- --------------------------------------------------------------------------------
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, 2000
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 1, 2000 was approximately $72,085,309. The number of
shares of the registrant's Common Stock outstanding as of March 1, 2001was
4,928,910.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated March 26, 2001 to be delivered
to shareholders in connection with the Annual Meeting of Shareholders to be held
April 19, 2001 are incorporated by reference into Part III.
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1
EASTERN VIRGINIA BANKSHARES, INC.
FORM 10-K
For the Year Ended December 31, 2000
INDEX
Part I
- ------
Item 1. Business 3
Item 2. Properties 3
Item 3. Legal Proceedings 3
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 4
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 16
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 18
Part III
- --------
Item 10. Directors and Executive Officers of the Registrant 18
Item 11. Executive Compensation 19
Item 12. Security Ownership of Certain Beneficial Owners and Management 19
Item 13. Certain Relationships and Related Transactions 19
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 20
Signatures 21
2
PART 1
Item 1. Business
--------
General
Eastern Virginia Bankshares, Inc. (the "Corporation" 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. The
Corporation owns all of the stock of its subsidiaries - Bank of Northumberland
Inc., Hanover Bank, and Southside Bank. Bank of Northumberland, Inc. and
Southside Bank were chartered as state banks under the laws of the Commonwealth
of Virginia in 1910. Hanover Bank was chartered as a state bank in 2000.
The remainder of the response to this Item is incorporated by reference to the
information under the caption "To Our Stockholders" in EVB's Annual Report to
Shareholders.
Employees
As of December 31, 2000, the Corporation and its subsidiary banks employed 147
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 Corporation 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 EVB operations center. The three
subsidiary banks own 13 full service branch buildings including the land on
which 12 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 and Hanover County house two branches each (one of which in
Hanover is leased) while King William County, Caroline County, Lancaster 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, 2000, 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 2000.
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters
--------------------------------------------------------------------
The information titled "Common Stock Performance and Dividends" set forth on
page 44 of the 2000 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 2000 Annual Report to Shareholders is
incorporated herein by reference and filed herewith as Exhibit 13.2.
3
Item 7. 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 (EVB) reported a decrease in net income and earnings
per share for the year ended December 31, 2000 as it focused on long-term
strategic initiatives. Two initiatives discussed in the 1999 Annual Report were
successfully implemented in the first half of 2000, as the imaging system came
online in January, and a third banking subsidiary, Hanover Bank, opened in May.
Combined these two strategic moves had an estimated negative impact of $700
thousand or 14 cents per share on Year 2000 net income. Although these major
initiatives, with their short-term negative earnings impact, interrupted the
Corporation's history of earnings growth, they are projected to be in the best
interest of shareholders in producing long-term growth and value. Additionally
the Corporation was not immune to the effects of a difficult interest rate
environment that placed pressure on net interest income throughout most of the
nation's banking industry. EVB's net interest margin decreased 25 basis points
from 4.78% in 1999 to 4.53% in 2000.
Results of Operations
Net income decreased 7.4% in 2000 to $5.52 million from $5.96 million in 1999
and 5.62 million in 1998. Earnings per share decreased 4.3% to $1.12, compared
to $1.17 and $1.08 for 1999 and 1998 respectively. The decrease in net income
in 2000 was the result of net interest margin pressures, expense increases
related to the opening of Hanover Bank and implementation of an imaging system.
Profitability, as measured by EVB's return on average equity was 12.94%, a
decrease from 1999's 13.95%. Return on average assets was 1.40%, a decrease from
the prior year's 1.64%. Return on average assets remains strong relative to the
Corporation's peer group average of 1.14%, (based on latest data available)
while return on equity remains in line with the peer group average of 12.50%.
The Corporation repurchased 102 thousand shares of its common stock in the early
months of 2000 under a share repurchase program announced by the Board in
November,1998. The Corporation halted the share repurchase program and filed a
limited offering of shares with the Securities and Exchange Commission related
to the opening of Hanover Bank in May, 2000. That limited offering which
resulted in the issuance of 18 thousand shares in the Hanover market was
completed in December, 2000, and the Board announced the resumption of a share
repurchase program in January, 2001. 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 to 4.53% in 2000, as
compared to 4.78% in 1999 and 4.83% in 1998. However, changes in volume exceeded
changes in rates, generating an additional $445 thousand of net interest income
in 2000 and $946 thousand in 1999.
The Corporation continued to experience strong, but moderating loan demand,
throughout 2000, with particularly strong demand in its consumer loan portfolio.
Net loans outstanding at year end were up 10.0% compared to 1999 year end and
average loans outstanding for the year increased 11.6% from the 1999 average.
The consumer loan portfolio increased 18.5% while the higher interest rate
environment moderated real estate loan demand to 7.5% growth.
EVB's efficiency ratio, a measure of performance based upon the relationship
between noninterest expense and income net of securities gains and losses,
continues to compare favorably to other Virginia financial institutions. The
Corporation's efficiency ratio for 2000 deteriorated to 53.63% compared to
1999's outstanding 47.83%. 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. EVB's decline in efficiency ratio was impacted by both the
decrease in net interest margin and the noninterest expense increases related to
the Hanover Bank startup and the imaging system implementation.
4
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.
SUMMARY OF FINANCIAL RESULTS BY QUARTER
Three Months Ended
----------------------------------------------------------------------
2000 1999
---------------------------------- ----------------------------------
Dec. 31 Sep. 30 June 30 Mar. 31 Dec. 31 Sep. 30 June 30 Mar. 31
------- ------- ------- ------- ------- ------- ------- -------
Interest income $7,997 $7,766 $ 7,610 $7,355 $7,205 $7,004 $6,787 $6,641
Interest expense 3,919 3,769 3,523 3,302 3,104 3,039 2,866 2,858
------ ------ ------- ------ ------ ------ ------ ------
Net interest income 4,078 3,997 4,087 4,053 4,101 3,965 3,921 3,783
Provision for loan losses 249 127 139 132 138 144 114 114
------ ------ ------- ------ ------ ------ ------ ------
Net interest income after
provision for loan losses 3,829 3,870 3,948 3,921 3,963 3,821 3,807 3,669
Noninterest income 654 533 548 490 425 482 403 413
Noninterest expense 2,847 2,551 2,508 2,440 2,366 2,228 2,109 2,110
------ ------ ------- ------ ------ ------ ------ ------
Income before income taxes 1,636 1,852 1,988 1,971 2,022 2,075 2,101 1,972
Applicable income taxes 395 471 576 484 547 606 563 494
------ ------ ------- ------ ------ ------ ------ ------
Net income $1,241 $1,381 $ 1,412 $1,487 $1,475 $1,469 $1,538 $1,478
================================= =================================
Net income per share,
basic and diluted $ 0.25 $ 0.28 $ 0.29 $ 0.30 $ 0.29 $ 0.29 $ 0.30 $ 0.29
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 on the
following page 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 reflects changes in interest income and interest expense
resulting from changes in average volume and average rates.
Tax-equivalent net interest income increased 2.6% in 2000 to $17.1 million from
$16.6 million in 1999. Average loan growth of 11.6% was the primary factor in
the increase in net interest income and in achieving a net interest margin of
4.53%, a 25 basis point decline from 4.78% in 1999. Yield on earning assets
increased 19 basis points to 8.38% in 2000 from 8.19% in 1999, while the cost of
interest bearing funds increased 47 basis points from 4.19% in 1999 to 4.66 % in
2000. Although average earning assets were up 8.2% with a yield increase of
0.19%, interest rate pressure increased cost of funds by a much greater 0.47% as
depositors moved funds from lower rate savings and money market accounts to
higher cost certificates of deposit. At times, the Corporation found it more
cost effective to increase its borrowings from the Federal Home Loan Bank rather
than to seek unprofitable high interest rate deposits.
Average earning asset growth of 8.2% resulted from increases in average loans
outstanding of 11.6% and average securities of 1.6%. Growth in the loan and
securities portfolios was partially funded by a 26.9% 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 2000 provided an
environment in which interest rates were generally well above those in 1999 for
most of the year, with that trend beginning to reverse in the fourth quarter.
5
In 1999, net interest income on a tax equivalent basis increased 6.3% 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 producing 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 earning asset yield and cost of funds
was successful as yield and cost decreased by 30 and 32 basis points,
respectively.
Average Balance, Income and Expense, Yields and Rates (1)
Twelve Months Ended December 31
------------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- --------------------------- ----------------------------
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
(Dollars in thousands) Balance Expense Rate Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------------
Assets:
Securities
Taxable $ 42,838 $ 2,808 6.55% $ 40,574 $ 2,626 6.47% $ 40,949 $ 2,636 6.44%
Tax-exempt (1) 39,603 2,755 6.96% 40,571 2,804 6.91% 35,961 2,668 7.42%
-------- ------- -------- ------- -------- -------
Total securities 82,441 5,563 6.75% 81,145 5,430 6.69% 76,910 5,304 6.90%
Federal funds sold 6,679 437 6.54% 9,137 455 4.98% 14,121 769 5.45%
Loans (net of unearned income) (2) 287,729 25,571 8.89% 257,876 22,612 8.77% 232,605 21,412 9.21%
-------- ------- -------- ------- -------- -------
Total earning assets 376,849 31,571 8.38% 348,158 28,497 8.19% 323,636 27,485 8.49%
Less allowance for loan losses (4,296) (4,020) (3,947)
Total non-earning assets 20,430 18,584 18,311
-------- -------- --------
Total assets $392,983 $362,722 $338,000
======== ======== ========
Liabilities & Shareholder's equity
Interest-bearing deposits:
Checking $ 40,545 $ 1,023 2.52% $ 36,546 $ 902 2.47% $ 31,608 829 2.62%
Savings 67,477 2,653 3.93% 72,953 2,696 3.70% 69,157 2,866 4.14%
Money market savings 25,942 860 3.32% 27,402 866 3.16% 28,518 954 3.35%
Certificates of deposit:
$100,000 and over 34,040 2,009 5.90% 24,801 1,300 5.24% 17,490 970 5.55%
Less than $100,000 133,673 7,373 5.52% 118,938 5,970 5.02% 116,073 6,227 5.36%
-------- ------- -------- ------- -------- -------
Total interest-bearing deposits 301,677 13,918 4.61% 280,640 11,734 4.18% 262,846 11,846 4.51%
Short-term borrowings 3,531 224 6.34% 409 23 5.62% - - -
Long-term debt 6,320 371 5.87% 1,923 110 5.72% - -
-------- ------- -------- ------- -------- -------
Total interest-bearing liabilities 311,528 14,513 4.66% 282,972 11,867 4.19% 262,846 11,846 4.51%
Non-interest bearing liabilities:
Demand deposits 35,160 33,903 30,739
Other liabilities 3,641 3,127 2,989
-------- -------- --------
Total liabilities 350,329 320,002 296,574
Shareholders' equity 42,654 42,720 41,426
-------- -------- --------
Total liabilities & shareholders' equity $392,983 $362,722 $338,000
======== ======== ========
Net interest income $17,058 $16,630 $15,639
======= ======= =======
Interest rate spread (3) 3.72% 4.00% 3.98%
Interest expense as a percent of
average earning assets 3.85% 3.41% 3.66%
Net interest margin (4) 4.53% 4.78% 4.83%
Notes:
(1) Income and yields are reported on a tax equivalent basis assuming a federal
tax rate of 34%.
