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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________to ____________
Commission File No. 333-37225
EASTERN VIRGINIA BANKSHARES, INC.
(Exact name of registrant as specified in its charter)
VIRGINIA 54-1866052
(State of Incorporation) (I.R.S. Employer Identification No.)
217 Duke Street, Tappahannock, Virginia 22560
(Address of principal executive offices)
Registrant's telephone number (804) 443-8423
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, $2 Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes x No __
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this form 10-K. [ ]
The aggregate market value of common stock held by non-affiliates of the
registrant as of March 1, 2002 was approximately $78,360,336.
The number of shares of the registrant's Common Stock outstanding as of March
1, 2002 was 4,897,521.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive Proxy Statement dated March 25, 2002, to be delivered
to shareholders in connection with the Annual Meeting of Shareholders to be held
April 18, 2002 are incorporated by reference into Part III.
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Business Profile
The primary mission of Eastern Virginia Bankshares is to produce maximum value
for its shareholders by operating strong, independent, financial services
providers, by delivering quality service to customers, and by contributing to
the economic vitality and quality of life in the communities we serve, while
providing a good work environment for our employees.
[LOGO]
Southside Bank
--------------------
Bank of
Northumberland, Inc.
--------------------
Hanover Bank
Selected Financial Data
(in thousands except ratios and per share amounts)
Year Ended December 31
------------------------------------------------
2001 2000 1999 1998 1997
------------------------------------------------
Income Statement Data:
Interest income $ 32,903 $ 30,728 $ 27,637 $ 26,670 $ 25,093
Interest expense 15,373 14,513 11,867 11,846 11,144
------ -------- -------- -------- --------
Net interest income 17,530 16,215 15,770 14,824 13,949
Provision for loan losses 2,183 647 510 449 412
-------- -------- -------- -------- --------
Net interest income after provision for loan 15,347 15,568 15,260 14,375 13,537
losses
Noninterest income 2,636 2,235 1,799 1,764 1,469
Securities gains (losses) 7 (10) (76) 8 (28)
Non-interest expense 11,460 10,346 8,813 8,442 7,705
-------- -------- -------- -------- --------
Income before income taxes 6,530 7,447 8,170 7,705 7,273
Income taxes 1,650 1,926 2,210 2,088 1,965
-------- -------- -------- -------- --------
Net Income $ 4,880 $ 5,521 $ 5,960 $ 5,617 $ 5,308
=================================================
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Per Share Data:
Net Income, basic and assuming dilution $ 0.99 $ 1.12 $ 1.17 $ 1.08 $ 1.02
Cash dividends 0.52 0.52 0.48 0.44 0.34
Book value at period end 9.67 9.10 8.50 8.22 7.57
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Balance Sheet Data:
Assets 467,263 407,105 377,839 347,995 323,430
Loans, net of unearned income 347,977 301,032 273,858 239,664 227,981
Securities 91,880 83,403 88,076 81,333 78,098
Deposits 408,241 350,414 322,647 304,330 280,882
Shareholders' equity 47,392 45,031 42,795 42,257 39,265
Average shares outstanding 4,915 4,948 5,092 5,179 5,188
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Performance Ratios
Return on average assets 1.13% 1.40% 1.64% 1.66% 1.68%
Return on average equity 10.47% 12.94% 13.95% 13.56% 13.97%
Dividend payout 52.45% 46.57% 41.08% 40.52% 32.78%
Efficiency (1) 54.74% 53.63% 47.83% 48.45% 47.26%
Average equity to average assets 10.75% 10.85% 11.78% 12.26% 12.01%
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Asset Quality Ratios:
Allowance for loan losses to period end loans 1.50% 1.46% 1.52% 1.61% 1.70%
Allowance for loan losses to nonaccrual loans 112.52% 224.10% 227.99% 237.39% 127.99%
Nonperforming assets to period
end loans and other real estate 1.34% 0.95% 1.24% 1.29% 1.77%
Net charge-offs to average loans 0.43% 0.14% 0.08% 0.20% 0.09%
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Capital and Liquidity Ratios:
Leverage 10.08% 11.14% 11.98% 12.39% 12.87%
Risk-based capital ratios:
Tier 1 capital 14.79% 16.58% 17.98% 19.34% 19.30%
Total capital 16.05% 17.89% 19.24% 20.59% 20.56%
Average loans to average deposits 84.82% 85.42% 81.98% 79.23% 79.01%
- ---------------------------------------------------------------------------------------------------------
Note: (1) Efficiency ratio is computed by dividing non-interest expense by the
sum of net-interest income on a tax equivalent basis and non-interest
income, net of securities gains or losses.
2 Eastern Virginia Bankshares
To Our Stockholders
On behalf of the Board of Directors of Eastern Virginia Bankshares, we are
pleased to present the following annual report for your Company for 2001. The
year was a memorable one for your Company, for the economy, and for our Nation.
Change has visited all of us in ways we never thought possible, and your Company
was no exception.
At the close of 2001, Eastern Virginia Bankshares owned three independent
banks, spanning 8 Counties with 16 service locations. Ending the year with
assets of over $467 million, your Company operated in the lowest interest rate
environment in 40 years, in the most technologically advanced period in history,
and with unprecedented competition among financial service providers. From this
climate of change, Eastern Virginia Bankshares emerged profitable, safe, sound,
and poised for the future.
Next to our employees, your capital is our most precious resource. It is
your stake in the enterprise, and the standard against which we measure our
performance. Eastern Virginia Bankshares recorded net earnings in 2001 of $4.88
million and paid 52% of this to you in dividends, using the remainder to
increase your capital to $47.4 million. Your return on average equity for 2001
was 10.47%, down from 12.94% the year before. While core earnings were strong,
net income was diminished by a $1.5 million increase in the provision for loan
losses, and start-up expenses associated with 3 new branches.
Growth of the Company is one of our strategic objectives and is necessary
to keep your capital at work. During 2001, total assets grew 14.8% to $467
million, with much credit due to our newest enterprise, Hanover Bank. Marty
Martin, President of Hanover Bank, has assembled a strong team of banking
professionals and they have done an outstanding job of building that bank. We
have often referred to Hanover Bank as our Company's "growth engine" and
President Martin has helped that come true in 2001.
Operating efficiency is essential to any well-run organization. The banking
industry uses a ratio to measure efficiency, and Eastern Virginia Bankshares has
one of the best efficiency ratios (55% in 2001) among peer institutions. As the
Company strives for continuous improvement in this area, the Bank of
Northumberland has set the pace for all of us, with an efficiency ratio far
superior to any other bank in the State. President Lewis Reynolds and his staff
have made extraordinary achievements in this area and we all recognize the value
of his efforts.
