Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2003

OR

For the transition period from                  to                 

Commission File No. 0-23565

EASTERN VIRGINIA BANKSHARES, INC.

(Exact name of registrant as specified in its charter)

330 Hospital Road, Tappahannock, Virginia 22560

(Address of principal executive offices)

Registrant’s telephone number (804) 443-8423

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $2 Par Value

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this form 10-K.    ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).

    Yes  x    No  ¨

The aggregate market value of common stock held by non-affiliates of the registrant as of June 30, 2003 was approximately $111,536,059.

The number of shares of the registrant’s Common Stock outstanding as of March 1, 2004 was 4,866,801.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the 2003 Annual Report to Shareholders are incorporated by reference into Part I and Part II, and portions of the 2004 definitive Proxy Statement to be delivered to shareholders in connection with the Annual Meeting of Shareholders to be held April 15, 2003 are incorporated by reference into Part III.

Table of Contents

EASTERN VIRGINIA BANKSHARES, INC.

FORM 10-K

For the Year Ended December 31, 2003

INDEX

2

Table of Contents

PART 1

Item 1. Business

General

Eastern Virginia Bankshares, Inc. (the “Company” or “EVB”) is a bank holding company that was organized and chartered under the laws of the Commonwealth of Virginia on September 5, 1997 and commenced operations on December 29, 1997. The Company conducts its primary operations through three wholly owned subsidiaries, Southside Bank, Bank of Northumberland, Inc. and Hanover Bank. Bank of Northumberland, Inc. and Southside Bank were chartered as state banks under the laws of the Commonwealth of Virginia in 1910. Hanover Bank was chartered as a state bank in 2000.

The banks jointly own EVB Financial Services, Inc., which in turn has 100% ownership of EVB Investments, Inc. and EVB Insurance, Inc. EVB Financial Services, Inc. also has an 75% ownership interest in EVB Title, LLC and a 50% ownership interest in EVB Mortgage, Inc. EVB Title, Inc sells title insurance, while EVB Insurance, Inc. has invested in a limited liability company, Virginia Bankers Insurance Center, LLC, which acts as a broker for insurance sales for its member banks. Bank of Northumberland has an ownership interest in Bankers Title, LLC which provides title insurance services. EVB Mortgage, Inc. was chartered in the first quarter of 2004 and is expected to begin conducting business by early second quarter 2004. The financial position and operating results of these subsidiaries are not significant to the Company as a whole and are not considered principal activities of the Company at this time

The Company’s primary activity is retail banking. Through its bank subsidiaries the Company provides full service banking including commercial and consumer demand and time deposit accounts, real estate, commercial and consumer loans, Visa and Mastercard revolving credit accounts, drive-in banking services, automated teller machine transactions, internet banking and wire transfer services. With 20 branches at 2003 year end, the banks serve diverse markets that primarily are in the counties of Caroline, Essex, Gloucester, Hanover, King and Queen, King William, Middlesex, Richmond, Northumberland, Southampton, Surry and Sussex. Ancillary services provided by the banks also includes travelers’ checks, safe deposit box rentals, collections and other customary bank services to its customers. The largest majority of the Company’s revenue comes from retail banking in the form of interest earned on loans and investment securities and fees related to deposit services.

As of December 31, 2003, the Company and its subsidiary banks employed 244 full-time equivalent employees. EVB’s success is highly dependent on its ability to attract and retain qualified employees. Competition for employees is intense in the financial services industry. The Company believes it has been successful in its efforts to recruit qualified employees, but there is no assurance that it will continue to be successful in the future. None of the Company’s employees are subject to collective bargaining agreements. EVB believes relations with its employees are excellent. The Company maintains an internet website at www.evb.org, which contains information relating to it and its business. The Company makes available free of charge through its website its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these documents as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the Securities and Exchange Commission. Copies of the Company’s Audit Committee Charter, Nominating Committee Charter and Code of Conduct are available upon written request to the Company’s Corporate Secretary.

Competition

EVB faces significant competition for loans and deposits with that competition differing based on the particular market. Competition for loans comes primarily from commercial banks and mortgage banking subsidiaries of both regional and community banks. Based on June 30, 2003 data published by the Federal Deposit Insurance Corporation EVB held the largest deposit share among its competitors in Northumberland, Middlesex and Surry Counties, was essentially tied for the top market share in Essex County, and had a strong deposit share in King William, Southampton and Sussex Counties, and a rapidly growing deposit base in Hanover and Gloucester

3

Table of Contents

Counties. The Companies primary competition is other community banks in Caroline, Essex, King William, Lancaster and Northampton Counties, while it competes with both community banks and large regional banks in Hanover, Gloucester, Middlesex, Caroline, Southampton, Surry and Sussex Counties.

The Company’s deposit market share by county as of the latest available regulatory reports is:

Credit Policies

All loans on Eastern Virginia Bankshares Balance Sheet are originated by one of the Company’s subsidiary banks – Southside Bank, Bank of Northumberland, Inc. or Hanover Bank. For purposes of the discussion that follows, these banks will be collectively referred to as EVB.

The principal risk associated with each of the categories of loans in EVB’s portfolio is the creditworthiness of its borrowers. Within each category, such risk is increased or decreased, depending on prevailing economic conditions. In an effort to manage the risk, EVB’s policy gives loan amount approval limits to individual loan officers based on their position and level of experience. The risk associated with real estate mortgage loans, commercial and consumer loans varies based on employment levels, consumer confidence, fluctuations in the value of real estate and other conditions that affect the ability of borrowers to repay indebtedness. The risk associated with real estate construction loans varies, based on the supply and demand for the type of real estate under construction.

