------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans and fees on loans $22,612,036 $21,412,321 $20,007,134
Interest on investment securities:
Taxable interest income -- -- 327,679
Tax exempt interest income 1,944,000 1,852,478 1,899,613
Interest on securities available for
sale:
Taxable interest income 2,549,910 2,572,219 2,398,437
Dividends 76,349 60,125 67,519
Interest on Federal funds sold 454,752 768,872 391,978
Interest on deposits in other banks -- 3,743 510
----------- ----------- -----------
Total interest income 27,637,047 26,669,758 25,092,870
----------- ----------- -----------
Interest Expense
Deposits 11,733,908 11,845,364 11,138,095
Short-term borrowings 23,408 290 5,928
Long-term debt 109,565 -- --
----------- ----------- -----------
Total interest expense 11,866,881 11,845,654 11,144,023
----------- ----------- -----------
Net interest income 15,770,166 14,824,104 13,948,847
Provision for Loan Losses 510,000 448,959 412,200
----------- ----------- -----------
Net interest income after provision for
loan losses 15,260,166 14,375,145 13,536,647
----------- ----------- -----------
Other Income
Service charges on deposit accounts 1,412,895 1,322,337 1,083,544
Gain (loss) on sale of available for
sale securities (76,268) 8,035 (27,604)
Other operating income 386,537 441,908 385,323
----------- ----------- -----------
1,723,164 1,772,280 1,441,263
----------- ----------- -----------
Other Expenses
Salaries and benefits 4,729,395 4,145,489 3,541,517
Net occupancy expense 1,214,692 1,021,247 989,705
Equipment expense 237,987 315,069 271,480
Other operating expenses 2,631,014 2,960,571 2,902,429
----------- ----------- -----------
8,813,088 8,442,376 7,705,131
----------- ----------- -----------
Income before income taxes 8,170,242 7,705,049 7,272,779
Income Tax Expense 2,210,603 2,087,573 1,964,985
----------- ----------- -----------
Net income $ 5,959,639 $ 5,617,476 $ 5,307,794
----------- ----------- -----------
Earnings Per Share, basic and assuming
dilution $ 1.17 $ 1.08 $ 1.02
----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES
23
<PAGE>
Consolidated Statements of Shareholders' Equity
<TABLE>
<CAPTION>
For the Years Ended December 31, 1999, 1998 and 1997
------------------------------------------------------------------------------
Accumulated
Other
Common Retained Comprehensive Comprehensive
Stock Surplus Earnings Income (Loss) Income Total
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1996 $10,374,440 $ 205,987 $24,976,854 $ (100,741) $35,456,540
Comprehensive income:
Net income - 1997 -- -- 5,307,794 -- $ 5,307,794 5,307,794
Other comprehensive
income:
Unrealized holding
gains arising during
period (net of tax,
$110,315) -- -- -- -- 214,140 --
Reclassification ad-
justment
(net of tax, $9,398) -- -- -- -- 18,219 --
-----------
Other comprehensive in-
come
(net of tax, $119,713) -- -- -- 232,359 232,359 232,359
-----------
Total comprehensive
income -- -- -- -- $ 5,540,153 --
-----------
Cash dividends declared -- -- (1,740,175) -- (1,740,175)
Shares sold under
dividend reinvestment
plan 11,616 62,151 -- -- 73,767
Shares repurchased and
retired (8,904) (47,335) -- -- (56,239)
Cash paid in lieu of
fractional shares -- -- (9,130) -- (9,130)
----------- ----------- ----------- ----------- -----------
Balance, December 31,
1997 10,377,152 220,803 28,535,343 131,618 39,264,916
Comprehensive income:
Net income - 1998 -- -- 5,617,476 -- $ 5,617,476 5,617,476
Other comprehensive
income:
Unrealized holding
gains arising during
period (net of tax,
$122,875) -- -- -- -- 238,523 --
Reclassification ad-
justment
(net of tax, $2,732) -- -- -- -- (5,303) --
-----------
Other comprehensive in-
come
(net of tax, $120,143) -- -- -- 233,220 233,220 233,220
-----------
Total comprehensive
income -- -- -- -- $ 5,850,696 --
-----------
Cash dividends declared -- -- (2,276,164) -- (2,276,164)
Shares repurchased and
retired (91,484) (491,299) -- -- (582,783)
Discretionary transfer -- 4,000,000 (4,000,000) -- --
----------- ----------- ----------- ----------- -----------
Balance, December 31,
1998 10,285,668 3,729,504 27,876,655 364,838 42,256,665
Comprehensive income:
Net income - 1999 -- -- 5,959,639 -- $ 5,959,639 5,959,639
Other comprehensive
income:
Unrealized holding
losses arising during
period, (net of tax,
$559,625) -- -- -- -- (1,086,331) --
Reclassification ad-
justment,
(net of tax, $25,931) -- -- -- -- 50,337 --
-----------
Other comprehensive in-
come (net of tax,
$533,694) -- -- -- (1,035,994) (1,035,994) (1,035,994)
-----------
Total comprehensive
income -- -- -- -- $ 4,923,645 --
-----------
Cash dividends declared -- -- (2,448,057) -- (2,448,057)
Shares purchased and
retired (221,142) (1,715,744) -- -- (1,936,886)
----------- ----------- ----------- ----------- -----------
Balance, December 31,
1999 $10,064,526 $ 2,013,760 $31,388,237 $ (671,156) $42,795,367
----------- ----------- ----------- ----------- -----------
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
24
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended December 31
----------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 5,959,639 $ 5,617,476 $ 5,307,794
Adjustments to reconcile net income to
net cash provided by operating
activities:
Loss from equity investment in
partnership 27,948 16,868 18,912
Depreciation and amortization 899,474 764,667 710,939
Deferred tax (benefit) provision (154,418) 169,071 (40,765)
Provision for loan losses 510,000 448,959 412,200
Net gain on other real estate (7,569) (6,587) (28,273)
Net loss (gain) on sale of bank
premises and equipment 1,965 (9,452) --
(Gain) losses realized on available
for sale securities 76,268 (8,035) 27,604
Accretion of discounts and
amortization of premiums, net 80,108 (50,838) (25,738)
Changes in assets and liabilities:
(Increase) decrease in accrued
interest receivable (159,187) 56,664 (77,074)
(Increase) decrease in other assets 227,616 156,225 (189,907)
Increase (decrease) in accrued
interest payable 54,923 (53,984) 47,996
Increase (decrease) in other
liabilities 1,465,815 (1,821,555) (129,588)
------------ ------------ ------------
Net cash provided by operating
activities 8,982,582 5,279,479 6,034,100
------------ ------------ ------------
Cash Flows from Investing Activities
Proceeds from sales of securities
available for sale 3,641,476 986,215 10,775,770
Maturities and principal repayments
of securities available for sale 8,806,051 30,365,423 4,300,000
Maturities of securities held to
maturity 4,151,575 4,928,700 6,690,050
Purchases of investment securities
available for sale (15,439,530) (28,683,708) (11,034,811)
Purchases of investment securities
held to maturity (9,656,710) (10,436,023) (5,573,394)
Proceeds from sale of other real
estate 32,319 49,587 270,128
Net (increase) in loans (34,409,235) (12,365,538) (21,957,554)
Purchases of bank premises and
equipment (797,042) (1,264,435) (1,307,300)
Proceeds from sale of bank premises
and equipment 24,963 11,909 --
(Increase) decrease in deposits with
other banks -- 99,570 (99,570)
------------ ------------ ------------
Net cash (used in) investing
activities (43,646,133) (16,308,300) (17,936,681)
------------ ------------ ------------
Cash Flows from Financing Activities
Net increase in demand deposit
accounts, interest-bearing demand
deposits and savings accounts 2,326,422 22,531,272 8,251,830
Net increase in certificates of
deposit 15,990,049 917,500 2,727,212
Proceeds from Federal Home Loan Bank
