EVBS » Topics » EXECUTIVE OVERVIEW

These excerpts taken from the EVBS 10-K filed Mar 10, 2009.

Executive Overview

The year 2008 was not a normal year in the banking industry. It showed the falling domino impact of loan instruments that are used to collateralize investment instruments and then sold to various institutions. Although we did not deal in subprime loans as a matter of direct business, we still were impacted. The year began with the financial industry, not just banks, continuing to deal with the subprime loan fallout. The Federal Reserve continued to lower rates through out the year which put a squeeze on interest margins, the largest contributor to our net income, as variable rate loans and investments re-priced quickly while fixed rate deposits and borrowings re-priced over a longer period of time. Finally in late summer the impact of the decreased value of asset backed securities, the high rate of defaulted mortgages and a liquidity crunch blended to cause massive write downs of securities, the takeover by the U. S. Government of its mortgage agencies FNMA and FHLMC and the buy out or failure of many institutions. This brought in the U. S. Treasury to assist the Federal Reserve and other government supervisory agencies in stabilizing the economy. As we enter 2009, we are operating under a quasi government controlled financial industry that is working hard to right itself.

Eastern Virginia Bankshares was not immune to these impacts. We had to take an impairment charge to write down some securities, primarily preferred stock of FNMA and FHLMC. When the Treasury Secretary acted to place the FNMA and FHLMC Government Sponsored Entities (“GSE’s”) into conservatorship, banks holding the securities were negatively impacted. Only a few months prior to the Treasury action, banking regulators had encouraged banks to incorporate these securities in the mix of their portfolio holdings to assist in meeting capital needs of these GSE’s. The result was that all financial institutions that held investments in the GSE’s were forced to take impairment charges that negatively impacted earnings. In addition, we have an increased volume of loans in nonaccrual status and subject to foreclosure risks. However, we have maintained a conservative strategy; risks within our markets are diversified; we are still earning net income and most important we are well capitalized with enough liquidity to meet most turns in the economic markets.

Our balance sheet, the primary driver of income, grew in 2008. Total assets are up $124.7 million from $926.7 at the end of 2007 to $1.05 billion at the end of 2008. Gross loans, our primary earning asset, are up $110.4 million and deposits are up $141.6 million while fed funds purchased are down at year end by $13.5 million. FHLB borrowing increased $7.6 million from a transaction early in the first quarter of 2008. As a result of this growth, if we were in a normal economic market, we start 2009 with the potential to produce a good earnings flow. With the

 

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economic turmoil, the potential might not come to fruition. Our 2008 growth was not just from branch purchases. While our branch purchases provided $49 and $93 million in loans and deposits, respectively, we still had significant growth from our existing markets. Loans increased an additional $61.4 million. The additional $48.6 million in deposits includes the addition of some low rate of brokered deposits. However, the deposit mix started changing with increases in interest checking and money market accounts. In addition, there was little run off from the acquired branches. The limitations on the earnings potential will be similar to those we faced in 2008. We begin the year with an economy still sliding and a hope that it will bottom out sooner than later. We anticipate weakened loan payment flows due to continued unemployment increases, creating a nervous public that is still looking for stability in the markets.

Net income for the year ended December 2008 was $3.1 million or a 64.9% decrease from $8.8 million for the year ended December 2007. This was the result of a number of factors. Our income on earning assets increased as loans and securities income were up while fed funds and dividend income were down. Dividends were impacted by lower payments from the FHLB of Atlanta, including the fourth quarter dividend being deferred to 2009. The infusion of deposits from our purchase of two Millennium bank branches helped fuel our funding needs for much of the second and third quarters, but our loan growth put us in a borrowing position by the end of the year. Rate changes through out the year were the primary cause of the declining interest income. The yield on earning assets dropped 63 basis points for the year while the yield on interest bearing liabilities was down only 32 basis points. This 31 point gap represents the rate change delay banks have in a declining rate environment.

While the rate gap is the major factor in 2008’s interest income weakening it is not the only factor in earnings decline. The provision for loan losses increased from $1.2 million in 2007 to $4.0 in 2008, taking an additional $2.8 million out of earnings for 2008. In addition, the competition for deposits has become extremely aggressive. This is pointed out in the trend of our net interest margin. In 2003, our net interest margin was 4.45% while in 2008 it was 3.57%. The rate has declined every year except 2006 when it was up 10 basis points. Management, in an effort to minimize this trend, looks at funding alternatives outside the traditional deposit sources and makes purchases of borrowed funds or brokered deposits when the spreads are significantly better than the normal deposit market.

Noninterest income was $3.0 million for 2008, a decrease of $3.1 million compared to $6.1 million in 2007. The decline was influenced by a number of unusual items that skew the year to year comparison. Our core noninterest income for 2008 was $6.5 million, an increase of 7.1%, compared to 2007. The unusual items that impacted 2008 noninterest income creating a net loss of $3.6 million were a $4.9 million other than temporary impairment, partially offset by a $1.3 million pension curtailment gain. The securities loss resulted primarily from the impairment charge taken on the FNMA and FHLMC preferred stock when the Federal Government took control of the agencies and eliminated the dividend. The economy is still in turmoil, but with the infusion of government money into the economy, we anticipate that it will eventually reverse these negative trends. This should occur as the funds move out to businesses that can then hire employees and start producing goods again and as the consumers move back into the work force and begin to feel more comfortable with spending. Our current view of the economy does not permit us to provide an estimate of when the turn-around is likely to occur.

Noninterest expense rose for the year due to infrastructure changes in the telecommunications system, higher FDIC insurance premiums due to a revised pricing structure but primarily from the acquisition of two new branches in the middle of March 2008. The purchase, as mentioned, helped fund our loan growth during the year, but did add noninterest expense. Our analysis of the performance of the acquired branches indicated that the acquisition was accretive to 2008. With strong expense controls and a freeze on merit increases in 2009, we expect noninterest expense increases in 2009 to only be related to non-controllable items such as FDIC insurance, postage, telecommunications and legal expenses related to loan defaults.

 

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Management’s announced strategy of growing net income annually by 10% is primarily dependent on growth of our existing markets and positioning the Company to grow in new markets. This strategy is emphasized by the progression over the last six years but in an economy that we are facing now, an economy never seen by most bankers in their careers, that goal takes a secondary position to our focus to help and work with our customers and our communities. Until the economy reverses direction, growth will probably be limited. However, while we do not plan any new branch openings in 2009, we are open to opportunities that may present themselves. If these opportunities arise, we will evaluate them and will act to enhance shareholder value. In light of the current economic conditions, our primary goal in 2009 is to maintain the stability of our company and assist our customers and communities.

Executive Overview

The year 2008 was not a normal year in the banking industry. It showed the falling domino impact of loan instruments that are used to collateralize investment instruments and then sold to various institutions. Although we did not deal in subprime loans as a matter of direct business, we still were impacted. The year began with the financial industry, not just banks, continuing to deal with the subprime loan fallout. The Federal Reserve continued to lower rates through out the year which put a squeeze on interest margins, the largest contributor to our net income, as variable rate loans and investments re-priced quickly while fixed rate deposits and borrowings re-priced over a longer period of time. Finally in late summer the impact of the decreased value of asset backed securities, the high rate of defaulted mortgages and a liquidity crunch blended to cause massive write downs of securities, the takeover by the U. S. Government of its mortgage agencies FNMA and FHLMC and the buy out or failure of many institutions. This brought in the U. S. Treasury to assist the Federal Reserve and other government supervisory agencies in stabilizing the economy. As we enter 2009, we are operating under a quasi government controlled financial industry that is working hard to right itself.

