Eastern Virginia Bankshares, Inc. Releases Third Quarter 2016 Results

GLEN ALLEN, Va., Oct. 24, 2016 /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 and nine months ended September 30, 2016.  

Performance Summary

The Company's results for the three and nine months ended September 30, 2016 were directly impacted by increases in the average balances of loans, deposits and short-term borrowings and, for the nine months ended September 30, 2016, senior subordinated debt. Results were also affected by decreases in average balances of and yields earned on tax exempt investment securities during the three and nine months ended September 30, 2016 as compared to the same periods in 2015, partially offset by increases in average balances of and yields earned on taxable securities during the same periods.  Loan yields declined 1 and 13 basis points for the three and nine months ended September 30, 2016 as compared to the same periods in 2015, and for the nine month period ended September 30, 2016, were negatively affected by lower fair value adjustments related to the acquisition of Virginia Company Bank ("VCB").  Also, as previously disclosed, the Company engaged an independent consultant to conduct a comprehensive assessment of its operations during the first half of 2015.  The assessment identified operating efficiencies and revenue enhancement opportunities.  The Company has leveraged the assessment's findings, and since the second half of 2015, has continued to realize targeted increases in revenues and declines in certain noninterest expenses, particularly salaries and employee benefits expense.  However, increases in group insurance costs due to claims and incentive compensation have largely offset the aforementioned realized declines in salaries and employee benefits expense.

In announcing these results, Joe A. Shearin, President and Chief Executive Officer commented, "I am pleased with our Company's results during the first nine months of 2016 and the continued company-wide focus to grow our balance sheet, improve profitability and enhance the quality of products and services we offer to our customers. For the first nine months of 2016, as compared to the same period of 2015, we are reporting an increase in net income available to common shareholders of 29.5%, an increase in annualized return on average assets of 10 basis points to 0.63%, and an increase in annualized return on average common shareholders' equity of 119 basis points to 7.44%.  Net income increased by 4.7% during the third quarter of 2016 as compared to the second quarter of 2016 and was primarily driven by higher interest and fees on loans, and partially offset by a lower net interest margin and higher current period expenses.  The increase in interest and fees on loans was driven primarily by strong loan growth.  During the third quarter of 2016, we generated loan growth of 3.0% as compared to 6.3% during the first nine months of 2016 and 8.7% during the last twelve months, which outpaced our internal targets.  Given our current pipeline of loan opportunities and our focus on total relationship banking, we believe that we are positioned to again deliver meaningful loan growth in the fourth quarter of 2016.  The lower net interest margin was driven by lower yields on investment securities and loans as a result of the historically low rate environment as well as competitive pressures for loans.  Salaries and employee benefits in the current period were again impacted by higher group insurance expense due to elevated claims, while occupancy and equipment expenses in the current period were impacted by the relocation of our corporate headquarters.  The balance of our other noninterest expense categories declined in the current period and we expect them to continue to level off during the fourth quarter of 2016." 

Shearin continued, "We are also very pleased to announce that on October 11, 2016 we finalized the relocation of our corporate headquarters to the Innsbrook business park in Glen Allen, Virginia.  This relocation is an exciting event for our company and reflects the culmination of a successful, multi-month effort by the board and the management team.  As previously announced, our new corporate headquarters allows us to integrate corporate departments from other locations throughout our footprint.  We continue to believe this relocation will not only increase collaboration and productivity, but capture operating efficiencies while also providing us the space and flexibility needed to continue to grow and reach new customers.  We wish to thank our directors, officers and employees for their contribution on what we believe will be a significant driver of the future success of the Company.  I am also pleased to announce that the Board of Directors declared another cash dividend and has also increased the cash dividend to $0.03 per share of common stock and Series B Preferred Stock payable on November 18, 2016 to shareholders of record as of November 4, 2016."