Of all the changes we experienced in 2001, none were more memorable than
those of Southside Bank. Our long-time, esteemed leader, Tom Boyd, announced his
upcoming retirement in early 2002, marking the 20th year of his leadership with
the Company, and 20 years of growth and prosperity for Southside Bank. This past
summer, we all welcomed Joe Shearin to Southside Bank, to succeed Tom as
President of the Bank. Thanks to Tom and Joe, the transition has been very
smooth for Southside Bank and the Bank's future is in capable hands. We shall
miss Tom and his contribution to all of us, personally and corporately.
Southside Bank is the largest bank within our corporate family and contributes
more earnings than any other bank, and Tom has played a major role in those
contributions.
Technological improvements throughout the Company are fast-paced, and
ever-changing. New delivery systems to maintain superior customer service, such
as statement imaging and Internet banking, are part of our strategic plan, and
require vision and resources. Chief Operating Officer Joe James and his staff
provide much of that vision as he works within Eastern Virginia Bankshares to
maintain state-of-the-art systems to serve our entire corporate family. This
centralized approach to technology empowers our independent banks to maintain
high levels of personal service to customers while sharing technological
resources. We are fortunate to have Joe and his staff to provide these services.
Eastern Virginia Bankshares 3
Eastern Virginia Bankshares Board of Directors:
1st row: Ned Stephenson, W. Rand Cook,
2nd row: J.T. Thompson, III, Lewis R. Reynolds, Leslie E. Taylor,
Howard R. Straughan, Jr.,
3rd row: F. Warren Haynie, Jr., Eric A. Johnson, L. Edelyn Dawson, Jr.,
F.L. Garrett, III, William L. Lewis.
[PHOTO]
Also this year, we report that our Company's founding Chairman, Robert L.
Covington, Jr., announced his retirement from the Board of Directors and W. Rand
Cook was unanimously elected to succeed Mr. Covington. Mr. Cook brings excellent
leadership skills to this vital position and both Board and Management have
confidence in his ability. Mr. Covington remains a part of our corporate family
as he continues to serve on the Board of the Bank of Northumberland.
There are so many dedicated and capable people within the Company that make
enormous contributions, often without notice or recognition. Eastern Virginia
Bankshares stands strong because of these people, and because of the continued
support from our customers and shareholders. We thank each of them for their
contributions to the Company, and look forward to the opportunities of the new
year.
/s/ Ned Stephenson /s/ W. Rand Cook
- ------------------ ---------------------
Ned Stephenson W. Rand Cook
President and CEO Chairman of the Board
4 Eastern Virginia Bankshares
EASTERN VIRGINIA BANKSHARES, INC.
FORM 10-K
For the Year Ended December 31, 2001
INDEX
Part I
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Item 1. Business 7
Item 2. Properties 7
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Part II
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Item 5. Market for Registrants Common Stock and Related Stockholder Matters 8
Item 6. Selected Financial Data 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 7a. Quantitative and Qualitative Disclosures About Market Risk 22
Item 8. Financial Statements and Supplementary Data 24
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures 24
Part III
- --------
Item 10. Directors and Executive Officers of the Registrant 24
Item 11. Executive Compensation 25
Item 12. Security Ownership of Certain Beneficial Owners and Management 25
Item 13. Certain Relationships and Related Transactions 25
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 25
Signatures 26
6
PART 1
ITEM 1. BUSINESS
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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. PROPERTIES
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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. LEGAL PROCEEDINGS
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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. 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.
7
PART II
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. 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. 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.
8
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
Three Months Ended
--------------------------------------------------------------------------------
2001 2000
--------------------------------------- --------------------------------------
Dec. 31 Sep. 30 June 30 Mar. 31 Dec. 31 Sep. 30 June 30 Mar. 31
======================================= ======================================
Interest income $ 8,331 $ 8,278 $ 8,248 $ 8,046 $ 7,997 $ 7,766 $ 7,610 $ 7,355
Interest expense 3,634 3,860 3,948 3,931 3,919 3,769 3,523 3,302
------- ------- ------- ------- ------- ------- ------- -------
Net interest income 4,697 4,418 4,300 4,115 4,078 3,997 4,087 4,053
Provision for loan losses 1,064 587 268 264 249 127 139 132
------- ------- ------- ------- ------- ------- ------- -------
Net interest income after
provision for loan losses 3,633 3,831 4,032 3,851 3,829 3,870 3,948 3,921
Noninterest income 727 641 654 621 654 533 548 490
Noninterest expense 2,995 2,708 3,115 2,642 2,847 2,551 2,508 2,440
------- ------- ------- ------- ------- ------- ------- -------
Income before applicable income taxes 1,365 1,764 1,571 1,830 1,636 1,852 1,988 1,971
Applicable income taxes 261 486 420 483 395 471 576 484
------- ------- ------- ------- ------- ------- ------- -------
Net Income $ 1,104 $ 1,278 $ 1,151 $ 1,347 $ 1,241 $ 1,381 $ 1,412 $ 1,487
====================================== =====================================
Net income per share, $ 0.23 $ 0.26 $ 0.23 $ 0.27 $ 0.25 $ 0.28 $ 0.29 $ 0.30
basic and diluted
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.