Eastern Virginia Bankshares was not immune to these impacts. We had to take an impairment charge to write down some securities, primarily preferred stock of FNMA and FHLMC. When the Treasury Secretary acted to place the FNMA and FHLMC Government Sponsored Entities (“GSE’s”) into conservatorship, banks holding the securities were negatively impacted. Only a few months prior to the Treasury action, banking regulators had encouraged banks to incorporate these securities in the mix of their portfolio holdings to assist in meeting capital needs of these GSE’s. The result was that all financial institutions that held investments in the GSE’s were forced to take impairment charges that negatively impacted earnings. In addition, we have an increased volume of loans in nonaccrual status and subject to foreclosure risks. However, we have maintained a conservative strategy; risks within our markets are diversified; we are still earning net income and most important we are well capitalized with enough liquidity to meet most turns in the economic markets.

Our balance sheet, the primary driver of income, grew in 2008. Total assets are up $124.7 million from $926.7 at the end of 2007 to $1.05 billion at the end of 2008. Gross loans, our primary earning asset, are up $110.4 million and deposits are up $141.6 million while fed funds purchased are down at year end by $13.5 million. FHLB borrowing increased $7.6 million from a transaction early in the first quarter of 2008. As a result of this growth, if we were in a normal economic market, we start 2009 with the potential to produce a good earnings flow. With the

 

27


Table of Contents

economic turmoil, the potential might not come to fruition. Our 2008 growth was not just from branch purchases. While our branch purchases provided $49 and $93 million in loans and deposits, respectively, we still had significant growth from our existing markets. Loans increased an additional $61.4 million. The additional $48.6 million in deposits includes the addition of some low rate of brokered deposits. However, the deposit mix started changing with increases in interest checking and money market accounts. In addition, there was little run off from the acquired branches. The limitations on the earnings potential will be similar to those we faced in 2008. We begin the year with an economy still sliding and a hope that it will bottom out sooner than later. We anticipate weakened loan payment flows due to continued unemployment increases, creating a nervous public that is still looking for stability in the markets.

Net income for the year ended December 2008 was $3.1 million or a 64.9% decrease from $8.8 million for the year ended December 2007. This was the result of a number of factors. Our income on earning assets increased as loans and securities income were up while fed funds and dividend income were down. Dividends were impacted by lower payments from the FHLB of Atlanta, including the fourth quarter dividend being deferred to 2009. The infusion of deposits from our purchase of two Millennium bank branches helped fuel our funding needs for much of the second and third quarters, but our loan growth put us in a borrowing position by the end of the year. Rate changes through out the year were the primary cause of the declining interest income. The yield on earning assets dropped 63 basis points for the year while the yield on interest bearing liabilities was down only 32 basis points. This 31 point gap represents the rate change delay banks have in a declining rate environment.

While the rate gap is the major factor in 2008’s interest income weakening it is not the only factor in earnings decline. The provision for loan losses increased from $1.2 million in 2007 to $4.0 in 2008, taking an additional $2.8 million out of earnings for 2008. In addition, the competition for deposits has become extremely aggressive. This is pointed out in the trend of our net interest margin. In 2003, our net interest margin was 4.45% while in 2008 it was 3.57%. The rate has declined every year except 2006 when it was up 10 basis points. Management, in an effort to minimize this trend, looks at funding alternatives outside the traditional deposit sources and makes purchases of borrowed funds or brokered deposits when the spreads are significantly better than the normal deposit market.

Noninterest income was $3.0 million for 2008, a decrease of $3.1 million compared to $6.1 million in 2007. The decline was influenced by a number of unusual items that skew the year to year comparison. Our core noninterest income for 2008 was $6.5 million, an increase of 7.1%, compared to 2007. The unusual items that impacted 2008 noninterest income creating a net loss of $3.6 million were a $4.9 million other than temporary impairment, partially offset by a $1.3 million pension curtailment gain. The securities loss resulted primarily from the impairment charge taken on the FNMA and FHLMC preferred stock when the Federal Government took control of the agencies and eliminated the dividend. The economy is still in turmoil, but with the infusion of government money into the economy, we anticipate that it will eventually reverse these negative trends. This should occur as the funds move out to businesses that can then hire employees and start producing goods again and as the consumers move back into the work force and begin to feel more comfortable with spending. Our current view of the economy does not permit us to provide an estimate of when the turn-around is likely to occur.

Noninterest expense rose for the year due to infrastructure changes in the telecommunications system, higher FDIC insurance premiums due to a revised pricing structure but primarily from the acquisition of two new branches in the middle of March 2008. The purchase, as mentioned, helped fund our loan growth during the year, but did add noninterest expense. Our analysis of the performance of the acquired branches indicated that the acquisition was accretive to 2008. With strong expense controls and a freeze on merit increases in 2009, we expect noninterest expense increases in 2009 to only be related to non-controllable items such as FDIC insurance, postage, telecommunications and legal expenses related to loan defaults.

 

28


Table of Contents

Management’s announced strategy of growing net income annually by 10% is primarily dependent on growth of our existing markets and positioning the Company to grow in new markets. This strategy is emphasized by the progression over the last six years but in an economy that we are facing now, an economy never seen by most bankers in their careers, that goal takes a secondary position to our focus to help and work with our customers and our communities. Until the economy reverses direction, growth will probably be limited. However, while we do not plan any new branch openings in 2009, we are open to opportunities that may present themselves. If these opportunities arise, we will evaluate them and will act to enhance shareholder value. In light of the current economic conditions, our primary goal in 2009 is to maintain the stability of our company and assist our customers and communities.

Executive Overview

The year 2008 was not a normal year in the
banking industry. It showed the falling domino impact of loan instruments that are used to collateralize investment instruments and then sold to various institutions. Although we did not deal in subprime loans as a matter of direct business, we
still were impacted. The year began with the financial industry, not just banks, continuing to deal with the subprime loan fallout. The Federal Reserve continued to lower rates through out the year which put a squeeze on interest margins, the
largest contributor to our net income, as variable rate loans and investments re-priced quickly while fixed rate deposits and borrowings re-priced over a longer period of time. Finally in late summer the impact of the decreased value of asset backed
securities, the high rate of defaulted mortgages and a liquidity crunch blended to cause massive write downs of securities, the takeover by the U. S. Government of its mortgage agencies FNMA and FHLMC and the buy out or failure of many institutions.
This brought in the U. S. Treasury to assist the Federal Reserve and other government supervisory agencies in stabilizing the economy. As we enter 2009, we are operating under a quasi government controlled financial industry that is working hard to
right itself.

Eastern Virginia Bankshares was not immune to these impacts. We had to take an impairment charge to write down some securities, primarily
preferred stock of FNMA and FHLMC. When the Treasury Secretary acted to place the FNMA and FHLMC Government Sponsored Entities (“GSE’s”) into conservatorship, banks holding the securities were negatively impacted. Only a few months
prior to the Treasury action, banking regulators had encouraged banks to incorporate these securities in the mix of their portfolio holdings to assist in meeting capital needs of these GSE’s. The result was that all financial institutions that
held investments in the GSE’s were forced to take impairment charges that negatively impacted earnings. In addition, we have an increased volume of loans in nonaccrual status and subject to foreclosure risks. However, we have maintained a
conservative strategy; risks within our markets are diversified; we are still earning net income and most important we are well capitalized with enough liquidity to meet most turns in the economic markets.

