ITEM 1. BUSINESS ----------------------------------------------------------------------
GENERAL
Eastern Virginia Bankshares, Inc. (the "Corporation" or "EVB") was organized and chartered under the laws of the Commonwealth of Virginia on September 5, 1997 and commenced operations on December 29,1997 as a bank holding company. The Corporation owns all of the stock of its subsidiaries - Bank of Northumberland Inc., Hanover Bank, and Southside Bank. Bank of Northumberland, Inc. and Southside Bank were chartered as state banks under the laws of the Commonwealth of Virginia in 1910. Hanover Bank was chartered as a state bank in 2000.
The remainder of the response to this Item is incorporated by reference to the information under the caption "To Our Stockholders" in EVB's Annual Report to Shareholders.
EMPLOYEES
As of December 31, 2001, the Corporation and its subsidiary banks employed 168 full-time equivalent employees. EVB's success is highly dependent on its ability to attract and retain qualified employees. Competition for employees is intense in the financial services industry. The Corporation believes it has been successful in its efforts to recruit qualified employees, but there is no assurance that it will continue to be successful in the future. None of the Company's employees are subject to collective bargaining agreements. EVB believes relations with its employees are excellent.
ITEM 2.
ITEM 2. PROPERTIES ----------------------------------------------------------------------
The Company's principal executive offices are located at 217 Duke Street, Tappahannock, Virginia 22560. The corporate office is less than a block from the headquarters of SSB and the 5,400 square foot EVB operations center. The three subsidiary banks own 13 full service branch buildings including the land on which 12 of those buildings are located. Three branch office buildings are leased at current market rates. Northumberland and Middlesex Counties each are the home to three of the branches. Essex County houses two branch offices plus the corporate office and the operations center. Hanover County houses four branches (three of which are leased) while King William County, Caroline County, Lancaster County and Gloucester County each have one full service branch office. All properties are in good condition. The land on which the Caroline County office is located is under long-term lease.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS ----------------------------------------------------------------------
In the course of its operations, EVB and its subsidiaries are not aware of any material pending or threatened litigation, unasserted claims and/or assessments through December 31, 2001, or subsequent thereto. The only litigation in which EVB and its subsidiaries, the Banks, are involved are collection suits involving delinquent loan accounts in the normal course of business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ----------------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth quarter of 2001.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS ---------------------------------------------------------------------- The information titled "Common Stock Performance and Dividends" set forth on the last page of the 2001 Annual Report to Shareholders is incorporated herein by reference and is filed herewith as Exhibit 13.1.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA ---------------------------------------------------------------------- The information set forth on page 2 of the 2001Annual Report to Shareholders is incorporated herein by reference and filed herewith as Exhibit 13.2.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS ---------------------------------------------------------------------- Management's discussion and analysis is intended to assist the reader in evaluating and understanding the consolidated results of operations and financial condition of Eastern Virginia Bankshares, Inc. and subsidiaries (the "Corporation"). The following analysis provides information about the major components of the results of operations, financial condition, liquidity and capital resources of Eastern Virginia Bankshares (EVB) and attempts to identify trends and material changes that occurred during the reporting periods. The discussion should be read in conjunction with Selected Financial Data and the Consolidated Financial Statements and Notes to Consolidated Financial Statements.
OVERVIEW Eastern Virginia Bankshares (EVB) reported a decrease in net income and earnings per share for the year ended December 31, 2001 as it focused on long-term strategic initiatives and increased its loan loss provision by over $1.5 million in recognition of a deteriorating economy and an increase in nonperforming loans. The company opened new branch offices in Kilmarnock, Hanover Air Park and Ashland during the year and relocated its corporate office in Tappahannock. Additionally the Corporation's net interest margin decreased 12 basis points to 4.41% from the year 2000 margin of 4.53%.
RESULTS OF OPERATIONS Net income decreased 11.6% in 2001 to $4.88 million from $5.52 million in 2000 and $5.96 million in 1999. Earnings per share decreased 11.6% to $0.99, compared to $1.12 and $1.17 for 2000 and 1999, respectively. The decrease in net income in 2001 was the result of a $1.54 million increase in loan loss provision, startup costs for three new branches and a one time expense for supplemental retirement benefits.
Profitability, as measured by EVB's return on average equity was 10.47%, a decrease from 2000's 12.94%. Return on average assets was 1.13%, a decrease from the prior year's 1.40%. The Corporation repurchased 50 thousand shares of its common stock in 2001 under a share repurchase program announced by the Board in January, 2001. The repurchase plan is intended to reduce high capital levels and to increase return on equity to shareholders.
Net interest margin, on a tax equivalent basis, declined to 4.41% in 2001, as compared to 4.53% in 2000 and 4.78% in 1999. However, changes in volume exceeded changes in rates, generating an additional $1.31 million of net interest income in 2001 and $445 thousand in 2000.
The Corporation experienced record loan and deposit growth in 2001, with particularly strong results in the fourth quarter. Deposits grew $57.8 million or 16.5% while loans increased by $47 million or 15.6%. Average loans outstanding for the year increased 10.9% from the 2000 average. Residential real estate mortgages outstanding increased 9.8% from the prior year end while all other areas of the portfolio experienced double digit growth rates.
EVB's efficiency ratio, a measure of performance based upon the relationship between noninterest expense and income net of securities gains and losses, continues to compare favorably to other Virginia financial institutions. The Corporation's efficiency ratio for 2001 declined to 54.74% compared to 2000's 53.63%. A lower efficiency ratio represents greater control of noninterest costs. Fluctuation in the efficiency ratio can be attributed to relative changes in both noninterest income and net interest income as well as noninterest expense. EVB's decline in efficiency ratio was impacted by both the decrease in net interest margin and the noninterest expense increases related to the new branch office startups and the one time employee retirement supplement.
EVB is not aware of any current recommendations by any regulatory authorities which, if they were implemented, would have a material effect on the registrant's liquidity, capital resources, or results of operations.
The following table sets forth, for the periods indicated, selected quarterly results of EVB's operations.
SUMMARY OF FINANCIAL RESULTS BY QUARTER
NET INTEREST INCOME Net interest income represents the Corporation's gross profit margin and is defined as the difference between interest income and interest expense. For comparative purposes, income from tax-exempt securities is adjusted to a tax-equivalent basis using the federal statutory tax rate of 34%. Tax-equivalent securities income is further adjusted by the TEFRA adjustment for the disallowance as a deduction of a portion of total interest expense related to the ratio of average tax-exempt securities to average total assets. This adjustment results in tax-exempt income and yields being presented on a basis comparable with income and yields from fully taxable earning assets.
Net interest margin represents the Corporation's net interest income divided by average earning assets. Changes in the volume and mix of earning assets and interest bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income.
The "Average Balances, Income and Expense, Yields and Rates" table on the following page presents average balances, related interest income and expense, and average yield/cost data for each of the past three years. The "Volume and Rate Analysis" table reflects changes in interest income and interest expense resulting from changes in average volume and average rates.
AVERAGE BALANCE, INCOME AND EXPENSE, YIELDS AND RATES /(1)/
Notes: /(1)/ Income and yields are reported on a tax equivalent basis assuming a federal tax rate of 34%. /(2)/ Nonaccrual loans have been included in the computations of average loan balances. /(3)/ Interest rate spread is the average yield on earning assets, calculated on a fully taxable basis, less the average rate incurred on interest-bearing liabilities. /(4)/ Net interest margin is the net interest income, calculated on a fully taxable basis assuming a federal income tax rate of 34%, expressed as a percentage of average earning assets.
Tax-equivalent net interest income increased 7.3% in 2001 to $18.3 million from $17.1 million in 2000. Average loan growth of 10.9% was the primary factor in the increase in net interest income and in achieving a net interest margin of 4.41%, a 12 basis point decline from 4.53% in 2000. Yield on earning assets decreased 27 basis points to 8.11% in 2001 from 8.38% in 2000, while the cost of interest bearing funds decreased 17 basis points from 4.66% in 2000 to 4.49 % in 2001. Although average earning assets were up 10.2%, the yield on earning assets decreased at a faster rate than the cost of funds
Average earning asset growth of 10.2% resulted from increases in average loans outstanding of 10.9%, average securities of 3.5% and average federal funds sold of 64.1%. Growth in average earning assets of $38.6 million was funded by average deposit growth of $39.4 million. Growth in the lower yielding federal funds sold category
created a change in the mix of average earning assets that negatively impacted yield. In 2000, net interest income on a tax equivalent basis increased 2.6% to $17.1 million from $16.6 million in 1999. Average loan growth of 11.6% was the primary factor in the increase in net interest income and in producing a net interest margin of 4.53% which was a 25 basis point decline from 4.78% in 1999.
VOLUME AND RATE ANALYSIS
Notes: /(1)/ Changes caused by the combination of rate and volume are allocated based on the percentage caused by each. /(2)/ Income and yields are reported on a tax-equivalent basis, assuming a federal tax rate of 34%.
