FIRST VIRGINIA BANKS INC - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

Annual Report Pursuant to Section 13 or 15(d) of the

Securities Exchange Act of 1934

For the fiscal year ended

December 31, 2002

Commission file number 1-6580

FIRST VIRGINIA BANKS, INC.

(Exact name of registrant as specified in its charter)


Virginia		54-0497561
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

6400 Arlington Boulevard Falls Church, Virginia (Address of principal executive offices)		22042-2336 (Zip Code)

(703) 241-4000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


		Name of each exchange on
Title of each class		which registered

Common Stock, Par Value $1.00		New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

Title of each class

Convertible Preferred Stock, Par Value $10.00

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 þ No o

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 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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.) Yes þ No o

The aggregate market value of the common stock of the registrant held by nonaffiliates as of February 28, 2003, was approximately $2,761,758,000. The registrant’s voting preferred stock is not actively traded and the market value of such stock is not readily determinable. On February 28, 2003, there were 69,344,956 shares of common stock outstanding.

INDEX


		Page

PART I
Item 1.	Business		1
	General		1
	Segments		1
	Competitive Factors		1
	Regulation		1–2
	Employees		2
Item 2.	Properties		2
Item 3.	Legal Proceedings		2
Item 4.	Submission of Matters to a Vote of Security Holders		2
	Executive Officers		2–3
PART II
Item 5.	Market for Registrant’s Common Equity and Related Stockholder Matters		3-4
Item 6.	Selected Financial Data		4–5
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		5–31
Item 7A.	Quantitative and Qualitative Disclosure About Market Risk		25–28
Item 8.	Financial Statements and Supplementary Data		32–58
PART III
Item 10.	Directors and Executive Officers of the Registrant		59-60
Item 11.	Executive Compensation		60-71
Item 12.	Security Ownership of Certain Beneficial Owners and Management		72-73
Item 13.	Certain Relationships and Related Transactions		73
PART IV
Item 14.	Controls and Procedures		74
Item 15.	Exhibits, Financial Statement Schedules and Reports on Form 8-K		74–75
	Signatures and Certifications		76-79

PART I


Item 1	*Business*

General

First Virginia Banks, Inc., (FVBI) is a bank holding company registered under the Bank Holding Company Act of 1956 (BHC Act), and is headquartered in Falls Church, Virginia. FVBI was incorporated under the laws of the Commonwealth of Virginia in October 1949.

FVBI currently operates eight commercial banks (the banking companies). In addition, FVBI owns, directly or indirectly through its banking companies, several nonbanking companies which offer bank-related services. The nonbanking companies operate offices in the banks’ markets which provide services to customers of the banking companies and in addition have offices in adjoining states.

FVBI is the largest bank holding company with headquarters in Virginia and the fifth largest banking organization in the state. Total assets were $11.228 billion as of December 31, 2002.

In January 2003, FVBI’s Board of Directors approved a proposal to be acquired by BB&T Corporation. The combined organization will be the second largest bank in Virginia in deposit size and the 11th largest in the country.

Segments

For segment reporting disclosure, reference is made to Note 22 of the Notes to Consolidated Financial Statements.

Competitive Factors

Other banking organizations have been active in opening new banking offices through acquisition and control of existing banks, mergers, branching and formation of new banks and in acquiring or forming bank-related subsidiaries in areas where FVBI’s banking companies operate. Accordingly, each banking company faces strong competition. Savings and loan associations and credit unions actively compete for deposits. Such institutions, as well as consumer finance companies, mortgage companies, loan production offices of out-of-state banks, factors, insurance companies and pension trusts are important competitors for various types of loans. The bank-related member companies also operate in highly competitive fields.

Based on the most recent available data, the service area of our eight banking companies reached approximately 89% of Virginia’s population with 298 offices, approximately 40% of Maryland’s population with 55 offices, and approximately 18% of East Tennessee’s population with 11 offices.

Regulation

As a bank holding company, FVBI is subject to regulation under the BHC Act, and to inspection, examination and supervision by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the state regulators of Virginia, Maryland and Tennessee which have jurisdiction over financial institutions. Under the BHC Act, bank holding companies generally may not own or control more than 5% of the voting shares of any company, including a bank, without the Federal Reserve Board’s prior approval. In addition, bank holding companies generally may engage, directly or indirectly, only in banking and such other activities as are determined by the Federal Reserve Board to be financial in nature or incidental or complementary to a financial activity.

Various governmental requirements, including Sections 23A and 23B of the Federal Reserve Act, limit borrowing by FVBI and its nonbank subsidiaries from the banking companies. These requirements also limit various other transactions among affiliates.

Under Federal Reserve policy, FVBI is expected to act as a source of financial strength to each of the banking companies and to maintain resources adequate to support each such subsidiary bank. This support

may be required at times when FVBI may not have the resources to provide it. In addition, any capital loans by a bank holding company to any of its bank subsidiaries are subordinate to the payment of deposits and to certain other indebtedness.

The corporation is subject to capital requirements and guidelines imposed on bank holding companies by the Federal Reserve Board and the FDIC. These requirements are discussed in Note 19 of the Notes to the Consolidated Financial Statements.

Various provisions of federal and state law limit the amount of dividends the banking companies can pay to FVBI without regulatory approval. For example, approval generally is required for any state-chartered bank that is a member of the Federal Reserve System to pay any dividend that would cause the bank’s total dividends paid during any calendar year to exceed the sum of the bank’s net income during such calendar year plus the bank’s retained net income for the prior two calendar years (see Note 20 of the Notes to the Consolidated Financial Statements).

Employees

As of December 31, 2002, FVBI and its subsidiaries employed 5,245 individuals (4,813 full-time equivalent).

Web Site Access to First Virginia Banks Inc’s Filings with the Securities and Exchange Commission

All of the corporation’s electronic filings with the Securities and Exchange Commission (“SEC”), including the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, are made available at no cost on the Corporation’s web site, www.firstvirginia.com, as soon as reasonably practicable after the corporation files such material with, or furnishes it to, the SEC. The corporation’s SEC filings are also available through the SEC’s web site at www.sec.gov.


Item 2	*Properties*

On December 31, 2002, the banking companies operated a total of 364 banking offices. Of these offices, 233 were owned and 131 were leased from others. FVBI owns other properties, including the two corporate headquarters buildings that house personnel of the corporation and its subsidiaries. The corporation currently has no mortgage indebtedness.

As of December 31, 2002, a total annual base rental of approximately $9,924,000 was being paid on leased premises. As of December 31, 2002, total lease commitments having a term in excess of one year to persons other than affiliates were approximately $50,865,000.

The majority of the properties are modern, well furnished and provide adequate parking.


Item 3	*Legal Proceedings*

There are no legal proceedings, other than ordinary routine litigation incidental to the business, to which the corporation is a party or of which any of its property is subject. Management believes that the liability, if any, resulting from current litigation will not be material to the financial statements of the corporation.


Item 4	*Submission of Matters to a Vote of Security Holders*

There was no submission of matters to a vote of security holders during the fourth quarter of 2002.

Executive Officers

There are no arrangements or understandings between the executive officers named below and any other person pursuant to which they were selected as an officer.

There are no family relationships among the executive officers. All ages, in parentheses, and positions are as of December 31, 2002.

BARRY J. FITZPATRICK (62)
Chairman of the Board, President and Chief Executive Officer since July, 1995. 33 years of service.

SHIRLEY C. BEAVERS, JR. (57)
Senior Executive Vice President since December 2000; Executive Vice President from April 1992 to December 2000. 33 years of service.

RICHARD F. BOWMAN (50)
Executive Vice President, Treasurer and Chief Financial Officer since December 1999; Senior Vice President, Treasurer and Chief Financial Officer from 1994 to 1999. 27 years of service.

RAYMOND E. BRANN, JR. (62)
Executive Vice President since January, 1995. 38 years of service.

DOUGLAS M. CHURCH, JR. (52)
Senior Vice President since December 1994. 29 years of service.

THOMAS P. JENNINGS (55)
Senior Vice President and General Counsel since December 1995; Secretary from December 1995 to April 1999. 24 years of service.

JOHN P. SALOP (51)
Senior Vice President since April 1996. 28 years of service.

CYNTHIA A. WILLIAMS (49)
Senior Vice President and General Auditor since October, 2001; Senior Vice President of First Virginia Bank — Blue Ridge from August, 1995 to October, 2001. 17 years of service.

BARBARA J. CHAPMAN (55)
Vice President and Secretary since April 1999 and Assistant Corporate Secretary from 1993 to 1999. 9 years of service.

PART II

Item 5 Market for Registrants Common Equity and Related Stockholder Matters

The common stock of the corporation is listed for trading on the New York Stock Exchange (trading symbol: FVB). The dividends declared per share and the high and low sales prices for common shares were:



	Sales Price

									Dividends
	2002				2001				Per Share

	High		Low		High		Low		2002		2001

1st Quarter	$	36.60	$	32.60	$	32.83	$	25.69	$	.2667	$	.2533
2nd Quarter		38.97		34.33		31.53		27.80		.2733		.2600
3rd Quarter		39.98		30.93		32.50		27.07		.2733		.2600
4th Quarter		39.00		33.35		34.77		26.87		.2800		.2667

The corporation’s preferred stock is not actively traded. The 5% cumulative convertible preferred stock, Series A, pays a quarterly dividend of 12 1/2 cents per share. The 7% cumulative convertible preferred stock, Series B and C, pays a quarterly dividend of 17 1/2 cents per share. The 8% cumulative convertible preferred stock, Series D, pays a quarterly dividend of 20 cents per share. As of December 31, 2002, there were 20,320 holders of record of the corporation’s voting securities, of which 19,813 were holders of common stock.

There are no equity compensation plans issued by the corporation that were not approved by the shareholders.

Number of

securities remaining

Number of

available for future

securities to be

Weighted-average

issuance under

issued upon exercise

exercise price of

equity compensation

of outstanding

outstanding

plans (excluding

options, warrants

securities reflected

and rights

in column (a))

Plan category

(a)

(b)

(c)

Equity compensation plans approved by security holders

1,847,627

30.57

2,428,392

There are various equity compensation plans that the corporation honored as part of two mergers. As of December 31, 2002, there were 23,985 shares outstanding at a weighted average price of $18.00 for these plans. No additional options may be granted from these plans. The provisions of these plans are similar to the corporation’s plans and are discussed in Note 14 on page 47.

Item 6 Selected Financial Data


		2002			2001			2000			1999			1998


		(In thousands, except per share data)
Balance Sheet Data
Cash		$	370,387		$	386,171		$	322,966		$	441,825		$	377,374
Money market investments			210,339			95,808			190,443			110,598			265,557
Securities			3,750,712			3,097,615			2,164,108			2,034,788			2,323,052
Loans, net of allowance for loan losses			6,306,853			6,438,622			6,296,164			6,315,281			6,022,903
Other earning assets			36,383			26,872			18,717			28,683			37,164
Other assets			552,913			577,939			524,071			520,638			538,646

	Total Assets	$	11,227,587		$	10,623,027		$	9,516,469		$	9,451,813		$	9,564,696

Deposits		$	9,210,491		$	8,649,636		$	7,825,816		$	7,863,948		$	8,055,078
Short-term borrowings			617,589			639,351			539,469			420,297			385,996
Long-term debt			13,488			19,526			1,116			2,205			3,217
Other liabilities			147,674			162,028			157,362			134,876			130,077
Shareholders’ equity			1,238,345			1,152,486			992,706			1,030,487			990,328

	Total Liabilities and Shareholders’ Equity	$	11,227,587		$	10,623,027		$	9,516,469		$	9,451,813		$	9,564,696

Operating Results
Interest income		$	627,426		$	653,323		$	643,806		$	640,622		$	663,631
Interest expense			139,577			212,769			219,311			206,914			234,332

Net interest income			487,849			440,554			424,495			433,708			429,299
Provision for loan losses			9,955			6,755			9,428			14,190			20,800
Noninterest income			137,224			149,997			118,030			136,604			116,775
Noninterest expense			337,409			332,740			322,145			327,294			325,678

Income before income taxes			277,709			251,056			210,952			228,828			199,596
Provision for income taxes			93,772			86,605			68,921			77,968			69,434

	Net Income	$	183,937		$	164,451		$	142,031		$	150,860		$	130,162

Dividends Declared		$	78,271		$	73,435		$	69,233		$	67,745		$	61,244
Operating Results
Diluted earnings per share		$	2.55		$	2.32		$	2.00		$	2.00		$	1.68
Return on average assets			1.69	%		1.65	%		1.51	%		1.59	%		1.40	%
Return on average shareholders’ equity			15.22			15.18			14.36			14.64			12.81
Net interest margin			4.91			4.87			4.96			5.08			5.13
Per Share of Common Stock
Dividends declared		$	1.09		$	1.04		$	0.99		$	0.91		$	0.80
Shareholders’ equity			17.46			16.06			14.34			13.97			13.17
Market price — Year-end			37.23			33.84			32.00			28.67			31.33
— High			39.98			34.77			32.63			35.09			39.63
— Low			30.93			25.69			19.33			27.00			26.46


		2002			2001			2000			1999			1998


		(In thousands, except per share data)
Capital Ratios
Tier 1 leverage			9.60	%		9.39	%		8.99	%		9.22	%		8.73	%
Average equity to average assets			11.12			10.87			10.49			10.86			10.95
Risk-based capital
	Tier 1		14.99			13.58			12.20			12.67			12.14
	Total capital		16.01			14.59			13.22			13.70			13.20
Dividend payout ratio			42.54			44.70			49.01			45.03			47.24


Item 7	*Management’s Discussion and Analysis of Financial Condition and Results of Operation* (Dollars in thousands, except per share data)

In 2002, First Virginia Banks, Inc. produced the sixth consecutive year of record earnings per share, increasing 10% to $2.55 compared to $2.32 in 2001. Total income was up 12% to $183.937 million in 2002 compared to $164.451 million in 2001. The return on average assets increased to 1.69% compared to 1.65% in 2001, while the return on average shareholders’ equity rose to 15.22% compared to 15.18%. Once again, First Virginia was among the most profitable financial institutions in the nation in 2002. All per-share numbers have been adjusted throughout this annual report to reflect the August 16, 2002, three-for-two stock split.

Earnings per share from recurring operations increased 21% to $2.55 compared to $2.11 earned in 2001. 2001 included several nonrecurring gains including a gain of $.12 per share or $8.425 million from the sale of the corporation’s former Knoxville banking affiliate and $.09 per share or $6.588 million from the sale of the corporation’s interest in an electronic switch network company. If these nonrecurring gains are excluded from 2001 income, the return on average assets increased to 1.69% in 2002 compared to 1.50% in the prior year, and the return on average shareholders’ equity increased to 15.22% compared to 13.79%.



		Year Ended December 31

		2002			2001			2000

Recurring diluted net income per share — prior period		$	2.11		$	1.96		$	1.82

Change during the year (net of federal taxes)
	Interest income (taxable-equivalent)		(.24	)		.10			.02
	Interest expense		.67			.06			(.11	)
	Provision for loan losses		(.03	)		.02			.04
	Noninterest income		.11			.11			(.01	)
	Noninterest expense		(.04	)		(.10	)		.04
	Other income tax effects		.02			(.05	)		.04
	Decrease (increase) in average common shares outstanding		(.05	)		.01			.12

Net increase during the period			.44			.15			.14

Recurring diluted net income per share — current period			2.55			2.11			1.96
Reconciliation to GAAP diluted net income per share
	Gain on bank divestiture		—			.12			—
	Gain on sale of investment in Star Systems		—			.09			—
	Gain on sale of branches		—			—			.03
	Gain on sale of mortgage servicing rights		—			—			.01

Diluted net income per share — current period		$	2.55		$	2.32		$	2.00

The corporation also achieved new record highs in total assets and deposits despite a year that began with a recession and witnessed only modest growth in the second half. At December 31, 2002, total assets increased 6% to $11.228 billion following a 12% growth rate in the preceding year to $10.623 billion, positioning the corporation as the 47th largest bank in the country based on total asset size. After growing by 11% in 2001, total deposits increased 6% in 2002 to $9.210 billion, exceeding $9 billion for the first time. All of this growth

was internally generated in 2002. In 2001, First Virginia acquired the $531 million James River Bankshares and divested its bank centered in Knoxville, Tennessee.

Weak loan demand, the result of a sluggish economy and low-interest rate loans by auto manufacturers, resulted in a net decline in outstanding loans of 2% at the end of 2002 compared to the end of 2001. The Federal Reserve lowered interest rates one more time in late 2002 following a record 11 interest rate reductions in 2001, placing interest rates at their lowest levels in more than 40 years. However, the low level of interest rates encouraged consumers and businesses to assume or refinance more real estate secured loans and, as a consequence, the average for this loan category increased 20% during 2002.

The corporation’s reputation for pristine asset quality remained intact during 2002 with nonperforming assets declining 31% after a 15% drop in 2001. At December 31, 2002, nonperforming assets were at a record low, representing only .20% of outstanding loans compared to ..28% at the end of 2001. Net charge-offs were only .17% of average loans compared to .14% in 2001. All of these measures are significantly better than the average for both the corporation’s peer group of banks in the $10- to $25-billion asset size and the 100 largest banks in the country.

Total capital increased 7% in 2002 to $1.238 billion following a 16% increase to $1.152 billion in 2001. Book value per share increased 9% to $17.46. The corporation’s equity to asset ratio of 11.03% at December 31, 2002, was up from the 10.85% at the end of 2001, placing the corporation among the nation’s most highly capitalized banks. First Virginia’s regulatory capital ratios continued to significantly exceed the levels required to be classified as a “well-capitalized bank” as the Tier 1 risk based capital ratio rose to 14.99% from 13.58% and the Total capital ratio increased to 16.01% from 14.59%. This compares to regulatory minimums for well-capitalized banks of 6.00% and 10.00%, respectively. Consistent with its philosophy of safety, profitability and growth, always in that order, First Virginia maintains a capital position that is significantly higher than its peer group of banks. This high level of capital, coupled with the growth and consistency of First Virginia’s net income, permits the corporation to regularly increase its dividend to shareholders. During 2002, the corporation increased the dividend for the 26th consecutive year to its current annualized rate of $1.12 per share, representing a ten-year compounded annual rate of increase of 9.5%. In addition, the corporation declared a three-for-two stock split, the third such split in the last ten years. The corporation also returns capital to its shareholders through a regular program of share repurchases, and during 2002 it acquired and retired 1,003,850 shares of stock.

Average Balance Sheets and Interest Rates on Earning Assets and Interest-Bearing Liabilities



		2002								2001								2000

					Interest								Interest								Interest
		Average			Income/					Average			Income/					Average			Income/
		Balance			Expense		Rate			Balance			Expense		Rate			Balance			Expense		Rate

Assets
Interest-earning assets:
Securities — available for sale
	U.S. Government and its agencies	$	1,171,885		$	57,472		4.91	%	$	298,134		$	15,567		5.22	%	$	104,152		$	5,427		5.21	%
	Other(1)		12,202			609		4.99			12,362			606		4.90			10,151			540		5.32
Securities — held to maturity
	U.S. Government and its agencies		1,588,616			81,627		5.14			1,582,783			94,832		5.99			1,505,413			87,677		5.82
	State, municipal and other(1)		317,812			18,434		5.80			351,965			20,871		5.93			320,369			18,954		5.92

Total securities			3,090,515			158,142		5.12			2,245,244			131,876		5.87			1,940,085			112,598		5.81

Loans, net of unearned income(2)
	Installment		4,032,930			286,217		7.10			4,091,862			321,841		7.87			4,221,129			333,333		7.90
	Real estate		1,510,098			115,636		7.66			1,256,379			102,010		8.12			1,120,414			91,625		8.18
	Commercial and other(1)		967,312			65,762		6.80			1,072,248			83,397		7.78			1,037,884			89,172		8.59

Total loans			6,510,340			467,615		7.18			6,420,489			507,248		7.90			6,379,427			514,130		8.06

Money market investments			452,527			7,523		1.66			529,679			20,694		3.91			352,788			22,195		6.29
Other earning assets(1)			31,208			1,704		5.46			20,495			1,327		6.48			22,499			1,613		7.17

Total earning assets and interest income			10,084,590			634,984		6.30			9,215,907			661,145		7.17			8,694,799			650,536		7.48

Noninterest-earning assets:
Cash and due from banks			282,433								280,715								289,734
Premises and equipment, net			151,050								152,066								153,755
Other			420,458								393,606								363,441
Allowance for loan losses			(72,232	)							(71,008	)							(70,066	)

Total assets		$	10,866,299							$	9,971,286							$	9,431,663

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing deposits
	Interest checking	$	1,741,104			4,123		0.24		$	1,555,282			5,801		0.37		$	1,501,243			8,877		0.59
	Money market		1,360,893			21,157		1.55			984,523			26,881		2.73			929,587			29,549		3.18
	Savings		1,104,019			7,118		0.64			1,017,800			12,026		1.18			1,038,889			15,650		1.51
	Consumer certificates of deposit		2,297,312			82,664		3.60			2,396,966			121,878		5.08			2,318,151			114,545		4.94
	Large denomination certificates of deposit		484,420			17,883		3.69			517,925			27,756		5.36			469,372			25,402		5.41

Total interest-bearing deposits			6,987,748			132,945		1.90			6,472,496			194,342		3.00			6,257,242			194,023		3.10
Short-term borrowings			620,180			5,837		0.94			589,662			17,806		3.02			462,764			25,122		5.43
Long-term debt			13,952			795		5.70			10,553			621		5.88			1,707			166		9.71

Total interest-bearing liabilities and interest expense			7,621,880			139,577		1.83			7,072,711			212,769		3.01			6,721,713			219,311		3.26

Noninterest-bearing liabilities:
Demand deposits			1,886,410								1,658,469								1,589,650
Other			149,290								156,503								131,065
Preferred shareholders’ equity			410								432								467
Common shareholders’ equity			1,208,309								1,083,171								988,768

Total liabilities and shareholders’ equity		$	10,866,299							$	9,971,286							$	9,431,663

Net interest income and net interest margin					$	495,407		4.91	%				$	448,376		4.87	%				$	431,225		4.96	%

(1) Income from tax-exempt securities and loans is included in interest income on a taxable-equivalent basis. Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 35% and adjusted for the partial disallowance of interest costs incurred to carry the tax-exempt investments.

(2) Nonaccruing loans are included in their respective categories.

Effect of Rate-Volume Changes on Net Interest Income



		2002 Compared to 2001									2001 Compared to 2000
		Increase (Decrease)									Increase (Decrease)
		Due to Change In									Due to Change In

		Average			Average						Average			Average
		Volume			Rate			Total			Volume			Rate			Total

Interest Income
Securities — available for sale
	U.S. Government and its agencies	$	45,610		$	(3,705	)	$	41,905		$	10,106		$	34		$	10,140
	Other*		(8	)		11			3			118			(52	)		66
Securities — held to maturity
	U.S. Government and its agencies		349			(13,554	)		(13,205	)		4,503			2,652			7,155
	State, municipal and other*		(2,025	)		(412	)		(2,437	)		1,870			47			1,917

Total securities			43,926			(17,660	)		26,266			16,597			2,681			19,278

Loans, net of unearned income
	Installment		(4,638	)		(30,986	)		(35,624	)		(10,225	)		(1,267	)		(11,492	)
	Real estate		20,602			(6,976	)		13,626			11,122			(737	)		10,385
	Commercial and other*		(8,164	)		(9,471	)		(17,635	)		2,952			(8,727	)		(5,775	)

Total loans			7,800			(47,433	)		(39,633	)		3,849			(10,731	)		(6,882	)

Money market investments			(3,017	)		(10,154	)		(13,171	)		11,126			(12,627	)		(1,501	)
Other earning assets*			694			(317	)		377			(144	)		(142	)		(286	)

Total interest income			49,403			(75,564	)		(26,161	)		31,428			(20,819	)		10,609

Interest Expense
Interest-bearing deposits
	Interest checking		688			(2,366	)		(1,678	)		319			(3,395	)		(3,076	)
	Money market		10,275			(15,999	)		(5,724	)		1,747			(4,415	)		(2,668	)
	Savings		1,017			(5,925	)		(4,908	)		(318	)		(3,306	)		(3,624	)
	Consumer certificates of deposit		(5,062	)		(34,152	)		(39,214	)		3,893			3,440			7,333
	Large denomination certificates of deposit		(1,796	)		(8,077	)		(9,873	)		2,627			(273	)		2,354

Total interest-bearing deposits			5,122			(66,519	)		(61,397	)		8,268			(7,949	)		319

Short-term borrowings			922			(12,891	)		(11,969	)		6,891			(14,207	)		(7,316	)
Long-term debt			200			(26	)		174			859			(404	)		455

Total interest expense			6,244			(79,436	)		(73,192	)		16,018			(22,560	)		(6,542	)

Net interest income		$	43,159		$	3,872		$	47,031		$	15,410		$	1,741		$	17,151

* Fully taxable-equivalent basis.