advances 8,000,000 -- --
Increase in Federal funds purchased 1,468,000 -- --
Proceeds from sale of stock -- -- 73,767
Repurchases and retirement of stock (1,936,886) (582,783) (56,239)
Dividends paid (2,448,057) (2,276,164) (1,749,305)
------------ ------------ ------------
Net cash provided by financing
activities 23,399,528 20,589,825 9,247,265
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents (11,264,023) 9,561,004 (2,655,316)
Cash and Cash Equivalents
Beginning of year 21,522,363 11,961,359 14,616,675
------------ ------------ ------------
End of year $ 10,258,340 $ 21,522,363 $ 11,961,359
------------ ------------ ------------
Supplemental Disclosures of Cash Flow
Information
Cash payments for:
Interest $ 11,811,959 $ 11,899,638 $ 11,096,028
------------ ------------ ------------
Income taxes $ 1,730,215 $ 2,166,398 $ 1,946,176
------------ ------------ ------------
Supplemental Disclosures of Noncash
Financing Activities,
transfers from loans to foreclosed
real estate $ -- $ 224,757 $ 131,945
------------ ------------ ------------
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES
25
<PAGE>
Notes to Consolidated Financial Statements
December 31, 1999, 1998 and 1997
Note 1. Summary of Significant Accounting Policies
The accounting and reporting policies of Eastern Virginia Bankshares, Inc. and
Subsidiaries (the "Corporation") conform to generally accepted accounting
principles and general practices within the banking industry. The following is
a description of the more significant of those policies:
Business
Eastern Virginia Bankshares, Inc. is a bank holding company that provides full
banking services, including commercial and consumer demand and time deposit
accounts, commercial and consumer loans, Visa and Mastercard revolving credit
accounts, drive-in banking services and automated teller machine transactions
through its wholly-owned subsidiaries, Southside Bank ("SSB") and Bank of
Northumberland, Inc. ("BNI"). The area served by the Corporation is primarily
the counties of Essex, Northumberland, King & Queen, King William, Richmond,
Lancaster, Hanover, Gloucester, Middlesex and Caroline.
The Corporation has filed applications with the Federal Deposit Insurance
Corporation, the Federal Reserve Bank and the State Corporation Commission for
the opening of a new subsidiary named Hanover Bank. The new subsidiary is to be
wholly owned by Eastern Virginia Bankshares and is scheduled to open in the
second quarter of 2000. Hanover Bank was incorporated in December, 1999 but
remained dormant until January, 2000.
Basis of Presentation and Consolidation
The consolidated statements of Eastern Virginia Bankshares, Inc. and its
wholly-owned subsidiaries, Southside Bank and Bank of Northumberland, Inc.
include the accounts of all companies. All material intercompany balances and
transactions have been eliminated in consolidation. SSB and BNI were merged
with and into the Corporation on December 29, 1997.
Use of Estimates
In preparing consolidated financial statements in conformity with generally
accepted accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities as of
the date of the balance sheet and reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Material estimates that are particularly susceptible to significant change in
the near term relate to the determination of the allowance for loan losses,
valuation of foreclosed real estate and deferred tax assets.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash
equivalents include cash and balances due from banks and federal funds sold,
all which mature within ninety days.
Securities
Debt securities that management has the positive intent and ability to hold to
maturity are classified as "held to maturity" and recorded at amortized cost.
Securities not classified as held to maturity or trading, including equity
securities with readily determinable fair values, are classified as "available
for sale" and recorded at fair value, with unrealized gains and losses excluded
from earnings and reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the
interest method over the terms of the securities. Declines in the fair value of
held to maturity and available for sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized losses.
Gains and losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.
Loans
The Corporation grants mortgage, commercial and consumer loans to customers. A
substantial portion of the loan portfolio is represented by mortgage loans. The
ability of the Corporation's debtors to honor their contracts is dependent upon
the real estate and general economic conditions in the Corporation's market
area.
Loans that management has the intent and ability to hold for the foreseeable
future or until maturity or pay-off generally are reported at their outstanding
unpaid principal balances less the allowance for loan losses, and any deferred
fees or costs on originated loans. Interest income is accrued on the unpaid
principal balance. Loan origination fees, net of certain direct origination
costs, are deferred and recognized as an adjustment of the related loan yield
using the interest method.
The accrual of interest on mortgage and commercial loans is discontinued at the
time the loan is 90 days delinquent unless the credit is well-secured and in
process of collection. Credit card loans and other personal loans are typically
charged off no later than 180 days past due. In all cases, loans are placed on
nonaccrual or charged-off at an earlier date if collection of principal or
interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual
or charged-off is reversed against interest income. The interest on these loans
is accounted for on the cash-basis or cost-recovery method, until qualifying
for return to accrual. Loans are returned to accrual status when all the
principal and interest amounts contractually due are brought current and future
payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to have
occurred through a provision for loan losses charged to earnings. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed. Subsequent recoveries, if any, are credited to
the allowance.
26
<PAGE>
The allowance for loan losses is evaluated on a regular basis by management and
is based upon management's periodic review of the collectibility of the loans
in light of historical experience, the nature and volume of the loan portfolio,
adverse situations that may affect the borrower's ability to repay, estimated
value of any underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it
is probable that the Corporation will be unable to collect the scheduled
payments of principal or interest when due according to the contractural terms
of the loan agreement. Factors considered by management in determining
impairment include payment status, collateral value, and the probability of
collecting scheduled principal and interest payments when due. Loans that
experience insignificant payment delays and payment shortfalls generally are
not classified as impaired. Management determines the significance of payment
delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan by loan basis for
commercial and construction loans by either the present value of expected
future cash flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated
for impairment. Accordingly, the Corporation does not separately identify
individual consumer and residential loans for impairment disclosures.