EVB has written policies and procedures to help manage credit risk. The Company utilizes a loan review process that includes formulation of portfolio management strategy, guidelines for underwriting standards and risk assessment, procedures for ongoing identification and management of credit deterioration, and regular independent third party portfolio reviews to establish loss exposure and to ascertain compliance with policies.

The Company uses a Management Loan Committee, Bank Directors Loan Committee and for larger loans a Bank Board of Directors to approve loans. The individual banks’ Chief Credit Officer is responsible for reporting to the Directors Loan Committee monthly on the activities of the Management Loan Committee and on the status of various delinquent and non-performing loans. The Directors Loan Committee also reviews lending policies proposed by Management. EVB’s corporate Board of Directors establishes the total lending limit for the banks on a combined basis.

Residential loan originations come primarily from walk-in customers, real estate brokers and builders. Commercial real estate loan originations are obtained through broker referrals, direct solicitation of developers and continued business from current customers. An EVB loan officer as part of the application process reviews all loan applications. Information is obtained concerning the income, financial condition, and employment and credit history of the applicant. If commercial real estate is involved, information is also obtained concerning cash flow

4

Table of Contents

available for debt service. Loan quality is analyzed based on the EVB’s experience and credit underwriting guidelines as well as the guidelines used by an external loan review firm, depending on the type of loan involved. Independent appraisers who have been pre-approved by the banks’ Boards of Directors appraise real estate collateral.

In the normal course of business, EVB makes various commitments and incurs certain contingent liabilities that are disclosed but not reflected in its annual financial statements including commitments to extend credit. At December 31, 2003, commitments to extend credit totaled $58.3 million.

Construction Lending

EVB makes local construction loans, primarily residential, and land acquisition and development loans. Residential houses under construction and the underlying land for which the loan was obtained secure construction loans. At December 31, 2003, construction, land and land development loans outstanding were $20.2 million, or 4.1%, of gross loans. These loans are concentrated in the EVB’s local markets. The average life of a construction loan is less than one year. Because the interest rate charged on these loans usually floats with the market, they help EVB in managing its interest rate risk. Construction lending entails significant additional risks, compared with residential mortgage lending. Construction loans often involve larger loan balances concentrated with single borrowers or groups of related borrowers. Another risk involved in construction lending is attributable to the fact that loan funds are advanced upon the security of the land or home under construction, where the value is estimated prior to the completion of construction. Thus, it is more difficult to evaluate accurately the total loan funds required to complete a project and related loan-to-value ratios. To mitigate the risks associated with construction lending, EVB generally limits loan amounts to 80% of appraised value in addition to analyzing the creditworthiness of its borrowers. The Company also obtains a first lien on the property as security for its construction loans and typically requires personal guarantees from the borrower’s principal owners.

Commercial Business Loans

Commercial business loans generally have a higher degree of risk than residential mortgage loans, but have higher yields. To manage these risks, EVB generally obtains appropriate collateral and personal guarantees from the borrower’s principal owners and monitors the financial condition of its business borrowers. Residential mortgage loans generally are made on the basis of the borrower’s ability to make repayment from their employment and other income and are secured by real estate whose value tends to be readily ascertainable. In contrast, commercial business loans typically are made on the basis of the borrower’s ability to make repayment from cash flow from its business and are secured by business assets, such as commercial real estate, accounts receivable, equipment and inventory. As a result, the availability of funds for the repayment of commercial business loans is substantially dependent on the success of the business itself. Furthermore, the collateral for commercial business loans may depreciate over time and generally cannot be appraised with as much precision as residential real estate. EVB has a loan review and monitoring process to regularly assess the repayment ability of commercial borrowers. At December 31, 2003, commercial loans totaled $55.5 million, or 11.4% of the total loan portfolio.

Commercial Real Estate Lending

Various types of commercial real estate in EVB’s market area, including multi-family residential buildings, commercial buildings and offices, recreational facilities, small shopping centers and churches, secure commercial real estate loans. At December 31, 2003, commercial real estate loans aggregated $114.4 million or 23.5% of EVB’s gross loans. In its underwriting of commercial real estate, EVB may lend up to 80% of the secured property’s appraised value. Commercial real estate lending entails significant additional risk, compared with residential mortgage lending. Commercial real estate loans typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. Additionally, the payment experience on loans secured by income producing properties is typically dependent on the successful operation of a business or a real estate project and thus may be subject, to a greater extent, to adverse conditions in the real estate market or in the economy generally. EVB’s commercial real estate loan underwriting criteria requires an examination of debt service

5

Table of Contents

coverage ratios, the borrower’s creditworthiness and prior credit history and reputation, and EVB typically requires personal guarantees or endorsements of the borrowers’ principal owners. EVB also carefully evaluates the location of the security property.

One-to-Four-Family Residential Real Estate Lending

Residential one-to-four family mortgage loans comprise EVB’s total largest loan category. At December 31, 2003, this category of mortgage loans accounted for $222.4 million or 45.7% of EVB’s gross loan portfolio. Security for the majority of EVB’s residential lending is in the form of owner occupied one-to-four family dwellings. Of this $222.4 million, $94.9 million are adjustable rate loans, primarily 3 year ARM’s.