(2) Nonaccruing loans have been included in the computations of average loan
balances
(3) Interest rate spread is the average yield on earning assets, calculated on a
fully taxable basis, less the average rate incurred on interest-bearing
liabilities.
(4) Net interest margin is the net interest income, calculated on a fully
taxable basis assuming a federal income tax rate of 34%, expressed as a
percentage of average earning assets.
6
VOLUME AND RATE ANALYSIS
2000 vs. 1999 1999 vs. 1998
Increase Increase
(Decrease) (Decrease)
Due to Changes in: Due to Changes in:
---------------------------- -----------------------------
Volume Rate Total Volume Rate Total
- ---------------------------------------------------------------------------- -----------------------------
Earning Assets:
Taxable securities $ 149 $ 33 $ 182 $ (19) $ 13 $ (6)
Tax exempt securities (69) 20 (49) 347 (211) 136
Loans, (net) 2,618 341 2,959 2,333 (1,133) 1,200
Federal funds sold (122) 104 (18) (271) (43) (314)
Interest-bearing deposits-other banks - - - (4) - (4)
------ ------ ------ ------ ------- ------
Total earning assets 2,576 498 3,074 2,386 (1,374) 1,012
Interest-Bearing Liabilities:
Interest checking 101 21 122 128 (55) 73
Regular savings & clubs (215) 172 (43) 157 (327) (170)
Money market savings (46) 40 (6) (37) (51) (88)
Certificates of deposit:
$100,000 and over 545 164 709 407 (77) 330
Less than $100,000 807 595 1,402 154 (411) (257)
Borrowings 454 8 462 133 - 133
------ ------ ------ ------ ------- ------
Total interest-bearing liabilities 1,646 1,000 2,646 942 (921) 21
------ ------ ------ ------ ------- ------
Change in net interest income: $ 930 $ (502) $ 428 $1,444 $ (453) $ 991
========================= =========================
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.
7
Noninterest Income
Noninterest income increased by $502 thousand (29.1%) from $ 1.72 million in
1999 to $2.23 million in 2000. Service charges, the largest source of
noninterest income, increased $358 thousand (25.3%) from $1.41 million in 1999
to $1.77 million in 2000. Other operating income increased $78 thousand (20.2%)
from $386 thousand in 1999 to $464 thousand in 2000, primarily the result of an
increase of $63 thousand in gains on sale of other real estate owned. Other
operating income includes gain on sale of other real estate, credit life
premiums, ATM fees charged to foreign users, safe deposit box fees, and other
miscellaneous income. Realized gain/(loss) on sale of securities was an
important factor in the increase in noninterest income as the Corporation
reported a $10 thousand loss in 2000, compared to a $76 thousand loss in 1999.
Noninterest income decreased $49 thousand (2.8%) from 1998 to 1999, attributable
primarily to a $76 thousand realized loss on sale of securities in 1999,
compared to an $8 thousand gain in 1998.
Year Ended December 31
--------------------------
(Dollars in thousands) 2000 1999 1998
- ---------------------------------------------------------
Service charges $1,771 $1,413 $1,323
Gain (loss) on securities (10) (76) 8
Other operating income 464 386 441
------ ------ ------
$2,225 $1,723 $1,772
==========================
Noninterest Expense
Total noninterest expense increased $1.53 million (17.4 %) from $8.81 million in
1999 to $10.35 million in 2000. The Hanover Bank start up was responsible for
$1.02 million of this increase. Absent the Hanover Bank expenses, total
noninterest expense was up $518 thousand or 5.88%. Including the Hanover Bank
expenses, noninterest expense increases from 1999 to 2000 included: salaries and
benefits up $616 thousand or 13.0 %, advertising and public relations up $206
thousand or 72.5%, printing supplies and postage up $142 thousand or 24.3%, net
occupancy and equipment up $97 thousand or 6.7%, data processing up $62 thousand
or 27.7%, and other operating expenses up $410 thousand or 26.6%. The primary
contributors to the increase in other operating expenses were consultant fees up
$136 thousand or 155.0%, directors fees up $83 thousand or 51.7%, and
legal/collection expense up $51 thousand or 58.4%.
Noninterest expense increased $371 thousand or 4.4% from $8.44 million in 1998
to $8.81 million in 1999, primarily the result of salary and benefit expense
growth of $584 thousand, consisting largely of $303 thousand in normal increases
related to growth, a $161 thousand increase in employee retirement expense based
on market fluctuations in pension plan assets at the 1999 fiscal year end, and a
$140 thousand increase in health insurance expense caused by a one-time life
insurance expense adjustment. Other 1999 expense increases included net
occupancy and equipment up $117 thousand related to increased technology
investments and full year depreciation on the Gloucester branch opened in mid-
1998. Increases in 1999 salary and benefit expense and net occupancy and
equipment expense were partially offset by a $319 thousand decrease in data
processing expense from savings related to technology investments, and a $93
thousand savings in merger expense as compared to 1998.
Years Ended December 31
---------------------------
(Dollars in thousands) 2000 1999 1998
- ------------------------------------------------------------------
Salaries and employee benefits $ 5,345 $4,729 $4,145
Net occupancy and equipment 1,550 1,453 1,336
Printing supplies and postage 726 584 576
Data processing 286 224 543
Advertising and public relations 490 284 296
Other operating expenses 1,949 1,539 1,546
------- ------ ------
Total non-interest expense $10,346 $8,813 $8,442
===========================
8
Income Taxes
Income tax expense in 2000 was $1.93 million, down from $ 2.21 million in 1999
and $2.09 million in 1998. The decrease in income taxes is attributable to
decreased taxable earnings at the federal statutory rate of 34%. Income tax
expense corresponds to an effective rate of 25.9 %, 27.1 % and 27.1 % for the
three years ended December 31, 2000, 1999, and 1998, 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 2000 and 1999.
Loan Portfolio
Loans, net of unearned income, increased to $301.0 million at December 31, 2000,
up $27.2 million or 9.9% from $273.9 million at year end 1999. The Corporation
experienced strong loan growth throughout 2000, continuing a trend that started
in the fourth quarter of 1998. Loan growth in 2000 was spread among the various
loan categories with the real estate portfolio growing $14.5 million or 7.5%,
consumer loans $9.6 million or 18.5%, and commercial loans $3.8 million or
12.3%. With the increasing rate environment of 2000, real estate lending growth
moderated from 1999's 21.4% while consumer loan demand increased.
At year end 1999, loans net of unearned income were $273.9 million, an increase
of $34.2 million over $239.7 million at year end 1998. Net loan growth in 1999
was completely attributed to the real estate portfolio which grew $34.2 million
or 21.4% to $194.3 million from $160.1 million at 1998 year end.
December 31
------------------------------------------------------------
(Dollars in thousands) 2000 1999 1998 1997 1996
- --------------------------------------------------------------------------------------------------------------
Commercial, industrial and agricultural loans $ 34,807 $ 31,003 $ 30,649 $ 32,901 $ 29,195
Real estate mortgage 163,573 152,905 130,856 118,639 109,015
Real estate construction 9,021 8,267 6,096 6,430 3,808
Commercial real estate 36,183 33,103 23,114 27,324 25,330
Consumer loans 61,506 51,890 51,481 45,723 41,887
All other loans 448 460 961 294 496
-------- -------- -------- -------- --------
Total loans 305,538 277,628 243,157 231,311 209,731
Less unearned income (4,507) (3,770) (3,493) (3,330) (3,388)
-------- -------- -------- -------- --------
Loans, net of unearned income $301,031 $273,858 $239,664 $227,981 $206,343
============================================================
________________________________________________________________________________
Maturity Schedule of Selected Loans
December 31, 2000
----------------------------------
Commercial and Real Estate
(Dollars in thousands) Agricultural Construction
- -------------------------------------------------------------
Within 1 year $24,049 $7,720
Variable rate:
1 to 5 years 4,491 987
After 5 years - -
------- ------
Total 4,491 987
Fixed rate:
1 to 5 years 4,896 173
After 5 years 1,371 141
------- ------
Total 6,267 314
------- ------
Total Maturities $34,807 $9,021
========================
9
Approximately 69.4 % of EVB's loan portfolio at December 31, 2000 was comprised
of loans secured by real estate. Residential real estate mortgages made up 54.3
% of the loan portfolio as compared to 55.8% at year end 1999 and 54.6% at year
end 1998. 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 decreased from 12.1% of the total loan
portfolio at year end 1999 to 12.0% at 2000 year end. Real estate construction
loans accounted for only 3.0 % of total loans outstanding at both year end 2000
and 1999. The Corporation's losses on loans secured by real estate have
historically been low, averaging $7 thousand in net charges offs per year over
the last five years.