9
AVERAGE BALANCE, INCOME AND EXPENSE, YIELDS AND RATES /(1)/
Twelve Months Ended December 31
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2001 2000 1999
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
------- ------- ---- ------- ------- ---- ------- ------- -----
Assets:
Securities
Taxable $ 47,472 $ 3,039 6.40% $ 42,838 $ 2,808 6.55% $ 40,574 $ 2,626 6.47%
Tax exempt /(1)/ 37,849 2,524 6.67% 39,603 2,755 6.96% 40,571 2,804 6.91%
--------- --------- ---------- --------- ---------- ---------
Total securities 85,321 5,563 6.52% 82,441 5,563 6.75% 81,145 5,430 6.69%
Federal funds sold 10,960 389 3.55% 6,679 437 6.54% 9,137 455 4.98%
Loans (net of unearned income) 319,165 27,722 8.69% 287,729 25,571 8.89% 257,876 22,612 8.77%
--------- --------- ---------- --------- ---------- ---------
Total earning assets 415,446 33,674 8.11% 376,849 31,571 8.38% 348,158 28,497 8.19%
Less allowance for loan losses (4,725) (4,296) (4,020)
Total non-earning assets 22,842 20,430 18,584
--------- ---------- ----------
Total assets $ 433,563 $ 392,983 $ 362,722
========== ========== ==========
Liabilities & Shareholders' Equity
Interest checking $ 44,218 $ 855 1.93% $ 40,545 $ 1,023 2.52% $ 36,546 $ 902 2.47%
Regular savings 75,342 2,545 3.38% 67,477 2,653 3.93% 72,953 2,696 3.70%
Money market accounts 28,274 841 2.97% 25,942 860 3.32% 27,402 866 3.16%
Large dollar certificates of deposit 44,394 2,644 5.96% 34,040 2,009 5.90% 24,801 1,300 5.24%
Consumer certificates of deposit 143,658 8,104 5.64% 133,673 7,373 5.52% 118,938 5,970 5.02%
--------- --------- --------- --------- ---------- ---------
Total interest-bearing deposits 335,886 14,989 4.46% 301,677 13,918 4.61% 280,640 11,734 4.18%
Short-term borrowings 88 6 6.82% 3,531 224 6.34% 409 23 5.62%
Long-term borrowings 6,353 378 5.95% 6,320 371 5.87% 1,923 110 5.72%
--------- --------- --------- --------- ---------- ---------
Total interest-bearing liabilities 342,327 15,373 4.49% 311,528 14,513 4.66% 282,972 11,867 4.19%
Noninterest-bearing liabilities
Demand deposits 40,376 35,160 33,903
Other liabilities 4,270 3,641 3,127
--------- --------- ----------
Total liabilities 386,973 350,329 320,002
Shareholders' equity 46,591 42,654 42,720
--------- --------- ----------
Total liabilities and
shareholders' equity $ 433,564 $ 392,983 $ 362,722
========== --------- ==========
Net interest income $ 18,301 $ 17,058 $ 16,630
========== ========= =========
Interest rate spread /(3)/ 3.61% 3.72% 4.00%
Interest expense as a percent of
average earning assets 3.70% 3.85% 3.41%
Net interest margin /(4)/ 4.41% 4.53% 4.78%
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
10
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
2001 vs. 2000 2000 vs. 1999
Increase (Decrease) Increase (Decrease)
Due to Changes in: Due to Changes in:
--------------------------------- ------------------------------
Volume Rate Total Volume Rate Total
- -------------------------------------------------------------------------- ------------------------------
Earning Assets:
Taxable securities $ 297 $ (66) $ 231 $ 149 $ 33 $ 182
Tax exempt securities
(121) (110) (231) (69) 20 (49)
Loans, (net)
2,790 (639) 2,151 2,618 341 2,959
Federal funds sold
280 (328) (48) (122) 104 (18)
------- --------- ------- ------- -------- --------
Total earning assets
3,246 (1,143) 2,103 2,576 498 3,074
Interest-Bearing Liabilities:
Interest checking
93 (261) (168) 101 21 122
Savings deposits
308 (416) (108) (215) 172 (43)
Money market accounts
78 (97) (19) (46) 40 (6)
Consumer certificates of deposit
557 174 731 807 595 1,402
Large denomination certificates
609 26 635 545 164 709
Short-term borrowings
(218) - (218) 176 25 201
Long-term borrowings 2 5 7 252 9 261
------- --------- ------- ------- -------- --------
Total interest-bearing liabilities 1,429 (569) 860 1,620 1,026 2,646
------- --------- ------- ------- -------- --------
Change in net interest income $1,817 $ (574) $1,243 $ 956 $ (528) $ 428
=============================== ============================
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.
11
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.
Year Ended December 31
---------------------------------------------
(Dollars in thousands) 2001 2000 1999
- ---------------------- ---------------------------------------------
Service charges on deposit accounts $ 1,968 $ 1,686 $ 1,311
Gain (loss) on securities 7 (10) (76)
Other operating income 668 549 488
------- ---------- ---- ---------- ---
$ 2,643 $ 2,225 $ 1,723
=============================================
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%.
Years Ended December 31
(Dollars in thousands) 2001 2000 1999
- -------------------------------------- ----------------------------------------------------
Salaries and employee benefits $ 6,477 $ 5,345 $ 4,729
Net occupancy and equipment 1,596 1,563 1,464
Printing and supplies 430 512 368
Advertising and marketing 374 431 236
Other operating expenses 2,583 2,496 2,016
-------- -------- -------
Total noninterest expense $ 11,460 $ 10,347 $ 8,813
====================================================
12
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.
December 31
------------------------------------------------------------------------
(Dollars in thousands) 2001 2000 1999 1998 1997
- ----------------------------------------------- ------------------------------------------------------------------------
Commercial, industrial and agricultural loans $ 43,809 $ 34,807 $ 31,003 $ 30,649 $ 32,901
Residential real estate mortgage 179,641 163,573 152,905 130,856 118,639
Real estate construction 10,708 9,021 8,267 6,096 6,340
Commercial real estate 49,239 36,183 33,103 23,114 27,324
Consumer loans 68,605 61,506 51,890 51,481 45,723
All other loans 652 448 460 961 294
-------- -------- -------- --------- --------
Total loans 352,654 305,538 277,628 243,157 231,221
Less unearned income (4,657) (4,507) (3,770) (3,493) (3,330)
-------- -------- -------- --------- --------
Total net loans $347,997 $301,031 $273,858 $ 239,664 $227,891
========================================================================
13
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.
14
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
(Dollars in thousands) 2001 2000 1999 1998 1997
- --------------------------------------------------- ------------------------------------------------------------------------
Average loans outstanding, net of $ 319,165 $ 287,729 $ 257,876 $ 232,605 $ 217,320
unearned income
Allowance for loan losses, January 1 4,408 4,154 3,860 3,868 3,643
Loans charged off:
Commercial and agricultural
548 203 71 213 252
Real estate
38 78 37 2 12
Consumer 1,069 410 358 452 381
--------- --------- --------- --------- ---------
Total loans charged off 1,655 691 466 667 645
Recoveries:
Commercial and agricultural
1 106 46 24 279
Real estate
18 24 17 20 6
Consumer 279 168 187 166 173
--------- --------- --------- --------- ---------
Total recoveries 298 298 250 210 458
--------- --------- --------- --------- ---------
Net loans charged off 1,357 393 216 457 187
Provision for loan losses 2,183 647 510 449 412
--------- --------- --------- --------- ---------
Balance, end of year $ 5,234 $ 4,408 $ 4,154 $ 3,860 $ 3,868
========================================================================
15
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.