Other Real Estate
Real estate acquired through, or in lieu of, foreclosure are held for sale and
are initially recorded at fair value at the date of foreclosure, establishing a
new cost basis. Subsequent to foreclosure, valuations are periodically
performed by management and the assets are carried at the lower of carrying
amount or fair value less cost to sell. Revenues and expenses from operations
and changes in the valuation are included in other operating expenses.
Bank Premises and Equipment
Bank premises and equipment are stated at cost, less accumulated depreciation.
Depreciation is charged to expense over the estimated useful lives of the
assets and is computed using the straight-line or declining-balance method for
financial reporting purposes. Depreciation for tax purposes is computed based
upon accelerated methods. The costs of major renewals or improvements are
capitalized while the costs of ordinary maintenance and repairs are charged to
expense as incurred.
Income Taxes
Deferred income tax assets and liabilities are determined using the balance
sheet method. Under this method, the net deferred tax asset or liability is
determined based on the tax effects of the temporary differences between the
book and tax bases of the various balance sheet assets and liabilities and
gives current recognition to changes in tax rates and laws.
Earnings Per Share
Earnings per common share has been computed on the basis of the weighted-
average number of common shares outstanding during each period presented.
Weighted average shares were 5,092,008, 5,178,700 and 5,188,071 for the years
ended 1999, 1998 and 1997, respectively. The Corporation had no potential
common stock as of December 31, 1999, 1998, and 1997.
Pension Plan
The Corporation has a defined benefit pension plan covering employees meeting
certain age and service requirements. The Corporation computes the net periodic
pension cost of the plan in accordance with FASB No. 87, "Employers' Accounting
for Pensions."
Comprehensive Income
As of January 1, 1998, the Corporation adopted FASB No. 130, "Reporting
Comprehensive Income." FASB No. 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this statement had no impact on the Corporation's net income or shareholders'
equity. FASB No. 130 requires other comprehensive income to include unrealized
gains (losses) on available for sale securities, which prior to adoption were
reported separately in shareholders' equity. The December 31, 1997 financial
statements have been reclassified to conform to the requirements of FASB No.
130.
Advertising
The Corporation practices the policy of charging advertising costs to expense
as incurred. Advertising expense totaled $236,117, $247,254 and $224,292 for
the three years ended December 31, 1999, 1998 and 1997, respectively.
Reclassifications
Certain reclassifications have been made to prior period balances to conform to
the current year presentation.
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES
27
<PAGE>
Notes to Consolidated Financial Statements--Continued
Note 2. Securities
The following is a comparison of amortized cost and estimated fair values of
securities at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Government obligations $ 8,517,407 $ 3,396 $ (63,449) $ 8,457,354
Obligations of U.S. Government
agencies 23,281,111 23,131 (718,883) 22,585,359
Corporate bonds 4,278,173 325 (80,023) 4,198,475
Obligations of state and
political subdivisions 7,033,903 3,641 (185,050) 6,852,494
Other securities 1,201,510 -- -- 1,201,510
----------- ---------- ----------- -----------
44,312,104 30,493 (1,047,405) 43,295,192
----------- ---------- ----------- -----------
Held to Maturity:
Obligations of state and
political subdivisions 44,780,367 308,627 (637,615) 44,451,379
----------- ---------- ----------- -----------
Total $89,092,471 $ 339,120 $(1,685,020) $87,746,571
----------- ---------- ----------- -----------
<CAPTION>
1998
-----------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for Sale:
U.S. Government obligations $ 9,567,133 $ 202,286 $ (1,965) $ 9,767,454
Obligations of U.S. Government
agencies 24,055,904 219,580 (62,048) 24,213,436
Corporate bonds 1,765,920 25,090 -- 1,791,010
Obligations of state and
political subdivisions 4,589,780 175,209 (5,367) 4,759,622
Other securities 1,468,057 -- -- 1,468,057
----------- ---------- ----------- -----------
41,446,794 622,165 (69,380) 41,999,579
----------- ---------- ----------- -----------
Held to Maturity:
Obligations of state and
political subdivisions 39,332,854 1,069,105 (93,494) 40,308,465
----------- ---------- ----------- -----------
Total $80,779,648 $1,691,270 $ (162,874) $82,308,044
----------- ---------- ----------- -----------
</TABLE>
28
<PAGE>
The following is a comparison of amortized cost and estimated fair values of
the Corporation's securities by contractual maturity at December 31, 1999:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
- ---------------------------------------------------
<S> <C> <C>
Available for Sale:
One year or less $ 3,867,559 $ 3,866,643
1-5 years 19,492,679 19,190,001
5-10 years 12,396,724 11,870,012
After 10 years 1,431,324 1,407,488
Mortgage-backed securities 7,123,818 6,961,048
----------- -----------
44,312,104 43,295,192
----------- -----------
Held to Maturity:
One year or less 2,966,457 2,984,381
1-5 years 14,059,026 14,152,869
5-10 years 19,835,015 19,653,981
After 10 years 7,919,869 7,660,148
----------- -----------
44,780,367 44,451,379
----------- -----------
Total $89,092,471 $87,746,571
----------- -----------
</TABLE>
For the years ended December 31, 1999, 1998 and 1997, proceeds from sales of
securities available for sale amounted to $3,641,476, $986,215 and $10,775,770,
respectively. Gross realized gains amounted to $8,035 in 1998 and gross
realized losses amounted to $76,268 and $27,604 in 1999 and 1997, respectively.
The book value of securities pledged to secure public deposits and other
purposes amounted to $8,851,091 and $7,769,488 at December 31, 1999 and 1998,
respectively.
As permitted under FASB No. 133, the Corporation transferred securities held to
maturity with a book value of $4,466,031 and a market value of $4,608,947 to
securities available for sale as of October 1, 1998.
- --------------------------------------------------------------------------------
Note 3. Loans
The following is a comparison of loans by type which were outstanding at
December 31, 1999 and 1998:
<TABLE>
<CAPTION>
(Thousands) 1999 1998
- -----------------------------------------------------------------
<S> <C> <C>
Real estate-construction $ 8,267 $ 6,096
Real estate-mortgage 152,905 130,856
Commercial real estate 33,103 23,114
Commercial, industrial and agricultural loans 31,003 30,649
Loans to individuals for household, family
and other consumer expenditures 51,890 51,481
All other loans 460 961
-------- --------
Total gross loans 277,628 243,157
Less unearned income and deferred loan fees (3,770) (3,492)
Less allowance for loan losses (4,154) (3,860)
-------- --------
Total net loans $269,704 $235,805
-------- --------
</TABLE>
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES
29
<PAGE>
Notes to Consolidated Financial Statements--Continued
Note 4. Allowance for Loan Losses
The following is a summary of the activity in the allowance for loan losses:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $3,859,996 $3,868,433 $3,642,753
Provisions charged against income 510,000 448,959 412,200
Recoveries of loans charged off 249,824 209,827 458,604
Loans charged off (466,007) (667,223) (645,124)
---------- ---------- ----------
Balance at end of year $4,153,813 $3,859,996 $3,868,433
---------- ---------- ----------
</TABLE>
Information about impaired loans is as follows:
<TABLE>
<CAPTION>
1998
- ------------------------------------------------------------------------------
<S> <C>
Impaired loans for which an allowance
has been provided $ --
Impaired loans for which no
allowance has been provided 216,031
--------
Total impaired loans $216,031
--------
</TABLE>
There were no impaired loans at December 31, 1999. No additional funds are
committed to be advanced in connection with impaired loans.
