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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, 2009
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 number 0-23565
EASTERN VIRGINIA BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
| VIRGINIA | 54-1866052 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| 330 Hospital Road, Tappahannock, Virginia |
22560 | |
| (Address of principal executive offices) | (Zip Code) | |
Registrant’s telephone number, including area code (804) 443-8423
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Name of each exchange on which registered | |
| Common Stock, $2 Par Value | The Nasdaq Stock Market, LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 whether the registrant has submitted electronically and posted on its corporate Website, if any, every interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ¨ 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. x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer” , “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ (Do not check if a smaller reporting company) | Smaller reporting company | x | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2009 was approximately $49.1 million.
The number of shares of the registrant’s Common Stock outstanding as of March 2, 2010 was 5,945,593.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the 2009 Annual Report to Shareholders are incorporated by reference into Part I and Part II, and portions of the 2010 definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held April 15, 2010 are incorporated by reference into Part III.
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EASTERN VIRGINIA BANKSHARES, INC.
FORM 10-K
For the Year Ended December 31, 2009
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PART I
| Item 1. | Business |
General
Eastern Virginia Bankshares, Inc. (“the Company”, “our Company”, “we”, “our” or us”) is a bank holding company headquartered in Tappahannock, Virginia (45 miles northeast of Richmond, Virginia). Through our wholly-owned bank subsidiary, EVB, we operate 25 full service branches in eastern Virginia. EVB is a community bank targeting small to medium-sized businesses and consumers in our traditional coastal plain markets and the emerging suburbs outside of the Richmond and Greater Tidewater areas.
Our mission is to maximize shareholder value while providing superior financial products and services in each of the communities we serve and empowering employees to always do the right thing with a level of integrity that lives up to the trust our customers place in us.
We provide a broad range of personal and commercial banking services including commercial, consumer and real estate loans. We complement our lending operations with an array of retail and commercial deposit products and fee-based services. Our services are delivered locally by well-trained and experienced bankers, whom we empower to make decisions at the local level, so they can provide timely lending decisions and respond promptly to customer inquiries. We believe that, by offering our customers personalized service and a breadth of products, we can compete effectively as we expand within our existing markets and into new markets.
Two of the banks that formed Eastern Virginia Bankshares, Inc. in 1998, Bank of Northumberland, Inc. and Southside Bank, were established in 1910. Thus, the company is celebrating 100 years of existence and financial growth. Having survived the depression of the 1930’s, the booms and recessions in between and the most recent economic recession of 2008 and 2009, we are looking forward to many more years of serving our communities.
Until April 2006, we operated as an affiliation of three separate community banks. As noted above, Bank of Northumberland, Inc. and Southside Bank were the initial founding banks. Seeking to accelerate our growth by expanding into a higher growth market adjacent to our existing locations, we started a de novo bank, Hanover Bank, in 2000. From 2003 through April 2006 we developed procedural standards and consolidated support functions to benefit from the efficiency of a centralized operations process. This effort culminated in April 2006 when our three subsidiary banks merged, to form a single bank that was rebranded as EVB. Over the last three years we have seen many benefits from the consolidation. Our goal has been to expand our footprint in eastern and central Virginia; to accomplish that, we have expanded and improved our branch network. In 2008, we opened the permanent location of our Quinton branch in New Kent County, Virginia after a year in a temporary location. In January 2008, we relocated our Village branch to a prominent Hanover County location, called the Windmill, giving us a highly visible location on Route 360. In March 2008, we purchased two branches from Millennium Bank placing us in two new Virginia markets: Henrico County and Colonial Heights. This transaction grew our bank by adding $93 million in deposits and $49 million in loans. We plan to continue these strategies of building new branches in growing markets and purchasing other locations as the opportunities arise.
EVB Financial Services, Inc., a wholly owned subsidiary of EVB, has 100% ownership of EVB Investments, Inc. and a 50% ownership interest in EVB Mortgage, LLC. The mortgage company operates with a partner in generating various real estate loans for sale in the mortgage loan markets, earning interest and fees from these loans prior to sale while retaining no servicing rights after the sale. For a fee, EVB Investments Inc. provides securities, brokerage and investment advisory services through its sales force and its minority ownership in Infinex Financial Group which purchased Bankers Investment Group, LLC in 2008. Infinex provides our investment company with a brokerage firm and operational services enabling our sale of investment services. The bank also has a 75% ownership interest in EVB Title, LLC, and a 2.33% interest in Virginia Bankers Insurance Center, LLC. EVB Title, LLC sells title insurance and Virginia Bankers Insurance Center, LLC acts as a broker for selling insurance products for its member banks. Through these investments, we are able to augment our fee income by
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providing financial products and services that are complementary to traditional banking products. These investments give us and our customer’s access to experienced professionals while we avoid making large investments to develop these capabilities internally. The bank further has a 100% interest in Dunston Hall LLC which was formed to hold the title to real estate acquired by the bank upon foreclosure of real estate secured loans.
On January 9, 2009, as part of the Capital Purchase Program established by the U.S. Department of the Treasury (the “Treasury”) under the Emergency Economic Stabilization Act of 2008 (“EESA”), we entered into a Letter Agreement and Securities Purchase Agreement with the Treasury, pursuant to which the Company sold (i) 24,000 shares of the Company’s Fixed Rate Cumulative Perpetual Preferred Stock, Series A, and (ii) a warrant to purchase 373,832 shares of the Company’s common stock, at an initial exercise price of $9.63 per share, subject to certain anti-dilution and other adjustments, for an aggregate purchase price of $24,000,000 in cash. While we are and were at that time a well capitalized bank, these funds increased our Tier I capital level and increased the relevant capital ratios. These funds assisted us in getting through a very tumultuous and trying 2009. See Note 21 (Preferred Stock and Warrant” in the attached Financial Statements for more detailed discussion of this transaction.
Available Information
We maintain Internet websites at www.bankevb.com for our bank and at www.evb.org for our corporation. Among other items, the bank site offers our customers information about our products and locations and is the site to access online banking. Our corporate site offers information, free of charge, on the corporation including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these documents as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission. If not on the website, please make written requests to our Corporate Secretary to receive copies of our Audit Committee Charter, Nominating Committee Charter and Code of Conduct or other information that may be available.
Employees
As of December 31, 2009, we employed 315 full-time equivalent employees down from 317 at the end of 2008. This number fluctuates during the year as we hire some seasonal part time personnel to help on projects or help customer coverage during the summer vacation period. Our success as a service business is highly dependent on our ability to attract and retain qualified employees in a financial services environment where competition for quality employees is intense. We provide ongoing training for our employees in all areas of the company that emphasizes providing excellent service to our customers by listening to discover their needs and meeting those needs with great service and products. We believe we have been successful in our efforts to recruit qualified employees, but this is a continuous process and there is no assurance that we will continue to be successful in the future. None of our employees are subject to collective bargaining agreements. We believe relations with our employees are excellent.
Market Areas and Growth Strategy
We currently conduct business through 25 branches. Our markets are located east of U.S. Route 250 and extend from northeast of Richmond to the Chesapeake Bay in central Virginia and across the James River from Colonial Heights to southeastern Virginia. Geographically, we have four primary market areas: Northern Neck, Middle Peninsula, Capital (suburbs of Richmond) and Southern.
Our Northern Neck and Middle Peninsula regions are in the eastern coastal plain of Virginia, often referred to as River Country. According to the Virginia Economic Development Partnership, the region’s industries have traditionally been associated with abundant natural resources that include five rivers and the Chesapeake Bay. The diversified economy includes seafood harvesting, light manufacturing, agriculture, leisure, marine services and service sectors dedicated to many upscale retirement communities.
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Our Capital region is currently comprised of Hanover, Henrico, King William and Caroline counties and Colonial Heights which are emerging suburbs of Richmond. Hanover County is approximately 10 miles from downtown Richmond and 86 miles south of Washington, DC. Hanover County is the largest county by area in the Richmond metropolitan area. The county provides residents and businesses the geographic advantages of a growing metropolitan area coupled with substantial acreage for expansion in a suburban setting. The addition of a branch in the adjacent county of Henrico which is closer to Richmond and has similar economic potential is in keeping with our strategic plan.
Our Southern region is comprised of New Kent, Surry, Sussex, and Southampton counties. New Kent is one of the fastest growing counties in Virginia. It is located south of Richmond and north of Williamsburg placing us in the growth zone of U.S. highway 64 that runs from Richmond to the Virginia Beach area of the Virginia Tidewater region. The other three counties are approximately 50 miles southeast of Richmond along or just off the state route 460 corridor and are adjacent to the Greater Tidewater area. The port of Hampton Roads is approximately 50 miles to the east of our Southern region. The region’s close proximity to major military, naval and research centers and transportation infrastructure make this an attractive location for contractors, service and manufacturing companies. Our addition of a branch in Colonial Heights gives us a link between the U.S. 64 and the 460 access routes and positions us to take advantage of new growth occurring at nearby Fort Lee.
Business Strategy
As a result of our 100 years of experience serving the Northern Neck and Middle Peninsula regions, we have a stable, loyal customer base and a high deposit market share in these regions. Due to the lower projected population growth of these markets, we expanded in Hanover, Henrico, Gloucester, New Kent and King William Counties and the city of Colonial Heights to target the higher potential growth in these existing and emerging suburban markets. The deposit market share we have accumulated in our Northern Neck, Middle Peninsula and Southern regions has helped fund our loan growth in the emerging suburban areas in the Central region.
We believe that economic growth and bank consolidation have created a growing number of businesses and consumers in need of the broad range of products and services and high level of personal service that we provide. While we work through the economic challenges of the last two years and look at 2010 as a year to strengthen our existing markets, our long-term business plan is to capitalize on the growth opportunity in our markets by further developing our branch network in our existing markets and augmenting our market area by expanding to the counties near the urban markets of Richmond and Greater Tidewater. In addition, we expect the continued growth of these two markets will create new growth into our existing markets up the middle peninsula and up and down the U.S. route 64 corridor. We intend not only to build upon existing relationships, but also to create new relationships and expand into new markets by de novo branch expansion, branch acquisitions or potential whole bank acquisitions that meet our strategic and financial criteria.
Competition
We face significant competition for loans and deposits. The sources of competition vary based on the particular market of operation, which can range from a small rural town to part of an urban market. Competition for loans, our primary source of income, comes primarily from commercial banks and mortgage banking subsidiaries of both regional and community banks. Based on June 30, 2009 data published by the Federal Deposit Insurance Corporation, the most recent date for which such data is available, EVB held the largest deposit share among its competitors in Middlesex, Essex, Northumberland and Surry Counties. EVB also had a strong deposit share in King William, Southampton and Sussex Counties, and a rapidly growing deposit base in Gloucester and Hanover Counties. Our primary competition is other community banks in Essex, King William, Lancaster and Northumberland Counties, while we compete with both community banks and large regional banks in Caroline, Gloucester, Hanover, Henrico, Middlesex, Southampton, Surry and Sussex Counties and the city of Colonial Heights.
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Credit Policies
The principal risk associated with each of the categories of loans in our portfolio is the creditworthiness of our borrowers. Within each category, such risk is increased or decreased, depending on various factors. The risks associated with real estate mortgage loans, commercial loans and consumer loans vary based on employment levels, consumer confidence, fluctuations in the value of real estate and other conditions that affect the ability of borrowers to repay indebtedness. The risk associated with real estate construction loans varies based on the supply and demand for the type of real estate under construction. In an effort to manage these risks, we have loan amount approval limits for individual loan officers based on their position and level of experience.
We have written policies and procedures to help manage credit risk. We use a loan review process that includes a portfolio management strategy, guidelines for underwriting standards and risk assessment, procedures for ongoing identification and management of credit deterioration, and regular independent third party portfolio reviews to establish loss exposure and to monitor compliance with policies. Third party reviews are done by a consulting firm that is comprised of experienced commercial lenders who understand the laws, regulations and critical areas of portfolio management. They provide management with an unbiased opinion of our credits and actions needed to strengthen them or protect the company.
Our loan approval process includes our management loan committee, directors loan committee and, for larger loans, the board of directors. Our Chief Credit Officer is responsible for reporting to the Directors Loan Committee monthly on the activities of the Management Loan Committee and on the status of various delinquent and non-performing loans. The Directors Loan Committee also reviews lending policies proposed by management. Our board of directors establishes our total lending limit policy which is less than the legal lending limit.
Loan Originations
Residential real estate loan originations come primarily from walk-in customers, real estate brokers and builders, and through referrals from EVB Mortgage, LLC. Adjustable rate loans and other loans that cannot be sold in the secondary mortgage market, but that meet our underwriting guidelines, are referred to us by EVB Mortgage, LLC. Commercial real estate loan originations are obtained through broker referrals, direct solicitation of prospects and continued business from current customers. We may also purchase or sell loan participations with other community banks in Virginia.
Our loan officers, as part of the application process, review and underwrite all loan applications. Information is obtained concerning the repayment ability and stability, credit history and collateral of the applicant. Loan quality is analyzed based on our experience and credit underwriting guidelines as well as the guidelines used by an independent third party loan review firm based on the type of loan. Real estate collateral is appraised by independent appraisers who have been pre-approved by meeting the requirement of providing a current and valid license certification and based on the bank’s experience with these appraisers.
In the normal course of business, we make various commitments and incur certain contingent liabilities that are disclosed but not reflected in our annual financial statements including commitments to extend credit. At December 31, 2009, commitments to extend credit totaled $109.5 million for loans, $8.6 million for credit cards and $5.1 million related to letters of credit.
Construction Lending
We make local construction and land acquisition and development loans. These loans are secured by residential houses and commercial real estate under construction and the underlying land associated with the project. At December 31, 2009, construction, land acquisition and land development loans outstanding were $87.8 million, or 10.3% of total loans and reflects managements’ decision to scale back our concentration in this type of loan. These loans are concentrated in our local markets. The average life of a construction loan is generally less than one year. Because the interest rate charged on these loans usually floats with the market, the rates charged assist us in managing our interest rate risk. Construction lending entails significant additional risks, compared to residential mortgage lending. Construction loans often involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the value of the building under construction is only estimable when the loan funds are disbursed. Thus, it is more difficult to evaluate accurately the total loan funds required to complete
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a project and related loan-to-value ratios. To mitigate the risks associated with construction lending, we generally limit loan amounts to 80% of appraised value in addition to analyzing the creditworthiness of our borrowers. We also obtain a first lien on the property as security for its construction loans and typically require personal guarantees from the borrower’s principal owners.
Commercial Business Loans
Commercial business loans generally have a higher degree of risk than loans secured by real property but have higher yields. To manage these risks, we generally obtain appropriate collateral and personal guarantees from the borrower’s principal owners and monitor the financial condition of our business borrowers. Residential mortgage loans generally are made on the basis of the borrower’s ability to make repayment from employment and other income and are secured by real estate whose value tends to be readily ascertainable. In contrast, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as commercial real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for commercial business loans is heavily impacted by the economic environment and may depreciate over time and generally cannot be appraised with as much precision as residential real estate. We have a loan review and monitoring process to regularly assess the repayment ability of commercial borrowers. At December 31, 2009, commercial loans totaled $82.6 million, or 9.7% of the total loan portfolio.
Commercial Real Estate Lending
Various types of commercial real estate in our market area include commercial buildings and offices, recreational facilities, small shopping centers and churches, and other secured commercial real estate loans. At December 31, 2009, commercial real estate loans totaled $234.7 million, or 27.5% of our total loans. We generally lend up to 80% of the secured property’s appraised value. Commercial real estate lending entails significant additional risk, compared with residential mortgage lending. Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the payment experience on loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or in the economic environment. Our commercial real estate loan underwriting criteria requires an examination of debt service coverage ratios, the borrower’s creditworthiness and prior credit history and reputation, and we typically require personal guarantees or endorsements of the borrowers’ principal owners. In addition, we carefully evaluate the location of the security property.
One-to-Four-Family Residential Real Estate Lending
Residential one-to-four family mortgage loans comprise our total largest loan category. At December 31, 2009, this category of mortgage loans accounted for $400.8 million, or 47.0% of our total loan portfolio. Security for the majority of our residential lending is in the form of owner occupied one-to-four-family dwellings. Adjustable rate loans are $164.5 million of the residential real estate portfolio and are primarily 3-year adjustable rate mortgages.
All residential mortgage loans originated by us contain a “due-on-sale” clause providing that we may declare the unpaid principal balance due and payable upon sale or transfer of the mortgaged premises. In connection with residential real estate loans, we require title insurance, hazard insurance and if required, flood insurance. We do not require escrows for real estate taxes and insurance, but under new regulations will have to begin requiring escrows later in 2010.
Consumer Lending
We offer various secured and unsecured consumer loans, including unsecured personal loans and lines of credit, automobile loans, boat loans, deposit account loans, installment and demand loans, credit cards, and home equity lines of credit and loans. At December 31, 2009, we had consumer loans, net of unearned interest, of $42.4 million or 5.0% of total loans. Such loans are generally made to customers with whom we have a pre-existing relationship.
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We currently originate all of our consumer loans in our geographic market area. Most of the consumer loans are made at fixed rates. Consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured, such as lines of credit, or secured by depreciable assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment as a result of the greater likelihood of damage, loss or depreciation. Due to the relatively small amounts involved, the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount that can be recovered on such loans. Such loans may also give rise to claims and defenses by a consumer borrower against an assignee of collateral securing the loan, and a borrower may be able to assert against such assignee claims and defenses that it has against the seller of the underlying collateral. Consumer loan delinquencies often increase over time as the loans age.
The underwriting standards we employ to mitigate the risk for consumer loans include a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment and from any verifiable secondary income. Although creditworthiness of the applicant is of primary consideration, the underwriting process also includes an analysis of the value of the security in relation to the proposed loan amount.
Supervision and Regulation
We are subject to the periodic reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which include, but are not limited to, the filing of annual, quarterly and other reports with the Securities and Exchange Commission. As an Exchange Act reporting company, we are directly affected by the Sarbanes-Oxley Act, which seeks to improve corporate governance and reporting procedures by requiring expanded disclosure of our corporate operations and internal controls. We are already complying with SEC and other rules and regulations implemented pursuant to the Sarbanes-Oxley Act and intend to comply with any applicable rules and regulations implemented in the future. Although we have incurred, and expect to continue to incur, additional expense in complying with the provisions of the Sarbanes-Oxley Act and the resulting regulations, our management does not expect such compliance to have a material impact on our financial condition or results of operations in the future.
The current discussion at the federal government level to redesign the regulation of the financial industry may present different or additional regulatory requirements as we move through 2010.
We are a bank holding company within the meaning of the Bank Holding Company Act of 1956, and are registered as such with, and subject to the supervision of, the Board of Governors of the Federal Reserve System and the Federal Reserve Bank of Richmond. A bank holding company is prohibited from engaging in or acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company engaged in non-banking activities. Subject to notice to the Federal Reserve or the Federal Reserve’s prior approval, a bank holding company may, however, engage in or acquire an interest in a company that engages in activities that the Federal Reserve has determined by regulation or order are so closely related to banking as to be a proper incident to banking. In making these determinations, the Federal Reserve considers whether the performance of such activities by a bank holding company would offer advantages to the public that outweigh possible adverse effects. A bank holding company must seek the prior approval of the Federal Reserve before it acquires all or substantially all of the assets of any bank, and before it acquires ownership or control of the voting shares of any bank if, after giving effect to the acquisition, the bank holding company would own or control more than 5% of the voting shares of such bank. Federal Reserve approval is also required for the merger or consolidation of bank holding companies.
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We file periodic reports with the Federal Reserve and must provide any additional information that the Federal Reserve may require. The Federal Reserve also has the authority to examine us and our nonbanking affiliates, as well as any arrangements between us and EVB. Banking subsidiaries of bank holding companies are subject to certain restrictions imposed by federal law in dealings with their holding companies and other affiliates. Subject to certain restrictions set forth in the Federal Reserve Act and Federal Reserve regulations promulgated thereunder, a bank can loan or extend credit to an affiliate, purchase or invest in the securities of an affiliate, purchase assets from an affiliate or issue a guarantee, acceptance or letter of credit on behalf of an affiliate, as long as the aggregate amount of such transactions of the bank and its subsidiaries with its affiliates does not exceed 10% of the capital stock and surplus of the bank on a per affiliate basis or 20% of the capital stock and surplus of the bank on an aggregate affiliate basis. In addition, such transactions must be on terms and conditions that are consistent with safe and sound banking practices. In particular, a bank and its subsidiaries generally may not purchase from an affiliate a low-quality asset, as defined in the Federal Reserve Act and Federal Reserve regulations promulgated thereunder. These restrictions also prevent the bank holding company and its other affiliates from borrowing from the bank unless the loans are secured by marketable collateral of designated amounts. Additionally, the bank holding company and the bank are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services, other than in connection with a traditional banking product such as a loan, discount, deposit or trust service.
As a Virginia-chartered, federally-insured bank, and Federal Reserve member, EVB is subject to regulation, supervision and regular examination by the Bureau of Financial Institutions of the Virginia State Corporation Commission and the Federal Reserve as its appropriate federal bank regulator. Moreover, EVB’s deposits are insured by the Deposit Insurance Fund, as administered by the FDIC, to the maximum amount permitted by law. Congress has enacted legislation authorizing the temporary increase in deposit insurance coverage limits to $250,000 effective October 3, 2008. Originally, this was to revert to the $100,000 level at December 31, 2009. On May 20, 2009, President Barack Obama signed the Helping Families Save Their Homes Act, which extends the temporary increase in the standard maximum deposit insurance amount (SMDIA) to $250,000 per depositor through December 31, 2013 and became effective immediately. The legislation provides that the SMDIA will return to $100,000 on January 1, 2014. In addition, EVB is participating in the FDIC’s “Transaction Account Guarantee Program” which originally was to run through December 31, 2009. Under this program as it was revised in 2009, all EVB non-interest bearing checking accounts, IOLTAs, and NOW accounts (paying interest of 0.50% or less) are fully guaranteed by the FDIC for the entire amount in the account through June 30, 2010 (for those institution that did not opt out of the program). This coverage is in addition to and separate from the coverage available under the FDIC’s general deposit insurance rules.
EVB pays insurance premiums on deposits in accordance with a deposit premium assessment system recently revised by the FDIC in accordance with the Federal Deposit Insurance Reform Act of 2005 (“FDIRA”), which required that the FDIC revise its current risk-based deposit premium system by November 2006. The revised rules impose deposit insurance premium assessments based upon perceived risks to the Deposit Insurance Fund, by evaluating an institution’s risk profile and other financial ratios and then determining insurance premiums based upon the likelihood an institution could be a higher risk entity in the following year. As a result, institutions deemed to pose less risk would pay lower premiums than those institutions deemed to pose more risk, which would pay more. FDIC changes in coverage and premium assessments have resulted in a substantial increase in our deposit premium assessments; we estimated that our 2009 assessment would be approximately $1.2 million, compared to an assessment of $545 thousand (before an $80 thousand credit carryover from prior years) in 2008. With the addition of a special assessment in 2009, our actual expense was $1.7 million. In addition, in an effort to maintain the ability of the FDIC to take over distressed banks and payoff depositors, the company has prepaid the expected assessments for the next three years at a cost of $5.4 million.
The regulations of the Bureau of Financial Institutions, FDIC and Federal Reserve govern most aspects of our business, including deposit reserve requirements, investments, loans, certain check clearing activities, issuance of securities, branching, payment of dividends and numerous other matters. As a consequence of the extensive
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regulation of commercial banking activities in the United States, our business is particularly susceptible to changes in legislation and regulations, which may have the effect of increasing the cost of doing business, limiting permissible activities or increasing competition. The likelihood and timing of any legislation or regulatory modifications and the impact they might have on us or EVB cannot be determined at this time.
Troubled Asset Relief Program
See Note 21 “Preferred Stock and Warrant” in the attached Financials for a detailed discussion of our participation in and the regulatory restrictions relating to the Capital Purchase Program portion of this program.
Change of Control
Federal Reserve approval would be required prior to any acquisition of control of us. “Control” is conclusively presumed to exist if a person or company acquires, directly or indirectly, more than 25% of any class of voting stock of a company, controls in any manner the election of a majority of directors or the power to exercise directly or indirectly a controlling influence over management or policies of a company. Under Federal Reserve regulations, control is also presumed to exist, subject to rebuttal, if a person acquires more than 10% of any class of voting stock and no other person will own, control or hold the power to vote a greater percentage of that class of voting shares immediately after the transaction. Under the Bank Holding Company Act, a corporate acquirer of control of a company must register with the Board of Governors of the Federal Reserve System and be subject to the activities limitations of the Bank Holding Company Act. Non-controlling acquirers of more than 10% but less than 25% of a company’s voting securities also may be required to enter into certain passivity commitments, to ensure they lack an ability to control the company.
Governmental Policies and Legislation
Banking is a business that depends primarily on interest rate differentials. In general, the difference between the interest rates paid by the bank on its deposits and its other borrowings and the interest rates received by the bank on loans extended to its customers and securities held in its portfolio comprise the major portion of our earnings. These rates are highly sensitive to many factors that are beyond our control. Accordingly, our growth and earnings are subject to the influence of domestic and foreign economic conditions, including inflation, recession and unemployment.
The commercial banking business is affected not only by general economic conditions, but is also influenced by the monetary and fiscal policies of the federal government and the policies of its regulatory agencies, particularly the Federal Reserve. The Federal Reserve implements national monetary policies (with objectives such as curbing inflation and combating recession) by its open-market operations in U.S. Government securities, by adjusting the required level of reserves for financial institutions subject to its reserve requirements and by varying the discount rates applicable to borrowings by depository institutions. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits, and also affect interest rates charged on loans and paid on deposits. The nature and impact of any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted that has the effect of increasing the cost of doing business, limiting or expanding permissible activities or affecting the competitive balance between banks and other financial institutions. Proposals to change the laws and regulations governing the operations and taxation of bank holding companies, banks and other financial institutions are frequently made in Congress and in the Virginia Legislature and are brought before various bank regulatory agencies. The likelihood of any major changes and the impact such changes might have are impossible to predict.
Dividends
We are organized under the Virginia Stock Corporation Act, which prohibits the payment of a dividend if, after giving it effect, the corporation would not be able to pay its debts as they become due in the usual course of business or if the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved, to satisfy the preferential rights upon dissolution of any preferred shareholders.
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The issuance of preferred stock discussed in Note 21 of the attached Financials has put a claim ahead of the common stockholder which requires payment of the preferred dividend before any dividend can be paid to the common shareholder. Currently this dividend is 5%, or $1.2 million dollars per year. This rate is in effect for a five year period ending January 2014, then the dividend rate increases to 9%.
Our dividend policy and restrictions on our ability to pay dividends are discussed in more detail in Part II, Item 5 of this Form 10-K.
Capital Requirements
The Federal Reserve and the FDIC have adopted risk-based capital adequacy guidelines for bank holding companies and banks. These capital adequacy regulations are based upon a risk-based capital determination, and a bank holding company’s capital adequacy is determined in light of the risk, both on- and off-balance sheet, contained in the company’s assets. Different categories of assets are assigned risk weightings and are counted at a percentage of their book value.
The regulations divide capital between Tier 1 capital (“core capital”) and Tier 2 capital. For a bank holding company, Tier 1 capital consists primarily of common stock, related surplus, non-cumulative perpetual preferred stock and minority interests in consolidated subsidiaries. Restricted core capital elements, including qualifying trust preferred securities, qualifying cumulative perpetual preferred stock and certain minority interests, may be treated as Tier 1 capital in an amount up to 25% of total Tier 1 capital. The excess, if any, of such securities may be included in Tier 2 capital. Goodwill and certain other intangibles are excluded from Tier 1 capital. Tier 2 capital consists of an amount equal to the allowance for loan and lease losses up to a maximum of 1.25% of risk weighted assets, limited other types of preferred stock not included in Tier 1 capital, hybrid capital instruments and term subordinated debt. Investments in and loans to unconsolidated banking and finance subsidiaries that constitute capital of those subsidiaries are excluded from capital. The sum of Tier 1 and Tier 2 capital constitutes qualifying total capital. The guidelines generally require banks to maintain a total qualifying capital to weighted risk assets level of 8% (the “total capital ratio”). Of the total 8%, at least 4% of the total qualifying capital to weighted risk assets (the “Tier 1 capital ratio”) must be Tier 1 capital.
The Federal Reserve and the FDIC have adopted leverage requirements that apply in addition to the risk-based capital requirements. Banks and bank holding companies are required to maintain a minimum leverage ratio of Tier 1 capital to average total consolidated assets (the “leverage capital ratio”) of at least 3.0% for the most highly-rated, financially sound banks and bank holding companies and a minimum leverage capital ratio of at least 4.0% for all other banks. The FDIC and the Federal Reserve define Tier 1 capital for banks in the same manner for both the leverage capital ratio and the total capital ratio. However, the Federal Reserve defines Tier 1 capital for bank holding companies in a slightly different manner. An institution may be required to maintain Tier 1 capital of at least 4% or 5%, or possibly higher, depending upon the activities, risks, rate of growth, and other factors deemed material by regulatory authorities. As of December 31, 2009, we and our subsidiary bank EVB both met all applicable capital requirements imposed by regulation.
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Federal Deposit Insurance Act and Prompt Corrective Action Requirements
As an insured depository institution, EVB is required to comply with the capital requirements promulgated under the Federal Deposit Insurance Act and the Federal Reserve’s prompt corrective action regulations thereunder, which set forth five capital categories, each with specific regulatory consequences. Under these regulations, the categories are:
| • | Well Capitalized — The institution exceeds the required minimum level for each relevant capital measure. A well capitalized institution is one (i) having a total capital ratio of 10% or greater, (ii) having a Tier 1 capital ratio of 6% or greater, (iii) having a leverage capital ratio of 5% or greater and (iv) that is not subject to any order or written directive to meet and maintain a specific capital level for any capital measure. |
| • | Adequately Capitalized — The institution meets the required minimum level for each relevant capital measure. No capital distribution may be made that would result in the institution becoming undercapitalized. An adequately capitalized institution is one (i) having a total capital ratio of 8% or greater, (ii) having a Tier 1 capital ratio of 4% or greater and (iii) having a leverage capital ratio of 4% or greater or a leverage capital ratio of 3% or greater if the institution is rated composite 1 under the CAMELS rating system. |
| • | Undercapitalized — The institution fails to meet the required minimum level for any relevant capital measure. An undercapitalized institution is one (i) having a total capital ratio of less than 8% or (ii) having a Tier 1 capital ratio of less than 4% or (iii) having a leverage capital ratio of less than 4%, or if the institution is rated a composite 1 under the CAMEL rating system, a leverage capital ratio of less than 3%. |
| • | Significantly Undercapitalized — The institution is significantly below the required minimum level for any relevant capital measure. A significantly undercapitalized institution is one (i) having a total capital ratio of less than 6% or (ii) having a Tier 1 capital ratio of less than 3% or (iii) having a leverage capital ratio of less than 3%. |
| • | Critically Undercapitalized — The institution fails to meet a critical capital level set by the appropriate federal banking agency. A critically undercapitalized institution is one having a ratio of tangible equity to total assets that is equal to or less than 2%. |
If the appropriate federal banking regulator determines, after notice and an opportunity for hearing, that a bank is in an unsafe or unsound condition, the regulator is authorized to reclassify the bank to the next lower capital category (other than critically undercapitalized) and require the submission of a plan to correct the unsafe or unsound condition.
If a bank is not well capitalized, it cannot accept brokered deposits without prior FDIC approval and, if approval is granted, cannot offer an effective yield in excess of 75 basis points on interest paid on deposits of comparable size and maturity in such institution’s normal market area for deposits accepted from within its normal market area, or national rate paid on deposits of comparable size and maturity for deposits accepted outside the bank’s normal market area. Moreover, if a bank becomes less than adequately capitalized, it must adopt a capital restoration plan acceptable to the appropriate federal regulator that is subject to a limited performance guarantee by the bank. A bank also would become subject to increased regulatory oversight and is increasingly restricted in the scope of its permissible activities. Each company having control over an undercapitalized institution also must provide a limited guarantee that the institution will comply with its capital restoration plan.
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Except under limited circumstances consistent with an accepted capital restoration plan, an undercapitalized institution may not grow. An undercapitalized institution may not acquire another institution, establish additional branch offices or engage in any new line of business unless determined by the appropriate Federal banking agency to be consistent with an accepted capital restoration plan, or unless the FDIC determines that the proposed action will further the purpose of prompt corrective action. The appropriate federal banking agency may take any action authorized for a significantly undercapitalized institution if an undercapitalized institution fails to submit an acceptable capital restoration plan or fails in any material respect to implement a plan accepted by the agency. A critically undercapitalized institution is subject to having a receiver or conservator appointed to manage its affairs and for loss of its charter to conduct banking activities.
An insured depository institution may not pay a management fee to a bank holding company controlling that institution or any other person having control of the institution if, after making the payment, the institution, would be undercapitalized. In addition, an institution cannot make a capital distribution, such as a dividend or other distribution that is in substance a distribution of capital to the owners of the institution if following such a distribution the institution would be undercapitalized. Thus, if payment of such a management fee or the making of such would cause the bank to become undercapitalized, it could not pay a management fee or dividend to us.
Gramm-Leach-Bliley Act of 1999
The Gramm-Leach-Bliley Act of 1999 implemented major changes to the statutory framework for providing banking and other financial services in the United States. The Gramm-Leach-Bliley Act, among other things, eliminated many of the restrictions on affiliations among banks and securities firms, insurance firms and other financial service providers. A bank holding company that qualifies as a financial holding company will be permitted to engage in activities that are financial in nature or incidental or complimentary to financial activities. The activities that the Gramm-Leach-Bliley Act expressly lists as financial in nature include insurance underwriting, sales and brokerage activities, providing financial and investment advisory services, underwriting services and limited merchant banking activities.
