| EASTERN VIRGINIA BANKSHARES INC Item 1A Risk Factors An investment in the Company’s common stock involves significant risks inherent to the Company’s business |
| The risks and uncertainties that management believes affect or could affect the Company are described below |
| You should carefully read and consider these risks and uncertainties described below together with all of the other information included or incorporated by reference in this report, before you decide to invest in our common stock |
| We may incur losses if we are unable to successfully manage interest rate risk |
| Our profitability will depend in substantial part upon the spread between the interest rates earned on investments and loans and interest rates paid on deposits and other interest-bearing liabilities |
| These rates are normally in line with our competition with rises and falls based on the Asset Liability committee’s vision of the Company’s needs |
| However, the Company may pay above-market rates to attract deposits as we have done in some of our marketing promotions in the past |
| Changes in interest rates will affect our operating performance and financial condition in diverse ways including the pricing of securities, loans and deposits, and the volume of loan originations in our mortgage banking business |
| We attempt to minimize our exposure to interest rate risk, but we will be unable to eliminate it |
| Our net interest spread will depend on many factors that are partly or entirely outside our control, including competition, federal economic, monetary and fiscal policies, and economic conditions generally |
| We may be adversely affected by economic conditions in our market area |
| We operate in a mixed market environment with influences from both rural and urban areas |
| Because our lending is concentrated in these markets, we will be affected by the general economic conditions in the Eastern, Richmond and Tidewater areas of Virginia |
| Changes in the economy may influence the growth rate of our loans and deposits, the quality of the loan portfolio and loan and deposit pricing and the performance of our mortgage subsidiary |
| A significant decline in general economic conditions caused by inflation, recession, unemployment or other factors beyond our control would impact these local economic conditions and the demand for banking products and services generally, which could negatively affect our financial condition and performance |
| Although we might not have significant credit exposure to all the businesses in our areas, the downturn in any of these businesses could have a negative impact on local economic conditions and real estate collateral values generally, which could negatively affect our profitability |
| Our concentration in loans secured by real estate may increase our credit losses, which would negatively affect our financial results |
| We offer a variety of secured loans, including commercial lines of credit, commercial term loans, real estate, construction, home equity, consumer and other loans |
| A major change in the real estate market, such as a deterioration in the value of this collateral, or in the local or national economy, could adversely affect our customers’ ability to pay these loans, which in turn could impact us |
| Risk of loan defaults and foreclosures are unavoidable in the banking 15 ______________________________________________________________________ [33]Table of Contents industry, and we try to limit our exposure to this risk by monitoring our extensions of credit carefully |
| We cannot fully eliminate credit risk, and as a result credit losses may occur in the future |
| If our allowance for loan losses becomes inadequate, our results of operations may be adversely affected |
| We maintain an allowance for loan losses that we believe is a reasonable estimate of known and inherent losses in our loan portfolio |
| Through a periodic review and consideration of the loan portfolio, management determines the amount of the allowance for loan losses by considering general market conditions, credit quality of the loan portfolio, the collateral supporting the loans and performance of our customers relative to their financial obligations with us |
| The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, which may be beyond our control, and these losses may exceed our current estimates |
| Rapidly growing loan portfolios are, by their nature, unseasoned |
| As a result, estimating loan loss allowances is more difficult, and may be more susceptible to changes in estimates, and to losses exceeding estimates, than more seasoned portfolios |
| Although we believe the allowance for loan losses is a reasonable estimate of known and inherent losses in our loan portfolio, we cannot fully predict such losses or that our loan loss allowance will be adequate in the future |
| Excessive loan losses could have a material impact on our financial performance |
| Consistent with our loan loss reserve methodology, we expect to make additions to our loan loss reserve levels as a result of our loan growth, which may affect our short-term earnings |
| Federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize further loan charge-offs, based on judgments different than those of our management |
| Any increase in the amount of our provision or loans charged-off as required by these regulatory agencies could have a negative effect on our operating results |
| Our future success is dependent on our ability to compete effectively in the highly competitive banking industry |
| We face vigorous competition from other banks and other financial institutions, including savings and loan associations, savings banks, finance companies and credit unions for deposits, loans and other financial services in our market area |
| A number of these banks and other financial institutions are significantly larger than we are and have substantially greater access to capital and other resources, as well as larger lending limits and branch systems, and offer a wider array of banking services |
| To a limited extent, we also compete with other providers of financial services, such as money market mutual funds, brokerage firms, consumer finance companies, insurance companies and governmental organizations which may offer more favorable financing than we can |
| Many of our non-bank competitors are not subject to the same extensive regulations that govern us |
| As a result, these non-bank competitors have advantages over us in providing certain services |
| This competition may reduce or limit our margins and our market share and may adversely affect our results of operations and financial condition |
| Our profitability may suffer because of rapid and unpredictable changes in the highly regulated environment in which we operate |
| The banking industry is subject to extensive regulation by state and federal banking authorities |
| Many of the banking regulations we are governed by are intended to protect depositors, the public or the insurance funds maintained by the Federal Deposit Insurance Corporation, not shareholders |