(Dollars in thousands) 2001 2000 1999 1998 1997
- --------------------------------------------------------- -----------------------------------------------------------
Nonaccrual loans $ 4,651 $ 1,967 $ 1,822 $ 1,626 $ 3,022
Restructured loans - - - - -
Loans past due 90 days and accruing interest 9 520 1,345 1,190 927
--------- --------- --------- --------- ---------
Total nonperforming loans 4,660 2,487 3,167 2,816 3,949
Other real estate owned - 378 243 268 86
--------- --------- --------- --------- ---------
Total nonperforming assets $ 4,660 $ 2,865 $ 3,410 $ 3,084 $ 4,035
===========================================================
Nonperforming assets to total loans and 1.34% 0.95% 1.24% 1.29% 1.77%
other real estate
Allowance for loan losses to nonaccrual loans 112.52% 224.10% 227.99% 237.39% 127.99%
Net charge-offs to average loans for the year 0.43% 0.14% 0.08% 0.20% 0.09%
Allowance for loan losses to year end loans 1.50% 1.46% 1.52% 1.61% 1.70%
Foregone interest income on nonaccrual loans $ 193 $ 104 $ 151 $ 98 $ 308
Interest income recorded on nonaccrual loans $ - $ - $ - $ 7 $ 2
16
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
December 31, 2001 December 31, 2000 December 31, 1999
---------------------------------------------------------------------------
Percent of Percent of Percent of
loans loans loans
in each in each in each
category category category
Amount to total Amount to total loans Amount to total
loans loans
---------------------------------------------------------------------------
Commercial and agricultural $ 1,407 12.59% $ 1,260 11.56% $ 1,233 11.32%
Real estate mortgage 1,369 51.61% 1,398 54.34% 1,429 55.83%
Real estate construction 108 3.08% 32 3.00% 30 3.02%
Commercial real estate 537 14.15% 128 12.02% 133 12.09%
Consumer 1,602 18.38% 1,441 18.93% 1,191 17.57%
Other loans 3 0.19% 2 0.15% 2 0.17%
------- ----- ------- ----- ------- -----
Total allowance for balance sheet loans 5,026 100.00% 4,261 100.00% 4,018 100.00%
Allowance for off balance sheet risk 208 147 136
------- ------- -------
Total allowance for loan losses $ 5,234 $ 4,408 $ 4,154
December 31, 1998 December 31, 1997
---------------------------------------------------------
Percent of Percent of
loans loans
in each in each
category category
Amount to total loans Amount to total loans
---------------------------------------------------------
Commercial and agricultural $ 1,244 12.79% $ 1,346 14.21%
Real estate mortgage 1,209 54.60% 1,207 51.29%
Real estate construction 25 2.54% 65 2.78%
Commercial real estate 193 9.65% 279 11.82%
Consumer 1,186 20.02% 969 19.77%
Other loans 3 0.40% 2 0.13%
------- ------- ------- -------
Total allowance for loan losses $ 3,860 100.00% $ 3,868 100.00%
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.
17
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.
December 31, 2001 December 31, 2000 December 31, 1999
--------------------------- ----------------------- ------------------------
Amortized Fair Amortized Fair Amortized Fair
(Dollars in thousands) Cost Value Cost Value Cost Value
- ---------------------------------- --------------------------- ----------------------- ------------------------
Available for sale:
U.S. Treasury securities $ 4,060 $ 4,156 $ 7,195 $ 7,216 $ 8,517 $ 8,457
U.S. government agency securities 17,676 17,897 18,704 18,656 16,157 15,624
Mortgage-backed securities 8,224 8,257 5,705 5,733 7,124 6,962
States and political subdivisions 47,694 48,635 42,828 43,139 7,034 6,853
Corporate bonds 10,296 10,464 6,174 6,173 4,278 4,198
Equity securities 2,471 2,471 2,486 2,486 1,202 1,202
-------- -------- -------- -------- -------- --------
Total available for sale 90,421 91,880 83,092 83,403 44,312 43,296
Held to maturity:
States and political subdivisions - - - - 44,780 44,451
-------- -------- -------- -------- --------- --------
Total securities $ 90,421 $ 91,880 $ 83,092 $ 83,403 $ 89,092 $ 87,747
=========================== ======================= ========================
MATURITY DISTRIBUTION AND YIELDS OF SECURITIES
December 31, 2001
-------------------------------------------------------------------------------------------------------
Due after 1 through Due after 5 through Due after 10 years and
Due in 1 year or less 5 years 10 years equity securities Total
-------------------------------------------------------------------------------------------------------
(Dollars in thousands) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ---------------------------- ------ ----- ------ ----- ------ ----- ------ ----- ------ ------
U.S. Government securities $ 6,320 6.00% $17,159 5.31% $ 4,816 6.81% $2,015 6.33% $30,310 5.76%
Taxable municipals /(1)/ 547 6.24% 2,385 6.85% 5,014 6.95% - - 7,946 6.87%
Tax exempt municipals 3,460 6.85% 12,283 6.83% 19,910 6.85% 5,036 6.74% 40,689 6.83%
Corporate bonds 1,372 6.18% 5,077 6.39% 3,746 7.72% 269 8.00% 10,464 6.88%
Equity securities - - - - - - 2,471 6.43% 2,471 6.43%
-------- ------- ------- ------ -------
Total securities $ 11,699 6.28% $36,904 6.06% $33,486 6.96% $9,791 6.61% $91,880 6.47%
=================== =================== =================== ====================== ================
/(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.
18
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
For the Years Ending December 31
---------------------------------------------------------------------------------
2001 2000 1999
-------------------------- ------------------------- ----------------------
(Dollars in thousands) Amount Rate Amount Rate Amount Rate
- ------------------------------------- -------------------------- ------------------------- ----------------------
Noninterest bearing accounts $ 40,376 $ 35,160 $ 33,903
Interest bearing accounts
Interest checking 44,218 1.93% 40,545 2.52% 36,546 2.47%
Money market 28,274 2.97% 25,942 3.32% 27,402 3.16%
Regular savings 75,342 3.38% 67,477 3.93% 72,953 3.70%
Consumer certificates of deposit 143,658 5.64% 133,673 5.52% 118,938 5.02%
Large denomination certificates 44,494 5.96% 34,040 5.90% 24,801 5.24%
---------- ---------- ----------
Total interest bearing 335,986 4.46% 301,677 4.61% 280,640 4.18%
---------- ----- ---------- ----- ---------- -----
Total average deposits $ 376,362 $ 336,837 $ 314,543
========== ========== ==========
- -----------------------------------------------------------------------------------------------------------------------------
MATURITIES OF LARGE DENOMINATION CERTIFICATES OF DEPOSIT
Percent
Within 3-12 1-3 Over 3 of Total
(Dollars in thousands) 3 Months Months Years Years Total Deposits
- ----------------------- --------- -------- -------- --------- -------- ----------
At December 31, 2001 $ 9,445 $ 19,741 $ 11,876 $ 4,477 $ 45,539 11.15%
At December 31, 2000 $ 4,849 $ 22,518 $ 9,312 $ 2,768 $ 39,447 11.26%
At December 31, 1999 $ 4,437 $ 15,128 $ 5,821 $ 3,800 $ 29,186 9.05%
19
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
December 31
----------------------------------------
(Dollars in thousands) 2001 2000 1999
- -------------------------------- ----------------------------------------
Tier 1 capital:
Common stock $ 9,802 $ 9,897 $ 10,065
Additional paid in capital 0 590 2,014
Retained earnings 36,627 34,338 31,388
---------- ---------- ----------
Total Tier 1 capital 46,429 44,825 43,467
Tier 2 capital:
Allowable portion of
allowance for loan losses 3,940 3,380 3,036
---------- ---------- ----------
Total risk-based capital 50,369 48,205 46,503
Risk-weighted assets 313,921 269,391 241,734
Capital ratios:
Tier 1 risk based capital 14.79% 16.58% 17.98%
Total risk based capital 16.05% 17.89% 19.24%
Tier 1 capital to average
total assets 10.08% 11.14% 11.98%
20
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.