To become eligible for these expanded activities, a bank holding company must qualify as a financial holding company. To qualify as a financial holding company, each insured depository institution controlled by the bank holding company must be well-capitalized, well-managed and have at least a satisfactory rating under the Community Reinvestment Act (discussed below). In addition, a bank holding company must file with the Federal Reserve a declaration of its intention to become a financial holding company. While we satisfy these requirements, we do not contemplate seeking to become a financial holding company unless we identify significant specific benefits from doing so.
The Gramm-Leach-Bliley Act has not had a material adverse impact on our operations. To the extent that it allows banks, securities firms and insurance firms to affiliate, the financial services industry may experience further consolidation.
Privacy and Fair Credit Reporting
Financial institutions, such as our subsidiary bank EVB, are required to disclose their privacy policies to customers and consumers and require that such customers or consumers be given a choice (through an opt-out notice) to forbid the sharing of nonpublic personal information about them with nonaffiliated third persons. EVB has a written privacy policy that is delivered to each of its customers when customer relationships begin and annually thereafter. In accordance with the privacy policy, EVB will protect the security of information about its customers, educate its employees about the importance of protecting customer privacy, and allow its customers to remove their names from the solicitation lists they use and share with others. EVB requires business partners with whom it shares such information to have adequate security safeguards and to abide by the re-disclosure and reuse provisions of applicable law. EVB has programs to fulfill the expressed requests of customers and consumers to opt out of information sharing subject to applicable law. In addition to adopting federal requirements regarding privacy, individual states are authorized to enact more stringent laws relating to the use of customer information. To date, Virginia has not done so, but is authorized to consider proposals that would impose additional requirements or restrictions on EVB. If the federal or state regulators establish further guidelines for addressing customer privacy issues, EVB may need to amend its privacy policies and adapt its internal procedures.
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Community Reinvestment Act
EVB is subject to the requirements of the CRA. The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. A financial institution’s efforts in meeting community credit needs are currently evaluated as part of the examination process pursuant to three performance tests. These factors also are considered in evaluating mergers, acquisitions and applications to open a branch or facility.
USA PATRIOT Act
The USA PATRIOT Act became effective on October 26, 2001 and provides, in part, for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering by enhancing anti-money laundering and financial transparency laws, as well as enhanced information collection tools and enforcement mechanics for the U.S. government, including: (i) requiring standards for verifying customer identification at account opening; (ii) rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (iii) reports by nonfinancial trades and businesses filed with the Treasury Department’s Financial Crimes Enforcement Network for currency transactions exceeding $10,000; (iv) filing suspicious activities reports if a bank believes a customer may be violating U.S. laws and regulations; and (v) requiring enhanced due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons.
Under the USA PATRIOT Act, the Federal Bureau of Investigation (“FBI”) has sent, and will send, our banking regulatory agencies lists of the names of persons suspected of involvement in terrorist activities. The bank has been requested, and will be requested, to search its records for any relationships or transactions with persons on those lists. If the bank finds any such relationships or transactions, it must file a suspicious activity report and contact the FBI.
The Office of Foreign Assets Control (“OFAC”), which is a division of the Department of the Treasury, is responsible for helping to insure that United States entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send, our banking regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts. If the bank finds a name on any transaction, account or wire transfer that is on an OFAC list, it must freeze the account and block any transactions from the account, file a suspicious activity report and notify the FBI. The bank has appointed an OFAC compliance officer to oversee the inspection of its accounts and the filing of any notifications. The bank actively checks high-risk OFAC areas such as new accounts, wire transfers and customer files. The bank performs these checks utilizing software, which is updated each time a modification is made to the lists provided by OFAC and other agencies of Specially Designated Nationals and Blocked Persons.
The federal financial institution regulators also have promulgated rules and regulations implementing the USA PATRIOT Act, which (i) prohibit U.S. correspondent accounts with foreign banks that have no physical presence in any jurisdiction, (ii) require financial institutions to maintain certain records for correspondent accounts of foreign banks, (iii) require financial institutions to produce certain records relating to anti-money laundering compliance upon the request of the appropriate federal banking agency, (iv) require due diligence with respect to private banking and correspondent banking accounts, (v) facilitate information sharing between government and financial institutions, (vi) require verification of customer identification, and (vii) require financial institutions to have in place an anti-money laundering program.
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Consumer Laws and Regulations
The bank is also subject to certain consumer laws and regulations that are designed to protect consumers in transactions with banks. While the list set forth herein is not exhaustive, these laws and regulations include the Truth in Lending Act, the Truth in Savings Act, the Electronic Funds Transfer Act, the Expedited Funds Availability Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Fair Housing Act, the Home Mortgage Disclosure Act, the Real Estate Settlement Procedures Act (RESPA), the Service Members’ Civil Relief Act, and implementing regulations promulgated thereunder. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions transact business with customers. The bank must comply with the applicable provisions of these consumer protection laws and regulations as part of its ongoing customer relations.
| Item 1A. | Risk Factors |
An investment in our common stock involves risks. You should carefully consider the risks described below in conjunction with the other information in this Form 10-K, including our consolidated financial statements and related notes, before investing in our common stock. If any of the following risks or other risks that have not been identified or that we may believe are immaterial or unlikely to actually occur, were to occur, then our business, financial condition and results of operations could be harmed. This could cause the price of our stock to decline, and you may lose part or all of your investment. This Form 10-K contains forward-looking statements that involve risks and uncertainties, including statements about our future plans, objectives, intentions and expectations. Past results are not a reliable indicator of future results, and historical trends should not be used to anticipate results or trends in future periods. Many factors, including those described below, could cause actual results to differ materially from those discussed in forward-looking statements.
Asset quality is our primary focus and concern going into 2010.
Our concentration in loans secured by real estate may increase our credit losses, which would negatively affect our financial results.
We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans. Many of our loans are secured by real estate (both residential and commercial) in our market area. Consequently, a decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loan portfolios are geographically diverse.
In addition to the financial strength and cash flow characteristics of the borrower in each case, we often secure loans with real estate collateral. At December 31, 2009, approximately 84.8% of our loans have real estate as a primary or secondary component of collateral. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. If we are required to liquidate the collateral securing a loan to satisfy the debt during a period of reduced real estate values, our earnings and capital could be adversely affected.
Risk of loan defaults and foreclosures are unavoidable in the banking industry, and we try to limit our exposure to this risk by monitoring our extensions of credit carefully. While the subprime loan problems of the financial industry did not have a direct impact on us in 2007 and early 2008, the economic implosion caused by the economic melt down in the last half of 2008 has increased the risk in our earning asset portfolios. The year 2009 brought on more past due loans, more foreclosures and more charge offs which we have a handle on, but 2010 will may bring further challenges. The economy for the near-term is expected to be unsettled with the potential for more downturns. Since we cannot fully eliminate credit risk and impact of the current economy, credit losses may occur in the future.
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We have a concentration of credit exposure in acquisition and development (“ADC”) real estate loans.
At December 31, 2009, we had approximately $82.6 million in loans for the acquisition and development of real estate and for construction of improvements to real estate, representing approximately 10.3% of our total loans outstanding as of that date. These loans are to developers, builders and individuals. Project types financed include acquisition and development of residential subdivisions and commercial developments, builder lines for 1-4 family home construction and loans to individuals for primary and secondary residence construction. These types of loans are generally viewed as having more risk of default than residential real estate loans. Completion of development projects and sale of developed properties may be affected significantly by general economic conditions, and further downturn in the local economy or in occupancy rates in the local economy where the property is located could increase the likelihood of default. Because our loan portfolio contains acquisition and development loans with relatively large balances, the deterioration of one or a few of these loans could cause a significant increase in our percentage of non-performing loans. An increase in non-performing loans could result in a loss of earnings from these loans, an increase in the provision for loan losses and an increase in charge-offs, all of which could have a material adverse effect on our financial condition and results of operations.
Our ADC loans have decreased 14.6% since December 31, 2008. The banking regulators are giving ADC lending greater scrutiny, and may require banks with higher levels of ADC loans to implement improved underwriting, internal controls, risk management policies and portfolio stress testing, as well as possibly higher levels of allowances for losses and capital levels as a result of ADC lending growth and exposures.
In 2009, the Company increased its allowance for loan losses by $1.6 million or 15.3% to match potential losses in our loan portfolio. The total balance of allowance for loan losses at December 31, 2009, was $12.2 million. Of this amount, a little over $2.3 million was allocated to the ADC type loans. We will continue to monitor our situation and make adjustments as warranted.
Our small to medium-sized business target market may have fewer financial resources to weather a downturn in the economy.
We target our commercial development and marketing strategy primarily to serve the banking and financial services needs of small and medium-sized businesses. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact this major economic sector in the markets in which we operate, our results of operations and financial condition may be adversely affected.
We may be adversely affected by economic conditions in our market area.
We operate in a mixed market environment with influences from both rural and urban areas. Because our lending operation is concentrated in the Eastern, Richmond and Tidewater areas of Virginia, we will be affected by the general economic conditions in these markets. Changes in the local economy may influence the growth rate of our loans and deposits, the quality of the loan portfolio, and loan and deposit pricing. A significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control would impact these local economic conditions and the demand for banking products and services generally, which could negatively affect our financial condition and performance. Although we might not have significant credit exposure to all the businesses in our areas, the downturn in any of these businesses could have a negative impact on local economic conditions and real estate collateral values generally, which could negatively affect our profitability.
If our allowance for loan losses becomes inadequate, our results of operations may be adversely affected.
We maintain an allowance for loan losses that we believe is a reasonable estimate of probable and inherent losses in our loan portfolio. Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio, the collateral supporting the loans and performance of our customers relative to their financial obligations with us. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and these losses may exceed our
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current estimates. Rapidly growing loan portfolios are, by their nature, unseasoned. As a result, estimating loan loss allowances is more difficult, and may be more susceptible to changes in estimates, and to losses exceeding estimates, than more seasoned portfolios.
Although we believe the allowance for loan losses is a reasonable estimate of probable and inherent losses in our loan portfolio, we cannot fully predict such losses or that our loan loss allowance will be adequate in the future. Excessive loan losses could have a material impact on our financial performance. Consistent with our loan loss reserve methodology, we expect to make additions to our loan loss reserve levels as a result of our loan growth, which may affect our short-term earnings.
Federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management. Any increase in the amount of our provision or loans charged-off as required by these regulatory agencies could have a negative effect on our operating results.
Difficult market conditions have adversely affected our industry.
Dramatic declines in the housing market over the past year, with falling home prices and increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of real estate related loans and resulted in significant write-downs of asset values by financial institutions. These write-downs, initially of asset-backed securities but spreading to other securities and loans, have caused many financial institutions to seek additional capital, to reduce or eliminate dividends, to merge with larger and stronger institutions and, in some cases, to fail. Reflecting concern about the stability of the financial markets generally and the strength of counterparties, many lenders and institutional investors have reduced or ceased providing funding to borrowers, including to other financial institutions. This market turmoil and tightening of credit have led to an increased level of commercial and consumer delinquencies, lack of consumer confidence, increased market volatility and widespread reduction of business activity generally. The resulting economic pressure on consumers and lack of confidence in the financial markets has adversely affected our business, financial condition and results of operations. Market developments may affect consumer confidence levels and may cause adverse changes in payment patterns, causing increases in delinquencies and default rates, which may impact our charge-offs and provision for credit losses. A worsening of these conditions would likely exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry.
Current levels of market volatility are unprecedented.
The capital and credit markets have been experiencing volatility and disruption for well over a year. Recently, the volatility and disruption has reached unprecedented levels. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuers’ underlying financial strength. If current levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.
The soundness of other financial institutions could adversely affect us.
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. Many of these transactions expose us to credit risk in the event of default of our counterparty or client. In addition, our credit risk may be exacerbated when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due us. To prepare us for these possibilities, we monitor the financial soundness of companies we deal with. However, there is no assurance that any such losses would not materially and adversely affect our results of operations.
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There can be no assurance that recently enacted legislation will stabilize the U.S. financial system.
On October 3, 2008, President Bush signed into law the Emergency Economic Stabilization Act of 2008 (the “EESA”). The legislation was the result of a proposal by Treasury Secretary Henry Paulson to the U.S. Congress in response to the financial crises affecting the banking system and financial markets and threats to investment banks and other financial institutions. Pursuant to the EESA, the U.S. Treasury will have the authority to, among other things, purchase up to $700 billion of mortgages, mortgage-backed securities and certain other financial instruments from financial institutions for the purpose of stabilizing and providing liquidity to the U.S. financial markets. On October 14, 2008, the U.S. Department of Treasury announced a program under the EESA pursuant to which it would make senior preferred stock investments in participating financial institutions (the “TARP Capital Purchase Program”). On October 14, 2008, the Federal Deposit Insurance Corporation announced the development of a guarantee program under the systemic risk exception to the Federal Deposit Act (“FDA”) pursuant to which the FDIC would offer a guarantee of certain financial institution indebtedness in exchange for an insurance premium to be paid to the FDIC by issuing financial institutions (the “FDIC Temporary Liquidity Guarantee Program”). Most recently, on February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009 (the “AARA”), which contains a wide array of provisions aimed at stimulating the U.S. economy.
There can be no assurance, however, as to the actual impact that the EESA, AARA and their implementing regulations, the FDIC programs, or any other governmental program will have on the financial markets. The failure of the EESA, AARA, the FDIC, or the U.S. government to stabilize the financial markets and a continuation or worsening of current financial market conditions could materially and adversely affect our business, financial condition, results of operations, and access to credit or the trading price of our common stock.
The impact on us of recently enacted legislation, in particular the Emergency Economic Stabilization Act of 2008 and the American Recovery and Reinvestment Act of 2009 and their implementing regulations, and actions by the FDIC, cannot be predicted at this time.
The programs established or to be established under the EESA, ARRA and Troubled Asset Relief Program may have adverse effects upon us. We may face increased regulation of our industry. Compliance with such regulation has increased our costs and may limit our ability to pursue business opportunities. Also, participation in specific programs has subjected us to additional restrictions. For example, participation in the TARP Capital Purchase Program has limited (without the consent of the Department of Treasury) our ability to increase our dividend or to repurchase our common stock for so long as any securities issued under such program remain outstanding. It has also subjected us to additional executive compensation restrictions. Similarly, programs established by the FDIC under the systemic risk exception of the FDA, whether we participate or not, may have an adverse effect on us. Participation in the FDIC Temporary Liquidity Guarantee Program likely requires the payment of additional insurance premiums to the FDIC.
We may incur losses if we are unable to successfully manage interest rate risk.
Our profitability will depend in substantial part upon the spread between the interest rates earned on investments and loans and the interest rates paid on deposits and other interest-bearing liabilities. These rates are normally in line with general market rates and rise and fall based on the asset liability committee’s view of our needs. However, we may pay above-market rates to attract deposits as we have done in some of our marketing promotions in the past. Changes in interest rates will affect our operating performance and financial condition in diverse ways including the pricing of securities, loans and deposits, and the volume of loan originations in our mortgage banking business. We attempt to minimize our exposure to interest rate risk, but we are unable to completely eliminate this risk. Our net interest spread will depend on many factors that are partly or entirely outside our control, including competition, federal economic, monetary and fiscal policies, and economic conditions generally. Our net interest income will be adversely affected if market interest rates change so that the interest we pay on deposits and borrowings increases faster than the interest we earn on loans and investments.
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We are experiencing strong competition from other banks and financial institutions for deposits. We may offer more competitive rates to our customers or find alternative funding sources to fund the growth in our loan portfolio. In 2009, we had a surplus of funds from internal deposit growth and the TARP funds but the low interest rate environment limited effective investment options until mid-year. In 2008 and 2007, deposit growth was not sufficient to fund our loan growth. In 2007, we were able to utilize the $23.5 million from our stock offering in late 2006 to fund loan growth early in the year. In addition, as we did in 2006, we used Federal Home Loan Bank advances and principal and interest payments on available-for-sale securities to make up the difference. In 2008, we borrowed from the FHLB early in the year but were able to fund a large part of our loan growth from the deposits we acquired from our purchase of 2 branches.
We rely heavily on our management team and the unexpected loss of any of those personnel could adversely affect our operations; we depend on our ability to attract and retain key personnel.
We are a customer-focused and relationship-driven organization. We expect our future growth to be driven in a large part by the relationships maintained with our customers by our president and chief executive officer and other senior officers. We have entered into employment agreements with four of our executive officers. The existence of such agreements, however, does not necessarily assure that we will be able to continue to retain their services. The unexpected loss of any of our key employees could have an adverse effect on our business and possibly result in reduced revenues and earnings. We do maintain bank-owned life insurance on key officers that would help cover some of the economic impact of a loss caused by death. The implementation of our business strategy will also require us to continue to attract, hire, motivate and retain skilled personnel to develop new customer relationships as well as new financial products and services. Many experienced banking professionals employed by our competitors are covered by agreements not to compete or solicit their existing customers if they were to leave their current employment. These agreements make the recruitment of these professionals more difficult. The market for these people is competitive, and we cannot assure you that we will be successful in attracting, hiring, motivating or retaining them.
Our future success is dependent on our ability to compete effectively in the highly competitive banking industry.
We face vigorous competition from other banks and other financial institutions, including savings and loan associations, savings banks, finance companies and credit unions for deposits, loans and other financial services in our market area. A number of these banks and other financial institutions are significantly larger than we are and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of banking services. To a limited extent, we also compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, insurance companies and governmental organizations which may offer more favorable financing than we can. Many of our non-bank competitors are not subject to the same extensive regulations that govern us. As a result, these non-bank competitors have advantages over us in providing certain services. While we believe we compete effectively with these other financial institutions in our primary markets, we may face a competitive disadvantage as a result of our smaller size, smaller asset base, lack of geographic diversification and inability to spread our marketing costs across a broader market. If we have to raise interest rates paid on deposits or lower interest rates charged on loans to compete effectively, our net interest margin and income could be negatively affected. Failure to compete effectively to attract new or to retain existing, clients may reduce or limit our margins and our market share and may adversely affect our results of operations, financial condition and growth.
We may not be able to successfully manage our growth, which may adversely affect our results of operations and financial condition.
During the last five years, we have experienced significant growth, and a key aspect of our business strategy is our continued growth and expansion. Our ability to continue to grow depends, in part, upon our ability to:
| • | open new branch offices or acquire existing branches or other financial institutions; |
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| • | attract deposits to those locations; and |
| • | identify attractive loan and investment opportunities. |
We may not be able to successfully implement our growth strategy if we are unable to identify attractive markets, locations or opportunities to expand in the future. Our ability to manage our growth successfully also will depend on whether we can maintain capital levels adequate to support our growth, maintain cost controls and asset quality and successfully integrate any businesses we acquire into our organization. As we continue to implement our growth strategy by opening new branches or acquiring branches or other banks, we expect to incur increased personnel, occupancy and other operating expenses. In the case of new branches, we must absorb those higher expenses while we begin to generate new deposits, and there is a further time lag involved in redeploying new deposits into attractively priced loans and other higher yielding earning assets. Thus, our plans for branch expansion could decrease our earnings in the short run, even if we efficiently execute our branching strategy.
We could sustain losses if our asset quality declines.
Our earnings are significantly affected by our ability to properly originate, underwrite and service loans. We could sustain losses if we incorrectly assess the creditworthiness of our borrowers or fail to detect or respond to deterioration in asset quality in a timely manner. Problems with asset quality could cause our interest income and net interest margin to decrease and our provisions for loan losses to increase, which could adversely affect our results of operations and financial condition.
We may face risks with respect to de novo banking opportunities and future acquisitions.
As a strategy, we have sought to increase the size of our franchise by pursuing business development opportunities, and we have grown rapidly since we were formed. As part of that strategy, we have grown primarily through opening new branches. We also acquired three branches in 2003, and purchased two branches in the first quarter of 2008. We may acquire other branches or financial institutions in the future, if a desirable opportunity presents itself. Growth through new branches or acquisitions involves a number of risks, including:
| • | the time and costs associated with identifying and evaluating where we should open a new branch and who may be a favorable acquisition or merger partner; |
| • | the estimates and judgments used to evaluate credit, operations, management and market risks with respect to any growth opportunity may not be accurate; |
| • | the time and costs of evaluating new markets, hiring experienced local management and opening new offices, and the time lags between these activities and the generation of sufficient assets and deposits to support the costs of the expansion; |
| • | entry into new markets where we lack experience; |
| • | our ability to finance an acquisition and possible ownership and economic dilution to our shareholders; |
| • | the diversion of our management’s attention to the negotiation of a transaction, and the integration of the operations and personnel of the combining businesses; |
| • | the introduction of new products and services into our business; |
| • | the incurrence and possible impairment of goodwill associated with an acquisition and possible adverse short-term effects on our results of operations; and |
| • | the loss of key employees and clients. |
We may incur substantial costs to expand, and we can give no assurance such expansion will result in the levels of profits we seek. There can be no assurance that integration efforts for any new branches or future mergers or acquisitions will be successful. Also, we may issue equity securities, including common stock and securities convertible into shares of our common stock, in connection with future acquisitions, which could cause ownership and economic dilution to our shareholders. There is no assurance that, following any future merger or acquisition, our integration efforts will be successful or we, after giving effect to the acquisition, will achieve profits comparable to or better than our historical experience.
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Our profitability may suffer because of rapid and unpredictable changes in the highly regulated environment in which we operate.
The banking industry is subject to extensive regulation by state and federal banking authorities. Many of the banking regulations we are governed by are intended to protect depositors, the public or the insurance fund maintained by the Federal Deposit Insurance Corporation rather than our shareholders. Banking regulations affect our lending practices, capital structure, investment practices, dividend policy and many other aspects of our business. These requirements may constrain our rate of growth, and changes in regulations could adversely affect us. The burden imposed by these federal and state regulations may place banks in a competitive disadvantage compared to less regulated competitors. In addition, the cost of compliance with regulatory requirements could adversely affect our ability to operate profitably. See “Supervision and Regulation” for more information about applicable banking laws and regulations.
The Sarbanes-Oxley Act of 2002, and the related rules and regulations promulgated by the Securities and Exchange Commission and NASDAQ that are applicable to us, have increased the scope, complexity and cost of corporate governance, reporting and disclosure practices, including the cost of completing our audit and maintaining our internal controls. As a result, we may experience greater compliance costs.
We may identify a material weakness or a significant deficiency in our internal control over financial reporting that may adversely affect our ability to properly account for non-routine transactions.
As we have grown and expanded, we have acquired and added, and expect to continue to acquire and add, businesses and other activities that complement our core retail and commercial banking functions. Such acquisitions or additions frequently involve complex operational and financial reporting issues that can influence management’s internal control system. While we make every effort to thoroughly understand any new activity or acquired entity’s business processes, our planning for proper integration into our company can give no assurance that we will not encounter operational and financial reporting difficulties impacting our internal control over financial reporting.
If we need additional capital in the future to continue our growth, we may not be able to obtain it on terms that are favorable. This could negatively affect our performance and the value of our common stock.
Our business strategy calls for continued growth. We anticipate that we will be able to support this growth through the generation of additional deposits at new branch locations, as well as investment opportunities. However, we may need to raise additional capital in the future to support our continued growth and to maintain our capital levels. Our ability to raise capital through the sale of additional securities will depend primarily upon our financial condition and the condition of financial markets at that time. We may not be able to obtain additional capital in the amounts or on terms satisfactory to us. Our growth may be constrained if we are unable to raise additional capital as needed.
Liquidity needs could adversely affect our results of operations and financial condition.
We rely on dividends from our bank as our primary source of funds. The primary sources of funds of our bank are client deposits and loan repayments. While scheduled loan repayments are a relatively stable source of funds, they are subject to the ability of borrowers to repay the loans. The ability of borrowers to repay loans can be adversely affected by a number of factors, including changes in economic conditions, adverse trends or events affecting business industry groups, reductions in real estate values or markets, business closings or lay-offs, inclement weather, natural disasters and international instability. Additionally, deposit levels may be affected by a number of factors, including rates paid by competitors, general interest rate levels, regulatory capital requirements, returns available to clients on alternative investments and general economic conditions. Accordingly, we may be required from time to time to rely on secondary sources of liquidity to meet withdrawal demands or otherwise fund operations. Such sources include Federal Home Loan Bank advances, sales of securities and loans, and federal funds lines of credit from correspondent banks, as well as out-of-market time deposits. While we believe that these sources are currently adequate, there can be no assurance they will be sufficient to meet future liquidity demands, particularly if we continue to grow and experience increasing loan demand. We may be required to slow or discontinue loan growth, capital expenditures or other investments or liquidate assets should such sources not be adequate.
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Our recent results may not be indicative of our future results.
We may not be able to sustain our historical rate of growth or may not even be able to grow our business at all. In addition, our recent and rapid growth may distort some of our historical financial ratios and statistics. In the future, we may be subject to various factors that may influence our performance such as the interest rate environment which can have drastic swings that impact our revenue stream and cost of funds, the state of the real estate market and the valuations associated with property that is collateral on loans, or the ability to find suitable expansion opportunities. Other factors, such as economic conditions, regulatory and legislative considerations and competition, may also impede or prohibit our ability to expand our market presence. If we experience a significant decrease in our historical rate of growth, our results of operations and financial condition may be adversely affected due to a high percentage of our operating costs being fixed expenses.
We depend on the accuracy and completeness of information about clients and counterparties.
In deciding whether to extend credit or enter into other transactions with clients and counterparties, we may rely on information furnished to us by or on behalf of clients and counterparties, including financial statements and other financial information. We also rely on representations of clients and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. For example, in deciding whether to extend credit to clients, we assume that a customer’s audited financial statements conform with GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. Our financial condition and results of operations could be negatively impacted to the extent we rely on financial statements that do not comply with GAAP or are materially misleading.
A substantial decline in the value of our Federal Home Loan Bank of Atlanta common stock may result in an other than temporary impairment charge.
We are a member of the Federal Home Loan Bank of Atlanta, or FHLB, which enables us to borrow funds under the Federal Home Loan Bank advance program. As a FHLB member, we are required to own FHLB common stock, the amount of which increases with the level of our FHLB borrowings. The carrying value and fair market value of our FHLB common stock was $8.9 million as of December 31, 2009 compared to $9.2 million at December 31, 2008. The $293 thousand decline was the result of liquidating FHLB stock in early January 2009 as we paid down some of our borrowings which is a normal practice with FHLB. The value of shares did not change. On January 30, 2009, the FHLB announced that in light of the FHLB’s other-than-temporary impairment analysis it was deferring the declaration of the fourth quarter dividend and later decided not to pay a dividend. The FHLB also suspended daily repurchases of FHLB common stock, which adversely affects the liquidity of these shares. Consequently, there is a risk that our investment could be deemed other than temporarily impaired at some time in the future. However, in August of 2009, the FHLB resumed dividend payments but at a lower rated which minimizes but does not alleviate potential risk in these assets.
Increases in FDIC insurance premiums may cause our earnings to decrease.
The Emergency Economic Stabilization Act of 2008 temporarily increased the limit on FDIC coverage to $250,000 for all accounts through December 31, 2009. As a result, the FDIC almost doubled its assessment rate on well-capitalized institutions by raising the assessment rate 7 basis points at the beginning of 2009. The FDIC has adopted another final rule effective April 1, 2009, to change the way that the FDIC’s assessment system differentiates for risk, make corresponding changes to assessment rates beginning with the second quarter of 2009, as well as other changes to the deposit insurance assessment rules. In May 2009, the Board of Directors of the FDIC voted to levy a special assessment of five basis points on an FDIC-insured depository institution’s assets, minus Tier 1 capital, as of June 30, 2009. The special assessment will be capped at 10 basis points of an institution’s domestic deposits. We are also participating in the FDIC’s Temporary Liquidity Guarantee Program, or TLG, for noninterest-bearing transaction deposit accounts. Banks that participate in the TLG’s noninterest
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bearing transaction account guarantee will pay the FDIC an annual assessment of 10 basis points on the amounts in such accounts above the amounts covered by FDIC deposit insurance. To the extent that these TLG assessments are insufficient to cover any loss or expenses arising from the TLG program, the FDIC is authorized to impose an emergency special assessment on FDIC-insured depository institutions. Legislation has been proposed to give the FDIC authority to impose charges for the TLG program upon depository institution holding companies, as well. These changes, along with the full utilization of our FDIC insurance assessment credit in early 2009, will cause the premiums and TLG assessments charged by the FDIC to increase. These actions could significantly increase our noninterest expense in 2010 and for the foreseeable future.
Declines in value may adversely impact the investment securities portfolio.
We may be required to record other-than-temporary impairment charges on our investment securities if they suffer a decline in value that is considered other-than-temporary. Numerous factors, including lack of liquidity for re-sales of certain investment securities, absence of reliable pricing information for certain investment securities, adverse changes in business climate, adverse actions by regulators, or unanticipated changes in the competitive environment could have a negative effect on our securities portfolio in future periods. An other-than-temporary impairment charge could have a material adverse effect on our results of operations and financial condition.
| Item 1B. | Unresolved Staff Comments |
None.
| Item 2. | Properties |
Our principal executive offices are located at 330 Hospital Road, Tappahannock, Virginia 22560 where a 15,632 square foot corporate headquarters and operations center was opened in July 2003. We merged our three subsidiary banks into one bank in April 2006. At the end of 2008, EVB owned 25 full service branch buildings including the land on which 19 of those buildings are located and two remote drive-in facilities. Six branch office buildings are leased at current market rates. The counties of Gloucester, Northumberland and Middlesex are each the home to three of our branches. Essex and King William County are home to two branch offices. In addition, Essex County houses the EVB loan administration center and the corporate/operations center. Hanover County houses four branch offices (two of which are leased) while Caroline, Henrico, Lancaster, New Kent, Southampton, Surry, Sussex Counties and Colonial Heights each have one full service branch office. Southampton County and Sussex County also have stand-alone drive-in/automated teller machine locations. All properties are in good condition. The land on which the Hartfield office is located is under long-term lease.
On February 26, 2009, we utilized a 1031 “like kind” exchange transaction to transfer the 5.5 acre parcel of unimproved land purchased in 2008 on Walnut Grove Road in Hanover County for a 5.5 acre parcel of unimproved land in the Bell Creek business park in anticipation of future growth needs. On September 15, 2009, we purchased an additional 2 acres of land adjacent to the Bell Creek property. In November 2009, we purchased 3 business condo units (2,400 square feet per unit) at Atlee Condos in Hanover County. All of these properties were purchased in anticipation of future space needs and to lower or eliminate current rental costs. No new branches were built or purchased in 2009.
While the existing locations are meeting our needs, and many may meet our needs into the future, we are a growing entity and are frequently reevaluating our locations and space needs. Our strategy of continued growth through purchases, relocations or de novo branching may require expansions or relocations in the future.
| Item 3. | Legal Proceedings |
We and our subsidiaries are not aware of any material pending or threatened litigation, unasserted claims and/or assessments, other than ordinary routine litigation incidental to our business.
| Item 4. | Submission of Matters to a Vote of Security Holders |
None in the fourth quarter of 2009.
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Executive Officers of the Registrant
Following are the persons who are currently executive officers of Eastern Virginia Bankshares, Inc., their ages as of December 31, 2009, their current titles and positions held during the last five years:
Joe A. Shearin, 53, joined our Company in 2001 as the president and chief executive officer of Southside Bank until 2006 when he became president and chief executive officer of EVB. Mr. Shearin became the president and chief executive officer of our Company in 2002.
Joseph H. James, Jr., 54, took on the responsibilities of chief operating officer in January 2009 and became senior executive vice president. Prior to this promotion, he was an executive vice president of EVB and the chief operations officer of our Company since April 2006. Mr. James joined us in 2000 as vice president and operations manager. From April 2002 until November 2002, Mr. James was our vice president and chief operations officer. From November 2002 through April 2006, Mr. James was our senior vice president and chief operations officer.
Ronald L. Blevins, 65, has been our chief financial officer since 2000. He served as our senior vice president from December 2000 until April 2006. In April 2006, he was named an executive vice president of EVB.
James S. Thomas, 55, has been an executive vice president and Chief Credit Officer of EVB since June 2007. He joined Southside Bank in 2003 as senior vice president and retail banking manager. In 2005, he became executive vice president and chief operating officer of Southside Bank and served in that position through April 2006. In April 2006, Mr. Thomas became executive vice president – retail banking of EVB. Prior to joining Southside Bank, Mr. Thomas was vice president of South Trust from 2002 to 2003 and a senior vice president and senior credit officer of Bank of Richmond from 2001 to 2002.
The Board of Directors has approved a Code of Ethics for all directors, officers and staff of our Company and its subsidiaries. The Code of Ethics is designed to promote honest and ethical conduct, proper disclosure of financial information in our periodic reports, and compliance with applicable laws, rules, and regulations by our senior officers who have financial responsibilities. The Code of Ethics is available on our web page at www.bankevb.com.
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
The information titled “Common Stock Performance and Dividends” set forth on the last page of the 2009 Annual Report to Shareholders is incorporated herein by reference and is filed herewith as Exhibit 13.1.
Dividend Policy
We have historically paid cash dividends on a quarterly basis. However, we cannot guarantee that we will continue to pay cash dividends on any particular schedule or that we will not reduce the amount of dividends we pay in the future. Our future dividend policy is subject to the discretion of the board of directors and will depend upon a number of factors deemed relevant by our board, including but not limited to the future consolidated earnings, financial condition, liquidity, capital requirements for us and EVB, applicable governmental regulations and policies.