| Banking regulations affect our lending practices, capital structure, investment practices, dividend policy and many other aspects of our business |
| These requirements may constrain our rate of growth and changes in regulations could adversely affect us |
| The burden imposed by these federal and state regulations may place banks in a competitive disadvantage compared to less regulated competitors |
| In addition, the cost of compliance with regulatory requirements could adversely affect our ability to operate profitably |
| See “Supervision and Regulation” for more information about applicable banking laws and regulations |
| 16 ______________________________________________________________________ [34]Table of Contents We may not be able to successfully manage our growth, which may adversely affect our results of operations and financial condition |
| During the last five years, we have experienced significant growth, and a key aspect of our business strategy is our continued growth and expansion |
| Our ability to continue to grow depends, in part, upon our ability to: • open new branch offices or acquire existing branches or other financial institutions; • attract deposits to those locations; and • identify attractive loan and investment opportunities |
| We may not be able to successfully implement our growth strategy if we are unable to identify attractive markets, locations or opportunities to expand in the future |
| Our ability to manage our growth successfully also will depend on whether we can maintain capital levels adequate to support our growth, maintain cost controls and asset quality and successfully integrate any businesses we acquire into our organization |
| As we continue to implement our growth strategy by opening new branches or acquiring branches or other banks, we expect to incur increased personnel, occupancy and other operating expenses |
| In the case of new branches, we must absorb those higher expenses while we begin to generate new deposits, and there is a further time lag involved in redeploying new deposits into attractively priced loans and other higher yielding earning assets |
| Thus, our plans to branch aggressively could depress our earnings in the short run, even if we efficiently execute our branching strategy |
| We rely heavily on our management team and the unexpected loss of any of those personnel could adversely affect our operations; we depend on our ability to attract and retain key personnel |
| We expect our future growth to be driven in a large part by the relationships maintained with our customers by our Chairman, President and other Senior Officers |
| We have entered into employment agreements with five our executive officers |
| The existence of such agreements, however, does not necessarily assure that we will be able to continue to retain their services |
| The unexpected loss of any of our key employees could have a material adverse effect on our business and possibly result in reduced revenues and earnings |
| We do maintain Bank owned life insurance on key officers that would help cover some of the economic impact of a loss caused by death |
| The implementation of our business strategy will also require us to continue to attract, hire, motivate and retain skilled personnel to develop new customer relationships as well as new financial products and services |
| Many experienced banking professionals employed by our competitors are covered by agreements not to compete or solicit their existing customers if they were to leave their current employment |
| These agreements make the recruitment of these professionals more difficult |
| The market for these people is competitive, and we cannot assure you that we will be successful in attracting, hiring, motivating or retaining them |
| We may identify a material weakness or a significant deficiency in our internal control over financial reporting that may adversely affect our ability to properly account for non-routine transactions |
| As we have grown and expanded, we have acquired and added, and expect to continue to acquire and add, businesses and other activities that complement our core retail and commercial banking functions |
| Such acquisitions or additions frequently involve complex operational and financial reporting issues that can influence management’s internal control system |
| While we make every effort to thoroughly understand any new activity or acquired entity’s business processes, our planning for proper integration into our company can give no assurance that we will not encounter operational and financial reporting difficulties impacting our controls over the Company |
| 17 ______________________________________________________________________ [35]Table of Contents If we need additional capital in the future to continue our growth, we may not be able to obtain it on terms that are favorable |
| This could negatively affect our performance and the value of our common stock |
| Our business strategy calls for continued growth |
| We anticipate that we will be able to support this growth through the generation of additional deposits at new branch locations as well as investment opportunities |
| However, we may need to raise additional capital in the future to support our continued growth and to maintain our capital levels |
| Our ability to raise capital through the sale of additional securities will depend primarily upon our financial condition and the condition of financial markets at that time |
| We may not be able to obtain additional capital in the amounts or on terms satisfactory to us |
| Our growth may be constrained if we are unable to raise additional capital as needed |
| We may in the future issue additional stock, any or all of which will dilute your percentage ownership and, possibly, the value of your shares |
| Our board of directors generally has the authority to issue all or part of any authorized but unissued common shares without prior shareholder approval and without allowing the shareholders the right to purchase their pro rata portion of such shares |
| This includes shares authorized to be issued under our stock option plans |
| The issuance of any new common shares will dilute your percentage ownership, and could dilute the value of your shares |
| Because our mortgage banking revenue is sensitive to changes in economic conditions, decreased economic activity, a slowdown in the housing market or high interest rates may reduce our profits |
| Maintaining a high level of fees from this operation depends primarily on our ability to continue to originate mortgage loans |
| Production levels are sensitive to changes in economic conditions and can suffer from decreased economic activity, a slowdown in the housing market or higher interest rates |
| Generally, any sustained period of decreased economic activity or higher interest rates could adversely affect our mortgage originations and, consequently, reduce our income from mortgage banking activities |
| As a result, these conditions may adversely affect our net income |