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, 1997
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 13, 1998 was approximately $106,365,808.
The number of shares of the registrant's Common Stock outstanding as of March
13, 1998 was 5,188,576.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's 1997 Annual Report to Shareholders are incorporated by
reference into Parts I, II and IV. Portions of the definitive Proxy Statement
dated April 28,1998 to be delivered to shareholders in connection with the
Annual Meeting of Shareholders to be held May 21,1998 are incorporated by
reference into Part III.
EASTERN VIRGINIA BANKSHARES, INC.
FORM 10-K
For the Year Ended December 31, 1997
INDEX
Part I
Item 1. Business 1
Item 2. Properties 1
Item 3. Legal Proceedings 1
Item 4. Submission of Matters to a Vote
of Security Holders 2
Part II
Item 5. Market for Registrants Common Stock
and Related Stockholder Matters 2
Item 6. Selected Financial Data 2
Item 7. Management's Discussion and Analysis
of Financial Condition and Results of Operations 2
Item 7a. Quantitative and Qualitative Disclosures
About Market Risk 2
Item 8. Financial Statements and Supplementary Data 4
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosures 4
Part III
Item 10. Directors and Executive Officers of the Registrant 5
Item 11. Executive Compensation 5
Item 12. Security Ownership of Certain Beneficial
Owners and Management 5
Item 13. Certain Relationships and Related Transactions 5
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 6
Signatures 7
PART 1
Item 1. Business
General
Eastern Virginia Bankshares, Inc. (the "Company" or "EVB") was organized and
chartered under the laws of the Commonwealth of Virginia on September 5, 1997
and commenced operations on December 29,1997 as a bank holding company. On
December 29, 1997, the effective date, Southside Bank (SSB) a state chartered
nonmember bank and Bank of Northumberland, Inc., (BNI) a state chartered Federal
Reserve member bank, the "Banks" , became wholly-owned subsidiaries of EVB. The
consummation of the affiliation of the Banks was a result of a definitive
agreement entered into on September 26, 1997. The Banks have retained their
respective names, banking offices, executive officers and boards of directors.
On the effective date, each of the common shares of SSB and BNI were exchanged
for 2.5984 and 1.0 shares of EVB respectively. The exchange resulted in the
issuance of 5,188,576 common shares of EVB stock. Former common shareholders of
SSB received their fractional shares in cash totaling $9,130.
The remainder of the response to this Item is incorporated by reference to the
information under the captions "To Our Stockholders" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" of
EVB's Annual Report to Shareholders.
Employees
As of December 31, 1977, the Company had no employees. The subsidiary banks
employed 121 full-time equivalent employees. EVB's success is highly dependent
on its ability to attract and retain qualified employees. Competition for
employees is intense in the financial services industry. The Company believes it
has been successful in its efforts to recruit qualified employees, but there is
no assurance that it will continue to be successful in the future. None of the
Company's employees are subject to collective bargaining agreements. EVB
believes relations with its employees are excellent.
Item 2. Properties
EVB, the parent company, did not own any property as of December 31, 1997. The
Company's principal executive offices are located at 307 Church Lane,
Tappahannock, Virginia 22560. The corporate office is also the headquarters of
SSB and is adjacent to a 5,400 square foot SSB operations center. The two
subsidiary banks own 12 full service branch buildings including the land on
which 11 of those buildings are located. Northumberland and Middlesex Counties
each are the home to three of the branches, Essex County which houses the
corporate offices is home to two branches while Hanover County, King William
County, Caroline County and Gloucester County each have one full service branch
office. All branches except Gloucester currently provide full service banking.
The Gloucester Office is expected to begin operations in the second quarter of
1998. 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, 1997, 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 have been submitted to EVB shareholders for a vote since the Company
commenced operations as a bank holding company, with SSB and BNI becoming wholly
owned subsidiaries on December 29, 1997.
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 23 of the 1997 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 1997 Annual Report to Shareholders is
incorporated herein by reference and filed herewith as Exhibit 13.2.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information set forth on pages 9-24 of the 1997 Annual Report to
Shareholders is incorporated herein by reference and is filed herewith as
Exhibit 13.3.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
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.
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. Interest rate gaps are
managed through investments, loan pricing and deposit pricing. Accordingly, EVB
has developed guidelines that the targeted gap, for the combined Company, should
be between a negative 15% and a positive 15 %.
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.
Market risk is the risk of loss arising from adverse changes in the fair value
of financial instruments due to changes in interest rates, exchange rates and
equity prices. EVB's market risk is composed primarily of interest rate risk.
The Company's Management is responsible for reviewing the interest rate
sensitivity position of EVB's subsidiary banks and establishing policies to
monitor and limit exposure to interest rate risk. Guidelines established by
Management are reviewed by The Board of Directors.
Interest Rate Risk Measurement: Interest rate risk is monitored through the use
of three complementary 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.
Because EVB commenced operations as a combined Company only two days prior to
1997 year end, these measures are available only on an individual bank basis as
of December 31, 1997.
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 -5.43% for Southside Bank and -22.6 %
for Bank of Northumberland, Inc. The policy limit for the one-year gap is 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 timeframes 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 decrease
approximately 9.1% for SSB and increase approximately 8.5% for BNI, of
stable-rate net income if rates were to fall immediately by two percentage
points. It projects an increase of approximately 7.7% for SSB and a decrease of
approximately 9.9% for BNI if rates rise by two percentage points. Management
believes this reflects a slight asset-sensitive risk rate for SSB and a
corresponding liability-sensitive rate interest risk for BNI for the one year
horizon. The differing positions of the two banks provides a slight risk which
is within the Company's guideline of 15%.