As a result of our issuance of Preferred Stock to the Treasury on January 9, 2009, new requirements have taken effect. The Preferred Stock is in a superior ownership position compared to common stock. Dividends are to be paid to the preferred stock holder before they can be paid to the common stock holder. In addition, prior to January 9, 2012, unless the Company has redeemed the Preferred Stock or the Treasury has transferred the Preferred Stock to a third party, the consent of the Treasury will be required for the Company to increase its common stock dividend or repurchase its common stock or other equity or capital securities, other than in certain circumstances
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specified in the Purchase Agreement with the Treasury. If the dividends on the Preferred Stock have not been paid for an aggregate of six (6) quarterly dividend periods or more, whether or not consecutive, the Company’s authorized number of directors will be automatically increased by two (2) and the holders of the Preferred Stock will have the right to elect those directors at the Company’s next annual meeting or at a special meeting called for that purpose; these two directors will be elected annually and will serve until all accrued and unpaid dividends for all past dividend periods have been declared and paid in full.
We are organized under the Virginia Stock Corporation Act, which prohibits the payment of a dividend if, after giving it effect, the corporation would not be able to pay its debts as they become due in the usual course of business or if the corporation’s total assets would be less than the sum of its total liabilities plus the amount that would be needed, if the corporation were to be dissolved, to satisfy the preferential rights upon dissolution of any preferred shareholders.
We are a legal entity separate and distinct from our subsidiaries. Our ability to distribute cash dividends will depend primarily on the ability of EVB to pay dividends to us, and EVB is subject to laws and regulations that limit the amount of dividends that it can pay. As a state member bank, EVB is subject to certain restrictions imposed by the reserve and capital requirements of federal and Virginia banking statutes and regulations. The Federal Reserve and the state of Virginia have the general authority to limit the dividends paid by insured banks if the payment is deemed an unsafe and unsound practice. Both the state of Virginia and the Federal Reserve have indicated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsound and unsafe banking practice. Under Virginia law, a bank may not declare a dividend in excess of its undivided profits.
Under the Federal Reserve’s regulations, EVB may not declare or pay any dividend if the total amount of all dividends, including the proposed dividend, is in excess of its net income for the current year plus any retained net income from the prior two calendar years, unless the dividend is approved by the Federal Reserve. In addition, EVB may not declare or pay a dividend without the approval of its board and two-thirds of its shareholders if the dividend would exceed its undivided profits, as reported to the Federal Reserve.
In addition, we are subject to certain regulatory requirements to maintain capital at or above regulatory minimums. These regulatory requirements regarding capital affect our dividend policies. The Federal Reserve has indicated that a bank holding company should generally pay dividends only if its net income available to common shareholders over the past year has been sufficient to fully fund the dividends, and the prospective rate of earnings retention appears consistent with the organization’s capital needs, asset quality and overall financial condition.
| Item 6. | Selected Financial Data |
The information set forth on the page following the “To Our Shareholders” letter in the 2009 Annual Report to Shareholders is incorporated herein by reference and is filed herewith as Exhibit 13.2.
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation |
Management’s discussion and analysis is intended to assist the reader in evaluating and understanding the consolidated results of operations and our financial condition. The following analysis provides information about the major components of the results of operations, financial condition, liquidity and capital resources of Eastern Virginia Bankshares 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 (Item 6 above) and the Consolidated Financial Statements and Notes to Consolidated Financial Statements (Item 8 below).
Forward Looking Statements
Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We caution you to be aware of the speculative nature of “forward-looking statements.” These statements are not guarantees of performance or results. Statements that are not historical in nature, including statements that include the words “may,” “anticipate,” “estimate,” “could,” “should,” “would,” “will,” “plan,”
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“predict,” “project,” “potential,” “expect,” “believe,” “intend,” “continue,” “assume” and similar expressions, are intended to identify forward-looking statements. Although these statements reflect our good faith belief based on current expectations, estimates and projections about (among other things) the industry and the markets in which we operate, they are not guarantees of future performance. Whether actual results will conform to our expectations and predictions is subject to a number of known and unknown risks and uncertainties, including the risks and uncertainties discussed in this Form 10-K, including the following:
| • | our ability to assess and manage our asset quality; |
| • | the strength of the economy in our target market area, as well as general economic, market, or business conditions; |
| • | changes in the quality or composition of our loan or investment portfolios, including adverse developments in borrower industries, decline in real estate values in our markets, or in the repayment ability of individual borrowers or issuers; |
| • | The impact of government intervention in the banking business; |
| • | an insufficient allowance for loan losses as a result of inaccurate assumptions; |
| • | changes in the interest rates affecting our deposits and our loans; |
| • | the loss of any of our key employees; |
| • | changes in our competitive position, competitive actions by other financial institutions and the competitive nature of the financial services industry and our ability to compete effectively against other financial institutions in our banking markets; |
| • | our ability to manage growth; |
| • | our potential growth, including our entrance or expansion into new markets, the opportunities that may be presented to and pursued by us and the need for sufficient capital to support that growth; |
| • | changes in government monetary policy, interest rates, deposit flow, the cost of funds, and demand for loan products and financial services; |
| • | our ability to maintain internal control over financial reporting; |
| • | our ability to raise capital as needed by our business; |
| • | our reliance on secondary sources, such as Federal Home Loan Bank advances, sales of securities and loans, federal funds lines of credit from correspondent banks and out-of-market time deposits, to meet our liquidity needs; |
| • | changes in laws, regulations and the policies of federal or state regulators and agencies; and |
| • | other circumstances, many of which are beyond our control. |
Consequently, all of the forward-looking statements made in this filing are qualified by these cautionary statements and there can be no assurance that the actual results anticipated by us will be realized or, even if substantially realized, that they will have the expected consequences to, or effects on, us or our business or operations. You should refer to risks detailed under the “Risk Factors” section included in this Form 10-K and in our periodic and current reports filed with the Securities and Exchange Commission for specific factors that could cause our actual results to be significantly different from those expressed or implied by our forward-looking statements.
Critical Accounting Policies
General
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. For example, we use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ substantially from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.
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Allowance for Loan Losses
The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) FASB ACS 450, Accounting for Contingencies, which requires that losses be accrued when their occurrence is probable and estimable and (ii) FASB ACS 310, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of the collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.
We evaluate non-performing loans individually for impairment, such as nonaccrual loans, loans past due 90 days or more, restructured loans and other loans selected by management. The evaluations are based upon discounted expected cash flows or collateral valuations. If the evaluation shows that a loan is individually impaired, then a specific reserve is established for the amount of the impairment. If a loan evaluated individually is not impaired, then the loan is assessed for impairment. In an effort to better develop the estimate used for allowance for loan loss, we have implemented a PC based software system to document and perform consistent calculations and document the logic and reasons for the estimate on a monthly basis. While it gives a more controlled environment, some decisions or estimates as to the collectability of a loan are left with the Chief Credit Officer and the loan committee. Specific information, including the comments of the loan officer and the credit officer, is maintained within this software by utilizing a separate tab for each loan that has a specific reserve assigned. Each tab has the same format and performs the calculations based on the prescribed procedure.
For loans without individual measures of impairment, we make estimates of losses for groups of loans. Loans are grouped by similar characteristics, including the type of loan, the assigned loan grade and general collateral type. A loss rate reflecting the expected loss inherent in a group of loans is derived based upon historical loss rates for each loan type, the predominant collateral type for the group and the terms of the loan. The resulting estimates of losses for groups of loans are adjusted for relevant environmental factors and other conditions of the portfolio of loans including: borrower or industry concentrations; levels and trends in delinquencies, charge-offs and recoveries; changes in risk selection; level of experience, ability and depth of lending staff; and national and local economic conditions. The allowance for loan loss software maintains a tab which calculates the reserve assigned to each group based on the variables listed above.
The amounts of estimated losses for loans individually evaluated for impairment and groups of loans are added together for a total estimate of loan losses. The estimate of losses is compared to our allowance for loan losses as of the evaluation date and, if the estimate of losses is greater than the allowance, an additional provision to the allowance would be considered. If the estimate of losses is less than the allowance, the degree to which the allowance exceeds the estimate is evaluated to determine whether a reduction to the allowance would be necessary. While management uses the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the valuations. Such adjustments would be made in the relevant period and may be material to the Consolidated Financial Statements. In 2009, additional provisions were made to bring the total allowance in line with the projected estimate.
Other-Than-Temporary Impairment
On a quarterly basis our Investment Committee reviews any securities which are considered to be impaired as defined by accounting guidance. During this review, the Committee determines if the impairment is deemed to be other-than-temporary. If it is determined that the impairment is other-than-temporary, i.e. impaired because of credit issues rather than interest rate, the investment is written down through the Statement of Operations in accordance with accounting guidance.
Goodwill
Goodwill is evaluated annually to see if there is any impairment associated with its value. Refer to Footnote 1, item goodwill on page 68.
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Executive Overview
During 2009, the financial instability of 2008 continued to impact the banking industry. In the aftermath of the subprime mortgage crisis, the FNMA and FHMC issues of impairment and conservatorship and the rapid rate cutting by the Federal Reserve in 2008, our industry also was faced with revisions to TARP by a new administration, an unprecedented increase in bank failures and the resulting valuation decline in pooled trust preferred securities that derived value from the cash flow they receive from the participating banks. The bank failures also precipitated a cash flow problem for the FDIC, which prompted a special assessment on insured banks and the prepayment of future assessments. In addition, the federal government continues to debate the overhaul of the bank regulatory structure and hierarchy creating uncertainty in the banking industry concerning the ultimate impact of these changes. Within this environment, the recession continued most of the year with higher unemployment, lower new home starts, growing bankruptcy filings and higher loan delinquencies. While the economy appears to have started a slow but staggered resurgence, we expect that 2010 will be the year banks’ capital will be tested by the number of loans that go bad and how many more banks fail.
We believe Eastern Virginia Bankshares, Inc. is strong and viable. We have a strong capital base. We have experienced lenders and collectors, who are doing all they can to minimize the financial damage to customers and the bank. We initiated a special loan program to assist customers who are having difficulty with their mortgage debt and have booked over $7.6 million in these loans through December 31, 2009 and have growing demand for the product. We continue to have demand for loans. We have survived economic downturns for the past one hundred years and expect to continue that tradition.
Despite the depressed economy, our balance sheet, the primary driver of income, grew in 2009. Total assets increased $74.9 million from $1.05 billion at the end of 2008 to $1.13 billion at the end of 2009. Gross loans, our primary earning asset, are up $33.8 million and deposits are up $39.3 million, compared to 2008 year end. Federal funds sold at year end were zero but we spent much of the year in a sold position with an average balance for the year of $20.1 million. Most of this surplus of funds was caused by the $24 million in TARP money that we received in January of 2009. Federal funds purchased at year end 2009 were $24.2 million as we used the low cost of these funds to fund a short term securities transaction at year end. FHLB borrowings decreased $11.4 million as we paid off a maturing loan and paid down others. As a result of this growth, we believe that we are well positioned to start 2010 with the potential to produce a good earnings flow. However, as we learned in 2009, the economic downturn that we are experiencing can produce surprises which can impact our earnings potential. In 2009, we felt the full impact of bank failures when we took an other-than-temporary impairment charge on most of our preferred trust investments. This resulted in an $18.9 million write down that resulted in a loss of $8.8 million in net income and $10.3 million in income available to common shareholders. We were profitable in the first and fourth quarters but our earnings were negatively impacted by increased FDIC expense, higher provision for loan loss, the impact of nonaccrual interest lost, the added impact of a cumulative dividend on the new preferred stock and costs related to the terminated merger with First Capital Bank. The investment write down allowed us to strengthen our balance sheet by removing the unrealized loss for the downgraded investments. The result was higher risk weighted capital ratios and a stronger company moving forward. We believe that EVB’s earnings potential is in the balance sheet but in 2010 we will have to work through loan challenges and project continued high provision expense. If the economy improves in 2010, we expect to benefit with increased earnings.
Net income (loss) for the year ended December 2009 was a net loss of $8.8 million, an $11.9 million decrease from net income of $3.1 million in 2008. Net income (loss) available to common shareholders was a loss of $10.3 million, or $1.73 per share. Net interest income in 2009 increased by $100 thousand from $32.6 million in 2008 to $32.7 million in 2009. Income from earning assets (not FTE) decreased $2.7 million, while the cost of funding declined $2.8 million. The yield on earning assets was down 80 basis points as a result of the lower interest rate environment created by the Federal Reserve in 2008 and pricing pressure. While loans were pricing at lower rates and interest and fees from loans declined $1.6 million from 2008, our securities portfolio was influenced by the lower rates of new investments and the loss or lowering of some income sources as they decreased $1.0 million from the 2008 levels. The securities income decline was the result of the loss of FNMA and FHLMC income and
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preferred trust income while FHLB suspended its dividend early in 2009 then paid a lower dividend later in the year. The cost of funds decrease was the result of year long re-pricing moves in all our deposit categories with most of the results showing in the second half of the year, especially the fourth quarter. We are encouraged by this interest expense swing since it resulted in increased quarterly net interest margins in the fourth quarter for the first time in almost two years.
Noninterest income was a charge of $12.5 million for 2009, a decrease of $15.5 million compared to $3.0 million in 2008. The driver of the loss was the $18.9 million impairment loss taken on the trust preferred investment instruments which was the result of defaulted and deferred interest payments from the debt issuers. Other noninterest income categories were impacted by the economy as deposit service charges were down 3.8% to $3.8 million from $4.0 million in 2008. Card fees were up 4.8% to $1.2 million compared to $1.1 million in 2008. This had been a double digit growth product over the last few years.
Noninterest expense increased $2.7 million, primarily from a $1.2 million increase in FDIC expense and $658 thousand in merger-related expenses. Salary and benefits increased as a result of higher pension plan and group insurance expense. Occupancy costs were up in operating categories such as utilities, building supplies and rental, while equipment expense was up $299 thousand primarily from a $277 thousand increase in the IT service contract and software maintenance expenses. This last expense was the result of software upgrades across our PC network. Increases in the other expenses category, other than the FDIC and merger expenses, were controlled with limited increases and a decline in marketing and advertisement costs.
Management is encouraged by what we believe are the initial signs of an economic turn around and, while it may be slow in emerging, we are confident that when the economy does expand that we are in a position to benefit from it. In 2009, we committed to “maintain the stability of our company”. While the economy impacted us in unanticipated ways in 2009, we feel we are in a good position to take on 2010. Our primary challenge is in asset quality, which we address on an almost daily basis. Until the economy improves, growth will be limited, and our plan for 2010 is to concentrate on our existing markets and build our relationships with existing customers. However, while we do not plan any new branch openings in 2010, we are open to opportunities that may present themselves. If these opportunities arise, we will evaluate them and will act to enhance shareholder value.
Results of Operations
The table below lists our quarterly performance for the years ended December 31, 2009 and 2008.
SUMMARY OF FINANCIAL RESULTS BY QUARTER
| Three Months Ended | |||||||||||||||||||||||||||||
| 2009 | 2008 | ||||||||||||||||||||||||||||
| (dollars in thousands) |
Dec. 31 | Sep. 30 | June 30 | Mar. 31 | Dec. 31 | Sep. 30 | June 30 | Mar. 31 | |||||||||||||||||||||
| Interest income |
$ | 14,091 | $ | 14,047 | $ | 14,656 | $ | 13,933 | $ | 14,415 | $ | 15,177 | $ | 15,031 | $ | 14,763 | |||||||||||||
| Interest expense |
5,227 | 5,990 | 6,464 | 6,369 | 6,643 | 6,816 | 6,792 | 6,558 | |||||||||||||||||||||
| Net interest income |
8,864 | 8,057 | 8,192 | 7,564 | 7,772 | 8,361 | 8,239 | 8,205 | |||||||||||||||||||||
| Provision for loan losses |
1,700 | 850 | 750 | 900 | 1,225 | 1,050 | 1,300 | 450 | |||||||||||||||||||||
| Net interest income after provision for loan losses |
7,164 | 7,207 | 7,442 | 6,664 | 6,547 | 7,311 | 6,939 | 7,755 | |||||||||||||||||||||
| Noninterest income |
1,440 | (13,217 | ) | (2,269 | ) | 1,557 | 1,418 | (3,039 | ) | 1,934 | 2,657 | ||||||||||||||||||
| Noninterest expense |
7,920 | 7,313 | 8,036 | 7,379 | 7,305 | 6,986 | 7,059 | 6,595 | |||||||||||||||||||||
| Income (loss) before applicable income taxes |
684 | (13,323 | ) | (2,863 | ) | 842 | 660 | (2,714 | ) | 1,814 | 3,817 | ||||||||||||||||||
| Applicable income taxes (benefit) |
(78 | ) | (4,805 | ) | (1,092 | ) | 119 | (1,554 | ) | 355 | 560 | 1,145 | |||||||||||||||||
| Net Income (loss) |
762 | (8,518 | ) | (1,771 | ) | 723 | 2,214 | (3,069 | ) | 1,254 | 2,672 | ||||||||||||||||||
| Effective dividend on preferred stock |
373 | 372 | 372 | 342 | — | — | — | — | |||||||||||||||||||||
| Net income (loss) available to common shareholders |
$ | 389 | $ | (8,890 | ) | $ | (2,143 | ) | $ | 381 | $ | 2,214 | $ | (3,069 | ) | $ | 1,254 | $ | 2,672 | ||||||||||
| Net income (loss) per share, basic and diluted |
$ | 0.07 | $ | (1.50 | ) | $ | (0.36 | ) | $ | 0.06 | $ | 0.38 | $ | (0.52 | ) | $ | 0.21 | $ | 0.45 | ||||||||||
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Net Interest Income
The primary source of income for our company is net interest income which represents our 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 35% and adjusted by the Tax Equity and Fiscal Responsibility Act (“TEFRA”) adjustment. This latter adjustment is 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. By making these adjustments, tax-exempt income and their yields are presented on a comparable basis with income and yields from fully taxable earning assets. Net interest margin is a ratio based on the formula of net interest income divided by average earning assets which represents the profits left over after paying for deposits and borrowed funds. 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. Below, the “Average Balances, Income and Expense, Yields and Rates” table presents average balances, interest income on earning assets and related average yields, as well as interest expense on interest-bearing liabilities and related average rates paid, for each of the past three years.
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Average Balances, Income and Expense, Yields and Rates (2)
| Year Ended December 31 | ||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||||||||||||||
| (dollars in thousands) |
Average Balance |
Income/ Expense |
Yield/ Rate |
Average Balance |
Income/ Expense |
Yield/ Rate |
Average Balance |
Income/ Expense |
Yield/ Rate |
|||||||||||||||||||||
| Assets: |
||||||||||||||||||||||||||||||
| Securities |
||||||||||||||||||||||||||||||
| Taxable (1) |
$ | 112,607 | $ | 4,981 | 4.42 | % | $ | 114,507 | $ | 6,273 | 5.48 | % | $ | 104,116 | $ | 5,522 | 5.30 | % | ||||||||||||
| Tax exempt (2) |
46,974 | 2,737 | 5.83 | % | 40,482 | 2,388 | 5.90 | % | 34,325 | 2,038 | 5.94 | % | ||||||||||||||||||
| Total securities |
159,581 | 7,718 | 4.84 | % | 154,989 | 8,661 | 5.59 | % | 138,441 | 7,560 | 5.46 | % | ||||||||||||||||||
| Interest bearing deposits in other banks |
12,094 | 99 | 0.82 | % | ||||||||||||||||||||||||||
| Federal funds sold |
20,130 | 43 | 0.21 | % | 4,416 | 84 | 1.90 | % | 12,382 | 638 | 5.15 | % | ||||||||||||||||||
| Loans (net of unearned income) (3) |
821,539 | 49,702 | 6.05 | % | 768,519 | 51,371 | 6.68 | % | 681,456 | 50,626 | 7.43 | % | ||||||||||||||||||
| Total earning assets |
1,013,344 | 57,562 | 5.68 | % | 927,924 | 60,116 | 6.48 | % | 832,279 | 58,824 | 7.07 | % | ||||||||||||||||||
| Less allowance for loan losses |
(11,247 | ) | (9,489 | ) | (7,296 | ) | ||||||||||||||||||||||||
| Total non-earning assets |
97,151 | 77,978 | 58,920 | |||||||||||||||||||||||||||
| Total assets |
$ | 1,099,248 | $ | 996,413 | $ | 883,903 | ||||||||||||||||||||||||
| Liabilities & Shareholders’ Equity: |
||||||||||||||||||||||||||||||
| Interest bearing deposits |
||||||||||||||||||||||||||||||
| Checking |
$ | 185,436 | $ | 2,815 | 1.52 | % | $ | 144,558 | $ | 2,925 | 2.02 | % | $ | 105,494 | $ | 1,864 | 1.77 | % | ||||||||||||
| Savings |
74,081 | 540 | 0.73 | % | 74,667 | 671 | 0.90 | % | 81,843 | 950 | 1.16 | % | ||||||||||||||||||
| Money market savings |
84,192 | 1,367 | 1.62 | % | 52,321 | 1,256 | 2.40 | % | 40,817 | 983 | 2.41 | % | ||||||||||||||||||
| Large dollar certificates of deposit (4) |
177,650 | 5,935 | 3.34 | % | 143,115 | 6,376 | 4.46 | % | 120,735 | 5,799 | 4.80 | % | ||||||||||||||||||
| Other certificates of deposit |
235,097 | 7,584 | 3.23 | % | 242,184 | 9,109 | 3.76 | % | 212,967 | 9,525 | 4.47 | % | ||||||||||||||||||
| Total interest-bearing deposits |
756,456 | 18,241 | 2.41 | % | 656,845 | 20,337 | 3.10 | % | 561,856 | 19,121 | 3.40 | % | ||||||||||||||||||
| Federal Funds Purchased |
1,725 | 18 | 1.04 | % | 3,817 | 91 | 2.38 | % | 1,353 | 73 | 5.40 | % | ||||||||||||||||||
| Other borrowings |
134,955 | 5,791 | 4.29 | % | 144,529 | 6,381 | 4.42 | % | 121,378 | 5,768 | 4.75 | % | ||||||||||||||||||
| Total interest-bearing liabilities |
893,136 | 24,050 | 2.69 | % | 805,191 | 26,809 | 3.33 | % | 684,587 | 24,962 | 3.65 | % | ||||||||||||||||||
| Noninterest-bearing liabilities |
||||||||||||||||||||||||||||||
| Demand deposits |
93,154 | 96,874 | 98,282 | |||||||||||||||||||||||||||
| Other liabilities |
11,520 | 7,770 | 11,375 | |||||||||||||||||||||||||||
| Total liabilities |
997,810 | 909,835 | 794,244 | |||||||||||||||||||||||||||
| Shareholders’ equity |
101,438 | 86,578 | 89,659 | |||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity |
$ | 1,099,248 | $ | 996,413 | $ | 883,903 | ||||||||||||||||||||||||
| Net interest income |
$ | 33,512 | $ | 33,307 | $ | 33,862 | ||||||||||||||||||||||||
| Interest rate spread (5) |
2.99 | % | 3.15 | % | 3.42 | % | ||||||||||||||||||||||||
| Interest expense as a percent of average earning assets |
2.37 | % | 2.89 | % | 3.00 | % | ||||||||||||||||||||||||
| Net interest margin (6) |
3.31 | % | 3.59 | % | 4.07 | % | ||||||||||||||||||||||||
Notes:
| (1) | Includes restricted securities which are carried at cost. |
| (2) | Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 35%. |
| (3) | Nonaccrual loans have been excluded in the computations of average loan balances. |
| (4) | Large dollar certificates of deposit are certificates issued in amounts of $100,000 or greater. |
| (5) | 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. |
| (6) | Net interest margin is the net interest income, calculated on a fully taxable basis assuming a federal income tax rate of 35%, expressed as a percentage of average earning assets. |
Tax-equivalent net interest income increased 0.62% to $33.5 million in 2009 from $33.3 million in 2008. Average earning assets grew 9.2%, or $85.4 million in 2009 compared to 11.5%, or $95.6 million in 2008, while interest-bearing liabilities grew 10.9%, or $87.9 million, in 2009 compared to 17.6%, or $120.6 million, in the prior period. The 2008 growth was aided by the purchase of two branches from Millennium bank. Despite growth on both sides of the balance sheet in both 2009 and 2008, the 2009 yield on earning assets was 5.68% down 80 basis points from the 2008 yield on earning assets of 6.48% and after a decline of 59 basis points in the 2008 to 2007 comparable
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period. The cost of interest bearing liabilities did not decline at the same rate. In 2009, this cost was 2.69% compared to a cost of 3.33% in 2008 a decline of 64 basis points which was double the 2008 to 2007 decline of 32 basis points. Average loans excluding nonaccrual loans grew $53.0 million in 2009 to $821.5 million compared to $768.5 million in 2008. In spite of the growth in our loans, these earning assets were re-pricing or being added to the portfolio at lower yields while the largest portion of our interest bearing liabilities, certificates of deposits, re-priced slowly over the last two years. However, the interest rate spread declined 16 basis points in 2009 compared to a decline of 27 basis points in the prior year comparison. This demonstrates the narrowing of the re-pricing gap that has existed over the last two years. All categories of earning assets grew in 2009 except for taxable securities. Average securities were up $4.6 million with a decline of $1.9 million in taxable securities and a $6.5 million increase in tax exempt securities. Taxable securities income in 2009 decreased $1.3 million as a result of the absence of FNMA and FHLMC securities income, a sharp decline in trust preferred income and a lower FHLB dividend. Tax exempt income in 2009 increased $349 thousand, after a $350 thousand increase in the 2008 to 2007 period and reflects a conscious effort by management to restructure the portfolio. As a result of the TARP money received early in the year, the average balance of Federal funds was up $15.7 million in 2009 at $20.1 million compared to $4.4 million in 2008. The infusion of these funds, while welcomed, presented a challenge since federal funds were earning below 25 basis points, so management spent a large part of the year redeploying these funds to higher earning assets while experiencing the earnings drag during the first half of 2009.
For 2009, total average interest bearing deposits grew $99.6 million, or 15.2%, with increases in all categories except savings and consumer certificates of deposit as consumers continued to move to interest bearing checking and money market savings. For 2009, interest bearing checking experienced the largest growth in total dollars and increased $40.9 million, despite interest rate changes which lowered the product’s yield 50 basis points to 1.52% in 2009 compared to 2.02% for 2008. This category is comprised mostly of our Reward checking product with its above market interest rate and demonstrates customers’ interest in better returns on their deposit funds. In 2009, interest bearing checking was 24.5% of the total average interest bearing deposits portfolio, compared to 22% in 2008. The largest percentage increase in interest bearing deposits in 2009 was money market savings which grew $31.9 million or 60.9% when compared to 2008 totals, also despite a decline of 78 basis points in its rate from 2.40% in 2008 to 1.62% in 2009. Savings average balances were down slightly to $74.1 million in 2009 from $74.7 in 2008. Consumer certificates, comprising 36.9% of our average interest-bearing deposit base in 2008 but 26.3% in 2009, decreased $7.1 million. The certificate balance changes were influenced by a decrease in brokered deposits and a movement out of the bank by CD depositors whose only relationship with the bank was a CD based solely on interest rate. Large dollar certificates of deposit increased $34.6 million from $143.1 million in 2008 to $177.7 million in 2009. The interest cost of all interest bearing deposits decreased in all categories except money market where the volume increase accounted for the higher interest expense. Total cost of interest bearing deposits in 2009 was $18.2 million compared to $20.3 million in 2008. Certificates of deposits accounted for $1.97 million of the cost decrease as consumer certificates were down $1.5 million. The movement of funds from longer term instruments which are paying lower rates to liquid higher yielding instruments, points to our customers need for liquidity in the current economic environment and the desire to be flexible as rates eventually move up. Average borrowings are down in 2009 as we paid off a $9.0 million FHLB borrowing early in the year and have not needed to borrow any funds during the year. By the end of the year, management moved to a funds purchased position to take advantage of the lower rates for short term and over night funding while maximizing the spread from higher yielding earning assets. Average noninterest bearing demand deposits decreased $3.7 million compared to 2008 continuing a trend seen over the last two years.
In 2008, average earning assets grew 11.5% or $95.6 million, while interest bearing liabilities grew 17.6% or $120.6 million. Average loans grew $87.1 million from a combination of loans purchased with the Millennium branch deal and growth in our existing markets. Average deposits grew $95.0 million, or 16.9%, again influenced by the branch purchases. The yield on average earning assets declined 59 basis points, while the rate on interest bearing liabilities was down 32 basis points for a decline in the net rate spread of 27 basis points. This large decline was the result of the rapid interest rate cuts implemented by the Federal Reserve over late 2007 and 2008. Average securities were up $16.5 million, while Federal funds were down $8.0 million. Borrowings from the FHLB increased $23.1 million. Net interest margin was 3.59% down 48 basis points from 4.07% for 2007.
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The “Volume and Rate Analysis” table that follows reflects changes in interest income and interest expense resulting from changes in average volume and average rates.
Volume and Rate Analysis (1)
| 2009 vs. 2008 Increase (Decrease) Due to Changes in: |
2008 vs. 2007 Increase (Decrease) Due to Changes in: |
|||||||||||||||||||||||
| (dollars in thousands) |
Volume | Rate | Total | Volume | Rate | Total | ||||||||||||||||||
| Earning Assets: |
||||||||||||||||||||||||
| Taxable securities |
$ | (204 | ) | $ | (1,195 | ) | $ | (1,399 | ) | $ | 559 | $ | 192 | $ | 751 | |||||||||
| Tax exempt securities (2) |
377 | (28 | ) | 349 | 364 | (14 | ) | 350 | ||||||||||||||||
| Loans (net of unearned income) |
4,264 | (5,933 | ) | (1,669 | ) | 5,150 | (5,704 | ) | (554 | ) | ||||||||||||||
| Interest bearing deposits in other banks |
— | 99 | 99 | |||||||||||||||||||||
| Federal funds sold |
(54 | ) | 14 | (40 | ) | 1,019 | (274 | ) | 745 | |||||||||||||||
| Total earning assets |
4,383 | (7,043 | ) | (2,660 | ) | 7,092 | (5,800 | ) | 1,292 | |||||||||||||||
| Interest-Bearing Liabilities: |
||||||||||||||||||||||||
| Interest checking |
(822 | ) | 712 | (110 | ) | 770 | 291 | 1,061 | ||||||||||||||||
| Savings deposits |
(6 | ) | (126 | ) | (132 | ) | (80 | ) | (199 | ) | (279 | ) | ||||||||||||
| Money market accounts |
236 | (124 | ) | 112 | 277 | (4 | ) | 273 | ||||||||||||||||
| Consumer certificates of deposit |
811 | (1,252 | ) | (441 | ) | 2,200 | (1,623 | ) | 577 | |||||||||||||||
| Large denomination certificates (3) |
9,978 | (11,503 | ) | (1,525 | ) | 16 | (432 | ) | (416 | ) | ||||||||||||||
| Long-term borrowings |
(503 | ) | (160 | ) | (663 | ) | 1,138 | (507 | ) | 631 | ||||||||||||||
| Total interest-bearing liabilities |
9,694 | (12,453 | ) | (2,759 | ) | 4,321 | (2,474 | ) | 1,847 | |||||||||||||||
| Change in net interest income |
$ | (5,311 | ) | $ | 5,410 | $ | 99 | $ | 2,771 | $ | (3,326 | ) | $ | (555 | ) | |||||||||
Notes:
| (1) | Changes caused by the combination of rate and volume are allocated based on the percentage caused by each. |
| (2) | Income and yields are reported on a tax-equivalent basis, assuming a federal tax rate of 35%. |
| (3) | Large denomination certificates are those issued in amounts of $100 thousand or greater. |
Interest Sensitivity
Our primary goals in interest rate risk management are to minimize negative 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 fixed rate average maturity of asset and liability contracts reasonably consistent and short, and by routinely adjusting pricing to market conditions on a regular basis.
We generally strive to maintain a position flexible enough to move to 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. Interest rate gaps are managed through investments, loan pricing and deposit pricing. 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.
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In a year where the bond rate yield curve moved back to a more normal slope and the Federal Reserve did not change rates, our balance sheet moved back to an asset sensitive status. In an environment where we anticipate rates will rise sometime in the near future, late 2010 or first quarter 2011, we have moved to a position where we have more assets set to re-price than liabilities and based on model forecasts, this appears to be the situation for at least the next year. Depositors remain uncertain about where to put their money, especially with the probability of a continuation of the current economic recession, and are keeping their funds in more liquid investments which will allow them to react to any rate increases. Our balances in interest checking and money market savings accounts have been our fastest growing deposit categories, as customers looking for safer investments have moved deposits to us. With the decreases in the interest rates paid on deposits and the lag in them repricing, our current interest sensitivity position is where we want to be going into 2010.
Noninterest Income
Noninterest income (charge) for 2009 was ($12.5) million, a decrease of $15.5 million, compared to 2008. This decline was driven by ($18.9) million in impairment charges in the pooled trust preferred securities in our available for sale securities portfolio. The losses were brought on by the closing or depressed income streams of many banks in 2008 and 2009 which resulted in defaults or deferred payments of the interest requirements on the pooled trust preferred instruments that backed these securities. For more information, see “Securities” starting at page 42. Other items in the noninterest income category were influenced by the recessionary economy. Service charges on deposit accounts, normally the largest source of noninterest income, decreased by $150 thousand or 3.8% from $4.0 million in 2008 to $3.8 million in 2009. Debit card and ATM fee income, which had grown rapidly over the last few years, increased $54 thousand or 4.8% from $1.1 million in 2008 to $1.2 million in 2009. Both of these categories were influenced by the depressed economy as customers opted to watch their spending, monitor their check book balances and utilize their debit cards on a less frequent basis. Other operating income declined $657 thousand from $1.6 million in 2008 to $1.0 million in 2009. This was the result of decreases of $46 thousand in investment services income and $47 thousand in EVB Mortgage, Inc. income and a write down of LLC investments in CRA driven community development and housing development funds of $346 thousand. These were offset slightly by increases of $20 thousand in title and insurance income, of $16 thousand in wire transfer fees, and $4 thousand in bank owned life insurance (“BOLI”) income. There were no fixed asset sales gains in 2009, compared to a $128 thousand gain in 2008. Realized gains on sale of securities increased $22 thousand from $44 thousand to $66 thousand in 2009 as a result of securities calls during the year. There was a non- recurring item in 2008, a $1.3 million actuarial gain from our pension plan restructuring. OREO gains or losses which are influenced by the economy and market valuations increased $586 thousand to $357 thousand in 2009 from ($229) thousand in 2008. With $4.1 million in OREO properties at period end, this category could change radically in 2010.