Consumer loans are the second largest component of EVB's loan portfolio.
Consumer loans were 18.9 % of the loan portfolio at year end 2000, 17.6% and
20.0% at year end 1999 and 1998 respectively. This portfolio component consists
primarily of installment loans. Net consumer loans for household, family and
other personal expenditures totaled $57.0 million at 2000 year end, up $8.9
million or 18.5% from $48.1 million at 1999 year end, and $48.0 million at 1998
year end.
Performance of the consumer loan portfolio is closely tied to general economic
conditions in our market region and is impacted by intense competition from both
other financial institutions and the automotive industry. Commercial and
industrial loans are designed specifically to meet the needs of small and
medium-size business customers. This category of loans increased $3.8 million in
total loans outstanding at year end 2000 compared to 1999, with the percentage
to total loans increasing slightly to 11.6% of the total loan portfolio from
11.3% at year end 1999, but well below 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 the 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 2000 year end totaled $25.9 million, down $4
million from $29.9 million at December 31, 1999. Unfunded loan commitments
(excluding $1.8 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. 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 needed
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 experienced in 2000, the level of past due
loans usually shows a moderate increase.
Each of EVB's subsidiary banks has a loan review function consisting of bank
officers and board members who regularly review loans. Additionally an
independent credit review consultant performs a monthly review of loans he
selects for Southside Bank and refers those deemed appropriate to the Loan
Committee of the Bank Board. Bank of Northumberland, Inc and Hanover Bank
maintain a review process by senior credit personnel. As a matter of policy,
Southside Bank and Hanover Bank place 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 on the same basis except when management makes a determination
that the loan is well secured and in the process of collection. For the
Corporation, this detailed management process 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.
From 1998 through 2000, improved loan quality, historically low levels of
nonperforming assets and improved loan underwriting standards have allowed EVB
to maintain a lower allowance for loan losses. The ratio of allowance for loan
losses to period end net loans, for 2000, 1999 and 1998 was 1.46%, 1.52%, and
1.61% respectively. For the same periods the ratio of allowance for loan losses
to nonaccrual loans was 224%, 228% and 237%, 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,
2000 continue at levels far superior to that experienced prior to 1998. The
allowance for loan losses is 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.
10
Allowance for Loan Losses
(Dollars in thousands) 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------
Average loans outstanding, net of $287,729 $257,876 $232,605 $217,320 $197,336
unearned income
Allowance for loan losses, January 1 $ 4,154 $ 3,860 $ 3,868 $ 3,643 $ 3,814
Loans charged off:
Commercial and agricultural 203 71 213 252 435
Real estate 78 37 2 12 23
Consumer 410 358 452 381 371
-------- -------- -------- -------- --------
Total loans charged off 691 466 667 645 829
Recoveries:
Commercial and agricultural 106 46 24 279 19
Real estate 24 17 20 6 48
Consumer 168 187 166 173 154
-------- -------- -------- -------- --------
Total recoveries 298 250 210 458 221
-------- -------- -------- -------- --------
Net loans charged off 393 216 457 187 608
Provision for loan losses 647 510 449 412 437
-------- -------- -------- -------- --------
Balance, end of year $ 4,408 $ 4,154 $ 3,860 $ 3,868 $ 3,643
===========================================================
Ratios:
- -------
Ratio of allowance for loan losses to
total loans outstanding, end of year 1.46% 1.52% 1.61% 1.70% 1.77%
Ratio of net charge-offs to average loans
outstanding during the year 0.14% 0.08% 0.20% 0.09% 0.31%
Nonperforming Assets
Total nonperforming assets, consisting of nonaccrual loans, loans past due 90
days, and other real estate decreased 16.0% in 2000, continuing a trend that has
seen a steady increase in credit quality over the past five years from 2.26%
nonperforming assets in 1996 to less than 1.0% at year end 2000.
Nonperforming assets at December 31, 2000 were $2.9 million or 0.95% of total
loans and other real estate owned, down from $3.4 million or 1.24% at 1999 year
end, and $3.1 million or 1.29% at 1998 year end. Nonperforming loans at year end
2000 consisted primarily of 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 $104 thousand and $151 thousand for the years 2000 and 1999.
(Dollars in thousands) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------
Nonaccrual loans $ 1,967 $ 1,822 $ 1,626 $ 3,022 $3,871
Restructured loans - - - - -
Loans past due 90 days and accruing interest 520 1,345 1,190 927 597
------- ------- ------- ------- ------
Total nonperforming loans $ 2,487 $ 3,167 $ 2,816 $ 3,949 $4,468
Other real estate owned 378 243 268 86 196
------- ------- ------- ------- ------
Total nonperforming assets $ 2,865 $ 3,410 $ 3,084 $ 4,035 $4,664
======================================================
Nonperforming assets to total loans and
other real estate 0.95% 1.24% 1.29% 1.77% 2.26%
Allowance for loan losses to nonaccrual loans 224.10% 227.99% 237.39% 127.99% 94.11%
Net charge-offs to average loans for the year 0.14% 0.08% 0.20% 0.09% 0.31%
Allowance for loan losses to year end loans 1.46% 1.52% 1.61% 1.70% 1.77%
Foregone interest income on nonaccrual loans $ 104 $ 151 $ 98 $ 308 $ 290
Interest income recorded on nonaccrual loans $ - $ - $ 7 $ 2 $ -
11
Although trends for credit quality factors continue to improve, it is likely
that EVB will continue modest provisions for loan losses in 2001. The primary
factor for additional provision is growth in the loan portfolio as the result of
continued improvement in the region's economy and an anticipated environment of
decreasing interest rates for 2001. 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 below.
Allocation of Allowance for Loan Losses
December 31, 2000 December 31,1999 December 31, 1998
------------------------- ------------------------- ------------------------
Percent of Percent of Percent of
loans loans loans
in each in each in each
category category category
Amount to Total Loans Amount to Total Loans Amount to Total Loans
- ------------------------------------------------------------------------ ------------------------- ------------------------
Commercial and agricultural $1,260 11.56% $1,233 11.32% $1,244 12.79%
Real estate mortgage 1,398 54.34% 1,429 55.83% 1,209 54.60%
Real estate construction 32 3.00% 30 3.02% 25 2.54%
Commercial real estate 128 12.02% 133 12.09% 193 9.65%
Consumer 1,441 18.93% 1,191 17.57% 1,186 20.02%
Other loans 2 0.15% 2 0.17% 3 0.40%
------ ------ ------ ------ ------ ------
Total allowance for balance sheet loans 4,261 100.00% 4,018 100.00% $3,860 100.00%
Allowance for Off Balance Sheet risk 147 136
------ ------
Total allowance for loan losses $4,408 $4,154
December 31, 1997 December 31, 1996
------------------------ ---------------------------
Percent of Percent of
loans loans
in each in each
category category
Amount to Total Loan Amount to Total Loans
------ ------------- -------- --------------
Commercial and agricultural $1,346 14.21% $ 496 13.62%
Real estate mortgage 1,207 51.29% 1,894 51.97%
Real estate construction 65 2.78% 66 1.82%
Commercial real estate 279 11.82% 433 11.89%
Consumer 969 19.77% 739 20.29%
Other loans 2 0.13% 15 0.41%
------ ------ ------ ------
Total allowance for loan losses $3,868 100.00% $3,643 100.00%
Potential Problem Loans: At December 31, 2000, potential problem loans were
approximately $915 thousand, including four lending relationships in excess of
$100,000, which had aggregate principal balances outstanding of $635 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, 2000 are generally
secured by residential and commercial real estate with appraised values that
exceed the principal balance.
Securities
The investment securities portion of the securities portfolio was reclassified
to securities available for sale at April 1, 2000, in accordance with the
interpretation of FAS 133. 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.
At December 31, 2000, the securities portfolio, at fair market value, was $83.40
million, a 5.3% decrease from $88.08 million at 1999 year end. Prior year
reporting included available for sale securities at fair market value of $43.30
million and investment securities at book value of $44.78 million.
12
At December 31, 1999, the combined securities portfolio was $88.1 million, an
8.3% increase from $81.3 million at 1998 year end. Book value of the investment
component of the portfolio was $44.8 million compared to $39.3 million at
December 31, 1998. The available for sale portion of the portfolio at 1999 year
end was $43.3 million compared to $42.0 million at December 31, 1998.
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 2000 year end was $83.4 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 $206 thousand at December 31,
2000 and ($671) thousand at 1999 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.
Investment Securities and Securities Available for Sale
The following table presents the book value and fair value of securities for the
years 2000, 1999 and 1998.