INTEREST SENSITIVITY EVB's primary goals in interest rate risk management are to minimize fluctuations in net interest margin as a percentage of earning assets and to increase the dollar amount of net interest income at a growth rate consistent with the growth rate of total assets. These goals are accomplished by managing the interest sensitivity gap, which is the difference between interest sensitive assets and interest sensitive liabilities in a specific time interval. Interest sensitivity gap is managed by balancing the volume of floating-rate liabilities with a similar volume of floating-rate assets, by keeping the average maturity of fixed rate asset and liability contracts reasonably consistent and short, and by routinely adjusting pricing to market conditions on a regular basis.
The Corporation generally strives to maintain a position flexible enough to move to an equality between rate-sensitive assets and rate-sensitive liabilities, which may be desirable when there are wide and frequent fluctuations in interest rates. Matching the amount of assets and liabilities maturing in the same time interval helps to hedge interest rate risk and to minimize the impact on net interest income in periods of rising or falling interest rates. When an unacceptable positive gap within a one-year time frame occurs, maturities can be extended by selling shorter term investments and purchasing longer maturities. When an unacceptable negative gap occurs, variable rate loans can be increased and more investment in shorter term investments can be made. Interest rate gaps are managed through investments, loan pricing and deposit pricing.
NONINTEREST INCOME Noninterest income increased by $418 thousand (18.8%) from $2.23 million in 2000 to $2.64 million in 2001. Service charges on deposit accounts, the largest source of noninterest income, increased $282 thousand (16.7%) from $1.69 million in 2000 to $1.97 million in 2001. Other operating income increased $119 thousand (21.7%) from $549 thousand in 2000 to $668 thousand in 2001, primarily the result of $44 thousand income on a title company investment, and $41 thousand investment services income. Other operating income includes gain on sale of other real estate, investment services income, credit life premiums, ATM fees charged to foreign users, safe deposit box fees, non deposit service charges and other miscellaneous income.
Noninterest income increased $502 thousand or 29.1% from 1999 to 2000, attributable primarily to a $375 thousand increase in service charges, a $66 thousand decrease in realized securities losses and an increase of $63 thousand in gain on sale of other real estate owned.
NONINTEREST EXPENSE Total noninterest expense increased $1.11 million (10.8 %) from $10.35 million in 2000 to $11.46 million in 2001. Salaries and benefits accounted for this entire increase with an increase of $1.13 million or 21.2% to $6.48 million in 2001 as compared to $5.35 million in 2000. The increase in salaries and benefits was the result of a $351 thousand nonrecurring pension supplement, $325 thousand for three new branch offices and the EVB Investment Division opened during the year, $175 thousand related to full year of operation of Hanover Bank compared to only seven months in the prior year, and $280 thousand or 5.2% for normal increases in salaries and benefits. Net occupancy and equipment expense increased $33 thousand or 2.1% while other operating expenses decreased $52 thousand or 1.5%. The decrease in other operating expense was primarily the result of many expense categories being impacted less by the opening of new offices in 2001 than they were by the opening of a new bank in 2000.
Noninterest expense increased $1.53 million (17.4 %) from $8.81 million in 1999 to $10.35 million in 2000. The Hanover Bank start up was responsible for $1.02 million of this increase. Absent the Hanover Bank expenses, total noninterest expense was up $518 thousand or 5.88%. Including the Hanover Bank expenses, noninterest expense increases from 1999 to 2000 included: salaries and benefits up $616 thousand or 13.0 %, advertising and marketing up $195 thousand or 82.6%, printing and supplies up $144 thousand or 39.1%, net occupancy and equipment up $99 thousand or 6.8%, and other operating expenses up $480 thousand or 23.8%. The primary contributors to the increase in other operating expenses were data processing up $62 thousand or 27.7%, consultant fees up $136 thousand or 155.0%, directors fees up $83 thousand or 51.7%, and legal/collection expense up $51 thousand or 58.4%.
INCOME TAXES Income tax expense in 2001 was $1.65 million, down from $1.93 million in 2000 and $2.21 million in 1999. The decrease in income taxes is attributable to decreased taxable earnings at the federal statutory rate of 34%. Income tax expense corresponds to an effective rate of 25.3 %, 25.9 % and 27.1 % for the three years ended December 31, 2001, 2000, and 1999, respectively. Note 9 to the Consolidated Financial Statements provides a reconciliation between the amount of income tax expense computed using the federal statutory income tax rate and EVB's actual income tax expense. Also included in Note 9 to the Consolidated Financial Statements is information regarding deferred taxes for 2001 and 2000.
LOAN PORTFOLIO Loans, net of unearned income, increased to $348.0 million at December 31, 2001, up $47.0 million or 15.6% from $301.0 million at year end 2000. The Corporation experienced particularly strong loan growth in the fourth quarter of 2001, and has seen that trend continue in the early weeks of 2002. Loan growth in 2001 was spread among the various loan categories with the real estate portfolio growing $30.8 million or 14.8%, commercial loans $9.0 million or 25.9% and consumer loans net of unearned discount $7.0 million or 12.2%. Primary contributors to increased loan growth were the addition of new branch offices in Lancaster and Hanover Counties.
At year end 2000, loans, net of unearned income were $301.0 million, up $27.2 million or 9.9% from $273.9 million at year end 1999. The Corporation experienced strong loan growth throughout 2000, continuing a trend that started in the fourth quarter of 1998. Loan growth in 2000 was spread among the various loan categories with the real estate portfolio growing $14.5 million or 7.5%, consumer loans net of unearned discount $8.9 million or 18.5%, and commercial loans $3.8 million or 12.3%. With the increasing rate environment of 2000, real estate lending growth moderated from 1999's 21.4% while consumer loan demand increased.
MATURITY SCHEDULE OF SELECTED LOANS Commercial and Real Estate (Dollars in thousands) Agricultural Construction - ------------------------------ ------------------------------------- Within 1 year $ 33,581 $ 7,710
Variable rate: 1 to 5 years 3,611 2,541 After 5 years - - --------- ------------ Total 3,611 2,541
Fixed rate: 1 to 5 years 5,717 173 After 5 years 900 284 --------- ------------ Total 6,617 457 --------- ------------ Total maturities $ 43,809 $ 10,708 =====================================
Approximately 68.8% of EVB's loan portfolio at December 31, 2001 was comprised of loans secured by real estate. Residential real estate mortgages made up 51.6 % of the loan portfolio as compared to 54.3% at year end 2000 and 55.8% at year end 1999. The Corporation attempts to limit its exposure to the risk of local real estate markets by controlling the size of its commercial real estate loan portfolio, and by focusing on real estate loans secured by owner-occupied properties. Commercial real estate loans increased from 12.0% of the total loan portfolio at year end 2000 to 14.1% at 2001 year end. Real estate construction loans accounted for only 3.1 % of total loans outstanding at year end 2001 and 3.0% at year end 2000. The Corporation's losses on loans secured by real estate have historically been low, averaging $16 thousand in net charges offs per year over the last five years.
Consumer loans are the second largest component of EVB's loan portfolio. Consumer loans were 18.4% of the loan portfolio at year end 2001, 18.9% and 17.6% at year end 2000 and 1999 respectively. This portfolio component consists primarily of installment loans. Net consumer loans for household, family and other personal expenditures totaled $64.0 million at 2001 year end, up $7.0 million or 12.2% from $57.0 million at 2000 year end, and $48.1 million at 1999 year end. Performance of the consumer loan portfolio is closely tied to general economic conditions in our market region and is impacted by intense competition from both other financial institutions and the automotive industry.
Commercial and agricultural loans are designed specifically to meet the needs of small and medium-size business customers. This category of loans increased $9.0 million in total loans outstanding at year end 2001 compared to 2000, with the percentage to total loans increasing to 12.6% of the total loan portfolio from 11.6% at year end 2000, matching the prior four year history as a percent of total loans.
Consistent with its focus on providing community-based financial services, EVB generally does not make loans outside of its principal market region. The Corporation does not engage in foreign lending activities; consequently the loan portfolio is not exposed to the sometimes volatile risk from foreign credits. EVB further maintains a policy not to originate or purchase loans classified by regulators as highly-leveraged transactions or loans to foreign entities or individuals. The Corporation's unfunded loan commitments, excluding credit card lines and letters of credit, at 2001 year end totaled $37.6 million, up $11.7 million from $25.9 million at December 31, 2000. Unfunded loan commitments (excluding $2.1 million in home equity lines) are used in large part to meet seasonal funding needs which are generally higher from Spring through Fall than at year end. Historically, EVB's loan collateral has been primarily real estate because of the nature of our market region.
ASSET QUALITY The Corporation's allowance for loan losses is an estimate of the amount needed to provide for potential losses in the loan portfolio. In determining adequacy of the allowance, management considers the Corporation's historical loss experience, the size and composition of the loan portfolio, specific impaired loans, the overall level of nonaccrual loans, the value and adequacy of collateral and guarantors, and economic conditions. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Because the risk of loan loss includes general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses can only be an estimate. EVB was not immune to the declining economic environment experienced in 2001, with a resultant increase in nonperforming loans and charge offs.