Noninterest income for 2008 was $3.0 million, a decrease of $3.1 million or 51.4% compared to 2007. This decline was primarily the result of $4.9 million of impairments on securities, partially offset by a $1.3 million actuarial gain from our pension plan restructuring and a $229 thousand other-than-temporary impairment of an OREO asset. In 2008 we recognized through the Statement of Operations a $4.6 million OTTI charge on investments in the preferred stock of Federal Home Loan Mortgage Co (“FHLMC”) and Federal Home Loan Mortgage Association (“FNMA”). Service charges on deposit accounts, the largest source of noninterest income, increased by $320 thousand or 8.7% from $3.7 million in 2007 to $4.0 million in 2008. Debit card and ATM fee income increased $291 thousand or 34.5% from $844 thousand in 2007 to $1.1 million in 2008. Service charge fees were strong until the fourth quarter when the economy appears to have forced consumers to look more closely at expenses, especially fees for overdrawing their accounts. Other operating income was impacted by decreases of $154 thousand in investment services income and $81 thousand in EVB Mortgage, Inc. income and increases of $18 thousand in bank owned life insurance (“BOLI”) income and $15 thousand in wire transfer fees. LLC investments and fixed asset sales increased $274 thousand primarily from a one time benefit from the exchange of our ownership in Bankers Investment for a similar interest in Infinex. Realized gains on sale of securities increased $30 thousand from $14 thousand to $44 thousand in 2008.
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The following table shows the components of noninterest income for the periods indicated.
Noninterest Income (Charges):
| Years Ended December 31 | |||||||||||
| (dollars in thousands) |
2009 | 2008 | 2007 | ||||||||
| Service Charges of deposit accounts |
$ | 3,841 | $ | 3,991 | $ | 3,671 | |||||
| Card transaction fees |
1,189 | 1,135 | 844 | ||||||||
| Other Operating Income |
977 | 1,506 | 1,568 | ||||||||
| Gain on available for sale securities |
66 | 44 | 14 | ||||||||
| Impairment - Securities |
(18,919 | ) | (4,933 | ) | — | ||||||
| Gain on the sale of fixed assets |
— | 128 | 13 | ||||||||
| Gain (impairment) on the sale of OREO |
357 | (229 | ) | — | |||||||
| Actuarial Gain on Pension Curtailment |
— | 1,328 | — | ||||||||
| Noninterest Income (Charges) |
$ | (12,489 | ) | $ | 2,970 | $ | 6,110 | ||||
Noninterest Expense
Total noninterest expense for 2009 increased $2.7 million or 9.7% compared to an increase of $2.1 million or 8.0% for 2008. Noninterest expense was $30.6 million in 2009 compared to $27.9 million in 2008. The three biggest contributors to this increase were a $1.2 million increase in FDIC expense, and $658 thousand in various other expense categories related to the terminated merger. Total salary and benefits expenses increased $478 thousand, or 3.2%, from $14.8 million in 2008 to $15.3 million in 2009. While salaries were frozen in 2009, the total increased $185 thousand, or 2.6% from new hires and some promotions, pension expense increased $290 thousand from $651 thousand in 2008 and FASB 91 deferrred cost declined $167 thousand from $1.8 million in 2008 to $1.6 million in 2009. These increases were slightly offset by a $100 thousand decrease in bonus expense from $150 thousand to $50 thousand in 2009. Fulltime equivalent staff count decreased in 2009 to 315 from 317 at year end 2008.
Net occupancy and equipment expense increased $406 thousand, or 8.6%, to $5.1 million in 2009 from $4.7 million for 2008. Increases in service contracts and software maintenance and software amortization comprised $398 thousand of this increase as we upgraded our software infrastructure during the year. Rental expense rose $43 thousand from lease increases and some minor office space expansion. With no major projects planned in 2010, many of the expense categories should reflect normal operating increases.
Total other expenses increased $1.8 million, or 21.6%, to $10.2 million in 2009 from $8.4 million in 2008. FDIC expense increased $1.2 million as a result of increased assessments and a $500 thousand special assessment. In addition we absorbed $658 thousand in expenses initially classified as merger expenses which were related to our proposed merger of First Capital Bank of Richmond. With the termination of that transaction in the fourth quarter of 2009, these expenses were reclassified to the appropriate expense categories. These expenses would not have occurred if we had not had the merger process in place during the year. Consultant fees increased $98 thousand from $653 in 2008 primarily from added costs related to the merger. Telephone expense increased $74 thousand due to an expanded network for the whole year. Marketing expense decreased $137 thousand as a result of no branch opening expenses and management controlling all line items in this category. Other operating expenses increased $514 thousand from $4.9 million in 2008 to $5.4 million in 2009. Within this category, loan expenses were up $518 thousand, primarily from increases of $230 thousand in collection expense, $147 thousand in OREO expense on foreclosed properties, $96 thousand cost for special loan closings and $56 thousand in higher credit card expenses. The collection and OREO increases reflect the economic impact on our customer’s ability to pay which we expect to continue in 2010. The special closing costs are related to a loan program we put in place in 2009 to assist customers by refinancing there loans and we paid the closing costs.
Our credit card expenses rose as a result of increased charges from our servicer. Legal expenses increased $218 thousand from $170 thousand in 2008 to $389 thousand in 2009. Legal fee increases were from continued assistance with TARP issues, an increase in assistance with loan situations and the fees associated with the merger
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planning and applications filed with the Federal Reserve Bank and the SEC. Declines in other expense categories helped to offset some of these increases as office supplies, printing and forms declined $121 thousand, courier expense decline $70 thousand, director fees down $57 thousand, education and training down $48 thousand, travel and lodging down $43 thousand and customer meals down $35 thousand. All these expenses are controllable expenses, meaning management has a direct impact on their occurrence; the decreases in these expense categories emphasizes the control management exercised over these expenses in 2009. Management plans to tightly control these expenses in 2010 unless and until we believe they can assist us in attracting new or holding on to existing customers.
For 2008, total noninterest expense increased $2.1 million or 8.0% compared to an increase of $55 thousand, or 0.2% in 2007. Noninterest expense was $27.9 million in 2008 compared to $25.9 million in 2007. Total personnel expense increased $229 thousand, or 1.6%, from $14.5 million in 2007 to $14.8 million in 2008.
Net occupancy and equipment expense increased $456 thousand or 10.6% to $4.7 million for 2008, compared to $4.3 million in 2007. Over $226 thousand of this increase was related to the acquisition of 2 new branches in 2008, while the remainder was from normal operating increases such as rent, utilities and cleaning expenses.
Other noninterest expenses increased $1.4 million or 19.7% to $8.4 million in 2008 from $7.0 million in 2007. Most of this increase was related to our branch acquisitions, higher FDIC expense which increased $365 thousand and higher loan expenses of $190 thousand. Marketing expense increased $118 thousand from expenses related to the branch openings.
The following table shows the components of noninterest expense for the periods indicated.
Noninterest Expense:
| Years Ended December 31 | |||||||||
| (dollars in thousands) |
2009 | 2008 | 2007 | ||||||
| Salaries and employee benefits |
$ | 15,254 | $ | 14,776 | $ | 14,547 | |||
| Occupancy and equipment |
5,144 | 4,738 | 4,282 | ||||||
| Consultant Fees |
751 | 653 | 629 | ||||||
| Telephone |
1,070 | 996 | 613 | ||||||
| Marketing and advertising |
737 | 874 | 756 | ||||||
| FDIC |
1,705 | 465 | 100 | ||||||
| Collection/reposesion/OREO |
569 | 193 | 62 | ||||||
| Other operating expenses |
5,418 | 5,250 | 4,885 | ||||||
| Total Noninterest Expense |
$ | 30,648 | $ | 27,945 | $ | 25,874 | |||
Income Taxes
As a result of the securities impairment, we had an income tax benefit in 2009 of $5.9 million, compared to an expense of $506 thousand in 2008. Tax expense in 2007 was $3.5 million. In 2009, increased tax exempt income also influenced tax expense slightly.
Note 9 in the Consolidated Financial Statements presents a reconciliation between the amount of income tax expense computed using the federal statutory income tax rate and our actual income tax expense. Also included in Note 9 to the Consolidated Financial Statements is information regarding deferred taxes for 2009 and 2008. That Note is incorporated by reference into this section of Management’s Discussion and Analysis.
Loan Portfolio
Loans, net of unearned income and including nonaccruals, increased to $853.0 million at December 31, 2009, an increase of $33.8 million, or 4.1%, from $819.3 million at year-end 2008. The real estate loan portfolio continued to drive growth in 2009, increasing $26.7 million, or 3.3%, with the commercial, industrial and agricultural loan
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portfolio increasing by $13.5 million, or 19.6%, and consumer loans declining by $4.8 million, or 10.2%. While the dollar amount of the increase in real estate loans was the highest single category, the mix has changed with real estate construction loans down $15.1 million as we decreased our exposure to acquisition and development business in 2009. Consumer loan balances continue a declining trend with 2007 being an anomaly with a slight gain. The increases in loan balances are the result of growth within our existing markets and we expect 2010 growth to be from a similar source. The Gloucester and Richmond areas continue to offer opportunities for steady growth. While real estate construction loans declined, real estate mortgage loans grew $28.8 million, or 7.7% and commercial real estate loans grew $12.9 million, or 5.8%. In 2009, loan growth was steady but provided decreased volume compared to 2008.
At year-end 2008, loans, net of unearned income, were $819.3 million, up $110.4 million or 15.6% from $708.8 million at year-end 2007. Loan growth for all periods reported was primarily driven by increases in the real estate portfolio. In the fourth quarter of 2008, the Company performed a loan scrub of all loan categories which resulted in some movement from category to category. The changes put us in position to more effectively report our loan categories based on Federal Reserve definitions.
The following table shows the composition of the loan portfolio at the dates indicated.
| At December 31 | ||||||||||||||||||||
| (dollars in thousands) |
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
| Commercial, industrial and agricultural loans |
$ | 82,563 | $ | 69,024 | $ | 60,778 | $ | 59,859 | $ | 55,732 | ||||||||||
| Residential real estate mortgage |
400,846 | 372,067 | 317,767 | 288,114 | 263,191 | |||||||||||||||
| Real estate construction |
87,782 | 102,837 | 98,877 | 85,910 | 47,620 | |||||||||||||||
| Commercial real estate |
234,676 | 221,769 | 178,011 | 164,948 | 151,897 | |||||||||||||||
| Consumer loans |
42,416 | 47,226 | 52,170 | 51,446 | 55,680 | |||||||||||||||
| All other loans |
4,786 | 6,354 | 1,243 | 305 | 321 | |||||||||||||||
| Total loans |
853,069 | 819,277 | 708,846 | 650,582 | 574,441 | |||||||||||||||
| Less unearned income |
(6 | ) | (11 | ) | (29 | ) | (90 | ) | (356 | ) | ||||||||||
| Total loans net of unearned discount |
853,063 | 819,266 | 708,817 | 650,492 | 574,085 | |||||||||||||||
| Less allowance for loan losses |
(12,155 | ) | (10,542 | ) | (7,888 | ) | (7,051 | ) | (6,601 | ) | ||||||||||
| Net loans |
$ | 840,908 | $ | 808,724 | $ | 700,929 | $ | 643,441 | $ | 567,484 | ||||||||||
The following table presents loan categories that are particularly sensitive to rate changes:
Remaining Maturities of Selected Loans
| Within 1 year |
Variable Rate | Fixed Rate | Total Maturities | |||||||||||||||||||||
| Year Ended December 31, 2009 (in thousands) |
1 to 5 years |
After 5 years |
Total | 1 to 5 years |
After 5 years |
Total | ||||||||||||||||||
| Commercial & Agricultural |
$ | 8,356 | $ | 6,027 | $ | 72 | $ | 6,099 | $ | 59,848 | $ | 3,755 | $ | 63,603 | $ | 78,058 | ||||||||
| Real Estate Construction |
23,607 | 7,651 | 125 | 7,776 | 48,844 | 3,235 | 52,079 | 83,462 | ||||||||||||||||
Loans secured by real estate comprised approximately 84.8% of our loan portfolio at December 31, 2009. Within this category, residential real estate mortgages made up 47.0% of the loan portfolio at year end 2009, 45.4% at December 31, 2008 and 44.8% at year-end 2007. While residential real estate mortgages grew $28.8 million, or 7.7%, real estate construction loans declined $15.1 million changing the mix of the portfolio and lowering the $87.8 million in this category to just 10.3% of the portfolio compared to 12.6% in 2008. As a percentage of the portfolio, commercial real estate loans increased from 27.1% of the total loan portfolio at year-end 2008 to 27.5% at year-end 2009. Our losses on loans secured by real estate have historically been low, about $141 thousand per year over the last 10 years, but the impact of the economy has changed this in 2009 as we had $1.5 million in charge offs and $1.4 million in net charge offs. With such a large portion of our portfolio secured by real estate and property valuations still dropping, management recognizes that 2010 presents some major challenges.
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While consumer loans are the fifth largest component of our loan portfolio comprising 5.0% of the portfolio at year-end 2009 compared to 5.8% at year-end 2008 and 7.4% at year-end 2007, it is also a steadily declining balance. The portfolio’s primary component consists of installment loans. Net consumer loans for household, family and other personal expenditures totaled $42.4 million at 2009 year-end, a decrease of $4.8 million from $47.2 million at 2008 year-end and very close to the $4.9 decline during the period 2008 – 2007. The continued decline in this category is the result of intense competition for consumer borrowing dollars and changes in consumer lifestyle resulting in increasing emphasis on fast and easy one-step loans. While automobile loans were once a major part of our consumer loan portfolio, we have opted out of the automobile dealer loan market because the dealers can offer 0% and lower interest loans and for the same reason, we receive fewer direct auto loan requests. We even compete with ourselves in this category since our HELOC and second mortgage products cover many of the loan purposes previously covered in consumer loans. These circumstances continue and we expect will continue a trend that started in 2002 of decreasing consumer loans both in absolute amount and percentage of the total loan portfolio.
Commercial and agricultural loans are designed specifically to meet the needs of small and medium size business customers. This category of loans increased $13.5 million, or 19.6% to $82.6 million at December 31, 2009 compared to $69.0 million at December 31, 2008. In 2009 it amounted to 9.7% of our portfolio compared to only 8.4% of the total portfolio at year-end 2008 compared to 8.6% at year-end 2007. Management believes much of this growth is the result of businesses taking on debt as working capital to get over the slow times the recession has brought on.
Consistent with our focus on providing community-based financial services, we generally do not make loans outside of our principal market region. We do not engage in foreign lending activities; consequently the loan portfolio is not exposed to the sometimes volatile risk from foreign credits. We further maintain a policy not to originate or purchase loans classified by regulators as highly leveraged transactions or loans to foreign entities or individuals. Our unfunded loan commitments, excluding credit card lines and letters of credit, at year-end 2009 total $109.5 million compared to $117.2 million at 2008 year end. Unfunded loan commitments (excluding $52.8 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, our loan collateral has been primarily real estate because of the nature of our market region. However, as we expand into newer markets at the fringe of our existing market foot print, we are encountering other collateral options which in lieu of real estate, are booked based on strong credit guidelines and controls to monitor the status of the collateral.
Asset Quality
Our allowance for loan losses is an estimate of the amount needed to provide for inherent losses in the loan portfolio. In determining adequacy of the allowance, we consider our historical loss experience, the size and composition of the loan portfolio, specific impaired loans, the overall level of nonaccrual loans, the value and adequacy of collateral and guarantors, experience and depth of lending staff, effects of credit concentrations and economic conditions. As mentioned previously, in an effort to better monitor and utilize this large number of variables, we installed a PC based program designed to track the allowance for loan loss, calculate the expected amount to cover a distressed loan and present a total of all loss requirement either based on loan groupings or specific allowance reserves within loan groups. Based on the sum from this model, the allowance is increased by expensing to the provision for loan losses an estimated amount that management deems needed to bring the total allowance for loan losses to the estimated level at the end of each monthly period. The offset to the expense is the allowance account on the balance sheet to which charge offs, net of recoveries are posted. 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. Our ratio of nonperforming assets to total loans and other real estate owned at year-end 2009 increased to 3.88% compared to 2.04% at December 31, 2008 and up from 0.40% at December 31, 2007.
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The continued increase in this measure points out the severity of the national recession and its impact on the lending environment. Nonperforming assets increased $16.5 million, or 98.8% to $33.2 million at year-end 2009, compared to $16.7 million at year end 2008. Net charge offs for 2009 increased $727 thousand or 39.1% to $2.6 million, compared to $1.9 million for the year 2008.
We have a loan review committee consisting of bank officers and board members. Additionally, an independent credit review firm performs a review of loans, including a FASB ACS 310 review for determining specific reserves. We utilize the PC program that is risk based to accumulate the required reserve based on the regulatory purpose code loan types, specific reserve within a loan type, collateral with updates on the valuation of the real estate, equipment or other assets and the payment history on the loan and the experience with the borrower now and in the past to determine the amount of the allowance for loan losses. Management believes the allowance for loan losses to be adequate based on this loan review process and analysis. In the current lending environment with the economic markets stressed and our borrowers struggling, management expensed $4.2 million to the provision for loan loss compared to $4.0 million expensed in 2008 and expects to reserve a similar amount in 2010 as the risk assessments dictate. In 2009, at year-end, EVB had a ratio of allowance for loan losses to total loans outstanding of 1.42% compared to 1.29% at year-end 2008 and to 1.11% at December 31, 2007, respectively. For the same dates, the loan loss allowance to nonaccrual loans ratio was 62.9%, 77.4% and 544.4%, indicating that, while the allowance appears adequate, its ability to cover the nonaccrual loans has narrowed and management sees these loans as their primary area of focus in 2010. The adequacy of the allowance for loan losses is subject to regulatory examinations and review of such factors as the method used to calculate the allowance and the size of the allowance in comparison to regulatory identified peer companies. The regulators during their exams can also require us to write off a loan that they consider a loss based on their evaluation.
We will continue to adjust our loan loss reserve in 2010 as our portfolio risks dictate. We will work with our customers, where feasible, through these tough economic times. In addition, we will review all of the new initiatives that the U.S. government implements that may offer relief to our borrowers.
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The following table shows loan charge-offs, loan recoveries, and loan loss provision for the periods indicated.
Allowance for Loan Losses
| Years Ended December 31 | ||||||||||||||||||||
| (Dollars in thousands) |
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
| Average loans outstanding, net of unearned income (1) |
$ | 835,076 | $ | 773,838 | $ | 681,456 | $ | 614,330 | $ | 537,736 | ||||||||||
| Allowance for loan losses, January 1 |
10,542 | 7,888 | 7,051 | 6,601 | 6,676 | |||||||||||||||
| Loans charged off: |
||||||||||||||||||||
| Commercial and agricultural |
410 | 441 | 37 | 37 | 156 | |||||||||||||||
| Real estate |
1,498 | 1,092 | 98 | 42 | 67 | |||||||||||||||
| Consumer |
1,086 | 880 | 726 | 691 | 895 | |||||||||||||||
| Total loans charged off |
2,994 | 2,413 | 861 | 770 | 1,118 | |||||||||||||||
| Recoveries: |
||||||||||||||||||||
| Commercial and agricultural |
65 | 170 | 63 | 23 | 66 | |||||||||||||||
| Real estate |
54 | 30 | 27 | 23 | 36 | |||||||||||||||
| Consumer |
288 | 354 | 370 | 449 | 389 | |||||||||||||||
| Total recoveries |
407 | 554 | 460 | 495 | 491 | |||||||||||||||
| Net loans charged off |
2,587 | 1,859 | 401 | 275 | 627 | |||||||||||||||
| Adjustment from branch purchase |
488 | |||||||||||||||||||
| Provision for loan losses |
4,200 | 4,025 | 1,238 | 725 | 552 | |||||||||||||||
| Allowance for loan losses, December 31 |
$ | 12,155 | $ | 10,542 | $ | 7,888 | $ | 7,051 | $ | 6,601 | ||||||||||
| Ratios: |
||||||||||||||||||||
| Ratio of allowance for loan losses to total loans outstanding, end of year |
1.42 | % | 1.29 | % | 1.11 | % | 1.08 | % | 1.15 | % | ||||||||||
| Ratio of net charge-offs to average loans outstanding during the year |
0.31 | % | 0.24 | % | 0.06 | % | 0.04 | % | 0.12 | % | ||||||||||
Notes:
| (1) | Includes nonaccrual loans |
The following table shows the allocation of allowance for loan losses at the dates indicated.
Allocation of Allowance for Loan Losses
| At December 31 | ||||||||||||||||||||||||||||||
| 2009 | 2008 | 2007 | 2006 | 2005 | ||||||||||||||||||||||||||
| Allowance | Percent | Allowance | Percent | Allowance | Percent | Allowance | Percent | Allowance | Percent | |||||||||||||||||||||
| Commercial and agricultural |
2,683 | 9.7 | % | 1,454 | 8.4 | % | $ | 1,235 | 8.57 | % | $ | 1,061 | 9.20 | % | $ | 1,893 | 9.08 | % | ||||||||||||
| Real estate mortgage |
3,131 | 47.0 | % | 2,309 | 45.4 | % | 1,145 | 44.83 | % | 1,144 | 44.29 | % | 763 | 49.22 | % | |||||||||||||||
| Real estate construction |
4,092 | 10.3 | % | 2,624 | 12.6 | % | 1,606 | 13.95 | % | 1,066 | 13.21 | % | 492 | 4.61 | % | |||||||||||||||
| Commercial real estate |
1,553 | 27.5 | % | 3,021 | 27.1 | % | 2,569 | 25.11 | % | 2,630 | 25.35 | % | 2,037 | 25.62 | % | |||||||||||||||
| Consumer |
481 | 5.0 | % | 969 | 5.8 | % | 981 | 7.36 | % | 949 | 7.91 | % | 1,258 | 11.45 | % | |||||||||||||||
| Other loans and overdrafts |
215 | 0.6 | % | 84 | 0.8 | % | 55 | 0.18 | % | 54 | 0.04 | % | — | 0.02 | % | |||||||||||||||
| Total allowance for balance sheet loans |
12,155 | 100.0 | % | 10,461 | 100.0 | % | 7,591 | 100.00 | % | 6,904 | 100.00 | % | 6,443 | 100.00 | % | |||||||||||||||
| Unallocated |
— | 81 | 297 | 147 | 158 | |||||||||||||||||||||||||
| Total allowance for loan losses |
$ | 12,155 | $ | 10,542 | $ | 7,888 | $ | 7,051 | $ | 6,601 | ||||||||||||||||||||
(Percent is loans in category divided by total loans)
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Nonperforming Assets
Total nonperforming assets, consisting of nonaccrual loans, restructured loans, loans past due 90 days or more, and other real estate owned, increased $16.5 million or 99% to $33.2 million at year-end 2009, while total loans outstanding, net of unearned discount, increased $33.8 million or 4.1% to $853.1 million for the same period. The ratio of nonperforming assets to total loans and other real estate at year-end 2009 was 3.88% compared to 2.04% at year-end 2008. These sharp increases in the ratios reflect the impact the recession is having on our customers and the increased risk in our loan portfolio.
Nonperforming loans at year-end 2009 were $29.1 million which included $19.3 million in nonaccrual loans with $14.7 million of the nonaccrual loans secured by real estate in our market area, $4.5 million of commercial and agricultural loans and $104 thousand of consumer loans. Based on estimated fair values of the related collateral using independent, third party appraisers, we consider the nonperforming real estate loans recoverable, with any individual deficiency covered by the allowance for loan losses. We have no agricultural loans on nonaccrual at December 31, 2009 and the commercial nonaccruals primarily consist of two customers with $3.7 million and $657 thousand, respectively. Some of these customer’s loans are cross collateralized with real estate and we have $1.3 million and $416 thousand in specific reserve, respectively. Between these reserves and the various collateral items, management believes the debt will be covered. Excluding the two customers mentioned above, we have $146 thousand in non real estate secured nonaccrual loans at December 31, 2009. All non-real estate secured and unsecured loans are automatically placed on nonaccrual status when they reach the 90 day past due mark. Some loans can be and are placed on nonaccrual status at the time when the collection of principal and interest are considered to be doubtful. Real Estate loans 90 days or more are reviewed and placed on non-accrual at the discretion of the collection manager. Credit card loans and other personal loans are typically charged off before reaching 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 unlikely. No interest is accrued on loans placed in a nonaccrual status, and any unpaid interest previously accrued on such loans is reversed when a loan is placed in nonaccrual status. If interest on nonaccrual loans had been accrued, such income would have approximated $893 thousand and $571 thousand for the years 2009 and 2008, respectively.
Troubled debt restructure (TDR) loans are loans that we have worked out agreements with the borrower, usually to their advantage, in order to help the borrower work through a difficult time. At December 31, 2009, we had $6.7 million, or 30 loans, in this category. All these loans are secured by some type of real estate and are monitored on a monthly basis to see that they are following the agreement. It is hoped that these loans will return to a normal status in the future.
At December 31, 2009, we had approximately $615 thousand in loans in the process of foreclosure. This number fluctuates as borrowers bring loans current, pay them out or have them sold at the foreclosure auction. Loans that the bank buys back at foreclosure go to the other real estate owned (OREO) category. This is the last category in nonperforming assets and amounted to $4.1 million at year end 2009 compared to $560 thousand at year end 2008. The OREO balance consists of twenty properties with $2.0 million in other construction loans, $1.7 million in 1-4 family residential real estate construction loans and $368 thousand in 1-4 family residential mortgages. This is an increase from our historical levels and reflects a weak and slow real estate market, since balances are staying in this category for a longer period of time. All of the balances at the end of 2008 were disposed of in 2009 and none of the balances have been on the books for more than 10 months.
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The following table shows nonperforming assets at the dates indicated.
Nonperforming Assets
| At December 31, | ||||||||||||||||||||
| (dollars in thousands) |
2009 | 2008 | 2007 | 2006 | 2005 | |||||||||||||||
| Nonaccrual loans |
$ | 19,321 | $ | 13,574 | $ | 1,449 | $ | 1,400 | $ | 884 | ||||||||||
| Restructured loans |
6,699 | — | — | — | — | |||||||||||||||
| Loans past due 90 days and accruing interest |
3,090 | 2,590 | 358 | 1,504 | 1,655 | |||||||||||||||
| Total nonperforming loans |
29,110 | 16,164 | 1,807 | 2,904 | 2,539 | |||||||||||||||
| Other real estate owned |
4,136 | 560 | 1,056 | — | — | |||||||||||||||
| Total nonperforming assets |
$ | 33,246 | $ | 16,724 | $ | 2,863 | $ | 2,904 | $ | 2,539 | ||||||||||
| Nonperforming assets to total loans and |
3.88 | % | 2.04 | % | 0.40 | % | 0.45 | % | 0.44 | % | ||||||||||
| other real estate owned |
||||||||||||||||||||
| Allowance for loan losses to nonaccrual loans |
62.91 | % | 77.66 | % | 544.37 | % | 503.52 | % | 746.72 | % | ||||||||||
| Net charge-offs to average loans for the year |
0.31 | % | 0.24 | % | 0.06 | % | 0.04 | % | 0.12 | % | ||||||||||
| Allowance for loan losses to year end loans |
1.42 | % | 1.29 | % | 1.11 | % | 1.08 | % | 1.15 | % | ||||||||||
| Foregone interest income on nonaccrual loans |
$ | 893 | $ | 571 | $ | 72 | $ | 45 | $ | 37 | ||||||||||
Net charge offs in 2009 increased to $2.6 million from $1.9 million in 2008. The 2009 net charge offs included $798 thousand of consumer loans, $345 thousand of commercial loans and $1.4 million of real estate loans. This is a continuation of what began in 2008 and is a direct result of the current recession. We expect that this increased level of charge offs will probably continue through 2010 or until the economy really turns around. As stated earlier, reserves will continue to be increased as needed. While loans are charged off, there is some potential to recover portions in the future.
At December 31, 2009, we reported $29.4 million in impaired loans, an increase of $14.4 million from $15.0 million at December 31, 2008. Of this $29.4 million in impaired loans, $15.0 million were included in nonperforming loans. The average balance of impaired loans for the twelve months ended December 31, 2009 was $21.8 million. Loans are viewed as impaired based upon individual evaluations of discounted expected cash flows or collateral valuations. These loans are subject to constant management attention, and their status is reviewed on a regular basis.
Securities
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. An independent third party review of this portfolio is made annually and presented to the Board of Directors as an unbiased presentation of our risks and the condition of the portfolio.
At December 31, 2009 the securities portfolio (excluding restricted securities carried at cost), at fair market value, was $169.4 million, an 11.0% increase from $152.6 million at 2008 year-end. 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 of $745 thousand at December 31, 2009 compared to a loss of $11.8 million at 2008 year-end.
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We follow a policy of not engaging in activities considered to be derivative in nature such as options, futures, swaps or forward commitments. We consider derivatives to be speculative in nature and contrary to our historical philosophy. We do not hold or issue financial instruments for trading purposes.
The following table presents the book value and fair value of securities at the dates indicated. (EVB does not hold any commercial mortgage backed securities.)
The following table presents the maturity and yields of securities at their amortized cost at the date indicated.
| December 31, 2009 | December 31, 2008 | December 31, 2007 | ||||||||||||||||
| (dollars in thousands) |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value |
Amortized Cost |
Fair Value | ||||||||||||
| Available for Sale: |
||||||||||||||||||
| Obligations of U.S. Government agencies |
$ | 34,180 | $ | 34,522 | $ | 33,149 | $ | 33,619 | $ | 43,284 | $ | 43,515 | ||||||
| Agency Mortgage- backed securities |
39,774 | 41,481 | 50,419 | 51,481 | 25,138 | 24,862 | ||||||||||||
| Agency CMO securities |
29,727 | 29,992 | 11,256 | 11,472 | 5,700 | 5,760 | ||||||||||||
| Non Agency CMO securities |
5,149 | 5,145 | 6,676 | 6,199 | 8,601 | 8,447 | ||||||||||||
| State and political subdivisions |
47,938 | 48,072 | 39,376 | 39,241 | 41,137 | 41,211 | ||||||||||||
| Pooled trust preferred securities |
632 | 688 | 19,075 | 3,582 | 18,207 | 16,385 | ||||||||||||
| FNMA and FHLMC preferred stock |
77 | 126 | 94 | 94 | 4,708 | 3,885 | ||||||||||||
| Corporate securities |
10,819 | 9,416 | 10,802 | 6,957 | 10,156 | 8,378 | ||||||||||||
| Total |
$ | 168,296 | $ | 169,442 | $ | 170,847 | $ | 152,645 | $ | 156,931 | $ | 152,443 | ||||||
Maturity Distribution and Yields of Securities
| December 31, 2009 | ||||||||||||||||||||||||||||||
| Due in 1 year or less |
Due after 1 through 5 years |
Due after 5 through 10 years |
Due after 10 years and equity securities |
Total | ||||||||||||||||||||||||||
| (Dollars in thousands) |
Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | Amount | Yield | ||||||||||||||||||||
| U.S. Treasury and agencies |
$ | 25,999 | 1.09 | % | $ | 5,023 | 5.07 | % | $ | 3,158 | 5.43 | % | — | 0.00 | % | $ | 34,180 | 2.08 | % | |||||||||||
| Mortgage-backed securities |
2,791 | 2.71 | % | 26,349 | 4.80 | % | 9,100 | 4.65 | % | $ | 1,534 | 5.83 | % | 39,774 | 4.66 | % | ||||||||||||||
| States and political subdivisions (1) |
5,972 | 3.69 | % | 12,540 | 5.81 | % | 11,159 | 6.30 | % | 18,344 | 6.17 | % | 48,015 | 5.80 | % | |||||||||||||||
| Corporate, CMO and other securities |
2,987 | 2.52 | % | 37,107 | 3.80 | % | 6,233 | 5.12 | % | — | 46,327 | 3.90 | % | |||||||||||||||||
| Total securities |
$ | 37,749 | 1.73 | % | $ | 81,019 | 4.52 | % | $ | 29,650 | 5.45 | % | $ | 19,878 | 6.14 | % | $ | 168,296 | 4.25 | % | ||||||||||
| (1) | Yields on tax-exempt securities have been calculated on a tax equivalent basis at 5.83% for 2009, down from 5.90% in 2008. |
See Note 3 to the Consolidated Financial Statements.
We recognized other-than-temporary impairment on pooled trust preferred debt securities classified as AFS in accordance with ASC 320-10-65. As required by this ASC guidance, we assessed whether we intend to sell or it was more likely than not that we would be required to sell the security before recovery of its amortized cost basis less any current period losses. We separated the amount of impairment into the loss that is credit related and the amount due to all other factors. The credit loss component was recognized in earnings. The remaining difference between the securities’ fair value and present value of future expected cash flows is due to factors not credit related, and therefore, was not required to be recognized as a loss in the income statement, but was recognized in other comprehensive income. We believe that we will fully collect the carrying value of securities on which we have recorded a non-credit-related impairment in other comprehensive income.