STYLE="margin-top:12px;margin-bottom:0px">Our balance sheet, the primary driver of income, grew in 2008. Total assets are up $124.7 million from $926.7 at the end of 2007 to $1.05 billion at the end of 2008.
Gross loans, our primary earning asset, are up $110.4 million and deposits are up $141.6 million while fed funds purchased are down at year end by $13.5 million. FHLB borrowing increased $7.6 million from a transaction early in the first quarter of
2008. As a result of this growth, if we were in a normal economic market, we start 2009 with the potential to produce a good earnings flow. With the

 


27







Table of Contents



economic turmoil, the potential might not come to fruition. Our 2008 growth was not just from branch purchases. While our branch purchases provided $49 and
$93 million in loans and deposits, respectively, we still had significant growth from our existing markets. Loans increased an additional $61.4 million. The additional $48.6 million in deposits includes the addition of some low rate of brokered
deposits. However, the deposit mix started changing with increases in interest checking and money market accounts. In addition, there was little run off from the acquired branches. The limitations on the earnings potential will be similar to those
we faced in 2008. We begin the year with an economy still sliding and a hope that it will bottom out sooner than later. We anticipate weakened loan payment flows due to continued unemployment increases, creating a nervous public that is still
looking for stability in the markets.

Net income for the year ended December 2008 was $3.1 million or a 64.9% decrease from $8.8 million for the year
ended December 2007. This was the result of a number of factors. Our income on earning assets increased as loans and securities income were up while fed funds and dividend income were down. Dividends were impacted by lower payments from the FHLB of
Atlanta, including the fourth quarter dividend being deferred to 2009. The infusion of deposits from our purchase of two Millennium bank branches helped fuel our funding needs for much of the second and third quarters, but our loan growth put us in
a borrowing position by the end of the year. Rate changes through out the year were the primary cause of the declining interest income. The yield on earning assets dropped 63 basis points for the year while the yield on interest bearing liabilities
was down only 32 basis points. This 31 point gap represents the rate change delay banks have in a declining rate environment.

While the rate gap is the
major factor in 2008’s interest income weakening it is not the only factor in earnings decline. The provision for loan losses increased from $1.2 million in 2007 to $4.0 in 2008, taking an additional $2.8 million out of earnings for 2008. In
addition, the competition for deposits has become extremely aggressive. This is pointed out in the trend of our net interest margin. In 2003, our net interest margin was 4.45% while in 2008 it was 3.57%. The rate has declined every year except 2006
when it was up 10 basis points. Management, in an effort to minimize this trend, looks at funding alternatives outside the traditional deposit sources and makes purchases of borrowed funds or brokered deposits when the spreads are significantly
better than the normal deposit market.

Noninterest income was $3.0 million for 2008, a decrease of $3.1 million compared to $6.1 million in 2007. The
decline was influenced by a number of unusual items that skew the year to year comparison. Our core noninterest income for 2008 was $6.5 million, an increase of 7.1%, compared to 2007. The unusual items that impacted 2008 noninterest income creating
a net loss of $3.6 million were a $4.9 million other than temporary impairment, partially offset by a $1.3 million pension curtailment gain. The securities loss resulted primarily from the impairment charge taken on the FNMA and FHLMC preferred
stock when the Federal Government took control of the agencies and eliminated the dividend. The economy is still in turmoil, but with the infusion of government money into the economy, we anticipate that it will eventually reverse these negative
trends. This should occur as the funds move out to businesses that can then hire employees and start producing goods again and as the consumers move back into the work force and begin to feel more comfortable with spending. Our current view of the
economy does not permit us to provide an estimate of when the turn-around is likely to occur.

Noninterest expense rose for the year due to infrastructure
changes in the telecommunications system, higher FDIC insurance premiums due to a revised pricing structure but primarily from the acquisition of two new branches in the middle of March 2008. The purchase, as mentioned, helped fund our loan growth
during the year, but did add noninterest expense. Our analysis of the performance of the acquired branches indicated that the acquisition was accretive to 2008. With strong expense controls and a freeze on merit increases in 2009, we expect
noninterest expense increases in 2009 to only be related to non-controllable items such as FDIC insurance, postage, telecommunications and legal expenses related to loan defaults.

SIZE="1"> 


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Table of Contents


Management’s announced strategy of growing net income annually by 10% is primarily dependent on growth of our
existing markets and positioning the Company to grow in new markets. This strategy is emphasized by the progression over the last six years but in an economy that we are facing now, an economy never seen by most bankers in their careers, that goal
takes a secondary position to our focus to help and work with our customers and our communities. Until the economy reverses direction, growth will probably be limited. However, while we do not plan any new branch openings in 2009, we are open to
opportunities that may present themselves. If these opportunities arise, we will evaluate them and will act to enhance shareholder value. In light of the current economic conditions, our primary goal in 2009 is to maintain the stability of our
company and assist our customers and communities.

Executive Overview

The year 2008 was not a normal year in the
banking industry. It showed the falling domino impact of loan instruments that are used to collateralize investment instruments and then sold to various institutions. Although we did not deal in subprime loans as a matter of direct business, we
still were impacted. The year began with the financial industry, not just banks, continuing to deal with the subprime loan fallout. The Federal Reserve continued to lower rates through out the year which put a squeeze on interest margins, the
largest contributor to our net income, as variable rate loans and investments re-priced quickly while fixed rate deposits and borrowings re-priced over a longer period of time. Finally in late summer the impact of the decreased value of asset backed
securities, the high rate of defaulted mortgages and a liquidity crunch blended to cause massive write downs of securities, the takeover by the U. S. Government of its mortgage agencies FNMA and FHLMC and the buy out or failure of many institutions.
This brought in the U. S. Treasury to assist the Federal Reserve and other government supervisory agencies in stabilizing the economy. As we enter 2009, we are operating under a quasi government controlled financial industry that is working hard to
right itself.

Eastern Virginia Bankshares was not immune to these impacts. We had to take an impairment charge to write down some securities, primarily
preferred stock of FNMA and FHLMC. When the Treasury Secretary acted to place the FNMA and FHLMC Government Sponsored Entities (“GSE’s”) into conservatorship, banks holding the securities were negatively impacted. Only a few months
prior to the Treasury action, banking regulators had encouraged banks to incorporate these securities in the mix of their portfolio holdings to assist in meeting capital needs of these GSE’s. The result was that all financial institutions that
held investments in the GSE’s were forced to take impairment charges that negatively impacted earnings. In addition, we have an increased volume of loans in nonaccrual status and subject to foreclosure risks. However, we have maintained a
conservative strategy; risks within our markets are diversified; we are still earning net income and most important we are well capitalized with enough liquidity to meet most turns in the economic markets.

STYLE="margin-top:12px;margin-bottom:0px">Our balance sheet, the primary driver of income, grew in 2008. Total assets are up $124.7 million from $926.7 at the end of 2007 to $1.05 billion at the end of 2008.
Gross loans, our primary earning asset, are up $110.4 million and deposits are up $141.6 million while fed funds purchased are down at year end by $13.5 million. FHLB borrowing increased $7.6 million from a transaction early in the first quarter of
2008. As a result of this growth, if we were in a normal economic market, we start 2009 with the potential to produce a good earnings flow. With the

 


27







Table of Contents



economic turmoil, the potential might not come to fruition. Our 2008 growth was not just from branch purchases. While our branch purchases provided $49 and
$93 million in loans and deposits, respectively, we still had significant growth from our existing markets. Loans increased an additional $61.4 million. The additional $48.6 million in deposits includes the addition of some low rate of brokered
deposits. However, the deposit mix started changing with increases in interest checking and money market accounts. In addition, there was little run off from the acquired branches. The limitations on the earnings potential will be similar to those
we faced in 2008. We begin the year with an economy still sliding and a hope that it will bottom out sooner than later. We anticipate weakened loan payment flows due to continued unemployment increases, creating a nervous public that is still
looking for stability in the markets.