The increase or decrease due to a change in average volume has been determined by multiplying the change in average volume by the average rate during the preceding period, and the increase or decrease due to a change in average rate has been determined by multiplying the current average volume by the change in average rate.

Statement of Income


	*Net Interest Income*

The table on page 7 details the increase in earning assets, interest-bearing liabilities and demand deposits for the last three years, along with the related levels of fully taxable-equivalent interest income and expense. The variance in interest income and expense caused by differences in average balances and rates is shown on page 8.

2002 was characterized by a continuation of the weak economy that began in mid-2001. In contrast to 2001, however, interest rates although trading down were relatively stable, marking a sustained period of low rates. Following several years of strong growth in the late 1990s, the economy entered a recessionary period in 2001, causing the Federal Reserve to lower interest rates 11 times in 2001 and once in 2002 in an effort to stimulate business activity. This dramatic reduction in interest rates helped to reduce the negative impact of the recession, but did not alleviate the strain of continued fears of terrorist activities and a potential war with Iraq on the economy. Demand for loans from commercial sources declined and zero- and low-rate automobile financing offered by auto manufacturers restricted growth from this traditional source of lending strength of First Virginia. The record low interest rate levels did persuade many businesses and consumers to refinance existing real estate loans, contributing to strength in the real estate sector.

Since the cost of funds declined at a faster pace than the yield on earning assets, First Virginia benefited from this lower level of interest rates, and, as a result, the net interest margin increased four basis points to 4.91% in 2002, compared to a nine basis point decline in 2001. The corporation maintains a very liquid portfolio of both assets and liabilities to mitigate the risk inherent in changing rates. First Virginia is relatively unaffected by changes in interest rates since it attempts to balance its rate-sensitive assets and liabilities; however, the very low level of interest rates in effect at the end of 2002 makes it more difficult to reach the kind of spread between interest earning assets and interest bearing liabilities that the corporation historically achieves. Due to the stable and core nature of its deposit base, First Virginia will generally perform better in periods of higher rather than lower interest rates.

First Virginia relies almost entirely on its branch network to supply it with a relatively low-cost source of funds, and it has no purchased funds and does not need to hedge its position with derivative securities of any kind. This has produced one of the highest net interest margins among the country’s largest banks on a consistent basis. A recent report by SunTrust Robinson Humphrey demonstrated that First Virginia has

sustained the highest risk-adjusted net interest margin of the nation’s largest banks over the past ten years. A comparison of First Virginia’s net interest margin to its peer group of banks is illustrated in the graph on the previous page.

The yield on earning assets declined 87 basis points during 2002 to 6.30%, while the cost of funds declined at a faster pace of 118 basis points to 1.83%. The yield on investment securities declined 75 basis points during 2002 to 5.12% as the dramatic decline in rates in 2001 began to impact securities maturing and reinvested in 2002. In addition, the weakness in new loan volume and an increase in deposits resulted in a growth in the investment portfolio of 38% at a time when interest rates are at historically low levels, further contributing to a decrease in the portfolio’s overall yield. Despite the decline in the general level of interest rates in 2001, the yield on the portfolio had actually increased six basis points to 5.87% in that year. The increase was the direct result of the corporation’s decision to increase the proportion of securities in tax-exempt municipal securities and U.S. Government agency securities, which generally have higher yields than the U.S. Government securities comprising much of the corporation’s investment portfolio in the past. The yield on short-term money market investments declined 225 basis points to 1.66% following a 238 basis point drop in 2001 when the short-term sector of the interest rate market reacted more dramatically to the reduction in interest rates engineered by the Federal Reserve. The yield on the loan portfolio declined 72 basis points to 7.18% led by a 98 basis point drop in yields on commercial loans, which tend to be for shorter durations with variable rates that float with changes in prime or other short-term indices. The 77 basis point decline in installment loan yields came primarily in the auto loan portfolio. A combination of competition from the auto manufacturers and the general decline in rates on shorter duration loans drove the sharp decline. The yield on real estate loans declined at a lesser pace of 46 basis points as longer-term rates did not drop as dramatically as short-term rates.

The cost of funds in 2002 declined 118 basis points to 1.83% led by the 148 basis point decline in the cost of certificates of deposit and a 167 basis point decline in large denomination certificates of deposit. During 2002, the corporation was able to reprice its higher cost certificates of deposit as they matured throughout the year. In contrast, in 2001, despite the dramatic decline in interest rates, the cost of certificates of deposit actually increased 14 basis points as older, lower-cost certificates issued several years before matured and were replaced with relatively higher-cost certificates. The cost of other categories of funds also declined in 2002, although not as dramatically as the higher-cost certificates of deposit category. The corporation derives a large portion of its deposit funds from lower-cost areas such as interest checking, money market and consumer savings accounts, and there was a trend in 2002 for consumers to shorten maturity periods on investments and keep their funds more liquid. As a result, these areas grew while certificates of deposit declined; however, because of their relatively lower cost level, the decline in costs was less than for certificates of deposit. The cost of funds for interest checking accounts declined only 13 basis points to .24% in 2002 following a 22 basis point drop in 2001. This is in sharp contrast to the 525 basis point decline in the Federal Reserve discount rate over the same two-year period. Money market account costs dropped 118 basis points in 2002 to 1.55% compared to a 45 basis point drop in 2001, and the cost of savings accounts dropped 54 basis points following a 33 basis point decline in 2001. The cost of short-term borrowings, composed entirely of repurchase agreements and commercial paper with customers using First Virginia’s cash management services, declined 208 basis points in 2002 following a 241 basis point decline in 2001. These funds are priced based on the rates the corporation receives on its own short-term money market investments to produce a positive spread.


	*Provision for Loan Losses*

The provision for loan losses increased 47% in 2002 to $9.955 million after declining 28% to an eight-year low in 2001. Actual net loan charge-offs increased 17% in 2002 to $10.879 million after remaining unchanged in 2001 compared to 2000. Despite the slight increase in net charge-offs, overall asset quality was slightly better in 2002 compared to 2001. In 2001, the provision for loan losses was less than net charge-offs, the direct result of improving credit quality trends and a recent shift in the loan portfolio away from loans with a higher incidence of loss such as credit cards. Approximately 50% of the corporation’s loan portfolio is composed of high-quality indirect automobile loans, and the net charge-off rate on these loans has ranged between 20 and 23 basis points over the past four years, significantly lower than industry averages.

The corporation has a lower risk exposure to charge-offs than many banks because most of its loans are made in small amounts to consumers and are generally well secured by assets such as automobiles or real estate. These loans also have regular monthly repayment schedules, and their average duration is substantially less than their stated lives. The balance of the corporation’s loans are made primarily to small- and medium-sized businesses in the corporation’s trade area and are well secured. The corporation has avoided the subprime segment of both the automobile and home equity loan markets. The corporation does not have any international, syndicated, national or highly leveraged credits, nor does it have any concentration of credit in any one industry that exposes the loan portfolio to adverse risk.


	*Noninterest Income*

Noninterest income declined 9% in 2002 to $137.224 million after increasing 27% in 2001. During 2001 and 2000, the corporation recognized $24.570 million and $4.232 million, respectively, in nonrecurring income items. If these items are excluded from income, noninterest income would have increased 9% in 2002 and 10% in 2001. There were no nonrecurring income items in 2002. First Virginia receives approximately 22% of its revenue from noninterest sources, primarily service charges on deposit accounts, electronic banking service fees and asset management fees.

Income from service charges increased 6% in 2002 following increases of 12% in 2001 and 5% in 2000. Growth in fees from commercial accounts, internet banking and the corporation’s relationship products accounted for most of the increases in both 2002 and 2001. Commercial service charges grew 12% in 2002 following a 32% increase in 2001. This growth came from an increased customer base, an increase in fees from business deposit accounts for large customers with multiple locations, such as food stores, convenience stores and retailers, and businesses using the corporation’s cash management services. Internet banking fees continued to grow strongly, increasing 53% in 2002 after more than doubling in the prior year. The corporation has one of the most extensive business and consumer internet services available, giving customers the ability to manage all of their banking needs online. Service charges from the corporation’s relationship product, which encourages consumers to maintain all of their account relationships under one umbrella of linked accounts, increased 56% during 2002.

Income from electronic banking services continued to increase at a rapid rate. Led by growth in the corporation’s VISA CheckCard, fee income from these sources increased 14% in 2002, 28% in 2001 and 19% in 2000.

Income from trust and asset management services recovered slightly in 2002 with fees increasing 3% after declining 1% in 2001, following several years of double-digit growth. The decline in the stock market continued to impact asset values in customers’ accounts, the primary basis on which fees are calculated in this area.

Insurance income increased 15% in both 2002 and 2001. The high level of activity in real estate has resulted in two years of excellent growth in commissions from the sale of title insurance, which rose 54% in 2002 and 76% in 2001. The corporation continues to have success in selling insurance to its business customers as part of its commitment to total relationship banking, and as a consequence, income from the sale of commercial insurance products increased 22% in 2002, following increases of 25% and 54% in the prior two years. The weakness in the stock market over the past three years has increased the commissions from the sale of annuity products, particularly fixed annuities, and income from this source increased 246% in 2002 following increases of 15% and 10% in the prior two years. Changes in regulations affecting credit insurance have virtually eliminated the sale of credit insurance on consumer debt and, as a consequence, income from this area declined 29% in 2002, a trend that is expected to continue.

In 2001, there were two nonrecurring income items totaling $24.570 million compared to two nonrecurring items in 2000, which produced $4.232 million in income. There were no nonrecurring income items in 2002. In 2001, the corporation sold its banking affiliate serving the Knoxville, Tennessee, market and recorded a gain of $13.789 million and also recognized a gain of $10.781 million ($3.032 million included in securities gains mentioned below) upon the sale of its interest in Star Systems, Inc. to Concord EFS, Inc. The 2000 nonrecurring income was a result of the sale of six small and slower-growth banking offices in Virginia,

Maryland and Tennessee and the sale of the remainder of the corporation’s mortgage banking activities as it began offering mortgage loans only through its website.

The corporation recognized gains of $516 thousand in 2002 and $4.547 million in 2001, primarily from the sale of equity securities. The corporation’s policy is to hold virtually all of its fixed-income securities to maturity, and it generally does not have income from this source except for some bonds called by the issuer prior to the maturity date.


	*Noninterest Expense*

First Virginia continued to maintain excellent control over the growth of noninterest expense. In 2002, noninterest expense increased only 1% following a 3% increase in 2001 and a 2% decrease in 2000. Excluding the increase in expense in 2001 from the corporation’s acquisition of James River Bankshares, expense in 2001 would also have increased at just a 1% rate. The efficiency ratio improved to 52.0% in 2002 compared to 55.4% in 2001 and 56.3% in 2000 and is 3.7% points better than the peer group average of 55.7%. The corporation considers this an excellent result considering its more extensive branch network. Although the network tends to increase costs, it also generates a large number of low-cost core deposits that give the corporation a significantly higher net interest margin than its peer group of banks.

Salaries and employee benefits increased 5% during 2002 and 4% in 2001, driven primarily by increases in the costs of benefit plans. Employee health insurance increased 7% to $15.107 million following a 31% increase in 2001. Medical care costs nationwide are increasing at a rapid pace, and the corporation took a number of measures to reduce the impact of this inflation and still offer an attractive package for its employees. The continued decline in the stock market and lower interest rates combined to nearly triple the cost of the corporation’s qualified pension plan during 2002 to $1.862 million and will result in a probable increase in 2003 of approximately $4.521 million. Salaries expense increased only 2% in 2002 to $154.060 million as the corporation reduced the number of full-time-equivalent employees by 100 to 4,813 compared to the end of 2001. Continued gradual gains in efficiency and work flow resulting from the implementation of new technology, combined with the closure of the remainder of the corporation’s supermarket location branches, led to this improved productivity. The corporation has the lowest number of employees at the end of 2002 since 1993, despite a 60% increase in total assets.

Occupancy and equipment expenses increased less than 1% during 2002 after advancing only 1% in 2001. The corporation has been able to contain these costs while still allowing for growth and maintaining its computer capabilities at the top of the technology curve.

Amortization of intangibles declined 40% during 2002 to $8.847 million following a slight decline in 2001. During 2002, in accordance with Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), the corporation ceased the amortization of goodwill, reducing amortization expense by $6.161 million. Under the standards of this statement, goodwill is evaluated at least annually for impairment rather than amortized. Based on the corporation’s evaluation, there was no impairment of goodwill in 2002.

Other noninterest expenses increased 2% in 2002 and 3% in 2001 with most of those increases coming from the inclusion of expenses from the 2001 acquisition of James River Bankshares for the full year of 2002 and for six months in 2001. There were no significant changes in individual expense categories in 2002 or 2001.


	*Provision for Income Taxes*

Income tax expense increased 8% to $93.772 million compared to $86.605 million in 2001 consistent with an increase of 11% in pretax income. State income taxes were slightly higher than normal in 2001. Banks are not subject to state income tax in the state of Virginia; however, the parent company and its nonbanking subsidiaries pay state income taxes on their net income. The sale of the parent company’s former bank subsidiary and other equity securities increased the state income tax in 2001. The effective tax rate declined slightly to 33.8% from 34.5% in 2001, primarily as a result of the SFAS 142-related reduction in nondeductible goodwill and the decline in state income taxes to a more normal level in 2002.

Balance Sheet

First Virginia’s loan portfolio is its primary earning asset, generating approximately 61% of the corporation’s total revenue. Nearly all earning assets are funded from deposits originated through the corporation’s network of banking offices or from capital. Other sources of funding include customer repurchase agreements and commercial paper originated from business customers who utilize the corporation’s cash management products, which are functionally equivalent to deposits. The corporation does not fund any of its earning assets from “purchased” deposits or other nondeposit funding sources, nor does it sell or securitize any of its earning assets. The corporation’s objective is to invest 70–85% of its total deposits and short-term borrowings in loans. In 2002, the loan to funding liabilities rate was 68%, a decline from the 74% funding rate in 2001 and the 77% funding rate in 2000. The decline in the funding rate in 2002 was due primarily to a 9% increase in deposits, which grew faster than average loans.

The table below shows the average balances of the various categories of earning assets as a percentage of total earning assets for the years indicated.



	December 31

	2002			2001			2000			1999			1998

Loans		64.56	%		69.67	%		73.37	%		71.43	%		70.37	%
Securities		30.64			24.36			22.31			24.97			23.12
Money market investments		4.49			5.75			4.06			3.23			6.04
Other earning assets		.31			.22			.26			.37			.47

Total		100.00	%		100.00	%		100.00	%		100.00	%		100.00	%


	*Loans*

Growth in average outstanding loans has been slow in the last two years, averaging 1% in both 2002 and 2001. Demand for consumer and commercial loans began to slow in late 2000 as the economy entered into the 2001 recession. This weakness was exacerbated in late 2001 by the terrorist events of September 11 and continued into 2002 as fears of a possible war with Iraq served to restrain new investment by businesses and

dampen consumer spending. On the other hand, the lowest level in interest rates in nearly 40 years increased refinance and new loan activity for real estate related transactions, and loans in this area were up strongly in 2002. Overall, average loans increased $89.851 million to $6.510 billion during 2002 after advancing $41.062 million in 2001.

The largest component of First Virginia’s loan portfolio is automobile-related loans, particularly loans originated through automobile dealerships. The corporation is a full service provider to the automobile dealership community and makes loans to consumers to finance their purchase of automobiles and loans to dealers to finance their inventory of automobiles and, to a lesser extent, their facilities, as well as serving their cash management, insurance and other financial needs. The corporation is one of the 25 largest automobile lenders in the nation. As the corporation has leveraged its historic expertise, the percentage of auto-related loans increased from 38% of the loan portfolio at the end of 1994, to approximately 50% at the end of 2002. First Virginia is committed to remaining a full financial-service provider to the automobile market, regardless of swings in the economic cycle, and it devotes its primary lending resources to this area.

First Virginia concentrates on the highest quality automobile loans, primarily “A” and “B” credits. Most of these loans are made to consumers and are secured by new cars with a maximum term of 66 months. The corporation does not participate in the sub-prime or leasing markets. The loan portfolio’s high quality means net charge-offs are significantly below industry averages, and servicing and funding costs are among the lowest in the industry, giving the corporation a competitive advantage over less efficient producers. First Virginia uses an experienced loan reviewer in underwriting each loan in its local loan production offices and does not rely on credit-scoring models. This allows the corporation to give highly personal service and quick approval, generally in less than 16 minutes, to the dealer originating the loan. Once made, the loans are serviced centrally to ensure consistency and quality of collection at the lowest cost.



		December 31

		2002		2001		2000		1999		1998

Consumer
	Automobile	$	2,993,976	$	3,156,680	$	3,169,269	$	3,214,659	$	2,771,579
	Home equity, fixed- and variable-rate		645,659		748,888		743,542		831,952		898,748
	Revolving credit, including credit card		36,238		35,365		31,907		28,505		136,445
	Other		129,469		160,697		170,482		184,930		210,080
Commercial			815,210		862,794		954,925		852,140		824,475
Construction and land development			113,800		158,575		181,575		151,776		121,338
Real estate
	Commercial mortgage		713,330		619,356		432,053		409,590		401,330
	Residential mortgage (excluding loans held for sale)		930,184		768,204		682,711		711,848		729,220

Total loans, net of unearned income		$	6,377,866	$	6,510,559	$	6,366,464	$	6,385,400	$	6,093,215

In an effort to stimulate sales, the auto manufacturers have been offering very favorable low-rate financing options to consumers on a broad range of their new car lines since the latter part of 2001. In addition, reduced demand for commercial and other types of loans has induced competitors to pursue automobile lending more aggressively than in the past. This has reduced the corporation’s ability to increase average loans in this area at yields that compensate the bank for the risk assumed, and the corporation has deliberately slowed the addition of loans in this area. To offset this weakness, the corporation is making a slightly higher proportion of its loans for used cars, primarily late model, low mileage vehicles in excellent condition. In addition, the corporation has extended its geographic reach and added automobile dealers in Florida and Ohio during 2002 as part of its planned, gradual expansion of indirect automobile lending. Year-end automobile loan balances declined 5% in 2002, following two years of smaller 1% declines. This is in contrast to the

double-digit rate of increase in these loans in the late 1990s. The corporation has consolidated all of its automotive-related lending under one company, which permits it to maximize its service capabilities and take full advantage of the latest technology. It is consistently cited as one of the top banks for customer satisfaction for consumers and automobile dealers by J.D. Powers and Associates.

The corporation also makes loans directly to dealers to finance their sales inventory (floor plan loans), which are fully secured by specific automobiles and subject to periodic inspection. Average floor plan loans declined 14% in 2002 after dropping 7% in 2001 as dealers continued to reduce their inventory of cars available for sale. The low-interest rate plans offered by the automobile manufacturers further lessened the demand for this type of loan.

Home equity loans are the second largest component of the corporation’s consumer lending portfolio, comprising approximately 10% of outstanding loans at the end of 2002. Average loans in this area declined 2% in 2002 as consumers paid off balances and refinanced them at lower rates with new first-trust mortgage loans. Residential real estate loans, primarily fixed-rate loans with terms of 15 years, increased 21% at the end of 2002, following a 13% advance in 2001, as consumers took advantage of low interest rates. The corporation has made an effort to increase its share of loans in the home equity and consumer real estate categories and has several attractively priced programs offering fixed-rate loans for 15 years or less. Mortgage loans with terms greater than 20 years are available through First Virginia’s website but are immediately sold to an unaffiliated party. First Virginia pursues the highest quality home equity loans with low loan-to-value ratios, enabling it to show a nominal net charge-off rate. These loans are originated through the corporation’s banking office network.

Average commercial loans, excluding construction loans, declined 8% in 2002 following 4% increases in both 2001 and 2000. Demand for new commercial loans was weak throughout 2002 as businesses scaled back their expansion plans waiting for more positive signs of economic recovery and a resolution of global tensions. The corporation has been emphasizing commercial loans during the last several years, stressing the relationship nature of its program, and it has been successful in cross-selling its cash management, insurance and asset management services. The corporation makes its loans to small- and medium-sized businesses in the communities served by its affiliate banks, including loans to government contractors, high-tech companies, hospitals, churches and country clubs. These loans are typically in amounts between $1 and $5 million. The corporation originates and retains all of its own loans to businesses headquartered within its market footprint and does not participate in loans with other organizations nor in nationally syndicated credits.

Average construction loans declined 19% in 2002 and 2% in 2001 as customers completed their construction of new facilities and transferred their loans to commercial real estate loans with permanent financing. This category comprises only 2% of outstanding loans and is primarily for residential development projects or commercial office space built for the borrower’s own use, generally carrying floating or adjustable interest rates. The corporation does not make construction loans for speculative or unleased properties. Commercial real estate loans increased 15% in 2002 and 43% in 2001. The 2002 increase was primarily due to commercial loans made to the corporation’s business customers for owner-occupied properties, whereas the 2001 increase is largely attributable to the James River Bankshares acquisition.


	*Securities*

The corporation has historically classified virtually its entire securities portfolio as held to maturity because it has both the ability and the intention to hold these securities to their stated maturity. However, in the latter part of 2001 and in 2002, the corporation classified a greater proportion of newly purchased securities as available for sale to provide for additional liquidity in the event strong loan growth materialized. The total average investment portfolio increased 38% in 2002, as deposit growth exceeded loan growth. Securities available for sale increased 281% in 2002 while securities held to maturity declined by 1%. The corporation has constructed its portfolio in a “laddered” approach so an approximately equal amount matures each month.

This supplies liquidity to fund loan growth and provides for a natural hedge against changes in interest rates. The corporation does not invest in structured notes or other types of derivative securities.



		December 31

		2002		2001		2000

Available for sale
	U.S. Government and its agencies	$	611,541	$	999,819	$	99,275
	Mortgage-backed securities of U.S. Government agencies		302,809		447,385		—
	Other		11,349		10,584		11,714
Held to maturity
	U.S. Government and its agencies		2,291,074		1,173,365		1,720,667
	Mortgage-backed securities of U.S. Government agencies		244,199		94,214		16,707
	State and municipal		287,692		370,175		315,745
	Other		2,048		2,073		—

Total securities		$	3,750,712	$	3,097,615	$	2,164,108

The decline in interest rates in 2001 began to impact the securities portfolio in 2002 as securities purchased in earlier years began to mature and as U.S. Government agency securities subject to call provisions were called during the year. As a consequence, the yield on the portfolio declined 75 basis points to 5.12% after having increased six basis points in 2001 despite that year’s reduction in interest rate levels.

The corporation places primary importance on safety and liquidity in its securities portfolio. Accordingly, the majority of the portfolio is invested in U.S. Government and agency securities with maximum lives of approximately five years. As the result of the rapid growth in the portfolio and the reinvestment of called U.S. Government agency securities, the 49-month average expected duration of these securities was greater than the more typical 25-month average expected duration at the end of 2000. Because of the callable nature of these securities, the actual duration of the portfolio will likely be less than 49 months.

At December 31, 2002, U.S. Government and agency securities comprised 77% of the securities portfolio compared to 70% at the end of 2001. At the end of 2002, the corporation held $547.008 million in mortgage-backed securities of U.S. Government sponsored entities with average lives of less than five years. The remainder of the portfolio is invested primarily in taxable and tax-exempt municipal securities. Over the past several years, a greater proportion of new securities have been placed in U.S. Government agency securities and less in U.S. Treasury securities. This is due to the lower yields available on U.S. Treasury securities and their lack of availability in certain maturity ranges, a direct consequence of the reduction of the federal deficit and federal debt in the late 1990s. By the end of 2002, U.S. Treasury securities comprised less than 1% of the investment portfolio.