After much deliberation and consultation with an independent securities appraisal firm that specializes in valuing illiquid securities, we recognized an impairment through the Statement of Operations in 2009 of $18.9 million, reducing our book value of pooled trust preferred securities to $632 thousand, $554 thousand of which is in a senior performing tranche that has an unrealized gain at 2009 year end. The independent appraiser followed other-than-temporary impairment (“OTTI”) guidelines in determining that the total lack of an orderly market for nonperforming pooled trust preferred securities was the result of credit issues in this class of securities. The model used to develop the fair market value considered performing collateral ratios, the level of subordination to senior tranches of the securities, credit ratings of and projected credit defaults in the underlying collateral and the discounted present value of projected future cash flows. After this impairment, our remaining pooled trust preferred securities no longer have an unrealized loss.
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Of the $18.9 million of credit-related OTTI included in the Statement of Operations for the year ended December 31, 2009, $15.5 million of the loss occurred prior to 2008 year end, and was included net of tax as an unrealized loss of $10.1 million in other comprehensive income (loss) at December 31, 2008. The $18.2 million that was considered a temporary loss at December 31, 2008 because of the lack of an orderly market became a credit-related loss in 2009 as defaults and nonperforming collateral in the trust preferred securities increased substantially. Impairment of pooled trust preferred securities occurred first in the second quarter of 2009, then again in the third quarter of 2009. Using the required discounted present value of expected future cash flows, none of these securities were considered to have OTTI until the second quarter of 2009; then they deteriorated more in the third quarter of 2009. At the end of the third quarter of 2009 the independent evaluation determined that Preferred Term Security XXIV, XXV and XXVI and SLOSO CDO 2007-B-1L were worthless. That evaluation also determined that Preferred Term Security XXIII, Preferred Term Security XXVII A tranche and Preferred Term Security XXVII D tranche should be impaired to reduce the book value to $78 thousand, $554 thousand and $400 respectively. Preferred Term Security XXVII D tranche was subsequently sold for $9 thousand. The table below presents the nonperforming collateral at 2008 year end along with the additions to nonperforming collateral during the first three quarters of 2009. There was no impairment in the fourth quarter of 2009.
| (Dollars in thousands) Nonperforming collateral additions |
Life to Date Y/E 2008 |
Q1 2009 | Q2 2009 | Q3 2009 | Total Nonperforming Collateral Sep 30, 2009 |
||||||||||
| Preferred Term Securities XXIII, D tranche |
5.43 | % | 2.57 | % | 4.34 | % | 4.76 | % | 17.09 | % | |||||
| Preferred Term Securities XXIV, D tranche |
3.47 | % | 6.33 | % | 10.79 | % | 7.91 | % | 28.50 | % | |||||
| Preferred Term Securities XXV, D tranche |
7.98 | % | 5.42 | % | 6.90 | % | 9.80 | % | 30.10 | % | |||||
| Preferred Term Securities XXVI, D tranche |
8.08 | % | 1.82 | % | 3.63 | % | 6.47 | % | 20.00 | % | |||||
| Preferred Term Securities XXVII, D tranche |
2.30 | % | 6.00 | % | 3.43 | % | 8.28 | % | 20.01 | % | |||||
| Preferred Term Securities XXVII, A tranche |
Nonperforming collateral same as XXVII, D tranche above | ||||||||||||||
| SLOSO CDO 2007 B-1L, D tranche |
9.22 | % | 0.88 | % | 0.00 | % | 10.62 | % | 20.72 | % | |||||
The additional table below presents the book value and market value of our pooled trust preferred securities at 2008 year end and, after impairment, the book value at 2009 year end. These securities have been written down to a book value of $632 thousand and are believed to have no remaining impairment risk as of December 31, 2009.
| December 31, 2008 | December 31, 2009 After Impairment | ||||||||||||||||||
| (Dollars in thousands) Nonperforming collateral additions |
Book Value |
Fair Value |
Unrealized Loss |
Book Value |
Fair Value |
Unrealized Gain(Loss) | |||||||||||||
| Preferred Term Securities XXIII, D tranche |
$ | 2,952 | $ | 712 | $ | (2,240 | ) | $ | 78 | $ | 78 | $ | — | ||||||
| Preferred Term Securities XXIV, D tranche |
2,487 | 378 | (2,109 | ) | — | — | — | ||||||||||||
| Preferred Term Securities XXV, D tranche |
2,474 | 337 | (2,137 | ) | — | — | — | ||||||||||||
| Preferred Term Securities XXVI, D tranche |
2,032 | 280 | (1,752 | ) | — | — | — | ||||||||||||
| Preferred Term Securities XXVII, D tranche |
3,720 | 827 | (2,893 | ) | — | — | — | ||||||||||||
| Preferred Term Securities XXVII, A tranche |
910 | 733 | (177 | ) | 554 | 610 | 56 | ||||||||||||
| SLOSO CDO 2007 B-1L, D tranche |
4,500 | 315 | (4,185 | ) | — | — | — | ||||||||||||
| $ | 19,075 | $ | 3,582 | $ | (15,493 | ) | $ | 632 | $ | 688 | $ | 56 | |||||||
Deposits
We have historically focused on increasing core deposits, a low cost and stable source of funding, to reduce the need for other borrowings to fund growth in earning assets. 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. Borrowings through the Federal Home Loan Bank of Atlanta (FHLB) are utilized for funding when the cost of borrowed funds falls below the cost of new interest-bearing deposits. We also utilize purchased deposits from a couple of sources when the rates are below our market rates. At year end 2009, our total deposit balance was
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$852.9 million, an increase of $39.3 million, or 4.83%, from $813.5 million at year end 2008. All of this growth was from our existing markets and achieved in a depressed economy. Our loan growth in 2009 continued but at a slower pace and with the TARP funds added in January of 2009 in addition to the deposit growth, we had excess funds for most of the year. Management continued to hold brokered deposits but at a lower level than in 2008. At year end 2009, there were $43.0 million in brokered deposits compared to $55.0 million at December 31, 2008. Brokered deposits include deposits under the CDARS program. In 2009, brokered deposits had extremely low rates available and we purchased deposits with staggered maturities over the next four years to decrease our sensitivity to interest rate risk. Noninterest-bearing deposits decreased by $562 thousand or 0.62% to $89.5 million at 2009 year-end compared to $90.1 million at December 31, 2008.
A more representative review of the year long funding picture is the average deposits for the year, which reflect how much we are really funding over the year. For 2009, average total deposits of $849.6 million represented a 12.7% increase over the 2008 average of $753.7 million. Noninterest bearing average deposits declined $3.7 million to $93.2 million for 2009. Savings declined $586 thousand compared to a decline of $7.2 million, or 7.8% in 2008. In looking at these two categories, it is important to note that customers want a return on their money, so the trend in our lowest cost deposit categories is down which forces the bank to pay more for deposits. Money market accounts, our fastest growth category, increased 60.9% to $84.2 million while the rate decreased 78 basis points. In 2009, large dollar certificates of deposit increased $34.5 million, or 24.1%, while consumer certificates declined $7.1 million, or 2.9%. Interest bearing checking accounts (NOW) had our largest dollar increase with growth of $40.9 million, or 28.3% compared to an increase of $39.1 million, or 37.0%, in 2008. This increase is attributed to our Reward Checking product, whose balances have continually grown since its introduction in late 2006. This product pays an above market interest rate if customers achieve some basic requirements that encourage the customer to utilize electronic transactions which are less costly to the bank. It continues to grow even with a lowering of the base rate and restrictions on the balance that can earn the high interest rate. It is a convenient way for our customers to get a good return on their deposits, which appears to be a big part of its appeal.
Interest rates on all interest bearing liabilities were lower in 2009, as management was able to lower rates and reprice incoming or roll over deposits at rates that matched the lower rate environment that the Federal Reserve brought us to in 2008. The rates on large certificates of deposit fell 112 basis points, while money market accounts were lower by 78 basis points. NOW accounts declined 50 basis points and regular certificates declined 53 basis points. The maturity of large blocks of certificates of deposits in the last half of the year allowed us to reprice at a lower rate and allow rate shoppers to consider other sources. These decreases in interest expense, while earning assets yields were declining, allowed our margin to grow in the third and fourth quarters. The interest checking account products, at $185.4 million or 21.8% of total average deposits, have clearly moved this product to our largest single category moving large certificates of deposits to a second position in the deposit balance ranking. The liquidity of the funds in interest checking funds presents a challenge to management in attempting to determine which of these relationships is a core deposit versus just a parking of funds until rates increase. Attracting deposits has been a challenge, and as the competition for funds heats up over the next couple of years, this is considered a critical area for managing our margin and profit. The high interest rate environment in the market three years ago, then the rapid decline in rates in 2008, coupled with the plummeting economy have made customers and potential customers fearful of what will happen to their money. Management’s challenge in 2010 continues to be managing the net interest margin in a recessionary economy by anticipating, reacting to and adjusting to each new change in the markets.
Total deposits at 2008 year-end of $813.5 million increased $141.6 million, or 21.1%, compared to $671.9 million at 2007 year-end. Our branch purchases from Millennium in 2008 added $93 million to the balance. The other major source was an increase in brokered deposits with $55 million in balances. Average deposit growth in 2008 was in all categories except demand and savings. Average deposits for 2008 were $753.7 million, an increase of 14.2%, or $93.6 million, compared to 2007 average deposits of $660.1 million.
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The following table presents average deposit balances and rates for the periods indicated:
Average Deposits and Rates Paid
| Years Ended December 31 | ||||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||||
| (dollars in thousands) |
Amount | Rate | Amount | Rate | Amount | Rate | ||||||||||||
| Noninterest bearing demand deposits |
$ | 93,154 | $ | 96,874 | $ | 98,282 | ||||||||||||
| Interest-bearing deposits: |
||||||||||||||||||
| Checking (NOW accounts) |
185,436 | 1.52 | % | 144,558 | 2.02 | % | 105,494 | 1.77 | % | |||||||||
| Money market accounts |
84,192 | 1.62 | % | 52,321 | 2.40 | % | 40,817 | 2.41 | % | |||||||||
| Regular savings accounts |
74,081 | 0.73 | % | 74,667 | 0.90 | % | 81,843 | 1.16 | % | |||||||||
| Large denomination certificates (1) (2) |
177,650 | 3.34 | % | 143,115 | 4.46 | % | 120,735 | 4.80 | % | |||||||||
| Other certificates of deposit (2) |
235,097 | 3.23 | % | 242,184 | 3.76 | % | 212,967 | 4.47 | % | |||||||||
| Total interest-bearing |
756,456 | 2.41 | % | 656,845 | 3.10 | % | 561,856 | 3.40 | % | |||||||||
| Total average deposits |
$ | 849,610 | $ | 753,719 | $ | 660,138 | ||||||||||||
| (1) | Certificates issued in amounts of $100,000 or greater |
| (2) | Includes some brokered deposits |
The following table presents the maturity schedule of large denomination certificates at the dates indicated:
Maturities of Large Denomination Certificates of Deposits (1) (2)
| (dollars in thousands) |
Within 3 Months |
3-6 Months |
6-12 Months |
Over 12 Months |
Total | Percent of Total Deposits |
||||||||||||
| At December 31, 2009 |
$ | 29,097 | $ | 16,256 | $ | 58,358 | $ | 69,034 | $ | 172,745 | 20.25 | % | ||||||
| (1) | Certificates issued in amounts of $100 thousand or greater |
| (2) | Includes some brokered deposits |
Capital Resources
Capital resources are managed to maintain a capital structure that provides us the ability to support asset growth, absorb potential losses and expand our franchise when appropriate. Capital represents original investment by shareholders plus retained earnings and provides financial resources over which we 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, plus trust preferred debt up to 25% of Tier 1 capital, less goodwill and intangibles. At December 31, 2009, we had a total risk based capital ratio of 12.29% and a Tier 1 leverage ratio of 9.08%, both in excess of regulatory guidelines and the amount needed to support our banking business.
Capital is carefully managed as the financial opportunities of a high capital base are weighed against the impact of the return on equity ratio. In January 2001, we announced a stock repurchase program intended to reduce high capital levels and to increase return on equity to shareholders. This plan was amended in 2003 and the number of shares that can be repurchased is 5% of the outstanding shares on January 1 of each year. We repurchased no shares in 2009, 70,545 shares in 2008 and 179,350 shares in 2007. Details of the number of shares available and purchases by month can be seen in our 10-Q filings with the SEC.
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As discussed in Note 21 of the attached Financials, on January 9, 2009 we issued preferred stock to the U. S. Treasury which added $24 million to capital. The preferred stock will pay cumulative dividends at a fixed rate of 5% per annum for the first five years, and thereafter, at a rate of 9% per annum. The addition of these funds helped us maintain strong capital positions in 2009.
The following table provides an analysis of our capital as of December 31, 2009, 2008 and 2007. Note 19 in the Consolidated Financial Statements presents an analysis of the capital position of both our Company and EVB as of year-end 2009, 2008 and 2007:
Analysis of Capital
| At December 31, | ||||||||||||
| (dollars in thousands) |
2009 | 2008 | 2007 | |||||||||
| Tier 1 capital: |
||||||||||||
| Preferred stock |
$ | 24,000 | $ | — | $ | — | ||||||
| Common stock |
11,877 | 11,798 | 11,865 | |||||||||
| Surplus |
18,965 | 18,456 | 18,812 | |||||||||
| Retained earnings |
49,611 | 62,804 | 63,616 | |||||||||
| Total equity |
104,453 | 93,058 | 94,293 | |||||||||
| Trust preferred debt |
10,000 | 10,000 | 10,000 | |||||||||
| Less goodwill and intangibles |
(16,184 | ) | (16,472 | ) | (6,496 | ) | ||||||
| Total Tier 1 capital |
98,269 | 86,586 | 97,797 | |||||||||
| Tier 2 capital: |
||||||||||||
| Allowance for loan losses |
10,613 | 10,301 | 7,888 | |||||||||
| Deductions for other investments (1) |
4,728 | 1,658 | 1,260 | |||||||||
| Total risk-based capital |
104,154 | 95,229 | 104,425 | |||||||||
| Risk-weighted assets |
847,462 | 823,862 | 707,850 | |||||||||
| Capital ratios: |
||||||||||||
| Tier 1 risk based capital |
11.60 | % | 10.51 | % | 13.82 | % | ||||||
| Total risk based capital |
12.29 | % | 11.56 | % | 14.75 | % | ||||||
| Tier 1 capital to average total assets |
9.08 | % | 8.62 | % | 10.80 | % | ||||||
| (1) | Federal Reserve requires a deduction from capital for the value of other LLC’s that the company has an interest in. |
Off -Balance Sheet Arrangements
At December 31, 2009, we had $123.2 million of off-balance sheet credit exposure in the form of $118.1 million of commitments to grant loans and unfunded commitments under lines of credit and $5.1 million of standby letters of credit. 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 us, is based on our 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 we are committed.
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Standby letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending a loan to our customers. We generally hold collateral supporting those commitments if deemed necessary.
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. Our management of liquid assets provides a liquidity level that we believe is sufficient to satisfy our depositors’ requirements and to meet our customers’ credit needs. At December 31, 2009, $505.4 million or 49.9% of total earning assets were due to mature or reprice within the next year.
We also maintain additional sources of liquidity through a variety of borrowing arrangements. Federal funds borrowing arrangements with major regional banks combined with immediately available lines of credit with the Federal Home Loan Bank totaled $86.8 million at December 31, 2009. At year-end 2009, we had $123.2 million of FHLB borrowings outstanding. During 2009, we reduced our FHLB borrowings by $11.4 million.
The following table presents our contractual obligations and scheduled payment amounts due at various intervals over the next five years and beyond.
| As of 12/31/2009 |
Payments Due by Period | ||||||||||||||
| Total | Less than 1 year |
1-3 years | 3-5 years | Over 5 years | |||||||||||
| (dollars in thousands) | |||||||||||||||
| Long-term debt |
$ | 133,524 | $ | 5,714 | $ | 10,000 | $ | — | $ | 117,810 | |||||
| Capital lease obligations |
— | — | — | — | — | ||||||||||
| Operating leases |
1,340 | 438 | 601 | 301 | — | ||||||||||
| Purchase obligations |
— | — | — | — | — | ||||||||||
| Other long-term liabilities |
— | — | — | — | — | ||||||||||
| Total |
$ | 134,864 | $ | 6,152 | $ | 10,601 | $ | 301 | $ | 117,810 | |||||
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 as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates.
Accounting Rule Changes
Refer to Note 1 of the audited financial statements for Recent Accounting Pronouncements.
| 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. Our market risk is composed primarily of interest rate risk. We are responsible for reviewing the interest rate sensitivity position of EVB and establishing policies to monitor and limit exposure to interest rate risk. The Board of Directors reviews guidelines established by Management. It is our policy not to engage in activities considered to be derivative in nature such as futures, option contracts, swaps, caps, floors, collars or forward commitments. We consider derivatives as speculative which is contrary to our historical or prospective philosophy. We do not hold or issue financial instruments for trading purposes. We do hold in our loan and securities portfolios investments that adjust or float according to changes in index rates which is not considered speculative, but necessary for good asset/liability management.
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Asset/Liability Risk Management: The primary goals of asset/liability risk management are to maximize net interest income and the net value of our future cash flows within the interest rate limits set by our Asset/Liability Committee (ALCO).
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 our interest rate risk, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships.
Static Gap: Gap analysis measures the amount of repricing risk embedded in the balance sheet at a point in time. It does so by comparing the differences in the repricing characteristics of assets and liabilities. A gap is defined as the difference between the principal amount of assets and liabilities, adjusted for off-balance sheet instruments, which reprice within a specific time period. The cumulative one-year gap at year-end was 12.33% which is within the policy limit for the one-year gap of plus 15% to minus 15% of total earning assets at a combined Company level.
Core deposits and loans with noncontractual maturities are included in the gap repricing distributions based upon historical patterns determined by statistical analysis, based upon industry accepted assumptions including the most recent core deposit defaults set forth by the FFIEC (Federal Financial Institutions Examination Council). 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 decrease approximately 2.15% of stable rate or base net income if rates were to fall immediately by 25 basis points to a fed funds rate of 0.0%. It projects an increase of approximately 6.85% if rates rise by 200 basis points. Management believes this reflects an asset sensitive interest risk for the one-year horizon. Historically this simulation has evaluated the impact of a rate decrease of 200 basis points, and internally we also evaluate monthly the impact of rate changes of 100 basis points and 300 basis points. However with current fed funds rate at 25 basis points, we consider a rate decrease to a level below zero to be meaningless.
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.
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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 3.11%. Additionally, NPV is estimated to increase by 1.2% if rates fall immediately by 25 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 than 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.
| (1) | Management has determined that simulation shock ratios for a decrease to a negative interest rate are meaningless. Thus 2009 data is presented under a scenario of rates decreasing 25 basis points to zero. 2008 year end data in a 25 basis point downward shock is not available. |
| Item 8. | Financial Statements and Supplementary Data |
The following financial statements are filed as a part of this report following item 15:
| • | Report of Independent Registered Public Accounting Firm |
| • | Consolidated Balance Sheets as of December 31, 2009 and 2008 |
| • | Consolidated Statements of Operations for the three years ended December 31, 2009 |
| • | Consolidated Statements of Changes in Shareholders’ Equity for the three years ended December 31, 2009 |
| • | Consolidated Statements of Cash Flows for the three years ended December 31, 2009 |
| • | Notes to Consolidated Financial Statements |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to provide assurance that the information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission. An evaluation of the effectiveness of the design and operations of our disclosure controls and procedures at the end of the period covered by this report was carried out under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer. Based on such evaluation, such officers concluded that the Company’s disclosure controls and procedures were effective as of the end of such period.
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Management’s Report on Internal Control Over Financial Reporting
The management of Eastern Virginia Bankshares, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934). Our internal control over financial reporting is a process designed under the supervision of our Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our Company’s financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
As of December 31, 2009, management has assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control – Integrated Framework” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission. Based on the assessment, management determined that we maintained effective internal control over financial reporting as of December 31, 2009, based on those criteria.
Yount, Hyde and Barbour, P.C., the independent registered public accounting firm that audited our consolidated financial statements, included in this Annual Report on Form 10-K, has issued an attestation report on the effectiveness of our internal control over financial reporting as of December 31, 2009. The report, which states an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2009, is incorporated by reference in Item 8 above, under the heading “Report of Independent Registered Public Accounting Firm.”
No changes were made in our internal control over financial reporting during the quarter ended December 31, 2009 that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting.
| Item 9B. | Other Information |
None.
PART III
| Item 10. | Directors, Executive Officers and Corporate Governance |
The response to this Item is incorporated by reference to the information under the caption “Election of Directors” and “Section 16(a) Beneficial Ownership Reporting Compliance” in EVB’s Proxy Statement for the 2010 annual meeting of shareholders, and for executive officers is listed in Part I of this Form 10-K.
| Item 11. | Executive Compensation |
The response to this Item is incorporated by reference to the information under the captions “Executive Compensation” and “Director Compensation” in EVB’s Proxy Statement for the 2010 annual meeting of shareholders.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The response to this Item is incorporated by reference to the information under the captions “Ownership of Stock” and “Executive Compensation” in our Proxy Statement for the 2010 annual meeting of shareholders.
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The response to this Item is incorporated by reference to the information under the captions “Corporate Governance and the Board of Directors, including the statement on independence of directors” and “Transactions with Management” in our Proxy Statement for the 2010 annual meeting of shareholders.
| Item 14. | Principal Accounting Fees and Services |
The response to this Item is incorporated by reference to the information under the caption “Fees of Independent Registered Public Accounting Firm” and “Pre-Approved Services” in EVB’s Proxy Statement for the 2010 annual meeting of shareholders.
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PART IV
| Item 15. | Exhibits, Financial Statement Schedules |
| (a)(1) | The response to this portion of Item 15 is included in Item 8 above. |
| (a)(2) | The response to this portion of Item 15 is included in Item 8 above. |
| (a)(3) | Exhibits |
The following exhibits are filed as part of this Form 10-K and this list includes the Exhibit Index.
| Exhibit |
||
| 3.1 | Amended and restated Articles of Incorporation of Eastern Virginia Bankshares, Inc., as amended and restated on December 29, 2008 attached as Exhibit 3.1 to our 2008 Form 10-K, incorporated herein by reference. | |
| 3.2 | Articles of Amendment to the Articles of Incorporation of Eastern Virginia Bankshares, Inc., attached as Exhibit 3.1 to the Company’s current report on form 8-K filed January 13, 2009, incorporated herein by reference. | |
| 3.3 | Bylaws of Eastern Virginia Bankshares, Inc., as amended May 21, 2009. | |
| 4.1 | Form of Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A, attached as Exhibit 4.1 to the Company’s current report on Form 8-K filed January 13, 2009, incorporated herein by reference. | |
| 4.2 | Warrant to Purchase Shares of Common Stock, dated January 9, 2009, attached as Exhibit 4.2 to the Company’s current report on Form 8-K filed January 13, 2009, incorporated herein by reference | |
| 10.1 | Eastern Virginia Bankshares, Inc. 2003 Stock Incentive Plan, included in the Company’s 2003 Proxy Statement, as filed with the Commission on March 24, 2003, incorporated herein by reference.* | |
| 10.2 | Eastern Virginia Bankshares, Inc. 2007 Equity Compensation Plan, included in the Company’s 2007 Proxy Statement, as filed with the Commission on March 21, 2007, incorporated herein by reference.* | |
| 10.3 | Employment Agreement dated as of January 1, 2008, between Eastern Virginia Bankshares, Inc. and Joe A. Shearin attached as Exhibit 10.3 to our 2008 Form 10-K, incorporated herein by reference.* | |
| 10.4 | Employment Agreement dated as of March 4, 2008, between Eastern Virginia Bankshares, Inc. and Ronald L. Blevins attached as Exhibit 10.4 to our 2008 Form 10-K, incorporated herein by reference.* | |
| 10.5 | Employment Agreement dated as of March 4, 2008 between Eastern Virginia Bankshares, Inc. and Joseph H. James, Jr. attached as Exhibit 10.5 to our 200 Form 10-K, incorporated herein by reference.* | |
| 10.6 | Employment Agreement dated as of June 10, 2008, between Eastern Virginia Bankshares, Inc. and James S. Thomas attached as Exhibit 10.6 to our 200 Form 10-K, incorporated herein by reference.* | |
| 10.7 | Letter Agreement, dated as of January 9, 2009, by and between Eastern Virginia Bankshares, Inc. and the United States Department of Treasury, attached as Exhibit 10.1 to the Company’s current report on Form 8-K filed January 13, 2009, incorporated herein by reference | |
| 10.8 | Form of Waiver agreement by and between the Senior Executive Officers and Eastern Virginia Bankshares, Inc., attached as exhibit 10.2 to Company’s current report on Form 8-K filed January 13, 2009, incorporated herein by reference* | |
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| 10.9 | Form of Letter Agreement by and between the Senior Executive Officers and Eastern Virginia Bankshares, Inc., attached as Exhibit 10.3 to the Company’s current report on Form 8-K filed January 13, 2009, incorporated herein by reference* | |
| 13.1 | Excerpt from the 2009 Annual Report to Shareholders with respect to Market for the Company’s Common Stock. | |
| 13.2 | Excerpt from the 2009 Annual Report to Shareholders with respect to Selected Financial Data. | |
| 14.1 | Code of Conduct and Business Ethics, attached as Exhibit 14 to the Company’s Annual Report on | |
| Form 10-K for the year ended December 31, 2003, incorporated herein by reference. | ||
| 21.1 | Subsidiaries of Eastern Virginia Bankshares, Inc. | |
| 23.1 | Consent of Yount, Hyde & Barbour, P.C. | |
| 31.1 | Rule 13a-14(a) Certification of Chief Executive Officer | |
| 31.2 | Rule 13a-14(a) Certification of Chief Financial Officer | |
| 32.1 | Section 906 Certification of Chief Executive Officer | |
| 32.2 | Section 906 Certification of Chief Financial Officer | |
| 99.1 | TARP certification of Primary Executive Officer | |
| 99.2 | TARP certification of Primary Financial Officer | |
| * | Management contract or compensatory plan or arrangement. |
| (b) | Exhibits – See exhibit index included in Item 15(a)(3) above. |
| (c) | Financial Statement Schedules – See Item 15(a)(2) above. |
(All exhibits not incorporated herein by reference are attached as exhibits to the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, as filed with the Securities and Exchange Commission.)
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.
| Eastern Virginia Bankshares, Inc. | ||||||||
| By | /s/ RONALD L. BLEVINS | Date: March 5, 2010 | ||||||
| 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 the Registrant and in the capacities indicated on March 5, 2010.
| Signature |
Title |
|||
| /s/ W. RAND COOK W. Rand Cook |
Chairman of the Board of Directors |
|||
| /s/ F. L. GARRETT, III F. L. Garrett, III |
Vice Chairman of the Board of Directors |
|||
| /s/ JOE A. SHEARIN Joe A. Shearin |
President and Chief Executive Officer and Director (Principal Executive Officer) |
|||
| /s/ W. GERALD COX W. Gerald Cox |
Director |
|||
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| /s/ MICHAEL E. FIORE, P. E. Michael E. Fiore |
Director |
|||
| /s/ IRA C. HARRIS Ira C. Harris |
Director |
|||
| /s/ ERIC A. JOHNSON Eric A. Johnson |
Director |
|||
| /s/ W. LESLIE KILDUFF, JR. W. Leslie Kilduff, Jr. |
Director |
|||
| /s/ WILLIAM L. LEWIS William L. Lewis |
Director |
|||
| /s/ CHARLES R. REVERE Charles R. Revere |
Director |
|||
| /s/ HOWARD R. STRAUGHAN Howard R. Straughan |
Director |
|||
| /s/ LESLIE E. TAYLOR Leslie E. Taylor |
Director |
|||
| /s/ F. WARREN HAYNIE, JR. F. Warren Haynie, Jr. |
Director |
|||
| /s/ JAY T. THOMPSON Jay T. Thompson |
Director |
|||
| /s/ RONALD L. BLEVINS Ronald L. Blevins |
Chief Financial Officer (Principal Financial and Accounting Officer) |
|||
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EXHIBIT INDEX
| Exhibit |
||
| 3.1 | Amended and restated Articles of Incorporation of Eastern Virginia Bankshares, Inc., as amended and restated on December 29, 2008 attached as Exhibit 3.1 to our 2008 Form 10-K, incorporated herein by reference. | |
| 3.2 | Articles of Amendment to the Articles of Incorporation of Eastern Virginia Bankshares, Inc., attached as Exhibit 3.1 to the Company’s current report on form 8-K filed January 13, 2009, incorporated herein by reference. | |
| 3.3 | Bylaws of Eastern Virginia Bankshares, Inc., as amended May 21, 2009. | |
| 4.1 | Form of Certificate for Fixed Rate Cumulative Perpetual Preferred Stock, Series A, attached as Exhibit 4.1 to the Company’s current report on Form 8-K filed January 13, 2009, incorporated herein by reference. | |
| 4.2 | Warrant to Purchase Shares of Common Stock, dated January 9, 2009, attached as Exhibit 4.2 to the Company’s current report on Form 8-K filed January 13, 2009, incorporated herein by reference | |
| 10.2 | Eastern Virginia Bankshares, Inc. 2003 Stock Incentive Plan, included in the Company’s 2003 Proxy Statement, as filed with the Commission on March 24, 2003, incorporated herein by reference.* | |
| 10.2 | Eastern Virginia Bankshares, Inc. 2007 Equity Compensation Plan, included in the Company’s 2007 Proxy Statement, as filed with the Commission on March 21, 2007, incorporated herein by reference.* | |
| 10.4 | Employment Agreement dated as of January 1, 2008, between Eastern Virginia Bankshares, Inc. and Joe A. Shearin attached as Exhibit 10.3 to our 2008 Form 10-K, incorporated herein by reference.* | |
| 10.4 | Employment Agreement dated as of March 4, 2008, between Eastern Virginia Bankshares, Inc. and Ronald L. Blevins attached as Exhibit 10.4 to our 2008 Form 10-K, incorporated herein by reference.* | |
| 10.10 | Employment Agreement dated as of March 4, 2008 between Eastern Virginia Bankshares, Inc. and Joseph H. James, Jr. attached as Exhibit 10.5 to our 200 Form 10-K, incorporated herein by reference.* | |
| 10.11 | Employment Agreement dated as of June 10, 2008, between Eastern Virginia Bankshares, Inc. and James S. Thomas attached as Exhibit 10.6 to our 200 Form 10-K, incorporated herein by reference.* | |
| 10.12 | Letter Agreement, dated as of January 9, 2009, by and between Eastern Virginia Bankshares, Inc. and the United States Department of Treasury, attached as Exhibit 10.1 to the Company’s current report on Form 8-K filed January 13, 2009, incorporated herein by reference | |
| 10.13 | Form of Waiver agreement by and between the Senior Executive Officers and Eastern Virginia Bankshares, Inc., attached as exhibit 10.2 to Company’s current report on Form 8-K filed January 13, 2009, incorporated herein by reference* | |
| 10.14 | Form of Letter Agreement by and between the Senior Executive Officers and Eastern Virginia Bankshares, Inc., attached as Exhibit 10.3 to the Company’s current report on Form 8-K filed January 13, 2009, incorporated herein by reference* | |
| 13.1 | Excerpt from the 2009 Annual Report to Shareholders with respect to Market for the Company’s Common Stock. | |
| 13.2 | Excerpt from the 2009 Annual Report to Shareholders with respect to Selected Financial Data. | |
| 14.1 | Code of Conduct and Business Ethics, attached as Exhibit 14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2003, incorporated herein by reference. | |
| 21.1 | Subsidiaries of Eastern Virginia Bankshares, Inc. | |
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Table of Contents
| 23.1 | Consent of Yount, Hyde & Barbour, P.C. | |
| 31.1 | Rule 13a-14(a) Certification of Chief Executive Officer | |
| 31.2 | Rule 13a-14(a) Certification of Chief Financial Officer | |
| 32.1 | Section 906 Certification of Chief Executive Officer | |
| 32.2 | Section 906 Certification of Chief Financial Officer | |
| 99.1 | TARP certification of Primary Executive Officer | |
| 99.2 | TARP certification of Primary Financial Officer | |
56
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
Eastern Virginia Bankshares, Inc.
Tappahannock, Virginia
We have audited the accompanying consolidated balance sheets of Eastern Virginia Bankshares, Inc. and subsidiaries as of December 31, 2009 and 2008, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for the years ended December 31, 2009, 2008 and 2007. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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, 2009 and 2008, and the results of their operations and their cash flows for the years ended December 31, 2009, 2008 and 2007, in conformity with U.S. generally accepted accounting principles.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Eastern Virginia Bankshares, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated March 11, 2010 expressed an unqualified opinion on the effectiveness of Eastern Virginia Bankshares, Inc. and subsidiaries’ internal control over financial reporting.
Winchester, Virginia
March 11, 2010
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors
Eastern Virginia Bankshares, Inc.
Tappahannock, Virginia
We have audited Eastern Virginia Bankshares, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Eastern Virginia Bankshares, Inc. and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A Company’s internal control over financial reporting includes those policies and procedures that (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (c) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Eastern Virginia Bankshares, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets as of December 31, 2009 and 2008 and the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the years ended December 31, 2009, 2008, and 2007 of Eastern Virginia Bankshares, Inc. and subsidiaries and our report dated March 11, 2010 expressed an unqualified opinion.