21
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. 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.
22
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%
23
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. 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,
2001
. 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,
2001
. Notes to Consolidated Financial Statements
. Independent Auditor's Report
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURES
----------------------------------------------------------------------
None.
PART III
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.
24
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. 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. 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. 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. 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
25
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)
26
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27
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28
EASTERN VIRGINIA BANKSHARES, INC.
AND SUBSIDIARIES
Tappahannock, Virginia
FINANCIAL REPORT
DECEMBER 31, 2001
29
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
30
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
31
EASTERN VIRGINIA BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2000
Assets 2001 2000
------------ ------------
Cash and due from banks $ 16,107,054 $ 14,160,519
Federal funds sold 4,765,534 1,930,730
Securities available for sale, at fair value 91,879,699 83,403,437
Loans, net of allowance for loan losses of $5,233,578 in
2001 and $4,408,389 in 2000 342,763,369 296,623,488
Deferred income taxes 1,570,582 1,622,873
Bank premises and equipment 6,161,310 5,339,679
Accrued interest receivable 2,739,696 2,909,766
Other real estate - - 377,605
Other assets 1,275,472 736,705
------------ ------------
Total assets $467,262,716 $407,104,802
============ ============
Liabilities and Shareholders' Equity
Liabilities
Noninterest-bearing deposits $ 45,159,948 $ 38,126,362
Interest-bearing deposits 363,080,705 312,287,508
------------ ------------
Total deposits 408,240,653 350,413,870
Federal funds purchased - - 1,048,000
Federal Home Loan Bank advances 6,000,000 7,000,000
Accrued interest payable 1,063,481 1,180,767
Other liabilities 4,566,506 2,431,236
Commitments and contingent liabilities - - - -
------------ ------------
Total liabilities 419,870,640 362,073,873
------------ ------------
Shareholders' Equity
Common stock of $2 par value per share; authorized
50,000,000 shares; issued and outstanding,
4,901,095 in 2001 and 4,948,410 in 2000 9,802,190 9,896,820
Surplus - - 589,487
Retained earnings 36,626,982 34,338,126
Accumulated other comprehensive income 962,904 206,496
------------ ------------
Total shareholders' equity 47,392,076 45,030,929
------------ ------------
Total liabilities and shareholders' equity $467,262,716 $407,104,802
============ ============
See Notes to Consolidated Financial Statements.
32
EASTERN VIRGINIA BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
----------- ----------- -----------
Interest and Dividend Income
Loans and fees on loans $27,722,179 $25,571,390 $22,612,036
Interest on investments:
Taxable interest income 2,773,128 2,742,571 2,549,910
Tax exempt interest income 1,753,275 1,913,109 1,944,000
Dividends 265,250 64,941 76,349
Interest on Federal funds sold 389,205 436,585 454,752
----------- ----------- -----------
Total interest and dividend income 32,903,037 30,728,596 27,637,047
----------- ----------- -----------
Interest Expense
Deposits 14,989,686 13,918,610 11,733,908
Federal funds purchased 6,105 61,440 8,408
Interest on FHLB advances 377,641 533,055 124,565
----------- ----------- -----------
Total interest expense 15,373,432 14,513,105 11,866,881
----------- ----------- -----------
Net interest income 17,529,605 16,215,491 15,770,166
Provision for Loan Losses 2,183,000 647,000 510,000
----------- ----------- -----------
Net interest income after provision
for loan losses 15,346,605 15,568,491 15,260,166
Noninterest Income
Service charges on deposit accounts 1,967,549 1,685,730 1,310,741
Gain (loss) on sale of available for sale securities 7,167 (9,716) (76,268)
Other operating income 668,859 549,165 488,691
----------- ----------- -----------
Total noninterest income 2,643,575 2,225,179 1,723,164
----------- ----------- -----------
Noninterest Expenses
Salaries and benefits 6,476,882 5,344,842 4,729,395
Net occupancy expense 1,389,620 1,329,190 1,226,329
Advertising and marketing 374,262 430,616 236,117
Printing and supplies 429,586 511,845 368,338
Other operating expenses 2,790,097 2,730,337 2,252,909
----------- ----------- -----------
Total noninterest expenses 11,460,447 10,346,830 8,813,088
----------- ----------- -----------
Income before income taxes 6,529,733 7,446,840 8,170,242
Income Tax Expense 1,649,999 1,925,879 2,210,603
----------- ----------- -----------
Net income $ 4,879,734 $ 5,520,961 $ 5,959,639
=========== =========== ===========
Earnings Per Share, basic and assuming dilution $ 0.99 $ 1.12 $ 1.17
=========== =========== ===========
See Notes to Consolidated Financial Statements.