Net income for the year ended December 2008 was $3.1 million or a 64.9% decrease from $8.8 million for the year
ended December 2007. This was the result of a number of factors. Our income on earning assets increased as loans and securities income were up while fed funds and dividend income were down. Dividends were impacted by lower payments from the FHLB of
Atlanta, including the fourth quarter dividend being deferred to 2009. The infusion of deposits from our purchase of two Millennium bank branches helped fuel our funding needs for much of the second and third quarters, but our loan growth put us in
a borrowing position by the end of the year. Rate changes through out the year were the primary cause of the declining interest income. The yield on earning assets dropped 63 basis points for the year while the yield on interest bearing liabilities
was down only 32 basis points. This 31 point gap represents the rate change delay banks have in a declining rate environment.

While the rate gap is the
major factor in 2008’s interest income weakening it is not the only factor in earnings decline. The provision for loan losses increased from $1.2 million in 2007 to $4.0 in 2008, taking an additional $2.8 million out of earnings for 2008. In
addition, the competition for deposits has become extremely aggressive. This is pointed out in the trend of our net interest margin. In 2003, our net interest margin was 4.45% while in 2008 it was 3.57%. The rate has declined every year except 2006
when it was up 10 basis points. Management, in an effort to minimize this trend, looks at funding alternatives outside the traditional deposit sources and makes purchases of borrowed funds or brokered deposits when the spreads are significantly
better than the normal deposit market.

Noninterest income was $3.0 million for 2008, a decrease of $3.1 million compared to $6.1 million in 2007. The
decline was influenced by a number of unusual items that skew the year to year comparison. Our core noninterest income for 2008 was $6.5 million, an increase of 7.1%, compared to 2007. The unusual items that impacted 2008 noninterest income creating
a net loss of $3.6 million were a $4.9 million other than temporary impairment, partially offset by a $1.3 million pension curtailment gain. The securities loss resulted primarily from the impairment charge taken on the FNMA and FHLMC preferred
stock when the Federal Government took control of the agencies and eliminated the dividend. The economy is still in turmoil, but with the infusion of government money into the economy, we anticipate that it will eventually reverse these negative
trends. This should occur as the funds move out to businesses that can then hire employees and start producing goods again and as the consumers move back into the work force and begin to feel more comfortable with spending. Our current view of the
economy does not permit us to provide an estimate of when the turn-around is likely to occur.

Noninterest expense rose for the year due to infrastructure
changes in the telecommunications system, higher FDIC insurance premiums due to a revised pricing structure but primarily from the acquisition of two new branches in the middle of March 2008. The purchase, as mentioned, helped fund our loan growth
during the year, but did add noninterest expense. Our analysis of the performance of the acquired branches indicated that the acquisition was accretive to 2008. With strong expense controls and a freeze on merit increases in 2009, we expect
noninterest expense increases in 2009 to only be related to non-controllable items such as FDIC insurance, postage, telecommunications and legal expenses related to loan defaults.

SIZE="1"> 


28







Table of Contents


Management’s announced strategy of growing net income annually by 10% is primarily dependent on growth of our
existing markets and positioning the Company to grow in new markets. This strategy is emphasized by the progression over the last six years but in an economy that we are facing now, an economy never seen by most bankers in their careers, that goal
takes a secondary position to our focus to help and work with our customers and our communities. Until the economy reverses direction, growth will probably be limited. However, while we do not plan any new branch openings in 2009, we are open to
opportunities that may present themselves. If these opportunities arise, we will evaluate them and will act to enhance shareholder value. In light of the current economic conditions, our primary goal in 2009 is to maintain the stability of our
company and assist our customers and communities.

This excerpt taken from the EVBS 10-K filed Mar 5, 2008.

Executive Overview

Net income for the year ended December 2007 was $8.8 million or a 21.0% increase over $7.2 million for the year ended December 2006. Three factors in 2007 contributed to this increase: increased net interest income of 5.3%, increased noninterest income of 18.3% and controlled noninterest expense growth of 0.2%. We grew our loans by 9.0% in 2007, despite weaker than desired deposit growth, we were rewarded by growth in all the major categories of noninterest income: deposit fees, credit and debit card fees, retail investment fees and mortgage company income. Equally important with the income gains was the minimal increase in expenses which reflected the full impact of the 2006 consolidation of three banks to one and management’s control of expense increases. This latter point is highlighted by the continued growth of the company’s footprint. During 2007, we relocated our Deltaville branch to a larger and more convenient location, opened our first branch in New Kent county, Virginia and prepared for a relocation of our leased Mechanicsville office to a renovated county landmark, the Windmill, in January 2008. Our Reward Checking product, a unique (in Virginia) interest-checking product at its inception in 2006, increased net product balances by 30.3% meeting our goal of retaining existing customers and bringing in new customers. In a year in which borrowings continued the 2006 trend of growing rapidly, Reward Checking was the only deposit category besides certificates to grow in 2007. While borrowings did grow in 2007, the need to borrow was delayed by the $23.5 million we received from our stock issuance in December 2006. The results of 2007 position us to continue to grow in 2008 and in future years. As announced in December 2007, the expected purchase of two Millennium Bank branches in March 2008, should add to the our over all profitability in 2008.

 

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The impact of the increased number of shares from the stock issuance and the higher amount of capital revealed itself in the ratios for 2007. For the year ended December 31, 2007, we had net income of $8.8 million, or $1.45 per share on a basic and a diluted basis, flat compared to $1.45 in 2006. Return on average assets (ROA) for 2007 was 0.99% compared to 0.91% in the prior year, and return on average equity (ROE) was 9.76% for 2007 compared to 11.10% in 2006. Core earnings during the period from 2006 to 2007 continued to improve as net interest income increased 5.3% and noninterest income excluding realized gains on securities increased 18.9% from the prior year.

Management’s control of noninterest expense in 2007 increased net income by growing only $55 thousand compared to an increase of $926 thousand in 2006. The small percentage increase in noninterest expense continues a trend over the last four years in which we have moved from a high of 21.1% in 2004, to 11.4% in 2005, to 3.7% in 2006 to 0.2 % in 2007. While this trend may not continue in 2008, it does show management’s strong emphasis on controlling expense growth.

Management’s goal of growing income annually by 10% is primarily dependent on growth of our existing markets and positioning the Company to grow in new markets. This strategy is emphasized by the progression over the last five years. In 2003, we purchased three branches from First Virginia bank in a new market, southeastern Virginia. These are on or just off the Route 460 corridor from Petersburg to Virginia Beach which gives us access to growth areas at both ends and in between. In late 2004, we opened a branch at Central Garage along the Route 360 corridor from Richmond to Tappahannock. This is an area of high residential growth and with the influx of new residents, growth of businesses supporting the new residents. In 2005, we opened a branch in Glenns, Virginia on the Route 17 corridor between Tappahannock and Gloucester. This is a market in which we look for future growth along Route 17 and across Route 33 from West Point. We also utilize parts of that building for training and accounting functions. In December 2006, our smallest branch – Airpark - in Hanover County was relocated to a larger office on a more accessible route in one of the fastest growing markets in Hanover County. This new Kings Charter office has two commercial loan officers and a large lobby, as well as accessible drive up windows which allows us to service our deposit customers while having better access to the business customers in the large business area in the vicinity. In 2007, we opened a new branch in New Kent County where we had operated with a loan production officer for a year and a half before opening the branch. The lender was able to generate a reasonable portfolio to help support opening a grass roots branch. The year 2008 opens with relocation of our Village branch to a new more visible and accessible branch at the Windmill and our announcement of the purchase of branches in Henrico County and Colonial Heights which brings us to new markets. With the economic growth up and down the Interstate 95 corridor from Northern Virginia to Emporia and the growth in the Hampton Roads area up the Interstate 64 and Route 17 corridor, we see many opportunities to expand our footprint in the existing corridors and new markets.