Winchester, Virginia
March 11, 2010
58
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PART I - FINANCIAL INFORMATION
| Item 1. | Financial Statements |
Eastern Virginia Bankshares, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
| December 31, 2009 |
December 31, 2008 |
|||||||
| Assets: |
||||||||
| Cash and due from banks |
$ | 13,117 | $ | 13,081 | ||||
| Interest bearing deposits with banks |
15,571 | 133 | ||||||
| Securities available for sale, at fair value |
169,442 | 152,645 | ||||||
| Restricted securities, at cost |
8,941 | 9,234 | ||||||
| Loans, net of unearned income |
853,063 | 819,266 | ||||||
| Allowance for loan losses |
(12,155 | ) | (10,542 | ) | ||||
| Total loans, net |
840,908 | 808,724 | ||||||
| Deferred income taxes |
6,929 | 12,930 | ||||||
| Bank premises and equipment, net |
20,035 | 20,806 | ||||||
| Accrued interest receivable |
3,886 | 4,050 | ||||||
| Other real estate owned |
4,136 | 560 | ||||||
| Goodwill |
15,970 | 15,970 | ||||||
| Other assets |
27,348 | 13,230 | ||||||
| Total assets |
$ | 1,126,283 | $ | 1,051,363 | ||||
| Liabilities and Shareholders’ Equity: |
||||||||
| Liabilities |
||||||||
| Noninterest-bearing demand accounts |
$ | 89,529 | $ | 90,090 | ||||
| Interest-bearing deposits |
763,333 | 723,443 | ||||||
| Total deposits |
852,862 | 813,533 | ||||||
| Federal funds purchased and repurchase agreements |
24,154 | 3,593 | ||||||
| Federal Home Loan Bank advances |
123,214 | 134,643 | ||||||
| Trust preferred debt |
10,310 | 10,310 | ||||||
| Accrued interest payable |
1,739 | 2,512 | ||||||
| Other liabilities |
8,806 | 8,743 | ||||||
| Total liabilities |
1,021,085 | 973,334 | ||||||
| Shareholders’ Equity |
||||||||
| Preferred stock, $2 par value per share, authorized 10,000,000, issued and outstanding 2009: Series A; $1,000 Stated Value 24,000 shares Fixed Rate Cumulative Perpetual Preferred, 2008 none |
24,000 | — | ||||||
| Common stock, $2 par value per share, authorized 50,000,000, issued and outstanding 5,966,662 and 5,912,553 including 28,400 and 13,500 nonvested shares, respectively |
11,877 | 11,798 | ||||||
| Surplus |
18,965 | 18,456 | ||||||
| Retained earnings |
50,850 | 62,804 | ||||||
| Warrant |
1,481 | — | ||||||
| Discount on preferred stock |
(1,192 | ) | — | |||||
| Accumulated other comprehensive (loss), net |
(783 | ) | (15,029 | ) | ||||
| Total shareholders’ equity |
105,198 | 78,029 | ||||||
| Total liabilities and shareholders’ equity |
$ | 1,126,283 | $ | 1,051,363 | ||||
See Notes to Consolidated Financial Statements.
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Table of Contents
EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
For the Years Ended December 31, 2009, 2008 and 2007
| (dollars in thousands, except per share data) | |||||||||||
| 2009 | 2008 | 2007 | |||||||||
| Interest and Dividend Income |
|||||||||||
| Loans and fees on loans |
$ | 49,702 | $ | 51,371 | $ | 50,626 | |||||
| Interest on investments: |
|||||||||||
| Taxable interest income |
4,879 | 5,918 | 5,065 | ||||||||
| Tax exempt interest income |
1,901 | 1,658 | 1,415 | ||||||||
| Dividends |
103 | 355 | 457 | ||||||||
| Interest on deposits with other banks |
99 | — | — | ||||||||
| Interest on federal funds sold |
43 | 84 | 638 | ||||||||
| Total interest and dividend income |
56,727 | 59,386 | 58,201 | ||||||||
| Interest Expense |
|||||||||||
| Deposits |
18,241 | 20,337 | 19,121 | ||||||||
| Federal funds purchased and repurchase agreements |
18 | 90 | 73 | ||||||||
| Interest on FHLB advances |
5,396 | 5,754 | 4,919 | ||||||||
| Interest on trust preferred debt |
395 | 628 | 849 | ||||||||
| Total interest expense |
24,050 | 26,809 | 24,962 | ||||||||
| Net interest income |
32,677 | 32,577 | 33,239 | ||||||||
| Provision for Loan Losses |
4,200 | 4,025 | 1,238 | ||||||||
| Net interest income after provision for loan losses |
28,477 | 28,552 | 32,001 | ||||||||
| Noninterest Income (Charges) |
|||||||||||
| Service charges on deposit accounts |
3,841 | 3,991 | 3,671 | ||||||||
| Debit/credit card fees |
1,189 | 1,135 | 844 | ||||||||
| Other operating income |
977 | 1,634 | 1,581 | ||||||||
| Gain on sale of available for sale securities, net |
66 | 44 | 14 | ||||||||
| Other-than-temporary impairment losses on securities. (no additional amounts were recognized in other comprehensive income.) |
(18,919 | ) | (4,933 | ) | — | ||||||
| Gain (loss) on sale or impairment of OREO |
357 | (229 | ) | — | |||||||
| Actuarial gain on pension curtailment |
— | 1,328 | — | ||||||||
| Total noninterest income (charges) |
(12,489 | ) | 2,970 | 6,110 | |||||||
| Noninterest Expenses |
|||||||||||
| Salaries and benefits |
15,254 | 14,776 | 14,547 | ||||||||
| Occupancy and equipment expense |
5,144 | 4,738 | 4,282 | ||||||||
| Telephone |
1,070 | 996 | 613 | ||||||||
| FDIC assessments |
1,705 | 465 | 100 | ||||||||
| Consultant fees |
751 | 653 | 629 | ||||||||
| Collection, reposession and OREO |
569 | 193 | 62 | ||||||||
| Marketing and advertising |
737 | 874 | 756 | ||||||||
| Other operating expenses |
5,418 | 5,250 | 4,885 | ||||||||
| Total noninterest expenses |
30,648 | 27,945 | 25,874 | ||||||||
| Income (loss) before income taxes |
(14,660 | ) | 3,577 | 12,237 | |||||||
| Income Tax Expense (Benefit) |
(5,856 | ) | 506 | 3,483 | |||||||
| Net Income (Loss) |
$ | (8,804 | ) | $ | 3,071 | $ | 8,754 | ||||
| Effective dividend on preferred stock |
1,459 | — | — | ||||||||
| Net income (loss) available to common shareholders |
$ | (10,263 | ) | $ | 3,071 | $ | 8,754 | ||||
| Earnings (loss) per common share: basic |
$ | (1.73 | ) | $ | 0.52 | $ | 1.45 | ||||
| diluted |
$ | (1.73 | ) | $ | 0.52 | $ | 1.45 | ||||
| Dividends per share, common |
$ | 0.31 | $ | 0.64 | $ | 0.64 | |||||
See Notes to Consolidated Financial Statements.
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EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2009, 2008 and 2007
| (dollars in thousands) | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Cash Flows from Operating Activities |
||||||||||||
| Net Income (Loss) |
$ | (8,804 | ) | $ | 3,071 | $ | 8,754 | |||||
| Adjustments to reconcile net income (loss) to cash provided by operating activities: |
||||||||||||
| (Gain) Loss from equity investment in partnership |
346 | (130 | ) | 16 | ||||||||
| Depreciation and amortization, net |
2,290 | 2,215 | 1,984 | |||||||||
| Deferred tax benefit |
(1,736 | ) | (2,096 | ) | (439 | ) | ||||||
| Provision for loan losses |
4,200 | 4,025 | 1,238 | |||||||||
| Gain on sale of OREO |
(357 | ) | — | — | ||||||||
| Gain realized on sale of fixed assets |
— | (129 | ) | (12 | ) | |||||||
| (Gain) realized on available for sale securities, net |
(66 | ) | (44 | ) | (14 | ) | ||||||
| Actuarial Gain- Pension Curtailment |
— | (1,328 | ) | — | ||||||||
| Impairment on securities |
18,919 | 4,933 | — | |||||||||
| Impairment on OREO |
— | 229 | — | |||||||||
| Amortization on securities, net |
254 | 20 | 59 | |||||||||
| Stock based compensation |
248 | 277 | 250 | |||||||||
| Changes in assets and liabilities: |
||||||||||||
| Decrease in accrued interest receivable |
164 | 247 | 8 | |||||||||
| (Increase) decrease in other assets |
(14,466 | ) | (1,913 | ) | 386 | |||||||
| Increase (decrease) in accrued interest payable |
(773 | ) | (1,234 | ) | 1,261 | |||||||
| Increase in other liabilities |
2,700 | 85 | 1,449 | |||||||||
| Net cash provided by operating activities |
2,919 | 8,228 | 14,940 | |||||||||
| Cash Flows from Investing Activities |
||||||||||||
| Proceeds from sales of securities available for sale |
976 | 5,624 | 4,070 | |||||||||
| Maturities and principal repayments on securities available for sale |
88,266 | 83,178 | 11,632 | |||||||||
| Purchases of securities available for sale |
(105,798 | ) | (107,627 | ) | (50,271 | ) | ||||||
| (Purchase) retirement of restricted stock, net |
293 | (812 | ) | |||||||||
| Proceeds from sale of other real estate |
3,239 | 950 | — | |||||||||
| Acquisition of branches |
— | 33,995 | — | |||||||||
| Improvement to other real estate |
(735 | ) | (123 | ) | ||||||||
| Net (increase) in loans |
(42,107 | ) | (63,483 | ) | (59,782 | ) | ||||||
| Purchases of bank premises and equipment |
(1,519 | ) | (4,658 | ) | (3,338 | ) | ||||||
| Proceeds from sale of bank premises and equipment |
— | 209 | 12 | |||||||||
| Net cash (used in) investing activities |
$ | (57,385 | ) | $ | (52,747 | ) | $ | (97,677 | ) | |||
61
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EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For the Years Ended December 31, 2009, 2008 and 2007
(continued)
| (dollars in thousands) | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Cash Flows from Financing Activities |
||||||||||||
| Net increase in demand deposit accounts, interest-bearing demand deposits and savings accounts |
$ | 106,126 | $ | 16,488 | $ | 16,594 | ||||||
| Net increase (decrease) in certificates of deposit |
(66,797 | ) | 33,272 | 1,327 | ||||||||
| Proceeds of Federal Home Loan Bank advances |
— | 18,000 | 85,000 | |||||||||
| Repayments of Federal Home Loan Bank advances |
(11,429 | ) | (10,428 | ) | (48,429 | ) | ||||||
| Increase (decrease) in federal funds purchased and repurchase agreements |
20,561 | (13,506 | ) | 17,099 | ||||||||
| Repurchases and retirement of stock |
— | (1,237 | ) | (3,610 | ) | |||||||
| Exercise of stock options |
— | — | 38 | |||||||||
| Issuance of common stock under dividend reinvestment plan |
283 | 434 | 413 | |||||||||
| Issuance of preferred stock |
24,000 | — | — | |||||||||
| Director stock grant |
54 | 104 | 143 | |||||||||
| Dividends paid |
(2,858 | ) | (3,778 | ) | (3,869 | ) | ||||||
| Net cash provided by financing activities |
69,940 | 39,349 | 64,706 | |||||||||
| Cash and Cash Equivalents |
||||||||||||
| Beginning of year |
13,214 | 18,384 | 36,415 | |||||||||
| Net increase (decrease) in cash and cash equivalents |
15,474 | (5,170 | ) | (18,031 | ) | |||||||
| End of year |
$ | 28,688 | $ | 13,214 | $ | 18,384 | ||||||
| Supplemental Disclosures of Cash Flow Information |
||||||||||||
| Cash payments for Interest |
$ | 24,823 | $ | 27,836 | $ | 23,701 | ||||||
| Cash payments for Income taxes |
$ | 1,167 | $ | 2,370 | $ | 4,009 | ||||||
| Supplemental Disclosures of Noncash Investing and Financing Activities |
||||||||||||
| Transfers from loans to foreclosed real estate |
$ | 5,723 | $ | 559 | $ | 1,056 | ||||||
| Change in unrealized gain(loss) on securities available for sale |
$ | 19,348 | $ | (13,714 | ) | $ | (754 | ) | ||||
| Pension liability adjustment |
$ | 2,636 | $ | (3,988 | ) | $ | 1,949 | |||||
| Details of acquistion of branches: |
||||||||||||
| Fair value of assets acquired |
$ | — | $ | 49,171 | $ | — | ||||||
| Fair value of liabilities assumed |
— | 93,706 | — | |||||||||
| Purchase price in excess of net assets acquired |
— | 10,265 | — | |||||||||
| Cash received |
— | 34,270 | — | |||||||||
| Less cash acquired |
— | (275 | ) | — | ||||||||
| Net cash received for acquisition |
$ | — | $ | 33,995 | $ | — | ||||||
See Notes to Consolidated Financial Statements.
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EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders’ Equity
For the Years Ended December 31, 2009, 2008 and 2007
(dollars in thousands)
| Common Stock |
Preferred Stock |
Surplus | Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
Comprehensive Income (Loss) |
Total | |||||||||||||||||||||
| Balance, December 31, 2006 |
$ | 12,166 | $ | — | $ | 21,276 | $ | 58,731 | $ | (4,366 | ) | $ | 87,807 | ||||||||||||||
| Comprehensive income: |
|||||||||||||||||||||||||||
| Net income - 2007 |
— | — | — | 8,754 | — | $ | 8,754 | 8,754 | |||||||||||||||||||
| Other comprehensive income: |
|||||||||||||||||||||||||||
| Unrealized securities losses arising during period, (net of tax, $296) |
— | — | — | — | — | (444 | ) | — | |||||||||||||||||||
| Reclassification adjustment, (net of tax, $5) |
— | — | — | — | — | (9 | ) | — | |||||||||||||||||||
| Change in unfunded pension liability |
— | — | — | — | — | 1,296 | — | ||||||||||||||||||||
| Other comprehensive income |
843 | 843 | 843 | ||||||||||||||||||||||||
| Total comprehensive income |
— | — | — | — | — | $ | 9,597 | ||||||||||||||||||||
| Cash dividends declared |
— | — | — | (3,869 | ) | — | (3,869 | ) | |||||||||||||||||||
| Stock-based compensation |
— | — | 250 | — | — | 250 | |||||||||||||||||||||
| Director stock grant |
13 | — | 130 | — | — | 143 | |||||||||||||||||||||
| Stock options exercised |
5 | — | 33 | — | — | 38 | |||||||||||||||||||||
| Shares purchased and retired |
(359 | ) | — | (3,251 | ) | — | — | (3,610 | ) | ||||||||||||||||||
| Issuance of common stock under dividend reinvestment plan |
40 | — | 373 | — | — | 413 | |||||||||||||||||||||
| Balance, December 31, 2007 |
$ | 11,865 | $ | — | $ | 18,811 | $ | 63,616 | $ | (3,523 | ) | $ | 90,769 | ||||||||||||||
| Comprehensive (loss): |
|||||||||||||||||||||||||||
| Net income - 2008 |
— | — | 3,071 | — | $ | 3,071 | 3,071 | ||||||||||||||||||||
| Other comprehensive loss: |
|||||||||||||||||||||||||||
| Unrealized securities losses arising during period, (net of tax, ($4,785)) |
— | — | — | — | (8,885 | ) | — | ||||||||||||||||||||
| Reclassification adjustment, (net of tax, $15) |
— | — | — | — | (29 | ) | — | ||||||||||||||||||||
| Change in unfunded pension liability |
— | — | — | — | (2,592 | ) | — | ||||||||||||||||||||
| Other comprehensive loss |
— | — | — | (11,506 | ) | (11,506 | ) | (11,506 | ) | ||||||||||||||||||
| Total comprehensive loss |
$ | (8,435 | ) | ||||||||||||||||||||||||
| Cash dividends declared |
— | — | (3,778 | ) | — | (3,778 | ) | ||||||||||||||||||||
| Stock-based compensation |
— | — | 277 | — | — | 277 | |||||||||||||||||||||
| Director stock grant |
13 | — | 91 | — | — | 104 | |||||||||||||||||||||
| Pension plan date change |
— | — | (105 | ) | — | (105 | ) | ||||||||||||||||||||
| Shares purchased and retired |
(141 | ) | — | (1,096 | ) | — | (1,237 | ) | |||||||||||||||||||
| Restricted common stock vested |
3 | — | (3 | ) | — | — | |||||||||||||||||||||
| Issuance of common stock under dividend reinvestment plan |
58 | — | 376 | — | — | 434 | |||||||||||||||||||||
| Balance, December 31, 2008 |
$ | 11,798 | $ | — | $ | 18,456 | $ | 62,804 | $ | (15,029 | ) | $ | 78,029 | ||||||||||||||
| Comprehensive income (loss): |
|||||||||||||||||||||||||||
| Net loss - 2009 |
— | — | — | (8,804 | ) | $ | (8,804 | ) | (8,804 | ) | |||||||||||||||||
| Other comprehensive income: |
|||||||||||||||||||||||||||
| Unrealized securities gains arising during period, (net of tax, ($1.372)) |
— | — | — | — | — | 2,549 | — | ||||||||||||||||||||
| Reclassification adjustment (net of tax (5,399)) |
— | — | — | — | — | 10,028 | — | ||||||||||||||||||||
| Change in unfunded pension liability (net of tax ($911) |
— | — | — | — | — | 1,669 | — | ||||||||||||||||||||
| Other comprehensive income |
— | — | — | — | 14,246 | 14,246 | 14,246 | ||||||||||||||||||||
| Total comprehensive income |
5,442 | — | |||||||||||||||||||||||||
| Issuance of preferred stock to U.S. Treasury |
— | 24,000 | — | — | — | 24,000 | |||||||||||||||||||||
| Cash dividends declared common and preferred |
— | — | — | (2,858 | ) | — | (2,858 | ) | |||||||||||||||||||
| Preferred stock discount |
— | 289 | — | (289 | ) | — | — | ||||||||||||||||||||
| Stock-based compensation |
248 | — | — | 248 | |||||||||||||||||||||||
| Director stock grant |
13 | — | 41 | — | — | 54 | |||||||||||||||||||||
| Restricted common stock vested |
3 | — | — | (3 | ) | — | — | ||||||||||||||||||||
| Issuance of common stock under dividend |
— | — | — | — | — | ||||||||||||||||||||||
| reinvestment plan |
63 | — | 220 | — | — | 283 | |||||||||||||||||||||
| Balance, December 31, 2009 |
$ | 11,877 | $ | 24,289 | $ | 18,965 | $ | 50,850 | $ | (783 | ) | $ | 105,198 | ||||||||||||||
See Notes to Consolidated Financial Statements.
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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 “Company”, “our Company”, “we” “us” or “our”) conform to accounting principles generally accepted in the United States of America 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 headquartered in Tappahannock, Virginia that was organized and chartered under the laws of the Commonwealth of Virginia on September 5, 1997 and commenced operations on December 29, 1997. We conduct our primary operations through our wholly-owned bank subsidiary, EVB. Two of our predecessor banks, Bank of Northumberland, Inc. and Southside Bank, were established in 1910. Seeking to accelerate our growth in a higher growth adjacent market, we started a de novo bank, Hanover Bank, in 2000. The three predecessor banks were merged and the surviving bank re-branded as EVB in April 2006.
Our primary activity is retail banking. Through our bank subsidiary, we provide full service banking including commercial and consumer demand and time deposit accounts, real estate, commercial and consumer loans, Visa revolving credit accounts, drive-in banking services, automated teller machine transactions, internet banking and wire transfer services. With 25 branches at 2009 year end, our bank serves diverse markets that primarily are in the counties of Caroline, Essex, Gloucester, Hanover, Henrico, King and Queen, King William, Lancaster, Middlesex, New Kent, Richmond, Northumberland, Southampton, Surry, Sussex and the City of Colonial Heights. Ancillary services provided by our bank include travelers’ checks, safe deposit box rentals, collections and other customary bank services to its customers. The majority of our revenue comes from retail banking in the form of interest earned on loans and investment securities and fees related to deposit services. The Company also owns EVB Statutory Trust I, a limited purpose entity that was created in 2003 for the purpose of issuing our trust preferred debt.
Our bank owns EVB Financial Services, Inc., which in turn has 100% ownership of EVB Investments, Inc. and a 50% ownership interest in EVB Mortgage, Inc. EVB Investments, Inc. has a 770 share interest in Infinex, which it uses as a brokerage firm for the investment services it provides. The bank also has a 75% ownership interest in EVB Title, LLC, a 100% interest in Dunston Hall, LLC and a 2.33% interest in Virginia Bankers Insurance Center, LLC. EVB Title, LLC sells title insurance, while Virginia Bankers Insurance Center, LLC acts as a broker for insurance sales for its member banks. Dunston Hall , LLC holds title to repossessed real estate. EVB Mortgage, Inc. was chartered in the first quarter of 2004 and began conducting business in the third quarter of 2004. The financial position and operating results of all of these subsidiaries are not significant to us as a whole and are not considered principal activities of our Company at this time.
Principles of Consolidation
The consolidated financial statements include the accounts of Eastern Virginia Bankshares, Inc. and all subsidiaries. All material intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
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Notes to Consolidated Financial Statements—(Continued)
Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred taxes, other-than-temporary impairment of securities, other real estate owned and fair value.
Cash and Cash Equivalents
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash, balances due from banks and federal funds sold, which all mature within ninety days.
Interest-Bearing Balances with Banks
EVB maintains interest-bearing deposit accounts with the Federal Reserve Bank of Richmond, the Federal Home Loan Bank of Atlanta and Bank of New York as custodian for (“CDARS”) the Certificate of Deposit Account Registry Service. Balances with the Federal Reserve Bank of Richmond are classified as zero risk by regulatory authorities while balances maintained with the Federal Home Loan Bank of Atlanta (“FHLB”) are generally limited to the amount covered by FDIC insurance. Balances in the CDARS program are fully covered by FDIC insurance.
Securities
Investments in debt securities with readily determinable fair values are classified as either held to maturity, available for sale (“AFS”) or trading based on management’s intent. Currently all of our debt securities are classified as AFS. Equity investments in the FHLB, the Federal Reserve Bank of Richmond and Community Bankers Bank are separately classified as restricted securities and are carried at cost. AFS securities are carried at estimated fair value with the corresponding 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.
Impairment of securities occurs when the fair value of a security is less than its amortized cost. For debt securities, impairment is considered other-than-temporary and recognized in its entirety in net income if either (i) we intend to sell the security or (ii) it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If, however, we do not intend to sell the security and it is not more-than-likely that we will be required to sell the security before recovery, we must determine what portion of the impairment is attributable to a credit loss, which occurs when the amortized cost of the security exceeds the present value of the cash flows expected to be collected from the security. If there is no credit loss, there is no other-than-temporary impairment. If there is a credit loss, other-than-temporary impairment exists, and the credit loss must be recognized in net income and the remaining portion of impairment must be recognized in other comprehensive income.
For equity securities carried at cost as restricted securities, impairment is considered to be other-than-temporary based on our ability and intent to hold the investment until a recovery of fair value. Other-than-temporary impairment of an equity security results in a write-down that must be included in income. We regularly review each security for other-than-temporary impairment based on criteria that include the extent to which costs exceeds market price, the duration of that market decline, the financial health of and specific prospects for the issuer, our best estimate of the present value of cash flows expected to be collected from debt securities, our intention with regard to holding the security to maturity and the likelihood that we would be required to sell the security before recovery.
Loans
We grant mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans in our market area. The ability of our debtors to honor their
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Notes to Consolidated Financial Statements—(Continued)
contracts is dependent upon the real estate and general economic conditions in our market area. Loans that we have 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 adjusted for charge-offs, 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 for loans with a maturity greater than one year at origination.
The accrual of interest on loans, except credit cards, consumer loans and residential mortgage loans, is automatically discontinued at the time the loan is 90 days delinquent. Credit card loans and other personal loans are typically charged off before reaching 180 days past due. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
Allowance for Loan Losses
The provision for loan losses charged to operations is an amount sufficient to bring the allowance for loan losses to an estimated balance considered adequate to absorb potential losses in the portfolio. Recoveries of amounts previously charged-off are credited to the allowance. Our determination of the adequacy of the allowance is based on an evaluation of the portfolio, current economic conditions, historical loss experience, the value and adequacy of collateral, and other risk factors. Recovery of the carrying value of loans is dependent to some extent on future economic, operating and other conditions that may be beyond our control. Unanticipated future adverse changes in such conditions could result in material adjustments to the allowance for loan losses.
The allowance consists of specific, general and unallocated components. The specific component generally relates to loans that are classified as either doubtful or substandard. The general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due, according to the contractual 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 shortfalls generally are not classified as impaired. We determine 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 cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify the individual consumer and residential loans for impairment disclosures.
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Notes to Consolidated Financial Statements—(Continued)
Other Real Estate
Real estate acquired through, or in lieu of, foreclosure is held for sale and is initially recorded at the lower of the loan balance or fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations less cost to sell are periodically performed by our management, and the assets are carried at the lower of the 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. Land is carried at cost. Depreciation and amortization are computed using the straight-line method for financial reporting purposes and are charged to expense over the estimated useful lives of the assets, ranging from three to thirty years. Depreciation for tax purposes is computed based upon accelerated methods. The costs of major renewals or improvements are capitalized while the costs of ordinary maintenance and repairs are charged to expense as incurred.
Income Taxes
Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax basis of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws.
When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statements of operations.
Stock Compensation Plans
At December 31, 2009, we had two stock-based compensation plans, which are described more fully in Note 12. We account for these plans under the recognition and measurement principles of FASB ASC 718 Compensation – Stock Compensation. Stock-based compensation costs included in salaries and benefits expense totaled $248 thousand for the year 2009, $277 thousand for the year 2008 and $250 thousand for the year 2007.
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Notes to Consolidated Financial Statements—(Continued)
Earnings Per Share
Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Company relate to outstanding stock options and restricted stock awards, and are determined using the treasury method. Earnings per share calculations are presented in Note 11.
Comprehensive Income
Accounting principles generally accepted in the United States of America 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, and pension liability adjustments, 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
We have a defined benefit pension plan covering employees meeting certain age and service requirements.
Advertising
We practice the policy of charging advertising costs to expense as incurred. Advertising expense totaled $500 thousand, $559 thousand, and $459 thousand for the three years ended December 31, 2009, 2008 and 2007, respectively.
Intangible Assets
Core deposit intangibles are included in other assets and are being amortized on a straight-line basis over the period of expected benefit, which is 28.5 months to seven years. Core deposit intangibles, net of amortization amounted to $215 thousand and $503 thousand at December 31, 2009 and 2008 respectively. Core deposit intangibles are included in other assets on our Consolidated Financial Statements.
Goodwill
In accounting for goodwill we follow the provisions of ASC 805 - Business Combinations - Goodwill and Other Intangible Assets. Goodwill is not subject to amortization over its estimated useful life, but is subject to at least an annual assessment for impairment by applying a fair value based test. Additionally, acquired intangible assets (such as core deposit intangibles) are separately recognized if the benefit of the asset can be sold, transferred, licensed, rented or exchanged, and are amortized over the useful life. Our goodwill was recognized in connection with the acquisition of branches in 2003 and 2008. The annual test for impairment was completed during the fourth quarter of 2009 and it was determined there was no impairment to be recognized in 2009.
Goodwill amounted to $16.0 million at December 31, 2009 and 2008, respectively. Based on annual testing, there were no impairment charges in 2009, 2008 or 2007.
Reclassifications
Certain reclassifications have been made to prior period balances to conform to the current year presentation.
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Notes to Consolidated Financial Statements—(Continued)
Troubled Asset Relief Program
On October 3, 2008, the Emergency Economic Stabilization Act of 2008 (“EESA”) was enacted establishing the Troubled Asset Relief Program (“TARP”), to be administered by the U. S. Department of the Treasury (“Treasury”). On October 14, 2008, Treasury announced its intention to inject capital into U. S. financial institutions under the TARP Capital Purchase Program (“CPP”). On January 9, 2009, we signed a letter agreement with Treasury under the CPP pursuant to which we sold 24,000 shares of our Series A Fixed Rate Cumulative Preferred Stock for a purchase price of $24 million cash. This preferred stock pays a cumulative dividend at a rate of 5% for the first five years, and if not redeemed, pays a rate of 9.0% starting at the beginning of the sixth year. As part of its purchase of the preferred stock, Treasury also was issued a warrant to purchase up to 373,832 shares of the Company’s common stock at an initial exercise price of $9.63 per share. If not exercised, the warrant terminates at the expiration of ten years. Under the agreement with the Treasury, the Company is subject to restrictions on its ability to increase the dividend rate on its common stock and to repurchase its common stock without Treasury consent.
In addition, we agreed that, until such time as Treasury ceases to own any of our securities acquired pursuant to the letter agreement, we will take all necessary steps to ensure that our benefits plans with respect to senior executive officers comply with Section 111(b) of EESA as implemented by any guidance or regulation under the EESA and have agreed not to adopt any benefit plans with respect to, or which covers our senior executive officers that do not comply with the EESA, and the applicable executives have consented to the foregoing. Finally, the Letter Agreement provides that the Treasury may unilaterally amend any provision of the Agreement to the extent required to comply with federal law.
The Special Inspector General for the Troubled Asset Relief Program (“SIGTARP”) was established pursuant to Section 121 of EESA and has the duty, among other things, to conduct, supervise, and coordinate audits and investigations of the purchase, management and sale of assets by Treasury under TARP and the CPP, including the preferred shares purchased from us.
Recent Accounting Pronouncements
In June 2009, FASB issued new accounting guidance related to U. S. GAAP (FASB ASC 105, Generally Accepted Accounting Principles). This guidance establishes FASB ASC as the source of authoritative U. S. GAAP recognized by FASB to be applied to nongovernmental entities. Rule and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative U. S. GAAP for SEC registrants. FASB ASC supersedes all existing non-SEC accounting and reporting standards. All other nongrandfathered, non-SEC accounting literature not included in FASB ASC has become nonauthoritative. FASB will no longer issue new standards in the form of Statements, FASB Staff Positions or Emerging Issues Task Force Abstracts. Instead, it will issue Accounting Standards Updates (ASUs), which will serve to update FASB ASC, provide background information about the guidance and provide the basis for conclusions on the changes to FASB ASC. FASB ASC is not intended to change U. S. GAAP or any requirements of the SEC.
The Company adopted new guidance impacting Financial Accounting Standards Board Topic 805: Business Combinations (Topic 805) on January 1, 2009. This guidance requires the acquiring entity in a business combination to recognize the full fair value of assets acquired and liabilities assumed in the transaction (whether a full or partial acquisition); establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed; requires expensing of most transaction and restructuring costs; and requires the acquirer to disclose to investors and other users all of the information needed to evaluate and understand the nature and financial effect of the business combination. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.
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Notes to Consolidated Financial Statements—(Continued)
In April 2009, the FASB issued new guidance impacting Topic 805. This guidance addresses application issues raised by preparers, auditors, and members of the legal profession on initial recognition and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination. This guidance was effective for business combinations entered into on or after January 1, 2009. This guidance did not have a material impact on the Company’s consolidated financial statements.
In December 2008, the FASB issued new guidance impacting FASB Topic 715-20: Compensation Retirement Benefits – Defined Benefit Plans – General. The objectives of this guidance are to provide users of the financial statements with more detailed information related to the major categories of plan assets, the inputs and valuation techniques used to measure the fair value of plan assets and the effect of fair value measurements using significant unobservable inputs (Level 3) on changes in plan assets for the period, as well as how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies. The disclosures about plan assets required by this guidance are included in Note 10 of the Company’s consolidated financial statements.
In April 2009, the FASB issued new guidance impacting FASB Topic 820: Fair Value Measurements and Disclosures (Topic 820). This interpretation provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased. This also includes guidance on identifying circumstances that indicate a transaction is not orderly and requires additional disclosures of valuation inputs and techniques in interim periods and defines the major security types that are required to be disclosed. This guidance was effective for interim and annual periods ending after June 15, 2009, and should be applied prospectively. The adoption of the standard did not have a material impact on the Company’s consolidated financial statements.
In April 2009, the FASB issued new guidance impacting FASB Topic 320-10: Investments – Debt and Equity Securities. This guidance amends GAAP for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements. This guidance was effective for interim and annual periods ending after June 15, 2009, with earlier adoption permitted for periods ending after March 15, 2009. The Company did not have any cumulative effect adjustment related to the adoption of this guidance.
In May 2009, the FASB issued new guidance impacting FASB Topic 855: Subsequent Events. This update provides guidance on management’s assessment of subsequent events that occur after the balance sheet date through the date that the financial statements are issued. This guidance is generally consistent with current accounting practice. This guidance was effective for periods ending after June 15, 2009 and had no impact on the Company’s consolidated financial statements.
In August 2009, the FASB issued new guidance impacting Topic 820. This guidance is intended to reduce ambiguity in financial reporting when measuring the fair value of liabilities. This guidance was effective for the first reporting period (including interim periods) after issuance and had no impact on the Company’s consolidated financial statements.
In September 2009, the FASB issued new guidance impacting Topic 820. This creates a practical expedient to measure the fair value of an alternative investment that does not have a readily determinable fair value. This guidance also requires certain additional disclosures. This guidance is effective for interim and annual periods ending after December 15, 2009. The Company does not expect the adoption of the new guidance to have a material impact on its consolidated financial statements.
