Eastern Virginia Bankshares, Inc. Releases First Quarter 2015 Results

TAPPAHANNOCK, Va., April 24, 2015 /PRNewswire/ -- Eastern Virginia Bankshares, Inc. (NASDAQ: EVBS) (the "Company"), the one bank holding company of EVB (the "Bank"), reported today its results of operations for the three months ended March 31, 2015.  

Performance Summary

The Company's results for the three months ended March 31, 2015 were directly impacted by the acquisition and integration of Virginia Company Bank ("VCB"), which was effective November 14, 2014, including additional legal fees and integration costs of $219 thousand, and increased average loan and deposit balances during the first quarter of 2015 as compared to the same period in 2014.  While the Company expects that it has recognized the majority of the expenses related to the acquisition and integration of VCB, the Company anticipates that additional legal and other transition expenses related to this acquisition will likely be incurred through the second quarter of 2015. 

In announcing these results, Joe A. Shearin, President and Chief Executive Officer commented, "I am pleased with our Company's results for the first quarter of 2015 and the continued focus and execution of our strategic plans.  Our overall asset quality remains very healthy and we continue to strengthen our balance sheet through the execution of our previously disclosed strategic initiatives.  While net income declined during the first quarter of 2015 as compared to the first quarter of 2014, these results were directly impacted by current period legal and other transition expenses related to our November 2014 acquisition and subsequent integration of VCB.  Excluding these expenses, our overall profitability for the first quarter of 2015 compared favorably to the fourth quarter of 2014.  Despite a 14% increase in net interest income and a 7 basis point improvement in our net interest margin during the current period, loan growth came in lower than our expectations.  Loan growth in our rural markets, primarily on the consumer side, remains weak while competition for commercial loans, especially in the Richmond and Tidewater markets, has been and we expect will continue to be intense given the historically low rate environment.  Our competitors, both large and small, continue to pursue loan growth by relaxing their credit standards and offering very low, long term pricing.  As a company we are committed to our long term success and enhancing shareholder value.  We plan to deliver this by continuing to focus on building profitable relationships through quality growth all while maintaining our credit culture and pricing discipline.  I remain very encouraged about the trends we began to see late in the first quarter, and given our current pipeline of loan opportunities, remain optimistic that this momentum will continue throughout the balance of 2015."

Shearin continued, "2015 is shaping up to be another very exciting year for our Company.  We continue to implement strategies to strengthen our financial condition and increase profitability going forward.  Earlier this year we announced the redemption of an additional $5.0 million of the Company's Series A Preferred Stock that was originally issued to the U.S. Treasury under TARP.  This redemption, combined with our previous $10.0 million redemption in October 2014, eliminates $15.0 million of the original $24.0 million issuance, and significantly reduced a high cost source of capital.  We successfully completed the data processing integration of VCB's systems into EVB's during late January, 2015, and we continue to focus our efforts on and expect to realize future cost savings and revenue enhancement opportunities from the VCB acquisition.  In March 2015, we paid our first quarterly common stock dividend since 2010.  This dividend was a reflection of the great progress we have made over the past few years in implementing our strategic plan and of the strength and financial stability of our Company.  I am pleased to announce that the Board of Directors declared another cash dividend of $0.01 per share of common stock and Series B Preferred Stock payable on May 22, 2015 to shareholders of record as of May 8, 2015.  Lastly, we recently announced the completion of a private placement of $20.0 million in aggregate principal amount of fixed-to-floating rate subordinated notes to institutional accredited investors.  These subordinated notes, which qualify as Tier 2 capital for regulatory purposes, were assigned an investment grade rating of BBB- by Kroll Bond Rating Agency.  Subject to regulatory approval, we plan to use a portion of the net proceeds from the subordinated notes to redeem the remaining $9.0 million of the Company's Series A Preferred Stock.  In addition, the remaining proceeds from the subordinated notes will enhance the Company's overall financial flexibility and serve general corporate purposes, including supporting growth and potential acquisitions."

For the three months ended March 31, 2015, the following were significant factors in the Company's reported results:

• Increase in net interest income of $1.3 million from the same period in 2014, principally due to a $1.6 million increase in interest and fees on loans driven primarily by loans acquired through the acquisition of VCB, partially offset by a decrease in interest on investment securities;
• Net interest margin (tax equivalent basis) increased 7 basis points to 4.00% during the first quarter of 2015 as compared to 3.93% for the same period in 2014;
• Increase in salaries and employee benefits of $1.0 million from the same period in 2014, primarily due to increased staff levels and support positions associated with the addition of three branches through the acquisition of VCB;
• Operating results were impacted by accounting adjustments which were recorded in relation to the VCB acquisition.  As a result, yields on acquired loans increased and were partially offset by amortization of the core deposit intangible and the time deposit premium.  The net accretion attributable to these adjustments was $178 thousand;
• No provision for loan losses was recorded during the first quarter of 2015 compared to $250 thousand for the same period in 2014.  Net charge-offs increased to $363 thousand for the first quarter of 2015 from $111 thousand in the same period of 2014;
• Increase in nonperforming assets of $1.4 million from December 31, 2014 to March 31, 2015 due primarily to the Company placing several loans (primarily one to four family residential real estate) on nonaccrual status as a result of the continued deteriorating financial condition of the respective borrowers in the first quarter of 2015;
• Gain of $25 thousand on the sale of available for sale securities during the first quarter of 2015 compared to $380 thousand during the first quarter of 2014.  This decrease was primarily due to the sale of a portion of the Company's previously impaired agency preferred securities (FNMA & FHLMC) during the first quarter of 2014, and the Company did not generate comparable gains on sales of securities during 2015;
• Expenses related to FDIC insurance premiums declined to $172 thousand, compared to $332 thousand for the same period in 2014, as the Company faced lower FDIC insurance assessment rates following termination of its memorandum of understanding with its federal and state banking regulators (the "MOU");
• Other operating expenses increased $676 thousand during the first quarter of 2015 as compared to the same period in 2014 and were driven primarily by increased costs associated with outsourcing of the Bank's core information technology processing and increased marketing and advertising expenses, including expenses associated with the acquisition of VCB.  Additionally, other operating expenses during the first quarter of 2015 increased as compared to the same period in 2014 due to higher franchise taxes, postage, dues and subscriptions, consulting fees, legal expenses and core deposit intangible amortization expense; and
• Decrease in the effective dividend on preferred stock of $298 thousand from the same period in 2014.  This was primarily due to the redemption of 10,000 shares of the Company's Series A Preferred Stock on October 15, 2014 and the redemption of another 5,000 shares on January 15, 2015, partially offset by the dividend rate on the Series A Preferred Stock increasing from 5% to 9% in the first quarter of 2014.

Operations Analysis

The following table presents average balances of assets and liabilities, the average yields earned on such assets (on a tax equivalent basis) and rates paid on such liabilities, and the net interest margin for the three months ended March 31, 2015 and 2014.

Interest Income and Expense

Net interest income

Net interest income in the first quarter of 2015 increased $1.3 million, or 14.2%, when compared to the first quarter of 2014.  The Company's net interest margin increased to 4.00% for the three months ended March 31, 2015, representing a 7 basis point increase over the Company's net interest margin for the three months ended March 31, 2014.  The most significant factors impacting net interest income during these periods were as follows:

Positive Impacts:

• Average loan balances increased primarily due to the acquisition of VCB; and
• Average rates paid on total interest-bearing deposits decreased for the three months ended March 31, 2015. However, higher average interest-bearing deposit balances during the first quarter of 2015 over the comparable 2014 period due to interest-bearing deposits added from the VCB acquisition offset the favorable impacts of the lower rates paid on interest-bearing deposits and drove a slight increase in interest expense attributable to the Company's deposit portfolio.

Negative Impacts:

• Decreasing yields on the Company's loan portfolio; and
• Decreases in the average balances of and average rates earned on total investment securities for the three months ended March 31, 2015.

Total interest income

Total interest income increased 13.4% for the three months ended March 31, 2015, as compared to the same period in 2014.  The increase in total interest income during the three months ended March 31, 2015 was primarily driven by an increase in average loan balances and partially offset by a decrease in average investment securities balances and declines in loan and investment securities yields. 

Loans

Average loan balances increased for the three month period ended March 31, 2015, as compared to the same period in 2014, due primarily to the acquisition of VCB loans totaling $101.5 million, net of credit and liquidity marks, the purchase of $27.2 million in performing one-to-four family residential mortgage loans in the first quarter of 2014, the opening of a new loan production office in Chesterfield County, Virginia in the second quarter of 2014 and the origination of a line of credit to fund loan originations through Southern Trust Mortgage, LLC (balance of $12.4 million as of March 31, 2015) in the second quarter of 2014.  These additions to the Company's loan portfolio were partially offset by weak loan demand in the Company's markets as a result of the continuing challenging economic conditions, such that the Company's average loan balances increased $138.9 million for the three months ended March 31, 2015, as compared to average loan balances for the same period in 2014.  In addition, due to the continuing low interest rate environment and competitive pressures, loans were originated during the first quarter of 2015 at much lower yields than seasoned loans in the Company's loan portfolio, which has contributed significantly to average yields on the loan portfolio declining 5 basis points for the three months ended March 31, 2015, as compared to the same period in 2014.  Total average loans were 75.4% of total average interest-earning assets for the three months ended March 31, 2015, compared to 70.3% for the three months ended March 31, 2014. 