Increased loan volume in 2007 and 2006 and the associated increased net interest income reflect our recognition that growth will fuel future earnings. In addition, the overall asset quality of the loan portfolio continues near its highest level in our history. In 2007 net interest margin continued to decrease as interest income from loan growth was offset by higher cost deposits and borrowings. With the rate cuts by the Federal Reserve in 2007, the surprise cut of 75 basis points in mid January 2008 and the continuing questions about the long term impacts of the subprime lending melt down, we see a turbulent market in 2008. We are coming out of an economic environment for 2006 and most of 2007 which had high rates and caused slow deposit growth and forced us, like many other banks, to look at more expensive funding sources to fund loan demand. The market that we are moving into for 2008 is one of rapid interest rate cuts by the Federal Reserve which is making the matching of loans and deposits repricing a challenge.

 

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The company was pleased by the contributions of our noninterest income businesses in brokerage and mortgages. These businesses added to the growth of noninterest income through their fees while having minimal operating expense impact. In addition, deposit fee income continues to grow with the growth of our deposit base. Other ancillary products, such as debit card and ATM fees, contributed a large part of the noninterest income increase in 2007.

This excerpt taken from the EVBS 10-K filed Mar 12, 2007.

Executive Overview

Growth in the loan portfolio of 13.3% increased net interest income by 5.1% for the year ended December 31, 2006. Increased noninterest income of 9.3% and controlled noninterest expense growth of 3.7% contributed to an increase of 7.6% in the net income. While we were growing, we also worked through combining three banks into one bank in the first quarter and part of the second quarter. This completed the streamlining of back-office functions and allowed us to focus on a unified product offering throughout our market area. In the third quarter of 2006, we implemented a unique (in Virginia) interest-checking product, Reward Checking, to increase deposit growth and retain customers. In December, we completed a stock issuance of 1.15 million shares, or over $23.5 million, net. This increased capital positions us for future growth and acquisitions.

For the year ended December 31, 2006, we had net income of $7.24 million, or $1.45 per share on a basic and a diluted basis, an increase of 7.6% from $6.73 million and a per share increase of 5.8% from $1.37 per share on a basic and diluted basis for 2005. Return on average assets (ROA) for 2006 was 0.91% compared to 0.93% in the prior year, and the return on average equity (ROE) was 11.10% for 2006 compared to 11.05% in 2005. Core earnings during the period from 2005 to 2006 continued to improve as net interest income increased 5.1% and noninterest income excluding realized gains on securities increased 14.5% from the prior year.

The impact of the new one bank organization and the centralized backroom processing was lower noninterest expense in some categories in 2006 compared to 2005. Printing and supplies expense was up 0.5%, or $2 thousand, and telephone increased 4.4%, or $24 thousand. Data processing expense decreased 41.5%, or $313 thousand, while consulting expense decreased 34.1%, or $397 thousand. On the other hand, making the communities aware of our new name and rolling out a new product caused marketing expenses to increase by $517 thousand, or 112.4%. While the year-to-year change in noninterest expense as a percent has been declining since 2003, the 3.7% increase in 2006 is well below the increases of 11.4% in 2005 and 21.1% in 2004. This reflects the effort we have made to build an efficient infrastructure and control expenses.

 

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Table of Contents

Growth and positioning the Company to grow are among the primary objectives of management. In late 2004, we opened a branch at Central Garage along the Route 360 corridor from Richmond to Tappahannock. In 2006, the branch produced a profit and contributed to the earnings of the Company. In December 2006, our smallest branch – Airpark—in Hanover County was relocated to a larger office on a more accessible route in one of the fastest growing markets in Hanover County. This new Kings Charter office has two commercial loan officers and a large lobby, as well as accessible drive up windows which allows us to service our deposit customers while having better access to the business customers in the large business area in the vicinity. With the economic growth up and down the Interstate 95 corridor from Northern Virginia to Emporia and the growth in the Hampton Roads area up the Interstate 64 corridor, we see many opportunities to expand our footprint.

Increased loan volume in 2006 and the associated increased net interest income reflect our recognition that growth will fuel future earnings. In addition, the overall asset quality of the loan portfolio is near its highest level in our history. Throughout 2006 net interest margin decreased as interest income from loan growth was offset by higher cost deposits. This will likely continue to influence earnings in early 2007, if the Federal Reserve continues to leave interest rates at the level where they have been since mid 2006. This economic environment has slowed deposit growth and forced us, like many other banks, to look at more expensive funding sources to fund loan demand. When the Federal Reserve starts to lower rates, probably in the second half of 2007, this funding pressure may ease allowing us to re-price deposits at lower rates and allow the net interest margin to expand.

This excerpt taken from the EVBS 10-Q filed Nov 3, 2006.

EXECUTIVE OVERVIEW

Net income for the quarter ended September 30, 2006 was $2.0 million, an increase of $282 thousand from third quarter 2005 net income of $1.7 million. This increase is the result of increases in both net interest income and noninterest income that exceeded the increase in noninterest expense. Year-to-date, net income is up $414 thousand or 8.4%, compared to the nine months ended September 30, 2005, impacted significantly by nonrecurring expenses in the first five months of 2006 related to the April merger of the subsidiary banks. Net interest income increased $518 thousand for the quarter ended September 30, 2006, compared to the same period in 2005. This increase was the result of strong loan growth that increased interest income on loans by $2.0 million and an increase in investment income on the securities portfolio of $134 thousand, compared to the third quarter of last year. These increases were largely offset by increases in funding expenses, which increased $1.6 million compared to the same period last year. Core earnings (net income excluding realized gains on sale of securities and sale of fixed assets) were up $362 thousand or 22.6% over the third quarter of 2005 and up $535 thousand or 11.3% over the nine months ended September 30, 2005. A table showing the calculation of core earnings follows:

 

     Three Months Ended
September 30
   Nine Months Ended
September 30
   2006    2005    2006    2005

Net Income

   $ 1,969    $ 1,687    $ 5,321    $ 4,907

Less: realized gains, net of tax:

           

Sale of AFS securities

     3      68      24      148

Sale of fixed assets and OREO

     —        15      17      14
                           
     3      83      41      162
                           

Core Earnings

   $ 1,966    $ 1,604    $ 5,280    $ 4,745
                           

A flat to sometimes-inverted yield curve has contributed to higher interest rates on deposits and increased borrowings to fund loan growth. To address the challenging deposit environment, late in the quarter the Company introduced a core deposit product unique to its market. “Reward Checking” is a free checking product that offers a high interest rate to checking customers who use our technology, including direct deposit, debit card transactions, electronic statements and internet banking. The initial results in producing new deposit customers have exceeded expectations. This product is not only service charge free, but also refunds out-of-network ATM fees. With Reward Checking, the customer will enjoy all the benefits of free checking including a free Visa® check card, unlimited check-writing privileges and no minimum balance requirements as well as no service charge. A $100 minimum opening deposit is required and technology utilization standards must be met each month to earn the monthly interest.

Total assets at September 30, 2006 were $815.8 million, up $60.6 million, or 8.0%, from $755.2 million at September 30, 2005 and up $51.9 million, or 6.8%, from $763.9 million at December 31, 2005. For the quarter, total assets averaged $805.5 million, 8.4% above the third quarter 2005 average of $743.2 million. Total loans, net of unearned income, amounted to $637.1 million at September 30, 2006, an increase of $80.4 million, or 14.4%, from $556.7 million at September 30, 2005, and an increase of $63.0 million, or 11.0%, from $574.1 million at December 31, 2005.

 

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Table of Contents

Net loans as a percent of total assets were 77.3% at September 30, 2006, as compared to 72.8% at September 30, 2005 and 74.3% at 2005 year-end. Loan demand continues to be strong at a time when deposit growth is challenging.