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Notes to Consolidated Financial Statements—(Continued)
In January 2010, the FASB issued ASU 2010-01, Equity (Topic 505): Accounting for Distributions to Shareholders with Components of Stock and Cash – a consensus of the FASB Emerging Issues Task Force. ASU 2010-01 clarifies that the stock portion of a distribution to shareholders that allows them to elect to receive cash or stock with a potential limitation on the total amount of cash that all shareholders can elect to receive in the aggregate is considered a share issuance that is reflected in EPS prospectively and is not a stock dividend. ASU 2010-01 is effective for interim and annual periods ending on or after December 15, 2009 and should be applied on a retrospective basis. The Company does not expect the adoption of ASU 2010-01 to have a material impact on its consolidated financial statements.
Accounting Standards Not Yet Effective
In June 2009, the FASB issued new guidance relating to the accounting for transfers of financial assets. The new guidance, which was issued as SFAS No. 166, Accounting for Transfers of Financial Assets, an amendment to SFAS No. 140, was adopted into Codification in December 2009 through the issuance of Accounting Standards Updated (ASU) 2009-16. The new standard provides guidance to improve the relevance, representational faithfulness, and comparability of the information that an entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. The Company will adopt the new guidance in 2010 and is evaluating the impact it will have, if any, on its consolidated financial statements.
In June 2009, the FASB issued new guidance relating to the variable interest entities. The new guidance, which was issued as SFAS No. 167, Amendments to FASB Interpretation No. 46(R), was adopted into Codification in December 2009. The objective of the guidance is to improve financial reporting by enterprises involved with variable interest entities and to provide more relevant and reliable information to users of financial statements. SFAS No. 167 is effective as of January 1, 2010. The Company does not expect the adoption of the new guidance to have a material impact on its consolidated financial statements.
In October 2009, the FASB issued ASU 2009-15, Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing. ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company does not expect the adoption of ASU 2009-15 to have a material impact on its consolidated financial statements.
In January 2010, the FASB issued ASU 2010-02, Consolidation (Topic 810): Accounting and reporting for Decreases in Ownership of a Subsidiary – a Scope Clarification. ASU 2010-02 amends Subtopic 810-10 to address implementation issues related to changes in ownership provisions including clarifying the scope of the decrease in ownership and additional disclosures. ASU 2010-02 is effective beginning in the period that an entity adopts Statement 160. If an entity has previously adopted Statement 160, ASU 2010-02 is effective beginning in the first interim or annual reporting period ending on or after December 15, 2009 and should be applied retrospectively to the first period Statement 160 was adopted. The Company does not expect the adoption of ASU 2010-02 to have a material impact on its consolidated financial statements.
In January 2010, the FASB issued ASU 2010-04, Accounting for Various Topics – Technical Corrections to SEC Paragraphs. ASU 2010-04 makes technical corrections to existing SEC guidance including the following topics: accounting for subsequent investments, termination of an interest rate swap, issuance of financial statements - subsequent events, use of residential method to value acquired assets other than
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Notes to Consolidated Financial Statements—(Continued)
goodwill, adjustments in assets and liabilities for holding gains and losses, and selections of discount rate used for measuring defined benefit obligation. The Company does not expect the adoption of ASU 2010-04 to have a material impact on its consolidated financial statements.
In January 2010, the FASB issued ASU 2010-05, Compensation – Stock Compensation (Topic 718): Escrowed Share Arrangements and the Presumption of Compensation. ASU 2010-05 updates existing guidance to address the SEC staff’s views on overcoming the presumption that for certain shareholders escrowed share arrangements represent compensation. The Company does not expect the adoption of ASU 2010-05 to have a material impact on its consolidated financial statements.
In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements. ASU 2010-06 amends Subtopic 820-10 to clarify existing disclosures, require new disclosures, and includes conforming amendments to guidance on employers’ disclosures about postretirement benefit plan assets. ASU 2010-06 is effective for interim and annual periods beginning after December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The Company does not expect the adoption of ASU 2010-06 to have a material impact on its consolidated financial statements.
In February 2010, the FASB issued ASU 2010-08, Technical Corrections to Various Topics. ASU 2010-08 clarifies guidance on embedded derivatives and hedging. ASU 2010-08 is effective for interim and annual periods beginning after December 15, 2009. The Company does not expect the adoption of ASU 2010-08 to have a material impact on its consolidated financial statements.
Note 2. Cash and Due From Banks
To comply with Federal Reserve Regulations, our subsidiary bank is required to maintain certain average reserve balances. For the final weekly reporting period in the years ended December 31, 2009 and 2008, the daily average required balances were approximately $75 thousand for both periods.
Note 3. Securities
The amortized cost and fair value of securities at December 31, 2009 and December 31, 2008, with gross unrealized gains and losses, follows:
| December 31, 2009 | ||||||||||||
| (dollars in thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value | ||||||||
| Available for Sale: |
||||||||||||
| Obligations of U.S. Government agencies |
$ | 34,180 | $ | 393 | $ | 51 | $ | 34,522 | ||||
| Agency Mortgage-backed securities |
39,774 | 1,712 | 5 | 41,481 | ||||||||
| Agency CMO securities |
29,727 | 479 | 214 | 29,992 | ||||||||
| Non Agency CMO securities |
5,149 | 36 | 40 | 5,145 | ||||||||
| State and political subdivisions |
47,938 | 775 | 641 | 48,072 | ||||||||
| Pooled trust preferred securities |
632 | 56 | — | 688 | ||||||||
| FNMA and FHLMC preferred stock |
77 | 49 | — | 126 | ||||||||
| Corporate securities |
10,819 | 145 | 1,548 | 9,416 | ||||||||
| Total |
$ | 168,296 | $ | 3,645 | $ | 2,499 | $ | 169,442 | ||||
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Notes to Consolidated Financial Statements—(Continued)
| December 31, 2008 | ||||||||||||
| (dollars in thousands) |
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value | ||||||||
| Available for Sale: |
||||||||||||
| Obligations of U.S. Government agencies |
$ | 33,149 | $ | 540 | $ | 70 | $ | 33,619 | ||||
| Agency Mortgage-backed securities |
50,419 | 1,084 | 22 | 51,481 | ||||||||
| Agency CMO securities |
11,256 | 223 | 7 | 11,472 | ||||||||
| Non Agency CMO securities |
6,676 | — | 477 | 6,199 | ||||||||
| State and political subdivisions |
39,376 | 753 | 888 | 39,241 | ||||||||
| Pooled trust preferred securities |
19,075 | — | 15,493 | 3,582 | ||||||||
| FNMA and FHLMC preferred stock |
94 | — | — | 94 | ||||||||
| Corporate securities |
10,802 | — | 3,845 | 6,957 | ||||||||
| Total |
$ | 170,847 | $ | 2,600 | $ | 20,802 | $ | 152,645 | ||||
We do not hold any commercial mortgage-backed securities. Our mortgage-backed securities are all agency backed and AAA rated with no subprime issues. Our pooled trust preferred securities include one senior issue of Preferred Terms Securities XXVII which is current on all payments and on which we took an impairment charge in the third quarter of 2009 to reduce our book value to the market value at September 30, 2009. That security is valued at year end 2009 at $56 thousand greater than the amortized cost after impairment. We also have an investment in Preferred Term Securities XXIII mezzanine tranche which was impaired to a cost basis of $77 thousand at September 30, 2009 and which retains that value at December 31, 2009.
The following is a comparison of amortized cost and estimated fair values of our securities by contractual maturity at December 31, 2009. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without penalties.
| (dollars in thousands) |
Amortized Cost |
Estimated Fair Value | ||||
| Due in one year or less |
$ | 37,749 | 37,919 | |||
| Due after one year through five years |
81,019 | 82,209 | ||||
| Due after five years through ten years |
29,650 | 29,619 | ||||
| Due after ten years |
19,878 | 19,695 | ||||
| Total |
$ | 168,296 | $ | 169,442 | ||
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Notes to Consolidated Financial Statements—(Continued)
At December 31, 2009, investments in an unrealized loss position that are temporarily impaired are:
| December 31, 2009 | ||||||||||||||||||
| Less than 12 months | 12 months or more | Total | ||||||||||||||||
| (dollars in thousands) |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss | ||||||||||||
| Description of Securities |
||||||||||||||||||
| Obligations of U. S. Government agencies |
$ | 26,966 | $ | 51 | $ | — | $ | — | $ | 26,966 | $ | 51 | ||||||
| Mortgage-backed and CMO securities |
14,072 | 217 | 977 | 42 | 15,049 | 259 | ||||||||||||
| States and political subdivisions |
6,440 | 127 | 4,511 | 514 | 10,951 | 641 | ||||||||||||
| Corporate securities |
860 | 140 | 5,914 | 1,408 | 6,774 | 1,548 | ||||||||||||
| $ | 48,338 | $ | 535 | $ | 11,402 | $ | 1,964 | $ | 59,740 | $ | 2,499 | |||||||
Bonds with unrealized loss positions of less than 12 months duration at 2009 year-end included 6 federal agency mortgage backed issues, 1 corporate bond, 15 municipal bonds, 1 agency mortgage-backed security and 8 agency collateralized mortgage obligations (“CMO”). Securities with losses of one year or greater duration included 3 federal agency mortgage-backed securities, 8 corporate bonds, 2 non-agency CMO securities and 4 municipal bonds.
Management reviews all securities with unrealized losses on a quarterly basis and documents its conclusion on whether a security is or is not other-than-temporarily impaired (“OTTI”). As of year-end, the Company held $3.0 million par value in GMAC bonds with a book value of $2.7 million. Holdings of GMAC contained unrealized loss positions totaling $515 thousand. These securities have been downgraded by Moodys and Standard & Poors rating agencies to levels below investment grade. These holdings are monitored regularly by the Company’s Chief Financial Officer and reported to the EVB Board on a monthly basis. Given the attractive yield and the belief that the risk of default is remote, we have not recommended sale of the holdings. GMAC participated in the Treasury’s TARP Capital Purchase Program (“CPP”). Other than the GMAC holdings, all corporate securities are rated as investment grade by either Moodys or S&P or both and are not considered by the Company to have credit impairment that would trigger OTTI. The GMAC holdings are reviewed on an ongoing basis by the CFO and reported to the board on a monthly basis. After considering the facts that GMAC is current on income payments, a maturity in 2008 was redeemed on schedule, remaining holdings all mature in less than eight years and our belief that GMAC will be a survivor in the economic crisis, management’s judgment is that these bonds are not OTTI. GMAC market value has increased significantly in the past year as the company has shown financial improvement.
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Notes to Consolidated Financial Statements—(Continued)
A table follows that provides detail information at December 31, 2009 on the corporate bond holdings that have been in a temporarily impaired position for 12 months or greater. These are all senior securities with no subordination.
| December 31, 2009 (Dollars in thousands) Issuer |
Amortized Cost Basis |
Fair Value |
Unrealized Loss |
Maturity | Current Market Yield |
Moody/S&P Credit Rating |
Excess Subordination |
Security Priority | |||||||||||||
| HSBC CPI Floating CPI + 255 basis points |
$ | 599 | $ | 532 | $ | (67 | ) | 2013 | 5.21 | % | A3/A | none | senior | ||||||||
| SLM Corp Floating 1 Month CPI + 212.5 bp |
1,000 | 769 | (231 | ) | 2013 | 7.49 | % | Ba1/BBB- | none | senior | |||||||||||
| SLM Corp Floating 1 Month CPI + 200 bp |
1,000 | 712 | (288 | ) | 2014 | 8.72 | % | Ba1/BBB- | none | senior | |||||||||||
| SLM Corp Floating 1 Month CPI + 162 bp |
1,000 | 709 | (291 | ) | 2014 | 8.54 | % | Ba1/BBB- | none | senior | |||||||||||
| Bear Stearns/J P Morgan Floating CPI + 145 bp |
1,000 | 987 | (13 | ) | 2014 | 1.59 | % | Aa3/A+ | none | senior | |||||||||||
| Pacific Life Global FNDG Floating CPI +218 bp |
1,000 | 860 | (140 | ) | 2016 | 3.44 | % | A1/AA- | none | senior | |||||||||||
| GMAC 6.25% Fixed Rate |
500 | 411 | (89 | ) | 2013 | 12.62 | % | CCC | none | senior | |||||||||||
| GMAC 6.15% Fixed Rate |
1,500 | 1,091 | (409 | ) | 2016 | 12.61 | % | CCC | none | senior | |||||||||||
| GMAC 6.875% Fixed Rate |
723 | 703 | (20 | ) | 2018 | 12.57 | % | CCC | none | senior | |||||||||||
| $ | 8,322 | $ | 6,774 | $ | (1,548 | ) | |||||||||||||||
We recognized other-than-temporary impairment for pooled trust preferred debt securities classified as AFS in accordance with ASC 320-10-65. As required by this ASC guidance, we assessed whether we intend to sell or it was more likely than not that we would be required to sell the security before recovery of its amortized cost basis less any current period losses. We separated the amount of impairment into the loss that is credit related and the amount due to all other factors. The credit loss component was recognized in earnings. The remaining difference between the securities’ fair value and present value of future expected cash flows is due to factors not credit related, and therefore, was not required to be recognized as a loss in the income statement, but was recognized in other comprehensive income. We believe that we will fully collect the carrying value of securities on which we have recorded a non-credit-related impairment in other comprehensive income.
After much deliberation and consultation with an independent securities appraisal firm that specializes in valuing illiquid securities, we recognized an impairment through the Statement of Operations in 2009 of $18.9 million, reducing our book value of pooled trust preferred securities to $632 thousand, $554 thousand of which is in a senior performing tranche that has an unrealized gain as of 2009 year end. The independent appraiser followed other-than-temporary impairment (“OTTI”) guidelines in determining that the total lack of an orderly market for nonperforming pooled trust preferred securities was the result of credit issues in this class of securities. The model used to develop the fair market value considered performing collateral ratios, the level of subordination to senior tranches of the securities, credit ratings of and projected credit defaults in the underlying collateral and the discounted present value of projected future cash flows. After this impairment, our remaining pooled trust preferred securities no longer have an unrealized loss.
The table below presents a roll forward of the credit loss component recognized in earnings (referred to as “credit-impaired debt securities). Changes in the credit loss component of credit -impaired debt securities were:
| (in thousands) |
Year Ended December 31, 2009 | ||
| Balance, beginning of period |
$ | — | |
| Additions |
|||
| Initial credit impairments |
18,903 | ||
| Subsequent credit impairments |
16 | ||
| Balance end of period |
$ | 18,919 | |
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Notes to Consolidated Financial Statements—(Continued)
We recognized OTTI charges as reflected on our Statement of Operations during 2008 of $4.6 million on our investments in the preferred stock of Federal Home Loan Mortgage Co (“FHLMC”) and Federal National Mortgage Association (“FNMA”). Revocation of dividends resulted in the value of these securities falling more than 95% and requiring the OTTI. The “Subsequent credit impairments” of $16 thousand in the above table represents 2009 additional impairment on the FNMA and FHLMC preferred stock that was impaired in 2008. We also recognized an impairment charge through the Statement of Operations of $300 thousand on our investments in GMAC. GMAC’s ownership of a mortgage company that was involved in subprime mortgages resulted in a 10% credit impairment in 2008.
At December 31, 2008, investments in an unrealized loss position that were temporarily impaired were:
| December 31, 2008 | ||||||||||||||||||
| Less than 12 months | 12 months or more | Total | ||||||||||||||||
| (dollars in thousands) |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss |
Fair Value |
Unrealized Loss | ||||||||||||
| Description of Securities |
||||||||||||||||||
| Obligations of U. S. Government agencies |
$ | 20,000 | $ | — | $ | 930 | $ | 70 | $ | 20,930 | $ | 70 | ||||||
| Agency Mortgage-backed securities |
3,719 | 16 | 572 | 6 | 4,291 | 22 | ||||||||||||
| Non agency CMO securities |
1,930 | 64 | 4,269 | 413 | 6,199 | 477 | ||||||||||||
| Agency CMO securities |
2,676 | 6 | 213 | 1 | 2,889 | 7 | ||||||||||||
| States and political subdivisions |
14,643 | 888 | — | — | 14,643 | 888 | ||||||||||||
| Pooled trust preferred securities |
736 | 197 | 2,846 | 15,296 | 3,582 | 15,493 | ||||||||||||
| Corporate securities |
2,960 | 537 | 3,997 | 3,308 | 6,957 | 3,845 | ||||||||||||
| $ | 46,664 | $ | 1,708 | $ | 12,827 | $ | 19,094 | $ | 59,491 | $ | 20,802 | |||||||
For the years ended December 31, 2009, 2008 and 2007, proceeds from sales of securities available for sale amounted to $924 thousand, $5.6 million, and $4.1 million, respectively. Net realized gains amounted to $66 thousand, $44 thousand, and $14 thousand in 2009, 2008 and 2007, respectively. The book value of securities pledged to secure public deposits and for other purposes amounted to $61.7 million and $15.2 million at December 31, 2009 and 2008, respectively.
Our investment in FHLB stock totaled $7.5 million at December 31, 2009. FHLB stock is generally viewed as a long-term investment and as a restricted security, which is carried at cost, because there is no market for the stock, other than the FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. Despite the FHLB’s temporary suspension of repurchases of excess capital stock in 2009, we do not consider this investment to be other-than-temporarily impaired at December 31, 2009, and no impairment has been recognized. The FHLB did repurchase at par the excess stock that we held in 2009. FHLB stock is shown in restricted securities on the balance sheet and is not part of the AFS securities portfolio.
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Notes to Consolidated Financial Statements—(Continued)
Note 4. Loans
The following is a comparison of loans by type that were outstanding at December 31, 2009 and 2008.
| 2009 | 2008 | |||||||
| (in thousands) | ||||||||
| Real estate - construction |
$ | 87,782 | $ | 102,837 | ||||
| Real estate - mortgage |
400,846 | 372,067 | ||||||
| Commercial real estate |
234,676 | 221,769 | ||||||
| Commercial, industrial and agricultural loans |
82,563 | 69,024 | ||||||
| Loans to individuals for household, family and other consumer expenditures |
42,416 | 47,226 | ||||||
| All other loans |
4,786 | 6,354 | ||||||
| Total gross loans |
853,069 | 819,277 | ||||||
| Less unearned income |
(6 | ) | (11 | ) | ||||
| Less allowance for loan losses |
(12,155 | ) | (10,542 | ) | ||||
| Total net loans |
$ | 840,908 | $ | 808,724 | ||||
We have a concentration in acquisition and development loans for the acquisition and development of real estate and improvements to real estate, representing approximately 10.3% of our total loans outstanding at December 31, 2009. In addition to the percent of total loans, we look at the percent of capital in determining the concentration definition.
Note 5. Allowance for Loan Losses
The following is a summary of the activity in the allowance for loan losses:
| December 31, | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
| Balance at beginning of year |
$ | 10,542 | $ | 7,888 | $ | 7,051 | ||||||
| Reserve on acquired loans |
— | 488 | — | |||||||||
| Provision charged against income |
4,200 | 4,025 | 1,238 | |||||||||
| Recoveries of loans charged off |
407 | 554 | 460 | |||||||||
| Loans charged off |
(2,994 | ) | (2,413 | ) | (861 | ) | ||||||
| Balance at end of year |
$ | 12,155 | $ | 10,542 | $ | 7,888 | ||||||
The following is a summary of information pertaining to impaired loans
| December 31 | |||||||||
| 2009 | 2008 | 2007 | |||||||
| (in thousands) | |||||||||
| Impaired loans for which no valuation allowance has been provided |
$ | 9,491 | $ | 9,264 | $ | 1,442 | |||
| Impaired loans with a valuation allowance |
19,880 | 14,977 | 4,365 | ||||||
| Allowance related to impaired loans |
$ | 5,768 | $ | 2,881 | $ | 1,054 | |||
| Average balance of impaired loans |
$ | 21,794 | $ | 8,564 | $ | 3,810 | |||
| Interest income recognized and collected on impaired loans |
$ | 699 | $ | 583 | $ | 270 | |||
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Notes to Consolidated Financial Statements—(Continued)
No additional funds are committed to be advanced in connection with impaired loans. If interest on nonaccrual loans had been accrued such income would have approximated $893 thousand and $570 thousand, for the years ended December 31, 2009 and 2008, respectively. Loans past due 90 days or greater and still accruing interest amounted to $3 million, $2.5 million and $358 thousand at December 31, 2009, 2008 and 2007, respectively.
Note 6. Related Party Transactions
Loans to directors and executive officers totaled $10.2 million and $11.3 million at December 31, 2009 and 2008, respectively. New advances to directors and officers totaled $6.3 million and repayments totaled $7.4 million in the year ended December 31, 2009. Deposits of directors and executive officers totaled $3.9 million and $3.2 million at December 31, 2009 and 2008, respectively.
Note 7. Bank Premises and Equipment
A summary of the cost and accumulated depreciation of bank premises and equipment follows:
| 2009 | 2008 | |||||
| (in thousands) | ||||||
| Land and improvements |
$ | 5,171 | $ | 4,480 | ||
| Buildings and leasehold improvements |
18,364 | 18,344 | ||||
| Furniture, fixtures and equipment |
15,340 | 14,431 | ||||
| Construction in progress |
1,252 | 1,354 | ||||
| 40,127 | 38,609 | |||||
| Less accumulated depreciation |
20,092 | 17,803 | ||||
| Net balance |
$ | 20,035 | $ | 20,806 | ||
For 2009, depreciation and amortization of premises and equipment was $2.3 million. Depreciation and amortization expense amounted to $2.2 million for 2008 and $2.0 million for 2007.
Total rent expense was $484 thousand, $441 thousand and $285 thousand for 2009, 2008, and 2007, respectively, and was included in occupancy expense.
The following is a schedule by year of future minimum lease requirements required under the long-term non-cancelable lease agreements:
| (in thousands) | |||
| 2010 |
$ | 462 | |
| 2011 |
419 | ||
| 2012 |
342 | ||
| 2013 |
312 | ||
| 2014 |
100 | ||
| Total |
$ | 1,635 | |
Note 8. Deposits
The aggregate amount of certificates of deposit with a minimum denomination of $100,000 was $168.8 million and $180.4 million at December 31, 2009 and 2008, respectively.
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Notes to Consolidated Financial Statements—(Continued)
At December 31, 2009, the scheduled maturities of certificates of deposit were as follows:
| (in thousands) | |||
| 2010 |
$ | 228,738 | |
| 2011 |
50,341 | ||
| 2012 |
49,114 | ||
| 2013 |
18,806 | ||
| 2014 |
19,821 | ||
| 2015 |
111 | ||
| Total |
$ | 366,931 | |
At December 31, 2009 and 2008, overdraft demand deposits reclassified to loans totaled $348 thousand and $341 thousand, respectively.
Note 9. Income Taxes
The Company files income tax returns in the U.S. federal jurisdiction and the Commonwealth of Virginia. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2006.
Net deferred tax assets consist of the following components as of December 31, 2009 and 2008.
| 2009 | 2008 | |||||
| (in thousands) | ||||||
| Deferred Tax Assets: |
||||||
| Allowance for loan losses |
$ | 4,254 | $ | 3,690 | ||
| Impairment on securities |
2,879 | 1,726 | ||||
| Interest on nonaccruals |
313 | 200 | ||||
| Accrued benefit cost |
811 | 1,778 | ||||
| Net unrealized loss on available for sale securities |
— | 6,369 | ||||
| Depreciation and amortization |
24 | — | ||||
| Home equity line closing cost |
126 | 90 | ||||
| Other |
28 | 0 | ||||
| 8,435 | 13,853 | |||||
| Deferred Tax Liabilities: |
||||||
| FHLB dividend |
8 | 8 | ||||
| Depreciation and amortization |
— | 18 | ||||
| Goodwill and other intangible assets |
1,097 | 790 | ||||
| Net unrealized loss on available for sale securities |
401 | — | ||||
| Other |
— | 107 | ||||
| 1,506 | 923 | |||||
| Net deferred tax asset |
$ | 6,929 | $ | 12,930 | ||
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Notes to Consolidated Financial Statements—(Continued)
Income tax expense charged to operations for the years ended December 31, 2009, 2008 and 2007, consists of the following:
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
| Currently Payable |
$ | (4,120 | ) | $ | 2,602 | $ | 3,922 | |||||
| Deferred tax benefit |
(1,736 | ) | (2,096 | ) | (439 | ) | ||||||
| $ | (5,856 | ) | $ | 506 | $ | 3,483 | ||||||
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, 2009, 2008 and 2007, due to the following.
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
| Expected tax expense (benefit) at statutory rate (34%) |
$ | (4,984 | ) | $ | 1,216 | $ | 3,400 | |||||
| Expected tax expense ( benefit) at statutory rate (35%) |
— | — | 783 | |||||||||
| Increase (decrease) in taxes resulting from: |
||||||||||||
| Tax exempt interest |
(738 | ) | (705 | ) | (573 | ) | ||||||
| Other |
(134 | ) | (5 | ) | (127 | ) | ||||||
| $ | (5,856 | ) | $ | 506 | $ | 3,483 | ||||||
Note 10. Employee Benefit Plans
Pension Plan
We have historically had a defined benefit pension plan covering substantially all of our employees. Benefits are based on years of service and the employee’s compensation during the last five years of employment. Our funding policy has been 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. The Plan was amended January 28, 2008 to freeze the Plan with no additional contributions for a majority of Participants. Employees age 55 or greater or with 10 years of credited service were grandfathered in the defined benefit plan which continues without revision for those participants.
Information about the plan follows:
| 2009 | 2008 | 2007 | ||||||||||
| (in thousands) | ||||||||||||
| Change in Benefit Obligation |
||||||||||||
| Obligations at beginning of year |
$ | 12,828 | $ | 13,994 | $ | 13,136 | ||||||
| Service cost |
662 | 1,146 | 1,491 | |||||||||
| Interest cost |
762 | 961 | 784 | |||||||||
| Actuarial (gain) loss |
(420 | ) | (909 | ) | (1,188 | ) | ||||||
| Decrease in obligation due to curtailment |
— | (2,147 | ) | |||||||||
| Benefits paid |
(721 | ) | (217 | ) | (229 | ) | ||||||
| Benefit obligation, end of year |
$ | 13,111 | $ | 12,828 | $ | 13,994 | ||||||
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Notes to Consolidated Financial Statements—(Continued)
| Change in Plan Assets |
||||||||||||
| Fair value of plan assets, beginning |
$ | 9,076 | $ | 13,062 | $ | 10,256 | ||||||
| Actual return on plan assets |
2,701 | (4,411 | ) | 1,410 | ||||||||
| Employer contributions |
940 | 642 | 1,625 | |||||||||
| Benefits paid |
(721 | ) | (217 | ) | (229 | ) | ||||||
| Fair value of plan assets, end of year |
$ | 11,996 | $ | 9,076 | $ | 13,062 | ||||||
| Funded Status at the End of the Year |
$ | (1,115 | ) | $ | (3,751 | ) | $ | (932 | ) | |||
| Amounts Recognized in the Balance Sheet |
||||||||||||
| Other liabilities, accrued pension |
$ | (1,115 | ) | $ | (3,751 | ) | $ | (932 | ) | |||
| Amounts Recognized in Accumulated Other Comprehensive (Income)/Loss |
||||||||||||
| Net loss |
$ | 2,244 | $ | 4,802 | $ | 785 | ||||||
| Prior service cost |
95 | 117 | 144 | |||||||||
| Deferred income tax benefit |
(811 | ) | (1,722 | ) | (327 | ) | ||||||
| Net obligation at transition |
— | — | 3 | |||||||||
| Amount recognized |
$ | 1,528 | $ | 3,197 | $ | 605 | ||||||
| Components of Net Periodic Benefit Cost |
||||||||||||
| Service cost |
$ | 662 | $ | 916 | $ | 1,491 | ||||||
| Interest cost |
762 | 769 | 784 | |||||||||
| Expected return on plan assets |
(716 | ) | (1,068 | ) | (755 | ) | ||||||
| Amortization of prior service cost |
22 | 22 | 22 | |||||||||
| Amortization of net obligation at transition |
— | 3 | 4 | |||||||||
| Recognized net gain due to curtailment |
— | (1,328 | ) | — | ||||||||
| Recognized net actuarial gain |
211 | — | 79 | |||||||||
| Net periodic benefit cost |
$ | 941 | $ | (686 | ) | $ | 1,625 | |||||
| Adjustment to Retained Earnings due to Change in Measurement Date |
||||||||||||
| Service cost |
$ | — | $ | 229 | $ | — | ||||||
| Interest cost |
— | 192 | — | |||||||||
| Expected return on plan assets |
— | (266 | ) | — | ||||||||
| Amortization of prior service cost |
— | 5 | — | |||||||||
| Deferred income tax |
— | (55 | ) | — | ||||||||
| Net periodic benefit cost |
$ | — | $ | 105 | $ | — | ||||||
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Notes to Consolidated Financial Statements—(Continued)
| Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive (Income) Loss |
||||||||||||
| Net (gain) / loss |
$ | (2,614 | ) | $ | 4,018 | $ | (1,923 | ) | ||||
| Amortization of prior service cost |
(22 | ) | (27 | ) | (22 | ) | ||||||
| Amortization of net obligation at transition |
— | (3 | ) | (4 | ) | |||||||
| Total recognized in Other Comprehensive Income |
$ | (2,636 | ) | $ | 3,988 | $ | (1,949 | ) | ||||
| Total Recognized in Net Periodic Benefit Cost and Other Comprehensive Income |
$ | (1,695 | ) | $ | 3,302 | $ | (324 | ) | ||||
| Weighted-Average Assumptions for Benefit Obligation. End of Year |
||||||||||||
| Discount rate |
6.00 | % | 6.00 | % | 6.25 | % | ||||||
| Rate of compensation increase |
4.00 | % | 4.00 | % | 5.00 | % | ||||||
| Weighted-Average Assumptions for Net Periodic Benefit Cost |
||||||||||||
| Discount rate |
6.00 | % | 6.25 | % | 6.00 | % | ||||||
| Expected return on plan assets |
8.00 | % | 8.50 | % | 8.50 | % | ||||||
| Rate of compensation increase |
4.00 | % | 4.00 | % | 5.00 | % | ||||||
| Accumulated Benefit Obligation |
$ | 11,034 | $ | 10,419 | $ | 8,750 |
Long Term Rate of Return
In consultation with their investment advisors and actuary, our plan sponsor selects the expected long-term rate of return on assets assumption. This rate is intended to reflect the average rate of earnings expected to be earned on the funds invested to provide plan benefits. Historical performance is reviewed, especially with respect to real rates of return (net of inflation), for the major asset classes held or anticipated to be held by the trust, and for the trust itself. Undue weight is not given to recent experience that may not continue over the measurement period, with significance placed on current forecasts of future long-term economic conditions. The discount rate used to calculate funding requirements and benefit expense was decreased from 6.25% in 2008 to 6.00% in 2009.
Because assets are held in a qualified trust, anticipated returns are not reduced for taxes. Solely for this purpose, the plan is assumed to continue in force and not terminate during the period during which the assets are invested. However, consideration is given to the potential impact of current and future investment policy, cash flow into and out of the trust, and expenses (both investment and non-investment) typically paid from plan assets (to the extent such expenses are not explicitly estimated with periodic cost). Our estimate of contributions to the plan for 2010 is $780 thousand.
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The fair value of the Company’s pension plan assets at December 31, 2009, by asset category are as follows:
| Fair Value Measurements at December 31, 2009 | ||||||||||||
| Asset Category |
Total | Quoted Prices in Active Makets for Identical Assets (Level 1) |
Significant Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) | ||||||||
| (in thousands) | ||||||||||||
| Cash and due from broker |
$ | 11 | $ | 11 | $ | — | $ | — | ||||
| Short-term mututal funds (1) |
53 | 53 | — | — | ||||||||
| Equity mutual funds (2) |
9,299 | 9,299 | — | — | ||||||||
| Fixed income mutual funds (3) |
2,633 | 2,633 | — | — | ||||||||
| Total |
$ | 11,996 | $ | 11,996 | $ | — | $ | — | ||||
| (1) | This category comprises cash and short-term cash equivalent funds. The funds are valued at cost which approximates fair value. |
| (2) | This category includes investments in mutual funds focused on equity securities with a diversified portfolio and includes investments in large cap and small cap funds, growth funds, international focused funds and value funds. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the funds. |
| (3) | This category includes investments in mutual funds focused on fixed income securities with both short-term and long-term investments. The funds are valued using the net asset value method in which an average of the market prices for the underlying investments is used to value the funds. |
The pension plan’s weighted average asset allocations at December 31, 2009 and 2008, by asset category are as follows:
| Plan Assets | ||||||
| 2009 | 2008 | |||||
| Asset Category: |
||||||
| Cash and equivalents |
0 | % | 4 | % | ||
| Mutual funds - fixed income |
22 | % | 18 | % | ||
| Mutual funds - equity |
78 | % | 78 | % | ||
| Total |
100 | % | 100 | % | ||
The trust fund is sufficiently diversified to maintain a reasonable level of risk without imprudently sacrificing return, with a targeted asset allocation of 25% fixed income and 75% equities. The Investment Manager selects investment fund managers with demonstrated experience and expertise, and funds with demonstrated historical performance, for the implementation of the Plan’s investment strategy. The Investment Manager will consider both actively and passively managed investment strategies and will allocate funds across the asset classes to develop an efficient investment structure.
It is the responsibility of our Trustee to administer the investments of the Trust within reasonable costs, being careful to avoid sacrificing quality. These costs include, but are not limited to, management and custodial fees, consulting fees, transaction costs and other administrative costs chargeable to the Trust. There is no Company common stock included in the Plan assets.