December 31, 2000 December 31, 1999 December 31, 1998
--------------------------------------------------------------------------------
Amortized Fair Amortized Fair Amortized Fair
(Dollars in thousands) Cost Value Cost Value Cost Value
- ----------------------------------------------------------------- ----------------------- ----------------------
Available for sale:
U.S. Treasury securities $ 7,195 $ 7,216 $ 8,517 $ 8,457 $ 9,567 $ 9,768
U.S. government agency securities 17,689 17,641 16,157 15,624 13,997 14,116
Mortgage-backed securities 5,705 5,733 7,124 6,962 10,059 10,097
States and political subdivisions 42,828 43,139 7,034 6,853 4,590 4,760
Corporate bonds 6,174 6,173 4,278 4,198 1,766 1,791
Equity securities 3,501 3,501 1,202 1,202 1,468 1,468
------- ------- ------- ------- ------- -------
Total available for sale 83,092 83,403 44,312 43,296 41,447 42,000
------- ------- ------- ------- ------- -------
Held to maturity:
States and political subdivisions - - 44,780 44,451 39,333 40,308
------- ------- ------- ------- ------- -------
Total held to maturity - - 44,780 44,451 39,333 40,308
------- ------- ------- ------- ------- -------
Total securities $83,092 $83,403 $89,092 $87,747 $80,780 $82,308
========================================================================
Maturity Distribution and Yields of Securities
December 31, 2000
---------------------------------------------------------------------------------
Due in Due after Due after
1 year 1 through 5 through
or less 5 years 10 years
---------------------------------------------------------------------------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield
------------- -------- ------------- -------- ------------- -------
U.S. Government securities 7,018 5.96% 16,143 6.25% 5,669 6.80%
Taxable municipals - - 2,648 6.73% 3,958 7.28%
Tax exempt municipals (1) 3,207 6.71% 11,846 6.83% 18,053 6.87%
Corporate bonds 500 6.54% 3,242 6.28% 2,431 8.09%
Equity securities - - 1,014 7.22% - -
------- ------- -------
Total securities 10,725 6.21% 34,893 6.52% 30,111 7.01%
=================================================================================
------------------------------------
Due
after 10 years and
equity securities Total
------------------------------------
(Dollars in thousands) Amount Yield Amount Yield
---------- ----- ------ -----
U.S. Government securities 1,760 7.26% 30,590 6.34%
Taxable municipals 6,606 7.06%
Tax exempt municipals (1) 3,427 7.46% 36,533 6.90%
Corporate bonds - - 6,173 7.01%
Equity securities 2,487 5.91% 3,501 6.29%
---------- ------
Total securities 7,674 6.91% 83,403 6.69%
====================================
(1) Yields on tax-exempt securities have been calculated on a tax-equivalent
basis. See Note 2 to the Consolidated Financial Statements as of December 31,
2000, for an analysis of gross unrealized gains and losses in the securities
portfolio.
13
Deposits
The Corporation has historically 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. The year 2000 saw an environment in which FHLB funding was
frequently more cost effective than high interest rate time deposits.
Total deposits at December 31, 2000 of $350.4 million reflected an increase of
$27.8 million (8.6%) compared to $322.6 million at 1999 year end. Non-interest
bearing deposits increased $5.3 million (16.2%) to $38.1 million at 2000 year
end compared to $32.8 million at December 31, 1999. During the same period,
interest bearing deposits increased 7.7 % to $312.3 million at 2000 year end,
compared to $289.8 million at December 31, 1999. While these figures are as of
a specific day at year end, it is also meaningful to review average deposits for
the year. For 2000, average total deposits of $336.8 million reflected a 7.1%
increase over the 1999 average of $314.5 million. Average noninterest bearing
demand deposits, interest checking and certificates of deposit showed an
increase in 2000 while average savings and money market deposit balances
decreased.
Total deposits at 1999 year end of $322.6 million reflected an increase of $18.3
million (6.0%) compared to $304.3 million at 1998 year end. Average deposits
for 1999 were $314.5 million, an increase of 7.1 % or $20.9 million compared to
1998 average deposits of $293.6 million. Average non-interest bearing deposit
growth in 1999 was 10.3% while interest bearing deposits increased 6.8%. All
components of deposits, other than money market, showed increases in 1999.
Average Deposits and Rates Paid
For the Years Ended December 31
---------------------------------------------------------------------------------------------
2000 1999 1998
---------------------------- ----------------------------- ----------------------------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
- ------------------------------------------------------------- ----------------------------- ----------------------------
Non-interest bearing accounts $ 35,160 $ 33,903 $ 30,739
Interest bearing accounts:
Interest checking 40,545 2.52% 36,546 2.47% 31,608 2.62%
Money market 25,942 3.32% 27,402 3.16% 28,518 3.35%
Regular savings 67,477 3.93% 72,953 3.70% 69,157 4.14%
Certificates of deposit:
Less than $100,000 133,673 5.52% 118,938 5.02% 116,073 5.36%
$100,000 and over 34,040 5.90% 24,801 5.24% 17,490 5.55%
-------- -------- --------
Total interest bearing 301,677 4.61% 280,640 4.18% 262,846 4.51%
-------- ----- -------- ----- -------- -----
Total average deposits $336,837 $314,543 $293,585
============== =============== ===============
_______________________________________________________________________________________________________________________________
Maturities of Certificates of Deposit of $100,000 and Over
Percent
Within 3-12 1-3 Over 3 of Total
(Dollars in thousands) 3 Months Months Years Years Total Deposits
- ------------------------------------------------------------------------------------------------------------------------------
At December 31, 2000 $ 4,849 $22,518 $ 9,312 $2,768 $ 39,447 11.26%
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%
14
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, 2000, EVB had
total capital of 17.89% and a Tier 1 ratio of 16.58%, 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, it had a
capital structure that far exceeded regulatory guidelines and created
significant challenges in managing the return on equity. 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 102 thousand shares in early 2000, 110 thousand shares in 1999, and
32 thousand shares in late 1998. When the Corporation announced a limited stock
offering in the second quarter of 2000 related to the opening of Hanover Bank,
the share repurchase program was halted. After successful completion of that
limited offering, the Board announced a resumption of a share repurchase program
in January, 2001.
The table which follows provides an analysis of the Corporation's capital as of
December 31, 2000, 1999, and 1998. Note 16 in the Consolidated Financial
Statements provides an analysis of the capital position of each of the
subsidiary banks as of year end 2000 and 1999.
Analysis of Capital
December 31
---------------------------------------------
(Dollars in thousands) 2000 1999 1998
- ----------------------------------------------------------------------------
Tier 1 capital:
Common stock $ 9,897 $ 10,065 $ 10,286
Additional paid in capital 590 2,014 3,729
Retained earnings 34,338 31,388 27,877
-------- -------- --------
Total Tier 1 capital 44,825 43,467 41,892
Tier 2 capital:
Allowable portion of
allowance for loan losses 3,380 3,036 2,722
-------- -------- --------
Total risk-based capital 48,205 46,503 44,614
Risk-weighted assets 269,391 241,734 216,630
Capital ratios:
Tier 1 risk based capital 16.58% 17.98% 19.34%
Total risk based capital 17.89% 19.24% 20.59%
Tier 1 capital to average
total assets 11.14% 11.98% 12.39%
15
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, 2000, $ 117.6 million or 30.2% 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, 2000. At year end 2000, the Corporation had
$7 million of FHLB borrowings outstanding. Also outstanding at December 31,
2000, was $1.048 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.
Accounting Rule Changes
There were no accounting rule changes during 2000 that will impact EVB.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
-----------------------------------------------------------
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 Corporation's Management is responsible for reviewing the interest rate
sensitivity position of EVB's subsidiary banks and establishing policies to
monitor and limit exposure to interest rate risk. Guidelines established by
Management are reviewed by The Board of Directors.
It is EVB's policy not to engage in activities considered to be derivative in
nature such as futures, option contracts, swaps, caps, floors, collars or
forward commitments. EVB considers derivatives as speculative which is contrary
to the Company's historical or prospective philosophy. EVB does not hold or
issue financial instruments for trading purposes. It does not hold in its loan
and security portfolio investments that adjust or float according to changes in
the "prime" lending rate which is not considered speculative, but necessary for
good asset/liability management.
Asset/Liability Risk Management: The primary goals of asset/liability risk
management are to maximize net interest income and the net value of EVB's future
cash flows within the interest rate limits set by the Asset/Liability Committee
(ALCO).
Interest Rate Risk Measurement: Interest rate risk is monitored through the use
of three complimentary measures. static gap analysis, earnings simulation
modeling and net present value estimation. While each of the interest rate risk
measurements has limitations, taken together they represent a reasonably
comprehensive view of the magnitude of interest rate risk in the Corporation,
the distribution of risk along the yield curve, the level of risk through time,
and the amount of exposure to changes in certain interest rate relationships.
16
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 -12.13% which is 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 7.41%, of stable-rate net income if rates were to fall immediately
by two percentage points. It projects a decrease of approximately 8.84% if
rates rise by two percentage points. Management believes this reflects a
liability-sensitive interest risk for the one-year horizon, a desirable position
in a projected decreasing interest rate environment.
This dynamic simulation model includes assumptions about how the balance sheet
is likely to evolve through time, in different interest rate environments. Loan
and deposit growth rate assumptions are derived from historical analysis and
management's outlook, as are the assumptions used to project yields and rates
for new loans and deposits. All maturities, calls and prepayments in the
securities portfolio are assumed to be reinvested in like instruments. Mortgage
loan prepayment assumptions are developed from industry median estimates of
prepayment speeds for portfolios with similar coupon ranges and seasoning.
Noncontractual deposit growth rates and pricing are assumed to follow historical
patterns. The sensitivities of key assumptions are analyzed at least annually
and reviewed by management.
Net Present Value: The Net Present Value ("NPV") of the balance sheet, at a
point in time, is defined as the discounted present value of asset cash flows
minus the discounted value of liability cash flows. Interest rate risk analysis
using NPV involves changing the interest rates used in determining the cash
flows and in discounting the cash flows. The resulting percentage change in NPV
is an indication of the longer term repricing risk and options embedded in the
balance sheet.
At year-end, a 200 basis point immediate increase in rates is estimated to
decrease NPV by 8.04 %. Additionally, NPV is estimated to increase by 5.29% 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.
17
Summary information about interest-rate risk measures is presented below:
December 31
---------------------------------
2000 1999
---------------------------------
Static 1-Year Cumulative Gap -12.13% -6.93%
1-year net income simulation projection:
-200 basis point shock vs. stable rate 7.41% 5.78%
+200 basis point shock vs. stable rate -8.84% -6.84%
Static net Present value change:
-200 basis point shock vs. stable rate 5.29% 8.08%
+200 basis point shock vs. stable rate -8.04% -9.99%
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 downward trend during
the first three quarters of 2001 to a level 150 to 200 basis points below that
at 2000 year end and believes that the current level of liability sensitivity is
appropriate.