Residential lending activity may be generated by referrals by real estate professionals and existing or new bank customers. A bank loan officer as part of the application process takes loan applications. Information is gathered concerning income, employment and credit history of the applicant. Loan quality is analyzed based on EVB’s underwriting guidelines. Independent appraisers who have been approved by the Board of Directors provide valuation of residential collateral.

All residential mortgage loans originated by EVB contain a “due-on-sale” clause providing that the bank may declare the unpaid principal balance due and payable upon sale or transfer of the mortgaged premises. In connection with residential real estate loans, the banks require title insurance, hazard insurance and if required, flood insurance. The banks do not require escrows for real estate taxes and insurance.

Consumer Lending

EVB offers various secured and unsecured consumer loans, including unsecured personal loans and lines of credit, automobile loans, boat loans, deposit account loans, installment and demand loans, credit cards, and home equity lines of credit and loans. At December 31, 2003, EVB had consumer loans of $60.3 million or 12.4% of gross loans. Such loans are generally made to customers with whom the Company has a pre-existing relationship. EVB currently originates all of its consumer loans in its geographic market area. Most of the consumer loans are issued at a fixed rate.

Consumer loans may entail greater risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured, such as lines of credit, or secured by rapidly depreciable assets such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. The remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. Such loans may also give rise to claims and defenses by a consumer borrower against an assignee of collateral securing the loan such as EVB, and a borrower may be able to assert against such assignee claims and defenses that it has against the seller of the underlying collateral. Consumer loan delinquencies often increase over time as the loans age.

The underwriting standards employed by EVB for consumer loans includes a determination of the applicant’s payment history on other debts and an assessment of ability to meet existing obligations and payments on the proposed loan. The stability of the applicant’s monthly income may be determined by verification of gross monthly income from primary employment, and additionally from any verifiable secondary income. Although creditworthiness of the applicant is of primary consideration, the underwriting process also includes an analysis of the value of the security in relation to the proposed loan amount.

6

Table of Contents

Supervision and Regulation

The Company is subject to regulation under the Bank Holding Company Act of 1956 (BHCA) and the examination and reporting requirements of the Board of Governors of the Federal Reserve System. Under the BHCA, a bank holding company may not acquire ownership or control of more than 5% of the voting shares or substantially all of the assets of any bank or merge or consolidate with another bank holding company without the prior approval of the Federal Reserve Board. The BHCA generally limits the activities of a bank holding company and its subsidiaries to that of banking, managing or controlling banks, or any other activity that is determined to be so closely related to banking or to managing or controlling banks that an exception is allowed for those activities. The Company is also a registered bank holding company under the bank holding company laws of the Commonwealth of Virginia. Accordingly, the Company is also subject to regulation and supervision by the State Corporation Commission of Virginia.

As state-chartered banks, each of EVB’s three bank subsidiaries are subject to regulation, supervision and examination by the Virginia State Corporation Commission through its Bureau of Financial Institutions. Bank of Northumberland and Hanover Bank are members of the Federal Reserve System and subject to regulation, supervision and examination by the Federal Reserve Bank of Richmond. Southside Bank is not a Federal Reserve member and is subject to regulation, supervision and examination by the Federal Deposit Insurance Corporation. Federal and State laws also govern the activities in which the banks may engage, the investments that they may make and the aggregate amount of loans that may be granted to one borrower. The Company is subject to the reporting requirements of the Securities and Exchange Act of 1934, as amended, including the filing of quarterly, annual and other periodic reports with the Securities and Exchange Commission (the SEC). The Company is directly impacted by the Sarbanes-Oxley Act of 2002 which has as its purpose the improvement of corporate governance and reporting. The Company believes it is fully complying with the new SEC rules and regulations implemented pursuant to the Sarbanes-Oxley Act.

There are a number of obligations and restrictions imposed on bank holding companies and their depository institution subsidiaries by federal law and regulatory policy that are designed to reduce potential loss exposure to the depositors of such depository institutions and to the Federal Deposit Insurance Corporation (“FDIC”) insurance funds in the event that the depository institution is insolvent or in danger of becoming insolvent. For example, under the policy of the Federal Reserve Board with respect to bank holding company operations, a bank holding company is required to serve as a source of financial strength to its subsidiary depository institutions and to commit resources and to support such institutions in circumstances where it might not do so absent such policy. In addition, the “cross-guarantee” provisions of federal law require insured depository institutions under common control to reimburse the FDIC for any loss suffered or reasonably anticipated by either the Saving Association Insurance Fund or the Bank Insurance Fund as a result of the default of a commonly controlled insured depository institution in danger of default. The FDIC may decline to enforce the cross-guarantee provision if it determines that a waiver is in the best interests of the deposit insurance funds. The FDIC’s claim for reimbursement under the cross-guarantee provisions is superior to claims of shareholders of the insured depository institution or its holding company, but is subordinate to claims of depositors, secured creditors and nonaffiliated holders of subordinated debt of the commonly controlled insured depository institutions.

Federal law permits bank holding companies from any state to acquire banks and bank holding companies located in any other state, subject to certain conditions, including nationwide and state imposed concentration limits. Banks are also able to branch across state lines, provided certain conditions are met, including that applicable state laws expressly permit such interstate branching. Virginia has adopted legislation that permits branching across state lines, provided there is reciprocity with the state in which the out-of-state bank is located. After a bank has established branches in a state through an interstate merger transaction, the bank may establish and acquire additional branches at any location in the state where a bank headquartered in that state could have established or acquired branches under the applicable federal or state law.