	Book		Average
	Value		Yield(1)

Available for sale
U.S. Government and its agencies:
One year or less	$	42,500		4.45	%
After five through ten years		569,041		4.27

Total U.S. Government and its agencies		611,541		4.28

Mortgage-backed securities of U.S. Government agencies:(2)
After one through five years		49,187		2.70
After five through ten years		107,735		4.55
After ten years		145,887		5.10

Total mortgage-backed securities of U.S. Government agencies		302,809		4.51

Total available for sale	$	914,350		4.36	%

Held to maturity
U.S. Government and its agencies:
One year or less	$	395,433		1.35	%
After one through five years		379,714		3.99
After five through ten years		1,515,927		4.24

Total U.S. Government and its agencies		2,291,074		3.70

Mortgage-backed securities of U.S. Government agencies:(2)
One year or less		359		4.62
After one through five years		849		6.12
After five through ten years		93,839		5.10
After ten years		149,152		5.88

Total mortgage-backed securities of U.S. Government agencies		244,199		5.58

State and municipal obligations:
One year or less		107,503		5.78
After one through five years		169,991		5.43
After five through ten years		9,640		6.72
After ten years		558		9.87

Total state and municipal obligations		287,692		5.61

Other securities:
After one through five years		2,048		5.88

Total held to maturity	$	2,825,013		4.06	%

(1) Fully taxable-equivalent basis.

(2) Based on contractual maturity.


	*Money Market Investments*

Money market investments, consisting primarily of federal funds sold and securities repurchase agreements, are generally governed by the size of normally anticipated deposit swings and loan demand. In 2002, average money market investments declined 15% to $452.527 million, following a 50% increase in 2001, as the corporation sought to reduce the percentage of this type of investment because of the extremely low interest rates in the short-term money markets. The increase in the prior year was a result of a reduced demand for loans and strong growth in deposits.


	*Deposits*

Average deposits increased 9% in 2002 to $8.874 billion following a 4% growth in 2001 and a 1% decline in 2000. Growth in deposits was strong throughout 2002 as the corporation continued to utilize its branch network and emphasize relationship banking. In addition, the third straight year of stock market declines reduced consumer and commercial confidence in equity-based investments. This increased the preference for more stable and secure vehicles such as bank deposits, despite the dramatic drop in interest rates that occurred in 2001. The corporation’s traditional emphasis on personal service and its reputation for safety and soundness typically attract deposits during periods of economic uncertainty. In mid-2001, the corporation acquired James River Bankshares with approximately $433 million in deposits, and in August, it sold its former affiliate in Knoxville, Tennessee, with approximately $136 million in deposits.

2002=$8,874

Average Deposits

(Millions of Dollars)

LOGO

2001=$8,131

2000=$7,847

(LEGEND FOR PIE CHARTS)

The corporation offers a variety of accounts that appeal to different target groups. The FirstVantage Plus account, which offers an attractive array of features to the high-balance customer, has grown substantially in the past several years. Other accounts, appealing more to the typical mid-balance customer, provide relationship linkages that avoid service charges. The corporation’s extensive branch office network creates a strong retail focus, resulting in a higher percentage of customers’ maintaining balances in transaction accounts compared to other banks. Approximately 41% of the corporation’s average deposits were composed of demand and interest checking accounts, a much higher percentage than most banks. This mix permits the corporation to maintain one of the lowest cost of funds among the 50 largest banks in the country.

Average demand deposits increased 14% during 2002 to $1.886 billion following growth of 4% in 2001. Most of this increase has come from commercial customers as the corporation continues to target this segment and increase its share of business coming from this source. Interest checking accounts increased 12% to $1.741 billion following a 4% increase in 2001, and the cost of funds from this source declined 13 basis points to .24%. Average money market accounts increased 38% in 2002 to $1.361 billion and grew 6% in 2001. The cost of these funds declined 118 basis points during 2002 to 1.55%. Because of its long-term strategy of increasing the proportion of funds it obtains from this lower-cost source of funds, the corporation has offered interest rates slightly higher than competing banks for the last two years. In addition, part of the growth in 2002 was a consequence of the low level of rates for alternative financial instruments and consumers’ desire to maintain liquidity in the event interest rates began to increase again. Savings accounts increased 8% in 2002 to $1.104 billion after declining slightly in 2001, reflecting consumers’ desire to increase liquidity and move financial assets away from equity-based investments. The cost of these funds declined 54 basis points to .64%.

Interest rates on certificates of deposit declined 148 basis points during 2002 to an average cost of 3.60%. The Federal Reserve’s 11 rate decreases in 2001 began to impact the corporation’s cost of funds in this area in 2002 as certificates issued in prior years at higher rates began to mature and were renewed at significantly lower rates. While most of this downward repricing was in place by the end of 2002, the corporation will still see some further reduction in its cost of funds in the latter part of 2003 as certificates issued five years ago begin to mature and experience significantly lower repricing. However, the lower level of interest rates for certificates of deposit persuaded some customers to move funds to more liquid forms of deposit such as money market accounts and, as a consequence, average outstanding certificates declined 4% to $2.297 billion.

Large denomination certificates of deposit declined 6% in 2002 to $484.420 million after increasing 10% in 2001 and 7% in 2000. The cost of funds in this category declined 167 basis points to 3.69% in 2002 after declining five basis points in 2001. Most of these deposits come from the corporation’s core consumer customers and a smaller amount from state and political jurisdictions that maintain other relationships with the corporation. The consumer certificates tend to mirror the rates of the regular certificates of deposit category. However, the state and political certificates are generally for much shorter average duration with rates that move more quickly in response to changes in interest rates. This group of certificates was primarily responsible for the decline in average balances in this category in 2002 as the corporation, not needing these types of funds, lessened its rates. The corporation does not purchase brokered deposits nor does it solicit deposits outside of its primary market areas.

Maturity ranges for certificates of deposit with balances of $100,000 or more on December 31, 2002, were:


Maturity Ranges	Amount

One month or less	$	76,012
After one through three months		54,249
After three through six months		70,124
After six through twelve months		157,183
Over twelve months		109,151

Total	$	466,719


	*Other Interest-Bearing Liabilities*

Short-term borrowings consist primarily of securities sold by the affiliate banks with an agreement to repurchase them on the following business day and commercial paper issued by the parent company, primarily to commercial customers using the corporation’s cash management services. Average short-term borrowings from these sources increased by 5% in 2002 to $620.180 million following several years of 21% to 27% growth. The lower growth rate in 2002 was a result of extremely low interest rates in the short-term money markets, which encouraged customers to reduce the percentage of their funds held in these liquid investments. In prior years the large increases were a result of the corporation’s success in increasing the number of commercial customers utilizing its sophisticated cash management services, including Treasury Workstation for larger businesses and Business Express, an internet product introduced in 2000 for small- and medium-sized businesses. The corporation does not borrow from other banks or debt markets.

Long-term debt consists of capitalized lease obligations on branch office facilities that are not subject to prepayment. In addition, long-term debt at December 31, 2002, includes $13 million in advances from the Federal Home Loan Bank incurred by James River Bankshares prior to its affiliation with First Virginia. Normally, the corporation does not borrow from the Federal Home Loan Bank although it is eligible to do so.


	*Shareholders’ Equity*

First Virginia has historically been one of the most highly capitalized banking companies in the nation, a reflection of its principles of safety, profitability and growth, in that order, and it maintains a capital position significantly higher than its peer group of banks. The ratio of total capital to total assets increased to 11.03%

compared to 10.85% at the end of 2001. The increase in the equity to asset ratio in 2002 and 2001 was a consequence of the retention of a greater amount of income. The corporation distributes its net income to shareholders through the payment of cash dividends and through the repurchase of its own shares in the open market. In 2002, the corporation increased its dividend twice during the year for the 21st consecutive year and declared dividends of $1.0933 per share, a 5% increase over the $1.04 declared in 2001, which represented 43% of net income. Book value per share increased 9% during 2002 to $17.46 compared to a 12% increase in 2001.

During 2002, the corporation purchased 1,003,850 shares of its stock at a total cost of $36.189 million compared to 748,500 shares in 2001 and 4,611,300 shares in 2000. Since 1993, the corporation has purchased an average of 2.404 million shares of stock each year and intends to purchase additional shares as market conditions dictate. The corporation’s Board of Directors approved a nine-million-share repurchase program in 1999, and there were 1.435 million shares authorized for repurchase at the end of 2002.

First Virginia’s subsidiary banks are required to comply with capital adequacy standards established by the Federal Reserve and the FDIC. Because of the high level of capital and the conservative nature of its assets, the corporation exceeded the additional regulatory risk-based capital requirements by wide margins. The Tier 1 risk-based capital ratio increased 141 basis points to 14.99% after increasing 138 basis points in 2001 to 13.58%. This increase in the risk-based ratio was due in part to an increase in the level of capital beyond that needed to pay dividends and repurchase stock of the corporation and by a reduction in the level of risk-based assets as assets shifted from more heavily weighted loans to lower weighted investment securities. The Total capital ratio increased 142 basis points in 2002 to 16.01% for the same reasons. Each of the corporation’s individual banks maintains capital ratios well in excess of regulatory minimums, and all qualify as “well capitalized” banks, allowing them the lowest FDIC premium rate and freedom to operate without restrictions from regulatory bodies.

Asset Quality

The corporation has a number of policies, reviewed regularly by senior management, to ensure that the risk in lending and investment activities is minimal, while the profit is consistent with the exposure to risk. Each affiliate bank’s internal loan monitoring system also provides a detailed monthly report of production, delinquencies, and nonperforming and potential problem loans. This careful monitoring has resulted in a consistent record of low delinquencies and charge-offs, as well as few nonperforming loans in relation to the entire loan portfolio.

The corporation has no foreign, nationally syndicated or highly leveraged transaction loans, and loans are only made within the trade areas of the affiliated banks or in adjacent states where the corporation maintains loan production offices generating high quality consumer installment loans. Loans are generally not participated with nor purchased from banks outside of the First Virginia affiliated group. In addition, participations between banks within the First Virginia group must first be shared with the corporation’s lead bank, where a second comprehensive loan review is performed. Approximately 74% of the corporation’s loans are made to consumers and are normally secured by personal or real property.

First Virginia has no significant concentrations of credit to a single industry or borrower, and its loans are spread throughout its market area. The corporation’s legal lending limit to any one borrower is approximately $111 million; however, it generally limits its loans to any one borrower and related interests to $15 million. In special cases, the corporation may exceed its internal guideline.

One of the corporation’s specialty loan areas is the automobile finance area, and loans are made to consumers, both directly through the corporation’s branch network and indirectly through automobile dealerships. Roughly half of the total loan portfolio is comprised of consumer automobile loans, but because loan amounts are relatively small and spread across many individual borrowers, the risk of any major charge-offs is minimized. The corporation’s automobile loans consist primarily of the highest quality loans, commonly referred to in the industry as “A” and “B” quality loans. These loans contain substantially fewer risk characteristics than lower quality “C” and “D” subprime loans and have lower delinquencies, charge-offs and collection costs. During periods of economic weakness, subprime loan categories generally have much higher delinquencies and charge-offs, while the high-quality loans the corporation specializes in experience only modestly higher delinquencies and charge-offs. The corporation also makes loans directly to high-quality automobile dealers to finance their inventories.


	*Nonperforming Assets*

After dropping 15% in 2001, nonperforming assets declined 31% in 2002 to a record low of .20% of outstanding loans at year-end. Total nonperforming assets were $12.665 million at the end of 2002 compared to $18.484 million or .28% of outstanding loans at the end of 2001, a continuation of a long-term downward trend begun in the early 1990s. First Virginia’s ratio of nonperforming assets has consistently been much lower than the average for similar sized banks in the corporation’s national and regional peer groups. There were no concentrations of foreclosed real estate or nonaccruing loans in any specific geographic location or type of property, and the majority of nonperforming assets were comprised of smaller-balance loans to consumers.

The table below shows total nonperforming assets at the end of each of the past five years. Experience has shown that actual losses on nonperforming assets are only a small percentage of such assets. The corporation expects to recover virtually all of its nonperforming assets, many with full interest.



	December 31

	2002			2001			2000			1999			1998

Nonaccruing loans	$	10,683		$	15,576		$	14,954		$	14,507		$	14,654
Restructured loans		496			912			1,814			1,829			2,441
Properties acquired by foreclosure		1,486			1,996			5,096			3,503			4,695

Total	$	12,665		$	18,484		$	21,864		$	19,839		$	21,790

Percentage of total loans and foreclosed real estate		.20	%		.28	%		.34	%		.31	%		.36	%
Loans 90 days past due and still accruing interest	$	10,105		$	14,365		$	11,111		$	12,401		$	17,162
Percentage of total loans		.16	%		.22	%		.17	%		.19	%		.29	%

Loans past due 90 days or more and still accruing interest decreased 30% at December 31, 2002, to $10.105 million and comprise only .16% of outstanding loans compared to a 29% increase to $14.365 million or .22% of outstanding loans in 2001. The corporation’s delinquency ratio is significantly below industry averages, reflecting the high overall quality of its loan portfolio.

Loans are classified as nonaccrual when full collectibility of principal or interest is in doubt; when repossession, foreclosure or bankruptcy proceedings are initiated; or when other legal actions are taken. Installment loans are generally placed in a nonaccrual status when payments are delinquent 120 days. All other loans are generally placed in nonaccrual status when they are 90 days delinquent. Loans may be classified as nonaccrual sooner if specific conditions indicate impairment is probable. A nonaccrual loan may be restored to an accruing status when principal and interest are no longer past due and future collection of principal and interest is not in doubt.

Potential problem loans consist of loans that are currently performing in accordance with contractual terms but for which management has concerns about the ability of an obligor to continue to comply with repayment terms because of the obligor’s potential operating or financial difficulties. At the end of 2002, loans of this type that are not included in the table of nonperforming and past due loans on this page amounted to approximately $33.935 million compared to $42.816 million at the end of the prior year. The majority of these loans represent commercial or property-related loans. Depending on changes in the economy and other unforeseen events, these loans and others not presently identified as problem loans could be reclassified as nonperforming or impaired loans in the future.


	*Allowance for Loan Losses*

The allowance for loan losses is maintained at a level that represents management’s best estimate of credit losses for specifically identified loans as well as losses inherent in the remainder of the loan portfolio. The provision for loan losses is the periodic cost of maintaining an appropriate allowance. At December 31, 2002, the allowance for loan losses was $71.013 million representing 1.11% of total loans outstanding, up slightly compared to the allowance at the end of 2001 of 1.10%. Net charge-offs increased to .17% of average loans during 2002, compared to .14% during 2001 and 2000. The primary reason for this increase in overall net charge-offs was a three basis point increase in net charge-offs of indirect automobile loans to .23%. Although the indirect automobile rate was up from .20% in both 2001 and 2000, it was still slightly below the five-year average of .24%. Other consumer loan net charge-offs increased eight basis points to ..34% of average consumer loans after a 12 basis point increase in 2001, but it is still significantly below peer group averages. There was a modest net recovery in real estate loans, and commercial loans had a four basis point increase to .06%, in line with the five-year average in this category. An analysis of the activity in the allowance for loan losses for each of the last five years is presented in the table on page 24.

The allowance for loan losses is composed of three elements: a general allowance based on historical loan loss experience and current trends, a specific allowance established on designated loans, and an unallocated allowance based on general economic conditions and other risk factors in the corporation’s individual markets. The general allowance is the largest component of the total allowance and is determined by the mix of loan products within the overall loan portfolio, an internal loan grading process and associated allowance factors. These factors are reviewed and updated periodically to reflect current charge-off and credit quality trends and specific risks associated with each loan category.

LOGO



		December 31

		2002			2001			2000			1999			1998

Balance at beginning of year		$	71,937		$	70,300		$	70,119		$	70,312		$	68,064
Provision charged to operating expense			9,955			6,755			9,428			14,190			20,800
Increase attributable to acquisitions			—			5,479			—			—			679
Decrease attributable to divestiture			—			(1,331	)		—			—			—
Reserve on loans sold			—			—			—			(4,323	)		—

Total balance before charge-offs			81,892			81,203			79,547			80,179			89,543

Charge-offs
	Indirect automobile		9,045			8,041			7,894			8,654			9,743
	Other consumer (including credit card)		4,985			4,235			3,241			4,663			13,238
	Real estate		173			445			518			188			215
	Commercial		700			1,140			1,138			679			384

Total charge-offs			14,903			13,861			12,791			14,184			23,580

Recoveries
	Indirect automobile		2,080			2,146			1,938			2,145			2,034
	Other consumer (including credit card)		1,563			1,386			1,521			1,891			2,198
	Real estate		235			104			28			29			47
	Commercial		146			959			57			59			70

Total recoveries			4,024			4,595			3,544			4,124			4,349

Net charge-offs			10,879			9,266			9,247			10,060			19,231

Balance at end of year		$	71,013		$	71,937		$	70,300		$	70,119		$	70,312

Net loan losses to average loans
	Indirect automobile		.23	%		.20	%		.20	%		.23	%		.32	%
	Other consumer (including credit card)		.34			.26			.14			.21			.69
	Real estate		—			.03			.04			.01			.02
	Commercial		.06			.02			.10			.06			.03
	Total loans		.17			.14			.14			.16			.32
Allowance for loan losses to year-end loans			1.11	%		1.10	%		1.10	%		1.10	%		1.15	%

The consumer loan portfolio is separated by loan type, and each type is treated as a homogeneous pool. Specific consumer pools include indirect installment loans, direct installment loans, revolving credit and residential mortgages. A general allowance is allocated to each of these pools based upon historical trends in charge-off rates, current delinquency ratios and loan characteristics. Consumer loans tend to be for relatively short durations of three to seven years and have fairly consistent charge-off experience. A general allowance is also allocated to a portion of the commercial loan portfolio. Each commercial and commercial real estate loan is assigned a risk rating by the loan officer based on established credit policy guidelines. These risk ratings are periodically reviewed, and all ratings are subject to independent review. Loans receiving a risk rating of average or above are aggregated and assigned an allocation percentage, which when multiplied by the dollar amount of loans results in a general allowance for these loans. The allocation percentage is based upon historical loss rates adjusted for current conditions.

Loans receiving a below average rating, excluding nonperforming loans in excess of $25 thousand, are assigned a specific allowance based upon the level of classification. Each nonperforming loan in excess of $25 thousand is reviewed and a specific allowance established. The amount of specific allowance assigned is based upon an assessment of probable sources of repayment including cash flow, collateral value, and the capacity of guarantors, if any.

The unallocated allowance comprised 6% of the total allowance as of December 31, 2002, unchanged from the end of 2001. This portion of the allowance is based on management’s evaluation of various conditions that are not directly measured by any other component. The evaluation includes, but is not limited to, general economic trends, business conditions affecting key lending areas, changes in credit quality, collateral values, loan volumes, concentrations of credit risk, results of internal credit reviews and regulatory examinations. The amount of reserves allocated to the major loan categories is indicated in the following table:



		2002					2001

		Percent					Percent
		of			Allowance		of			Allowance
		Loans			Allocation		Loans			Allocation

Consumer
	Indirect installment		45	%	$	28,709		46	%	$	29,469
	Direct installment		10			8,539		13			10,143
	Revolving credit		1			7,247		1			7,073
Commercial			13			11,436		13			10,407
Construction and land development			2			439		2			694
Real estate
	Commercial mortgage		11			6,321		10			5,961
	Residential mortgage		18			4,085		15			3,515
Unallocated			—			4,237		—			4,675

Total allowance for loan losses			100	%	$	71,013		100	%	$	71,937

Liquidity and Sensitivity to Interest Rates

The primary functions of asset/liability management are to ensure adequate liquidity and maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities. Interest-sensitive assets and liabilities are those that can be repriced to current market rates within a relatively short time period. Liquidity management involves the ability to meet the cash flow requirements of the corporation’s loan and deposit customers. Interest-rate-sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. The corporation does not hedge its position with swaps, options or futures but instead maintains a highly liquid and short-term position in substantially all of its earning assets and interest-bearing liabilities.

One of the primary ways the corporation meets its liquidity needs is by scheduling the maturity of its securities so that an approximately equal amount will mature each month. The weighted-average expected duration of the securities portfolio at the end of 2002 was 49 months, compared to 55 months at the end of 2001. Because the corporation views its securities portfolio primarily as a source of liquidity and safety, it does not necessarily react to changes in the yield curve in an attempt to enhance its yield. Accordingly, the average life of the portfolio is typically between two and three years as the corporation maintains a constant approach to its portfolio and invests primarily in U.S. Government and agency securities with a life generally no greater than five years. Due to the growth in deposits over the past two years and the weakness in loans, the securities portfolio has grown rapidly to absorb excess liquidity. This has resulted in an extension in the average life of the portfolio; however, this is expected to shorten as the portfolio matures and loans resume a more normal growth pattern. Municipal securities are also generally limited to lives of no more than five years, but availability and other factors mean they are occasionally purchased in serial issues with longer lives.

A cash reserve consisting primarily of overnight investments is also maintained by the parent company to meet any contingencies and to provide additional capital, if needed, to the affiliate banks.

Most of the corporation’s loans are fixed-rate installment loans to consumers and mortgage loans with maturities longer than the deposits by which they are funded. A degree of interest-rate risk is incurred if the interest rate on deposits should rise before the loans mature. However, the substantial liquidity provided by the

monthly repayments on these loans can be reinvested at higher rates that largely reduce the interest-rate risk. Home equity lines of credit have adjustable rates that are tied to the prime rate. The majority of the loans not in the installment or mortgage categories have maturities of less than five years or have floating rates that may be adjusted periodically to reflect current market rates. These loans are summarized in the table below.


			Between
	One Year		One and		After Five
Maturity ranges and interest-rate sensitivity	or Less		Five Years		Years		Total

Commercial	$	286,266	$	310,204	$	218,740	$	815,210
Construction and land development		33,608		75,291		4,901		113,800

Total	$	319,874	$	385,495	$	223,641	$	929,010

Fixed-rate loans			$	333,277	$	162,447	$	495,724
Floating-rate loans				52,218		61,194		113,412

Total			$	385,495	$	223,641	$	609,136

First Virginia’s Asset/ Liability Committee is responsible for reviewing the corporation’s liquidity requirements and maximizing the corporation’s net interest income consistent with capital requirements, liquidity, interest rate and economic outlooks, competitive factors and customer needs. Liquidity requirements are reviewed in detail for each of the corporation’s affiliate banks; however, overall asset/liability management is performed on a consolidated basis to achieve a consistent and coordinated approach.

One of the tools the corporation uses to determine its interest-rate risk is gap analysis. Gap analysis attempts to examine the volume of interest-rate-sensitive assets minus interest-rate-sensitive liabilities. The difference between the two is the interest-sensitivity gap, and it indicates how future changes in interest rates may affect net interest income. Regardless of whether interest rates are expected to increase or decrease, the objective is to maintain a gap position that will minimize any changes in net interest income. A negative gap exists when more interest-sensitive liabilities mature within a certain time period than interest-sensitive assets. Under this scenario, if interest rates were to increase it would tend to reduce net interest income.

The table on the next page shows the corporation’s interest-sensitivity position at December 31, 2002. The corporation was liability sensitive in the short term (under six months) by approximately 35% of earning assets, which declines to 33% in 12 months. Technically, the corporation may reprice interest checking, savings and insured money market accounts at any time and, accordingly, they have been classified in the 1-30 day sensitivity category. However, the degree and frequency of movement are more limited in practice, and they are much less sensitive than contractually possible.


														Beyond One
		1-30 Day			1-90 Day			1-180 Day			1-365 Day			Year or
		Sensitivity			Sensitivity			Sensitivity			Sensitivity			Nonsensitive			Total

Earning assets
	Loans, net of unearned income	$	667,511		$	1,085,480		$	1,635,816		$	2,666,895		$	3,710,971		$	6,377,866
	Securities		432,772			501,954			597,570			740,433			3,010,279			3,750,712
	Money market investments		210,339			210,339			210,339			210,339			—			210,339
	Other earning assets		—			—			—			—			36,383			36,383

Total earning assets			1,310,622			1,797,773			2,443,725			3,617,667			6,757,633			10,375,300

Funding sources
	Noninterest-bearing demand deposits		—			—			—			—			2,064,033			2,064,033
	Interest checking		1,878,680			1,878,680			1,878,680			1,878,680			—			1,878,680
	Money market		1,468,356			1,468,356			1,468,356			1,468,356			—			1,468,356
	Savings		1,126,497			1,126,497			1,126,497			1,126,497			—			1,126,497
	Consumer certificates of deposit		201,656			426,529			817,351			1,588,090			618,116			2,206,206
	Large denomination certificates of deposit		76,012			130,261			200,385			357,568			109,151			466,719
	Short-term borrowings		617,589			617,589			617,589			617,589			—			617,589
	Long-term debt		5,000			5,000			5,000			5,000			8,488			13,488
	Other funding sources		—			—			—			—			533,732			533,732

Total funding sources			5,373,790			5,652,912			6,113,858			7,041,780			3,333,520			10,375,300

Interest-sensitivity gap		$	(4,063,168	)	$	(3,855,139	)	$	(3,670,133	)	$	(3,424,113	)	$	3,424,113		$	—

Interest-sensitivity gap as a percentage of earning assets			(39.16	)%		(37.16	)%		(35.37	)%		(33.00	)%		33.00	%		0.00	%
Ratio of interest-sensitive assets to interest-sensitive liabilities			0.24x			0.32x			0.40x			0.51x			2.02x			1.00x

First Virginia also uses simulation analysis to monitor and manage interest-rate sensitivity. Under this analysis, changes in interest rates and volumes are used to test the sensitivity of First Virginia’s net interest income. Simulation analysis uses a more dynamic version of the information shown in the table above and includes adjustments for the expected timing and magnitude of changes in assets and liabilities. These adjustments take into account that interest rates on individual asset and liability categories may change at a different pace from their contractual rate. A large part of First Virginia’s loans and deposits come from its retail base, and they do not automatically reprice on a contractual basis in reaction to changes in interest rates. While First Virginia’s liability sensitivity in the short term indicates that an increase in interest rates may negatively affect short-term net interest income, management would likely take actions to minimize its exposure to negative results and within a relatively short period of time make adjustments so that net interest income would not be materially impacted. For example, the corporation’s net interest margin has averaged 5.10% over the past ten years and has exceeded 4.87% every year since 1978, despite wide changes in interest rates. After declining by 475 basis points in 2001, short-term interest rates remained relatively stable during 2002. The corporation benefited from the more rapid downward repricing in deposits during 2002, particularly certificates of deposit. As a consequence, the net interest margin rose four basis points to 4.91% in 2002, after declining nine basis points in 2001. During 2003, assuming no significant upward movement in interest rates, the net interest margin will more than likely decline as securities and loans mature and are repriced downward.