Each of EVB's subsidiary banks has a loan review function consisting of bank officers and board members who regularly review loans. Additionally an independent credit review consultant performs a monthly review of loans he selects for Southside Bank and refers those deemed appropriate to the Loan Committee of the Bank Board. Bank of Northumberland, Inc and Hanover Bank maintain a review process by senior credit personnel. As a matter of policy, the Company places loans on nonaccrual status when a loan becomes 90 days past due as to principal and interest, regardless of how well the loan may be collateralized. For the Corporation, this detailed management process forms the basis for determining the amount needed in the allowance for loan losses. Management believes the allowance for loan losses to be adequate based on this loan review process and analysis.
Management's close attention to a deteriorating economy and its impact on EVB's loan portfolio led to an increase in the reserve for loan losses in 2001, reversing a trend that had allowed the Company to lower its loan loss ratio in each of the prior three years. The ratio of allowance for loan losses to period end net loans, for 2001, 2000 and 1999 was 1.50%, 1.46%, and 1.52% respectively. For the same periods the ratio of allowance for loan losses to nonaccrual loans was 113%, 224% and 228%, indicating that the allowance was adequate with respect to nonaccrual loans. The allowance for loan losses is subject to regulatory examinations and determinations as to adequacy, which may take into account such factors as methodology used to calculate the allowance and the size of the allowance in comparison to peer companies identified by regulatory agencies.
ALLOWANCE FOR LOAN LOSSES
Ratios: - ------- Ratio of allowance for loan losses to total loans outstanding, end of year 1.50% 1.46% 1.52% 1.61% 1.70% Ratio of net charge-offs to average loans outstanding during the year 0.43% 0.14% 0.08% 0.20% 0.09%
NONPERFORMING ASSETS Total nonperforming assets, consisting of nonaccrual loans, loans past due 90 days, and other real estate increased $1.8 million or 62.7% in 2001, reversing a trend that had seen a steady increase in credit quality over the prior five years from 2.26% nonperforming assets in 1996 to less than 1.0% at year end 2000. Although nonperforming assets increased $1.6 million from year end 2000 to year end 2001, there was a 23% decrease in the last two months of the year. Quarterly nonperforming asset levels during the year were March 31 - $3.5 million, June 30 - $3.4 million, September 30 - $5.1 million, then peaking at $6.1 million at October 31. During the last two months of the year, nonperforming assets declined by over $1.4 million. The current nonperforming asset ratio of 1.34%, while above the year end 2000 level, is in line with the 1.24% at 1999 year end, 1.29% at 1998 year end, and superior to the 1.77% at 1997 year end.
Nonperforming assets at December 31, 2001 were $4.7 million or 1.34% of total loans and other real estate owned, up from $2.9 million or 0.95% at 2000 year end, and $3.4 million or 1.24% at 1999 year end. Nonperforming loans at year end 2001 consisted of $3.2 million of loans secured by real estate in the Corporation's market area, $722 thousand of commercial loans and $733 thousand of consumer loans. Based on estimated fair values of the related collateral, management considers the nonperforming real estate loans recoverable, with any individual deficiency well covered by the allowance for loan losses. No interest is accrued on loans placed in a nonaccrual status, and any unpaid interest previously accrued on such past due loans is reversed when a loan is placed in nonaccrual status. If interest on nonaccrual loans had been accrued, such income would have approximated $193 thousand and $104 thousand for the years 2001 and 2000.
Net charge offs in 2001 increased to $1.4 million from $393 thousand in 2000. Year 2001 net charge offs included $790 thousand of consumer loans and $547 thousand of commercial loans. The commercial loan charge offs included $500 thousand on one relationship where the borrower is in bankruptcy proceedings. Although trends for credit quality factors improved significantly in the fourth quarter of 2001, it is likely that EVB will continue provisions for loan losses in 2002. The primary factor for additional provision is growth in the loan portfolio and the level of net charge offs on nonperforming loans. The Corporation's formula for allocation of the allowance reflects current net loans and nonaccrual loans plus the five year history for net charge offs by loan category, and in 1999 added off-balance sheet credit risk . That allocation appears below.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
Potential Problem Loans: At December 31, 2001, potential problem loans were approximately $1.1 million, including three lending relationships in excess of $100,000, which had aggregate principal balances outstanding of $308 thousand. Loans are viewed as potential problem loans according to the ability of such borrowers to comply with current repayment terms. These loans are subject to constant management attention, and their status is reviewed on a regular basis. The potential problem loans identified at December 31, 2001 are generally secured by residential and commercial real estate with appraised values that exceed the principal balance.
SECURITIES Securities available for sale include those securities that may be sold in response to changes in market interest rates, changes in the security's prepayment risk, increases in loan demand, general liquidity needs, and other similar factors, and are carried at estimated fair market value.
At December 31, 2001, the securities portfolio, at fair market value, was $91.9 million, a 10.2% increase from $83.4 million at 2000 year end. At December 31, 2000, the combined securities portfolio was $83.4 million, a 5.3% decrease from $88.1 million at 1999 year end. Book value of $44.5 million in the investment component of the portfolio at 1999 year end was reclassified to available for sale in early 2000.
FASB pronouncement No. 115 effective January 1, 1994, requires EVB to show the effect of market value changes of securities available for sale. The market value of this portfolio at 2001 year end was $91.9 million. The effect of valuing the available for sale portfolio at market, net of income taxes, is reflected as a line in the Shareholders' Equity section of the Balance Sheet as accumulated other comprehensive income of $963 thousand at December 31, 2001 and 206 thousand at 2000 year end.
EVB follows a policy of not engaging in activities considered to be derivative in nature such as options, futures, swaps or forward commitments. The Corporation considers derivatives to be speculative in nature and contrary to EVB's historical philosophy. EVB does not hold or issue financial instruments for trading purposes.
INVESTMENT SECURITIES AND SECURITIES AVAILABLE FOR SALE The following table presents the book value and fair value of securities for the years 2001, 2000 and 1999.
MATURITY DISTRIBUTION AND YIELDS OF SECURITIES
/(1)/ Yields on tax-exempt securities have been calculated on a tax-equivalent basis. See Note 3 to the Consolidated Financial Statements as of December 31, 2001 for an analysis of gross unrealized gains and losses in the securities portfolio.
DEPOSITS
The Corporation has historically focused on increasing core deposits to reduce the need for other borrowings to fund growth in earning assets. Core deposits provide a low cost, stable source of funding for the Corporation's asset growth. Interest rates paid on deposits are carefully managed to provide an attractive market rate while at the same time not adversely affecting the net interest margin. Borrowing through the Federal Home Loan Bank of Atlanta is utilized for funding when the cost of borrowed funds falls below the cost of new interest bearing deposits.
EVB experienced record deposit growth in 2001 just as it did in loan growth. Total deposits at December 31, 2001 of $408.2 million reflected an increase of $57.8 million or 16.5% compared to $350.4 million at 2000 year end. Non-interest bearing deposits increased $7.0 million or 18.4% to $45.2 million at 2001 year end compared to $38.1 million at December 31, 2000. During the same period, interest bearing deposits increased 16.3% to $363.1 million at 2001 year end, compared to $312.3 million at December 31, 2000. While these figures are as of a specific day at year end, it is also meaningful to review average deposits for the year. For 2001, average total deposits of $376.4 million reflected an 11.7% increase over the 2000 average of $336.8 million. All deposit categories reflected an increase in average deposits for 2001.
Total deposits at 2000 year end of $350.4 million reflected an increase of $27.8 million or 8.6% compared to $322.6 million at 1999 year end. Average deposits for 2000 were $336.8 million, an increase of 7.1 % or $22.3 million compared to 1999 average deposits of $314.5 million. Average non-interest bearing deposit growth in 2000 was 3.7% while interest bearing deposits increased 7.5%. Average noninterest bearing demand deposits, interest checking and certificates of deposit increased in 2000 while average savings and money market deposits decreased.
AVERAGE DEPOSITS AND RATES PAID
MATURITIES OF LARGE DENOMINATION CERTIFICATES OF DEPOSIT
CAPITAL RESOURCES
Capital resources are managed to maintain a capital structure that provides the Corporation the ability to support asset growth, absorb potential losses and to expand EVB's franchise when appropriate. Capital represents original investment by shareholders along with retained earnings and provides financial resources over which management can exercise greater control as compared to deposits and borrowed funds.
Regulatory authorities have adopted guidelines to establish minimum capital standards. Specifically the guidelines classify assets and balance sheet items into four risk-weighted categories. The minimum regulatory total capital to risk-weighted assets is 8.0% of which at least 4.0% must be Tier 1 capital, defined as common equity and retained earnings. At December 31, 2001, EVB had total capital of 16.05% and a Tier 1 ratio of 14.79%, both far in excess of regulatory guidelines and the amount needed to support each subsidiary's banking business.