Item 8. Financial Statements and Supplementary Data
-------------------------------------------
The following financial statements are filed as a part of this report following
item 14:
. Consolidated Balance Sheets as of December 31, 2000 and 1999
. Consolidated Statements of Income for the three years ended December 31, 2000
. Consolidated Statements of Changes in Shareholders' Equity for the three
years ended December 31, 2000
. Consolidated Statements of Cash Flows for the three years ended December 31,
2000
. 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
--------------------------------------------------
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 2 and 3 of EVB's Proxy Statement for the 2001
annual meeting of shareholders and with respect to executive officers, is
presented below.
18
Executive Officers of the Registrant
- ------------------------------------
Following are the persons who were the executive officers of EVB as of December
31, 2000, their ages as of December 31, 2000, their current titles and positions
held during the last five years:
Robert L. Covington, 75, 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, 61, 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 a realtor in Essex County, VA
Thomas M. Boyd, Jr., 61, 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, 50, is Senior Vice President of EVB. Mr. Reynolds has served
as the President and Chief Executive Officer of BNI since 1991.
Ned Stephenson, 47, is Executive Vice President of EVB. Mr. Stephenson has been
Vice President and Chief Financial Officer of SSB since 1987.
Joseph H. James, 46, is Vice President - Operations of EVB. Mr. James joined
EVB in 2000. He served as Senior Vice President in the Operations Division of
SunTrust Banks during the five years prior to joining EVB.
Ronald L. Blevins, 56, is Chief Financial Officer of EVB. Mr. Blevins joined
EVB in 2000. He served as President of Betron International, while
contemporaneously providing regulatory and financial reporting services to EVB
from 1997 until joining EVB. He was a business owner from 1994-1997 and was a
senior vice president with NationsBank and predecessors from 1980-1994.
Item 11. Executive Compensation
----------------------
The response to this Item is incorporated by reference to the information under
the caption "Executive Compensation" on pages 6 and 7 of EVB's Proxy Statement
for the 2001 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 4 of EVB's Proxy Statement for the 2001 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 "Transactions with Management" on pages 8 and 9 of EVB's Proxy
Statement for the 2001 annual meeting of shareholders.
19
PART IV
Item 14. Exhibits, Financial Statements and Auditors' Report
---------------------------------------------------
(a) Financial Statements and Schedules
The financial statements set forth under Item 8 of this report on Form
10-K are incorporated by reference. Financial statement schedules have
been omitted since they are either not required, not applicable, or
the information is otherwise included.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during 2000.
(C) Exhibit Listing
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation (No changes - Articles of
Incorporation filed with 1997 Form 10-K are incorporated by
reference)
3.2 Bylaws (No changes - Bylaws filed with the 1999 Form 10-K are
incorporated by reference.)
10 Employment Contracts of Certain Officers and Directors is
incorporated by Reference to the information under the caption
"Employment Contracts" on page 9 of the Company's Proxy
Statement for the 2001 annual meeting of shareholders.
13.1 Quarterly Market Information Incorporated by Reference to page
10 of 2000 Annual Report to Shareholders ("2000 Annual
Report")
13.2 Selected Financial Data Incorporated by Reference to Page 4 of
2000 Annual Report
20
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 15, 2001.
Eastern Virginia Bankshares, Inc.
By /s/Ronald L. Blevins
------------------------------
Ronald L. Blevins
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of Registrant and in
the capacities indicated on March 15, 2001.
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 Senior Vice President and Director
------------------------------
Lewis R. Reynolds
/s/L. Edelyn Dawson, Jr. Director and Secretary of the Board
------------------------------
L. Edelyn Dawson, Jr.
/s/Warren Haynie, Jr. Director
------------------------------
F. Warren Haynie, Jr.
/s/W. Rand Cook Director
------------------------------
W. Rand Cook
/s/Eric A. Johnson Director
------------------------------
Eric A. Johnson
/s/William L. Lewis Director
------------------------------
William L. Lewis
/s/Leslie E. Taylor Director
------------------------------
Leslie E. Taylor
/s/Jay T. Thompson Director
------------------------------
Jay T. Thompson
/s/Thomas E. Stephenson Executive Vice President
------------------------------
Thomas E. Stephenson
/s/Ronald L. Blevins Chief Financial Officer
------------------------------ (Principal Financial and Accounting Officer)
Ronald L. Blevins
21
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22
EASTERN VIRGINIA BANKSHARES, INC.
AND SUBSIDIARIES
Tappahannock, Virginia
FINANCIAL REPORT
DECEMBER 31, 2000
23
CONTENTS
Page
INDEPENDENT AUDITOR'S REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 2
Consolidated statements of income 3
Consolidated statements of changes in shareholders' equity 4
Consolidated statements of cash flows 5 and 6
Notes to consolidated financial statements 7-27
24
INDEPENDENT AUDITOR'S REPORT
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, 2000 and 1999, and
the related consolidated statements of income, shareholders' equity and cash
flows for the years ended December 31, 2000, 1999 and 1998. 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, 2000 and 1999, and
the results of their operations and their cash flows for the years ended
December 31, 2000, 1999 and 1998, in conformity with generally accepted
accounting principles.
Winchester, Virginia
January 9, 2001
25
EASTERN VIRGINIA BANKSHARES, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
Assets 2000 1999
------------- -------------
Cash and due from banks $ 14,160,519 $ 10,258,340
Federal funds sold 1,930,730 --
Securities available for sale, at fair value 83,403,437 43,295,192
Securities held to maturity, at amortized cost,
fair value in 1999 of $44,451,379 -- 44,780,367
Loans, net of allowance for loan losses of $4,408,389 in
2000 and $4,153,813 in 1999 296,623,488 269,704,195
Deferred income taxes 1,622,873 1,641,339
Bank premises and equipment 5,339,679 4,568,324
Accrued interest receivable 2,909,766 2,581,879
Other real estate 377,605 242,801
Other assets 736,705 766,307
------------- -------------
Total assets $ 407,104,802 $ 377,838,744
============= =============
Liabilities and Shareholders' Equity
Liabilities
Noninterest-bearing deposits $ 38,126,362 $ 32,815,516
Interest-bearing deposits 312,287,508 289,831,431
------------- -------------
Total deposits 350,413,870 322,646,947
Federal funds purchased 1,048,000 1,468,000
Federal Home Loan Bank advances 7,000,000 8,000,000
Accrued interest payable 1,180,767 795,446
Other liabilities 2,431,236 2,132,984
Commitments and contingent liabilities -- --
------------- -------------
Total liabilities 362,073,873 335,043,377
------------- -------------
Shareholders' Equity
Common stock of $2 par value per share; authorized
50,000,000 shares; issued and outstanding,
4,948,410 in 2000 and 5,032,263 in 1999 9,896,820 10,064,526
Surplus 589,487 2,013,760
Retained earnings 34,338,126 31,388,237
Accumulated other comprehensive income (loss) 206,496 (671,156)
------------- -------------
Total shareholders' equity 45,030,929 42,795,367
------------- -------------
Total liabilities and shareholders' equity $ 407,104,802 $ 377,838,744
============= =============
See Notes to Consolidated Financial Statements.
26
EASTERN VIRGINIA BANKSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Income
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
------------ ------------ ------------
Interest and Dividend Income
Loans and fees on loans $ 25,571,390 $ 22,612,036 $ 21,412,321
Interest on investments:
Taxable interest income 2,742,571 2,549,910 2,572,219
Tax exempt interest income 1,913,109 1,944,000 1,852,478
Dividends 64,941 76,349 60,125
Interest on Federal funds sold 436,585 454,752 768,872
Interest on deposits in other banks -- -- 3,743
------------ ------------ ------------
Total interest and dividend income 30,728,596 27,637,047 26,669,758
------------ ------------ ------------
Interest Expense
Deposits 13,918,610 11,733,908 11,845,364
Federal funds purchased 61,440 8,408 290
Long-term debt 533,055 124,565 --
------------ ------------ ------------
Total interest expense 14,513,105 11,866,881 11,845,654
------------ ------------ ------------
Net interest income 16,215,491 15,770,166 14,824,104
Provision for Loan Losses 647,000 510,000 448,959
------------ ------------ ------------
Net interest income after provision
for loan losses 15,568,491 15,260,166 14,375,145
Noninterest Income
Service charges on deposit accounts 1,771,102 1,412,895 1,322,337
Gain (loss) on sale of available for sale securities (9,716) (76,268) 8,035
Other operating income 463,793 386,537 441,908
------------ ------------ ------------
Total noninterest income 2,225,179 1,723,164 1,772,280
------------ ------------ ------------
Noninterest Expenses
Salaries and benefits 5,344,842 4,729,395 4,145,489
Net occupancy expense 1,315,870 1,214,692 1,021,247
Equipment expense 234,102 237,987 315,069
Other operating expenses 3,452,016 2,631,014 2,960,571
------------ ------------ ------------
Total noninterest expenses 10,346,830 8,813,088 8,442,376
------------ ------------ ------------
Income before income taxes 7,446,840 8,170,242 7,705,049
Income Tax Expense 1,925,879 2,210,603 2,087,573
------------ ------------ ------------
Net income $ 5,520,961 $ 5,959,639 $ 5,617,476
============ ============ ============
Earnings Per Share, basic and assuming dilution $ 1.12 $ 1.17 $ 1.08
============ ============ ============
See Notes to Consolidated Financial Statements.