Using shock analysis of a hypothetical, immediate increase in all interest rates of 200 basis points, and comparing that to the anticipated interest-rate environment over the next 12 months, indicates that net interest income would decrease by 15%, while an immediate and hypothetical decrease in rates of 200 basis points would decrease net interest income by 10%. Such an immediate change in all rates would be highly unlikely in management’s opinion. The corporation’s dynamic simulation modeling takes into account the effects such changes may have on overall economic activity, the reaction of individual categories of assets and liabilities, and the impact that different management actions may have on net interest income. Accordingly, First Virginia has not experienced the volatility its interest-sensitive gap position or shock analysis may indicate.

Over time, or under stable interest rate conditions, net interest income will tend to be greater at higher interest rate levels. This is due to the large proportion of low-cost core deposits such as demand, interest checking, savings and money market accounts, comprising the corporation’s funding sources, which can be invested in relatively higher-yielding loans and investments.

Critical Accounting Policies

The accounting and reporting policies of the corporation are in accordance with accounting principles generally accepted in the United States of America and conform with general practices in the banking industry. The preparation of financial statements in conformity with these principles 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. These estimates and assumptions are based on information available at the date of the financial statements and could differ from actual results.

The single most critical accounting policy involves the determination of the allowance for loan losses, which reflects management’s best estimate of losses from the inability of the corporation’s borrowers to make their required loan payments. If the financial condition of the corporation’s borrowers were to deteriorate, resulting in their inability to repay the corporation, the corporation’s estimates would be reviewed and an additional provision for loan losses may be required. A more detailed discussion of the estimates and methodology used for determining the allowance for loan losses is found beginning on page 22.

New Financial Accounting Standards

During 2002, the Financial Accounting Standards Board issued four new accounting pronouncements that are briefly described below. These new pronouncements have had no impact on the corporation’s financial results nor are they expected to have a material impact.

Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections” (SFAS 145), was issued in April 2002. This statement affects the accounting for the extinguishment of long-term debt and eliminates an inconsistency between the required accounting for sale-leaseback transactions. In addition, SFAS 145 amends other existing authoritative pronouncements to make various technical corrections, clarify meaning, or describe their applicability under changed conditions.

Statement of Financial Accounting Standards No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” (SFAS 146), was issued in June 2002. It addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force Issue 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity” (EITF 94-3). Unlike EITF 94-3, SFAS 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when that liability is incurred rather than at the date of an entity’s commitment to an exit plan.

Statement of Financial Accounting Standards No. 147, “Acquisitions of Certain Financial Institutions” (SFAS 147), was issued in October 2002 and amends existing authoritative pronouncements. SFAS 147 requires that acquisitions of financial institutions be accounted for in accordance with Statement of Financial

Accounting Standards No. 141, “Business Combinations”, and Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets.”

Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” was issued in December 2002. It amends Statement of Financial Accounting Standards No. 123, “Accounting for Stock Based Compensation” (SFAS 123), to provide alternative methods of transition for an entity that voluntarily adopts the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provision of SFAS 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decision with respect to stock-based employee compensation.

Forward-Looking Statements

Certain statements in this discussion may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks including, but not limited to, changes in general economic and business conditions, interest-rate fluctuations, competition within and without the banking industry, new products and services in the banking industry, risks inherent in making loans, including repayment risks and fluctuating collateral values, changing trends in customer profiles and changes in laws and regulations applicable to the corporation. Although the corporation believes that its expectations with respect to the 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, performance or achievements of the corporation will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

Quarterly Results

The results of operations for the first three quarters of 2002 have been analyzed in quarterly reports to shareholders. The results of operations for each of the quarters during the two years ended December 31, 2002, are summarized in the table on the next page. The results of operations for the fourth quarter are highlighted below.

For the fourth quarter of 2002, First Virginia’s earnings per share increased 20% to $.67 or $47.851 million compared to $.56 or $40.284 million earned in the 2001 fourth quarter. The return on average assets was 1.73% compared to 1.54% in the prior year’s fourth quarter, and the return on average shareholders’ equity was 15.34% compared to 13.96%.

Average loans declined in the fourth quarter of 2002 by 2% to $6.433 billion compared to the prior year’s fourth quarter of $6.548 billion and were down 1% compared to the third quarter of 2002. Real estate loan activity increased at a strong 18% annualized pace from the third quarter as consumers and businesses took advantage of some of the lowest rates in 40 years. However, this was not enough to offset the impact of a sluggish economy and the zero-interest loans offered by auto manufacturers, which resulted in a 13% decline in average consumer installment loans, a 12% decline in business loans and an overall decline in fourth quarter average loans. Average deposits increased 7% over the prior year’s fourth quarter to $9.054 billion and at a 5% annualized rate over the third quarter. The strongest growth occurred in the corporation’s lower-cost core deposit areas with average demand deposits increasing 13%, interest checking 11% and money market accounts 33% compared to the prior year. Total assets reached a new high at December 31, 2002, of $11.228 billion compared to $10.623 billion at the end of 2001.

The sustained low level of interest rates and lack of loan demand reduced the corporation’s fourth quarter net interest margin to 4.75% compared to 4.90% in the third quarter of 2002 and 4.91% in the fourth quarter of 2001. The corporation expects a continued slight decline in the net interest margin in 2003 before a growing economy is expected to stimulate loan demand.

Noninterest income increased 9% to $36.267 million in the fourth quarter compared to $33.293 million in the prior year’s fourth quarter and the $34.079 million recorded in the third quarter. Service charges on deposit accounts increased 3% compared to the prior year’s fourth quarter, driven by a 17% increase in service charge

income from commercial accounts and a 39% increase in fees from internet-based banking for consumers and small-to medium-sized businesses. Fee income from electronic banking services increased 11% compared to the prior year’s fourth quarter, a direct result of increased sales and usage of the corporation’s debit card product. Income from the sales of insurance products in the fourth quarter declined 13% compared to the prior year, the result of new regulations that virtually eliminated the sale of credit insurance on consumer debt and will decrease the profitability of this area in the future. However, the corporation experienced strong growth in insurance agency income, which advanced at a 53% rate during the year. During the quarter, the corporation recognized a gain of $516 thousand from the sale of some equity securities.

The corporation continued to exercise its historic strong control over noninterest expense, and total expense declined 5% to $83.275 million compared to the prior year’s fourth quarter and was down from the $84.671 million in the third quarter of 2002. There were no significant changes in quarterly individual expense categories in 2002 or in comparison to the prior year’s fourth quarter, other than the elimination of $6.161 million in amortization expense because of new accounting rules for goodwill. The corporation achieved a new low in its efficiency ratio in the fourth quarter of 51.0% compared to 51.7% in the prior quarter and 54.6% in the fourth quarter of 2001.

At December 31, 2002, nonperforming assets declined 12% to $12.665 million compared to the previous record low achieved at the end of the third quarter of $14.409 million and were down 31% compared to the $18.484 million at the end of 2001. This decline resulted in a new record low of .20% in nonperforming assets as a percentage of outstanding loans compared to .22% at the end of the third quarter and .28% at December 31, 2001. Loans past due 90 days or more dropped 30% to $10.105 million or ..16% of loans at December 31, 2002, compared to $14.365 million or .22% of loans at the end of the prior year. Net charge-offs increased to $3.134 million or .19% in the fourth quarter compared to $2.277 million or .14% in the third quarter as the corporation, concerned over potential declines in used car prices, intentionally reduced its inventory of repossessed automobiles. At December 31, 2002, the allowance for loan losses of 1.11% of outstanding loans was unchanged from the end of the prior quarter and covered net charge-offs 6.5 times. The provision for loan loss expense declined 8% during the fourth quarter of 2002 to $1.885 million compared to the prior year’s fourth quarter.



			2002 Quarter Ended												2001 Quarter Ended

			Dec. 31			Sept. 30			June 30			Mar. 31			Dec. 31			Sept. 30			June 30			Mar. 31

Condensed Statements of Income
Interest and fees on loans			$	111,648		$	116,342		$	118,317		$	118,364		$	124,348		$	129,814		$	123,586		$	126,245
Income from securities				36,157			36,776			41,116			39,481			36,880			32,095			29,750			28,585
Other interest income				2,668			3,199			1,756			1,602			2,588			6,177			6,951			6,304

		Total interest income		150,473			156,317			161,189			159,447			163,816			168,086			160,287			161,134

Interest on deposits				27,791			31,094			34,878			39,182			44,322			50,263			49,291			50,466
Interest on borrowed funds				1,365			1,759			1,747			1,761			2,557			4,538			4,925			6,407

		Total interest expense		29,156			32,853			36,625			40,943			46,879			54,801			54,216			56,873

Net interest income				121,317			123,464			124,564			118,504			116,937			113,285			106,071			104,261
Provision for loan losses				1,885			1,194			3,359			3,517			2,046			1,708			2,138			863
Noninterest income				36,267			34,079			33,633			33,245			33,293			45,005			32,973			38,726
Noninterest expense				83,275			84,671			84,708			84,755			87,366			85,062			80,205			80,107
Provision for income taxes				24,573			24,377			23,564			21,258			20,534			25,000			19,316			21,755

		Net income	$	47,851		$	47,301		$	46,566		$	42,219		$	40,284		$	46,520		$	37,385		$	40,262

Net income per share
	Basic		$	.67		$	.66		$	.65		$	.59		$	.56		$	.64		$	.54		$	.58
	Diluted			.67			.66			.64			.59			.56			.64			.54			.58

Average Quarterly Balances (in millions)
Securities			$	3,263		$	3,000		$	3,123		$	2,974		$	2,684		$	2,243		$	2,061		$	1,985
Loans				6,433			6,515			6,588			6,506			6,548			6,592			6,245			6,292
Total earning assets				10,318			10,176			10,054			9,783			9,672			9,514			8,930			8,733
Total assets				11,089			10,939			10,847			10,584			10,473			10,307			9,643			9,448

Demand deposits				1,985			1,915			1,871			1,772			1,754			1,707			1,617			1,553
Interest-bearing deposits				7,069			7,026			7,003			6,850			6,725			6,658			6,290			6,209
Total deposits				9,054			8,941			8,874			8,622			8,479			8,365			7,907			7,762
Total shareholders’ equity				1,248			1,228			1,190			1,167			1,154			1,145			1,028			1,005

Key Ratios
Yield on earning assets				5.87	%		6.19	%		6.50	%		6.66	%		6.83	%		7.12	%		7.27	%		7.52	%
Cost of funds				1.50			1.70			1.92			2.22			2.52			2.98			3.18			3.42
Net interest margin				4.75			4.90			5.04			4.96			4.91			4.83			4.84			4.88

Return on average assets				1.73			1.73			1.72			1.60			1.54			1.81			1.55			1.70
Return on average equity				15.34			15.41			15.65			14.47			13.96			16.25			14.54			16.03


Item 8	*Financial Statements and Supplementary Data*

CONSOLIDATED BALANCE SHEETS



			December 31

			2002			2001


			(In thousands,
			except per share data)
Assets
Cash and due from banks			$	370,387		$	386,171
Money market investments				210,339			95,808

Total cash and cash equivalents — Note 4				580,726			481,979

Securities — available for sale				925,699			1,457,788
Securities — held to maturity (fair values — $2,863,619 — 2002 and $1,658,922 — 2001)				2,825,013			1,639,827

Total securities — Note 5				3,750,712			3,097,615

Loans, net of unearned income — Note 6				6,377,866			6,510,559
Allowance for loan losses — Note 7				(71,013	)		(71,937	)

Net loans				6,306,853			6,438,622

Other earning assets				36,383			26,872
Premises and equipment — Note 8				147,894			153,505
Intangible assets — Note 9				190,279			199,948
Accrued income and other assets				214,740			224,486

Total assets			$	11,227,587		$	10,623,027

Liabilities
Deposits
	Noninterest-bearing		$	2,064,033		$	1,831,324
	Interest-bearing
		Interest checking		1,878,680			1,711,885
		Money market		1,468,356			1,132,998
		Savings		1,126,497			1,048,577
		Consumer certificates of deposit		2,206,206			2,418,890
		Large denomination certificates of deposit		466,719			505,962

Total deposits				9,210,491			8,649,636

Short-term borrowings — Note 10				617,589			639,351
Long-term debt — Note 11				13,488			19,526
Accrued interest and other liabilities				147,674			162,028

Total liabilities				9,989,242			9,470,541

Shareholders’ Equity
Preferred stock, $10 par value (authorized 3,000 shares; outstanding 38 shares — 2002 and 42 shares — 2001) — Note 12				381			421
Common stock, $1 par value (authorized 175,000 shares; outstanding 70,899 shares — 2002 and 71,740 shares — 2001) — Note 12				70,899			71,740
Capital surplus				19,406			51,046
Retained earnings				1,141,923			1,036,257
Accumulated other comprehensive income (loss)				5,736			(6,978	)

Total shareholders’ equity				1,238,345			1,152,486

Total liabilities and shareholders’ equity			$	11,227,587		$	10,623,027

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF INCOME



		Year Ended December 31

		2002		2001		2000


		(In thousands,
		except per share data)
Interest income
	Loans	$	464,671	$	503,993	$	511,316
	Securities — available for sale		57,915		16,007		5,967
	Securities — held to maturity		95,615		111,303		102,717
	Money market investments		7,523		20,694		22,195
	Other earning assets		1,702		1,326		1,611

Total interest income			627,426		653,323		643,806

Interest expense
	Deposits		132,945		194,342		194,023
	Short-term borrowings		5,837		17,806		25,122
	Long-term debt		795		621		166

Total interest expense			139,577		212,769		219,311

Net interest income			487,849		440,554		424,495
Provision for loan losses — Note 7			9,955		6,755		9,428

Net interest income after provision for loan losses			477,894		433,799		415,067

Noninterest income
	Service charges on deposit accounts		70,470		66,796		59,408
	Electronic banking service fees		20,063		17,619		13,746
	Trust and asset management fees		13,230		12,878		13,069
	Insurance premiums and commissions		8,859		7,703		6,674
	Other		24,086		18,916		20,703
	Nonrecurring income — Note 13		—		21,538		4,232
	Securities gains — Note 5		516		4,547		198

Total noninterest income			137,224		149,997		118,030

Noninterest expense
	Salaries and employee benefits — Notes 14 and 15		203,160		194,376		186,213
	Occupancy		27,651		26,890		26,405
	Equipment		32,889		33,140		32,784
	Amortization of intangibles		8,847		14,836		14,974
	Other		64,862		63,498		61,769

Total noninterest expense			337,409		332,740		322,145

Income before income taxes			277,709		251,056		210,952
Provision for income taxes — Note 16			93,772		86,605		68,921

Net income		$	183,937	$	164,451	$	142,031

Net income per share of common stock — Note 17
	Basic	$	2.57	$	2.33	$	2.01
	Diluted		2.55		2.32		2.00
Average shares of common stock outstanding — Note 17
	Basic		71,680		70,650		70,598
	Diluted		72,109		70,976		70,886

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY


														Accumulated
														Other			Total
		Preferred			Common			Capital			Retained			Comprehensive			Shareholders’
		Stock			Stock			Surplus			Earnings			Income (Loss)			Equity


		(In thousands, except per share data)
Balance, January 1, 2000		$	485		$	73,743		$	—		$	957,776		$	(1,517	)	$	1,030,487
Comprehensive income
	Net income											142,031						142,031
	Unrealized gains on securities available for sale, net of tax of $1,065														1,899			1,899
	Reclassification for gains realized in net income, net of tax of $(67)														(123	)		(123	)

Total comprehensive income																		143,807
Conversion of preferred to common stock			(34	)		9			25									—
Issuance of shares for stock options						105			1,721									1,826
Common stock purchased and retired						(4,642	)		(1,746	)		(107,793	)					(114,181	)
Dividends declared
	Preferred stock											(31	)					(31	)
	Common stock $.9867 per share											(69,202	)					(69,202	)

Balance, December 31, 2000			451			69,215			—			922,781			259			992,706
Comprehensive income
	Net income											164,451						164,451
	Unrealized losses on securities available for sale, net of tax of $(2,281)														(4,459	)		(4,459	)
	Reclassification for gains realized in net income, net of tax of $(1,764)														(2,778	)		(2,778	)

Total comprehensive income																		157,214
Issuance of shares for an acquisition						3,156			92,376									95,532
Conversion of preferred to common stock			(30	)		10			20									—
Issuance of shares for stock options						129			3,014									3,143
Common stock purchased and retired						(770	)		(21,904	)								(22,674	)
Stock split adjustment									(22,460	)		22,460						—
Dividends declared
	Preferred stock											(30	)					(30	)
	Common stock $1.04 per share											(73,405	)					(73,405	)

Balance, December 31, 2001			421			71,740			51,046			1,036,257			(6,978	)		1,152,486
Comprehensive income
	Net income											183,937						183,937
	Unrealized gains on securities available for sale, net of tax of $7,435														13,029			13,029
	Reclassification for gains realized in net income, net of tax of $(201)														(315	)		(315	)

Total comprehensive income																		196,651
Conversion of preferred to common stock			(40	)		13			27									—
Issuance of shares for stock options						173			4,363									4,563
Common stock purchased and retired						(1,027	)		(36,030	)								(37,057	)
Dividends declared
	Preferred stock											(27	)					(27	)
	Common stock $1.0933 per share											(78,244	)					(78,244	)

Balance, December 31, 2002		$	381		$	70,899		$	19,406		$	1,141,923		$	5,736		$	1,238,345

See notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS



		Year ended December 31

		2002			2001			2000


		(In thousands)
Operating activities
Net income		$	183,937		$	164,451		$	142,031
Adjustments to reconcile net income to net cash provided by operating activities:
	Amortization of securities premiums		8,124			3,999			5,393
	Accretion of securities discounts		(798	)		(1,194	)		(1,427	)
	Gain on sale of premises and equipment		(3,157	)		(264	)		(829	)
	Gain on nonrecurring transactions		—			(21,538	)		(4,232	)
	Gain on sale of securities		(516	)		(4,547	)		(198	)
	Depreciation of premises and equipment		13,549			13,681			13,975
	Amortization of goodwill and other intangible assets		8,847			14,836			14,974
	Provision for loan losses		9,955			6,755			9,428
	Net (increase) decrease in loans held for sale		(2,082	)		366			5,192
	(Increase) decrease in interest receivable		7,130			5,753			(5,419	)
	Increase (decrease) in interest payable		(14,394	)		(3,304	)		8,856
	Increase (decrease) in deferred income taxes		9,369			3,618			(4,443	)
	(Increase) decrease in other assets		(8,403	)		(4,758	)		1,356
	Increase (decrease) in other liabilities		(9,380	)		(4,915	)		3,346

Net cash provided by operating activities			202,181			172,939			188,003

Investing activities
Proceeds from the sale of available for sale securities			1,544,245			202,809			7,440
Proceeds from the maturity of held to maturity securities			3,840,066			4,002,003			1,187,707
Purchase of available for sale securities			(996,727	)		(1,439,125	)		—
Purchase of held to maturity securities			(5,027,545	)		(3,609,949	)		(1,325,461	)
Net decrease in loans			121,815			86,906			9,689
Sales of premises and equipment			5,217			6,213			7,642
Purchases of premises and equipment			(9,997	)		(12,586	)		(10,707	)
Intangible assets acquired			—			—			(2,203	)
Net cash from acquisition			—			20,257			—
Net cash from bank divestiture			—			12,527			—
Other			(3,520	)		68			696

Net cash used for investing activities			(526,446	)		(730,877	)		(125,197	)

Financing activities
Net increase (decrease) in deposits			560,855			525,423			(38,132	)
Net increase (decrease) in short-term borrowings			(21,762	)		97,042			119,172
Principal payments on long-term debt			(6,037	)		(4,590	)		(1,089	)
Proceeds from issuance from common stock			4,536			3,143			1,826
Common stock purchased and retired			(37,057	)		(22,674	)		(114,181	)
Cash dividends paid			(77,523	)		(71,836	)		(69,416	)

Net cash (used for) provided by financing activities			423,012			526,508			(101,820	)

Net increase (decrease) in cash and cash equivalents			98,747			(31,430	)		(39,014	)
Cash and cash equivalents at beginning of year			481,979			513,409			552,423

Cash and cash equivalents at end of year		$	580,726		$	481,979		$	513,409

Cash paid for
	Interest	$	153,971		$	124,864		$	210,455
	Income taxes		87,176			85,642			68,584

See notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(In thousands, except per share data)

1. Summary of Significant Accounting Policies

First Virginia Banks, Inc. (“parent company”) is a bank holding company and conducts its operations primarily through its eight commercial banking subsidiaries. These banking subsidiaries provide a broad array of traditional banking products and services through offices located primarily in Virginia, Maryland and Tennessee. To a lesser extent, other subsidiaries also provide financial products and services including credit insurance products and property and casualty insurance on an agency basis. The parent company and its subsidiaries are collectively referred to as the “corporation.” The accounting and reporting policies of the corporation are in accordance with accounting principles generally accepted in the United States of America and conform with general practices in the banking industry. The following is a summary of the significant accounting policies used in the preparation of the accompanying consolidated financial statements.

Principles of Consolidation: The consolidated financial statements include the accounts of the parent company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Certain amounts for prior years have been reclassified for comparative purposes. These reclassifications are immaterial and had no effect on net income or shareholders’ equity.

Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. These estimates and assumptions are based on information available as of the date of the financial statements and could differ from actual results. In particular, the allowance for loan losses involves estimates that are susceptible to change in the near term.

Cash and Cash Equivalents: Cash and cash equivalents include cash and due from banks, federal funds sold, securities purchased under agreements to resell and other short-term investments.

Securities: Securities are classified as either available for sale or held to maturity at the time of purchase. Debt securities that may be sold to meet liquidity needs arising from unanticipated deposit or loan fluctuations, changes in regulatory capital requirements, or unforeseen changes in market conditions are classified as available for sale. In addition, investments in equity securities are classified as available for sale. Securities available for sale are reported at estimated fair value as determined from quoted market prices. Unrealized holding gains and losses are excluded from earnings and reported in accumulated other comprehensive income within shareholders’ equity, net of deferred income taxes. Gains or losses realized from the sale of securities available for sale are determined by specific identification and reported as a component of noninterest income.

Debt securities acquired with both the intent and ability to be held to maturity are classified as held to maturity and reported at cost adjusted for amortization of premiums and accretion of discounts on the constant yield method. Any gains or losses realized from the early redemption of securities held to maturity are determined by specific identification and are included as a component of noninterest income.

Loans: Loans are carried at the principal amount outstanding including deferred loan origination fees and costs. Loan origination fees and direct loan origination costs typically are deferred, and the net amount is amortized as an adjustment to the loan’s yield over the contractual life of the loan. Interest income on loans is primarily accrued based on the principal amount outstanding.