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Estimated Future Benefit Payments
The following benefit payments reflecting the appropriate expected future service are expected to be paid:
| Pension Benefits | |||
| (in thousands) | |||
| 2010 |
$ | 244 | |
| 2011 |
273 | ||
| 2012 |
369 | ||
| 2013 |
417 | ||
| 2014 |
545 | ||
| 2015-2019 |
4,201 | ||
401(k) Plan
We have 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 20% of their salary. The Company provides a matching contribution of 75% of the first 6% of the employee’s contribution. At the option of the Compensation Committee, the Company may make an additional contribution after the end of each year to employees not grandfathered in the pension plan in an amount up to 3% of the employee’s salary. Contributions to this Plan by the Company of $629 thousand, $642 thousand and $253 thousand were included in expenses for the years ended December 31, 2009, 2008, and 2007, respectively. We estimate that our contribution to the Plan in 2010 will increase to approximately $642 thousand. There is no Company common stock included in the 401 (k) Plan assets.
Note 11. Earnings Per Share
The following shows the weighted average number of shares used in computing the earnings per share and the effect on weighted average number of shares of diluted potential common stock. Potential diluted common stock had no effect on income available to common shareholders. There were 276,967 shares excluded from the 2009 calculations, 304,112 shares from the 2008 calculations and 237,137 shares from the 2007 calculations because their effects were anti-dilutive.
| Years Ended December 31 | ||||||||||||||||
| 2009 | 2008 | 2007 | ||||||||||||||
| Shares | Per Share Amount |
Shares | Per Share Amount |
Shares | Per Share Amount | |||||||||||
| Basic earnings (loss) per share |
5,920,024 | $ | (1.73 | ) | 5,888,655 | $ | 0.52 | 6,034,741 | $ | 1.45 | ||||||
| Effect of dilutive securities, stock options |
— | — | 919 | — | 5,069 | — | ||||||||||
| nonvested shares |
— | — | — | — | 539 | — | ||||||||||
| — | — | 919 | — | 5,608 | — | |||||||||||
| Diluted earnings (loss) per share |
5,920,024 | $ | (1.73 | ) | 5,889,574 | $ | 0.52 | 6,039,810 | $ | 1.45 | ||||||
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Note 12. Stock Compensation Plans
On September 21, 2000, we adopted the Eastern Virginia Bankshares, Inc. 2000 Stock Option Plan to provide a means for selected key employees and directors of the Company and its subsidiaries to increase their personal financial interest in our Company, thereby stimulating their efforts and strengthening their desire to remain with us. Under the Plan, options to purchase up to 400,000 shares of Company common stock may be granted. No options may be granted under the Plan after September 21, 2010. On April 17, 2003, the shareholders approved the 2003 Stock Incentive Plan, amending and restating the 2000 Plan while still authorizing the issuance of up to 400,000 shares of common stock. There are 40,088 shares still available under that Plan. On April 19, 2007, the shareholders approved the 2007 Equity Compensation Plan under which options or restricted stock for up to 400,000 shares of common stock may be granted. There are 400,000 shares still available under that Plan.
Stock compensation accounting guidance requires companies to recognize the cost of employee services received in exchange for awards of equity instruments, such as stock options, based on the fair value of those awards at the date of grant.
Stock option guidance also requires that new awards to employees eligible for retirement prior to the award becoming fully vested be recognized as compensation cost over the period through the date that the employee first becomes eligible to retire and is no longer required to provide service to earn the award.
For the years ended December 31, 2009, 2008 and 2007, stock option compensation expense of $216 thousand, $248 thousand and $250 thousand were included in salary and benefit expense and are identified as part of stock compensation expense in both the Statements of Consolidated Cash Flows and the Consolidated Statements of Changes in Shareholders’ Equity. No tax benefits were recognized in 2009, 2008 and 2007 on the qualified stock options.
Stock option compensation expense is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for each stock grant award. The weighted average estimated fair value of stock options granted in the years ended December 31, 2008, and 2007 was $3.62 and $5.95, respectively. There were no stock options granted in 2009. Fair value is estimated using the Black-Scholes option-pricing model with the assumptions indicated below for 2008 and 2007.
| 2008 | 2007 | |||||
| Dividend rate: |
2.82 | % | 2.82 | % | ||
| Price Volatility: |
33.25 | % | 32.89 | % | ||
| Risk-free interest rate: |
3.56 | % | 4.56 | % | ||
| Expected life: |
7 Years | 7 Years |
The dividend rate is calculated as the average quarterly dividend yield on our stock for the past seven years by dividing the quarterly dividend by the average daily closing price of the stock for the period. Volatility is a measure of the standard deviation of the daily closing stock price plus dividend yield for the same period. The risk-free interest rate is the 7 year Treasury strip rate on the date of the grant. The expected life of options granted in 2008 was calculated using the simplified method whereby the vesting period and contractual period are averaged.
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Stock option plan activity for the year ended December 31, 2009 is summarized below:
| Shares | 2009 Weighted Average Exercise Price |
Weighted Average Remaining Contractual Life (in years) |
Intrinsic Value of Unexercised In-the Money Options (in thousands) | ||||||||
| Outstanding at the beginning of the year |
304,312 | $ | 20.87 | ||||||||
| Granted |
— | — | |||||||||
| Exercised |
— | — | |||||||||
| Forfeited |
(27,345 | ) | — | ||||||||
| Outstanding at December 31, 2009 |
276,967 | 19.45 | 6.24 | $ | — | ||||||
| Options exercisable at December 31, 2009 |
136,842 | 21.31 | 4.39 | $ | — | ||||||
As of December 31, 2009, there was $277 thousand of unrecognized compensation expense related to stock options that will be recognized over the remaining requisite service period. There were no stock options exercised in 2009 and 2008. Because the exercise price of all outstanding options far exceeds the current market price, there is no intrinsic value in any of our options.
The table below summarizes information concerning stock options outstanding at December 31, 2009.
| Options Outstanding | Options Exercisable | |||||||||
| Exercise |
Number Outstanding |
Weighted Average Remaining Term |
Exercise Price |
Number Exercisable | ||||||
| $ | 16.10 | 21,180 | 2.25 years | $ | 16.10 | 21,180 | ||||
| 28.60 | 27,525 | 3.875 years | 28.60 | 27,525 | ||||||
| 19.92 | 38,325 | 4.50 years | 19.92 | 38,325 | ||||||
| 20.57 | 49,812 | 5.50 years | 20.57 | 49,812 | ||||||
| 21.16 | 52,875 | 6.75 years | — | — | ||||||
| 19.25 | 40,250 | 7.75 years | — | — | ||||||
| 12.36 | 47,000 | 8.75 years | — | — | ||||||
| $ | 19.45 | 276,967 | 6.24 years | $ | 21.31 | 136,842 | ||||
A summary of the status of our nonvested shares as of December 31, 2009, and changes during the year ended December 31, 2009 is presented below:
| Shares | Weighted-Average Grant-Date Fair Value | ||||
| Nonvested as of January 1, 2009 |
13,500 | $ | 17.25 | ||
| Granted |
18,000 | 8.31 | |||
| Vested |
1,300 | 17.25 | |||
| Forfeited |
1,800 | 17.25 | |||
| Nonvested as of December 31, 2009 |
28,400 | 13.47 | |||
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As of December 31, 2009, there was $84 thousand of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under our restricted stock plan. That cost is expected to be recognized over a remaining weighted-average period of four years. The total fair value of shares vested during 2009 was $9 thousand.
As of December 31, 2009, there was $39 thousand of unrecognized compensation cost related to the 2007 time-vested awards. Half of the 2007 restricted share award was performance-based and would vest on June 30, 2010 if, and only if, very aggressive targets were achieved. Because those targets were not met, the remaining 6,500 performance-based shares were forfeited in January 2010 and will be reflected as such in the 2010 Form 10-K. Compensation is accounted for using the fair market value of our common stock on the date the restricted shares were awarded, which was $17.25 per share for the 2007 award and $8.31 per share for 18,000 shares of restricted stock awarded in 2009. Half of the 2009 restricted shares vest ratably over a five year period, while the other half could vest on June 30, 2012 based on achievement of 2011 performance targets. The 2009 performance share award is being expensed based on an assumption that one third of those shares will vest. At December 31, 2009, there was $45 thousand of unrecognized compensation cost related to the 2009 grant.
Note 13 Branch Acquisitions
On March 14, 2008, we purchased two branches from Millennium Bank, N. A. The purchase price of $8.5 million represented a 9.25% premium on the deposits assumed at the date of consummation.
The acquisition included the assumption of certain deposit accounts and purchase of selected loans and fixed assets as follows:
| Assets purchased (at fair value): |
|||
| Cash |
$ | 275 | |
| Loans |
48,896 | ||
| Furniture, fixtures and equipment |
102 | ||
| Other assets |
173 | ||
| Goodwill |
10,245 | ||
| Core deposit intangibles |
20 | ||
| Total assets acquired |
$ | 59,711 | |
| Liabilities acquired (at fair value): |
|||
| Deposit accounts |
$ | 93,499 | |
| Other liabilities |
207 | ||
| Total liabilities assumed |
$ | 93,706 | |
| Net liabilities assumed |
$ | 33,995 | |
Of the acquired intangible assets, $20 thousand was assigned to core deposit intangibles to be amortized over a period of 28.5 months. The unamortized balance of accumulated core deposit intangibles, including previous branch acquisitions, was $215 thousand and $503 thousand at December 31, 2009 and 2008, respectively. The estimated aggregate amortization expense for core deposit intangibles for the next 9 months is $24 thousand per month.
In addition, $1.6 million was assigned as a discount on the certificates of deposit assumed, while $438 thousand was assigned as a premium on the loans purchased. Weighted average lives for the certificates of deposit and loans receivable were 1.05 years and 7.0 years, respectively. The unamortized balance of the CD discount was $0 and $389 thousand at December 31, 2009 and 2008, respectively. The
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Notes to Consolidated Financial Statements—(Continued)
unamortized balance of the loan premium was $329 thousand and $391 thousand at December 31, 2009 and 2008, respectively. The estimated aggregate loan premium amortization on a monthly basis for the remaining 64 month amortization period is $5 thousand.
Note 14. Commitments and Contingent Liabilities
In the normal course of business there are outstanding various commitments and contingent liabilities, which are not reflected in the accompanying financial statements. We do not anticipate any material losses as a result of these transactions.
See Note 18 with respect to financial instruments with off-balance-sheet risk.
Note 15. Restrictions on Transfers to Parent
Transfers of funds from banking subsidiaries to the Parent Company in the form of loans, advances and cash dividends, are restricted by federal and state regulatory authorities. As of December 31, 2009, there was no retained net income, which was free of restriction.
Note 16. Borrowings
Federal Home Loan Bank Advances and Available Lines of Credit
At December 31, 2009, our Federal Home Loan Bank (FHLB) debt consisted of advances of $123.2 million, $117.5 million of which is callable - $108.5 million in 2010, $9 million in 2011. Maturity information by year for more than 5 years is shown in the table below. There are two advances totaling $714 thousand at December 31, 2009 which are payable semi-annually and mature in 2010. Advances mature through 2018. At December 31, 2009, the interest rates ranged from 2.44% to 5.92% with a weighted average interest rate of 4.28%. Advances on the line are secured by a blanket lien on qualified 1 to 4 family residential real estate loans and on home equity loans. At December 31, 2009, immediate available credit amounted to $69.2 million with existing collateral pledged of $152.9 million subject to the pledge of additional collateral.
Aggregate annual maturities of FHLB advances (based on final maturity dates) are as follows:
| 2010 |
$ | 5,714 | |
| 2011 |
10,000 | ||
| 2012 |
— | ||
| 2013 |
— | ||
| 2014 |
— | ||
| Thereafter |
107,500 | ||
| Total |
$ | 123,214 | |
We have unused lines of credit totaling $17.7 million with nonaffiliated banks as of December 31, 2009.
Trust Preferred Securities
On September 5, 2003, EVB Statutory Trust I (the Trust), a wholly-owned subsidiary of the Company, was formed for the purpose of issuing redeemable capital securities. On September 17, 2003, $10 million of trust preferred securities were issued through a pooled underwriting totaling approximately $650 million. The Trust issued $310 thousand in common equity to the Company. The securities have a 3 month LIBOR indexed floating rate of interest. The interest rate at December 31, 2009 was 3.20%. The securities have a mandatory redemption date of September 17, 2033, and are subject to varying call provisions beginning September 17, 2008. The principal asset of the Trust is $10.31 million of our junior subordinated debt securities with the same maturity and interest rate structures as the capital securities.
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The trust preferred securities may be included in Tier I capital for regulatory capital adequacy purposes as long as their amount does not exceed 25% of Tier I capital, including total trust preferred securities. The portion of the trust preferred securities not considered as Tier I capital, if any, may be included in Tier 2 capital. The total amount ($10 million) of trust preferred securities issued by the Trust can be included in our Tier I capital.
Our obligations with respect to the issuance of the capital securities constituted a full and unconditional guarantee by the Company of the Trust’s obligations with respect to the capital securities. Subject to certain exceptions and limitations, we may elect from time to time to defer interest payments on the junior subordinated debt securities, which would result in a deferral of distribution payments on the related capital securities.
Note 17. Dividend Reinvestment Plan
We have in effect a Dividend Reinvestment Plan, which provides an automatic conversion of dividends into common stock for enrolled shareholders. It is based on the stock’s fair market value on the three trading days prior to each dividend record date, and allows for voluntary contributions to purchase stock up to $5 thousand per shareholder per calendar quarter.
Note 18. Financial Instruments with Off-Balance-Sheet Risk
We are party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of our customers. These financial instruments include commitments to extend credit and standby letters of credit. To varying degrees those instruments involve 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 we have in particular classes of financial instruments.
Our exposure to credit loss is represented by the contractual amount of these commitments. We use the same credit policies in making commitments and conditional obligations as we do for on-balance-sheet instruments.
At December 31, 2009 and 2008, the following financial instruments were outstanding whose contract amounts represent credit risk:
| Contract Amounts | ||||||
| 2009 | 2008 | |||||
| (in thousands) | ||||||
| Commitments to grant loans and unfunded commitments under lines of credit |
$ | 118,070 | $ | 125,366 | ||
| Standby letters of credit |
5,102 | 6,338 | ||||
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 us, is based on management’s credit evaluation of the customer.
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Notes to Consolidated Financial Statements—(Continued)
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 we are committed.
Standby letters of credit are conditional commitments issued by our bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. We generally hold collateral supporting those commitments if deemed necessary.
We maintain cash accounts in other commercial banks. The amount on deposit with correspondent institutions at December 31, 2009 exceeded the insurance limits of the Federal Deposit Insurance Corporation by $6.4 million.
Note 19. Fair Value of Assets and Liabilities
The company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. In accordance with the Fair Value Measurements and Disclosures topic of FASB ASC, the fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer the liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the company’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 discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
The recent fair value guidance provides a consistent definition of fair value, which focuses on exit price in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. The fair value of a reasonable point within the range this is most representative of fair value under current market conditions.
Fair Value Hierarchy
In accordance with this guidance, we group financial assets and financial liabilities generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine the fair value.
| • | Level 1 - Valuation is based on quoted prices in active markets for identical assets or liabilities in active markets at the measurement date. Level 1 assets and liabilities generally include debt and equity securities that are traded in an active exchange market. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities. |
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| • | Level 2 – Valuation is based on inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly or indirectly. The valuation may be based on quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the asset or liability. |
| • | Level 3 –Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which determination of fair value requires significant management judgment or estimation. |
Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:
Securities available for sale: Securities available for sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2). We obtain a single quote for all securities. Quotes for most securities are provided by our securities accounting and safekeeping correspondent bank which uses Reuters for securities other than municipals for which they use a pricing matrix. The correspondent also uses securities trader quotations for a small number of securities. Securities pricing for a single pooled trust preferred senior security is provided through another correspondent by Moodys Analytics. We do not adjust any quotes or prices provided by these third party sources. We perform a review of pricing data by comparing prices received from third party vendors to the previous month’s quote for the same security and evaluate any substantial changes.
The following tables present the balances of financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2009 and 2008. Securities identified in Note 3 as restricted securities including stock in the Federal Home Loan Bank of Atlanta (“FHLB”) and the Federal Reserve Bank (“FRB”) are excluded from the table below since there is no ability to sell these securities except when the FHLB or FRB require redemption based on either our borrowings at the FHLB, or in the case of the FRB changes in certain portions of our capital.
| Fair Value Measurements at December 31, 2009 Using | ||||||||||||
| (in thousands) Description |
Balance as of December 31, 2009 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputes (Level 3) | ||||||||
| Assets: |
||||||||||||
| Available-for-sale securities |
$ | 169,442 | $ | — | $ | 169,442 | $ | — | ||||
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| Fair Value Measurements at December 31, 2008 Using | ||||||||||||
| (in thousands) Description |
Balance as of December 31, 2008 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputes (Level 3) | ||||||||
| Assets: |
||||||||||||
| Available-for-sale securities |
$ | 152,645 | $ | — | $ | 152,645 | $ | — | ||||
Certain assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.
The following describes the valuation techniques used to measure certain assets recorded at fair value on a nonrecurring basis in the financial statements:
Impaired Loans: Loans are designated as impaired when, in the judgment of management, based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory, and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed external appraiser using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. If a real estate loan becomes a nonperforming loan, if the valuation is over one year old, either an evaluation by an officer of the bank or an outside vendor, or an appraisal is performed to determine current market value. We consider the value of a partially completed project for our loan analysis. For nonperforming construction loans, we obtain a valuation of each partially completed project “as is” from a third party appraiser. We use this third party valuation to determine if any charge-offs are necessary.
The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the Allowance for Loan Losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the Consolidated Statements of Operations
Other Real Estate Owned: Certain assets such as other real estate owned (“OREO”) are measured at fair value less cost to sell. We believe the fair value component in our valuation of OREO follows the provisions of accounting standards.
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The following tables summarize our financial assets that were measured at fair value on a nonrecurring basis during the periods.
| Fair Value Measurements at December 31, 2009 Using | ||||||||||||
| (in thousands) Description |
Balance as of December 31, 2009 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) | ||||||||
| Assets: |
||||||||||||
| Impaired loans |
$ | 14,112 | $ | — | $ | 8,686 | $ | 5,426 | ||||
| Other real estate owned |
4,136 | — | — | 4,136 | ||||||||
| Fair Value Measurements at December 31, 2008 Using | ||||||||||||
| (in thousands) Description |
Balance as of December 31, 2008 |
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputes (Level 3) | ||||||||
| Assets: |
||||||||||||
| Impaired loans |
$ | 12,096 | $ | — | $ | 7,538 | $ | 4,558 | ||||
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 and Interest-Bearing Deposits in Banks
For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
Securities
Where quoted prices are available in an active market, we classify the securities within level 1 of the valuation hierarchy. Securities are defined as both long and short positions. Level 1 securities include highly liquid government bonds and exchange-traded equities.
If quoted market prices are not available, we estimate fair values using pricing models and discounted cash flows that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, and credit spreads. Examples of such instruments, which would generally be classified within level 2 of the valuation hierarchy, include GSE obligations, corporate bonds, and other securities. Mortgage-backed securities are included in level 2 if observable inputs are available. In certain cases where there is limited activity or less transparency around inputs to the valuation, we classify those securities in level 3.
Loans
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one-to-four family residential), credit card loans and other consumer loans are based on quoted market prices of similar loans sold in conjunction with the securitization transaction, adjusted for differences in loan characteristics. Fair values for other loans (for example, commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses, using market interest rates for comparable loans. Fair values for nonperforming loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
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Notes to Consolidated Financial Statements—(Continued)
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 (that is, their carrying amounts). The carrying amounts of variable-rate, fixed-term money market accounts and certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates on comparable instruments to a scheduled of aggregated expected monthly maturities on time deposits.
Short-Term Borrowings
The carrying amounts of federal funds purchased and other short-term borrowings maturing within ninety days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the current incremental borrowing rates for similar types of borrowing arrangements.
Long-Term Borrowings
Current market rates for debt with similar terms and remaining maturities are used to estimate fair value for existing debt. Fair value of long-term debt is based on quoted market prices or dealer quotes for the identical liability when traded as an asset in an active market. If a quoted market price is not available, an expected present value technique is used to estimate fair value.
Accrued Interest
The carrying amounts of accrued interest approximate fair value.
Off-Balance-Sheet Financial Instruments
Fair value for off balance sheet, credit-related financial instruments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties credit standing. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.
At December 31, 2009 and 2008, the fair value of loan commitments and standby letters of credit are immaterial to fair value.
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Notes to Consolidated Financial Statements—(Continued)
The estimated fair value and related carrying amounts of the Company’s financial instruments follows:
| December 31, 2009 | December 31, 2008 | |||||||||||
| Carrying Amount |
Estimated Fair Value |
Carrying Amount |
Estimated Fair Value | |||||||||
| (in thousands) | (in thousands) | |||||||||||
| Financial assets: |
||||||||||||
| Cash and short-term investments |
$ | 13,117 | $ | 13,117 | $ | 13,081 | $ | 13,081 | ||||
| Interest-bearing deposits in other banks |
15,571 | 15,571 | 133 | 133 | ||||||||
| Securities - available for sale |
169,442 | 169,442 | 152,645 | 152,645 | ||||||||
| Loans, net |
840,908 | 866,579 | 808,724 | 835,595 | ||||||||
| Accrued interest receivable |
3,886 | 3,886 | 4,050 | 4,050 | ||||||||
| Financial liabilities: |
||||||||||||
| Noninterest-bearing deposits |
$ | 89,529 | $ | 89,529 | $ | 90,090 | $ | 90,090 | ||||
| Interest-bearing deposits |
763,333 | 755,391 | 723,443 | 713,498 | ||||||||
| Short-term borrowings |
24,154 | 24,154 | 3,593 | 3,593 | ||||||||
| Federal Home Loan Bank advances |
123,214 | 134,143 | 134,643 | 139,400 | ||||||||
| Trust preferred debt |
10,310 | 10,310 | 10,310 | 10,868 | ||||||||
| Accrued interest payable |
1,739 | 1,739 | 2,512 | 2,512 | ||||||||
We assume interest rate risk (the risk that general interest rate levels will change) as a result of our normal operations. As a result, the fair values of our financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to us. We attempt 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 rising 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. We monitor rates and maturities of assets and liabilities and attempt to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate our overall interest rate risk.
Note 20. Regulatory Matters
The Company (on a consolidated basis) and EVB 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 our and EVB’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we and EVB must meet specific capital guidelines that involve quantitative measures of our 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 us and EVB to maintain minimum amounts and ratios (set forth in the table that follows) 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). We believe, as of December 31, 2009 and 2008, that we and EVB meet all capital adequacy requirements to which we are subject.
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Notes to Consolidated Financial Statements—(Continued)
As of December 31, 2009, based on regulatory guidelines, we believe that EVB is well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, EVB 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 bank’s category.
Our Company’s and the bank’s actual capital amounts and ratios are presented in the following table.
| Actual | Minimum Capital Requirement |
Minimum To Be Well Capitalized Under Prompt Corrective Action Provision |
||||||||||||||||
| Amount | Ratio | Amount | Ratio | Amount | Ratio | |||||||||||||
| (dollars in thousands) | ||||||||||||||||||
| As of December 31, 2009 |
||||||||||||||||||
| Total capital to risk weighted assets |
||||||||||||||||||
| Consolidated |
$ | 104,154 | 12.29 | % | $ | 67,797 | 8.00 | % | NA | NA | ||||||||
| EVB |
98,231 | 11.59 | % | 67,791 | 8.00 | % | $ | 84,739 | 10.00 | % | ||||||||
| Tier 1 capital to risk weighted assets |
||||||||||||||||||
| Consolidated |
$ | 98,269 | 11.60 | % | $ | 33,898 | 4.00 | % | NA | NA | ||||||||
| EVB |
81,855 | 9.66 | % | 33,896 | 4.00 | % | $ | 50,844 | 6.00 | % | ||||||||
| Tier 1 capital to average adjusted assets |
||||||||||||||||||
| Consolidated |
$ | 98,269 | 9.08 | % | $ | 43,312 | 4.00 | % | NA | NA | ||||||||
| EVB |
81,855 | 7.57 | % | 43,242 | 4.00 | % | $ | 54,052 | 5.00 | % | ||||||||
| (dollars in thousands) | ||||||||||||||||||
| As of December 31, 2008 |
||||||||||||||||||
| Total capital to risk weighted assets |
||||||||||||||||||
| Consolidated |
$ | 95,229 | 11.56 | % | $ | 65,909 | 8.00 | % | NA | NA | ||||||||
| EVB |
91,688 | 11.16 | % | 65,750 | 8.00 | % | $ | 82,187 | 10.00 | % | ||||||||
| Tier 1 capital to risk weighted assets |
||||||||||||||||||
| Consolidated |
$ | 86,586 | 10.51 | % | $ | 32,954 | 4.00 | % | NA | NA | ||||||||
| EVB |
71,953 | 8.75 | % | 32,875 | 4.00 | % | $ | 49,312 | 6.00 | % | ||||||||
| Tier 1 capital to average adjusted assets |
||||||||||||||||||
| Consolidated |
$ | 86,586 | 8.62 | % | $ | 32,954 | 4.00 | % | NA | NA | ||||||||
| EVB |
71,953 | 7.17 | % | 40,144 | 4.00 | % | $ | 50,181 | 5.00 | % | ||||||||
Note 21. Preferred Stock and Warrant
On January 9, 2009, the Company signed a definitive agreement with the U. S. Department of the Treasury under the Economic Stabilization Act of 2008 to participate in the Treasury’s Capital Purchase Program. Pursuant to this agreement the Company sold 24,000 shares of its Series A Fixed Rate Cumulative Preferred Stock to the Treasury for an aggregate purchase price of $24 million. This preferred stock pays a cumulative dividend at a rate of 5% for the first five years, and if not redeemed, pays a rate of 9.0% starting at the beginning of the sixth year. As part of its purchase of the preferred stock, Treasury also was issued a warrant to purchase up to 373,832 shares of the Company’s common stock at an initial exercise price of $9.63 per share. If not exercised, the warrant terminates at the expiration of ten years. Under the agreement with the Treasury, the Company is subject to restrictions on its ability to increase the dividend rate on its common stock and to repurchase its common stock without Treasury consent.
Accounting for the issuance of preferred stock included entries to the equity portion of our balance sheet to recognize preferred stock at the full amount of the issuance, the warrant and discount on preferred stock at values calculated by discounting the future cash flows by a prevailing interest rate that a similar security would receive in the current market environment. At time of issuance that discount rate was determined to be 12%. The fair value of the warrants of $950 thousand was calculated using the Black Scholes model with inputs of 7 year volatility, average rate of quarterly dividends, 7 year Treasury strip rate and the exercise price of $9.63 per share exercisable for up to 10 years. The present value of the preferred stock using a 12% discount rate was $14.4 million. The preferred stock discount determined by the allocation of discount to the warrants is being accreted quarterly over a 5 year period on a constant effective yield method at a rate of approximately 6.4%. Allocation of the preferred stock discount and the warrant is provided in the table below:
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Notes to Consolidated Financial Statements—(Continued)
| 2009 | |||
| Warrants value |
|||
| Preferred |
$ | 24,000,000 | |
| Price |
9.63 | ||
| Warrants - shares |
373,832 | ||
| Value per warrant |
2.54 | ||
| Fair value of warrants |
$ | 949,533 | |
| NPV of preferred stock |
|||
| @ 12% discount rate |
|||
| (dollars in thousands) | |||||||||
| Fair Value |
Relative Value % |
Relative Value | |||||||
| $24 million 1/09/2009 |
|||||||||
| NPV of Preferred 12% discount rate |
$ | 14,446 | 93.8 | % | $ | 22,519 | |||
| Fair value of warrants |
950 | 6.2 | % | 1,481 | |||||
| $ | 15,396 | 100.0 | % | $ | 24,000 | ||||
Note 22. Subsequent Events
The Company evaluated subsequent events that have occurred after the balance sheet date, but before the financial statements are issued. There are two types of subsequent events (1) recognized, or those that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements, and (2) nonrecognized, or those that provide evidence about conditions that did not exist at the date of the balance sheet but arose after that date.
Based on the evaluation, the Company did not identify any recognized or nonrecognized subsequent events that would have required adjustment to or disclosure in the financial statements.
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Notes to Consolidated Financial Statements—(Continued)
Note 23. Condensed Financial Information - Parent Company Only
EASTERN VIRGINIA BANKSHARES, INC.
(Parent Corporation Only)
Balance Sheets
December 31, 2009 and 2008
| (dollars in thousands) | ||||||||
| 2009 | 2008 | |||||||
| Assets: |
||||||||
| Cash on deposit with subsidiary banks |
$ | 3,381 | $ | 682 | ||||
| Subordinated debt in subsidiaries |
13,000 | 13,000 | ||||||
| Investment in subsidiaries |
99,093 | 75,428 | ||||||
| Deferred income taxes |
811 | 1,278 | ||||||
| Other assets |
401 | 1,777 | ||||||
| Total assets |
$ | 116,686 | $ | 92,165 | ||||
| Liabilities: |
||||||||
| Trust preferred debt |
$ | 10,310 | $ | 10,310 | ||||
| Accrued benefit cost |
1,115 | 3,751 | ||||||
| Other liabilities |
63 | 75 | ||||||
| Total liabilities |
11,488 | 14,136 | ||||||
| Shareholders’ Equity: |
||||||||
| Preferred stock |
24,000 | $ | — | |||||
| Common stock |
11,877 | 11,798 | ||||||
| Surplus |
18,965 | 18,456 | ||||||
| Retained earnings |
50,850 | 62,804 | ||||||
| Warrants |
1,481 | — | ||||||
| Discount on preferred stock |
(1,192 | ) | — | |||||
| Accumulated other comprehensive (loss), net |
(783 | ) | (15,029 | ) | ||||
| Total shareholders’ equity |
105,198 | 78,029 | ||||||
| Total liabilities and shareholders’ equity |
$ | 116,686 | $ | 92,165 | ||||
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EASTERN VIRGINIA BANKSHARES, INC.
(Parent Corporation Only)
Statements of Operations
For the Years Ended December 31, 2009, 2008 and 2007
| (dollars in thousands) | |||||||||||
| 2009 | 2008 | 2007 | |||||||||
| Income: |
|||||||||||
| Dividends from subsidiaries |
$ | — | $ | — | $ | 4,000 | |||||
| Interest from subsidiaries |
106 | 279 | 669 | ||||||||
| Interest from subordinated debt |
1,376 | 432 | 140 | ||||||||
| Actuarial gain - pension curtailment |
— | 1,328 | — | ||||||||
| 1,482 | 2,039 | 4,809 | |||||||||
| Expenses: |
|||||||||||
| Interest on trust preferred debt |
395 | 628 | 849 | ||||||||
| Consultant fees |
129 | — | 1 | ||||||||
| Legal services |
336 | 66 | 13 | ||||||||
| Shareholder services |
241 | 170 | 1 | ||||||||
| Marketing and advertisement |
79 | — | 134 | ||||||||
| Investment banker fees |
54 | 30 | 40 | ||||||||
| Directors fees |
55 | 60 | 45 | ||||||||
| Miscellaneous |
30 | 20 | 17 | ||||||||
| 1,319 | 974 | 1,100 | |||||||||
| Net income before undistributed earnings of subsidiaries |
163 | 1,065 | 3,709 | ||||||||
| Undistributed earnings (loss) of subsidiaries |
(8,912 | ) | 2,368 | 4,958 | |||||||
| Income tax expense ( benefit) |
55 | 362 | (87 | ) | |||||||
| Net income (loss) |
$ | (8,804 | ) | $ | 3,071 | $ | 8,754 | ||||
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EASTERN VIRGINIA BANKSHARES, INC.
(Parent Corporation Only)
Statements of Cash Flows
For the Years Ended December 31, 2009, 2008 and 2007
| (dollars in thousands) | ||||||||||||
| 2009 | 2008 | 2007 | ||||||||||
| Cash Flows from Operating Activities |
||||||||||||
| Net income (loss) |
$ | (8,804 | ) | $ | 3,071 | $ | 8,754 | |||||
| Adjustments to reconcile net income to cash provided by ( used in) operating activities: |
||||||||||||
| Undistributed (earnings) loss of subsidiaries |
8,912 | (2,368 | ) | (4,958 | ) | |||||||
| Stock-based compensation |
248 | 277 | 250 | |||||||||
| Decrease (increase) in other assets |
876 | (13,695 | ) | 396 | ||||||||
| Increase (decrease) in other liabilities |
(12 | ) | 1,583 | (64 | ) | |||||||
| Net cash provided by (used in) operating activities |
1,220 | (11,132 | ) | 4,378 | ||||||||
| Cash Flows from Investing Activities |
||||||||||||
| Subordinated debt to subsidiary banks |
— | (11,000 | ) | — | ||||||||
| Net cash (used in) investing activities |
— | (11,000 | ) | — | ||||||||
| Cash Flows from Financing Activities |
||||||||||||
| Capital transferred to subsidiaries |
(20,000 | ) | — | — | ||||||||
| Dividends paid |
(2,858 | ) | (3,778 | ) | (3,869 | ) | ||||||
| Exercise of stock options |
— | — | 38 | |||||||||
| Director stock grant |
54 | 104 | 143 | |||||||||
| Issuance of preferred stock |
24,000 | — | — | |||||||||
| Issuance of common stock under dividend reinvestment plan, net of repurchases |
283 | 434 | 413 | |||||||||
| Repurchases and retirement of stock |
— | (1,237 | ) | (3,610 | ) | |||||||
| Net cash provided by (used in) financing activities |
1,479 | (4,477 | ) | (6,885 | ) | |||||||
| Increase (decrease) in cash and cash equivalents |
2,699 | (26,609 | ) | (2,507 | ) | |||||||
| Cash and Cash Equivalents, beginning of year |
682 | 27,291 | 29,798 | |||||||||
| Cash and Cash Equivalents, end of year |
$ | 3,381 | $ | 682 | $ | 27,291 | ||||||
100