7

Table of Contents

Dividends

Earnings of the Company’s banking subsidiaries are impacted by general economic conditions, legislative changes, and management policies. The majority of the Company’s revenue from which dividends may be paid is from dividends paid by the banks to the Company. Bank dividends are subject to regulatory requirements limiting dividends to current year earnings plus net retained earnings for the prior two years, unless otherwise approved by regulatory authorities. As of 2003 year end, Southside Bank had $6.1 million, Bank of Northumberland $233 thousand, and Hanover Bank $71 thousand of retained income, free of restriction for payment of dividends. The Company maintains a policy that each of its banks is to maintain capital sufficient to be categorized as well-capitalized under banking regulations and to meet its desired lending limit requirements and to fund anticipated growth. The banks paid $3.2 million in dividends to the Company in 2003, and the Company paid dividends to shareholders of over $2.7 million.

Capital

Banking regulatory agencies have issued risk-based and leverage capital guidelines applicable to banking organizations which they supervise. Under the risk-based capital guidelines of the federal regulatory agencies, the Company and the Banks are required to maintain a minimum ratio of total capital to risk-weighted assets of at least 8% and a minimum Tier 1 capital to risk-weighted assets of at least 4%. At least half of total capital is required to be composed of common equity, retained earnings and qualifying perpetual preferred stock, less certain intangibles and other adjustments (Tier 1 capital). The remainder (Tier 2 capital) may consist of a limited amount of subordinated debt and other qualifying debt (including certain hybrid capital instruments), and a limited amount of the loan loss reserve. As of December 31, 2003, the most recent notification from the Federal Reserve Bank categorized each of the three subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. The Company’s capital is discussed in greater detail under the caption Capital Resources in Item 7 of Management’s Discussion and Analysis of Financial Condition and Results of Operations and in Note 19 to the Financial Statements under the caption Regulatory Matters, and those Notes are incorporated by reference herein.

The risk-based capital guidelines of the federal regulatory agencies explicitly identify concentrations of credit risk and the risk arising from non-traditional activities, as well as an institution’s ability to manage these risks, as important factors to be taken into account by the agencies in assessing an institution’s overall capital adequacy. The capital guidelines also provide that an institution’s exposure to a decline in the economic value of its capital due to changes in interest rates be considered by the agency as a factor in evaluating a banking organization’s capital adequacy.

The Company and its subsidiary banks are also subject to certain other recent federal laws which directly impact operations of the Company:

USA Patriot Act

The USA Patriot Act became effective in October 2001 and provides for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering. Among other provisions, the USA Patriot Act permits financial institutions, upon providing notice to the United States Treasury, to share information with one another in order to better identify and report to the federal government concerning activities that may involve money laundering or terrorists’ activities. The USA Patriot Act is considered a significant banking law in terms of information disclosure regarding certain customer transactions. Although it does create a reporting obligation, EVB does not expect the USA Patriot Act to materially effect its products, services or other business activities.

The Federal Bureau of Investigation (“FBI”) has sent, and will send, our banking regulatory agencies lists of the names of persons suspected of terrorist activities. The Banks have been requested, and will be requested, to search their records for any relationships or transactions with persons on those lists. If the Banks find any relationship or transactions, they must file a suspicious activity report and contact the FBI.

8

Table of Contents

The Office of Foreign Assets Control (“OFAC”), which is a division of the Department of the Treasury, is responsible for helping to ensure that United States entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send, our banking regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts. If the Banks find a name on any account, or wire transfer that is on an OFAC list, they must freeze such account, file a suspicious activity report and notify the FBI.

Gramm-Leach-Bliley Act of 1999 (“GLBA”)

The GLBA implemented major changes to the statutory framework for providing banking and other financial services in the United States. The Act covers a broad range of issues, including the repeal of most of the restrictions on affiliations among depository institutions, securities firms and insurance companies. The Act repeals sections of 20 and 32 of the Glass-Stegall Act, thus permitting unrestricted affiliations between banks and securities firms. The Act also permits bank holding companies to elect to become financial holding companies. A financial holding company may engage in or acquire companies that engage in a broad range of financial services, including securities activities such as underwriting, dealing, brokerage, investment and merchant banking, insurance underwriting, sales and brokerage activities.

The Act provides that the states continue to have the authority to regulate insurance activities, but prohibits the states in most instances from preventing or significantly interfering with the ability of a bank, directly or through an affiliate, to engage in insurance sales, solicitations or cross-marketing activities. Although the states generally must regulate bank insurance activities in a nondiscriminatory manner, the states may continue to adopt and enforce rules that specifically regulate bank insurance activities in certain areas identified in the Act. The Act adopts a system of functional regulation under which the Federal Reserve Board is confirmed as the umbrella regulator for financial holding companies, but financial holding company affiliates are to be principally regulated by functional regulators such as the FDIC for state nonmember bank affiliates, the SEC for securities affiliates and state insurance regulators for insurance affiliates.

To become eligible for these activities, a bank holding company must qualify as a financial holding company. In order to become a financial holding company, the bank holding company and all of its affiliated depository institutions must be well-capitalized, well-managed, and have at least a satisfactory Community Reinvestment Act rating. In addition, the bank holding company must file with the Federal Reserve a declaration of its intention to become a financial holding company. While EVB satisfies these requirements, the Company has not found sufficient reason to elect to be treated as a financial holding company under the GLBA.