27
EASTERN VIRGINIA BANKSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
For the Years Ended December 31, 2000, 1999 and 1998
Accumulated
Other
Common Retained Comprehensive Comprehensive
Stock Surplus Earnings Income (Loss) Income Total
----------- ----------- ----------- ------------- -------------- -----------
Balance, December 31, 1997 $10,377,152 $ 220,803 $ 28,535,343 $ 131,618 $ 39,264
Comprehensive income:
Net income - 1998 -- -- 5,617,476 -- $ 5,617,476 5,617
Other comprehensive income:
Unrealized holding gains arising during period
(net of tax, $122,875) -- -- -- -- 238,523 --
Reclassification adjustment (net of tax, $2,732) -- -- -- -- (5,303) --
-------------
Other comprehensive income (net of tax, $120,143) -- -- -- 233,220 233,220 233,220
-------------
Total comprehensive income -- -- -- -- $ 5,850,696 --
=============
Cash dividends declared -- -- (2,276,164) -- (2,276,164)
Shares repurchased and retired (91,484) (491,299) -- -- (582,783)
Discretionary transfer -- 4,000,000 (4,000,000) --
----------- ----------- ------------ ------------ -----------
Balance, December 31, 1998 10,285,668 3,729,504 27,876,655 364,838 42,256,665
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 adjustment, (net of tax,
$25,931) -- -- -- -- 50,337
Other comprehensive income (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
Comprehensive income:
Net income - 2000 -- -- 5,520,961 -- $ 5,520,961 5,520,961
Other comprehensive income:
Unrealized holding gains arising
during period, (net of tax, $448,820) -- -- -- -- 871,239
Reclassification adjustment,
(net of tax, $3,303) -- -- -- -- 6,413
--------------
Other comprehensive income (net
of tax, $452,123) -- -- -- 877,652 877,652 877,652
--------------
Total comprehensive income -- $ 6,398,613
==============
Cash dividends declared -- -- (2,571,072) -- (2,571,072)
Proceeds from sale of common stock 36,812 257,684 -- -- 294,496
Repurchase of common stock under dividend
reinvestment plan (36,612) (272,329) -- -- (308,941)
Issuance of common stock under
dividend reinvestment plan 36,390 271,980 -- -- 308,370
Shares purchased and retired (204,296) (1,681,608) -- -- (1,885,904)
----------- ----------- ------------ ----------- -----------
Balance, December 31, 2000 $ 9,896,820 $ 589,487 $ 34,338,126 $ 206,496 $45,030,929
=========== =========== ============ =========== ===========
See Notes to Consolidated Financial Statements.
28
EASTERN VIRGINIA BANKSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
----------- ----------- -----------
Cash Flows from Operating Activities
Net income $ 5,520,961 $ 5,959,639 $ 5,617,476
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss from equity investment in partnership 32,018 27,948 16,868
Depreciation and amortization 962,038 899,474 764,667
Deferred tax (benefit) provision (433,657) (154,418) 169,071
Provision for loan losses 647,000 510,000 448,959
Net gain on other real estate (70,305) (7,569) (6,587)
Net loss (gain) on sale of bank premises and equipment -- 1,965 (9,452)
(Gain) losses realized on available for sale securities 9,716 76,268 (8,035)
Accretion of discounts and amortization of
premiums, net 23,467 80,108 (50,838)
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable (327,887) (159,187) 56,664
Decrease in other assets 29,601 227,616 156,225
Increase (decrease) in accrued interest payable 385,321 54,923 (53,984)
Increase (decrease) in other liabilities 298,252 1,465,815 (1,821,555)
----------- ----------- -----------
Net cash provided by operating activities 7,076,525 8,982,582 5,279,479
----------- ----------- -----------
Cash Flows from Investing Activities
Proceeds from sales of securities available for sale 6,079,372 3,641,476 986,215
Maturities and principal repayments of securities
available for sale 6,885,204 8,806,051 30,365,423
Maturities of securities held to maturity 280,000 4,151,575 4,928,700
Purchases of investment securities available for sale (7,307,879) (15,439,530) (28,683,708)
Purchases of investment securities held to maturity -- (9,656,710) (10,436,023)
Proceeds from sale of other real estate 354,098 32,319 49,587
Net (increase) in loans (27,969,890) (34,409,235) (12,365,538)
Purchases of bank premises and equipment (1,748,393) (797,042) (1,264,435)
Proceeds from sale of bank premises and equipment -- 24,963 11,909
Decrease in deposits with other banks -- -- 99,570
----------- ----------- -----------
Net cash used in investing activities (23,427,488) (43,646,133) (16,308,300)
----------- ----------- -----------
See Notes to Financial Statements.
29
EASTERN VIRGINIA BANKSHARES, INC.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Continued)
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
----- ---- ----
Cash Flows from Financing Activities
Net increase (decrease) in demand deposit accounts, interest-
bearing demand deposits and savings accounts (261,706) 2,326,422 22,531,272
Net increase in certificates of deposit 28,028,629 15,990,049 917,500
Proceeds from Federal Home Loan Bank advances -- 8,000,000 --
Repayments of Federal Home Loan Bank advances (1,000,000) -- --
Increase (decrease) in Federal funds purchased (420,000) 1,468,000 --
Proceeds from sale of stock 294,496 -- --
Repurchases and retirement of stock (1,885,904) (1,936,886) (582,783)
Repurchase of stock under dividend reinvestment plan (308,941) -- --
Issuance of common stock under reinvestment plan 308,370 -- --
Dividends paid (2,571,072) (2,448,057) (2,276,164)
------------ ------------- ------------
Net cash provided by financing activities 22,183,872 23,399,528 20,589,825
------------ ------------- ------------
Net increase (decrease) in cash
and cash equivalents 5,832,909 (11,264,023) 9,561,004
Cash and Cash Equivalents
Beginning of year 10,258,340 21,522,363 11,961,359
------------ ------------- ------------
End of year $ 16,091,249 $ 10,258,340 $ 21,522,363
============ ============= ============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 14,127,784 $ 11,811,959 $ 11,899,638
============ ============= ============
Income taxes $ 2,629,745 $ 1,730,215 $ 2,166,398
============ ============= ============
Supplemental Disclosures of Noncash Financing Activities,
transfers from loans to foreclosed real estate $ 418,597 $ -- $ 224,757
============ ============= ============
See Notes to Consolidated Financial Statements.
30
EASTERN VIRGINIA BANKSHARES, INC.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
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"), Bank of
Northumberland, Inc. ("BNI") and Hanover Bank ("HB"). The area
served by the Corporation is primarily the counties of Essex,
Northumberland, King & Queen, King William, Richmond, Lancaster,
Hanover, Gloucester, Middlesex and Caroline.
Basis of Presentation and Consolidation
The consolidated statements of Eastern Virginia Bankshares, Inc.
and its wholly-owned subsidiaries, Southside Bank, Bank of
Northumberland, Inc. and Hanover Bank include the accounts of all
companies. All material intercompany balances and transactions
have been eliminated in consolidation.
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.
31
Notes to Consolidated Financial Statements
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,
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.
32
Notes to Consolidated Financial Statements
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.
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.
33
Notes to Consolidated Financial Statements
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 4,947,507, 5,092,008, and 5,178,700
for the years ended 2000, 1999 and 1998, respectively. The
Corporation had no potential common stock as of December 31,
2000, 1999, and 1998.
Comprehensive Income
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized
gains and losses on available for sale securities, are reported
as a separate component of the equity section of the balance
sheet, such items, along with net income, are components of
comprehensive income.
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."
Advertising
The Corporation practices the policy of charging advertising
costs to expense as incurred. Advertising expense totaled
$430,661, $236,117 and $247,254 for the three years ended
December 31, 2000, 1999 and 1998, respectively.
Reclassifications
Certain reclassifications have been made to prior period balances
to conform to the current year presentation.
Note 2. Cash and Due From Banks
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, 2000 and 1999, the aggregate amounts of daily average
required balances were approximately $765,000 and $784,000.
34
Notes to Consolidated Financial Statements
Note 3. Securities
The amortized cost and fair value of securities, with gross unrealized
gains and losses,
December 31, 2000
------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- ------------ ------------- -------------
Available for Sale:
U.S. Government
obligations $ 7,195,200 $ 27,247 $ (6,075) $ 7,216,372
Obligations of U.S.
Government agencies 23,393,707 111,829 (131,976) 23,373,560
Corporate bonds 6,173,697 21,939 (22,746) 6,172,890
Obligations of state and
political subdivisions 42,827,840 583,818 (272,899) 43,138,759
Other securities 3,501,664 192 -- 3,501,856
------------ --------- ---------- -------------
Total $ 83,092,108 $ 745,025 $ (433,696) $ 83,403,437
============ ========= ========== =============
December 31, 1999
-----------------------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------------- ----------- ----------- -------------
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
-------------- ------------ ------------ -------------
follows:
35
Notes to Consolidated Financial Statements
The following is a comparison of amortized cost and estimated fair values of the
Corporation's securities by contractual maturity at December 31, 2000:
Amortized Fair
Cost Value
--------------- ---------------
Available for Sale:
One year or less $ 9,715,957 $ 9,723,528
1-5 years 30,920,035 30,998,652
5-10 years 29,906,090 30,034,496
After 10 years 6,844,834 6,913,672
Mortgage-backed securities 5,705,192 5,733,089
--------------- ---------------
Total $ 83,092,108 $ 83,403,437
=============== ===============
For the years ended December 31, 2000, 1999 and 1998, proceeds from sales of
securities available for sale amounted to $6,079,372, $3,641,476 and $986,215,
respectively. Gross realized losses amounted to $9,716 and $76,268 in 2000 and
1999, respectively, and gross realized gains amounted to $8,035 in 1998.
The book value of securities pledged to secure public deposits and other
purposes amounted to $5,721,367 and 8,851,091 at December 31, 2000 and 1999,
respectively.
As permitted under FASB No. 133, the Corporation transferred securities held to
maturity with a book value of $44,491,960 and a market value of $43,941,901 to
securities available for sale as of April 1, 2000.
36
Notes to Consolidated Financial Statements
Note 4. Loans
The following is a comparison of loans by type which were outstanding
at December 31, 2000 and 1999:
2000 1999
---------- ----------
(Thousands)
Real estate - construction $ 9,020 $ 8,267
Real estate - mortgage 163,573 152,905
Commercial real estate 36,183 33,103
Commercial, industrial and agricultural loans 34,807 31,003
Loans to individuals for household, family
and other consumer expenditures 61,505 51,890
All other loans 450 460
---------- ----------
Total gross loans 305,538 277,628
Less unearned income and deferred loan fees (4,507) (3,770)
Less allowance for loan losses (4,408) (4,154)
---------- ----------
Total net loans $ 296,623 $ 269,704
========== ==========
Note 5. Allowance for Loan Losses
The following is a summary of the activity in the allowance for loan
losses:
2000 1999 1998
------------ ------------ ------------
Balance at beginning of year $ 4,153,813 $ 3,859,996 $ 3,868,433
Provisions charged against income 647,000 510,000 448,959
Recoveries of loans charged off 298,405 249,824 209,827
Loans charged off (690,829) (466,007) (667,223)
------------ ------------ ------------
Balance at end of year $ 4,408,389 $ 4,153,813 $ 3,859,996
============ ============ ============
37
Notes to Consolidated Financial Statements
The Corporation had no impaired loans as of December 31, 2000 and
1999.