Investment securities

Average investment securities balances declined 6.8% for the three month period ended March 31, 2015, as compared to the same period in 2014.  This decline was the result of the Company moving towards its long term target of the investment securities portfolio comprising 20% of the Company's total assets, the lack of investment opportunities with acceptable risk-adjusted rates of return and liquidity needs to support our operations and strategic initiatives.  The yields on investment securities decreased 16 basis points for the three months ended March 31, 2015, as compared to the same period in 2014, driven by lower interest rates over the comparable period and sales/calls of higher yielding municipal securities since the first quarter of 2014. 

Interest-bearing deposits

Average total interest-bearing deposit balances increased for the three month period ended March 31, 2015, as compared to the same period in 2014, primarily due to the acquisition of VCB's interest-bearing deposit liabilities, which totaled $85.6 million.

Borrowings

Average total borrowings increased for the three month period ended March 31, 2015, as compared to the same period in 2014, primarily due to short-term FHLB advances assumed in the VCB acquisition ($8.7 million) and increased repurchase agreement balances related to a significant customer deposit relationship.    

Noninterest Income

The following table depicts the components of noninterest income for the three months ended March 31, 2015 and 2014:

Key changes in the components of noninterest income for the three months ended March 31, 2015, as compared to the same period in 2014, are discussed below:

• Service charges and fees on deposit accounts declined due to decreases in service charge and overdraft fees on checking accounts;
• Debit/credit card fees increased primarily due to an increase in debit card fees driven by the acquisition of VCB and a higher utilization rate of debit cards by our customer base;
• Gain on sale of available for sale securities, net decreased as the Company recognized gains during the first quarter of 2014 primarily due to the sale of a portion of its previously impaired agency preferred securities (FNMA & FHLMC), and the Company did not generate comparable gains during 2015; and
• Other operating income increased primarily due to higher earnings from the Bank's subsidiaries, its investment in Bankers Insurance, LLC and bank owned life insurance policies, partially offset by higher losses from the Bank's investments in Housing Equity Funds.  Additionally, other operating income includes earnings from the Bank's investments in Southern Trust Mortgage, LLC (acquired 4.9% ownership on May 15, 2014) and Bankers Title, LLC (acquired 6.0% ownership on October 1, 2014). 

Noninterest Expense  

The following table depicts the components of noninterest expense for the three months ended March 31, 2015 and 2014:

Key changes in the components of noninterest expense for the three months ended March 31, 2015, as compared to the same period in 2014, are discussed below:

• Salaries and employee benefits increased due to annual merit salary increases, increased restricted stock compensation expense, increased bonuses, commissions and other incentive compensation, higher group term insurance costs and valuation adjustments related to pension plan liabilities, partially offset by an increase in deferred compensation on loan originations and reduced expense related to paid time off accrual adjustments.  Additionally, the Bank incurred higher personnel costs associated with increased staff levels and support positions associated with the addition of three branches through the acquisition of VCB;
• Occupancy and equipment expenses increased primarily due to depreciation expense associated with certain acquired VCB assets and increased rent and real estate tax expenses related to the acquired VCB branch locations;
• FDIC insurance expense decreased due to lower base assessment rates resulting from the improvement in the Bank's overall composite rating in connection with the termination of the MOU in March 2014, and corresponding decreases in FDIC insurance assessment rates;
• Collection, repossession and other real estate owned expenses increased due to increases in carrying balances of and costs associated with other real estate owned and classified assets;
• Loss (gain) on the sale of other real estate owned increased primarily due to the resolution and disposition of a distressed property that was sold during the first quarter of 2015; and
• Other operating expenses increased primarily due to elevated costs associated with outsourcing of the Bank's core information technology processing and increased marketing and advertising expenses.  Marketing and advertising expenses were higher due to the timing of campaigns and costs associated with the acquisition of VCB. Other operating expenses also increased due to higher franchise taxes, postage, dues and subscriptions, consultant fees, legal expenses and core deposit intangible amortization expense. 

Balance Sheet and Asset Quality

Balance Sheet

Key balance sheet components as of March 31, 2015 and December 31, 2014 are as follows:

Key balance sheet components as of March 31, 2015 and 2014 are as follows:

Asset Quality

The asset quality measures depicted below continue to reflect the Company's efforts to prudently charge-off loans as losses are identified and maintain an appropriate allowance for potential future loan losses.     

The following table depicts the net charge-off activity for the three months ended March 31, 2015 and 2014.