For the three months ended September 30, 2016, the following were significant factors in the Company's reported results:

• Increase in net interest income of $548 thousand from the same period in 2015, principally due to an increase in interest and fees on loans driven primarily by loan growth, partially offset by increases in interest expense associated with our interest-bearing deposits and short-term borrowings;
• Net interest margin (tax equivalent basis) decreased 5 basis points to 3.68% during the third quarter of 2016 as compared to 3.73% for the same period of 2015 primarily due to the declines in yields on our investment securities and loan portfolio and the impact of increased amounts of and costs paid on our short-term borrowings;
• Net accretion attributable to accounting adjustments related to the VCB acquisition was $82 thousand for the third quarter of 2016, as compared to $20 thousand in the same period of 2015;
• Nonperforming assets at September 30, 2016 decreased $1.8 million from June 30, 2016, primarily due to a $1.1 million decrease in nonaccrual loans and a $746 thousand decrease in other real estate owned;  
• Net gain on sale of available for sale securities of $270 thousand as compared to $71 thousand in the same period of 2015 was higher due to the adjustments of the composition of the investment securities portfolio as part of our overall asset/liability management strategy;
• Increase in salaries and employee benefits of $449 thousand from the same period in 2015, primarily due to an increase in group insurance expense (which was driven by an increase in claims during the second and third quarters of 2016) and other incentive compensation;
• Collection, repossession and other real estate owned expense decreased $83 thousand from the same period of 2015 due to decreases in collection costs associated with classified assets; and
• Other operating expenses increased $139 thousand during the third quarter of 2016 as compared to the same period of 2015, primarily due to increases in director fees and other non-loan related losses and write-offs.

For the nine months ended September 30, 2016, 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 2015, principally due to an increase in interest and fees on loans driven primarily by loan growth, partially offset by an increase in interest expense associated with our short-term borrowings and the issuance of $20.0 million in senior subordinated debt during the second quarter of 2015;
• Net interest margin (tax equivalent basis) decreased 17 basis points to 3.72% during the nine months ended September 30, 2016 as compared to 3.89% for the same period of 2015 primarily due to a decline in yields on our investment securities and loan portfolio and the impact of interest incurred on the short-term borrowings and senior subordinated debt;
• Net accretion attributable to accounting adjustments related to the VCB acquisition was $200 thousand, as compared to $422 thousand in the same period of 2015;
• Nonperforming assets at September 30, 2016 increased $1.0 million from December 31, 2015, primarily due to a $1.5 million increase in loans past due 90 days and accruing interest (of which the majority of this increase came from a single purchased credit-impaired loan that is well secured) and a $1.0 million increase in other real estate owned (of which the majority of this increase came from foreclosures on several one to four family residential investment properties owned by a single borrower), partially offset by a decrease of $1.4 million in nonaccrual loans.  Nonperforming assets at September 30, 2016 increased $1.7 million from September 30, 2015, primarily due to a $1.5 million increase in loans past due 90 days and accruing interest (of which the majority of this increase came from a single purchased credit-impaired loan that is well secured) and a $1.3 million increase in other real estate owned, partially offset by a decrease of $1.1 million in nonaccrual loans;
• Net gain on sale of available for sale securities of $507 thousand as compared to $122 thousand in the same period of 2015 was higher due to the adjustments of the composition of the investment securities portfolio as part of our overall asset/liability management strategy;
• Consultant fees decreased $400 thousand from the same period in 2015, primarily due to expenses incurred during 2015 related to the aforementioned comprehensive assessment of our operations that were not repeated during 2016;
• Marketing and advertising expenses increased $249 thousand as compared to the same period in 2015 due to the timing of advertising campaigns and other initiatives;
• Decrease in merger and merger related expenses of $224 thousand due to certain costs incurred during the first quarter of 2015 associated with the VCB acquisition that were not repeated in 2016; and
• No effective dividend on preferred stock in the first nine months of 2016 as compared to $386 thousand from the same period of 2015.  This was due to the redemption of the remaining 14,000 shares of the Company's Series A Preferred Stock in transactions completed during the first half of 2015.