Loans are classified as nonaccrual when full collectibility of principal or interest is in doubt, when repossession, foreclosure or bankruptcy proceedings are initiated, or when legal actions are taken. Installment loans are generally placed in nonaccrual status when payments are delinquent 120 days. All other loans are generally placed in nonaccrual status when they are 90 days delinquent. Loans may be classified as nonaccrual sooner if specific conditions indicate impairment is probable. The decision to place a loan in nonaccrual status is also based on an evaluation of the borrower’s financial condition, the collateral and other factors that may

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

affect the borrower’s ability to pay. A nonaccrual loan may be restored to an accruing status when principal and interest are no longer past due and future collection of principal and interest is not in doubt.

The corporation identifies commercial, construction and commercial real estate loans as impaired when it is probable that the payments of principal and interest due under the loan agreement will not be collected. Since many of the corporation’s loans are secured by real estate, the value of impaired loans in most cases is based upon the fair value of the collateral. If the value of the collateral is less than the recorded investment in the loan, the corporation includes this deficiency in evaluating the allowance for loan losses.

Allowance for Loan Losses: The allowance for loan losses is maintained at a level that represents management’s best estimate of credit losses for specifically identified loans as well as losses inherent in the remainder of the loan portfolio. The provision for loan losses is the periodic cost of maintaining an appropriate allowance.

The allowance is composed of general reserves, specific reserves and an unallocated reserve. The consumer loan portfolio is separated by loan type, and each type is treated as a homogeneous pool. A general allowance is allocated to each of these pools based upon historical trends in charge-off rates, current delinquency ratios and loan characteristics. Every commercial and commercial real estate loan is assigned a risk rating by the loan officer based on established credit policy guidelines. These risk ratings are periodically reviewed, and all ratings are subject to independent review. Loans receiving a risk rating of average or above are aggregated and assigned an allocation percentage that, when multiplied by the dollar amount of loans, results in a general allowance for these loans. The allocation percentage is based upon historical loss rates adjusted for current conditions. Loans receiving a below average rating, excluding nonperforming loans in excess of $25 thousand, are assigned a specific allowance based upon the level of classification. Each nonperforming loan in excess of $25 thousand is reviewed and a specific allowance established.

The unallocated reserve consists of an amount based on management’s evaluation of various conditions that are not directly measured by any other component of the allowance. This evaluation includes general economic conditions and business conditions affecting key lending areas, credit quality trends, collateral values, loan volumes, concentrations of credit risk, seasoning of the loan portfolio, results of internal credit reviews and regulatory examinations.

Premises and Equipment: Premises and equipment are carried at cost less accumulated depreciation computed principally on the straight-line method over lives generally not exceeding 40 and 10 years for buildings and equipment, respectively. Gains and losses on disposition are reflected in current earnings. Maintenance and repairs are charged to operating expenses, and major alterations and renovations are capitalized.

Other Real Estate Owned: Other real estate owned is stated at the lesser of the loan balance prior to foreclosure plus the costs incurred for improvements to the property, or fair value less the estimated selling costs of the property. At the time of foreclosure, any excess of cost over the estimated fair value is charged to the allowance for loan losses. After foreclosure, the estimated fair value is reviewed periodically. Any further declines in fair value are charged against current earnings.

Intangible Assets: Goodwill relating to acquisitions occurring after June 30, 2001, is not being amortized. Effective January 1, 2002, goodwill existing as of June 30, 2001, is no longer being amortized. Prior to 2002, goodwill related to acquisitions before 1976 was being amortized on a straight-line basis over 40 years; goodwill related to acquisitions after 1975 and before June 30, 2001, was being amortized over 10 to 25 years. Core deposit premiums are being amortized over 10 years. All intangible assets are reviewed at least annually for impairment.

Income Taxes: Deferred tax assets and liabilities are based on the difference between financial reporting and tax bases of assets and liabilities and are measured at the enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Net Income per Share: Basic net income per share of common stock is computed on the basis of the weighted-average number of shares of common stock outstanding. Diluted net income per share is computed based on the weighted-average number of common and common equivalent shares and dilutive stock options outstanding during the year.

Stock-Based Compensation: The corporation adopted the disclosure only provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation” (SFAS 123) and Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure” (SFAS 148). These statements allow an entity to continue to measure compensation cost for these plans using the intrinsic value-based method of accounting prescribed by Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). The corporation has elected to follow APB 25 and related interpretations in accounting for its employee stock options.

Pro forma information regarding net income and earnings per share as required by SFAS 123 and SFAS 148 has been determined as if the corporation had accounted for its employee stock options under the fair-value method. The fair value of all currently outstanding options was estimated at the date of the grant using a Black-Scholes option pricing model. Pro forma results and a summary of the assumptions used for 2002, 2001 and 2000 are as follows:



		Year Ended December 31

		2002			2001			2000

Reported net income		$	183,937		$	164,451		$	142,031
Stock-based compensation expense (net of tax)
	Actual expense based on APB 25		—			225			602
	Pro forma expense based on SFAS 123		(1,747	)		(1,456	)		(1,307	)

Pro forma net income		$	182,190		$	163,220		$	141,326

Net income per share
	Basic — as reported	$	2.57		$	2.33		$	2.01
	Basic — pro forma		2.54			2.31			2.00
	Diluted — as reported		2.55			2.32			2.00
	Diluted — pro forma		2.53			2.30			1.99
Assumptions
	Risk-free interest rate		3.82	%		5.05	%		5.11	%
	Dividend yield		3.13	%		3.19	%		3.15	%
	Volatility factor		.238			.238			.235
	Weighted average expected life (years)		8.0			8.0			8.0
Fair value of options per share		$	8.10		$	8.01		$	7.38

2. Pending Merger

On January 20, 2003, the corporation entered into an Agreement and Plan of Reorganization (the “Merger”) with BB&T Corporation (“BB&T”), pursuant to which the corporation will merge into BB&T. In the Merger, the corporation’s shareholders will receive 1.26 shares of BB&T common stock for each share of the corporation’s common stock. The transaction is expected to close in the third quarter of 2003.

3. Acquisitions

On July 2, 2001, James River Bankshares, Inc. merged into the corporation. Shares of the corporation’s stock totaling 3.156 million were issued, valued at $30.31 per share. James River shareholders who elected to receive cash in lieu of stock received $11.208 million. The acquisition was accounted for using the purchase

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

method of accounting. Total assets and liabilities acquired were $576.503 million and $469.645 million, respectively. Total assets included a core deposit premium of $9.930 million, which is being amortized over ten years, and $48.708 million of goodwill. The results of operations of the acquisition are included in the consolidated statements of income from the date of acquisition.

On April 21, 2000, three branches with $22.523 million in deposits were acquired from Wilmington Trust FSB. A core deposit premium of $2.159 million was recorded and is being amortized over ten years.

4. Cash and Cash Equivalents

The corporation’s banking affiliates are required by Federal Reserve regulations to maintain certain minimum cash balances consisting of vault cash and deposits in the Federal Reserve Bank or in other commercial banks. Such restricted balances totaled $40.754 million and $35.850 million as of December 31, 2002 and 2001, respectively.

All securities underlying the money market investments were under the corporation’s control, and the maximum amount of outstanding money market investments at any month-end during 2002 and 2001 was $705.291 million and $843.837 million, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

5. Securities


	Amortized		Unrealized		Unrealized		Fair
	Cost		Gains		Losses		Value

Available for sale
December 31, 2002:
U.S. Government and its agencies	$	609,755	$	1,786	$	—	$	611,541
Mortgage-backed securities of U.S. Government agencies		298,943		3,950		84		302,809
Other		7,901		3,448		—		11,349

Total	$	916,599	$	9,184	$	84	$	925,699

December 31, 2001:
U.S. Government and its agencies	$	1,005,533	$	1,733	$	7,447	$	999,819
Mortgage-backed securities of U.S. Government agencies		453,706		—		6,321		447,385
Other		9,395		1,189		—		10,584

Total	$	1,468,634	$	2,922	$	13,768	$	1,457,788

Held to maturity
December 31, 2002:
U.S. Government and its agencies	$	2,291,074	$	19,652	$	23	$	2,310,703
Mortgage-backed securities of U.S. Government agencies		244,199		10,305		—		254,504
State and municipal obligations		287,692		8,615		47		296,260
Other		2,048		104		—		2,152

Total	$	2,825,013	$	38,676	$	70	$	2,863,619

December 31, 2001:
U.S. Government and its agencies	$	1,173,365	$	14,389	$	147	$	1,187,607
Mortgage-backed securities of U.S. Government agencies		94,214		483		859		93,838
State and municipal obligations		370,175		5,363		90		375,448
Other		2,073		26		—		2,099

Total	$	1,639,827	$	20,261	$	1,096	$	1,658,992

Securities having a carrying value of $932.829 million and $856.762 million at December 31, 2002 and 2001, respectively, were pledged to secure public deposits and for other purposes. Gains of $.516 million, $4.547 million and $.198 million were realized in 2002, 2001 and 2000, respectively, on the sale of securities

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

and consisted entirely of gross gains. The maturity ranges of securities as of December 31, 2002, were as follows:


	Amortized		Fair
	Cost		Value

Available for sale
One year or less	$	42,500	$	42,500
After five through ten years		567,255		569,041

Total		609,755		611,541

Mortgage-backed securities of U.S. Government agencies		298,943		302,809
Equity securities		7,901		11,349

Total available for sale	$	916,599	$	925,699

Held to maturity
One year or less	$	502,936	$	505,088
After one through five years		551,264		572,177
After five through ten years		1,526,056		1,531,216
After ten years		558		634

Total		2,580,814		2,609,115

Mortgage-backed securities of U.S. Government agencies		244,199		254,504

Total held to maturity	$	2,825,013	$	2,863,619

6. Loans

The corporation’s loans are widely dispersed among individuals and industries. On December 31, 2002, there was no concentration of loans in any single industry that exceeded 10% of total loans.



		December 31

		2002		2001

Consumer
	Automobile	$	2,993,976	$	3,156,680
	Home equity, fixed- and variable-rate		645,659		748,888
	Revolving credit		36,238		35,365
	Other		129,469		160,697
Commercial			815,210		862,794
Construction and land development			113,800		158,575
Real estate
	Commercial mortgage		713,330		619,356
	Residential mortgage		930,184		768,204

Total loans, net of unearned income			6,377,866		6,510,559
Less allowance for loan losses			71,013		71,937

Net loans		$	6,306,853	$	6,438,622

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Loans on which interest is not being accrued or whose terms have been modified to provide for a reduced rate of interest because of financial difficulties of borrowers, and interest income earned with respect to such loans were:



	December 31

	2002		2001		2000

Nonaccruing loans	$	10,683	$	15,576	$	14,954
Restructured loans		496		912		1,814

Total	$	11,179	$	16,488	$	16,768

Income anticipated under original loan agreements	$	850	$	1,231	$	1,411
Income recorded	$	427		457		795

There were no formal commitments of a material amount to lend additional funds under these agreements, but additional advances may be made if it is in the interest of the corporation to do so. Loans modified for reasons other than a reduction in the interest rate were not material in amount. All loans which the corporation has classified as impaired are nonaccruing and have been allocated a specific reserve in the allowance for loan losses. No income was recorded while the loans were impaired.



	December 31

	2002		2001		2000

Impaired loans	$	955	$	1,083	$	1,209
Related allowance for loan losses		276		131		966
Average balance of impaired loans		684		846		781

Loans of $2.719 million, $3.766 million and $5.145 million were transferred to foreclosed property during 2002, 2001 and 2000, respectively.

The corporation, in the normal course of business, has made commitments to extend loans and has written standby letters of credit that are not recognized in the financial statements. On December 31, 2002 and 2001, standby letters of credit totaled $50.870 million and $30.482 million, respectively, and the unfunded amounts of loan commitments were:



		December 31

		2002		2001

Adjustable-rate loans
	Home equity lines	$	398,657	$	431,936
	Commercial loans		530,051		683,322
	Construction and land development loans		120,348		127,266
Fixed-rate revolving credit lines			168,062		140,581

Total		$	1,217,118	$	1,383,105

A majority of the commercial, construction and land development commitments and letters of credit will expire within one year, and all loan commitments can be terminated by the corporation if the borrower violates any condition of the commitment agreement.

The credit risk associated with loan commitments and letters of credit is essentially the same as that involved with loans that are funded and outstanding. The corporation uses the same credit standards on a case-by-case basis in evaluating loan commitments and letters of credit as it does when funding loans, including the

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

determination of the type and amount of collateral, if required. There are no allowances associated with any of these commitments.

7. Allowance for Loan Losses



	Year Ended December 31

	2002		2001			2000

Balance at beginning of year	$	71,937	$	70,300		$	70,119
Provision charged to operating expense		9,955		6,755			9,428
Increase attributable to acquisition		—		5,479			—
Decrease attributable to divestiture		—		(1,331	)		—

Balance before charge-offs		81,892		81,203			79,547

Charge-offs		14,903		13,861			12,791
Recoveries		4,024		4,595			3,544

Net charge-offs		10,879		9,266			9,247

Balance at end of year	$	71,013	$	71,937		$	70,300

8. Premises, Equipment and Leases



	December 31

	2002		2001

Land	$	36,070	$	36,924
Premises and improvements		177,759		178,712
Furniture and equipment		120,685		123,008

Total cost		334,514		338,644
Accumulated depreciation		186,620		185,139

Carrying value	$	147,894	$	153,505

The corporation has entered into lease agreements with unaffiliated persons for premises, principally banking offices. Many of the leases have one or more renewal options, generally for five or ten years, and some contain a provision for increased rent during the renewal period. Leases containing a provision for contingent payments are not significant in either number or amount. Portions of a few premises are subleased, and the amount of rent received is not material. There are no significant restrictions imposed on the corporation by any of the lease agreements. The corporation also leases a portion of its computer systems and other equipment. Leases on two banking offices are currently recorded as capital leases. The effect of capitalizing such leases on net income has not been material.

During 2002, 2001 and 2000, occupancy and equipment expense included the rent paid on operating leases of $17.928 million, $17.587 million and $17.287 million, respectively.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Minimum rental payments over the noncancelable term of operating and capital leases having a term in excess of one year are:


Year Ended December 31	Amount

2003	$	14,938
2004		13,747
2005		12,042
2006		9,492
2007		6,183
Thereafter		17,804

Total minimum lease payments	$	74,206

9. Intangible Assets

The corporation’s intangible assets that are not subject to amortization consist entirely of goodwill related to its retail banking segment. The changes in the carrying amount of goodwill for the years ended December 31, 2002 and 2001, are as follows:


	Amount

Balance, January 1, 2001	$	109,266
James River Bankshares acquisition		49,236
Bank divestiture		(2,158	)
Amortization expense		(6,161	)

Balance, December 31, 2001		150,183
Adjustment for James River Bankshares acquisition		(528	)

Balance, December 31, 2002	$	149,655

The following tables present the corporation’s net income and net income per share amounts assuming the nonamortization provisions of SFAS 142 had been in effect for all periods presented.



		Year Ended December 31

		2002		2001		2000

Net income:
	Reported	$	183,937	$	164,451	$	142,031
	Goodwill amortization		—		6,161		6,749

	Adjusted net income	$	183,937	$	170,612	$	148,780

Basic net income per share:
	Reported	$	2.57	$	2.33	$	2.01
	Goodwill amortization		—		0.08		0.10

	Adjusted basic net income per share	$	2.57	$	2.41	$	2.11

Diluted net income per share:
	Reported	$	2.55	$	2.32	$	2.00
	Goodwill amortization		—		0.08		0.10

	Adjusted diluted net income per share	$	2.55	$	2.40	$	2.10

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

The carrying amount of intangible assets subject to amortization as of December 31, 2002 and 2001, the actual amortization expense for the years ended December 31, 2002 and 2001, and the expected amortization expense for each of the five years ended December 31, 2007, are presented in the following tables:



	December 31


	2002						2001

	Gross		Accumulated		Carrying		Gross		Accumulated		Carrying
	Amount		Amortization		Amount		Amount		Amortization		Amount

Core deposit premiums	$	89,808	$	49,184	$	40,624	$	92,669	$	43,222	$	49,447
Other		—		—		—		1,281		963		318

Total	$	89,808	$	49,184	$	40,624	$	93,950	$	44,185	$	49,765


		Core Deposit
Amortization Expense		Premiums		Other		Total

Actual for Year Ended December 31
	2001	$	8,565	$	110	$	8,675
	2002		8,823		24		8,847
Expected for Year Ended December 31
	2003		8,731		—		8,731
	2004		8,731		—		8,731
	2005		7,146		—		7,146
	2006		5,662		—		5,662
	2007		4,704		—		4,704

10. Short-Term Borrowings



	December 31

	2002		2001

Securities sold under agreements to repurchase	$	542,541	$	552,019
Commercial paper		75,048		87,332

Total short-term borrowings	$	617,589	$	639,351

Securities sold under agreements to repurchase generally mature within one business day from the transaction date. As of December 31, 2002 and 2001, the weighted average rate was .52% and .97%, respectively. The maximum amount of outstanding agreements for any month-end during 2002 and 2001 was $563.155 million and $571.018 million, respectively. The securities underlying the agreements were under the corporation’s control.

Commercial paper generally matures within one business day but may be issued for a term up to 270 days. As of December 31, 2002 and 2001, the weighted average rate was .25% and .71%, respectively.

Bank lines of credit available to the corporation amounted to $100 million and $50 million at December 31, 2002 and 2001, respectively. Such lines were not being used on either of those dates.

11. Long-Term Debt

Long-term debt at December 31, 2002, included $13 million in advances from the Federal Home Loan Bank with rates ranging from 5.21% to 5.48%. Of this amount $5 million matures in 2003, with the balance maturing over the next eight years. The remainder of long-term debt consists of capitalized lease obligations.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

12. Preferred and Common Stock

The corporation is authorized to issue three million shares of preferred stock, par value $10 per share. As of December 31, the following four series of cumulative convertible preferred stock were outstanding:



			Number of Shares

	Dividends		2002		2001

Series A		5%		14,357		15,551
Series B		7%		2,950		3,290
Series C		7%		4,936		5,072
Series D		8%		15,825		18,148

Total preferred shares				38,068		42,061

The Series A, Series B and Series D shares are convertible into three and three-eighths shares of common stock, and the Series C shares are convertible into two and seven-tenths shares of common stock. All of the preferred stock may be redeemed at the option of the corporation for $10.00 per share. The corporation is authorized to issue 175 million shares of common stock, par value $1 per share. At December 31, 2002, 4,425,083 shares of common stock were reserved: 125,079 for the conversion of preferred stock and 4,300,004 for stock options.

The corporation has adopted a shareholder rights plan that, under certain circumstances, will give the holders of the corporation’s common stock the right to purchase shares of its preferred stock or other securities. The rights will become exercisable if a person or entity acquires 20% or more of the corporation’s voting stock, unless it is acquired pursuant to an offer for all outstanding shares of common stock at a price and on terms determined by the Board of Directors to be adequate and in the best interests of the corporation and its shareholders.

If the rights become exercisable, the holder of each share of common stock, except the person or entity acquiring 20% or more of the voting stock, will have the right to receive upon exercise that number of one one-hundredths share of preferred stock equal to the number of shares of common stock having a market value of two times the exercise price of the right, to the extent available, and then an equal number of an equivalent security. The exercise price for each right is $450.00.

The corporation may redeem the rights, at its option, at any time prior to the date they become exercisable. The rights expire on August 8, 2008. As of December 31, 2002, each outstanding share of common stock had 8/27 of a right attached thereto.

13. Nonrecurring Income



		Year Ended December 31

		2002		2001		2000

Gain on bank divestiture		$	—	$	13,789	$	—
Gain on sale of investment in Star Systems			—		7,749		—
	(excludes $3,032 recorded in securities gains)
Gain on sale of branches			—		—		3,134
Gain on sale of mortgage servicing rights			—		—		1,098

Total nonrecurring income		$	—	$	21,538	$	4,232

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

14. Stock Incentive Plans

Under the company’s stock incentive plans, options may be granted to key employees to purchase the corporation’s common stock. All options are granted at full market price on the date of the grant and generally vest within five years of the grant date and expire after ten years. In the event of a change in control, these options may vest sooner. In certain instances, the corporation had to achieve established performance targets in order for the options to become exercisable. In those instances where vesting was dependent upon achieving certain performance targets, the corporation recognized compensation expense when it became probable that the targets would be achieved and the options would become exercisable, for the difference between the exercise price and the current market price. There were no unvested options outstanding at January 1, 2002, that were based on the corporation’s meeting performance targets, therefore there was no stock-related compensation expense recorded in 2002. Total stock-related compensation expense for 2001 and 2000 was $.225 million and $.636 million, respectively. A summary of the corporation’s stock option activity and related information follows:


							Weighted				Weighted
	Available To						Average				Average
	Grant			Outstanding			Price		Exercisable		Price

Balance, January 1, 2000		3,157,163			1,414,540		$	26.24		448,220	$	19.95
Granted		(218,250	)		218,250			30.29
Forfeited		18,750			(18,750	)		31.70
Exercised		—			(104,360	)		13.92

Balance, December 31, 2000		2,957,663			1,509,680			27.61		576,281		24.34
Granted		(273,000	)		273,000			32.97
Attributable to an acquisition		—			156,993			17.31
Expired		(16,221	)		—			—
Forfeited		23,550			(23,500	)		28.16
Exercised		—			(128,738	)		15.75

Balance, December 31, 2001		2,691,992			1,787,385			28.37		881,067		25.72
Granted		(266,000	)		266,000			37.22
Forfeited		2,400			(9,106	)		25.68
Exercised		—			(172,667	)		20.07

Balance, December 31, 2002		2,428,392			1,871,612		$	30.41		1,018,135	$	28.19


			Weighted
			Average		Weighted				Weighted
			Contractual		Average				Average
Range of Exercise Prices	Outstanding		Life in Years		Price		Exercisable		Price

$ 9.50–10.24		4,075		2.3	$	9.72		4,075	$	9.72
14.28–20.83		209,104		2.7		17.53		209,104		17.53
28.04–37.22		1,658,433		7.5		32.08		804,956		31.05

$ 9.50–37.22		1,871,612		6.9	$	30.41		1,018,135	$	28.19

15. Employee Benefit Plans

The corporation has a noncontributory, defined-benefit pension plan covering substantially all qualified employees. The benefits are based on years of service and the employee’s compensation during the last ten years of employment. The corporation’s funding policy is to make annual contributions in amounts necessary to satisfy the Internal Revenue Service’s funding standards to the extent they are deductible against taxable

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

income. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Contributions include normal costs of the plan and amortization for periods of up to 40 years of unfunded past service cost. The assets of the pension plan consist of U.S. Government and agency securities — 38.3%, other debt obligations — 10.0%, equity securities — 44.9%, and cash and equivalents — 6.8%.

The corporation also has an unfunded nonqualified plan that provides retirement benefits to certain officers in accordance with the same computational terms as the qualified plan when those terms provide benefits in excess of the amounts payable under the IRS-qualified rules. The projected and accumulated benefit obligations under this plan were $2.811 million and $1.660 million, respectively, at December 31, 2002.

The corporation sponsors a defined-benefit health care plan that provides postretirement medical benefits to full-time employees who have worked at least ten years and have attained age 55 while in service with the corporation. The benefits, based on years of service, are contributory, with retiree contributions adjusted annually, and contain other cost-sharing features such as deductibles and coinsurance. Employees hired after December 31, 1993, may participate in the plan but must pay 100% of the cost. The accounting for the plan anticipates future cost-sharing changes to the written plan that are consistent with the corporation’s expressed intent to increase the retiree contribution rate annually for the expected increase in medical costs for that year. The corporation has set a maximum amount that it will contribute per year of approximately three times the 1993 contribution level. Terminated employees may elect to receive medical benefits for a limited period.