The following table depicts the level of the allowance for loan losses as of the dates presented.

The following table depicts the level of nonperforming assets as of the dates presented.

The following tables present the change in the balances of OREO and nonaccrual loans for the three months ended March 31, 2015.

In general, the modification or restructuring of a loan constitutes a troubled debt restructuring ("TDR") when we grant a concession to a borrower experiencing financial difficulty.  The following table depicts the balances of TDRs as of the dates presented.

Forward Looking Statements

Certain statements contained in this release that are not historical facts may constitute "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.  In addition, certain statements may be contained in the Company's future filings with the Securities and Exchange Commission (the "SEC"), in press releases, and in oral and written statements made by or with the approval of the Company that are not statements of historical fact and constitute forward-looking statements within the meaning of the Act.  Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other financial items; (ii) statements of plans, objectives and expectations of the Company or its management or Board of Directors, including those relating to products or services, the performance or disposition of portions of the Company's asset portfolio, future changes to the Bank's branch network, the payment of dividends, and the ability to realize deferred tax assets; (iii) statements of future financial performance and economic conditions; (iv) statements regarding the adequacy of the allowance for loan losses; (v) statements regarding the effect of future sales of investment securities or foreclosed properties; (vi) statements regarding the Company's liquidity; (vii) statements of management's expectations regarding future trends in interest rates, real estate values, and economic conditions generally and in the Company's markets; (viii) statements regarding future asset quality, including expected levels of charge-offs; (ix) statements regarding potential changes to laws, regulations or administrative guidance; (x) statements regarding strategic initiatives of the Company or the Bank and the results of these initiatives, including the Company's integration of VCB and transactions to redeem or refinance the Company's Series A Preferred Stock; and (xi) statements of assumptions underlying such statements.  Words such as "believes," "anticipates," "expects," "intends," "targeted," "continue," "remain," "will," "should," "may" and other similar expressions are intended to identify forward-looking statements but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to:

• factors that adversely affect the Company's and the Bank's strategic and business initiatives, including the Company's integration of VCB and other factors that could impact the business of the combined organization, including, without limitation, changes in the economic or business conditions in the Company's markets;
• the Company's ability and efforts to assess, manage and improve its asset quality;
• the strength of the economy in the Company's target market area, as well as general economic, market, political, or business factors;
• changes in the quality or composition of the Company's loan or investment portfolios, including adverse developments in borrower industries or in the repayment ability of individual borrowers or issuers, or concentrations in segments of the loan portfolio or declines in real estate values in the Company's markets;
• the effects of the Company's adjustments to the composition of its investment portfolio;
• the strength of the Company's counterparties;
• an insufficient allowance for loan losses;
• the Company's ability to meet the capital requirements of its regulatory agencies;
• changes in laws, regulations and the policies of federal or state regulators and agencies, the implementation of the Basel III capital framework and for calculating risk-weighted assets, and compliance with laws and regulations to which the Company is subject;
• adverse reactions in financial markets related to the budget deficit of the United States government;
• changes in the interest rates affecting the Company's deposits and loans;
• the loss of any of the Company's key employees;
• failure, interruption or breach of any of the Company's communication or information systems, including those provided by external vendors;
• changes in the Company's competitive position, competitive actions by other financial institutions and the competitive nature of the financial services industry and the Company's ability to compete effectively against other financial institutions in its banking markets;
• the Company's potential growth, including its entrance or expansion into new markets, the opportunities that may be presented to and pursued by it 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;
• the Company's ability to maintain internal control over financial reporting;
• the Company's ability to realize its deferred tax assets, including in the event the Company experiences an ownership change as defined by section 382 of the code;
• the Company's ability to raise capital as needed by its business;
• the Company's reliance on secondary sources, such as Federal Home Loan Bank advances, sales of securities and loans, and federal funds lines of credit from correspondent banks to meet its liquidity needs; and
• other circumstances, many of which are beyond the Company's control.

Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable assumptions and projections within the bounds of its knowledge of its business and operations, there can be no assurance that actual results, performance, actions or achievements of the Company will not differ materially from any future results, performance, actions or achievements expressed or implied by such forward-looking statements. Readers should not place undue reliance on such statements, which speak only as of the date of this report. The Company does not undertake any steps to update any forward-looking statement that may be made from time to time by it or on its behalf.  For additional information on risk factors that could affect the Company's forward-looking statements, see the Company's Annual Report on Form 10-K for the year ended December 31, 2014 and other reports filed with the SEC.

Contact: Adam Sothen
Chief Financial Officer
Voice: (804) 443-8404
Fax: (804) 445-1047

SOURCE Eastern Virginia Bankshares, Inc.

Related Links

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