Capital is carefully managed as the financial opportunities of a high capital base are weighed against the impact of the return on equity ratio. In January 2001, the Corporation announced a stock repurchase program intended to reduce high capital levels and to increase return on equity to shareholders. The Corporation repurchased 50 thousand shares in 2001, and as part of the Board's previous November 1998 stock repurchase authorization 102 thousand shares in 2000, 110 thousand shares in 1999, and 32 thousand shares in late 1998. The Company anticipates a continuation of its stock repurchase efforts in 2002.
The table which follows provides an analysis of the Corporation's capital as of December 31, 2001, 2000, and 1999. Note 18 in the Consolidated Financial Statements provides an analysis of the capital position of each of the subsidiary banks as of year end 2001 and 2000.
ANALYSIS OF CAPITAL
LIQUIDITY
Liquidity represents an institution's ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, deposits with other banks, federal funds sold, investments and loans maturing or repricing within one year. EVB's management of liquid assets combined with the ability to generate liquidity through liability funding provides a liquidity level which management believes is sufficient to satisfy its depositors' requirements and to meet its customers' credit needs. At December 31, 2001, $151.0 million or 34.0% of total earning assets were due to mature or reprice within the next year.
EVB also maintains additional sources of liquidity through a variety of borrowing arrangements. Federal funds borrowing arrangements with major regional banks combined with lines of credit with the Federal Home Loan Bank totaled $57 million at December 31, 2001. At year end 2001, the Corporation had $6 million of FHLB borrowings outstanding.
INFLATION In financial institutions, unlike most manufacturing companies, virtually all of the assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on a bank's performance than the effects of general levels of inflation. Interest rate movement is not necessarily tied to movements in the same direction or with the same magnitude as the prices of goods and services, since such prices are affected by inflation to a larger extent than interest rates.
FORWARD-LOOKING STATEMENTS Certain statements in this report may constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Although EVB believes that its expectations concerning certain forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results and performance achievements of the Corporation will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.
ACCOUNTING RULE CHANGES In July, 2001, the Financial Accounting Standards Board issued two statements - Statement 141, Business Combinations, and Statement 142, Goodwill and Other Intangible Assets, which will potentially impact the accounting for goodwill and other intangible assets. Statement 141 eliminates the pooling method of accounting for business combinations and requires that intangible assets that meet certain criteria be reported separately from goodwill. The Statement also requires negative goodwill arising from a business combination to be recorded as an extraordinary gain. Statement 142 eliminates the amortization of goodwill and other intangibles that are determined to have an indefinite life. The Statement requires, at a minimum, annual impairment tests for goodwill and other intangible assets that are determined to have an indefinite life.
Upon adoption of these Statements, an organization is required to re-evaluate goodwill and other intangible assets that arose from business combinations entered into before July 1, 2001. If the recorded other intangible assets do not meet the criteria for recognition, they should be classified as goodwill. Similarly, if there are other intangible assets that meet the criteria for recognition but were not separately recorded from goodwill, they should be reclassified from goodwill. An organization also must reassess the useful lives of intangible assets and adjust the remaining amortization periods accordingly. Any negative goodwill must be written-off. The standards generally are required to be implemented by the Corporation in its 2002 financial statements. EVB has no goodwill or intangible assets; therefore the adoption of these standards will not have a material impact on the financial statements.
In June 2001, the Financial Accounting Standards Board issued Statement 143, Accounting for Asset Retirement Obligations. This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and the associated asset retirement costs be capitalized as part of the carrying value of the long-lived asset. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Statement is not expected to have a material effect on the Corporation's financial statements.
In August 2001, the Financial Accounting Standards Board issued Statement 144, Accounting for the Impairment or Disposal of Long-Lived Assets. The Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It also establishes a single accounting model for long-lived assets to be disposed of by sale, which includes long-lived assets that are part of a discontinued operation. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after December 31, 2001. The Statement is not expected to have a material effect on the Corporation's financial statements.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK -----------------------------------------------------------------------
Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates, exchange rates and equity prices. EVB's market risk is composed primarily of interest rate risk. The Corporation's Management is responsible for reviewing the interest rate sensitivity position of EVB's subsidiary banks and establishing policies to monitor and limit exposure to interest rate risk. Guidelines established by Management are reviewed by The Board of Directors.
It is EVB's policy not to engage in activities considered to be derivative in nature such as futures, option contracts, swaps, caps, floors, collars or forward commitments. EVB considers derivatives as speculative which is contrary to the Company's historical or prospective philosophy. EVB does not hold or issue financial instruments for trading purposes. It does not hold in its loan and security portfolio investments that adjust or float according to changes in the "prime" lending rate which is not considered speculative, but necessary for good asset/liability management.
Asset/Liability Risk Management: The primary goals of asset/liability risk management are to maximize net interest income and the net value of EVB's future cash flows within the interest rate limits set by the Asset/Liability Committee (ALCO).
Interest Rate Risk Measurement: Interest rate risk is monitored through the use of three complimentary measures. static gap analysis, earnings simulation modeling and net present value estimation. While each of the interest rate risk measurements has limitations, taken together they represent a reasonably comprehensive view of the magnitude of interest rate risk in the Corporation, the distribution of risk along the yield curve, the level of risk through time, and the amount of exposure to changes in certain interest rate relationships.
Static Gap: Gap analysis measures the amount of repricing risk embedded in the balance sheet at a point in time. It does so by comparing the differences in the repricing characteristics of assets and liabilities. A gap is defined as the difference between the principal amount of assets and liabilities, adjusted for off-balance sheet instruments, which reprice within a specific time period. The cumulative one-year gap, at year-end was -5.70% which is within the policy limit for the one-year gap of plus or minus 15% of adjusted total assets at a combined Company level.
Core deposits and loans with noncontractual maturities are included in the gap repricing distributions based upon historical patterns of balance attrition and pricing behavior which are reviewed at least annually. The gap repricing distributions include principal cash flows from residential mortgage loans and mortgage-backed securities in the time frames in which they are expected to be received. Mortgage prepayments are estimated by applying industry median projections of prepayment speeds to portfolio segments based on coupon range and loan age.
Earnings Simulation: The earnings simulation model forecasts one year net income under a variety of scenarios that incorporate changes in the absolute level of interest rates, changes in the shape of the yield curve and changes in interest rate relationships. Management evaluates the effects on income of alternative interest rate scenarios against earnings in a stable interest rate environment. This type of analysis is also most useful in determining the short-run earnings exposures to changes in customer behavior involving loan payments and deposit additions and withdrawals.
The most recent earnings simulation model projects net income would increase approximately 7.57% of stable-rate net income if rates were to fall immediately by two percentage points. It projects a decrease of approximately 14.20% if rates rise by two percentage points. Management believes this reflects a liability-sensitive interest risk for the one-year horizon.
This dynamic simulation model includes assumptions about how the balance sheet is likely to evolve through time, in different interest rate environments. Loan and deposit growth rate assumptions are derived from historical analysis and management's outlook, as are the assumptions used to project yields and rates for new loans and deposits. All maturities, calls and prepayments in the securities portfolio are assumed to be reinvested in like instruments. Mortgage loan prepayment assumptions are developed from industry median estimates of prepayment speeds for portfolios with similar coupon ranges and seasoning. Noncontractual deposit growth rates and pricing are assumed to follow historical patterns. The sensitivities of key assumptions are analyzed at least annually and reviewed by management.
Net Present Value: The Net Present Value ("NPV") of the balance sheet, at a point in time, is defined as the discounted present value of asset cash flows minus the discounted value of liability cash flows. Interest rate risk analysis using NPV involves changing the interest rates used in determining the cash flows and in discounting the cash flows. The resulting percentage change in NPV is an indication of the longer term repricing risk and options embedded in the balance sheet.
At year-end, a 200 basis point immediate increase in rates is estimated to decrease NPV by 16.37 %. Additionally, NPV is estimated to increase by 15.22% if rates fall immediately by 200 basis points. Analysis of the average quarterly change in the Treasury yield curve over the past ten years indicates that a parallel curve shift of 200 basis points or more is an event that has less that a 0.1% chance of occurrence.
As with gap analysis and earnings simulation modeling, assumptions about the timing and variability of balance sheet cash flows are critical in NPV analysis. Particularly important are the assumptions driving mortgage prepayments and the assumptions about expected attrition of the core deposit portfolios. These assumptions are applied consistently across the different rate risk measures.
SUMMARY INFORMATION ABOUT INTEREST-RATE RISK MEASURES IS PRESENTED BELOW:
December 31 ---------------------- 2001 2000 ---------------------- Static 1-Year Cumulative Gap -5.70% -12.13% 1-year net income simulation projection: -200 basis point shock vs. stable rate 7.57% 7.41% +200 basis point shock vs. stable rate -14.20% -8.84% Static net Present value change: -200 basis point shock vs. stable rate 15.22% 5.29% +200 basis point shock vs. stable rate -16.37% -8.04%
The earnings simulation model indicates that if all prepayments, calls and maturities of the securities portfolios expected over the next year were to remain uninvested, then the current liability sensitive position would be lessened.