The benefit obligation and plan asset activity for each of the plans, as well as the components of the periodic benefit cost, are summarized in the following charts:



								Postretirement
		Pension Benefits						Medical Benefits

		2002			2001			2002			2001

Change in benefit obligation
	Benefit obligation at beginning of year	$	151,020		$	135,397		$	19,508		$	17,748
	Service cost		5,485			5,223			395			416
	Interest cost		10,924			9,986			1,389			1,316
	Plan participants’ contributions		—			—			743			628
	Actuarial loss		10,550			6,129			1,398			879
	Benefits paid		(6,393	)		(5,715	)		(1,592	)		(1,479	)

Benefits obligation at end of year			171,586			151,020			21,841			19,508

Change in plan assets
	Fair value of plan assets at beginning of year		147,151			150,634
	Actual return on plan assets		(9,939	)		(1,025	)
	Company contributions		22,435			3,257
	Benefits paid		(6,393	)		(5,715	)

Fair value of plan assets at end of year			153,254			147,151

Unfunded status			(18,332	)		(3,869	)		(21,841	)		(19,508	)
Unrecognized actuarial loss (gain)			52,987			18,481			(1,972	)		(3,445	)
Unamortized prior service cost			299			156			—			—
Unrecognized transition obligation			—			—			6,105			6,715

Prepaid (accrued) benefit cost		$	34,954		$	14,768		$	$(17,708	)	$	(16,238	)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



	Weighted average assumptions
	as of December 31


	Pension Benefits

	2003			2002			2001

Discount rate		6.75	%		7.25	%		7.50	%
Expected return on plan assets		8.50			9.50			9.50
Rate of compensation increase		4.25			4.75			4.75



	Year Ended December 31


										Postretirement Medical
	Pension Benefits									Benefits

	2002			2001			2000			2002			2001			2000

Service cost	$	5,485		$	5,223		$	4,563		$	395		$	416		$	660
Interest cost		10,924			9,986			9,333			1,389			1,316			1,231
Expected return on plan assets		(14,423	)		(14,208	)		(13,782	)		—			—			—
Amortization of prior service cost and net transition obligation		(143	)		(143	)		(125	)		610			610			610
Recognized actuarial loss (gain)		406			(4	)		(17	)		(74	)		(147	)		(241	)

Net periodic benefit cost	$	2,249		$	854		$	(28	)	$	2,320		$	2,195		$	2,260

The weighted average discount rate used in determining the accumulated postretirement benefit obligation was 7.25% for 2002 and 7.50% for 2001. The weighted-average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost-trend rate) is 6.4% for 2003 and is assumed to decrease gradually to 5.0% for 2005 and to remain at that level thereafter. The health care cost-trend rate assumption has a significant effect on the amounts reported. The corporation has limited its exposure to increases in health care cost trend rates by setting a cap on the maximum amount it will ever pay on any one retiree and by passing through 100% of the cost of retiree health care to new employees hired after December 31, 1993. The following table represents the effect of a one-percent change in the assumed health care cost-trend rate:


	One-Percent		One-Percent
	Increase		Decrease

Effect on benefit obligation	$	1,541	$	(1,732	)
Effect on service and interest cost components		138		(160	)

The corporation has deferred compensation agreements with certain officers and directors. Benefits under these agreements are being funded by life insurance policies. The accrued liability for these agreements as of December 31, 2002 and 2001, was $27.767 million and $27.686 million, respectively. For the years ended December 31, 2002, 2001, and 2000, expenses related to these agreements were $1.605 million, $1.483 million, and $1.402 million, respectively.

The corporation has a thrift plan to which employees with six months of service may elect to contribute up to 12% of their salary. For employees with more than one year of service, the corporation contributes to the plan to the extent of 50% of the employees’ first 6% of contributions, and an additional 25% contribution is made if a specified profit objective is met. A 75% employer match was made in each of the years 2002, 2001 and 2000 when the corporation’s contributions to the plan totaled $5.035 million, $4.718 million and $4.466 million, respectively. The plan is administered under the provisions of Section 401(k) of the Internal Revenue Code.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


16.	Income Taxes

The provision for income taxes includes amounts currently payable and amounts deferred to or from other years as a result of differences in the timing of the recognition of income and expense for financial reporting and tax purposes. The income tax provision includes the following amounts:



		Year Ended December 31

		2002		2001			2000

Current
	Federal taxes	$	83,065	$	80,171		$	72,022
	State taxes		1,338		2,816			1,342

Total current			84,403		82,987			73,364

Deferred (benefit)
	Federal taxes		8,781		3,641			(2,888	)
	State taxes		588		(23	)		(1,555	)

Total deferred			9,369		3,618			(4,443	)

Provision for income taxes		$	93,772	$	86,605		$	68,921

The exclusion of certain categories of income and expense from taxable net income results in an effective tax rate that is lower than the statutory federal rate. The differences in the rates are shown below:



	Year Ended December 31


	2002						2001						2000

	Amount			Percent			Amount			Percent			Amount			Percent

Statutory rate	$	97,198			35.0	%	$	87,869			35.0	%	$	73,833			35.0	%
Nontaxable interest on municipal obligations		(5,332	)		(1.9	)		(5,346	)		(2.1	)		(5,274	)		(2.5	)
State taxes, net of federal tax benefit		1,252			0.5			1,815			0.7			(138	)		(0.1	)
Nondeductible goodwill		—			—			2,156			0.9			2,362			1.1
Other items		654			0.2			111			0.0			(1,862	)		(0.8	)

Effective rate	$	93,772			33.8	%	$	86,605			34.5	%	$	68,921			32.7	%

The corporation’s federal income tax returns are closed through December 31, 1996. Based on management’s estimates of future taxable income, the full amount of the corporation’s deferred tax asset will

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

more likely than not be realized, and a valuation allowance is not deemed necessary. Significant components of the corporation’s deferred-tax liabilities and assets are as follows:



		December 31

		2002		2001

Deferred-tax assets
	Allowance for loan losses	$	24,671	$	23,432
	Deferred compensation		8,483		8,700
	Postretirement benefits		6,243		5,748
	Unrealized loss on securities		—		3,868
	Other		12,507		8,759

Total deferred-tax assets			51,904		50,507

Deferred-tax liabilities
	Depreciation		5,371		3,134
	Pension		12,148		4,028
	Life insurance reserves		2,227		2,117
	Unrealized gain on securities		3,364		—
	Purchase accounting timing differences		2,745		2,377
	Other		8,157		4,289

Total deferred-tax liabilities			34,012		15,945

Net deferred-tax assets		$	17,892	$	34,562


17.	Net Income Per Share



	Year Ended December 31

	2002		2001		2000

Computation of basic net income per share:
Net income	$	183,937	$	164,451	$	142,031
Preferred stock dividends		27		30		31

Net income applicable to common stock	$	183,910	$	164,421	$	142,000

Average common shares outstanding		71,680		70,650		70,598
Net income per share of common stock	$	2.57	$	2.33	$	2.01

Computation of diluted net income per share:
Net income	$	183,937	$	164,451	$	142,031
Average common shares outstanding		71,680		70,650		70,598
Dilutive effect of stock options		294		184		135
Conversion of preferred stock		135		142		153

Total average common shares		72,109		70,976		70,886

Net income per share of common stock	$	2.55	$	2.32	$	2.00

Options to purchase 76,952, 336,065 and 979,868 shares in 2002, 2001 and 2000, respectively, at weighted average prices of $35.21, $34.07 and $30.71, respectively, were not included in the above calculation of diluted earnings per share because the options’ exercise price was greater than the average market price.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)


18.	Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107, “Disclosures about Fair Value of Financial Instruments” (SFAS 107), requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flow analyses or other valuation techniques. Those techniques involve subjective judgment and are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. As a result, the derived fair value estimates cannot be substantiated by comparison to independent markets, and in many cases, could not be realized in immediate settlement of the instrument.

SFAS 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. The disclosures also do not include certain intangible assets such as core deposit intangibles and goodwill. Accordingly, the aggregate fair value amount presented below should not be interpreted as representing the underlying value of the corporation.



		December 31


		2002				2001

		Carrying		Fair		Carrying		Fair
		Amount		Value		Amount		Value

Financial assets
	Cash and cash equivalents	$	580,726	$	580,726	$	481,979	$	481,979
	Securities		3,750,712		3,789,318		3,097,615		3,116,780
	Loans, net		6,306,853		6,580,489		6,438,622		6,645,744
	Other		85,903		85,903		83,522		83,522
Financial liabilities
	Deposits		9,210,491		9,256,923		8,649,636		8,709,054
	Short-term borrowings		617,589		617,589		639,351		639,351
	Other		42,137		44,070		62,531		63,842

The following methods and assumptions were used by the corporation in estimating the fair value of its financial instruments. All of the corporation’s financial instruments were held or issued for purposes other than trading.

Cash and Cash Equivalents: The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets’ fair value.

Securities: Fair values for securities are based on quoted market prices.

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 for loans with similar terms to borrowers of similar credit quality.

Other Financial Assets: Other financial assets consist primarily of accrued interest receivable, Federal Reserve Bank stock and Federal Home Loan Bank stock, for which the carrying amount approximates fair value.

Deposits: For deposits with no defined maturity, SFAS 107 defines the fair value as the amount payable on demand and prohibits adjusting fair value for any value derived from retaining those deposits for an expected future period of time. Accordingly, the fair value of demand, interest checking, regular savings and money market deposits is equivalent to their carrying value as of the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

Short-Term Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements and other short-term borrowings approximate their fair values.

Other Financial Liabilities: Other financial liabilities consist of accrued interest payable and long-term debt, excluding capital leases. The carrying amount of accrued interest approximates its fair value. The fair value of long-term debt was estimated using a discounted cash flow analysis, using interest rates currently available to the corporation for borrowings with similar terms.

Off-Balance Sheet Instruments: The majority of commitments to extend credit and standby letters of credit are at variable rates and have relatively short maturities. Therefore, the fair value of these instruments is immaterial. In addition, the corporation does not engage in hedging or swap transactions nor does it employ any derivative securities.


19.	Regulatory Capital Requirements

The corporation and its 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 discretionary, actions by regulators that, if undertaken, could have a direct material effect on the corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the corporation and its subsidiary banks must meet specific capital guidelines that involve quantitative measures of 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. Quantitative measures established by regulation to ensure capital adequacy require the corporation and its subsidiary banks to maintain at least the minimum amounts and ratios (set forth in the following table) 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 that, as of December 31, 2002, the corporation and its subsidiary banks exceeded all capital adequacy requirements to which they are subject.

To be categorized as “well capitalized,” a bank must maintain minimum Total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the table. The most recent notification from the federal banking agencies categorized all of the corporation’s bank subsidiaries as “well capitalized” under the regulatory framework. There are no conditions or events since the last notification that management believes have changed the subsidiary banks’ category. Actual capital amounts and ratios are presented in the table below for the consolidated corporation and First Virginia Bank, the largest bank subsidiary.



							For Capital					To Be “Well
		Actual					Adequacy Purposes					Capitalized”*

		Capital		Ratio			Capital		Ratio			Capital		Ratio

December 31, 2002:
Tier 1 leverage ratio
	Consolidated corporation	$	1,046,878		9.60	%	$	327,086		3.00	%
	First Virginia Bank		286,588		6.56			131,070		3.00		$	218,450		5.00	%
Tier 1 risk-based capital
	Consolidated corporation		1,046,878		14.99			279,287		4.00
	First Virginia Bank		286,588		9.41			121,798		4.00			182,697		6.00
Total risk-based capital
	Consolidated corporation		1,117,891		16.01			558,574		8.00
	First Virginia Bank		315,462		10.36			243,595		8.00			304,494		10.00

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)



							For Capital					To Be “Well
		Actual					Adequacy Purposes					Capitalized”*

		Capital		Ratio			Capital		Ratio			Capital		Ratio

December 31, 2001:
Tier 1 leverage ratio
	Consolidated corporation	$	965,089		9.39	%	$	308,348		3.00	%
	First Virginia Bank		275,392		7.01			105,390		3.00		$	175,649		5.00	%
Tier 1 risk-based capital
	Consolidated corporation		965,089		13.58			284,272		4.00
	First Virginia Bank		275,392		9.33			118,074		4.00			167,643		6.00	%
Total risk-based capital
	Consolidated corporation		1,037,026		14.59			568,544		8.00
	First Virginia Bank		304,055		10.30			236,149		8.00			279,406		10.00

* This requirement applies only to the bank subsidiaries.


20.	Restrictions on Loans and Dividends from Subsidiaries

The corporation’s banking affiliates and its life insurance subsidiary are subject to federal and/or state statutes that prohibit or restrict certain of their activities, including the transfer of funds to the parent company. There are restrictions on loans from the affiliate banks to the parent company, and the banks and life insurance subsidiary are limited as to the amount of cash dividends that they can pay. As of December 31, 2002, the parent company’s equity in the net assets of its subsidiaries, after elimination of intercompany deposits and loans, totaled $779.029 million. Of that amount, $28.040 million was unrestricted as to the payment of dividends.

21. Related-Party Transactions

Directors and officers of the corporation were customers of, and had other transactions with, the corporation in the ordinary course of business. The corporation has made residential mortgage loans at favorable rates to officers who have been relocated for the convenience of the corporation. Other loan transactions with directors and officers were made on substantially the same terms as those prevailing for comparable loans to other persons and did not involve more than normal risk of collectibility or present other unfavorable features. As of December 31, 2002 and 2001, loans to directors and executive officers of the parent company and its significant subsidiaries totaled $13.264 million and $42.193 million, respectively. During 2002, $4.056 million of new loans were made and repayments totaled $5.267 million. Other changes in loans to officers and directors during the year represent changes in the composition of directors and executive officers. These totals include loans to certain business interests and family members of the directors and executive officers. No losses are anticipated in connection with any of the loans.

22. Business Segments

Statement of Financial Accounting Standards No. 131, “Disclosures about Segments of an Enterprise and Related Information,” defines an operating segment as a component of an enterprise that engages in business activities that generate revenue and incur expenses, whose operating results are reviewed by the chief operating decision maker in the determination of resource allocation and performance, and for which discrete financial information is available. Pursuant to this definition the corporation maintains two segments: retail banking done through its affiliated banks with offices in Virginia, Maryland and Tennessee, and “other,” which consists primarily of nonbanking services and is immaterial for segment reporting purposes. Since each of the affiliated banks in the retail banking segment offers similar products and services to similar types and classes of customers, operates in the same regulatory environment and has similar economic characteristics, all the

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

affiliated banks are managed as one reportable segment, retail banking. Substantially all of the corporation’s consolidated assets, revenues and income are derived from this segment. The corporation has no foreign operations.

23. Contingencies

The corporation, in the normal course of its business, is the subject of legal proceedings instituted by customers and others. In the opinion of the corporation’s management, there were no legal matters pending as of December 31, 2002, that would have a material effect on the financial statements.

24. Parent Company Condensed Financial Information

BALANCE SHEETS



		December 31

		2002		2001

Assets
Cash and noninterest-bearing deposits principally in affiliated banks		$	143	$	269
Money market investments			130,077		160,180
Investment in affiliates based on the corporation’s equity in their net assets
	Banking companies		765,991		737,714
	Bank-related companies		13,038		13,209
Securities (fair value $29,635 and $27,515)			29,548		27,532
Loans (including $223,435 and $139,158 to affiliated companies)			232,252		148,566
Premises and equipment			27,093		28,420
Intangible assets			107,131		109,200
Accrued income and other assets			60,966		63,732

Total assets		$	1,366,239	$	1,288,822

Liabilities and Shareholders’ Equity
Commercial paper		$	75,048	$	87,332
Accrued interest and other liabilities			52,846		49,004

Total liabilities			127,894		136,336
Shareholders’ equity			1,238,345		1,152,486

Total liabilities and shareholders’ equity		$	1,366,239	$	1,288,822

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

INCOME STATEMENTS




		Year Ended December 31

		2002			2001			2000

Income
Dividends from affiliates
	Banking companies	$	166,593		$	258,041		$	175,303
	Bank-related companies		1,650			1,350			700
Service fees from affiliates			18,804			8,878			18,242
Rental income
	Affiliates		4,934			4,636			4,251
	Other		1,971			1,859			1,780
Interest and dividends
	Affiliates		486			635			932
	Other		4,266			6,569			6,518
Gain on bank divestiture			—			13,789			—
Gain on sale of investment in Star Systems			—			10,781			—
Other			2,353			1,880			492

Total income			201,057			308,418			208,218

Expense
Salaries and employee benefits			22,536			22,600			20,049
Interest
	Affiliates		—			1			42
	Other		605			2,736			4,713
Other expense
	Affiliates		965			822			859
	Other		12,649			17,660			17,408

Total expense			36,755			43,879			43,071

Income before income taxes and equity in undistributed income of affiliates			164,302			264,539			165,147
Provision for income taxes			(1,736	)		4,884			(3,108	)

Income before equity in undistributed income of affiliates			166,038			259,655			168,255
Equity in undistributed income of affiliates			17,899			(95,204	)		(26,224	)

Net income		$	183,937		$	164,451		$	142,031

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

STATEMENTS OF CASH FLOWS




		Year Ended December 31

		2002			2001			2000

Net cash provided by operating activities		$	174,650		$	245,699		$	174,601

Investing activities
Proceeds from the sale of available for sale securities			2,010			14,418			—
Proceeds from maturity of held to maturity securities			24,850			35,405			—
Purchase of held to maturity securities			(26,100	)		(36,320	)		(875	)
Net (increase) decrease in loans			(84,277	)		(126,333	)		5,763
Purchases of premises and equipment			(502	)		(524	)		(612	)
Sales of premises and equipment			1,696			287			(19	)
Net cash from bank divestiture			—			32,000			—
Net cash for acquisition			—			(8,680	)		—
Other			(228	)		(15,734	)		2,186

Net cash (used for) provided by investing activities			(82,551	)		(105,481	)		6,443

Financing activities
Net increase (decrease) in short-term borrowings			(12,284	)		(9,805	)		4,889
Common stock purchased and retired			(37,057	)		(22,674	)		(114,181	)
Proceeds from issuance of common stock			4,536			3,143			1,826
Cash dividends			(77,523	)		(71,836	)		(69,416	)

Net cash used for financing activities			(122,328	)		(101,172	)		(176,882	)

Net increase (decrease) in cash and cash equivalents			(30,229	)		39,046			4,162
Cash and cash equivalents at beginning of year			160,449			121,403			117,241

Cash and cash equivalents at end of year		$	130,220		$	160,449		$	121,403

Cash paid (refunded) for
	Interest	$	606		$	2,780		$	4,675
	Income taxes		(7,765	)		9,625			(5,185	)

REPORT OF KPMG LLP INDEPENDENT AUDITORS

To the Shareholders and Board of Directors
First Virginia Banks, Inc.:

We have audited the accompanying consolidated balance sheets of First Virginia Banks, Inc. and subsidiaries (the Corporation) as of December 31, 2002 and 2001, and the related consolidated statements of income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2002. These consolidated financial statements are the responsibility of the Corporation’s management. Our responsibility is to express an opinion on these consolidated 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 First Virginia Banks, Inc. and subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, First Virginia Banks, Inc. and subsidiaries adopted the provisions of SFAS No. 142, “Goodwill and Other Intangible Assets,” as required for the accounting for their goodwill and other intangible assets.

-s- KPMG LLP

Richmond, Virginia
January 15, 2003, except for Note 2 which is as of January 20, 2003

PART III

Item 10 Directors and Executive Officers of the Registrant

Certain information concerning the directors is as follows:


Name, Age and Year Became a
Director		Principal Occupation, Business Experience in Last Five Years, Other Directorships

		Class A Directors
Jennifer S. Banner Age [43] 2001		CPA and Principal, Pershing Yoakley & Associates, P.C, a public accounting and consulting firm headquartered in Knoxville, Tennessee, since 1987. Director and Secretary-Treasurer, Tennessee Aquatics, Inc., a nonprofit amateur athletic organization, since 1995. Director, First Vantage Bank-Tennessee, Knoxville, 2000-2001.
Barry J. Fitzpatrick Age [62] 1995		Chairman of the Board, President and Chief Executive Officer of First Virginia since 1995. Chairman of the Board, First Virginia Bank in Falls Church, and a director and principal officer of numerous First Virginia affiliated nonbanking companies since 1995. Trustee, Marymount University, Arlington, Virginia. Trustee, Virginia Foundation for Independent Colleges, Richmond, Virginia Member, Executive Advisory Board, Virginia Coalfield Economic Development Authority.
Lawrence T. Jennings Age [60] 2000		Director (since 1983), President (1983 to 2000), Chairman of the Board (since 2001), and Chief Executive Officer (since 1983) of L. F. Jennings, Inc., a regional commercial building contractor headquartered in Falls Church, Virginia.
W. Lee Phillips, Jr. Age [67] 1985		Professional engineer since 1959; former Chairman of the Board, Walter L. Phillips, Inc., engineers, planners and surveyors, Falls Church, Virginia. Partner, Talbot Investment Group. Director, First Virginia Bank, Falls Church.
Albert F. Zettlemoyer Age[68] 1978		Retired President, Government Systems Group of UNISYS Corporation in McLean, Virginia; retired Executive Vice President, UNISYS Corporation.
		Class B Directors
Edward L. Breeden, III Age [67] 1982		Of Counsel, Breeden, Salb, Beasley & DuVall, P.L.C., a law firm in Norfolk, Virginia, since 1968. Director, First Virginia Bank-Hampton Roads, Norfolk. Director, First Virginia Life Insurance Company, Falls Church, 1982-2000. Chairman of the Board and President, The Hunter Foundation, which operates a Victorian museum and a home for elderly men in Norfolk, Virginia (1970 to present), and The Breeden-Adams Foundation, a private foundation which provides financial support for cancer research (1988 to present). President, The Tanners Creek Company and B&H Associates, both of which are real estate investment companies in the Tidewater area of Virginia (1990 to present)
Eric C. Kendrick Age [56] 1986		Director and President, Mereck Associates, Inc., a real estate management and development firm in Arlington, Virginia, since 1989. Director and President, Murteck Construction Company, Inc., Upton Corporation, and Old Dominion Warehouse Corporation, Arlington.
Joseph W. Richmond, Jr. Age [58] 2001		Senior Partner, Richmond and Fishburne, L.L.P., a law firm located in Charlottesville, Virginia, since 1971. Director, Jefferson Area Board for Aging and Director and President, Jefferson Elder Care, Inc. Director, First Virginia Bank-Blue Ridge, Staunton, Virginia, 1990-2001.
Robert H. Zalokar Age [75] 1959		Retired Chairman of the Board and Chief Executive Officer of First Virginia, 1984-1994. Director, First Virginia Bank, First Virginia Life Insurance Company, 1980-2000, and First Virginia Mortgage Company, 1973-2000, Falls Church, Virginia.


Name, Age and Year Became a
Director		Principal Occupation, Business Experience in Last Five Years, Other Directorships

		Class C Directors
Paul H. Geithner, Jr. Age [72] 1984		Retired President and Chief Administrative Officer, First Virginia, 1985-1995. Director, First Virginia Life Insurance Company, 1988-2000. Director, Ellicott Machine Corporation, Baltimore, Maryland, 1996 to 2001. Trustee and Secretary-Treasurer, Fairfax Symphony Orchestra Foundation, and Director, Fairfax Symphony. Trustee and Secretary-Treasurer Dorothy Farnham Feuer Foundation.
L. H. Ginn, III Age [69] 1978		Partner, Ginn & Ginn, a real estate management partnership in Richmond, Virginia, since 1987; President, Lighting Affiliates, Inc., Richmond, 1975-2000; retired U.S. Army Reserve Major General. Chairman of the Board, First Virginia Bank-Colonial, Richmond. Chairman, Westminster-Canterbury Foundation, a foundation associated with a retirement facility in Richmond. Chairman, Church Schools in the Diocese of Virginia, Episcopal Diocese of Virginia, Richmond; Member, Board of Governors, Roslyn Management Corporation, an Episcopal Conference Center in Richmond.
Edward M. Holland Age[63] 1974		Attorney-at-Law in Northern Virginia since 1966; former Senator, Virginia General Assembly, 1972-1996. Director, First Virginia Bank, Falls Church. Trustee, Chesapeake Bay Foundation. Trustee, Vice President and Manager, Tidewater Research Foundation, a private charitable foundation supporting marine research and aquaculture, Arlington, Virginia. Member of Council, Virginia Institute of Marine Science, Gloucester Point, Virginia.
Lynda S. Vickers-Smith Age [55] 1999		Director (since 1987), President (since 1995) and Treasurer (1995-2000), Snell Construction Corporation, a privately held company headquartered in Arlington, Virginia, which owns and operates commercial and residential properties located in the Northern Virginia area. Director (since 1997), Virginia Management, Inc., a real estate management company located in Arlington. Trustee (since 1996), Flint Hill School, an independent school for grades JK through 12 located in Oakton, Virginia. Corporator, Northeastern University, Boston, since 1998.

Directors Banner, Breeden, Fitzpatrick, Geithner, Ginn, Holland, Jennings, Phillips, Richmond, Vickers-Smith and Zalokar, have been directors of various subsidiaries of First Virginia during the past five years. Information relating to executive officers can be found in Part I beginning on page 2.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires First Virginia’s directors and executive officers to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the New York Stock Exchange. Executive officers and directors are required by SEC regulation to furnish First Virginia with copies of all Section 16(a) forms they file.

Based on a review of the forms that were filed and written representations from the directors and executive officers, First Virginia believes that during the year 2002, all filing requirements applicable to its directors and officers were met on time except that two directors, Edward M. Holland and Lawrence T. Jennings, each had one late filing and four executive officers, Shirley C. Beavers, Jr., Raymond E. Brann, Jr., Barbara J. Chapman and Cynthia A. Williams, each had one late filing.