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $1,967,433 and $1,821,838 at December 31, 2000 and 1999.
If interest on these loans had been accrued such income would have
approximated $104,310 and $150,701, respectively.
Note 6. Related Party Transactions
Loans to directors and officers totaled $6,953,667 and $5,654,457 at
December 31, 2000 and 1999, respectively. New advances to directors
and officers totaled $4,262,559 and repayments totaled $2,963,349 in
the year ended December 31, 2000.
Note 7. Bank Premises and Equipment
A summary of the cost and accumulated depreciation of bank premises
and equipment follows:
2000 1999
------------ ------------
Land and land improvements $ 1,302,497 $ 1,227,647
Buildings 4,808,346 4,444,024
Furniture, fixtures and equipment 6,567,266 5,273,045
------------ ------------
12,678,109 10,944,716
Less accumulated depreciation 7,338,430 6,376,392
------------ ------------
$ 5,339,679 $ 4,568,324
============ ============
Depreciation and amortization expense amounted to $962,038, $899,474
and $764,667 for 2000, 1999 and 1998, respectively.
Note 8. Deposits
The aggregate amount of certificate of deposit with a minimum
denomination of $100,000, was $39,446,537 and $29,186,107 at December
31, 2000 and 1999, respectively.
38
Notes to Consolidated Financial Statements
At December 31, 2000, the scheduled maturities of certificates of
deposit were as follows:
2001 $ 104,319,750
2002 52,731,349
2003 12,212,509
2004 4,205,891
2005 4,673,324
2006 and thereafter 469,616
-------------
Total $ 178,612,439
=============
Note 9. Income Taxes
Net deferred tax assets consist of the following components as of
December 31, 2000 and 1999:
2000 1999
---------- ----------
Deferred tax assets:
Depreciation and amortization $ 240,337 $ 189,469
Deferred loan fees -- 11,124
Unrealized loss on available for sale securities -- 345,747
Allowance for loan losses 1,284,370 1,197,814
Interest on nonaccrual loans 35,465 51,238
Pension liability 106,173 6,091
Organizational costs 56,986 --
Other 13,806 28,789
---------- ----------
1,737,137 1,830,272
---------- ----------
Deferred tax liabilities:
Net unrealized gain on available for sale securities 106,376 --
Deferred loan costs -- 181,045
FHLB dividend 7,888 7,888
---------- ----------
114,264 188,933
---------- ----------
Net deferred tax asset $1,622,873 $1,641,339
========== ==========
39
Notes to Consolidated Financial Statements
Income tax expense charged to operations for the years ended December 31, 2000,
1999 and 1998, consists of the following:
2000 1999 1998
---- ---- ----
Currently payable $ 2,359,536 $ 2,365,021 $ 1,918,502
Deferred tax (benefit) provision (433,657) (154,418) 169,071
----------- ----------- -----------
$ 1,925,879 $ 2,210,603 $ 2,087,573
=========== =========== ===========
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, 2000, 1999 and 1998, due to the following:
2000 1999 1998
---- ---- ----
Expected tax expense at
statutory rate $ 2,531,926 $ 2,777,882 $ 2,619,717
Increase (decrease) in taxes
resulting from:
Tax-exempt interest (557,544) (572,918) (541,405)
Other (48,503) 5,639 (22,267)
-- -- 31,528
Merger expenses ----------- ----------- -----------
$ 1,925,879 $ 2,210,603 $ 2,087,573
=========== =========== ===========
40
Notes to Consolidated Financial Statements
Note 10. Employee Benefit Plans
Pension Plan
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:
2000 1999 1998
---- ---- ----
Change in Benefit Obligation
Benefit obligation, beginning $ 4,690,859 $ 4,262,636 $ 3,458,415
Service cost 326,690 293,394 222,583
Interest cost 349,215 317,051 257,668
Actuarial (gain) loss (16,011) (100,964) 402,697
Benefits paid (242,858) (81,258) (78,727)
------------- ------------- ------------
Benefit obligation, ending $ 5,107,895 $ 4,690,859 $ 4,262,636
------------- ------------- ------------
Change in Plan Assets
Fair value of plan assets, beginning $ 4,782,516 $ 3,894,540 $ 3,700,705
Actual return on plan assets 1,035,857 673,179 (48,988)
Employer contributions -- 296,055 321,550
Benefits paid (242,858) (81,258) (78,727)
------------- ------------- ------------
Fair value of plan assets, ending $ 5,575,515 $ 4,782,516 $ 3,894,540
------------- ------------- ------------
Funded status $ 467,620 $ 91,657 $ (368,096)
Unrecognized net actual gain (994,735) (343,540) 112,210
Unrecognized net obligation at transition 29,174 32,968 36,762
Unrecognized prior service cost 136,379 150,523 164,667
------------- ------------- ------------
Accrued benefit cost included in other liabilities $ (361,562) $ (68,392) $ (54,457)
============= ============= ============
Components of Net Periodic Benefit Cost
Service cost $ 326,690 $ 293,394 $ 222,583
Interest cost 349,215 317,051 257,668
Expected return on plan assets (400,673) (318,393) (331,006)
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)
------------- ------------- ------------
Net periodic benefit cost $ 293,170 $ 309,990 $ 149,229
============= ============= ============
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%
41
Notes to Consolidated Financial Statements
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 $62,685, $46,827
and $41,593 were included in expenses for the years ended
December 31, 2000, 1999, and 1998, respectively.
Note 11. Other Expenses
For the years ended December 31, 2000, 1999 and 1998, other expenses
included the following:
2000 1999 1998
---- ---- ----
Data processing $ 285,529 $ 223,768 $ 542,873
Printing supplies and postage 726,090 584,237 575,713
Advertising and marketing 430,616 236,117 247,254
Other (no item exceeds 1%
of total revenue) 2,009,781 1,586,892 1,594,731
------------ ----------- -------------
$ 3,452,016 $ 2,631,014 $ 2,960,571
============ =========== =============
Note 12. Commitments and Contingent Liabilities
Southside Bank has entered into a long-term land lease for its
Hartfield branch. The lease was entered into on May 9, 1988 and
provides for an original term of fifteen years with an option to renew
for two additional terms of ten years each, three additional terms of
five years each and, thereafter, for five additional terms of five
years each. Annual rent currently is $5,400 with an adjustment to
monthly rent at renewal of .9% of the then monthly rent.
Hanover Bank rents its principal location in Mechanicsville from a
related party under an operating lease. The lease was entered into on
May 1, 2000 and provides for an original term of five years with two
renewal options of five years each. Annual rent throughout this lease
term is $40,320.
Total rent expense was $32,280, $5,400 and $5,400 for 2000, 1999, and
1998, respectively, and was included in occupancy expense.
42
Notes to Consolidated Financial Statements
The following is a schedule by year of future minimum lease
requirements required under the long-term noncancellable lease
agreements:
2001 $ 45,720
2002 45,720
2003 42,120
2004 40,320
2005 13,440
---------
Total $ 187,320
=========
In the normal course of business there are outstanding various
commitments and contingent liabilities, which are not reflected in the
accompanying financial statements. Management does not anticipate any
material losses as a result of these transactions.
See Note 16 with respect to financial instruments with off-balance-
sheet risk.
Note 13. 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, 2000,
there were no unrestricted funds, which could be transferred from the
banking subsidiaries to the Parent Corporation without regulatory
approval.
Note 14. Federal Home Loan Bank Advances and Available Lines of Credit
At December 31, 2000, the Corporation's fixed-rate debt consisted of
Federal Home Loan Bank advances of $7,000,000 at SSB. The advances
mature through 2010. At December 31, 2000, the interest rates ranged
from 5.62 percent to 5.92 percent with a weighted average interest rate
of 5.83 percent. At December 31, 1999, SSB had a 5.62 percent fixed-
rate, long-term advance of $3,000,000 and a variable rate advance of
$5,000,000. The advances matured through 2002.
Advances on the line are secured by a blanket lien on the 1 to 4 family
dwelling loan portfolio of SSB. Available credit amounted to
$29,740,000 or 13% of SSB assets.
The contractual maturities of the Federal Home Loan Bank advances
are as follows:
Due in 2000 $ --
Due in 2001 1,000,000
Due in 2002 1,000,000
Due in 2008 5,000,000
-------------
$ 7,000,000
=============
The Corporation has unused lines of credit totaling $11,700,000 with
nonaffiliated banks as of December 31, 2000. There were no outstanding
borrowings on these lines of credit as of December 31, 2000.
43
Notes to Consolidated Financial Statements
Note 15. Dividend Reinvestment Plan
The Corporation has in effect a Dividend Reinvestment Plan which
provides an automatic conversion of dividends into common stock for
enrolled stockholders. It is based on the stock's fair market value on
each dividend record date, and allows for voluntary contributions to
purchase stock up to $5,000 per stockholder per calendar quarter.
Note 16. 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, 2000 and 1999, the following financial instruments were
outstanding whose contract amounts represent credit risk:
Contract Amount
------------------------
2000 1999
--------- ---------
(Thousands)
Commitments to grant loans and
unfunded commitments under
lines of credit $ 28,706 $ 26,566
Standby letters of credit $ 830 $ 744
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 necessarily 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 Notes to Consolidated Financial Statements
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.