At September 30, 2006, the investment portfolio totaled $127.5 million, down $13.1 million from $140.7 million at September 30, 2005 and down $7.9 million, or 5.8%, from $135.4 million at December 31, 2005. The decrease in the investment portfolio is primarily related to using investment portfolio cash flow to fund loan growth. Most of the funds that are invested in the investment portfolio are used to help to balance interest rate risk and to provide liquidity. There were $1.0 million of federal funds sold at September 30, 2006, while there were no federal funds sold at either September 30, 2005 or at December 31, 2005. The Company was in a federal funds purchased position of $6.8 million at December 31, 2005.

Total deposits of $642.2 million at September 30, 2006 represented an increase of $26.3 million, or 4.3%, from $615.8 million one year ago and an increase of $13.8 million, or 2.2%, from $628.3 million at December 31, 2005. The Company offers attractive, yet competitive, rates to maintain a strong stable deposit base. However, the cost of deposits has continued to rise in step with the Federal Reserve rate discount rate increases. At September 30, 2006, noninterest-bearing demand deposits were up $3.5 million or 3.6% and $2.7 million or 2.7%, compared to September 30, 2005 and December 31, 2005, respectively. For the same periods, interest-bearing deposits were up $22.8 million, or 4.4%, and up $11.1 million, or 2.1%, respectively. Interest expense has increased as higher-cost certificates of deposit have grown $42.2 million year-to-date while non-maturity interest-bearing and non interest-bearing deposits have decreased $28.2 million.

FHLB borrowings at September 30, 2006 totaled $91.2 million, a $38.6 million, or 73.3% increase over $52.6 million at September 30, 2005 and $39.3 million or 75.7% over $51.9 million at December 31, 2005. This change reflects management’s continued strategy to take advantage of interest rate spreads that benefit the Company by locking in the interest rate spread over the life of the liability. With loan demand outpacing deposit growth, management believes that this is a reasonable approach to control funding costs.

FASB Statement No. 115 requires the Company to show the effect of market changes in the value of securities available for sale. The effect of the change in market value of securities, net of income taxes, is reflected in a line titled “Accumulated other comprehensive (loss), net” in the Shareholders’ Equity section of the Consolidated Balance Sheets and was ($1.8 million) at September 30, 2006, a loss increase of $850 thousand from ($997 thousand) at September 30, 2005 and a loss increase of $71 thousand from ($1.8 million) at December 31, 2005. The unrealized loss position improved $1.9 million during the quarter ended September 30, 2006 to ($1.8 million) from ($3.8 million) at June 30, 2006. The unrealized (loss) on securities is presented as a value at one specific point in time but fluctuates significantly over time depending on interest rate changes.

This excerpt taken from the EVBS 10-Q filed Aug 8, 2006.

EXECUTIVE OVERVIEW

Net income for the quarter ended June 30, 2006 was $1.8 million, an increase of $252 thousand from second quarter 2005 net income of $1.5 million. This increase is the result of increases in both net interest income and noninterest income that exceeded the increase in noninterest expense. Year-to-date, net income is up $132 thousand or 4.1%,

 

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Table of Contents

impacted significantly by nonrecurring expenses in the first five months of the year related to the April consolidation to a one-bank holding company. Net interest income increased $482 thousand for the quarter ended June 30, 2006, compared to the same period in 2005. This increase was the result of strong loan growth that increased interest income on loans of $1.8 million and an increase in investment income of $114 thousand compared to the second quarter of last year. These increases were largely offset by increases in funding expenses which increased $1.5 million compared to the same period last year. A flat to sometimes inverted yield curve has contributed to higher interest rates on deposits and increased borrowings to fund loan growth.

Total assets at June 30, 2006 were $794.0 million, up $61.5 million, or 8.4%, from $732.5 million at June 30, 2005 and up $30.1 million, or 3.9%, from $763.9 million at December 31, 2005. For the quarter, total assets averaged $783.0 million, 10.4% above the second quarter 2005 average of $709.5 million. Total loans, net of unearned income, amounted to $611.9 million at June 30, 2006, an increase of $75.7 million, or 14.1%, from $536.2 million at June 30, 2005, and an increase of $37.8 million, or 6.6%, from $574.1 million at December 31, 2005. Net loans as a percent of total assets were 76.2% at June 30, 2006, as compared to 72.3% at June 30, 2005 and 74.3% at 2005 year-end. Loan demand continues to be strong at a time that deposits are not growing.

At June 30, 2006, the securities portfolio totaled $127.0 million, down $12.1 million, or 8.7%, from $139.2 million at June 30, 2005 and down $8.4 million, or 6.2%, from $135.4 million at December 31, 2005. The decrease in the investment portfolio is primarily related to using investment portfolio cash flow to fund strong loan growth. Most of the funds that are invested in the securities portfolio are part of management’s effort to balance interest rate risk and to provide liquidity. There were $2.3 million of federal funds sold at June 30, 2006, while there were no federal funds sold at either June 30, 2005 or December 31, 2005, when the Company was in a purchased position of $6.8 million at 2005 year end.

Total deposits of $624.8 million at June 30, 2006 represented an increase of $22.0 million, or 3.6%, from $602.8 million one year ago and a decrease of $3.5 million, or less than 1.0%, from $628.3 million at December 31, 2005. EVB offers attractive, yet competitive, rates to maintain a strong stable deposit base. However, the cost of deposits has continued to rise in step with the Federal Reserve interest increases. At June 30, 2006, noninterest-bearing demand deposits were up $10.7 million or 11.6% and $3.8 million or 3.8% compared to June 30, 2005 and December 31, 2005, respectively. For the same dates, interest-bearing deposits were up $11.2 million, or 2.2%, and down $7.3 million, or 1.4%, respectively.

FHLB borrowings at June 30, 2006 totaled $91.2 million, a $38.6 million, or 73.3% increase over $52.6 million at June 30, 2005 and $39.3 million or 75.7% above $51.9 million at December 31, 2005. This change reflects management’s continued strategy to take advantage of interest rate spreads that benefit the Company by locking in the interest rate spread over the life of the liability. With loan demand outpacing deposit growth, management believes that this is a reasonable approach to control funding costs.

FASB Pronouncement No. 115 requires the Company to show the effect of market changes in the value of securities available for sale. The effect of the change in market value of securities, net of income taxes, is reflected in a line titled “Accumulated other comprehensive (loss), net” in the Shareholders’ Equity section of the Consolidated Balance Sheets and was negative $3.8 million at June 30, 2006, a decrease of $3.6 million from June 30, 2005 and a decrease of $2.0 million from December 31, 2005. The unrealized gain or (loss) on securities is presented as a value at one specific point in time but fluctuates significantly over time depending on interest rate changes.

This excerpt taken from the EVBS 10-Q filed May 4, 2006.

EXECUTIVE OVERVIEW

Net income decreased 7.2% to $1.6 million for the first quarter of 2006, compared to $1.7 million for the same period in 2005. Diluted earnings per share decreased 5.9% to $0.32 for the first quarter of 2006, compared to $0.34 for the same quarter in 2005. Net interest income increased $221 thousand for the quarter ended March 31, 2006 when compared to the same period in 2005. This first quarter increase was the result of higher earnings on the loan portfolio and an increase in investment income offset by an increase in funding costs. Noninterest income without securities gains or losses was up $128 thousand, or 12.6%, for the quarter when compared to the same period in 2005 primarily from an increase in other investment income as the insurance, investment and mortgage groups had higher income than for the period ended March 31, 2005. Securities gains were down $122 thousand for the quarter when compared to the first quarter of 2005. Noninterest expense for the three months ended March 31, 2006 was up $246 thousand at $6.4 million compared to $6.1 million for the first quarter of 2005. Salaries and benefits were up 4.9% primarily from annual raises and an increase in pension expense; occupancy was up 9.2% mostly from lease increases and other expenses were down in total $10 thousand with most categories decreased, offset by a $75 thousand increase in marketing and advertising expenses for deposit advertisements and the one bank project.