Nonaccrual loans excluded from impaired loan disclosure under FASB 114 amounted
to $1,821,838 and $1,410,770 at December 31, 1999 and 1998. If interest on
these loans had been accrued such income would have approximated $150,701 and
$78,077, respectively.
- --------------------------------------------------------------------------------
Note 5. Related Party Transactions
Loans to directors and officers totaled $5,654,457 and $4,396,554 at December
31, 1999 and 1998, respectively. New advances to directors and officers totaled
$3,725,609 and repayments totaled $2,467,706 in the year ended December 31,
1999.
- --------------------------------------------------------------------------------
Note 6. Bank Premises and Equipment
A summary of the cost and accumulated depreciation of bank premises and
equipment follows:
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------
<S> <C> <C>
Land and land improvements $1,227,647 $1,110,174
Buildings 4,444,024 4,309,223
Furniture, fixtures and equipment 5,273,045 5,085,269
---------- ----------
10,944,716 10,504,666
Less accumulated depreciation 6,376,392 5,806,982
---------- ----------
$4,568,324 $4,697,684
---------- ----------
</TABLE>
Depreciation and amortization expense amounted to $899,474, $764,667 and
$710,939 for 1999, 1998 and 1997, respectively.
- --------------------------------------------------------------------------------
Note 7. Deposits
The aggregate amount of certificate of deposit with a minimum denomination of
$100,000, was approximately $29,186,107 and $21,417,002 in 1999 and 1998,
respectively.
At December 31, 1999, the scheduled maturities of certificates of deposit were
as follows:
<TABLE>
<S> <C>
2000 $105,686,635
2001 24,843,180
2002 8,997,422
2003 5,063,294
2004 5,703,112
2005 and thereafter 290,167
------------
Total $150,583,810
------------
</TABLE>
- --------------------------------------------------------------------------------
30
<PAGE>
Note 8. Commitments and Contingent Liabilities
In the normal course of business, there are outstanding various commitments and
contingent liabilities, which are not reflected in the accompanying financial
statements. The Corporation does not anticipate any material loss as a result
of these transactions.
See Note 14 with respect to financial instruments with off-balance-sheet risk.
To comply with Federal Reserve Regulations, the Corporation's subsidiary banks
are required to maintain certain average reserve balances. For the final weekly
reporting period in the years ended December 31, 1999 and 1998, the aggregate
amounts of daily average required balances were approximately $784,000 and
$669,000.
- --------------------------------------------------------------------------------
Note 9. Income Taxes
Net deferred tax assets consist of the following components as of December 31,
1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
- ------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Depreciation and amortization $ 189,469 $ 148,944
Deferred loan fees 11,124 27,188
Unrealized loss on available for sale
securities 345,747 --
Allowance for loan losses 1,197,814 1,097,916
Interest on nonaccrual loans 51,238 33,153
Pension liability 6,091 1,353
Other 28,789 4,264
----------- ----------
1,830,272 1,312,818
----------- ----------
Deferred tax liabilities:
Net unrealized gain on available for sale
securities -- 187,946
Deferred loan costs 181,045 163,756
FHLB dividend 7,888 7,888
----------- ----------
188,933 359,590
----------- ----------
Net deferred tax asset $ 1,641,339 $ 953,228
----------- ----------
Income tax expense charged to operations for the years ended December 31, 1999,
1998 and 1997, consists of the following:
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable $ 2,365,021 $1,918,502 $2,005,750
Deferred tax (benefit) (154,418) 169,071 (40,765)
----------- ---------- ----------
$2,210,603 $2,087,573 $1,964,985
----------- ---------- ----------
The income tax provision differs from the amount of income tax determined by
applying the U.S. federal income tax rate to pretax income for the years ended
December 31, 1999, 1998 and 1997, due to the following:
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Expected tax expense at statutory rate $ 2,777,882 $2,619,717 $2,473,952
Increase (decrease) in taxes resulting
from:
Tax-exempt interest (572,918) (541,405) (581,277)
Other 5,639 (22,267) (51,567)
Merger expenses -- 31,528 123,877
----------- ---------- ----------
$ 2,210,603 $2,087,573 $1,964,985
----------- ---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES
31
<PAGE>
Notes to Consolidated Financial Statements--Continued
Note 10. Employee Benefit Plans
The Corporation has a defined benefit pension plan covering substantially all
of the employees. Benefits are based on years of service and the employee's
compensation during the last five years of employment. The Corporation's
funding policy is to contribute annually the maximum amount that can be
deducted for federal income tax purposes. Contributions are intended to provide
not only for benefits attributable to service to date but also for those
expected to be earned in the future. Information about the plan follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Change in Benefit Obligation
Benefit obligation, beginning $4,262,636 $3,458,415 $2,754,328
Service cost 293,394 222,583 194,090
Interest cost 317,051 257,668 204,861
Actuarial loss (gain) (100,964) 402,697 352,743
Benefits paid (81,258) (78,727) (47,607)
---------- ---------- ----------
Benefit obligation, ending 4,690,859 4,262,636 3,458,415
---------- ---------- ----------
Change in Plan Assets
Fair value of plan assets, beginning 3,894,540 3,700,705 2,837,030
Actual return on plan assets 673,179 (48,988) 736,906
Employer contributions 296,053 321,550 174,376
Benefits paid (81,258) (78,727) (47,607)
---------- ---------- ----------
Fair value of plan assets, ending 4,782,514 3,894,540 3,700,705
---------- ---------- ----------
Funded status 91,655 (368,096) 242,290
Unrecognized net actual (gain) loss (343,540) 112,210 (688,435)
Unrecognized net obligation at transition 32,968 36,762 40,556
Unrecognized prior service cost 150,523 164,667 178,811
---------- ---------- ----------
Accrued benefit cost included in other
liabilities $ (68,394) $ (54,457) $ (226,778)
---------- ---------- ----------
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
1999 1998 1997
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Components of Net Periodic Benefit Cost
Service cost $293,394 $222,583 $194,090
Interest cost 317,051 257,668 204,861
Expected return on plan assets (318,393) (331,006) (253,276)
Amortization of prior service cost 14,144 14,144 14,144
Amortization of net obligation at transition 3,794 3,794 3,794
Recognized net actuarial gain -- (17,954) (14,274)
-------- -------- --------
Net periodic benefit cost $309,990 $149,229 $149,339
-------- -------- --------
Weighted-Average Assumptions as of December 31
Discount rate 7.5% 7.5% 7.5%
Expected return on plan assets 9.0% 9.0% 9.0%
Rate of compensation increase 5.0% 5.0% 5.0%
</TABLE>
401(k) Plan
The Corporation has a 401(k) defined contribution plan applicable to all
eligible employees. Contributions to the Plan are made in accordance with
proposals set forth and approved by the Board of Directors. Employees may elect
to contribute to the Plan an amount not to exceed 4% of salary, in addition to
the contribution made by the Corporation.