Management projects interest rates to continue a moderate downward trend during the first two quarters of 2002 to a level no more than 50 basis points below that at 2001 year end and believes that the current level of liability sensitivity is appropriate.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ----------------------------------------------------------------------- The following financial statements are filed as a part of this report following item 14:
. Consolidated Balance Sheets as of December 31, 2000 and 2001
. Consolidated Statements of Income for the three years ended December 31,
. Consolidated Statements of Changes in Shareholders' Equity for the three years ended December 31, 2001
. Consolidated Statements of Cash Flows for the three years ended December 31,
. Notes to Consolidated Financial Statements
. Independent Auditor's Report
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURES ---------------------------------------------------------------------- None.
PART III ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT ---------------------------------------------------------------------- The response to this Item required by Item 401 of Regulation S-K, with respect to directors, is incorporated by reference to the information under the caption "Election of Directors" on pages 2 and 3 of EVB's Proxy Statement for the 2002 annual meeting of shareholders and with respect to executive officers, is presented below.
EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------ Following are the persons who were the executive officers of EVB as of December 31, 2001, their ages as of December 31, 2001, their current titles and positions held during the last five years:
W. Rand Cook, 48, is the Chairman of the Board of Directors of EVB and has been a member of the Board since the Company's inception in December, 1997, and a director of Hanover Bank since its inception in 2000. Prior to the formation of Hanover Bank in, he was a director of Southside Bank from 1996. He is an attorney in Hanover County, VA.
F. L. Garrett, III, 62, is the Vice-Chairman of the Board of Directors of EVB and Chairman of the Board of SSB of which he has been a member since 1982. He is a realtor in Essex County, VA
Lewis R. Reynolds, 51, is Senior Vice President of EVB. Mr. Reynolds has served as the President and Chief Executive Officer of BNI since 1991.
Ned Stephenson, 48, is the President and Chief Executive Officer of EVB. Mr. Stephenson was previously Executive Vice President of EVB from April 2000 until April 2001, and Vice President and Chief Financial Officer of EVB from its inception in 1997, and Vice President and Chief Financial Officer of Southside Bank from 1987.
Joseph H. James, 47, is Vice President and Chief Operations Officer of EVB. Mr. James joined EVB in 2000. He served as Senior Vice President in the Operations Division of SunTrust Banks during the five years prior to joining EVB.
Ronald L. Blevins, 57, is Vice President and Chief Financial Officer of EVB. Mr. Blevins joined EVB in 2000. He served as President of Betron International, while contemporaneously providing regulatory and financial reporting services to EVB from 1997 until joining EVB. He was a business owner from 1994-1997 and was a senior vice president with NationsBank and predecessors from 1980-1994.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION ---------------------------------------------------------------------
The response to this Item is incorporated by reference to the information under the caption "Executive Compensation" on pages 6 and 7 of EVB's Proxy Statement for the 2002 annual meeting of shareholders .
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ---------------------------------------------------------------------
The response to this Item is incorporated by reference to the information under the caption "Security Ownership of Management and Certain Beneficial Owners" on pages 3 and 4 of EVB's Proxy Statement for the 2002 annual meeting of shareholders.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------------------------------
The response to this Item is incorporated by reference to the information under the caption "Transactions with Management" on page 9 of EVB's Proxy Statement for the 2002 annual meeting of shareholders.
PART IV ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS AND AUDITORS' REPORT --------------------------------------------------------------------- (a) Financial Statements and Schedules The financial statements set forth under Item 8 of this report on Form 10-K are incorporated by reference. Financial statement schedules have been omitted since they are either not required, not applicable, or the information is otherwise included.
(b) Reports on Form 8-K EVB filed Form 8-K on March 26, 2001, announcing the pending retirement of Thomas M. Boyd, Jr., its President and Chief Executive Officer, and the promotion of Ned Stephenson from Executive Vice President to President and Chief Executive Officer effective April 19, 2001.
(c) Exhibit Listing Exhibit Number Description ------ ----------- 3.1 Articles of Incorporation (No changes - Articles of Incorporation filed with 1997 Form 10-K are incorporated by reference) 3.2 Bylaws 10 Employment Contracts of Certain Officers and Directors is incorporated by Reference to the information under the caption "Employment Contracts" on pages 8 and 9 of the Company's Proxy Statement for the 2002 annual meeting of shareholders. 13.1 Quarterly Market Information Incorporated by Reference to the last page of 2001 Annual Report to Shareholders ("2001 Annual Report") 13.2 Selected Financial Data Incorporated by Reference to Page 2 of 2001 Annual Report
SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, in the town of Tappahannock, State of Virginia, on March 21, 2002.
Eastern Virginia Bankshares, Inc. By /s/Ronald L. Blevins --------------------------------------------------- Ronald L. Blevins Vice President and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of Registrant and in the capacities indicated on March 21, 2001. Signature Title
/s/W. Rand Cook Chairman of the Board of Directors - -------------------------------- W. Rand Cook
/s/F. L. Garrett, III Vice Chairman of the Board of Directors - -------------------------------- F. L. Garrett, III
/s/Ned Stephenson President and Chief Executive Officer - -------------------------------- and Director Ned Stephenson.
/s/Lewis R. Reynolds Senior Vice President and Director - -------------------------------- Lewis R. Reynolds
/s/L. Edelyn Dawson, Jr. Director and Secretary of the Board - -------------------------------- L. Edelyn Dawson, Jr.
/s/Warren Haynie, Jr. Director - -------------------------------- F. Warren Haynie, Jr.
/s/Eric A. Johnson Director - -------------------------------- Eric A. Johnson
/s/William L. Lewis Director - -------------------------------- William L. Lewis
/s/Howard R. Straughan Director - -------------------------------- Howard R. Straughan
/s/Leslie E. Taylor Director - -------------------------------- Leslie E. Taylor
/s/Jay T. Thompson Director - -------------------------------- Jay T. Thompson
/s/Ronald L. Blevins Chief Financial Officer - -------------------------------- (Principal Financial and Accounting Ronald L. Blevins Officer)
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EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
Tappahannock, Virginia
FINANCIAL REPORT
DECEMBER 31, 2001
C O N T E N T S
Page
INDEPENDENT AUDITOR'S REPORT 31
CONSOLIDATED FINANCIAL STATEMENTS
Consolidated balance sheets 32 Consolidated statements of income 33 Consolidated statements of changes in shareholders' equity 34 Consolidated statements of cash flows 35 and 36 Notes to consolidated financial statements 37 - 56
INDEPENDENT AUDITOR'S REPORT
[logo of YHB] Yount, Hyde & Barbour, P.C. Certified Public Accountants and Consulants
To the Board of Directors and Stockholders Eastern Virginia Bankshares, Inc. and Subsidiaries Tappahannock, Virginia
We have audited the accompanying consolidated balance sheets of Eastern Virginia Bankshares, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, shareholders' equity and cash flows for the years ended December 31, 2001, 2000 and 1999. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Eastern Virginia Bankshares, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the years ended December 31, 2001, 2000 and 1999, in conformity with accounting principles generally accepted in the United States of America.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia January 8, 2002
50 S. Cameron St. P.O. Box 2560 Winchester, VA 22604 (540) 662-3417
Offices located in: Winchester, Middleburg, Leesburg, and Culpeper, Virginia Member: American Institute of Certified Public Accountants / Virginia Society of Certified Public Accountants
EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000
See Notes to Consolidated Financial Statements.
EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2001, 2000 and 1999
See Notes to Consolidated Financial Statements.
EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY For the Years Ended December 31, 2001, 2000 and 1999
EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2001, 2000 and 1999
EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) For the Years Ended December 31, 2001, 2000 and 1999
See Notes to Consolidated Financial Statements.
EASTERN VIRGINIA BANKSHARES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of Eastern Virginia Bankshares, Inc. and Subsidiaries (the "Corporation") conform to generally accepted accounting principles and general practices within the banking industry. The following is a description of the more significant of those policies:
BUSINESS
Eastern Virginia Bankshares, Inc. is a bank holding company that provides full banking services, including commercial and consumer demand and time deposit accounts, commercial and consumer loans, Visa and Mastercard revolving credit accounts, drive-in banking services and automated teller machine transactions through its wholly-owned subsidiaries, Southside Bank ("SSB"), Bank of Northumberland, Inc. ("BNI") and Hanover Bank ("HB"). The area served by the Corporation is primarily the counties of Essex, Northumberland, King & Queen, King William, Richmond, Lancaster, Hanover, Gloucester, Middlesex and Caroline.
BASIS OF PRESENTATION AND CONSOLIDATION
The consolidated statements of Eastern Virginia Bankshares, Inc. and its wholly-owned subsidiaries, Southside Bank, Bank of Northumberland, Inc. and Hanover Bank include the accounts of all companies. All material intercompany balances and transactions have been eliminated in consolidation.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of foreclosed real estate and deferred taxes.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash and balances due from banks and federal funds sold, all which mature within ninety days.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SECURITIES
Debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as "available for sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.
Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held to maturity and available for sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
LOANS
The Corporation grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans. The ability of the Corporation's debtors to honor their contracts is dependent upon the real estate and general economic conditions in the Corporation's market area.
Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances less the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.
The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Credit card loans and other personal loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful.
All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractural terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Corporation does not separately identify individual consumer and residential loans for impairment disclosures.
OTHER REAL ESTATE
Real estate acquired through, or in lieu of, foreclosure are held for sale and are initially recorded at the lower of loan balance or fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenues and expenses from operations and changes in the valuation are included in other operating expenses.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment are stated at cost, less accumulated depreciation. Depreciation is charged to expense over the estimated useful lives of the assets and is computed using the straight-line or declining-balance method for financial reporting purposes. Depreciation for tax purposes is computed based upon accelerated methods. The costs of major renewals or improvements are capitalized while the costs of ordinary maintenance and repairs are charged to expense as incurred.
INCOME TAXES Deferred income tax assets and liabilities are determined using the balance sheet method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recogniti on to changes in tax rates and laws.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS PER SHARE
Basic earnings per share represents income available to common shareholders divided by the weighted-average number of common shares outstanding during the period. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options, and are determined using the treasury method.
Weighted average shares were 4,914,981, 4,947,507 and 5,092,008, for the years ended 2001, 2000 and 1999, respectively. The Corporation had no potential common stock as of December 31, 2001, 2000, and 1999.
COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income.
PENSION PLAN
The Corporation has a defined benefit pension plan covering employees meeting certain age and service requirements. The Corporation computes the net periodic pension cost of the plan in accordance with FASB No. 87, "Employers' Accounting for Pensions."
ADVERTISING
The Corporation practices the policy of charging advertising costs to expense as incurred. Advertising expense totaled $374,262, $430,661 and $236,117 for the three years ended December 31, 2001, 2000 and 1999, respectively.
RECLASSIFICATIONS
Certain reclassifications have been made to prior period balances to conform to the current year presentation.
NOTE 2. CASH AND DUE FROM BANKS
To comply with Federal Reserve Regulations, the Corporation's subsidiary banks are required to maintain certain average reserve balances. For the final weekly reporting period in the years ended December 31, 2001 and 2000, the aggregate amounts of daily average required balances were approximately $890,000 and $765,000.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SECURITIES
The amortized cost and fair value of securities, with gross unrealized gains and losses, follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a comparison of amortized cost and estimated fair values of the Corporation's securities by contractual maturity at December 31, 2001:
For the years ended December 31, 2001, 2000 and 1999, proceeds from sales of securities available for sale amounted to $1,251,180, $6,079,372 and $3,641,476, respectively. Gross realized gains amounted to $7,167 in 2001 and gross realized losses amounted to $9,716 and $76,268 in 2000 and 1999, respectively.
The book value of securities pledged to secure public deposits and other purposes amounted to $7,631,149 and $5,721,367 at December 31, 2001 and 2000, respectively.
As permitted under FASB No. 133, the Corporation transferred securities held to maturity with a book value of $44,491,960 and a market value of $43,941,901 to securities available for sale as of April 1, 2000.
NOTE 4. LOANS
The following is a comparison of loans by type which were outstanding at December 31, 2001 and 2000:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. ALLOWANCE FOR LOAN LOSSES
The following is a summary of the activity in the allowance for loan losses:
2001 2000 1999 ============ ============ ============
Balance at beginning of year $ 4,408,389 $ 4,153,813 $ 3,859,996 Provisions charged against income 2,183,000 647,000 510,000 Recoveries of loans charged off 297,201 298,405 249,824 Loans charged off (1,655,012) (690,829) (466,007) ------------ ------------ ------------ Balance at end of year $ 5,233,578 $ 4,408,389 $ 4,153,813 ============ ============ ============
The following is a summary of information pertaining to impaired loans:
No additional funds are committed to be advanced in connection with imparied loans.
Nonaccrual loans excluded from impaired loan disclosure under FASB 114 amounted to $3,676,352 and $1,967,433 at December 31, 2001 and 2000. If interest on these loans had been accrued such income would have approximated $147,739 and $104,310, respectively.
NOTE 6. RELATED PARTY TRANSACTIONS
Loans to directors and officers totaled $7,929,127 and $8,385,639 at December 31, 2001 and 2000, respectively. New advances to directors and officers totaled $1,693,520 and repayments totaled $2,150,032 in the year ended December 31, 2001.
NOTE 7. BANK PREMISES AND EQUIPMENT A summary of the cost and accumulated depreciation of bank premises and equipment follows:
2001 2000 ============= =============
Land and land improvements $ 1,756,425 $ 1,302,497 Buildings 5,495,683 4,808,346 Furniture, fixtures and equipment 7,202,611 6,567,266 ------------- ------------- 14,454,719 12,678,109 Less accumulated depreciation 8,293,409 7,338,430 ------------- ------------- $ 6,161,310 $ 5,339,679 ============= =============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation and amortization expense amounted to $954,978, $962,038 and $899,474 for 2001, 2000 and 1999, respectively.
NOTE 8. DEPOSITS
The aggregate amount of certificate of deposit with a minimum denomination of $100,000 was $45,539,302 and $39,446,537 at December 31, 2001 and 2000, respectively.
At December 31, 2001, the scheduled maturities of certificates of deposit were as follows:
2002 $ 129,369,376 2003 31,732,293 2004 18,938,435 2005 5,363,572 2006 6,238,318 Thereafter 119,571 ---------------- Total $ 191,761,565 ================
NOTE 9. INCOME TAXES
Net deferred tax assets consist of the following components as of December 31, 2001and 2000:
2001 2000 =========== =========== Deferred tax assets: Depreciation and amortization $ 255,803 $ 240,337 Allowance for loan losses 1,564,934 1,284,370 Interest on nonaccrual loans 65,698 35,465 Pension liability 18,933 106,173 Deferred Compensation 119,308 -- Organizational costs 44,084 56,986 Other 5,760 13,806 ----------- ----------- 2,074,520 1,737,137 ----------- ----------- Deferred tax liabilities: Net unrealized gain on available for sale securities 496,050 106,376 FHLB dividend 7,888 7,888 ----------- ---------- 503,938 114,264 ----------- ---------- Net deferred tax asset $ 1,570,582 $1,622,873 =========== ===========
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Income tax expense charged to operations for the years ended December 31, 2001, 2000 and 1999, consists of the following:
2001 2000 1999 ============ ============ =========== Currently payable $ 1,987,382 $ 2,359,536 $ 2,365,021 Deferred tax (benefit) provision (337,383) (433,657) (154,418) ------------ ------------ ----------- $ 1,649,999 $ 1,925,879 $ 2,210,603 ============ ============ ===========
The income tax provision differs from the amount of income tax determined by applying the U.S. Federal income tax rate to pretax income for the years ended December 31, 2001, 2000 and 1999, due to the following:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. EMPLOYEE BENEFIT PLANS
PENSION PLAN
The Corporation has a defined benefit pension plan covering substantially all of the employees. Benefits are based on years of service and the employee's compensation during the last five years of employment. The Corporation's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributable to service to date but also for those expected to be earned in the future. Information about the plan follows:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
401(K) PLAN
The Corporation has a 401(k) defined contribution plan applicable to all eligible employees. Contributions to the Plan are made in accordance with proposals set forth and approved by the Board of Directors. Employees may elect to contribute to the Plan an amount not to exceed 4% of salary, in addition to the contribution made by the Corporation.
Contributions to this Plan by the Corporation of $73,619, $62,685 and $46,827 were included in expenses for the years ended December 31, 2001, 2000, and 1999, respectively.
During 2001, the Corporation entered into a deferred compensation agreement with the former President and CEO of a subsidiary bank, which provides benefits payable beginning April 1, 2002. The present value of the estimated liability under the agreement of $350,905 was expensed in the year ended December 31, 2001.
NOTE 11. STOCK OPTION PLAN
On September 21, 2000, the Corporation adopted the Eastern Virginia Bankshares, Inc. 2000 Stock Option Plan to provide a means for selected key employees and directors of the Corporation and its subsidiaries to increase their personal financial interest in the Corporation, thereby stimulating their efforts and strengthening their desire to remain with the Corporation. Under the Plan, up to 400,000 shares of Corporation common stock may be granted. No options may be granted under the Plan after September 21, 2010. As of December 31, 2001, no stock options had been granted under the Plan.
NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES
Southside Bank has entered into a long-term land lease for its Hartfield branch. The lease was entered into on May 9, 1988 and provides for an original term of fifteen years with an option to renew for two additional terms of ten years each, three additional terms of five years each and, thereafter, for five additional terms of five years each. Annual rent currently is $5,400 with an adjustment to monthly rent at renewal of .9% of the then monthly rent.