Bank Secrecy Act

The GLBA and the new Bank Secrecy Act contain extensive customer privacy protection provisions. Under these provisions, a financial institution must provide to it customers, at the inception of the customer relationship and annually thereafter, the institution’s policies and procedures regarding the handling of customers’ nonpublic personal financial information. The Act provides that, except for certain limited exceptions, an institution may not provide such personal information to unaffiliated third parties unless the institution discloses to its customer that such information may be so provided and the customer is given the opportunity to opt out of such disclosure. An institution may not disclose to a non-affiliated third party, other than to a consumer reporting agency, customer account numbers of other similar account identifiers for marketing purposes. The Act also provides that the states may adopt customer privacy protections that are more strict that those contained in the Act. The Act also makes a criminal offense, except in limited circumstances, obtaining or attempting to obtain customer information of a financial nature by fraudulent or deceptive means.

9

Table of Contents

Community Reinvestment Act

The Company’s Southside Bank affiliate is subject to the requirements of the Community Reinvestment Act (“CRA”). The CRA imposes on financial institutions an affirmative and ongoing obligation to meet the credit needs of their local communities, including low and moderate-income neighborhoods, consistent with the safe and sound operation of those institutions. A financial institution’s efforts in meeting community credit needs are currently evaluated as part of the examination process pursuant to twelve assessment factors. These factors are considered in evaluating mergers, acquisitions and applications to open a branch or facility.

The remainder of the response to this Item is incorporated by reference to the information under the caption “To Our Stockholders” in EVB’s Annual Report to Shareholders.

Item 2. Properties

The Company’s principal executive offices are located at 330 Hospital Road, Tappahannock, Virginia 22560 where a new 15,632 square foot corporate headquarters and operations center was opened in the first week of July 2003. The three subsidiary banks own 17 full service branch buildings including the land on which 16 of those buildings are located and two remote drive-in facilities. Three branch office buildings are leased at current market rates. Northumberland and Middlesex Counties each are the home to three of the branches. Gloucester County is the home to two branch offices as is Essex County which also houses the Southside Bank loan administration center and the corporate/operations center. Hanover County houses four branch offices (three of which are leased) while King William County, Caroline County, Lancaster County, Southampton County, Surry County and Sussex County each have one full service branch office. Southampton County and Sussex County also have stand-alone drive-in/automated teller machine locations, and Sussex County has a vacant 6,143 square foot operations center. All properties are in good condition. The land on which the Caroline County office is located is under long-term lease.

Southside Bank purchased three branch offices from BB&T/First Virginia Bank-Hampton Roads in September 2003 with the purchase also including two stand-alone drive-in/automated teller machines locations. The purchases included a total of five parcels of land and six buildings. The vacant operations center is on the same site as the Waverly drive-in facility and includes 1.65 acres of land on Rt. 460 at the front of a strip shopping center. The other four facilities purchased include buildings totaling 19,809 square feet situated on land totaling over 162,000 square feet. Total purchase cost of these facilities was $3.4 million. Southside Bank has an office under construction at Central Garage in King William County, which is projected to open in the third quarter of 2004. That office will be situated on land purchased by Southside Bank in 2002.

Item 3. Legal Proceedings

EVB and its subsidiaries are not aware of any material pending or threatened litigation, unasserted claims and/or assessments through December 31, 2003, or subsequent thereto. The only litigation in which EVB and its subsidiaries are involved is collection suits involving delinquent loan accounts in the normal course of business.

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

No matters were submitted to a vote of security holders during the fourth quarter of 2003.

Executive Officers of the Registrant

Following are the persons who were the executive officers of EVB as of December 31, 2003, their ages as of December 31, 2003, their current titles and positions held during the last five years:

W. Rand Cook, 50, is the Chairman of the Board of Directors of EVB and has been a member of the Board since the Company’s inception in December 1997, and was a director of Hanover Bank from its inception in 2000 until December 2002. Prior to the formation of Hanover Bank in 2000, he was a director of Southside Bank from 1996.

10

Table of Contents

He is an attorney in Hanover County, VA.

F. L. Garrett, III, 64, is the Vice Chairman of the Board of Directors of EVB and Chairman of the Board of Southside Bank of which he has been a member since 1982. He is a realtor in Essex County, VA

William E. Martin, Jr., 54, is Senior Vice President of EVB. Mr. Martin has served as the President and Chief Executive Officer of Hanover Bank since it began operations in 2000. Prior to joining Hanover Bank, he was Vice President and senior corporate loan underwriter at First Union National Bank.

Lewis R. Reynolds, 53, is Senior Vice President of EVB. Mr. Reynolds has served as the President and Chief Executive Officer of Bank of Northumberland since 1991.

Joe A. Shearin, 47, is the President and Chief Executive Officer of EVB and its subsidiary Southside Bank. Mr. Shearin was previously President of Southside Bank from August, 2001. Prior to that time, he was Senior Vice President/City Executive of BB&T for three years, and Executive Vice President of First Federal Savings Bank for three years prior to joining BB&T.

Joseph H. James, 49, is Senior Vice President and Chief Operations Officer of EVB. Mr. James joined EVB in 2000. He served as Senior Vice President in the Operations Division of SunTrust Banks during the five years prior to joining EVB.

Ronald L. Blevins, 59, is Senior Vice President and Chief Financial Officer of EVB. Mr. Blevins joined EVB in 2000. He served as President of Betron International, while contemporaneously providing regulatory and financial reporting services to EVB from 1997 until joining EVB. He was a business owner from 1994-1997 and was a Senior Vice President with NationsBank and predecessors from 1980-1994.