Contributions to this Plan by the Corporation of $46,827, $41,593, and $71,800
were included in expenses for the years ended December 31, 1999, 1998, and
1997, respectively.
- --------------------------------------------------------------------------------
Note 11. Other Expenses
For the years ended December 31, 1999, 1998 and 1997, other expenses included
the following:
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------
<S> <C> <C> <C>
Data processing $ 223,768 $ 542,873 $ 261,080
Printing supplies and postage 584,237 575,713 505,620
Taxes other than income 204,009 192,957 302,132
Merger costs -- 92,726 364,285
Other 1,619,000 1,556,302 1,469,312
----------- ---------- ----------
$ 2,631,014 $2,960,571 $2,902,429
----------- ---------- ----------
</TABLE>
- --------------------------------------------------------------------------------
Note 12. Restrictions on Transfers to Parent
Transfers of funds from banking subsidiaries to the Parent Corporation in the
form of loans, advances and cash dividends, are restricted by federal and state
regulatory authorities. As of December 31, 1999, there were no unrestricted
funds which could be transferred from the banking subsidiaries to the Parent
Corporation without regulatory approval.
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES
33
<PAGE>
Notes to Consolidated Financial Statements--Continued
Note 13. Federal Home Loan Bank Advances and Available Lines of Credit
The Corporation has available a $29,450,000 line of credit with the Federal Home
Loan Bank of Atlanta. Borrowings are secured by a blanket line on the 1-4 family
dwelling loan portfolio of SSB. At December 31, 1999, SSB had a fixed-rate,
long-term advance of $3,000,000 maturing at $1,000,000 per year in May of 2000
through 2002. The interest rate for the long-term advance was 5.62%. The
Corporation has a $5,000,000 variable rate advance maturing in December 2000.
There were no outstanding borrowings as of December 31, 1998.
The Corporation has unused lines of credit totaling $11,700,000 with
nonaffiliated banks as of December 31, 1999. There were no outstanding
borrowings on these lines of credit as of December 31, 1999.
- --------------------------------------------------------------------------------
Note 14. Financial Instruments with Off-Balance-Sheet Risk
The Corporation is party to credit related financial instruments with off-
balance-sheet risk in the normal course of business to meet the financing needs
of its customers. These financial instruments include commitments to extend
credit and standby letters of credit. Those instruments involve, to varying
degrees, elements of credit and interest rate risk in excess of the amount
recognized in the balance sheet. The contract or notional amounts of those
instruments reflect the extent of involvement the Corporation has in particular
classes of financial instruments.
The Corporation's exposure to credit loss is represented by the contractual
amount of these commitments. The Corporation uses the same credit policies in
making commitments and conditional obligations as it does for on-balance-sheet
instruments.
At December 31, 1999 and 1998, the following financial instruments were
outstanding whose contract amounts represent credit risk:
<TABLE>
<CAPTION>
Contract Amount
---------------
(Thousands) 1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Commitments to grant loans and
unfunded commitments under lines of credit $33,757 $22,151
Standby letters of credit $ 744 $ 740
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. The commitments for equity lines of credit may expire
without being drawn upon. Therefore, the total commitment amounts do not nece
ssarily represent future cash requirements. The amount of collateral obtained,
if it is deemed necessary by the Corporation, is based on management's credit
evaluation of the customer.
Unfunded commitments under commercial lines of credit, revolving credit lines
and overdraft protection agreements are commitments for possible future
extensions of credit to existing customers. These lines of credit are usually
uncollateralized and do not always contain a specified maturity date and may
not be drawn upon to the total extent to which the Corporation is committed.
Standby letters of credit are conditional commitments issued by the Corporation
to guarantee the performance of a customer to a third party. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Corporation generally holds
collateral supporting those commitments if deemed necessary.
The Corporation maintains cash accounts in other commercial banks. The amount
on deposit with correspondent institutions at December 31, 1999, exceeded the
insurance limits of the Federal Deposit Insurance Corporation by $3,919,523.
- --------------------------------------------------------------------------------
34
<PAGE>
Note 15. Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate
that value.
Cash and Short-Term Investments
For those short-term instruments, the carrying amount is a reasonable estimate
of fair value.
Securities
For securities and marketable equity securities held for investment purposes,
fair values are based on quoted market prices or dealer quotes. For other
securities held as investments, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
Loans
For variable-rate loans that reprice frequently and with no significant change
in credit risk, fair values are based on carrying values. The fair values for
other loans were estimated using discounted cash flow analyses, using interest
rates currently being offered.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain money market
deposits is the amount payable on demand at the
reporting date. The fair value of fixed-maturity certificates of deposit is
estimated using market rates for deposits of similar remaining maturities.
Short-Term Borrowings
The carrying amounts of federal funds purchased and other short-term borrowings
maturing within 90 days approximate their fair values. Fair values of other
short-term borrowings are estimated using discounted cash flow analyses based on
the Corporation's current incremental borrowing rates for similar types of
borrowing arrangements.
Long-Term Debt
The fair values of the Corporation's long-term borrowings are estimated using
discounted cash flow analyses based on the Corporation's current incremental
borrowing rates for similar types of borrowing arrangements.
Accrued Interest
The carrying amounts of accrued interest approximate fair value.
Off-Balance-Sheet Financial Instruments
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter similar agreements, taking into account the
remaining terms of the agreements and the present credit worthiness of the
counterparties. For fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the committed rates.
The fair value of standby letters of credit is based on fees currently charged
for similar agreements or on the estimated cost to terminate them or otherwise
settle the obligations with the counterparties at the reporting date.
At December 31, 1999 and 1998, the carrying amounts and fair values of loan
commitments and standby letters of credit were immaterial.