Operations Analysis

The following tables present 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 and nine months ended September 30, 2016 and 2015:

Interest Income and Expense

Net interest income and net interest margin

Net interest income in the third quarter of 2016 increased $548 thousand, or 5.2%, when compared to the third quarter of 2015.  Net interest income for the nine months ended September 30, 2016 increased $1.3 million, or 4.3%, when compared to the same period in 2015.  The Company's net interest margin (tax equivalent basis) decreased to 3.68% and 3.72% for the three and nine months ended September 30, 2016, respectively, representing 5 and 17 basis point decreases over the Company's net interest margin (tax equivalent basis) for the three and nine months ended September 30, 2015.  The declines in the net interest margin (tax equivalent basis) were primarily driven by lower loan yields as a result of competitive pressures in the historically low rate environment, and for the nine months ended September 30, 2016, lower accretion of fair value adjustments related to the VCB acquisition as well as increased interest expense as a result of the private placement of $20.0 million of senior subordinated debt in April 2015.  Additionally, the average balance of and rates paid on our short-term borrowings increased as compared to the same periods in 2015.  These margin pressures were largely offset by increases in average loan balances in the Company's results for the three and nine months ended September 30, 2016, as compared to the same periods in 2015.  The most significant factors impacting net interest income during the three and nine month periods ended September 30, 2016 were as follows:

Positive Impact:

• Increases in average loan balances, primarily due to organic loan growth and loan purchases, partially offset by lower loan yields.

Negative Impacts:

• Decreases in average yields earned on investment securities, primarily tax exempt investment securities, partially offset by increases in average balances of total investment securities;
• Private placement of $20.0 million of senior subordinated debt during the second quarter of 2015 resulting in increases to total average interest-bearing liabilities and related interest expense for the nine months ended September 30, 2016;
• Increases in average short-term borrowings balances and rates paid, primarily due to loan growth outpacing deposit growth and other strategic initiatives; and
• The Company experienced higher average interest-bearing deposit balances during the three and nine months ended September 30, 2016 over the comparable 2015 periods, primarily due to customer growth.  The rates paid on total average interest-bearing deposits increased 3 and 2 basis points for the three and nine months ended September 30, 2016, respectively, over the comparable periods in 2015.  The result was an increase in interest expense attributable to the Company's deposit portfolio.

Total interest and dividend income

Total interest and dividend income increased 5.9% and 6.4% for the three and nine months ended September 30, 2016, respectively, as compared to the same periods in 2015.  The increase in total interest and dividend income during the three and nine months ended September 30, 2016 was primarily driven by an increase in average loan and investment securities balances, partially offset by a decrease in average loan and investment securities yields. 

Loans

Average loan balances increased for the three and nine month periods ended September 30, 2016, as compared to the same periods in 2015, primarily due to organic loan growth and the purchase of $21.2 million in performing commercial and consumer loans between September 2015 and September 2016.  Loan growth during the first nine months of 2016 outpaced our internal targets. However, loan growth in our rural markets, especially with respect to consumer loans, 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.  The Company's average loan balances increased $63.9 million and $78.2 million for the three and nine months ended September 30, 2016, respectively, as compared to average loan balances for the same periods in 2015.  Total average loans were 76.7% of total average interest-earning assets for the three months ended September 30, 2016, compared to 75.7% for the three months ended September 30, 2015.  Total average loans were 76.5% of total average interest-earning assets for the nine months ended September 30, 2016, compared to 75.3% for the nine months ended September 30, 2015.

Investment securities

Average total investment securities balances increased 1.6% and 2.5% for the three and nine month periods ended September 30, 2016, respectively, as compared to the same periods in 2015.  The overall increase was the result of management of the Company's liquidity needs to support its operations, along with funds provided by deposit growth and measured loan demand in the Company's markets, partially offset by a lack of investment opportunities with acceptable risk-adjusted rates of return.  The Company remains committed to its long-term target of managing the investment securities portfolio to comprise 20% of the Company's total assets.  The yields on total average investment securities decreased 19 and 12 basis points for the three and nine months ended September 30, 2016, respectively, as compared to the same periods in 2015.  The decrease in yields on average total investment securities during the three and nine month periods ended September 30, 2016, as compared to the same periods in 2015, was driven by a lower allocation of the total investment securities portfolio to SBA Pool securities and tax exempt municipal securities, both of which also tend to be higher-yielding segments of the Company's investment securities portfolio.  These decreases were partially offset by higher interest rates and a greater allocation of the total investment securities portfolio to higher yielding Agency CMO securities, Agency CMBS securities and taxable municipal securities. 