J. Lloyd Railey, 53, is Senior Vice President and Risk Management Officer of EVB. He was Chief Financial Officer of Southside Bank from 2001 to November 2002 when transferred to EVB. He was President of B&L professional Services, Inc., providing banks with project management and other consultative services during 2000-2001. He had previously served as Information Systems Manager for Citizens and Farmers Bank from 1998-2000.

PART II

Item 5. Market for Registrant’s Common Stock and Related Stockholder Matters

The information titled “Common Stock Performance and Dividends” set forth on the last page of the 2003 Annual Report to Shareholders is incorporated herein by reference and is filed herewith as Exhibit 13.1.

Item 6. Selected Financial Data

The information set forth on page 2 of the 2003 Annual Report to Shareholders is incorporated herein by reference and filed herewith as Exhibit 13.2.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s discussion and analysis is intended to assist the reader in evaluating and understanding the consolidated results of operations and financial condition of Eastern Virginia Bankshares, Inc. The following analysis provides information about the major components of the results of operations, financial condition, liquidity and capital resources of Eastern Virginia Bankshares and attempts to identify trends and material changes that occurred during the reporting periods. The discussion should be read in conjunction with Selected Financial Data and the Consolidated Financial Statements and Notes to Consolidated Financial Statements.

11

Table of Contents

CRITICAL ACCOUNTING POLICIES

General

The Company’s financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. For example we use historical loss factors as one factor in determining the inherent loss that may be present in our loan portfolio. Actual losses could differ substantially from the historical factors that we use. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.

Allowance for Loan Losses

The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on two basic principles of accounting: (i) Statement of Financial Accounting Standards Number 5, Accounting for Contingencies, which requires that losses be accrued when they are probable of occurring and estimable and (ii) SFAS 114, Accounting by Creditors for Impairment of a Loan, which requires that losses be accrued based on the differences between the value of the collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.

Our allowance for loan losses has two basic components: the formula allowance and the specific allowance. Each of these components is determined based upon estimates that can and do change when the actual events occur. The formula allowance uses historical loss as an indicator of future losses and, as a result, could differ from the loss incurred in the future. However, since the history is updated with the most recent loss information, management believes that the errors that might otherwise occur are mitigated. The formula allowance is revised as deemed appropriate to capture losses that are attributable to economic events and industry or geographic sectors whose impact on the portfolio have occurred but have yet to be recognized in the specific allowance. The specific allowance uses various techniques to arrive at an estimate of loss. Historical loss information, current level of nonaccrual loans, current level of unsecured loans past due 60 to 89 days and the fair market value of collateral are used to estimate these losses. The use of these values is inherently subjective and our actual losses could be greater or less than the estimates. In determining the adequacy of the allowance, management considers the Company’s historical loss experience, the size and composition of the loan portfolio, specific impaired loans, the overall level of nonperforming loans, the value and adequacy of collateral and guarantors, and economic conditions.

Overview

Eastern Virginia Bankshares (EVB) reported record net income and earnings per share for the year ended December 31, 2003 as it reaped the benefits of its long-term strategic initiatives including three new branch offices opened in 2001, a new branch office opened in the first quarter of 2003, three new branches purchased from BB&T/First Virginia Bank-Hampton Roads in September, 2003 and the achievement of meaningful profitability by the Company’s subsidiary Hanover Bank which opened in May 2000. The Company benefited from low and reasonably stable interest rates during the year 2003 and from improved quality in its loan portfolio as the ratio of nonperforming assets declined from 0.86% at year end 2002 to 0.84% at year end 2003, and net charge offs decreased 11.1%, compared to the prior year. The combination of the stable interest rate environment and improved loan quality resulted in a three basis point increase in net interest margin which increased to 4.89% from the year 2002 margin of 4.86%. The Company anticipates that the net interest margin for the year 2004 will decrease slightly from the 2003 level.

12

Table of Contents

Forward-Looking Statements

Certain information contained in this discussion may include “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are generally identified by phrases such as “the Company expects,” “the Company believes” or words of similar import. Such forward-looking statements involve known and unknown risks including, but not limited to:

Although the Company believes that its expectations with respect to the forward-looking statements are based upon reliable 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 Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements.

Results of Operations

Net income increased 6.5% in 2003 to $7.1 million from $6.6 million in 2002 and $4.9 million in 2001. Earnings per share increased 7.4% to $1.46, compared to $1.36 and $0.99 for 2002 and 2001, respectively. The increase in net income in 2003 was the result of a 16.4% increase in net interest income, a 25.1% increase in noninterest income, an 8.1% increase in loan loss provision expense, a 26.3% increase in noninterest expense and a decrease in the Company’s effective tax rate from 27.7% in 2002 to 26.5% in 2003. Profitability, as measured by EVB’s return on average equity was 12.96%, a decrease from 2002’s 13.33%. Return on average assets was 1.21%, a 12 basis point decrease from the prior year’s 1.33%. The Company repurchased 12,500 shares of its common stock in 2003 under a share repurchase program announced by the Board in early 2001. The repurchase plan is intended to reduce high capital levels and to increase return on equity to shareholders.