(continued on page 36)
EASTERN VIRGINIA BANKSHARES
35
<PAGE>
Notes to Consolidated Financial Statements--Continued
The estimated fair values and related carrying amounts of the Corporation's
financial instruments are as follows:
<TABLE>
<CAPTION>
December 31, 1999 December 31, 1998
------------------- -------------------
Carrying Estimated Carrying Estimated
(Thousands) Amount Fair Value Amount Fair Value
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments $10,258 $10,258 $21,522 $21,522
Securities - available for sale 43,295 43,295 42,000 42,000
Securities - held to maturity 44,780 44,451 39,333 40,308
Loans 269,704 273,300 235,805 244,182
Accrued interest receivable 2,582 2,582 2,423 2,423
Financial liabilities:
Noninterest-bearing deposits 32,816 32,816 33,216 33,216
Interest-bearing deposits 289,831 288,724 271,114 271,969
Federal funds purchased 1,468 1,468 -- --
Federal Home Loan Bank advances 5,000 5,000 -- --
Long-term debt 3,000 2,974 -- --
Accrued interest payable 795 795 741 741
- ------------------------------------------------------------------------
</TABLE>
Note 16. Regulatory Matters
The Corporation (on a consolidated basis) and the subsidiary banks are subject
to various regulatory capital requirements administered by the federal banking
agencies. Failure to meet minimum capital requirements can initiate certain
mandatory and possibly additional discretionary actions by regulators that, if
undertaken, could have a direct material effect on the Corporation's and
subsidiary banks' financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Corporation and the
subsidiary banks must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Prompt corrective action
provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation and subsidiary banks to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier 1 capital (as defined)
to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to
average assets (as defined). Management believes, as of December 31, 1999 and
1998, that the Corporation meets all capital adequacy requirements to which it
is subject.
As of December 31, 1999, the most recent notification from the Federal Reserve
Bank categorized the subsidiary banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the institutions must maintain minimum total risk-based, Tier 1 risk-based, and
Tier 1 leverage ratios as set forth in the following table. There are no
conditions or events since that notification that management believes have
changed the institution's category.
36
<PAGE>
The Corporation's actual capital amounts and ratios are presented in the table.
<TABLE>
<CAPTION>
Actual For Capital Adequacy Purposes
------------- --------------------------------------------------
(Amounts in
Thousands) Amount Ratio Amount Ratio
- -----------------------------------------------------------------------------------
As of December
31, 1999:
- --------------
<S> <C> <C> <C> <C>
Total Capital
(to Risk
Weighted
Assets)
Consolidated $46,503 19.24% (greater than or =)$19,339 (greater than or =)8.00%
SSB $16,718 10.97% (greater than or =)$12,189 (greater than or =)8.00%
BNI $14,437 16.09% (greater than or =)$ 7,179 (greater than or =)8.00%
Tier 1 Capital
(to Risk
Weighted
Assets)
Consolidated $43,467 17.98% (greater than or =)$ 9,669 (greater than or =)4.00%
SSB $11,802 7.75% (greater than or =)$ 6,094 (greater than or =)4.00%
BNI $ 9,313 10.38% (greater than or =)$ 3,589 (greater than or =)4.00%
Tier 1 Capital
(to
Average Assets)
Consolidated $43,467 11.98% (greater than or =)$14,509 (greater than or =)4.00%
SSB $11,802 5.22% (greater than or =)$ 9,049 (greater than or =)4.00%
BNI $ 9,313 6.12% (greater than or =)$ 6,084 (greater than or =)4.00%
<CAPTION>
As of December
31, 1998:
- --------------
<S> <C> <C> <C> <C>
Total Capital
(to Risk
Weighted
Assets)
Consolidated $44,614 20.59% (greater than or =)$17,330 (greater than or =)8.00%
SSB $13,308 9.94% (greater than or =)$10,716 (greater than or =)8.00%
BNI $11,568 14.01% (greater than or =)$ 6,606 (greater than or =)8.00%
Tier 1 Capital
(to Risk
Weighted
Assets)
Consolidated $41,892 19.34% (greater than or =)$ 8,665 (greater than or =)4.00%
SSB $11,623 8.68% (greater than or =)$ 5,358 (greater than or =)4.00%
BNI $10,533 12.76% (greater than or =)$ 3,303 (greater than or =)4.00%
Tier 1 Capital
(to
Average Assets)
Consolidated $41,892 12.39% (greater than or =)$13,520 (greater than or =)4.00%
SSB $11,623 5.91% (greater than or =)$ 7,865 (greater than or =)4.00%
BNI $10,533 7.56% (greater than or =)$ 5,572 (greater than or =)4.00%
<CAPTION>
To Be Well Capitalized Under Prompt Corrective
Action Provisions
--------------------------------------------------------
(Amounts in
Thousands) Amount Ratio
- -----------------------------------------------------------------------------------
As of December
31, 1999:
- --------------
<S> <C> <C> <C>
Total Capital
(to Risk
Weighted
Assets)
Consolidated N/A
SSB (greater than or =)$15,236 (greater than or =)10.00%
BNI (greater than or =)$ 8,973 (greater than or =)10.00%
Tier 1 Capital
(to Risk
Weighted
Assets)
Consolidated N/A
SSB (greater than or =)$ 9,142 (greater than or =)6.00%
BNI (greater than or =)$ 5,384 (greater than or =)6.00%
Tier 1 Capital
(to
Average Assets)
Consolidated N/A
SSB (greater than or =)$11,312 (greater than or =)5.00%
BNI (greater than or =)$ 7,606 (greater than or =)5.00%
<CAPTION>
As of December
31, 1998:
- --------------
<S> <C> <C> <C>
Total Capital
(to Risk
Weighted
Assets)
Consolidated N/A
SSB (greater than or =)$13,395 (greater than or =)10.00%
BNI (greater than or =)$ 8,257 (greater than or =)10.00%
Tier 1 Capital
(to Risk
Weighted
Assets)
Consolidated N/A
SSB (greater than or =)$ 8,037 (greater than or =)6.00%
BNI (greater than or =)$ 4,954 (greater than or =)6.00%
Tier 1 Capital
(to
Average Assets)
Consolidated N/A
SSB (greater than or =)$ 9,831 (greater than or =)5.00%
BNI (greater than or =)$ 6,965 (greater than or =)5.00%
</TABLE>
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES
37
<PAGE>
Notes to Consolidated Financial Statements--Continued
Note 17. Condensed Financial Information
EASTERN VIRGINIA BANKSHARES, INC.
(Parent Corporation Only)
Balance Sheets
<TABLE>
<CAPTION>
December 31
-------------------------
1999 1998
- ------------------------------------------------------------
<S> <C> <C>
Assets
Cash on deposit with subsidiary
banks $ 15,688,413 $19,726,946
Subordinated debt in subsidiaries 7,000,000 --
Investment in subsidiaries 20,444,056 22,521,378
Other assets 34,917 60,028
------------ -----------
Total assets $ 43,167,386 $42,308,352
------------ -----------
Liabilities and Shareholders'
Equity
Liabilities $ 372,019 $ 51,687
------------ -----------
Shareholders' Equity
Common stock 10,064,526 10,285,668
Capital surplus 2,013,760 3,729,504
Retained earnings 31,388,237 27,876,655
Accumulated other comprehensive
income (loss) (671,156) 364,838
------------ -----------
Total shareholders' equity 42,795,367 42,256,665
------------ -----------
Total liabilities and
shareholders' equity $ 43,167,386 $42,308,352
------------ -----------
</TABLE>
Statements of Income
<TABLE>
<CAPTION>
For the Years Ended December 31
--------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Income:
Dividends from subsidiaries $ 7,000,000 $ 6,995,376 $ 15,607,651
Interest from subsidiaries 438,500 474,353 --
Miscellaneous income 8 29,650 --
----------- ----------- ------------
7,438,508 7,499,379 15,607,651
----------- ----------- ------------
Expenses:
Management fees 185,600 332,800 --
Miscellaneous 251,941 170,866 --
----------- ----------- ------------
437,541 503,666 --
----------- ----------- ------------
Net income before distributions in
excess of earnings of subsidiaries 7,000,967 6,995,713 15,607,651
Distributions in excess of earnings of
subsidiaries (1,041,328) (1,378,237) (10,299,857)
----------- ----------- ------------
Net income $ 5,959,639 $ 5,617,476 $ 5,307,794
----------- ----------- ------------
</TABLE>
38
<PAGE>
EASTERN VIRGINIA BANKSHARES, INC.