Interest-bearing deposits

Average total interest-bearing deposit balances increased for the three and nine month periods ended September 30, 2016, as compared to the same periods in 2015, primarily due to organic deposit growth that was in part driven by the Company's marketing and advertising initiatives as well as new products and services.

Borrowings

Average total borrowings increased for the three and nine month periods ended September 30, 2016, as compared to the same periods in 2015, primarily due to increased short-term borrowings, and for the nine months ended September 30, 2016, the issuance of $20.0 million in senior subordinated debt in April 2015.  Average short-term borrowings increased for the three and nine month periods ended September 30, 2016, as compared to the same periods in 2015, due to additional short-term FHLB advances taken to fund loan growth and other strategic initiatives.   

Noninterest Income

The following tables depict the components of noninterest income for the three and nine months ended September 30, 2016 and 2015:

Key changes in the components of noninterest income for the three and nine months ended September 30, 2016, as compared to the same periods in 2015, are discussed below:

• Service charges and fees on deposit accounts increased primarily due to increases in overdraft and NSF fees on checking accounts;
• Gain on sale of available for sale securities, net increased primarily as a result of the Company adjusting the composition of the investment securities portfolio as part of the Company's overall asset/liability management strategy; and
• Other operating income decreased primarily due to lower earnings from the Bank's subsidiaries.  Additionally, other operating income includes earnings from the Bank's investment in Bankers Title, LLC and losses from the Bank's investment in housing equity funds.

Noninterest Expense  

The following tables depict the components of noninterest expense for the three and nine months ended September 30, 2016 and 2015:

Key changes in the components of noninterest expense for the three and nine months ended September 30, 2016, as compared to the same periods in 2015, are discussed below:

• Salaries and employee benefits increased primarily due to an increase in group insurance expense (which was driven by an increase in claims during the second and third quarters of 2016) and other incentive compensation;
• Consultant fees decreased during the first nine months of 2016 as compared to the same period of 2015, primarily due to expenses incurred related to the aforementioned comprehensive assessment of our operations that was completed during 2015;
• Collection, repossession and other real estate owned expenses decreased during the third quarter of 2016 as compared to the same period of 2015 due to decreases in collection costs associated with classified assets;
• Marketing and advertising expenses increased during the first nine months of 2016 as compared to the same period of 2015 due to the timing of advertising campaigns and other initiatives;
• Merger and merger related expenses incurred during the first half of 2015 were related to the acquisition of VCB in 2014, and no similar expenses were incurred during the same period in 2016; and
• Other operating expenses increased during the third quarter of 2016 as compared to the same period of 2015, primarily due to increases in director fees and other non-loan related losses and write-offs.
  

Balance Sheet and Asset Quality

Balance Sheet

Key balance sheet components as of September 30, 2016 and December 31, 2015 are as follows:

Key balance sheet components as of September 30, 2016 and 2015 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 loan losses.     

The following table depicts the net charge-off activity for the three and nine months ended September 30, 2016 and 2015:

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 nine months ended September 30, 2016:

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 (the "Exchange Act"), 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 Exchange Act.  Examples of forward-looking statements include, but are not limited to: (i) projections of revenues, expenses, income or loss, income 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 of portions of the Company's asset portfolio, future changes to the Bank's branch network and the payment of dividends; (iii) statements of future financial performance and economic conditions; (iv) statements regarding the adequacy of the allowance for loan losses; (v) statements regarding the Company's liquidity; (vi) statements of management's expectations regarding future trends in interest rates, real estate values, business opportunities and economic conditions generally and in the Company's markets; (vii) statements regarding future asset quality, including expected levels of charge-offs; (viii) statements regarding potential changes to laws, regulations or administrative guidance; (ix) statements regarding strategic initiatives of the Company or the Bank and the results of these initiatives; and (x) 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, 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;
• 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, including with respect to the implementation of the Basel III capital framework and related rules for calculating risk-weighted assets;
• 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;
• the effects of cyber-attacks or other security breaches;
• 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;
• future mergers or acquisitions, if any;
• 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;
• 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, 2015 and other reports filed with the SEC.

Contact:  Adam Sothen
Chief Financial Officer
Voice:  (804) 528-4753
Fax:     (804) 270-1215

SOURCE Eastern Virginia Bankshares, Inc.

Related Links

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