Net interest margin, on a tax equivalent basis, increased to 4.89% in 2003, as compared to 4.86% in 2002 and 4.41% in 2001. Changes in volume combined with the improvement in rates, generated an additional $3.7 million of net interest income in 2003, compared to a $5.0 million increase in the prior year. The Company experienced record loan and deposit growth in 2003. Deposits grew $112.0 million or 23.9% while loans increased by $86.9 million or 22.1%. $66 million of the deposit increase and $28.3 million of the loan growth are attributed to the purchase of the three new branches discussed previously. Average loans outstanding for the year increased $51.5 million or 13.6% from the 2002 average with $7.1 million of the average loan growth being a result of the purchased branches. Loan growth was led by a $39.6 million increase in commercial real estate, and a $37.9 million increase in residential real estate mortgages.

EVB’s efficiency ratio, a measure of performance based upon the relationship between noninterest expense and income net of securities gains and losses, increased to 61.1% compared to 2002’s 56.7%. A lower efficiency ratio represents greater control of noninterest costs. Fluctuation in the efficiency ratio can be attributed to relative changes in both noninterest income and net interest income as well as noninterest expense. EVB’s increase in efficiency ratio was impacted favorably by the increase in net interest margin and unfavorably by growth in

13

Table of Contents

noninterest expense. Noninterest expense growth of $3.8 million included the impact of re-engineering efforts to take advantage of the holding company structure that began in the second half of 2002 and continued throughout most of 2003, the development of an infrastructure to provide for future growth and revenue enhancement for the Company, the addition of the new state-of-the-art corporate and operations center in July, 2003, and the addition of expenses related to the three new branches purchased in September and a new branch opened in the first quarter of 2003. EVB is not aware of any current recommendations by any regulatory authorities that, if implemented, would have a material effect on the registrant’s liquidity, capital resources, or results of operations.

The following table sets forth, for the periods indicated, selected quarterly results of EVB’s operations.

SUMMARY OF FINANCIAL RESULTS BY QUARTER

Net Interest Income

Net interest income represents the Company’s gross profit margin and is defined as the difference between interest income and interest expense. For comparative purposes, income from tax-exempt securities is adjusted to a tax-equivalent basis using the federal statutory tax rate of 34%. Tax-equivalent securities income is further adjusted by the TEFRA adjustment for the disallowance as a deduction of a portion of total interest expense related to the ratio of average tax-exempt securities to average total assets. This adjustment results in tax-exempt income and yields being presented on a basis comparable with income and yields from fully taxable earning assets. Net interest margin represents the Company’s net interest income divided by average earning assets. Changes in the volume and mix of earning assets and interest bearing liabilities, as well as their respective yields and rates, have a significant impact on the level of net interest income. The “Average Balances, Income and Expense, Yields and Rates” table presents average balances, related interest income and expense, and average yield/cost data for each of the past three years. The “Volume and Rate Analysis” on the second following page reflects changes in interest income and interest expense resulting from changes in average volume and average rates.

14

Table of Contents

Average Balance, Income and Expense, Yields and Rates (1)

Notes:

Tax-equivalent net interest income increased 16.3% in 2003 to $27.1 million from $23.3 million in 2002.

Average earning asset growth of 15.7% which produced $2.1 million of increased income, and decreased interest expense of $1.7 million were the primary factors in the increase in net interest income. The Company achieved a net interest margin of 4.89%, a three basis point increase from 4.86% in 2002. Yield on earning assets decreased 62 basis points to 6.76% in 2003 from 7.38% in 2002, while the cost of interest-bearing funds decreased 81 basis

15

Table of Contents

points from 3.04% in 2002 to 2.23 % in 2003. The cost of funds decrease exceeding the decrease in yield on average earning continued the trend of the prior year, but cannot be expected to continue once the interest rate environment experiences significant increase, a factor that management does not consider likely in 2004.

Average earning asset growth of 15.7% resulted from increases in average loans outstanding of 13.6%, average securities of 25.6% and an increase in average federal funds sold of 1.6%. Growth in average earning assets of $75.2 million was funded by average deposit growth of $68.4 million, and an increase in average borrowings of $13.4 million from the Federal Home Loan Bank of Atlanta and the issuance in September of trust preferred debt. In 2002, net interest income on a tax equivalent basis increased 27.5% to $23.3 million from $18.3 million in 2001. Average loan growth of 18.9% was the primary factor in the increase in net interest income and in producing a net interest margin of 4.86%, a 45 basis point increase from 4.41% in 2001.

Volume and Rate Analysis

Interest Sensitivity

EVB’s primary goals in interest rate risk management are to minimize negative fluctuations in net interest margin as a percentage of earning assets and to increase the dollar amount of net interest income at a growth rate consistent with the growth rate of total assets. These goals are accomplished by managing the interest sensitivity gap, which is the difference between interest sensitive assets and interest sensitive liabilities in a specific time interval. Interest sensitivity gap is managed by balancing the volume of floating rate liabilities with a similar volume of floating rate assets, by keeping the average maturity of fixed rate asset and liability contracts reasonably consistent and short, and by routinely adjusting pricing to market conditions on a regular basis.

Notes:

16

Table of Contents

The Company generally strives to maintain a position flexible enough to move to equality between rate-sensitive assets and rate-sensitive liabilities, which may be desirable when there are wide and frequent fluctuations in interest rates. Matching the amount of assets and liabilities maturing in the same time interval helps to hedge interest rate risk and to minimize the impact on net interest income in periods of rising or falling interest rates. When an unacceptable positive gap within a one year time frame occurs, maturities can be extended by selling shorter term investments and purchasing longer maturities. When an unacceptable negative gap occurs, variable rate loans can be increased and more investment in shorter term investments can be made. Interest rate gaps are managed through investments, loan pricing and deposit pricing. Management of the interest rate gap has become much more challenging in the current environment when many depositors have chosen to move funds from certificates of deposit with a maturity of greater than one year to non-maturity interest-bearing savings, money market and NOW accounts. While this customer change in deposit preference favorable impacts the current interest rate margin it creates a liability sensitive balance sheet, i.e. more liabilities subject to short-term interest rate increases than the amount of assets subject to the same short-term increases.