Item 11 Executive Compensation

The Summary Compensation Table on the next page shows the annual compensation for the last three fiscal years for First Virginia’s Chief Executive Officer and for the four other most highly compensated executive officers.

Summary Compensation Table



		Annual Compensation								Long Term Compensation

(a)		(b)		(c)		(d)		(e)		(f)
								Other		Options/		(g)
								Annual		SARs		All Other
				Salary		Bonus		Compensation		Awarded		Compensation
Name and Principal Position		Year		($)(1)		($)(2)		($)(3)		(#)(4)		($)(5)

Barry J. Fitzpatrick			2002		780,000		635,733		4,549		45,000		87,471
	Chairman, President and Chief		2001		720,000		475,956		4,426		45,000		77,051
	Executive Officer of First Virginia		2000		690,000		450,692		4,165		45,000		75,407
Shirley C. Beavers, Jr.			2002		346,015		265,874		4,457		22,500		42,659
	Senior Executive Vice President		2001		320,000		211,532		5,023		22,500		40,616
	of First Virginia		2000		291,000		196,418		4,791		22,500		39,136
Richard F. Bowman			2002		295,962		263,744		5,044		22,500		30,576
	Executive Vice President,		2001		268,800		209,863		5,047		22,500		27,101
	Treasurer and Chief Financial		2000		258,500		194,592		4,703		22,500		34,362
	Officer of First Virginia
Raymond E. Brann, Jr.			2002		268,442		262,346		4,179		22,500		73,109
	Executive Vice President		2001		247,500		208,946		4,197		22,500		70,598
	of First Virginia		2000		236,500		193,831		4,189		22,500		69,417
Thomas P Jennings			2002		200,216		24,185		0		0		15,801
	Senior Vice President		2001		185,400		21,673		0		4,500		15,450
	and General Counsel		2000		178,500		31,616		0		0		15,126

(1) The Salary column (c) includes the base salary earned by the executive officer, which includes amounts that are deferred under the First Virginia Banks, Inc. Employees Thrift Plan, the First Virginia Thrift Restoration and Deferred Compensation Plan and the First Virginia Pre-Tax Health Benefit Plan.

(2) The Bonus column (d) includes the amounts earned as a bonus for that year even if paid in the following year. It also includes amounts earned for that year under the First Virginia Banks, Inc. Profit Sharing Plan.

(3) The Other Annual Compensation column (e) includes the amount of taxes paid by First Virginia for certain benefits.

(4) Column (f) includes the number of stock options that were granted in 2002.

(5) The All Other Compensation column (g) includes the amount paid by the employer under the First Virginia Banks, Inc. Employees Thrift Plan which, for each of the named officers, was $8,250. It also includes the amounts paid by the employer under the First Virginia Thrift Restoration and Deferred Compensation Plan. This plan provides supplemental retirement benefits for those key officers who are restricted from receiving further benefits under the Thrift Plan as a result of the limitation on pretax contributions imposed by the Internal Revenue Code. For 2002 these amounts were: for Mr. Fitzpatrick, $55,018; Mr. Beavers, $16,850; Mr. Bowman, $16,773; Mr. Brann, $13,243; and Mr. Jennings, $1,735. It also includes the premium amounts paid by the employer under the First Virginia Split Dollar Life Insurance Plan. For 2002 these amounts were: for Mr. Fitzpatrick, $20,370; Mr. Beavers, $13,678; Mr. Bowman, $4,818; Mr. Brann, $43,022; and Mr. Jennings, $4,071. It also includes the “above-market” earnings on deferred compensation earned during 2002. These amounts were: for Mr. Fitzpatrick, $3,833; Mr. Beavers, $3,881; Mr. Bowman, $735; Mr. Brann, $8,594; and Mr. Jennings, $1,745.

Stock Option Grants In 2002

The following table shows for each of the named executive officers (1) the number of stock options that were granted during 2002, (2) out of the total number of options granted to all employees, the percentage granted to the named executive officer, (3) the exercise price, (4) the expiration date, and (5) the potential realizable value of the options, assuming that the market price of the underlying securities appreciates in value

from the date of grant to the end of the option term, at annualized rates of 5% and 10%. No freestanding or tandem SARs were granted in 2002.

Stock Option Grants In 2002



			Percent of						Potential Realizable Value
	Number of		Total						at Assumed
	Securities		Options						Annual Rates of Stock
	Underlying		Granted to						Price Appreciation for
	Options		Employees		Exercise or				Option Term
	Granted (#		in Fiscal		Base Price		Expiration
Name	Shs.)(1)		Year(2)		($/Sh.)		Date		5% ($)		10% ($)

Barry J. Fitzpatrick		45,000		16.92		37.22		12/17/2012		1,053,336		2,669,359
Shirley C. Beavers, Jr.		22,500		8.46		37.22		12/17/2012		526,668		1,334,680
Richard F. Bowman		22,500		8.46		37.22		12/17/2012		526,668		1,334,680
Raymond E. Brann, Jr.		22,500		8.46		37.22		12/17/2012		526,668		1,334,680
Thomas P. Jennings		0		0		—		—		0		0

(1) Options granted to the named executive officers in 2002 vest over the lesser of (a) a five-year period or (b) the period of time based on the normal retirement age of the executive. All of the options that were granted in 2002 include a provision that would accelerate the vesting of the options upon a “change in control” of First Virginia. For an explanation of the “change in control” provision, see “Certain Director Relationships and Plans Which Include Change in Control Arrangements.”

(2) Options to purchase 266,000 of First Virginia Common Stock were granted to employees during 2002. No freestanding SARs were granted in 2002 to employees, and none of the options that were granted had any tandem SARs.

2002 Option Exercises and Yearend Values

The table below shows for each of the named executive officers the number of shares of First Virginia Common Stock acquired upon the exercise of stock options during 2002, the value realized upon their exercise, the number of unexercised stock options at the end of 2002, and the value of unexercised “in-the-money” stock options at the end of 2002. Stock options are considered “in-the-money” if the fair market value of the underlying securities exceeds the exercise price of the option. Some of the stock options which were granted to First Virginia’s executive officers include a provision that would accelerate the vesting of the options upon a “change in control” of First Virginia.

Aggregated Options Exercises in 2002 and Yearend Options

Number of Unexercised Options

Value of Unexercised In-the-

Shares Acquired on

at Yearend (#) Exercisable/

Money Options at Year end

Name

Exercise (#)

Value Realized ($)

Unexercisable

($) Exercisable/Unexercisable

Barry J. Fitzpatrick

34,698

483,394

116,997/136,501

655,202/550,135

Shirley C. Beavers, Jr.

104,994/71,250

1,258,112/287,850

Richard F. Bowman

7,614

131,519

63,634/71,250

413,714/287,850

Raymond E. Brann, Jr.

4,500

104,814

87,748/66,000

776,412/259,449

Thomas P. Jennings

12,375

110,822

13,800/11,700

56,656/69,283

Pension and Thrift Plans and Supplemental Arrangements

The table on the next page shows the estimated annual benefit payable upon retirement (assuming retiree elected single life only) under the First Virginia Pension Trust Plan and under the First Virginia Supplemental Pension Trust Plan based on specified remuneration and years of credited service classifications, assuming a participant retired on December 31, 2002, at age 65. Credited service in excess of thirty years is not taken into account in determining benefits under either plan.

Annual Benefits Under First Virginia’s Pension Trust Plan and
the First Virginia Supplemental Pension Trust Plan


Average Annual Pay		10 years		15 years		20 years		25 years		30 years

$	200,000	$	30,028	$	45,042	$	60,056	$	75,070	$	90,084
$	300,000	$	46,028	$	69,042	$	92,056	$	115,070	$	138,084
$	400,000	$	62,028	$	93,042	$	124,056	$	155,070	$	186,084
$	500,000	$	78,028	$	117,042	$	156,056	$	195,070	$	234,084
$	600,000	$	94,028	$	141,042	$	188,056	$	235,070	$	282,084
$	700,000	$	110,028	$	165,042	$	220,056	$	275,070	$	330,084
$	800,000	$	126,028	$	189,042	$	252,056	$	315,070	$	378,084
$	900,000	$	142,028	$	213,042	$	284,056	$	355,070	$	426,084
$	1,000,000	$	158,028	$	237,042	$	316,056	$	395,070	$	474,084
$	1,100,000	$	174,028	$	261,042	$	348,066	$	435,070	$	522,084
$	1,200,000	$	190,028	$	285,042	$	380,056	$	475,070	$	570,084
$	1,300,000	$	206,028	$	309,042	$	412,056	$	515,070	$	618,084
$	1,400,000	$	222,028	$	333,042	$	444,056	$	555,070	$	666,084

Under the First Virginia Pension Trust Plan, a participant retiring at age 65 with 30 years of credited service under the Plan will receive a maximum annual pension benefit equal to 1.1% of average annual pay multiplied by 30 years of credited service plus 0.5% of average annual pay in excess of covered compensation multiplied by 30 years of credited service. The calculation of “average annual pay” is based on annual compensation for the highest five consecutive years out of the participant’s final 10 years of service. “Covered compensation” is calculated by multiplying the annual average of Social Security taxable wage base in effect for the 35 years ending with the last day of the year in which the participant attains Social Security retirement age. First Virginia also has the First Virginia Supplemental Pension Trust Plan for certain key employees which provides for the payment of supplemental pension benefits as a result of the IRS restrictions on benefits under the First Virginia Pension Trust Plan. All of the named executive officers (except for Mr. Fitzpatrick who would receive benefits at retirement under a separate Supplemental Compensation Agreement) participate in the Supplemental Pension Trust Plan.

Remuneration or earnings determining pension benefits under both the Pension Trust Plan and the Supplemental Pension Trust Plan include salaries and bonuses (which are listed in the Summary Compensation Table) and any other taxable compensation. Compensation resulting from the exercise of nonqualified options, SARs, and deferred compensation are excluded from the computation of benefits under both plans. For purposes of determining benefits under the Pension Trust Plan, each of the named executives had the following years of service as of December 31, 2002 (30 years is the maximum): Mr. Fitzpatrick, 30 years; Mr. Beavers, 30 years; Mr. Bowman, 27.5 years; Mr. Brann, 30 years; and Mr. Jennings, 24.8 years. If a participant retired on December 31, 2002, at age 65, the participant would receive the pension benefits as determined by using the Summary Compensation and Pension Tables shown above in conjunction with the formula described in the previous paragraph.

Mr. Fitzpatrick’s Supplemental Compensation Agreement (“Agreement”) provides him with supplemental retirement benefits in addition to those pension benefits he would receive from the First Virginia Pension Trust Plan. Under the Agreement, if he resigns, retires or leaves First Virginia for any reason, he is entitled to receive for the rest of his life, supplemental compensation equal to sixty percent of the average of his highest five years of annual salary and bonus, reduced by the amount he would receive under the First Virginia Pension Trust Plan. Highest annual salary includes salary and bonus and any profit sharing payments received under the First Virginia Profit Sharing Plan but does not include any other form of compensation that is not salary or bonuses, such as compensation arising from the exercise of SARs and nonqualified options. To avoid a possible doubling up of benefits from this Agreement and a separate Employment Agreement (see below), payments to Mr. Fitzpatrick pursuant to his Agreement would be delayed for three years upon a

change of control. Should Mr. Fitzpatrick die, his spouse would be entitled to one-half of his total annual benefit for the rest of her life. Under his Agreement, once benefits begin to be paid, Mr. Fitzpatrick is to remain available to provide consulting and advisory services if he is physically and mentally capable of doing so. Furthermore, his benefits are forfeitable under certain circumstances.

On December 31, 1996, Messrs. Fitzpatrick, Beavers, Bowman, Brann, and Jennings entered into employment agreements with First Virginia which provide for their continued employment for a three-year period following the date on which a “change of control” takes place (the “Employment Period”). These agreements require First Virginia (or any successor corporation) to employ the executive during the Employment Period following a change of control in a position with authority, duties and responsibilities at least commensurate to what the executive had prior to a change of control, and at compensation levels (including benefits) at least equal to what the executive was making prior to the change of control. If, during the first year of his Employment Period, the executive is terminated other than for “cause” or “disability” or the executive terminates his employment for “good reason” (as those terms are defined under the employment agreements), then First Virginia (or its successor) would pay the executive a lump sum equal to 2.99 times the sum of his annual base salary and bonus. If, during the second or third year of his Employment Period, the executive is terminated other than for cause or disability or terminates his employment for good reason, then First Virginia or its successor would pay the executive a lump sum equal to two times the sum of his annual base salary and bonus. During a thirty-day period after the first year, the executive could terminate his employment for any reason and receive two times the sum of his annual base salary and bonus. Furthermore, if any payments made under the agreements subject the executive to excise taxes under Internal Revenue Code Section 4999, such payments would be “grossed up” to put the executive in the same after-tax position as if no excise taxes had been imposed. On January 20, 2003, Messrs. Fitzpatrick, Beavers, Bowman and Brann entered into Special Pay Agreements with First Virginia which provide for a monetary payment to these employees on the Effective Date of the merger of First Virginia into BB&T as settlement of all rights and benefits under their employment agreements. Mr. Fitzpatrick would receive $3,601,200; Mr. Beavers, $1,433,535; Mr. Brann, $1,128,305 and Mr. Bowman, $1,144,500 under these Special Pay Agreements.

Executive officers are eligible to participate in the First Virginia Banks, Inc. Employees’ Thrift Plan (“Thrift Plan”). Under the Thrift Plan, employees of First Virginia and its subsidiaries who have completed six months of service can contribute up to six percent of their compensation and receive matching employer contributions (after one year of service) equal to 50% of their employee contributions. Employees also can contribute up to an additional six percent of their compensation without receiving a matching contribution. For the years when First Virginia meets an earnings test under the Thrift Plan, employees can receive matching contributions equal to 75% of employee contributions. The Thrift Plan complies with Section 401(k) of the Internal Revenue Code so that employee contributions can be made on a pretax basis. Employees can direct the investment of their contributions and the matching employer contributions into one or more of three funds that are administered by the Trust and Asset Management Services Department of First Virginia Bank. Reference is made to Footnote 5 of the Summary Compensation Table for the amount of contributions made on behalf of the named executive officers under the Thrift Plan.

First Virginia also maintains a First Virginia Thrift Restoration and Deferred Compensation Plan which provides supplemental retirement benefits for those key officers who are restricted from receiving further benefits under the Thrift Plan as a result of the limitation on pretax contributions imposed by the Internal Revenue Code. Under the First Virginia Thrift Restoration and Deferred Compensation Plan, executive officers can continue to make pretax contributions in excess of the IRS limits imposed on the Thrift Plan and receive matching contributions from First Virginia identical to what they would have received if they were in the Thrift Plan and there were no limitations on contributions. Reference is made to Footnote 5 of the Summary Compensation Table for the amount of the employer contributions made on behalf of the named executive officers under the First Virginia Thrift Restoration and Deferred Compensation Plan.

Certain Director Relationships and Plans Which Include Change in Control Arrangements

In 2003 directors of First Virginia who are not salaried officers will be paid an annual retainer of $16,500 per year and a fee of $1,300 for each meeting of the Board of Directors attended. Committee chairmen will

receive $975 for each committee meeting they chair and other Committee members will receive $850 for each committee meeting they attend. Directors are reimbursed for out-of-town expenses incurred in connection with attendance at Board and Committee meetings.

During 2002, Thomas K. Malone, Jr., former Chairman and Chief Executive Officer of First Virginia, was paid $153,132, under a supplemental compensation agreement, in addition to the amount he received from the First Virginia Pension Trust Plan and the fees he received as Director Emeritus for attending Board meetings. When requested, Mr. Malone is required to provide consulting services under his supplemental compensation agreement. Also, during 2002, Robert H. Zalokar, former Chairman and Chief Executive Officer of First Virginia, and Paul H. Geithner, Jr., former President and Chief Administrative Officer of First Virginia, were paid $521,316 and $282,527, respectively, under supplemental compensation agreements, in addition to amounts they received from the First Virginia Pension Trust Plan and their director fees. When requested, both Zalokar and Geithner are required to provide consulting services under their supplemental compensation agreements. First Virginia paid country club membership fees for Zalokar and Malone of $1,885 and $1,740, respectively, during 2002. During 2002, Virginia H. Brown, formerly Virginia H. Beeton, received $71,000 pursuant to her former spouse’s Supplemental Retirement Agreement with First Virginia, in addition to what she received from the First Virginia Pension Trust Plan. Her former spouse, Ralph A. Beeton, who is now deceased, was Chairman and Chief Executive Officer of First Virginia.

First Virginia also has two key employee salary reduction deferred compensation plans, one of which began in 1983 and the other in 1986, and three directors deferred compensation plans, two of which also began in 1983 and 1986, and the other which began in 1998 (“Deferred Compensation Plans”). Under the 1983 and 1986 Deferred Compensation Plans, participants elect to defer some or all of their compensation from First Virginia, and First Virginia agrees to pay at normal retirement age or earlier (or to participant’s beneficiary or estate on participant’s death) a sum substantially in excess of what each participant has deferred. To fund the benefits under the 1983 and 1986 Deferred Compensation Plans, First Virginia has purchased life insurance policies on the lives of the participants, with First Virginia as the beneficiary. For the period ending December 31, 2002, none of the named executive officers of First Virginia deferred any compensation under the Deferred Compensation Plans. Under the 1998 Directors Deferred Compensation Plan, directors may defer their fees and receive earnings on those deferrals at the distribution date, the amount of which depends on the investment they choose.

The 1983 Deferred Compensation Plans include a provision regarding “change in control.” If there is a “change in control” of First Virginia, and a director is terminated under the directors’ plan, or in the case of the employee plan, an employee is terminated “without cause” or the employee terminates his/her employment for “good reason,” as those terms are defined under the employee plan, then the director or employee, as the case may be, becomes entitled to receive his/her benefits under the 1983 Deferred Compensation Plans at retirement, notwithstanding the fact that his/her affiliation with First Virginia has terminated.

First Virginia has a Split Dollar Life Insurance Plan (“Split Dollar Plan”) which currently includes certain executive employees of First Virginia including those named in the Summary Compensation Table. Under the Split Dollar Plan, an executive can purchase ordinary life insurance policies with coverage of at least two times what is projected to be the executive’s base salary at retirement, up to a limit of $1,000,000. A portion of the premiums will be loaned to the executives by First Virginia up to the later of ten years or the executive’s retirement date. At the end of this period, if assumptions about mortality, dividends and other factors are realized, First Virginia will recover all of its loans for premiums from the cash value of the policy. The policy will then be transferred to the executive, who will pay all further premiums, if any, under the policy. Executives who participate in the Split Dollar Plan forego any insurance coverage over $50,000 under the First Virginia Group Life Insurance Plan. The Split Dollar Plan includes a “change in control” provision which allows the executive to terminate the policy upon such an event.

First Virginia’s Board of Directors approved in 1992 the establishment of a trust with JP Morgan Chase Bank as the trustee to partially secure the benefits of some of First Virginia’s nonqualified compensation plans, including the Deferred Compensation Plans and the First Virginia Thrift Restoration and Deferred Compen-

sation Plan, in case of a change in control. Under the trust agreement establishing the trust, if a “change in control” takes place, the trustee would pay the benefits under the covered compensation plans out of the trust assets that have been contributed to the trust by First Virginia, if First Virginia or its successor refused to pay the benefits. The trust is considered a “grantor trust” subject to the claims of First Virginia’s general creditors. For accounting purposes, the trust assets are considered corporate assets and, therefore, no balance sheet impact to First Virginia resulted from the establishment of the trust. The trust agreement does not include a provision which would accelerate the vesting or payment of any of the benefits under the covered compensation plans in case of a change in control.

The 1983 Deferred Compensation Plans, the Split Dollar Plan, the above described trust agreement with JP Morgan Chase Bank, Mr. Fitzpatrick’s Supplemental Compensation Agreement, certain stock option agreements, and the above-described employment agreements all include change in control provisions. Under this definition, a change in control means: (a) an acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) (a “Person”) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of First Virginia Common Stock or (ii) the combined voting power of the then outstanding voting securities of First Virginia entitled to vote generally in the election of directors (the “Outstanding First Virginia Voting Securities”); provided, however, that any acquisition directly from or by First Virginia or any acquisition by any employee benefit plan (or related trust) sponsored or maintained by First Virginia or an affiliated company or any acquisition by a company pursuant to a transaction which complies with clauses (i), (ii) and (iii) of (c) below would be excluded; or (b) individuals who, as of the date when the change in control provisions were adopted, constitute the Board (the “Incumbent Board”) of First Virginia, cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director whose election, or nomination for election by First Virginia’s shareholders, was approved by vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual was a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of First Virginia (a “Business Combination”), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the outstanding First Virginia Common Stock and Outstanding First Virginia Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns First Virginia or all or substantially all of First Virginia’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the outstanding First Virginia Common Stock and the outstanding First Virginia Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of First Virginia or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or the action of the Board, providing for such Business Combination; or (d) approval by the shareholders of First Virginia of a complete liquidation or dissolution of First Virginia.

Compensation Committee Interlocks and Insider Participation

The current members of First Virginia’s Compensation and Benefits Committee are Edward M. Holland, Lawrence T. Jennings, Eric C. Kendrick, W. Lee Phillips, Jr., and Albert F. Zettlemoyer. As noted above, Edward M. Holland’s sister, Virginia H. Brown, receives a benefit pursuant to her former spouse’s Supplemental Retirement Agreement with First Virginia. Albert F. Zettlemoyer’s daughter is an officer of First Virginia Insurance Services, Inc., a subsidiary of First Virginia. None of the members of the Compensation and Benefits Committee served as members of the compensation committees of another entity. No executive officer of First Virginia served as a director of another entity that had an executive officer serving on First Virginia’s compensation committee. No executive officer of First Virginia served as a member of the compensation committee of another entity which had an executive officer who served as a director of First Virginia.

Compensation and Benefits Committee Report Concerning First Virginia’s Executive Compensation Policy

The Compensation and Benefits Committee (the “Committee”) of the Board of Directors establishes the policy for the compensation of the executive officers of First Virginia. It is also responsible for administering most of First Virginia’s executive compensation programs. The Committee is composed entirely of outside directors who are not eligible to participate in any First Virginia executive compensation program.

The overall goal of First Virginia’s compensation policy is to motivate, reward, and retain its key executive officers. The Committee believes this should be accomplished through an appropriate combination of competitive base salaries and, at times, both short-term and long-term incentives.

The primary components of First Virginia’s executive compensation program are base salaries, bonuses (i.e., short-term compensation), and equity compensation (i.e., long-term compensation). Executive officers also participate in other broad-based employee compensation and benefit programs. In its determination of executive compensation, the Committee noted the potential effect of the one million dollar deduction limitation under Section 162(m) of the Internal Revenue Code but declined to alter its policy in determining executive compensation to meet the requirements for deductibility under Section 162(m) because the amount of compensation affected is not material.

Base Salary

The Committee uses two primary factors to determine base salaries:

(1) the degree of responsibility the executive officer has, the executive officer’s experience, and the number of years the executive officer has been in office; and

(2) the compensation levels of corresponding positions at other banking companies.

For those executive officers who are not among the five executive officers named in the Proxy Statement, the Committee considers surveys of salaries and other compensation information that it receives from First Virginia’s Human Resources Department to determine base salaries. For the five named executive officers, the committee compares their salaries with a “National Peer Group” of regional bank holding companies. This group consists of 20 bank holding companies with assets between $10 and $25 billion as defined by Keefe Bruyette and Woods, a New York securities firm which specializes in the banking and thrift industry. Base salaries for the named executive officers are then targeted to be the median salaries of corresponding positions in the National Peer Group. For 2002, Mr. Fitzpatrick’s annual base salary was $750,000 which was 97% of the median for salaries paid to his counterparts in the “National Peer Group”.

Short-Term Incentives/ Bonuses

The Committee grants bonuses to the executive officers based on the extent to which First Virginia achieves or exceeds annual performance objectives. The Committee may award bonuses to the executive officers if First Virginia achieves a return on total average assets (ROA) of at least 1% (the same basis for determining payments of profit sharing to all employees). ROA generally is considered by the Committee to

be the most important single factor in measuring the performance of a banking company, and achievement of a 1% ROA generally is considered by the Committee to be the minimum for a good performing banking company.