(Parent Corporation Only)
Statements of Cash Flows
<TABLE>
<CAPTION>
For the Years Ended December 31
---------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net income $ 5,959,639 $ 5,617,476 $ 5,307,794
Adjustments to reconcile net income
to net cash provided by operating
activities:
Distributions in excess of earnings
of subsidiaries 1,041,328 1,378,237 10,299,857
Decrease (increase) in other assets 25,111 (60,028) --
Increase in other liabilities 320,332 51,687 --
------------ ----------- ------------
Net cash provided by operating
activities 7,346,410 6,987,372 15,607,651
------------ ----------- ------------
Cash Flows from Financing Activities
Subordinated debt to subsidiary banks (7,000,000) -- --
Dividends paid (2,448,057) (2,276,164) --
Cash paid in lieu of fractional
shares -- -- (9,130)
Shares repurchased and retired (1,936,886) (582,783) --
------------ ----------- ------------
Net cash (used in) financing
activities (11,384,943) (2,858,947) (9,130)
------------ ----------- ------------
Increase (decrease) in cash and cash
equivalents (4,038,533) 4,128,425 15,598,521
Cash and Cash Equivalents, beginning
of year 19,726,946 15,598,521 --
------------ ----------- ------------
Cash and Cash Equivalents, end of year $ 15,688,413 $19,726,946 $ 15,598,521
------------ ----------- ------------
</TABLE>
- --------------------------------------------------------------------------------
EASTERN VIRGINIA BANKSHARES
39
<PAGE>
Independent Auditor's Report
Logo appears here
To the Board of Directors and Stockholders
Eastern Virginia Bankshares, Inc. and Subsidiaries
Tappahannock, Virginia
We have audited the accompanying consolidated balance sheets of Eastern
Virginia Bankshares, Inc. and Subsidiaries as of December 31, 1999 and 1998,
and the related consolidated statements of income, shareholders' equity and
cash flows for the years ended December 31, 1999, 1998 and 1997. These
financial statements are the responsibility of the Corporation's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Eastern Virginia
Bankshares, Inc. and Subsidiaries as of December 31, 1999 and 1998, and the
results of their operations and their cash flows for the years ended December
31, 1999, 1998 and 1997, in conformity with generally accepted accounting
principles.
Logo appears here
Winchester, Virginia
January 7, 2000
- --------------------------------------------------------------------------------
40
<PAGE>
Directors
Eastern Virginia Bankshares
Robert L. Covington
Chairman of the Board
F. L. Garrett, III
Vice Chairman
Thomas M. Boyd, Jr.
President and Chief Executive Officer
Lewis R. Reynolds
Executive Vice President
L. Edelyn Dawson, Jr.
Secretary
Eric A. Johnson
General Manager,
Mason Realty
William L. Lewis
Attorney,
Lewis & Ware, P.C.
W. Rand Cook
Attorney,
McCaul, Martin, Evans & Cook, P.C.
F. Warren Haynie, Jr.
Attorney,
F. Warren Haynie, Jr. P.C.
- --------------------------------------------------------------------------------
Bank of Northumberland
Robert L. Covington
Chairman of the Board of the Bank
S. Lake Cowart, Sr.
President,
Cowart Seafood, Inc.,
Lake Packing Company, Inc.,
and Lake Farms, Inc.
L. Edelyn Dawson, Jr.
Senior Vice President of the Bank
F. Warren Haynie, Jr.
Attorney,
F. Warren Haynie, Jr., P.C.
Lewis R. Reynolds
President and Chief Executive Officer
Charles R. Rice
Retired Petroleum Products Distributor
William E. Sanford, Jr.
Real Estate Developer and Retired Farmer
Howard R. Straughan, Jr.
Retired Banker
W. Leslie Kilduff
Retired Petroleum Products Distributor
- --------------------------------------------------------------------------------
Southside Bank
E. Gary Ball
Vice President,
Ball Lumber Company
Thomas M. Boyd, Jr.
President and Chief Executive Officer
Southside Bank
W. Rand Cook
Attorney,
McCaul, Martin, Evans & Cook, P.C.
W. Gerald Cox
President
Twin Rivers Realty, Inc.
F. L. Garrett, III
Oysterman and Realtor
Eric A. Johnson
General Manager,
Mason Realty
William L. Lewis
Attorney,
Lewis & Ware, P.C.
William W. Lowery, III
Part Owner,
Lowery's Restaurant
Lawrence R. Moter, M.D.
Physician
J. Thomas Newman
Retired Sr. Vice President,
Southside Bank
Charles R. Revere
President,
Revere Gas & Appliance
Leslie E. Taylor
President,
Leslie E. Taylor, C.P.A., P.C.
Emmett Upshaw
Clerk, Circuit Court
King William County
- --------------------------------------------------------------------------------
Franklin Y. Hundley
1915-1999
It is with great sorrow that we report the death of Franklin Y. Hundley, member
of the Board of Directors for 33 years. We have lost a conscientious member and
a friend.
EASTERN VIRGINIA BANKSHARES
41
<PAGE>
Officers
Eastern Virginia Bankshares
Thomas M. Boyd, Jr.
President and Chief Executive Officer
Robert L. Covington
Chairman of the Board
L. Edelyn Dawson, Jr.
Secretary
F. L. Garrett, III
Vice Chairman
Lewis R. Reynolds
Executive Vice President
Ned Stephenson
Chief Financial Officer
- --------------------------------------------------------------------------------
Bank of Northumberland
Sylvia O. Bartlett
Assistant Vice President
Lisa K. Baughan
Assistant Vice President
Robert L. Covingtgon
Chairman of the Board
L. Edelyn Dawson, Jr.
Senior Vice President
Joyce W. Hall
Assistant Cashier
Rebecca H. Haynie
Assistant Cashier
W. Leslie Kilduff
Vice President
Dorothy C. Reynolds
Cashier & Assistant Secretary
Lewis R. Reynolds
President and Chief Executive Officer
Charles R. Thrift, Jr.