Hanover Bank rents its principal location in Mechanicsville from a related party under an operating lease. The lease was entered into on May 1, 2000 and provides for an original term of five years with two renewal options of five years each. Annual rent throughout the original lease term is $40,320.
Hanover Bank leases a banking facility in Ashland, Virginia under an operating lease. The lease was entered into on April 26, 2001 and provides for an original term of three years with one renewal option of five years. Annual rent ranges from $18,600 to $19,680 for the original term and increases during the renewal period from $21,600 to $24,000.
Hanover Bank leases a banking facility in the Ashland-Hanover Office Building under an operating lease. The lease was entered into on July 1, 2001 and provides for an original term of five years with two renewal options of five years each. Annual rent throughout this lease term is $45,960.
Total rent expense was $80,630, $32,280 and $5,400 for 2001, 2000, and 1999, respectively, and was included in occupancy expense.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a schedule by year of future minimum lease requirements required under the long-term noncancellable lease agreements:
2002 $ 111,330 2003 109,670 2004 96,371 2005 64,415 2006 25,864 -------------- Total $ 407,650 ==============
In the normal course of business there are outstanding various commitments and contingent liabilities, which are not reflected in the accompanying financial statements. Management does not anticipate any material losses as a result of these transactions.
See Note 16 with respect to financial instruments with off-balance-sheet risk.
NOTE 13. RESTRICTIONS ON TRANSFERS TO PARENT
Transfers of funds from banking subsidiaries to the Parent Corporation in the form of loans, advances and cash dividends, are restricted by federal and state regulatory authorities. As of December 31, 2001, retained net income, which was free of restriction, amounted to $1,278,572.
NOTE 14. FEDERAL HOME LOAN BANK ADVANCES AND AVAILABLE LINES OF CREDIT
At December 31, 2001, the Corporation's fixed-rate debt consisted of Federal Home Loan Bank advances of $6,000,000 at SSB. The advances mature through 2010. At December 31, 2001, the interest rates ranged from 5.62 percent to 5.92 percent with a weighted average interest rate of 5.87 percent. At December 31, 2000, SSB had a 5.62 percent fixed-rate, long-term advance of $2,000,000 and a variable rate advance of $5,000,000. The advances matured through 2010.
Advances on the line are secured by a blanket lien on the 1 to 4 family dwelling loan portfolio of SSB and BNI. Immediate available credit amounted to $47,946,549 for SSB and BNI.
The contractual maturities of the Federal Home Loan Bank advances are as follows:
Due in 2002 $ 1,000,000 Due in 2010 5,000,000 ------------------- $ 6,000,000 ===================
The Corporation has unused lines of credit totaling $11,700,000 with nonaffiliated banks as of December 31, 2001.
NOTE 15. DIVIDEND REINVESTMENT PLAN
The Corporation has in effect a Dividend Reinvestment Plan, which provides an automatic conversion of dividends into common stock for enrolled stockholders. It is based on the stock's fair market value on each dividend record date, and allows for voluntary contributions to purchase stock up to $5,000 per stockholder per calendar quarter.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation is party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract or notional amounts of those instruments reflect the extent of involvement the Corporation has in particular classes of financial instruments.
The Corporation's exposure to credit loss is represented by the contractual amount of these commitments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments.
At December 31, 2001 and 2000, the following financial instruments were outstanding whose contract amounts represent credit risk:
Contract Amount ------------------------------ 2001 2000 ------------- ------------- (in Thousands) Commitments to grant loans and unfunded commitments under lines of credit $ 40,796 $ 28,706 Standby letters of credit $ 900 $ 830
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Corporation, is based on management's credit evaluation of the customer.
Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are usually uncollateralized and do not always contain a specified maturity date and may not be drawn upon to the total extent to which the Corporation is committed.
Standby letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Corporation generally holds collateral supporting those commitments if deemed necessary.
The Corporation maintains cash accounts in other commercial banks. The amount on deposit with correspondent institutions at December 31, 2001, exceeded the insurance limits of the Federal Deposit Insurance Corporation by $8,394,006.
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK
The fair value of a financial instrument is the current amount that would be exchanged between willing parties, other than in a forced liquidation. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Corporation's various financial instruments. In cases where quoted market prices are not available, fair values are
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the fair discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Corporation.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value.
CASH AND SHORT-TERM INVESTMENTS
For those short-term instruments, the carrying amount is a reasonable estimate of fair value.
SECURITIES
For securities and marketable equity securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. For other securities held as investments, fair value equals quoted market price, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.
LOANS
For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans were estimated using discounted cash flow analyses, using interest rates currently being offered.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using market rates for deposits of similar remaining maturities.
SHORT-TERM BORROWINGS
The carrying amounts of federal funds purchased and other short-term borrowings maturing within 90 days approximate their fair values. Fair values of other short-term borrowings are estimated using discounted cash flow analyses based on the Corporation's current incremental borrowing rates for similar types of borrowing arrangements.
LONG-TERM DEBT
The fair values of the Corporation's long-term borrowings are estimated using discounted cash flow analyses based on the Corporation's current incremental borrowing rates for similar types of borrowing arrangements.
ACCRUED INTEREST
The carrying amounts of accrued interest approximate fair value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit is estimated using the fees currently charged to enter similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.
The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date.
At December 31, 2001 and 2000, the carrying amounts of loan commitments and standby letters of credit approximated fair value.
The estimated fair values and related carrying amounts of the Corporation's financial instruments are as follows:
The Corporation assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Corporation's financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Corporation. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a risking rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Corporation's overall interest rate risk.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. REGULATORY MATTERS
The Corporation (on a consolidated basis) and the subsidiary banks are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's and subsidiary banks' financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the subsidiary banks must meet specific capital guidelines that involve quantitative measures of their assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital adequacy require the Corporation and subsidiary banks to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined) in the regulations to risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average assets (as defined). Management believes, as of December 31, 2001 and 2000, that the Corporation meets all capital adequacy requirements to which it is subject.
As of December 31, 2001, the most recent notification from the Federal Reserve Bank categorized the subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the institutions must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the following table. There are no conditions or events since that notification that management believes have changed the institution's category.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Corporation's and the Banks' actual capital amounts and ratios are presented in the table.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
EASTERN VIRGINIA BANKSHARES, INC. (PARENT CORPORATION ONLY)
BALANCE SHEETS December 31, 2001 and 2000
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EASTERN VIRGINIA BANKSHARES, INC. (PARENT CORPORATION ONLY)
STATEMENTS OF INCOME For the Years Ended December 31, 2001, 2000 and 1999
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EASTERN VIRGINIA BANKSHARES, INC. (PARENT CORPORATION ONLY)
STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2001, 2000 and 1999
Southside Bank
Tapppahannock 307 Church Lane P.O. Box 1005 Tappahannock, VA 22560 (804) 443-4333
Urbanna 291 Virginia Street P.O. Box 817 Urbanna, VA 23175 (804) 758-3096
Tapppahannock Essex Square Office Essex Square Shopping Center P.O. Box 2128 Tappahannock, VA 22560 (804) 443-9381
Hartfield U.S. Route 3 & 33 P.O. Box 250 Hartfield, VA 23071 (804) 776-7677
Aylett 8270 Richmond/ Tappahannock Highway P.O. Box 123 Aylett, VA 23009 (804) 769-3001
Deltaville U.S. Route 1101 & 33 P.O. Box 188 Deltaville, VA 23043 (804) 776-0777
Bowling Green 202 N. Main Street P.O. Box 1009 Bowling Green, VA 22427 (804) 633-5075
Gloucester 7132 George Washington Memorial Highway P.O. Box 250 Gloucester, VA 23061 (804) 694-4700
[MAP]
Hanover Bank
Old Church 4241 Mechanicsville Turnpike P.O. Box 397 Mechanicsville, VA 23111 (804) 779-3232
Mechanicsville 8071 Mechanicsville Turnpike P.O. Box 397 Mechanicsville, VA 23111 (804) 559-9000
Airpark 10374 Leadbetter Road Ashland, VA 23005 (804) 550-7670
Ashland 201 N. Washington Hwy. Ashland, VA 23005 (804) 752-0100
Bank of Northumberland
Heathsville 6958 Northumberland Hwy. P.O. Box 9 Heathsville, VA 22473 (804) 580-3621
Callao 110 Northumberland Hwy. P.O. Box 1040 Callao, VA 22435 (804) 529-6158
Burgess 14953 Northumberland Hwy. P.O. Box 81 Burgess, VA 22432 (804) 453-7003
Kilmarnock 437 N. Main Street. P.O. Box 1937 Kilmarnock, VA 22482 (804) 435-2850
Eastern Virginia Bankshares 57
Directors/ Officers
Eastern Virginia Bankshares, Inc.
Directors
W. Rand Cook Partner McCaul, Martin, Evans & Cook, P.C
L. Edelyn Dawson, Jr. Senior Vice President Bank of Northumberland, Inc.
F. L. Garrett, III Realtor
F. Warren Haynie, Jr. Attorney-at-Law
Eric A. Johnson General Manager Mason Realty
William L. Lewis Attorney Lewis & Ware, P.C
Lewis R. Reynolds President and Chief Executive Officer Bank of Northumberland, Inc.