33
EASTERN VIRGINIA BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2001, 2000 and 1999
Common Retained
Stock Surplus Earnings
------------ ------------ ------------
Balance, December 31, 1998 $10,285,668 $ 3,729,504 $27,876,655
Comprehensive income:
Net income - 1999 -- -- 5,959,639
Other comprehensive income:
Unrealized holding losses arising during
period, (net of tax, $559,625) -- -- --
Reclassification adjustment, (net of tax, $25,931) -- -- --
Other comprehensive income (net of tax, $533,694) -- -- --
Total comprehensive income -- -- --
Cash dividends declared -- -- (2,448,057)
Shares purchased and retired (221,142) (1,715,744) --
----------- ----------- -----------
Balance, December 31, 1999 10,064,526 2,013,760 31,388,237
Comprehensive income:
Net income - 2000 -- -- 5,520,961
Other comprehensive income:
Unrealized holding gains arising during
period, (net of tax, $448,820) -- -- --
Reclassification adjustment, (net of tax, $3,303) -- -- --
Other comprehensive income (net of tax, $452,123) -- -- --
Total comprehensive income -- -- --
Cash dividends declared -- -- (2,571,072)
Proceeds from sale of common stock 36,812 257,684 --
Repurchase of common stock under dividend
reinvestment plan, net (222) (349) --
Shares purchased and retired (204,296) (1,681,608) --
----------- ----------- -----------
Balance, December 31, 2000 9,896,820 589,487 34,338,126
Comprehensive income:
Net income - 2001 -- 4,879,734
Other comprehensive income:
Unrealized holding gains arising during
period, (net of tax, $392,101) -- -- --
Reclassification adjustment, (net of tax, $2,437) -- -- --
Total comprehensive income -- -- --
Cash dividends declared -- -- (2,558,653)
Issuance of common stock under dividend
reinvestment plan, net 5,919 43,326 --
Shares purchased and retired (100,549) (632,813) (32,225)
----------- ----------- -----------
Balance, December 31, 2001 $ 9,802,190 $ -- $36,626,982
=========== =========== ===========
Accumulated
Other
Comprehensive Comprehensive
Income (Loss) Income Total
-------------- ------------- ------------
Balance, December 31, 1998 $ 364,838 $ 42,256,665
Comprehensive income:
Net income - 1999 -- $ 5,959,639 5,959,639
Other comprehensive income:
Unrealized holding losses arising during
period, (net of tax, $559,625) -- (1,086,331) --
Reclassification adjustment, (net of tax, $25,931) -- 50,337 --
-------------
Other comprehensive income (net of tax, $533,694) (1,035,994) (1,035,994) (1,035,994)
--------------
Total comprehensive income -- $ 4,923,645 --
==============
Cash dividends declared -- (2,448,057)
Shares purchased and retired -- (1,936,886)
-------------- -------------
Balance, December 31, 1999 (671,156) 42,795,367
Comprehensive income:
Net income - 2000 -- $ 5,520,961 5,520,961
Other comprehensive income:
Unrealized holding gains arising during
period, (net of tax, $448,820) -- 871,239 --
Reclassification adjustment, (net of tax, $3,303) -- 6,413 --
-------------
Other comprehensive income (net of tax, $452,123) 877,652 877,652 877,652
-------------
Total comprehensive income -- $ 6,398,613 --
=============
Cash dividends declared -- (2,571,072)
Proceeds from sale of common stock -- 294,496
Repurchase of common stock under dividend
reinvestment plan, net -- (571)
Shares purchased and retired -- (1,885,904)
-------------- -------------
Balance, December 31, 2000 206,496 45,030,929
Comprehensive income:
Net income - 2001 -- $ 4,879,734 4,879,734
Other comprehensive income:
Unrealized holding gains arising during
period, (net of tax, $392,101) -- 761,138 --
Reclassification adjustment, (net of tax, $2,437) -- (4,730) --
-------------
Other comprehensive income (net of tax, $389,665) 756,408 756,408 756,408
-------------
Total comprehensive income -- $ 5,636,142 --
=============
Cash dividends declared -- (2,558,653)
Issuance of common stock under dividend
reinvestment plan, net -- 49,245
Shares purchased and retired -- (765,587)
-------------- -------------
Balance, December 31, 2001 $ 962,904 $ 47,392,076
============== -------------
See Notes to Consolidated Financial Statements
34
EASTERN VIRGINIA BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
-------------- -------------- --------------
Cash Flows from Operating Activities
Net income $ 4,879,734 $ 5,520,961 $ 5,959,639
Adjustments to reconcile net income to net cash
provided by operating activities:
Loss from equity investment in partnership 23,521 32,018 27,948
Depreciation and amortization 954,978 962,038 899,474
Deferred tax (benefit) (337,383) (433,657) (154,418)
Provision for loan losses 2,183,000 647,000 510,000
Net (gain) on other real estate (36,494) (70,305) (7,569)
Net loss on sale of bank premises and equipment -- -- 1,965
(Gain) losses realized on available for sale securities (7,167) 9,716 76,268
Accretion of discounts and amortization of
premiums, net 51,679 23,467 80,108
Changes in assets and liabilities:
(Increase) decrease in accrued interest receivable 170,070 (327,887) (159,187)
(Increase) decrease in other assets (538,767) 29,601 227,616
Increase (decrease) in accrued interest payable (117,286) 385,321 54,923
Increase in other liabilities 2,135,270 298,252 1,465,815
-------------- -------------- --------------
Net cash provided by operating activities 9,361,155 7,076,525 8,982,582
-------------- -------------- --------------
Cash Flows from Investing Activities
Proceeds from sales of securities available for sale 1,251,180 6,079,372 3,641,476
Maturities and principal repayments of securities
available for sale 31,415,048 6,885,204 8,806,051
Maturities of securities held to maturity -- 280,000 4,151,575
Purchases of securities available for sale (40,064,441) (7,307,879) (15,439,530)
Purchases of securities held to maturity -- -- (9,656,710)
Proceeds from sale of other real estate 527,267 354,098 32,319
Net (increase) in loans (48,436,049) (27,969,890) (34,409,235)
Purchases of bank premises and equipment (1,776,609) (1,748,393) (797,042)
Proceeds from sale of bank premises and equipment -- -- 24,963
-------------- -------------- --------------
Net cash (used in) investing activities (57,083,604) (23,427,488) (43,646,133)
-------------- -------------- --------------
35
EASTERN VIRGINIA BANKSHARES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the Years Ended December 31, 2001, 2000 and 1999
2001 2000 1999
------------ ------------ -------------
Cash Flows from Financing Activities
Net increase (decrease) in demand deposit accounts, interest-
bearing demand deposits and savings accounts 44,677,657 (261,706) 2,326,422
Net increase in certificates of deposit 13,149,126 28,028,629 15,990,049
Proceeds from Federal Home Loan Bank advances -- -- 8,000,000
Repayments of Federal Home Loan Bank advances (1,000,000) (1,000,000) --
Increase (decrease) in Federal funds purchased (1,048,000) (420,000) 1,468,000
Proceeds from sale of stock -- 294,496 --
Repurchases and retirement of stock (765,587) (1,885,904) (1,936,886)
Repurchase of stock under dividend reinvestment plan -- (308,941) --
Issuance of common stock under dividend reinvestment plan 49,245 308,370 --
Dividends paid (2,558,653) (2,571,072) (2,448,057)
------------ ------------ -------------
Net cash provided by financing activities 52,503,788 22,183,872 23,399,528
------------ ------------ -------------
Net increase (decrease) in cash
and cash equivalents 4,781,339 5,832,909 (11,264,023)
Cash and Cash Equivalents
Beginning of year 16,091,249 10,258,340 21,522,363
------------ ------------ -------------
End of year $ 20,872,588 $ 16,091,249 $ 10,258,340
============ ============ =============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest $ 15,490,718 $ 14,127,784 $ 11,811,959
============ ============ ==============
Income taxes $ 2,551,058 $ 2,629,745 $ 1,730,215
============ ============ ==============
Supplemental Disclosures of Noncash Financing Activities,
transfers from loans to foreclosed real estate $ 113,168 $ 418,597 $ --
============ ============ ==============
See Notes to Consolidated Financial Statements.
36
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.
37
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.
38
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.
39
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.