Vice President
- --------------------------------------------------------------------------------
Southside Bank
Patricia H. Barrett
Vice President
Training and Human Resources Officer
Tappahanock
Thomas M. Boyd, Jr.
President and Chief Executive Officer
Patsy C. Clow
Assistant Vice President
Branch Manager
Bowling Green
Carolyn H. Elliott
Assistant Operations Officer
Tappahannock
Dennis W. Elmore
Vice President
Branch Operations
Tappahannock
Rick A. Fulk
Assistant Vice President
Gloucester
F. L. Garrett, III
Chairman
Patricia H. Gallagher
Administrative Officer
Tappahannock
Gertrude C. Hand
Teller Coordination Officer
Tappahannock
Virginia S. Hogge
Assistant Branch Manager
Assistant Cashier
Urbanna
Betsy G. Hudgins
Assistant Branch Manager
Assistant Cashier
Hartfield
C. Tony Hudson
Vice President/Sr. Loan Officer
Branch Administrator
Tappahannock
Edwin P. Jones
Assistant Vice President
Branch Manager
Aylett
Cellta S. Lane
Assistant Branch Manager
Hanover
Wiliam B. Littreal
Vice President of Operations
Tappahannock
Larry L. Lucas
Assistant Vice President
Branch Manager
Hartfield
Thomas J. McKittrick, III
Assistant Vice President
Branch Manager
Hanover
Betty R. Miller
Assistant Vice President
Branch Manager
Urbanna
John L. Muller
Vice President/Manager
Tappahannock Region
Marketing Director
Tappahannock
William E. Saunders, Jr.
Vice President Operations
Tappahannock
Sheilah E. Seal
Assistant Branch Manager
Aylett
Mae W. Staton
Assistant Vice President
Branch Manager
Essex Square
Clay S. Smith
Assistant Branch Manager
Bowling Green
Kavan W. Snow
Assistant Vice President
Branch Manager
Deltaville
N. Diane Struse
Assistant Branch Manager
Gloucester
Ned Stephenson
Vice President/Cashier
Chief Financial Officer
Tappahannock
Betty M. Vaughan
Assistant Vice President
Loan Officer
Tappahannock
- --------------------------------------------------------------------------------
42
<PAGE>
[MAP]
EASTERN VIRGINIA BANKSHARES
43
<PAGE>
Stockholder Information
Corporate Headquarters
Eastern Virginia Bankshares, Inc
307 Church Lane P.O. Box 1005
Tappahannock, VA 22560-1005
- --------------------------------------------------------------------------------
Annual Meeting
The Annual Meeting of Stockholders will be held Thursday, April 20, 2000, at
9:30 A.M. at Saint Margaret's School, 444 Water Lane, Tappahannock, Virginia.
All shareholders are cordially invited to attend.
- --------------------------------------------------------------------------------
Common Stock
Eastern Virginia Bankshares common stock is traded on the NASDAQ Small Cap
Market under the symbol EVBS. On December 31, 1998 there were approximately
2,000 shareholders. The CUSIP number is 277196101.
- --------------------------------------------------------------------------------
Common Stock Performance and Dividends
Eastern Virginia Bankshares, Inc. commenced operations on December 29, 1997,
with the acquisition of Southside Bank and Bank of Northumberland, Inc., and
its common stock began trading on the NASDAQ Small Cap market on January 5,
1998. Prior to the commencement of operations by EVB, shares of the banks
traded in private transactions. There was no known market in the Corporation's
common stock from the December 29, 1997 effective date until January 5, 1998.
The SEC's Office of the Chief Accountant has advised EVB management that based
on the lack of a market for the Corporation's common stock prior to January 5,
1998, providing trading history for the predecessor companies would not be
appropriate.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Common Stock Price Dividends Declared
--------------------------------- --------------------
1999 1998
High Low High Low 1999 1998 1997
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------- --------------------
First quarter $ 18.75 $16.50 $ 22.50 $17.50 $ 0.12 $ 0.11
Second quarter 19.25 16.00 22.00 20.50 0.12 0.11 .120
Third quarter 22.75 16.00 21.75 16.50 0.12 0.11
Fourth quarter 21.69 17.06 20.00 15.75 0.12 0.11 .215
Years ended December 31 22.75 16.00 22.50 15.75 $ 0.48 $ 0.44 $ 0.34
- -------------------------------------------------------------------------------
At December 31, Closing
Price $19.00 $17.50
Common shares
outstanding 5,032,263 5,142,834
</TABLE>
- --------------------------------------------------------------------------------
Investor Relations
Eastern Virginia Bankshares' Annual Report, Form 10-K and other corporate
publications are available to shareholders on request without charge, by
writing:
Ned Stephenson, Vice President & Chief Financial Officer
Eastern Virginia Bankshares, Inc.
P.O. Box 1005
Tappahannock, VA 22560
(804) 443-4333
Fax 804/443-1271
- --------------------------------------------------------------------------------
Transfer Agent
Shareholders requiring information on stock transfer requirements, lost
certificates, dividends and other shareholder matters should contact our
transfer agent:
Southside Bank
Stock Transfer Department
P.O. Box 1005
Tappahannock, VA 22560
804/443-4333
Internet: http://www.southsidebank.com
- --------------------------------------------------------------------------------
Independent Auditors
Yount, Hyde & Barbour, P.C.
50 South Cameron Street
Winchester, VA 22604
- --------------------------------------------------------------------------------
44
<TABLE> <S> <C>
<PAGE>
<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> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 10,258
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 43,295
<INVESTMENTS-CARRYING> 44,780
<INVESTMENTS-MARKET> 44,451
<LOANS> 273,858
<ALLOWANCE> 4,154
<TOTAL-ASSETS> 377,839
<DEPOSITS> 322,647
<SHORT-TERM> 6,468
<LIABILITIES-OTHER> 2,928
<LONG-TERM> 3,000
0
0
<COMMON> 10,065
<OTHER-SE> 32,730
<TOTAL-LIABILITIES-AND-EQUITY> 377,839
<INTEREST-LOAN> 22,612
<INTEREST-INVEST> 4,570
<INTEREST-OTHER> 455
<INTEREST-TOTAL> 27,637
<INTEREST-DEPOSIT> 11,734
<INTEREST-EXPENSE> 11,867
<INTEREST-INCOME-NET> 15,770
<LOAN-LOSSES> 510
<SECURITIES-GAINS> (76)
<EXPENSE-OTHER> 8,813
<INCOME-PRETAX> 8,170
<INCOME-PRE-EXTRAORDINARY> 5,960
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,960
<EPS-BASIC> 1.17
<EPS-DILUTED> 1.17
<YIELD-ACTUAL> 4.53
<LOANS-NON> 1,822
<LOANS-PAST> 1,345
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,120
<ALLOWANCE-OPEN> 3,860
<CHARGE-OFFS> 466
<RECOVERIES> 250
<ALLOWANCE-CLOSE> 4,154
<ALLOWANCE-DOMESTIC> 4,154
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