Bonus awards are based on the following:

(a) The Committee establishes target amounts each year for return on average assets (“ROA”), return on total stockholders’ equity (“ROE”), asset quality, and capital strength consistent with First Virginia’s Profit Plan target amounts. Up to 50% of an executive’s salary may be awarded if the corporation achieves an ROA equivalent to 80% or more of the ROA target amount for the year. For the chief executive officer, First Virginia would also have to achieve 80% of targeted amounts for ROE, asset quality as determined by the ratio of nonperforming assets to total loans (NPA ratio) and net loan charge-offs (CO ratio) and capital strength based on the average equity-to-asset ratio (Equity/ Asset ratio) and the Tier I risk-based capital ratio; and/or

(b) Up to 30% of an executive’s salary may be awarded based on the degree to which First Virginia’s earnings, asset quality, and capital ratios exceed the average for the National Peer Group; and/or

(c) Up to 20% of an executive’s salary may be awarded at the discretion of the Committee based on an individual executive’s performance.

Within the above parameters, prior to the beginning of each year, the Committee establishes for the CEO a target bonus which is based on a projected return on assets for First Virginia. Toward the end of the year, the Committee considers a preliminary bonus after taking into account the target bonus, First Virginia’s actual return on assets for the first three quarters of the year, and a formula which is based on a set relationship between the actual versus the projected return on assets.

The Committee then exercises its judgment in light of the foregoing parameters and other considerations, including the Committee’s view of individual performance and potential and the recommendations of the CEO (for executive officers other than the CEO), to establish a bonus for each executive officer. The Committee does not use a formula to determine a final bonus decision. Among other things, Mr. Fitzpatrick’s bonus reflected First Virginia’s success in achieving a 1.68% return on assets (for the first nine months) and the other above-described results. Consistent with the Committee’s desire to avoid a strict formula approach, the Committee’s conclusions were based on a subjective analysis of the factors noted above. The Committee believes that the use of the above approach provides a flexible yet effective method of motivating First Virginia’s management.

Listed below are the annualized ratios for First Virginia and the National Peer Group based on results for the first nine months of 2002, the latest data available to the Committee at the time the incentive awards were made.

First Virginia


		Profit Plan or				National Peer
		Target Amount		Actual		Group

Earnings (Higher is better)
	Return on Average Assets (ROA)		1.59		1.68		1.53
	Return on Equity (ROE)		14.43		15.18		16.23
Asset Quality (Lower is better)
	Nonperforming
	Assets Ratio (NPA)		.28		.22		.62
	Charge-Off Ratio (CO)		.20		.16		.34
Capital (Higher is better)
	Equity/ Asset Ratio		10.25		11.19		8.76
	Tier I Risk Based Capital		10.00		14.62		10.20

First Virginia’s actual results were greater than 80% of the profit plan or target amount in every category and exceeded the National Peer Group in every category except Return on Equity. Based on all these factors, the Committee awarded Mr. Fitzpatrick a bonus of $600,000.

Long-Term Compensation/ Stock Options

The Committee believes that the granting of stock options is the most appropriate form of long-term compensation for executives and that such awards of equity encourage the executive to achieve a significant ownership stake in the success of First Virginia.

At the end of 2002, the Committee granted options covering a total of 266,000 shares of First Virginia Common Stock at $37.22 per share to the CEO and to certain officers. Most options that were awarded by the Committee vest over a five-year period in equal annual installments. Those optionees who are expected to retire in the next few years were awarded options that vest fully shortly before their anticipated retirement dates.

The size of each option award was not based on a formula and did not necessarily correlate to the degree by which First Virginia’s results exceeded those of its National Peer Group or the amount of each executive’s current stock-based holdings. Instead, the size of each award was based on a number of factors, some of which were subjective, including the performance of the CEO and each executive officer and the degree of responsibility each executive officer has with First Virginia. Mr. Fitzpatrick received options covering 45,000 shares. The size of his grant was primarily based on the performance of First Virginia as described above.

Edward M. Holland

Lawrence T. Jennings

Eric C. Kendrick

W. Lee Phillips, Jr.

Albert F. Zettlemoyer

Comparison of Five-Year Cumulative Return

The following performance chart compares the yearly percentage change in First Virginia’s cumulative total shareholder return on its Common Stock with (1) the cumulative total return of a broad market index that includes companies whose equity securities are traded on the same exchange or are of comparable market capitalization and (2) the cumulative total return of a published industry or line-of-business index.

COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN

First Virginia Banks, Inc., S&P MidCap 400 and

KBW 50 Index (with dividends reinvested)

LOGO

First Virginia believes the most appropriate equity market indices to be used to measure the price performance of First Virginia’s Common Stock are the “S&P MidCap 400” and the “KBW 50.” First Virginia is included as a component of the S&P MidCap 400.

The Standard & Poor’s MidCap 400 is comprised of 400 securities with market value between approximately $200 million and $4 billion. First Virginia considers it more representative of companies its size (year-end 2002 market capitalization of approximately $2.6 billion) than the S&P 500 index which is heavily dominated by large capitalization stocks (the 50 largest stocks account for 50% of the total value of the S&P 500). Also, financial stocks represent approximately 15% of the S&P MidCap 400 index.

The KBW 50 is an index comprised of 50 banking companies, including all the money center banks and most large regional banks. It was developed by Keefe, Bruyette & Woods, a New York securities firm which specializes in the banking and thrift industry. The KBW 50 is considered more representative of price performance of the major banking companies in the United States. As is the case with the S&P MidCap 400 index, the KBW 50 is a market capitalization weighted index and assumes quarterly reinvestment of dividends.

Comparison of Return on Average Assets

As indicated in the Compensation and Benefits Committee Report above, return on average assets (ROA) is an important factor for determining First Virginia’s performance and for determining short-term and long-term compensation for First Virginia’s executive officers. The following chart compares First Virginia’s ROA during the period 1998-2002 with the KBW Southern Regional Peer Group and with a local peer group consisting of Compass Bancshares, Hibernia Corporation, Mercantile Bankshares Corporation, First Tennessee National Corporation, Allfirst Financial Inc., National Commerce Financial Corporation and Riggs National Corporation. As noted in the Management Compensation and Benefits Committee Report, the Compensation Committee compared First Virginia’s ROA with both these groups as part of their evaluation of executive compensation.

COMPARISON OF RETURN ON AVERAGE ASSETS

First Virginia Banks, Inc., Southern Regional

and Local Peer Groups

LOGO


Item 12	*Security Ownership of Certain Beneficial Owners and Management*


	Common Stock Beneficially Owned
	December 31, 2002
Name	and Percentage of Class(1)

Directors
Jennifer S. Banner		1,080
Edward L. Breeden, III		147,874	(2)
Barry J. Fitzpatrick		318,532	(3)
Paul H. Geithner, Jr.		62,759	(4)
L. H. Ginn, III		33,553	(5)
Edward M. Holland		81,949	(6)
Lawrence T. Jennings		450
Eric C. Kendrick		127,225	(7)
W. Lee Phillips, Jr.		19,771	(8)
Joseph W. Richmond, Jr.		600
Lynda S. Vickers-Smith		17,325	(9)
Robert H. Zalokar		287,344
Albert F. Zettlemoyer		5,000

Executive Officers
Shirley C. Beavers, Jr.		155,866	(10)
Richard F. Bowman		115,784	(11)
Raymond E. Brann, Jr.		153,246	(12)
Thomas P. Jennings		63,398	(13)

(1) No director or executive officer owned as much as 1.0% of First Virginia Common Stock.

(2) Includes 16,875 shares held indirectly by a corporation, of which Mr. Breeden is President, 85,893 shares held by two trusts, of which he is a trustee, and 33,930 shares held by two foundations, of which Mr. Breeden is Chairman of the Board and President.

(3) Includes options to purchase 125,998 shares of common stock which are exercisable as of December 31, 2002 and within sixty days thereafter.

(4) Includes 53,236 shares held in a revocable trust and 9,508 shares held indirectly through his spouse’s trust.

(5) Includes 705 shares held indirectly through his souse’s Individual Retirement Account and 4,527 shares held by a trust of which Mr. Ginn is trustee.

(6) Includes 7,750 shares held in two trusts in which he is the beneficiary and 7,500 shares in trust in which he is a co-trustee.

(7) Includes 95,257 shares held in a revocable trust, 28,076 shares held by his spouse, and 3,889 shares held by a corporation of which Mr. Kendrick is a director and President.

(8) Includes 8,250 shares held by a trust of which Mr. Phillips is a trustee.

(9) Includes 16,875 shares held indirectly by a corporation of which Ms. Vickers-Smith is an officer and director (shared voting and investment power).

(10) Includes options to purchase 109,495 shares of common stock which are exercisable as of December 31, 2002 and within sixty days thereafter.

(11) Includes options to purchase 68,135 shares of common stock which are exercisable as of December 31, 2002 and within sixty days thereafter.

(12) Includes options to purchase 92,249 shares of common stock which are exercisable as of December 31, 2002 and within sixty days thereafter.

(13) Includes options to purchase 16,050 shares of common stock which are exercisable as of December 31, 2002 and within sixty days thereafter.

As of December 31, 2002, directors and executive officers as a group beneficially owned 1,820,321 shares of Common Stock, representing approximately 2.5% of those shares outstanding (including shares covered by options exercisable as of December 31, 2002, and sixty days thereafter), and 100 shares of Preferred Stock, representing less than one percent of those shares outstanding. The total shares outstanding for the directors and executive officers as a group includes the shares held by two senior advisory directors and one Director Emeritus: Robert M. Rosenthal, Chairman and Chief Executive Officer, Rosenthal Automotive Organization, Josiah P. Rowe, III, President of The Free Lance-Star Publishing Co. of Fredericksburg, Va., and Thomas K. Malone, former Chairman and Chief Executive Officer of First Virginia. As of December 31, 2002, Mr. Rosenthal owned 46,224 shares of First Virginia Common Stock, Mr. Rowe owned 3,375 shares of First Virginia Common Stock and 100 shares of First Virginia Preferred Stock, and Mr. Malone owned 100,419 shares (including 22,780 shares owned by his spouse) of First Virginia Common Stock.

Item 13 Certain Relationships and Related Transactions

Messrs. Breeden and Holland are members of or are associated with law firms which have been in the last three years retained by subsidiaries of First Virginia, and Mr. Holland is associated with a law firm which, in the future, may be retained by subsidiaries of First Virginia.

During the past year, certain of the directors and officers of First Virginia and their associates had loans outstanding from First Virginia’s banking subsidiaries. Each of these loans was made in the ordinary course of the lending bank’s business. In some cases in the past, where officers of First Virginia or its subsidiaries had to be relocated, residential mortgage loans were made by First Virginia at favorable interest rates. None of the named executive officers had any below-market-rate loans from First Virginia and none of them had any loans from any of First Virginia’s banking subsidiaries at favorable interest rates. All other loans have been made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectibility or present other unfavorable features.

PART IV


Item 14	*Controls and Procedures*

The corporation’s management, including the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the corporation’s disclosure controls and procedures within 90 days of the filing of this annual report, and, based on their evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective. There were no significant changes in the corporation’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.


Item 15	*Exhibits, Financial Statement Schedules and Reports on Form 8-K*

Financial Statements:

The following consolidated financial statements and report of independent auditors of the corporation and its subsidiaries are in Part II, item 8 on the following pages:


	Page

Consolidated Balance Sheets — December 31, 2002 and 2001		32
Consolidated Statements of Income — Years Ended December 31, 2002, 2001 and 2000		33
Consolidated Statements of Shareholders’ Equity — Years Ended December 31, 2002, 2001 and 2000		34
Consolidated Statements of Cash Flows — Years Ended December 31, 2002, 2001 and 2000		35
Notes to Consolidated Financial Statements		36-57
Report of KPMG LLP Independent Auditors		58

Exhibits:

The following exhibits have been filed with the Securities and Exchange Commission but are not included in this copy of Form 10-K. A copy of the Exhibits may be obtained by a written request to the Secretary of the Corporation:


(2)		Agreement and Plan of Reorganization dated January 20, 2003, between First Virginia Banks, Inc. and BB&T Corporation. The Plan omits annexes A through E, which include articles of merger and forms of various employment agreements. The corporation hereby agrees to furnish a copy of such instruments to the Commission upon its request.
(3)(i)		Restated Articles of Incorporation are incorporated by reference to Exhibit 3 of Form 10-Q for June 30, 1998.
(3)(ii)		Restated Bylaws as of December 18, 2002.
(3)		Reference is made to First Virginia’s Amendment to Form 8-A filed with the Commission on September 29, 1997 for a complete copy of the Amended and Restated Rights Agreement which describes the Rights which are attached to all common stock certificates.
		Instruments defining the rights of holders of the corporation’s long-term debt are not filed herein because the total amount of securities authorized thereunder does not exceed 10% of consolidated total assets. The corporation hereby agrees to furnish a copy of such instruments to the Commission upon its request.
(10)		Supplemental compensation agreement for Mr. Barry J. Fitzpatrick is incorporated by reference to Exhibit 10 of the 1994 Annual Report on Form 10-K.
		Amendment to Paragraph 1(a) of Barry J. Fitzpatrick’s Supplemental Compensation Agreement is incorporated by reference to Exhibit 10 of the 1995 Annual Report on Form 10-K.
		Second Amendment to the Management Contract for Mr. Barry J. Fitzpatrick is incorporated by reference to Exhibit 10 of the 1996 Annual Report on Form 10-K.
		Supplemental compensation agreement for Mr. Paul H. Geithner, Jr. is incorporated by reference to Exhibit 10 of the 1992 Annual Report on Form 10-K.


		Supplemental compensation agreement for Mr. Thomas K. Malone, Jr. is incorporated by reference to Exhibit 10 of the 1992 Annual Report on Form 10-K.
		Supplemental compensation agreement for Mr. Robert H. Zalokar is incorporated by reference to Exhibit 10 of the 1992 Annual Report on Form 10-K.
		Employment agreements regarding “Change of Control” for Messrs. Barry J. Fitzpatrick, Shirley C. Beavers, Jr., Richard F. Bowman, Raymond E. Brann, Jr. and Thomas P. Jennings are incorporated by reference to Exhibit 10 of the 1996 Annual Report on Form 10-K.
		Special Pay Agreements for Messrs. Barry J. Fitzpatrick, Shirley C. Beavers, Jr., Raymond E. Brann, Jr., and Richard F. Bowman.
		Key Employee Salary Reduction Deferred Compensation Plans for 1983 and 1986 are incorporated by reference to Exhibit 10 of the 1992 Annual Report on Form 10-K.
		Amendment to Article VI, Section 6.03 of the Key Employee Salary Reduction Deferred Compensation Plan is incorporated by reference to Exhibit 10 of the 1995 Annual Report on Form 10-K.
		Directors’ Deferred Compensation Plans for 1983 and 1986 are incorporated by reference to Exhibit 10 of the 1992 Annual Report on Form 10-K.
		1998 Directors’ Deferred Compensation Plan is incorporated by reference to Exhibit 10 of the 1999 Annual Report on Form 10-K.
		First Virginia Thrift Restoration and Deferred Compensation Plan is incorporated by reference to Exhibit 10 of the 1999 Annual Report on Form 10-K.
		Collateral Assignment Split Dollar Life Insurance Agreement and Plan is incorporated by reference to Exhibit 10 of the 1992 Annual Report on Form 10-K.
		Amendment to the third paragraph of Section 9 of the Collateral Assignment Split Dollar Life Insurance Agreement and Plan is incorporated by reference to Exhibit 10 of the 1995 Annual Report on Form 10-K.
		1986 Incentive Stock Option Plan, Nonqualified Stock Option Plan and Stock Appreciation Rights Plan is incorporated by reference to Registration Statement Number 33-17358 on Form S-8 dated September 28, 1987.
		1991 Incentive Stock Option Plan, Nonqualified Stock Option Plan and Stock Appreciation Rights Plan is incorporated by reference to Registration Statement Number 33-54802 on Form S-8 dated November 20, 1992.
		1998 Stock Incentive Plan is incorporated by reference to Registration Statement Number 333-53698 on Form S-8 dated January 12, 2001.
(21)		Subsidiaries of the Registrant
(23)		Consent of Independent Auditors
(24)		Power of Attorney concerning Directors’ signatures
(99)(1)		Certification of Periodic Report by Barry J. Fitzpatrick
(99)(2)		Certification of Periodic Report by Richard F. Bowman

Reports on Form 8-K:

No reports on Form 8-K were required to be filed during the last quarter of 2002.

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 as of March 12, 2003, on its behalf by the undersigned, thereunto duly authorized.

FIRST VIRGINIA BANKS, INC.

By: /s/ BARRY J. FITZPATRICK

Barry J. Fitzpatrick,

Chairman, President

and Chief Executive Officer

By: /s/ RICHARD F. BOWMAN

Richard F. Bowman,

Executive Vice President,

Treasurer 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 as of March 12, 2003 on behalf of the registrant and in the capacities indicated.


	Signature	Title


/s/ BARRY J. FITZPATRICK Barry J. Fitzpatrick		Chairman, President, Chief Executive Officer and Director (Principal Executive Officer)

/s/ RICHARD F. BOWMAN Richard F. Bowman		Executive Vice President, Treasurer and Chief Financial Officer (Principal Financial and Accounting Officer)

Jennifer S. Banner		Director

/s/ EDWARD L. BREEDEN III* Edward L. Breeden, III		Director

/s/ PAUL H. GEITHNER, JR.* Paul H. Geithner, Jr.		Director

/s/ L. H. GINN III* L.H. Ginn, III		Director

/s/ EDWARD M. HOLLAND* Edward M. Holland		Director

/s/ LAWRENCE T. JENNINGS* Lawrence T. Jennings		Director


	Signature	Title


/s/ ERIC C. KENDRICK* Eric C. Kendrick		Director

/s/ W. LEE PHILLIPS, JR.* W. Lee Phillips, Jr.		Director

Joseph W. Richmond, Jr.		Director

/s/ LYNDA S. VICKERS-SMITH* Lynda S. Vickers-Smith		Director

/s/ ROBERT H. ZALOKAR* Robert H. Zalokar		Director

/s/ ALBERT F. ZETTLEMOYER* Albert F. Zettlemoyer		Director

*By:	/s/ THOMAS P. JENNINGS Thomas P. Jennings, Attorney-in-fact

March 12, 2003

I, Barry J. Fitzpatrick, certify that:

1. I have reviewed this annual report on Form 10-K of First Virginia Banks, Inc.;

2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

March 12, 2003

/s/ BARRY J. FITZPATRICK

Barry J. Fitzpatrick,

Chairman, President and

Chief Executive Officer

I, Richard F. Bowman, certify that:

March 12, 2003

/s/ RICHARD F. BOWMAN

Richard F. Bowman,

Executive Vice President,

Treasurer and Chief Financial Officer


(1)	Income from tax-exempt securities and loans is included in interest income on a taxable-equivalent basis. Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 35% and adjusted for the partial disallowance of interest costs incurred to carry the tax-exempt investments.

(2)	Nonaccruing loans are included in their respective categories.


(1)	Fully taxable-equivalent basis.

(2)	Based on contractual maturity.


(1)	The Salary column (c) includes the base salary earned by the executive officer, which includes amounts that are deferred under the First Virginia Banks, Inc. Employees Thrift Plan, the First Virginia Thrift Restoration and Deferred Compensation Plan and the First Virginia Pre-Tax Health Benefit Plan.

(2)	The Bonus column (d) includes the amounts earned as a bonus for that year even if paid in the following year. It also includes amounts earned for that year under the First Virginia Banks, Inc. Profit Sharing Plan.

(3)	The Other Annual Compensation column (e) includes the amount of taxes paid by First Virginia for certain benefits.

(4)	Column (f) includes the number of stock options that were granted in 2002.

(5)	The All Other Compensation column (g) includes the amount paid by the employer under the First Virginia Banks, Inc. Employees Thrift Plan which, for each of the named officers, was $8,250. It also includes the amounts paid by the employer under the First Virginia Thrift Restoration and Deferred Compensation Plan. This plan provides supplemental retirement benefits for those key officers who are restricted from receiving further benefits under the Thrift Plan as a result of the limitation on pretax contributions imposed by the Internal Revenue Code. For 2002 these amounts were: for Mr. Fitzpatrick, $55,018; Mr. Beavers, $16,850; Mr. Bowman, $16,773; Mr. Brann, $13,243; and Mr. Jennings, $1,735. It also includes the premium amounts paid by the employer under the First Virginia Split Dollar Life Insurance Plan. For 2002 these amounts were: for Mr. Fitzpatrick, $20,370; Mr. Beavers, $13,678; Mr. Bowman, $4,818; Mr. Brann, $43,022; and Mr. Jennings, $4,071. It also includes the “above-market” earnings on deferred compensation earned during 2002. These amounts were: for Mr. Fitzpatrick, $3,833; Mr. Beavers, $3,881; Mr. Bowman, $735; Mr. Brann, $8,594; and Mr. Jennings, $1,745.


(1)	Options granted to the named executive officers in 2002 vest over the lesser of (a) a five-year period or (b) the period of time based on the normal retirement age of the executive. All of the options that were granted in 2002 include a provision that would accelerate the vesting of the options upon a “change in control” of First Virginia. For an explanation of the “change in control” provision, see “Certain Director Relationships and Plans Which Include Change in Control Arrangements.”

(2)	Options to purchase 266,000 of First Virginia Common Stock were granted to employees during 2002. No freestanding SARs were granted in 2002 to employees, and none of the options that were granted had any tandem SARs.


	(1)	the degree of responsibility the executive officer has, the executive officer’s experience, and the number of years the executive officer has been in office; and

	(2)	the compensation levels of corresponding positions at other banking companies.


	(a)	The Committee establishes target amounts each year for return on average assets (“ROA”), return on total stockholders’ equity (“ROE”), asset quality, and capital strength consistent with First Virginia’s Profit Plan target amounts. Up to 50% of an executive’s salary may be awarded if the corporation achieves an ROA equivalent to 80% or more of the ROA target amount for the year. For the chief executive officer, First Virginia would also have to achieve 80% of targeted amounts for ROE, asset quality as determined by the ratio of nonperforming assets to total loans (NPA ratio) and net loan charge-offs (CO ratio) and capital strength based on the average equity-to-asset ratio (Equity/ Asset ratio) and the Tier I risk-based capital ratio; and/or

	(b)	Up to 30% of an executive’s salary may be awarded based on the degree to which First Virginia’s earnings, asset quality, and capital ratios exceed the average for the National Peer Group; and/or

	(c)	Up to 20% of an executive’s salary may be awarded at the discretion of the Committee based on an individual executive’s performance.


	(1)	No director or executive officer owned as much as 1.0% of First Virginia Common Stock.

	(2)	Includes 16,875 shares held indirectly by a corporation, of which Mr. Breeden is President, 85,893 shares held by two trusts, of which he is a trustee, and 33,930 shares held by two foundations, of which Mr. Breeden is Chairman of the Board and President.

	(3)	Includes options to purchase 125,998 shares of common stock which are exercisable as of December 31, 2002 and within sixty days thereafter.

	(4)	Includes 53,236 shares held in a revocable trust and 9,508 shares held indirectly through his spouse’s trust.

	(5)	Includes 705 shares held indirectly through his souse’s Individual Retirement Account and 4,527 shares held by a trust of which Mr. Ginn is trustee.

	(6)	Includes 7,750 shares held in two trusts in which he is the beneficiary and 7,500 shares in trust in which he is a co-trustee.

	(7)	Includes 95,257 shares held in a revocable trust, 28,076 shares held by his spouse, and 3,889 shares held by a corporation of which Mr. Kendrick is a director and President.

	(8)	Includes 8,250 shares held by a trust of which Mr. Phillips is a trustee.

	(9)	Includes 16,875 shares held indirectly by a corporation of which Ms. Vickers-Smith is an officer and director (shared voting and investment power).


(10)	Includes options to purchase 109,495 shares of common stock which are exercisable as of December 31, 2002 and within sixty days thereafter.

(11)	Includes options to purchase 68,135 shares of common stock which are exercisable as of December 31, 2002 and within sixty days thereafter.


(12)	Includes options to purchase 92,249 shares of common stock which are exercisable as of December 31, 2002 and within sixty days thereafter.

(13)	Includes options to purchase 16,050 shares of common stock which are exercisable as of December 31, 2002 and within sixty days thereafter.



	Barry J. Fitzpatrick,
	Chairman, President
	and Chief Executive Officer



	Richard F. Bowman,
	Executive Vice President,
	Treasurer and Chief Financial Officer


1.	I have reviewed this annual report on Form 10-K of First Virginia Banks, Inc.;

2.	Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;

3.	Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;

4.	The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:


	a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;

	b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and

	c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;


	a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

	b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and



	Barry J. Fitzpatrick,
	Chairman, President and
	Chief Executive Officer