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
increase NPV by 4.43 % for SSB and 17.8% for BNI. Additionally, NPV is estimated
to decrease by 9.1% for SSB and 20.4% for BNI 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.
Summary information about interest-rate risk measures is presented below:
December 31, 1997
-----------------
SSB BNI
--- ---
Static 1-Year Cumulative Gap -5.43% -22.67%
1-Year Net Income Simulation Projection
-200 basis point Shock vs. Stable Rate -9.1% 8.5%
+200 basis point Shock vs. Stable Rate 7.7% -9.9%
Static Net Present Value Change
-200 basis point Shock vs. Stable Rate 4.43% 17.8%
+200 basis point Shock vs. Stable Rate -9.1% -20.4%
Due to borrowers' preferences for floating-rate loans and depositors'
preferences for fixed-rate deposits, EVB's balance sheet tends to move toward
less liability sensitivity with the passage of time. 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 expects interest rates to be relatively stable during 1998 and
believes that the current modest level of liability sensitivity is appropriate.
Item 8. Financial Statements and Supplementary Data
The following financial statements for the Company and independent auditors'
report set forth on pages 24-41 of the 1997 Annual Report to Shareholders are
incorporated herein by reference and are filed herewith as Exhibit 13.4.
o Balance Sheet as of December 31, 1996 and 1997
o Income Statement for the three years ended December 31, 1997
o Cash Flow Statement for the three years ended December 31, 1997
o Statement of Changes in Shareholders' Equity for the three years
ended December 31, 1997
o Notes to Financial Statements
o Independent Auditors' 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 1 through 5 of EVB's Proxy Statement for the
1998 annual meeting of shareholders and with respect to executive officers, is
presented below.
Executive Officers of the Registrant
Following are the persons who were the executive officers of EVB as of December
31, 1997, their ages as of December 31, 1997, their current titles and positions
held during the last five years:
Robert L. Covington, 72, 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, 58, is the Vice-Chairman of the Board of Directors of EVB
and Chairman of the Board of SSB of which he has been a member since 1982. He is
an oysterman and a realtor in Essex County, VA
Thomas M. Boyd, Jr. 58 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 47 is the Executive Vice President of EVB. Mr. Reynolds has
served as the President and Chief Executive Officer of BNI since 1991.
Thomas E. Stephenson 43 is Chief Financial Officer of EVB. Mr. Stephenson has
been Vice President and Chief Financial Officer of SSB since 1987.
Item 11. Executive Compensation
The response to this Item is incorporated by reference to the information under
the caption "Executive Compensation" on pages 3 and 4 of EVB's Proxy Statement
for the 1998 annual meeting of shareholders .
Item 12. Security Ownership of Certain Beneficial Owners and Management
The response to this Item is incorporated by reference to the information under
the caption "Security Ownership of Management and Certain Beneficial Owners" on
page 3 of EVB's Proxy Statement for the 1998 annual meeting of shareholders.
Item 13. Certain Relationships and Related Transactions
The response to this Item is incorporated by reference to the information under
the caption "Interest of Directors and Officers in Certain Transactions" on
pages 4 and 5 of EVB's Proxy Statement for the 1998 annual meeting of
shareholders.
PART IV
Item 14. Exhibits, Financial Statements and Auditors' Report
(a) Financial Statements and Schedules
The financial statements set for 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 the last quarter of 1997.
(C) Exhibit Listing
Exhibit
Number Description
------ -----------
3.1 Articles of Incorporation
3.2 Bylaws
10 Employment Contracts of Certain Officers and Directors
is incorporated by Reference to the information under
the caption "Employment Contracts" on page 4 of the
Company's Proxy Statement for the 1998 annual meeting of
shareholders.
13.1 Quarterly Market Information Incorporated by Reference to
page 23 of 1997 Annual Report to Shareholders ("1997
Annual Report")
13.2 Selected Financial Data Incorporated by Reference to Page 2
of 1997 Annual Report
13.3 Management's Discussion and Analysis of Financial Condition
and Results of Operations Incorporated by Reference to Pages 9
through 24 of Annual Report
13.4 Financial Statements Incorporated by Reference to Pages 25
through 41 of Annual Report 21 Subsidiaries of the Registrant
Incorporated by Reference to pages 29 and 31 of Annual Report
21 Subsidiaries of the Registrant Incorporated by References to
pages 29 and 31 of Annual Report
27 Financial Data Schedule
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, in the town of
Tappahannock, State of Virginia, on March 19, 1998.
Eastern Virginia Bankshares, Inc.
By /s/Thomas E. Stephenson
-------------------------------------
Thomas E. Stephenson
Vice President, 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 19, 1998.
Signature Title
/s/ Robert L. Covington Chairman of the Board of Directors
- ----------------------------
Robert L. Covington
/s/ F. L. Garrett, III Vice Chairman of the Board of Directors
- ----------------------------
F.L. Garrett, III
/s/ Thomas M. Boyd,Jr. President and Chief Executive Officer
- ---------------------------- and Director
Thomas M. Boyd, Jr.
/s/ Lewis R. Reynolds Executive Vice President and Director
- ----------------------------
Lewis R. Reynolds
/s/ L. Edelyn Dawson, Jr. Director and Secretary of the Board
- ----------------------------
L. Edelyn Dawson, Jr.
/s/ Warren Haynie, Jr. Director
- ----------------------------
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/ Thomas E. Stephenson Vice President, Chief Financial Officer
- ----------------------------- (Principal Financial and Accounting Officer)
Thomas E. Stephenson