Total assets at March 31, 2006 were $783.1 million, up $85.6 million, or 12.3%, from $697.4 million at March 31, 2005 and up $19.2 million, or 2.5%, from $763.9 million at December 31, 2005. For the quarter, total assets averaged $775.7 million, 12.0% above the first quarter 2005 average of $692.8 million. Total loans, net of unearned income, amounted to $596.0 million at March 31, 2006, an increase of $74.8 million, or 14.4%, from $521.1 million at March 31, 2005, and an increase of $21.9 million, or 3.8%, from $574.1 million at December 31, 2005. Net loans as a percent of total assets were 75.3% at March 31, 2006, as compared to 73.8% at March 31, 2005 and 74.3% at 2005 year-end. Loan demand continues to grow faster than deposits.

At March 31, 2006, the securities portfolio totaled $133.5 million, up $11.7 million, or 9.6%, from $121.8 million at March 31, 2005 and down $2.0 million, or negative 1.4%, from $135.4 million at December 31, 2005. Most of the funds that are invested in the securities portfolio are part of management’s effort to balance interest rate risk and to provide liquidity. There were $523 thousand of federal funds sold at March 31, 2006, down from $2.9 million at March 2005 and there were no federal funds sold at December 31, 2005 when the Company was in a purchased position of $6.8 million.

 

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Table of Contents

Total deposits of $627.6 million at March 31, 2006 represented an increase of $34.9 million, or 5.9%, from $592.7 million one year ago and a slight decrease of $754 thousand, or less than 1.0%, from $628.3 million at December 31, 2005. EVB offers attractive, yet competitive, rates to maintain a strong stable deposit base. However, the price of funds has continued to rise in step with the Federal Reserve interest increases. At March 31, 2006, noninterest-bearing demand deposits were up $9.6 million or 11.0% and down $2.2 million or 2.2% compared to March 31 and December 31, 2005, respectively. For the same time periods, interest-bearing deposits were up $25.2 million, or 5.0%, and $1.5 million, or less than 1%, respectively.

FHLB borrowings at March 31, 2006 totaled $76.9 million, a $47.1 million, or 157.7% increase over $29.9 million at March 31, 2005. This change reflects management’s continued strategy to take advantage of interest rate spreads that benefit the Company by locking in the interest rate spread over the life of the liability. With the loan demand outpacing deposit growth, this is a reasonable approach to control funding costs.

FASB Pronouncement No. 115 requires the Company to show the effect of market changes in the value of securities available for sale. The effect of the change in market value of securities, net of income taxes, is reflected in a line titled “Accumulated other comprehensive income/(loss), net” in the Shareholders’ Equity section of the Consolidated Balance Sheets and was negative $2.2 million at March 31, 2006, a decrease of $1.3 million from March 31, 2005 and a decrease of $403 thousand from December 31, 2005. The unrealized gain or (loss) on securities is presented as a value at one specific point in time but fluctuates significantly over time depending on interest rate changes.

This excerpt taken from the EVBS 10-K filed Mar 3, 2006.

Executive Overview

While EVB increased net interest income by 3.6% for the year ended December 31, 2005, this was counteracted by increased noninterest expenses which lowered net income and earnings per share. The higher noninterest expense was the result of the Company’s backroom centralization project, the full expense impact of two new branches, and the initial impact of the planned one bank reorganization. The Company had net income of $6.73 million, or $1.37 per share on a basic and a diluted basis, down 7.1% from $7.24 million and $1.49 per share on basic and $1.48 per share on a diluted basis for 2004. Return on average assets (ROA) for 2005 was 0.93% compared to 1.05% in the prior year, and the return on average equity (ROE) was 11.05% for 2005 compared to 12.42% in 2004. Core earnings during the period from 2004 to 2005 continued to improve as net interest income increased by 3.6% and noninterest income excluding realized gains on securities increased 6.7% from the prior year. As stated this was largely offset by an 11.4% increase in noninterest expenses which reflects a slowing of the higher expense rate when compared to a 21.1% increase in noninterest expenses between 2003 and 2004.

As the Company went through the year 2005, it continued to feel the expense impact of the re-engineering project, SOX, the new branches, new training to raise the level of customer service and the initial impact of the one bank reorganization project. It benefited from both loan growth and better asset quality which should carry forward into 2006.

While most of the major costs associated with SOX hit in 2004, the costs to continue the procedures and maintain effective control of the Company are on going. A grid outlining the control responsibilities of all divisions has to be maintained and revised as the Company changes. The Company hired an outside consultant to perform SOX reviews and many internal audit functions. The external audit firm has more responsibilities to review the control environment of the Company and thus higher fees. In addition, the Company continues to conduct training for all government compliance requirements.

Late in 2004, Southside Bank opened the Central Garage branch in King William County near the crossroads of Route 360 and Route 30. In June 2005, Southside Bank opened a branch in Glenns, along the Route 17 corridor to Hampton Roads. While these branches have grown, their contribution in 2005 was mostly expenses. Management expects a higher contribution to expense coverage in 2006 through higher branch earnings. Customer service training was introduced late in the third quarter to make the whole company aware of the best practices in handling both external customer and internal bank employee calls for service or information. This training was presented to all the employees. This is an initial step to develop a sales culture within the Company, so the employees can better recognize and effectively meet the needs of our customers.

Finally, towards the end of the year, the Company announced plans to transform itself from a three-bank holding company to a one-bank holding company. This process will further streamline backroom processes by creating a unified process company-wide and minimize various reporting requirements from three banks to one. The costs associated with this began in the fourth quarter of 2005 and will most likely end in the second quarter of 2006.

 

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Table of Contents

With all these non-income producing projects going on, the Company increased loan volume and the associated income very well. Even more important, the overall asset quality is at its highest level in the history of the Company. While the Federal Reserve continues increasing interest rates, future net interest income from loan rate growth could be squeezed by higher cost deposits, since the demand for funds from all financial sectors will drive up the cost of customer deposits.

This excerpt taken from the EVBS 10-Q filed Nov 3, 2005.

EXECUTIVE OVERVIEW

 

Net income decreased 8.9% to $1.7 million for the third quarter of 2005, compared to $1.9 million for the same period in 2004. Diluted earnings per share decreased 10.5% to $0.34 for the third quarter of 2005, compared to $0.38 for the same quarter in 2004. On a year-to-date basis, diluted earnings per share declined $0.14 to $1.00 compared to $1.14 for the same period in 2004. Net interest income increased $220 thousand for the quarter ended September 30, 2005 when compared to the same period in 2004. On a year-to-date basis, net interest income for the period ended September 30, 2005 was up $610 thousand compared to September 2004. This increase in the third quarter of 2005 was the result of higher earnings on the loan portfolio, a decline in investment income and an increase in funding costs. Noninterest income was up $195 thousand, or 17.4%, for the quarter when compared to the same period in 2004 and up $160 thousand on a year-to-date comparison. The increase for the quarter was the result of a $80 thousand increase in securities gains, an increase of 4.0% in service charges and an 17.7% increase in other operating income. On a year-to-date basis securities gains are behind the 2004 level. Noninterest expense for the three months ended September 30, 2005 was up $630 thousand and up $2.1 million for the nine months ended September 30, 2005. Infrastructure improvements which began in 2004 negatively impacted earnings in the first two quarters of 2005 and began to provide benefits of lower expenses in the current quarter. In addition, the Company transitioned to a new VoIP (Voice over Internet Protocol) telephone system during the quarter which should save expenses in the future. The increased service capacity and production efficiency are expected to improve long-term earnings as the Company grows. On a linked quarter basis, management was encouraged to see a decrease in total noninterest expense, including salaries and is focused on managing these expenses to improve the Company’s efficiencies.

