EASTERN VIRGINIA BANKSHARES INC

In March 2017, the FASB issued ASU No. 2017-07, “Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” The amendments in this ASU require an employer that offers defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715 to report the service cost component of net periodic benefit cost in the same line item(s) as other compensation costs arising from services rendered during the period. The other components of net periodic benefit cost are required to be presented in the income statement separately from the service cost component. If the other components of net periodic benefit cost are not presented on a separate line or lines, the line item(s) used in the income statement must be disclosed. In addition, only the service cost component will be eligible for capitalization as part of an asset, when applicable. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. Early adoption is permitted. The Company does not expect the adoption of ASU 2017-07 to have a material impact on its consolidated financial statements.

In March 2017, the FASB issued ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities.” The amendments in this ASU shorten the amortization period for certain callable debt securities purchased at a premium. Upon adoption of the standard, premiums on these qualifying callable debt securities will be amortized to the earliest call date. Discounts on purchased debt securities will continue to be accreted to maturity. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. Upon transition, entities should apply the guidance on a modified retrospective basis, with a cumulative-effect adjustment to retained earnings as of the beginning of the period of adoption and provide the disclosures required for a change in accounting principle. The Company is currently assessing the impact that ASU 2017-08 will have on its consolidated financial statements.

Net interest income in the first quarter of 2017 increased $931 thousand, or 8.5%, when compared to the first quarter of 2016.  The Company's net interest margin (tax equivalent basis) decreased to 3.66%, representing a decrease of 12 basis points for the three months ended March 31, 2017 as compared to the same period in 2016.  The decrease in the net interest margin (tax equivalent basis) was primarily due to a decrease in the yield earned on average loans, higher average balances of and rates paid on interest-bearing liabilities and a decrease in average balances of and yields earned on investment securities. These margin pressures were offset by increases in average loan balances. Total interest and dividend income increased 10.7% for the three months ended March 31, 2017 while total interest expense increased 26.1%, both as compared to the same period in 2016. The most significant factors impacting net interest income during the three months ended March 31, 2017 were as follows:

The ratio of allowance for loan losses to total loans outstanding declined from December 31, 2016 to March 31, 2017 due to loan growth, improvements in economic and financial conditions in the Company’s markets and improvements in the Company’s asset quality which was primarily due to a decline in special mention loans. In addition to these factors, a decline in the ratio of allowance for loan losses to total loans outstanding from March 31, 2016 to March 31, 2017 was also driven by the resolution of certain classified or problem assets. Impaired loans decreased approximately $2.2 million from March 31, 2016, primarily due to the payoff of two previously restructured loans, partially offset by the addition of a large commercial real estate construction relationship to impaired loans as a result of a deterioration in the financial condition of the borrower. Nonperforming loans decreased approximately $865 thousand from March 31, 2016 to March 31, 2017 primarily due to the resolution of and foreclosure on closed end one to four family residential real estate properties related to a single borrower. Additionally, due to acquisition accounting related to the Company’s acquisition of VCB, the Company recorded loans acquired from VCB at fair value at the effective time of the acquisition, and any allowance for loan losses previously established by VCB was not recorded on the Company’s financial statements.  Net charge-offs for the three months ended March 31, 2017 were $318 thousand, compared to $408 thousand for the same period of 2016.  This represents, on an annualized basis, 0.12% of average loans outstanding for the three months ended March 31, 2017 compared to 0.18% of average loans outstanding for the same period of 2016. 

Loans increased during the first three months of 2017 primarily due to organic loan growth and the purchase of $6.9 million in performing commercial, student and consumer loans. Closed end first and second loans decreased primarily due to weak demand in our rural markets and refinancing activity in a competitive mortgage lending market driven by the low interest rate environment.  Other construction, land development and other land loans increased as the Company has renewed its focus and efforts on this loan segment. Non-farm, non-residential real estate loans increased due to the addition of a new commercial loan officer in the third quarter of 2016, as well as focused efforts of our commercial lending team in our Richmond and Tidewater markets. Loan growth in the Company’s 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 is expected to continue to be intense given the historically low rate environment and increased competition among banks and other financial institutions.