Ned Stephenson President & Chief Executive Officer Eastern Virginia Bankshares, Inc.
Howard R. Straughan, Jr. Retired Banker
Leslie E. Taylor President Leslie E. Taylor, C.P.A., P.C.
Jay T. Thompson, III President Mechanicsville Drug Store
Officers
Ronald L. Blevins Vice President and Chief Financial Officer
W. Rand Cook Chairman of the Board
L. Edelyn Dawson, Jr. Secretary
F. L. Garrett, III Vice Chairman
A. Faye Hundley Assistant Vice President
Joseph H. James, Jr. Vice President and Chief Operations Officer
Lisa A. Jones Assistant Vice President
Lewis R. Reynolds Senior Vice President
Ned Stephenson President and Chief Executive Officer
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Bank of Northumberland
Directors
Robert L. Covington Retired President and Chief Executive Officer Bank of Northumberland, Inc.
S. Lake Cowart, Sr. President, Cowart Seafood, Inc. Lake Packing Company, Inc. and Lake Farms, Inc.
L. Edelyn Dawson, Jr. Senior Vice President Bank of Northumberland, Inc.
F. Warren Haynie, Jr. Attorney-at-Law
Alfred D. Hurt, Jr., D.S.S. Dentist
W. Leslie Kilduff Retired Petroleum Products Distributor
Lewis R. Reynolds President and Chief Executive Officer Bank of Northumberland, Inc.
William E. Sanford, Jr. Real Estate Developer and Retired Farmer
Howard R. Straughan, Jr. Retired Banker
Officers
Sylvia O. Bartlett Assistant Vice President
Lisa K. Baughan Assistant Vice President
Robert L. Covington Chairman of the Board
L. Edelyn Dawson, Jr. Senior Vice President
Joyce W. Hall Assistant Cashier
Rebekah Byrd Haynie Assistant Cashier
W. Leslie Kilduff Vice Chairman
Dorothy C. Reynolds Cashier and Assistant Secretary
Lewis R. Reynolds President and Chief Executive Officer
C. Reuben Thrift, Jr. Vice President
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Hanover Bank
Directors
Robert P. Burcham, CPA Partner Cheely Burcham Eddins Rokenbrod & Carroll
W. Rand Cook Partner McCaul, Martin, Evans & Cook, P.C.
Michael E. Fiore, P.E. President Resource International, Ltd.
William E. Martin, Jr. President and Chief Executive Officer Hanover Bank
Jay T. Thompson, III President Mechanicsville Drug Store
John T. Wash President S. Galeski Optical
Officers
Todd B. Boyle Loan Operations Officer
W. Rand Cook Vice Chairman
Michael C. Dixon Vice President
Linda Franklin Branch Manager
Kyle H. Hendricks Assistant Vice President
R. Eric Knopf Assistant Vice President
Anthony P. Lewis Assistant Vice President
William E. Martin, Jr. President and Chief Executive Officer
Thomas J. McKittrick, III Vice President
M. Delores Nabors Branch Operations Officer
William D. Stegeman Senior Vice President and Chief Operating Officer
Jay T. Thompson, III Chairman of the Board
John T. Wash Secretary
====================================
58 Eastern Virginia Bankshares
Southside Bank
Directors
E. Gary Ball Vice President Ball Lumber Company
Thomas M. Boyd, Jr. Vice Chairman and Chief Executive Officer Southside Bank
W. Gerald Cox President Twin Rivers Realty, Inc.
F. L. Garrett, III Realtor
Eric A. Johnson General Manager Mason Realty
William L. Lewis Attorney Lewis & Ware, P.C.
William W. Lowery, III Part Owner Lowery's Restaurant
Harry A. Morris Attorney-at-Law & Counselor
Lawrence R. Moter, M.D. Physician
J. Thomas Newman Retired Senior Vice President Southside Bank
Charles R. Revere President Revere Gas & Appliance
Leslie E. Taylor President Leslie E. Taylor, C.P.A., P.C.
Emmett Upshaw Retired Clerk of the Court King William County
Officers
Brenda L. Ball Assistant Vice President
Patricia H. Barrett Vice President
Thomas M. Boyd, Jr. Vice Chairman and Chief Executive Officer
Patsy C. Clow Assistant Vice President
Debbie M. Coghill Loan Administration Officer
Dennis W. Elmore Vice President
Rick A. Fulk Assistant Vice President
Patricia H. Gallagher Assistant Vice President
Della P. Garrett Assistant Branch Manager
F. L. Garrett, III Chairman of the Board
Sherry S. Grantham Assistant Vice President
Gertrude C. Hand Teller Coordination Officer
Virginia S. Hogge Assistant Vice President
C. Tony Hudson Senior Vice President
Edwin P. Jones Assistant Vice President
Pamela P. Loving Loan Officer
Betty R. Miller Assistant Vice President
Dale Mitchell Assistant Compliance Officer
John L. Muller Vice President
J. Thomas Newman Secretary
J. Lloyd Railey Chief Financial Officer
Stephanie S. Robins Assistant Branch Manager
Joe A. Shearin President and Chief Operating Officer
Clay S. Smith Assistant Branch Manager
Kavan W. Snow Assistant Vice President
Catherine W. Snowden Assistant Branch Manager
Mae W. Staton Assistant Vice President
James R. Stevens Assistant Branch Manager
Annie S. Stone Assistant Branch Manager
Ned Ware Assistant Vice President
George W. Watkins Loan Officer
EVB Investments, Inc.
Directors
Thomas M. Boyd, Jr. Vice Chairman and Chief Executive Officer Southside Bank
William E. Martin, Jr President and Chief Executive Officer Hanover Bank
Lewis R. Reynolds President and Chief Executive Officer Bank of Northumberland, Inc.
William D. Stegeman Senior Vice President and Chief Operating Officer Hanover Bank
Ned Stephenson President and Chief Executive Officer Eastern Virginia Bankshares, Inc.
Officers
Brian R. Logan Investment Officer
William E. Martin, Jr Chairman
William D. Stegeman President and Managing Director
Dennis S. Wilt Vice President
==========================================
Eastern Virginia Bankshares 59
Stockholder Information
Corporate Office
Eastern Virginia Bankshares, Inc. 217 Duke Street, P.O. Box 1455 Tappahannock, VA 22560
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Annual Meeting
The Annual Meeting of Stockholders will be held Thursday, April 18, 2002, at 10:00 A.M. at Saint Margaret's School, 444 Water Lane, Tappahannock, Virginia. All stockholders are cordially invited to attend.
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Common Stock
Eastern Virginia Bankshares common stock is traded on the NASDAQ Small Cap Market under the symbol EVBS. On December 31, 2001, there were approximately 2,000 shareholders. The CUSIP number is 277196101.
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Independent Auditors
Yount, Hyde & Barbour, PC. 50 South Cameron Street Winchester, VA 22604
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Local Market Makers (known)
Branch, Cabell Davenport & Company, LLC Ferris, Baker Watts, Inc. Scott & Stringfellow
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Common Stock Price Dividends Declared ---------------------------------- ------------------ 2001 2000 2001 2000 ---------------------------------- ------------------ High Low High Low
First Quarter $17.50 $14.25 $20.00 $11.00 $0.13 $0.13 Second Quarter 17.70 14.60 17.00 13.12 0.13 0.13 Third Quarter 15.60 14.25 17.75 14.50 0.13 0.13 Fourth Quarter 15.40 13.87 18.00 12.50 0.13 0.13
Investor Relations
Eastern Virginia Bankshares' Annual Report, Form 10-K and other corporate publications are available to shareholders on request without charge by writing: Ronald L. Blevins Eastern Virginia Bankshares, Inc. P. 0. Box 1455 Tappahannock, VA 22560 (804)443-8423 Fax (804)445-1047
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Direct Deposit of Cash Dividends
Shareholders of Eastern Virginia Bankshares, Inc. common stock may have their cash dividend deposited automatically on the date of payment, to a checking, savings, or money market account in a financial institution that participates in an Automatic Clearing House. Shareholders who wish to receive direct deposit may contact the dividend paying agent, Eastern Virginia Bankshares, at (804) 443-8421.
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Transfer Agent
Shareholders requiring information on stock transfers, lost certificates, dividends and other shareholder matters should contact the transfer agent: Eastern Virginia Bankshares, Inc. Stock Transfer Agent P. 0. Box 1455 Tappahannock, VA 22560 (804) 443-8421 Toll free 1-866-443-8421
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Automatic Dividend Reinvestment and Stock Purchase Plan
Eastern Virginia Bankshares, Inc. offers its shareholders a Plan whereby they may automatically invest their cash dividends in EVB stock, at the market price on the dividend record date. Shareholders who wish to enroll in the Plan should contact the Stock Transfer Agent, above.
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60 Eastern Virginia Bankshares