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. SECURITIES
The amortized cost and fair value of securities, with gross
unrealized gains and losses, follows:
December 31, 2001
====================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
============ =========== =========== ============
Available for Sale:
U.S. Government
obligations $ 4,059,823 $ 95,920 $ -- $ 4,155,743
Obligations of U.S.
Government agencies 25,899,769 367,991 (113,890) 26,153,870
Corporate bonds 10,295,853 251,694 (84,118) 10,463,429
Obligations of state and
political subdivisions 47,693,720 1,190,651 (249,018) 48,635,353
Other securities 2,471,304 -- -- 2,471,304
------------ ----------- ---------- -------------
Total $ 90,420,469 $ 1,906,256 $ (447,026) $ 91,879,699
============ =========== =========== ============
December 31, 2001
==================================================
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
=========== =========== =========== ===========
Available for Sale:
U.S. Government
obligations $ 7,195,200 $ 27,247 $ (6,075) $ 7,216,372
Obligations of U.S.
Government agencies 24,408,265 112,021 (131,976) 24,388,310
Corporate bonds 6,173,697 21,939 (22,746) 6,172,890
Obligations of state and
political subdivisions 42,827,840 583,818 (272,899) 43,138,759
Other securities 2,487,106 -- -- 2,487,106
----------- ----------- ----------- -----------
Total $83,092,108 $ 745,025 $ (433,696) $83,403,437
=========== =========== =========== ===========
41
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:
Estimated
Amortized Fair
Cost Value
------------ ------------
Available for Sale:
One year or less $ 11,447,497 $ 11,630,986
1-5 years 29,648,716 30,280,656
5-10 years 31,261,748 31,920,958
After 10 years 7,366,904 7,320,152
Other securities 2,471,304 2,471,304
Mortgage-backed securities 8,224,300 8,255,643
------------ ------------
Total $ 90,420,469 $ 91,879,699
============ ============
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:
2001 2000
---------- ----------
(in Thousands)
Real estate - construction $ 10,708 $ 9,020
Real estate - mortgage 179,641 163,573
Commercial real estate 49,239 36,183
Commercial, industrial and agricultural loans 43,809 34,807
Loans to individuals for household, family
and other consumer expenditures 68,605 61,505
All other loans 652 450
---------- ----------
Total gross loans 352,654 305,538
Less unearned income and deferred loan fees (4,657) (4,507)
Less allowance for loan losses (5,234) (4,408)
---------- ----------
Total net loans $ 342,763 $ 296,623
========== ==========
42
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:
December 31
2001 2000 1999
============ ============ ============
(in thousands)
Impaired loans for which an allowance has
been provided $ 975 $ -- $ --
============ ============ ============
Allowance related to impaired loans $ 152 $ -- $ --
============ ============ ============
Average balance of impaired loans $ 771 $ -- $ --
============ ============ ============
Interest income recognized on
impaired loans $ 70 $ -- $ --
============ ============ ============
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
============= =============
43
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
=========== ===========
44
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:
2001 2000 1999
============= =========== ============
Expected tax expense at statutory rate $ 2,220,109 $ 2,531,926 $ 2,777,882
Increase (decrease) in taxes resulting from:
Tax-exempt interest (508,065) (557,544) (572,918)
Other (62,045) (48,503) 5,639
------------- ----------- ------------
$ 1,649,999 $ 1,925,879 $ 2,210,603
============= =========== ============
45
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:
2001 2000 1999
============ ========== ==========
Change in Benefit Obligation
Benefit obligation, beginning $ 5,107,895 $4,690,859 $4,262,636
Service cost 326,009 326,690 293,394
Interest cost 380,493 349,215 317,051
Actuarial (gain) (117,078) (16,011) (100,964)
Benefits paid (231,043) (242,858) (81,258)
------------ ---------- ----------
Benefit obligation, ending $ 5,466,276 $5,107,895 $4,690,859
------------ ---------- ----------
Change in Plan Assets
Fair value of plan assets, beginning $ 5,575,515 $4,782,516 $3,894,540
Actual return on plan assets (1,131,030) 1,035,857 673,179
Employer contributions 508,618 -- 296,055
Benefits paid (231,043) (242,858) (81,258)
------------ ---------- ----------
Fair value of plan assets, ending $ 4,722,060 $5,575,515 $4,782,516
------------ ---------- ----------
Funded status $ (744,216) $ 467,620 $ 91,657
Unrecognized net actuarial (gain) loss 540,915 (994,735) (343,540)
Unrecognized net obligation at transition 25,380 29,174 32,968
Unrecognized prior service cost 122,235 136,379 150,523
------------ ---------- ----------
Accrued benefit cost included in other liabilities $ (55,686) $ (361,562) $ (68,392)
============ ========== ==========
Components of Net Periodic Benefit Cost
Service cost $ 326,009 $ 326,690 $ 293,394
Interest cost 380,493 349,215 317,051
Expected return on plan assets (498,688) (400,673) (318,393)
Amortization of prior service cost 14,144 14,144 14,144
Amortization of net obligation at transition 3,794 3,794 3,794
Recognized net actuarial gain (23,010) -- --
------------ ---------- ----------
Net periodic benefit cost $ 202,742 $ 293,170 $ 309,990
============ ========== ==========
Weighted-Average Assumptions as
Of December 31
Discount rate 7.50% 7.5% 7.5%
Expected return on plan assets 9.00% 9.0% 9.0%
Rate of compensation increase 5.00% 5.0% 5.0%
46
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.
47
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.
48
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
49
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.
50
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:
December 31, 2001 December 31, 2000
------------------------------- ------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------- -------------- ------------- -------------
(in Thousands) (in Thousands)
Financial assets:
Cash and short-term
investments $ 20,873 $ 20,873 $ 16,091 $ 16,091
Securities - available for sale 91,880 91,880 83,403 83,403
Loans, net 342,763 358,440 296,623 303,092
Accrued interest receivable 2,740 2,740 2,910 2,910
Financial liabilities:
Noninterest-bearing deposits $ 45,160 $ 45,160 $ 38,126 $ 38,126
Interest-bearing deposits 363,180 368,705 312,288 315,404
Federal funds purchased -- -- 1,048 1,048
Federal Home Loan Bank
advances 6,000 6,282 7,000 7,135
Accrued interest payable 1,063 1,063 1,181 1,181
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.
51
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.
52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Corporation's and the Banks' actual capital amounts and ratios
are presented in the table.