44
Notes to Consolidated Financial Statements
The Corporation maintains cash accounts in other commercial banks. The
amount on deposit with correspondent institutions at December 31, 2000,
exceeded the insurance limits of the Federal Deposit Insurance
Corporation by $5,971,210.
Note 17. Fair Value of Financial Instruments and Interest Rate Risk
The fair value of a financial instrument is the current amount that
would be exchanged between willing parties, other than in a forced
liquidation. Fair value is best determined based upon quoted market
prices. However, in may instances, there are no quoted market prices
for the Corporation's various financial instruments. In cases where
quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used,
including the fair discount rate and estimates of future cash flows.
Accordingly, the fair value estimates may not be realized in an
immediate settlement of the instrument. SFAS 107 excludes certain
financial instruments and all nonfinancial instruments from its
disclosure requirements. Accordingly, the aggregate fair value amounts
presented may not necessarily represent the underlying fair value of
the Corporation.
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.
45
Notes to Consolidated Financial Statements
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, 2000 and 1999, the carrying amounts of loan
commitments and standby letters of credit approximated fair value.
The estimated fair values and related carrying amounts of the
Corporation's financial instruments are as follows:
December 31, 2000 December 31, 1999
------------------------------- ----------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- --------------
(Thousands) (Thousands)
Financial assets:
Cash and short-term
investments $ 16,091 $ 16,091 $ 10,258 $ 10,258
Securities - available for sale 83,403 83,403 43,295 43,295
Securities - held to maturity -- -- 44,780 44,451
Loans 296,623 303,092 269,704 273,300
Accrued interest receivable 2,910 2,910 2,582 2,582
46
Notes to Consolidated Financial Statements
December 31, 2000 December 31, 1999
------------------------------ -------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
---------- ----------- ------------ -------------
(Thousands) (Thousands)
Financial liabilities:
Noninterest-bearing deposits $ 38,126 $ 38,126 $ 32,816 $ 32,816
Interest-bearing deposits 312,288 315,404 289,831 288,724
Federal funds purchased 1,048 1,048 1,468 1,468
Federal Home Loan Bank
advances 7,000 7,135 8,000 7,974
Accrued interest payable 1,181 1,181 795 795
The Corporation assumes interest rate risk (the risk that general
interest rate levels will change) as a result of its normal operations.
As a result, the fair values of the Corporation's financial instruments
will change when interest rate levels change and that change may be
either favorable or unfavorable to the Corporation. Management attempts
to match maturities of assets and liabilities to the extent believed
necessary to minimize interest rate risk. However, borrowers with fixed
rate obligations are less likely to prepay in a risking rate
environment. Conversely, depositors who are receiving fixed rates are
more likely to withdraw funds before maturity in a rising rate
environment and less likely to do so in a falling rate environment.
Management monitors rates and maturities of assets and liabilities and
attempts to minimize interest rate risk by adjusting terms of new loans
and deposits and by investing in securities with terms that mitigate the
Corporation's overall interest rate risk.
Note 18. 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) in the regulations to risk-weighted assets
(as defined), and of Tier 1 capital (as defined) to average assets (as
defined). Management believes, as of December 31, 2000 and 1999, that
the Corporation meets all capital adequacy requirements to which it is
subject.
As of December 31, 2000, 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.
47
Notes to Consolidated Financial Statements
The Corporation's and the Banks' actual capital amounts and ratios are presented
in the table.
Minimum
To Be Well
Capitalized Under
Maximum Prompt Corrective
Actual Capital Requirement Action Provisions
----------------------- ------------------------ -------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- -------- ----------- ---------- ---------- -----------
(Amounts in Thousands)
As of December 31, 2000:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 48,205 17.89% $ 21,551 8.00% N/A N/A
SSB $ 16,819 10.88% $ 12,372 8.00% $ 15,465 10.00%
BNI $ 15,811 16.80% $ 7,529 8.00% $ 9,411 10.00%
HB $ 4,876 24.33% $ 1,603 8.00% $ 2,004 10.00%
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $ 44,825 16.58% $ 10,817 4.00% N/A N/A
SSB $ 11,878 7.65% $ 6,211 4.00% $ 9,317 6.00%
BNI $ 10,631 11.26% $ 3,777 4.00% $ 5,666 6.00%
HB $ 4,625 22.29% $ 805 4.00% $ 1,207 6.00%
Tier 1 Capital (to
Average Assets)
Consolidated $ 44,825 11.14% $ 16,093 4.00% N/A N/A
SSB $ 11,878 7.65% $ 9,156 4.00% $ 11,445 5.00%
BNI $ 10,631 6.98% $ 6,091 4.00% $ 7,614 5.00%
HB $ 4,625 17.76% $ 1,042 4.00% $ 1,302 5.00%
As of December 31, 1999:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 46,503 19.24% $ 19,339 8.00% N/A N/A
SSB $ 16,718 10.97% $ 12,189 8.00% $ 15,236 10.00%
BNI $ 14,437 16.09% $ 7,179 8.00% $ 8,973 10.00%
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $ 43,467 17.98% $ 9,669 4.00% N/A N/A
SSB $ 11,802 7.75% $ 6,094 4.00% $ 9,142 6.00%
BNI $ 9,313 10.38% $ 3,589 4.00% $ 5,384 6.00%
Tier 1 Capital (to
Average Assets)
Consolidated $ 43,467 11.98% $ 14,509 4.00% N/A N/A
SSB $ 11,802 5.22% $ 9,049 4.00% $ 11,312 5.00%
BNI $ 9,313 6.12% $ 6,084 4.00% $ 7,606 5.00%
48
Notes to Consolidated Financial Statements
Note 19. Condensed Financial Information - Parent Company Only
EASTERN VIRGINIA BANKSHARES, INC.
(Parent Corporation Only
Balance Sheets
December 31 2000 and 1999
Assets 2000 1999
-------------- -----------------
Cash on deposit with subisidary banks $ 9,540,739 $ 15,688,413
Subordinated debt in subsidiaries 7,000,000 7,000,000
Investment in subsidiaries 27,340 20,444,056
Other investments 118,375 --
Deferred income taxes 80,473 --
Premises and equipment, net 1,061,757 --
Accrued interst receivable 739 --
Other assets 264,850 34,917
-------------- -----------------
Total assets $ 45,407,591 $ 43,167,386
============== =================
Liabilities and Shareholders' Equity
Liabilities
Other liabilities $ 376,662 $ 372,019
Shareholders' Equity
Common stock 9,896,820 10,064,526
Capital surplus 589,487 2,013,760
Retained earnings 34,338,126 31,388,237
Accumulated other comprehensive income (loss) 206,496 (671,156)
-------------- -----------------
Total shareholders' equity 45,030,929 42,795,367
-------------- -----------------
Total liabilities and shareholders' equity $ 45,407,591 $ 43,167,386
============== =================
49
Notes to Consolidated Financial Statements
EASTERN VIRGINIA BANKSHARES, INC.
(Parent Corporation Only)
Statements of Income
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
-------------- -------------- --------------
Income:
Dividends from subsidiaries $ 4,500,000 $ 7,000,000 $ 6,995,376
Dividends 688 -- --
Interest from subsidiaries 212,456 438,500 474,353
Interest from subordinated debt 490,000 -- --
Operations services 1,412,132 -- --
Miscellaneous income 12,431 8 29,650
-------------- -------------- --------------
6,627,707 7,438,508 7,499,379
-------------- -------------- --------------
Expenses:
Salaries and benefits 607,413 -- --
Net occupancy expense 436,057 -- --
Equipment expense 23,108 -- --
Management fees 390,000 185,600 332,800
Miscellaneous 669,117 251,941 170,866
-------------- -------------- --------------
2,125,695 437,541 503,666
-------------- -------------- --------------
Net income before distributions in excess
of earnings of subsidiaries 4,502,012 7,000,967 6,995,713
Undistributed (distributed) earnings of subsidiaries 1,018,949 (1,041,328) (1,378,237)
-------------- -------------- --------------
Net income $ 5,520,961 $ 5,959,639 $ 5,617,476
============== ============== ==============
50
Notes to Consolidated Financial Statements
EASTERN VIRGINIA BANKSHARES, INC.
(Parent Corporation Only)
Statements of Cash Flows
For the Years Ended December 31, 2000, 1999 and 1998
2000 1999 1998
-------------- -------------- --------------
Cash Flows from Operating Activities
Net income $ 5,520,961 $ 5,959,639 $ 5,617,476
Adjustments to reconcile net income to net cash
provided by operating activities:
Distributions in excess of (undistributed)
earnings of earnings of subsidiaries (1,018,949) 1,041,328 1,378,237
Depreciation 403,344 -- --
Deferred tax (benefit) (80,473) -- --
(Increase) in accrued interest receivable (739) -- --
Decrease (increase) in other assets (229,935) 25,111 (60,028)
Increase in other liabilities 4,643 320,332 51,687
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Net cash provided by operating activities 4,598,852 7,346,410 6,987,372
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Cash Flows from Investing Activities
Purchases of investment securities (118,375) -- --
Purchases of premises and equipment (1,465,100) -- --
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Net cash (used in) investing activities (1,583,475) -- --
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Cash Flows from Financing Activities
Capital transferred to Hanover Bank (5,000,000) -- --
Subordinated debt to subsidiary banks -- (7,000,000) --
Dividends paid (2,571,072) (2,448,057) (2,276,164)
Proceeds from sale of common stock 294,496 -- --
Repurchase of common stock under dividend
reinvestment plan (308,941) -- --
Issuance of common stock under
dividend reinvestment plan 308,370 -- --
Shares repurchased and retired (1,885,904) (1,936,886) (582,783)
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Net cash (used in) financing activities (9,163,051) (11,384,943) (2,858,947)
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Increase (decrease) in cash
and cash equivalents (6,147,674) (4,038,533) 4,128,425
Cash and Cash Equivalents, beginning of year 15,688,413 19,726,946 15,598,521
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Cash and Cash Equivalents, end of year $ 9,540,739 $ 15,688,413 $ 19,726,946
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