 

Total assets at September 30, 2005 were $755.2 million, up $50.1 million, or 7.1%, from $705.1 million at September 30, 2004 and up $58.9 million, or 8.5%, from $696.3 million at December 31, 2004. For the quarter, total assets averaged $743.2 million, 6.5% above the third quarter 2004 average of $697.5 million. Total loans, net of unearned income, amounted to $556.7 million at September 30, 2005, an increase of $47.0 million, or 9.2%, from $509.6 million at September 30, 2004, and up $44.1 million, or 8.6%, from $512.6 million at December 31, 2004. Net loans as a percent of total assets were 72.8% at September 30, 2005, as compared to 71.3% at September 30, 2004 and 72.6% at 2004-year end. Net loan volume for the first nine months of 2005 was $44.1 million, compared to $22.4 million for the first nine months of 2004. Loan demand continues to grow faster than deposits.

 

At September 30, 2005, the securities portfolio totaled $140.7 million, up $1.8 million, or 1.3%, from $138.9 million at September 30, 2004 and up $7.0 million, or 5.2%, from $133.7 million at December 31, 2004. Most of the funds that

 

11


are invested in the securities portfolio are part of the effort to balance interest rate risk and to provide liquidity. There were no federal funds sold at September 30, 2005 or September 30, 2004, and there were $8.3 million net federal funds purchased at December 31, 2004. Federal funds purchased at September 30, 2005 were $7.7 million, down $690 thousand from year-end but up $2.3 million over September 30, 2004.

 

Total deposits of $615.8 million at September 30, 2005 represented an increase of $15.7 million, or 2.6%, from $600.1 million for the same period a year ago and an increase of $25.9 million, or 4.4%, from $589.9 million at December 31, 2004. EVB offers attractive, yet competitive, rates to maintain a strong stable deposit base. At September 30, 2005, noninterest-bearing demand deposits were up $12.6 million or 14.5% while interest-bearing deposits were up $3.1 million or 0.6%, compared to September 30, 2004. Compared to the year ended December 31, 2004, noninterest-bearing demand deposits were up $12.1 million or 13.9% while interest-bearing deposits were up $13.9 million or 2.8%.

 

FHLB borrowings at September 30, 2005 totaled $52.6 million, a $29.1 million, or 123% increase over $23.6 million at September 30, 2004. Compared to the year ended December 31, 2004, FHLB borrowings at September 30, 2005 increased $29.8 million, or 130% increase over $22.9 million at the end of 2004. This change reflects action by management to take advantage of interest rate spreads that benefit the Company by locking in the interest rate spread over the life of the liability. While these transactions have narrowed the net interest margin, they are still lower than the deposit rates now being paid in a rising rate environment and will benefit the Company in the long run.

 

Financial Accounting Standards Board Pronouncement Number 115 requires the Company to show the effect of market changes in the value of securities available for sale. The effect of the change in market value of securities, net of income taxes, is reflected in a line titled “Accumulated other comprehensive income/ (loss), net” in the Shareholders’ Equity section of the Consolidated Balance Sheet and was a negative $997 thousand at September 30, 2005, a loss increase of $2.3 million from September 30, 2004 and a loss increase of $1.6 million from December 31, 2004. The unrealized gain or (loss) on securities is presented as a value at one specific point in time but fluctuates significantly over time depending on interest rate changes. The decrease of the securities market value on a year-to-year and a year-end to present basis reflects some subtle changes in the portfolio and the volatility of the yield curve in a rising rate environment.

 

This excerpt taken from the EVBS 10-Q filed Aug 3, 2005.

EXECUTIVE OVERVIEW

 

Net income decreased 14.8% to $1.5 million for the second quarter of 2005, compared to $1.8 million for the same period in 2004. Diluted earnings per share decreased 13.5% to $0.32 for the second quarter of 2005, compared to $0.37 for the second quarter of 2004. On a year to date basis, earnings per share declined $0.11 to $0.66 compared to $0.77 for the same period in 2004. Net interest income increased $364 thousand for the quarter ended June 30, 2005 when compared to the same period in 2004. On a year-to-date basis, net interest income for the period ended June 30, 2005 was up $390 thousand compared to June 2004. This increase in the second quarter of 2005 was the result of higher earnings on the loan portfolio despite a decline in investment income and an increase in funding costs. Noninterest income was down $91 thousand, or 7.4%, for the quarter when compared to the same period in 2004 and down $35 thousand on a year-to-date comparison. In both cases, the decline was the result of no investment gains in the second quarter of 2005 and lower gains in 2005 compared with 2004. Noninterest expense for the three months ended June 30, 2005 was up $642 thousand and up $1.4 million for the six months ended June 30, 2005. Infrastructure improvements and associated consulting costs which began in 2004 continue to negatively impact earnings in the short term. However, the increased service capacity and production efficiency are expected to improve long-term earnings as the Company grows.

 

Total assets at June 30, 2005 were $732.5 million, up $45.0 million, or 6.5%, from $687.5 million at June 30, 2004 and up $36.2 million, or 5.2%, from $696.3 million at December 31, 2004. For the quarter, total assets averaged $709.5 million, 2.8% above the second quarter 2004 average of $689.9 million. Total loans, net of unearned income, amounted to $536.2 million at June 30, 2005, an increase of $36.7 million, or 7.3%, from $499.6 million at June 30, 2004, and up $23.6 million, or 4.6%, from $512.6 million at December 31, 2004. Net loans as a percent of total assets were 72.3% at June 30, 2005, as compared to 71.7% at June 30, 2004 and 72.6% at 2004-year end. Net loan volume for the first six months of 2005 was $23.8 million, compared to $12.5 million for the first six months of 2004. Loan demand continues to grow faster than deposits.

 

At June 30, 2005, the securities portfolio totaled $139.2 million, up $4.0 million, or 3.0%, from $135.1 million at June 30, 2004 and up $5.5 million, or 4.1%, from $133.7 million at December 31, 2004. Most of the funds that are invested in the securities portfolio are part of the effort to balance interest rate risk and to provide liquidity. There were no federal funds sold at June 30, 2005 or June 30, 2004, and there were $8.3 million net federal funds purchased at December 31, 2004.

 

Total deposits of $602.8 million at June 30, 2005 represented an increase of $11.5 million, or 1.9%, from $591.3 million one year ago and an increase of $13.0 million, or 2.2%, from $589.9 million at December 31, 2004. EVB offers attractive, yet competitive, rates to maintain a strong stable deposit base. At June 30, 2005, noninterest-bearing demand deposits were up $9.9 million or 12.0% and interest-bearing deposits were up $1.6 million or 0.3%, compared to June 30, 2004.

 

FHLB borrowings at June 30, 2005 totaled $52.6 million, a $29.1 million, or 123% increase over $23.6 million at June 30, 2004. This change is an action by management to take advantage of some interest rate spreads that benefit the Company by locking in the interest rate spread over the life of the liability.

 

11


Financial Accounting Standards Board Pronouncement Number 115 requires the Company to show the effect of market changes in the value of securities available for sale. The effect of the change in market value of securities, net of income taxes, is reflected in a line titled “Accumulated other comprehensive income (loss), net” in the Shareholders’ Equity section of the Consolidated Balance Sheet and was ($144 thousand) at June 30, 2005, a loss decrease of $529 thousand from June 30, 2004 and a decrease of $741 thousand from December 31, 2004. The unrealized gain or (loss) on securities is presented as a value at one specific point in time but fluctuates significantly over time depending on interest rate changes. The increase of the securities market value on a year-to-year basis reflects some subtle changes in the portfolio and more stable long-term rates. The decrease in the equity effect of the change in the value of securities in the last six months reflects the unchanged status of the portfolio and a rising, volatile rate environment over the last six months.

 

"EXECUTIVE OVERVIEW" elsewhere:

Old Point Financial (OPOF)
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