Minimum
To Be Well
Capitalized Under
Maximum Prompt Corrective
Actual Capital Requirement Action Provisions
--------------------- --------------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- -------- ------------- ----------- ------------ -----------
(Amounts in Thousands)
As of December 31, 2001:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 50,369 16.05% $ 25,114 8.00% N/A N/A
SSB $ 17,682 10.91% $ 12,971 8.00% $ 16,214 10.00%
BNI $ 16,056 14.79% $ 8,682 8.00% $ 10,853 10.00%
HB $ 9,751 22.55% $ 3,460 8.00% $ 4,325 10.00%
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $ 46,429 14.79% $ 12,557 4.00% N/A N/A
SSB $ 12,646 7.80% $ 6,485 4.00% $ 9,728 6.00%
BNI $ 10,693 9.85% $ 4,341 4.00% $ 6,512 6.00%
HB $ 7,010 16.21% $ 1,730 4.00% $ 2,595 6.00%
Tier 1 Capital (to
Average Assets)
Consolidated $ 46,429 10.08% $ 18,424 4.00% N/A N/A
SSB $ 12,646 5.00% $ 10,111 4.00% $ 12,639 5.00%
BNI $ 10,693 6.42% $ 6,658 4.00% $ 8,323 5.00%
HB $ 7,010 12.74% $ 2,200 4.00% $ 2,751 5.00%
As of December 31, 2000:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 48,205 17.89% $ 21,551 8.00% N/A N/A
SSB $ 16,819 10.88% $ 12,372 8.00% $ 15,465 10.00%
BNI $ 15,811 16.80% $ 7,529 8.00% $ 9,411 10.00%
HB $ 4,876 24.33% $ 1,603 8.00% $ 2,004 10.00%
Tier 1 Capital (to Risk
Weighted Assets)
Consolidated $ 44,825 16.58% $ 10,817 4.00% N/A N/A
SSB $ 11,878 7.65% $ 6,211 4.00% $ 9,317 6.00%
BNI $ 10,631 11.26% $ 3,777 4.00% $ 5,666 6.00%
HB $ 4,625 22.29% $ 805 4.00% $ 1,207 6.00%
Tier 1 Capital (to
Average Assets)
Consolidated $ 44,825 11.14% $ 16,093 4.00% N/A N/A
SSB $ 11,878 7.65% $ 9,156 4.00% $ 11,445 5.00%
BNI $ 10,631 6.98% $ 6,091 4.00% $ 7,614 5.00%
HB $ 4,625 17.76% $ 1,042 4.00% $ 1,302 5.00%
53
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
Assets 2001 2000
------------ ------------
Cash on deposit with subsidiary banks $ 4,863,211 $ 9,540,739
Subordinated debt in subsidiaries 9,200,000 7,000,000
Investment in subsidiaries 31,311,450 27,340,658
Other investments 118,375 118,375
Deferred income taxes -- 80,473
Premises and equipment, net 1,094,932 1,061,757
Accrued interest receivable -- 739
Other assets 899,065 264,850
------------ ------------
Total assets $ 47,487,033 $ 45,407,591
============ ============
Liabilities and Shareholders' Equity
Liabilities
Deferred income taxes $ 12,553 $ --
Other liabilities 82,404 376,662
------------ ------------
94,957 376,662
------------ ------------
Shareholders' Equity
Common stock 9,802,190 9,896,820
Surplus -- 589,487
Retained earnings 36,626,982 34,338,126
Accumulated other comprehensive income 962,904 206,496
------------ ------------
Total shareholders' equity 47,392,076 45,030,929
------------ ------------
Total liabilities and shareholders' equity $ 47,487,033 $ 45,407,591
============ ============
54
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
2001 2000 1999
----------- ----------- ------------
Income:
Dividends from subsidiaries $ 4,500,000 $ 4,500,000 $ 7,000,000
Dividends 1,500 688 --
Interest from subsidiaries 76,638 212,456 438,500
Interest from subordinated debt 586,250 490,000 --
Operations services 1,281,430 1,412,132 --
Miscellaneous income 13,377 12,431 8
----------- ----------- ------------
6,459,195 6,627,707 7,438,508
----------- ----------- ------------
Expenses:
Salaries and benefits 816,513 607,413 --
Net occupancy expense 437,187 436,057 --
Equipment expense 32,961 23,108 --
Management fees -- 390,000 185,600
Miscellaneous 707,184 669,117 251,941
----------- ----------- ------------
1,993,845 2,125,695 437,541
----------- ----------- ------------
Net income before undistributed (distributed)
earnings of subsidiaries 4,465,350 4,502,012 7,000,967
Undistributed (distributed) earnings of subsidiaries 414,384 1,018,949 (1,041,328)
----------- ----------- ------------
Net income $ 4,879,734 $ 5,520,961 $ 5,959,639
=========== =========== ============
55
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
2001 2000 1999
------------ ------------ --------------
Cash Flows from Operating Activities
Net income $ 4,879,734 $ 5,520,961 $ 5,959,639
Adjustments to reconcile net income to net cash
provided by operating activities:
(Undistributed) distributed earnings of subsidiaries (414,384) (1,018,949) 1,041,328
Depreciation 396,013 403,344 --
Deferred income taxes (benefits) 93,026 (80,473) --
(Increase) decrease in accrued interest receivable 739 (739) --
Decrease (increase) in other assets (634,215) (229,935) 25,111
Increase (decrease) in other liabilities (294,258) 4,643 320,332
------------ ------------ --------------
Net cash provided by operating activities 4,026,655 4,598,852 7,346,410
------------ ------------ --------------
Cash Flows from Investing Activities
Purchases of investment securities -- (118,375) --
Purchases of premises and equipment (429,188) (1,465,100) --
------------ ------------ --------------
Net cash (used in) investing activities (429,188) (1,583,475) --
------------ ------------ --------------
Cash Flows from Financing Activities
Capital transferred to Hanover Bank (2,800,000) (5,000,000) --
Subordinated debt to subsidiary banks (2,200,000) -- (7,000,000)
Dividends paid (2,558,653) (2,571,072) (2,448,057)
Proceeds from sale of common stock -- 294,496 --
Repurchase of common stock under dividend
reinvestment plan -- (308,941) --
Issuance of common stock under
dividend reinvestment plan 49,245 308,370 --
Shares repurchased and retired (765,587) (1,885,904) (1,936,886)
------------ ------------ --------------
Net cash (used in) financing activities (8,274,995) (9,163,051) (11,384,943)
------------ ------------ --------------
(Decrease) in cash and cash equivalents (4,677,528) (6,147,674) (4,038,533)
Cash and Cash Equivalents, beginning of year 9,540,739 15,688,413 19,726,946
------------ ------------ --------------
Cash and Cash Equivalents, end of year $ 4,863,211 $ 9,540,739 $ 15,688,413
============ ============ ==============
56
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
======================================
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
=======================================
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
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Independent Auditors
Yount, Hyde & Barbour, PC.
50 South Cameron Street
Winchester, VA 22604
- --------------------------------------------------------------------------------
Local Market Makers (known)
Branch, Cabell
Davenport & Company, LLC
Ferris, Baker Watts, Inc.
Scott & Stringfellow
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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