Noninterest Income

Noninterest income increased by $792 thousand or 25.1% from $3.2 million in 2002 to $3.9 million in 2003. Service charges on deposit accounts, the largest source of noninterest income, increased $303 thousand or 14.5% from $2.1 million in 2002 to $2.4 million in 2003. Other operating income increased $409 thousand or 63.8% from $643 thousand in 2002 to $1.05 million in 2003. Other operating income includes a $141 thousand increase in insurance commissions, $97 thousand income on bank owned life insurance which was a new balance sheet category in the second half of 2003, an $81 thousand increase in service charge income not related to deposit products, and $76 thousand of income from certificate of deposit accretion related to the purchase of the three branches from BB&T/First Virginia Bank-Hampton Roads. Realized gain on sale of securities increased $80 thousand to $173 thousand from $93 thousand in the prior year.

Noninterest income increased $508 thousand or 19.2% from 2001 to 2002, attributable to a $280 thousand increase in investment services income, a $128 thousand increase in service charges, and an $86 thousand increase in realized gain on sale of securities.

Noninterest Income:

Noninterest Expense

Total noninterest expense increased $3.9 million or 26.3% from $15.0 million in 2002 to $18.9 million in 2003. Salaries and benefits accounted for $2.0 million, increasing 23.4% to $10.4 million in 2003 compared to $8.5 million in 2002. The increase in salaries and benefits was the result of additions to staff related to the opening of the new Gloucester Point office and the acquisition of three new offices divested by BB&T/First Virginia Bank-Hampton Roads, infrastructure development to position the Company for future growth, a $207 thousand or 52.5% increase in pension expense related to market depreciation of pension assets for the fiscal year ended in 2002, a $90thousand or 13.4% increase in employee medical insurance, and normal increases in salaries and other benefits. The total number of officers and staff increased by 41 or 20.2% to 244, compared to 203 at year end 2003.

Net occupancy and equipment expense increased $789 thousand or 42.2% to $2.7 million from $1.9 million in 2002. Primary contributors to the increase in occupancy expense included $208 thousand from the four new branch

17

Table of Contents

offices, $205 thousand from the new Corporate/Operations Center including the data center move expense, and $165 thousand in main frame computer depreciation. Other operating expenses increased $1.2 million or 25.0% to $5.8 million in 2003 from $4.6 million in 2002. Primary contributors to this expense increase were consultant fees up $335 thousand to $804 thousand as the Company focused on a re-engineering process; directors’ fees up $182 thousand including $151 thousand related to a stock grant to directors, printing and supplies expense up $145 thousand from expenses of establishing four new branch offices, Virginia bank franchise tax up $101 thousand related to the Company’s growth, data processing expense up $95 thousand primarily the result of systems’ vendor expense associated with growth in the number of accounts processed by the operations center, and $70 thousand amortization of core deposit premium related to the acquisition of $66 million of deposits as part of the branch offices purchased from BB&T/First Virginia Bank-Hampton Roads.

Noninterest expense increased $3.5 million or 30.5 % from $11.5 million in 2001 to $15.0 million in 2002. Salaries and benefits increased $2.0 million to $8.5 million, compared to $6.5 million in 2001, primarily the result of the full year impact of three new offices and the EVB Investments subsidiary opened in the prior year, $191 thousand increase in pension expense, $185 thousand increase in medical insurance, $117 thousand severance expense for a former executive, and normal increases in salaries and benefits. Net occupancy and equipment expense increased $273 thousand or 17.1% to $1.87 million, largely the result of the full year impact of the three new offices and the EVB Investments subsidiary opened in the prior year, and building repair and maintenance costs related to refurbishing of several branch offices. Other operating expenses increased $1.3 million or 38.2% to $4.6 million in 2002 from $3.4 million in 2001. Primary contributors to this expense increase were consultant fees up $291 thousand as the Company initiated its re-engineering process, legal and collection fees up $120 thousand related to collection efforts on a single lending relationship charged off in 2001, and normal increases in data processing, postage, telephone, printing and supplies, education and training and audit.

Noninterest Expense:

Income Taxes

Income tax expense in 2003 increased $7 thousand to $2.553 million, up from $2.546 million in 2002 and $1.650 million in 2001. Income tax expense corresponds to an effective rate of 26.5 %, 27.7 % and 25.3 % for the three years ended December 31, 2003, 2002, and 2001, respectively. The 120 basis point decrease in effective tax rate results from increased income on tax exempt securities and non taxable income from bank owned life insurance.

Note 9 to the Consolidated Financial Statements provides a reconciliation between the amount of income tax expense computed using the federal statutory income tax rate and EVB’s actual income tax expense. Also included in Note 9 to the Consolidated Financial Statements is information regarding deferred taxes for 2003 and 2002. That Note is incorporated by reference into this section of Management’s Discussion and Analysis.

18

Table of Contents

Loan Portfolio

Loans, net of unearned income, increased to $486.8 million at December 31, 2003, up $87.6 million or 22.0% from $399.1 million at year-end 2002. The real estate loan portfolio accounted for $82.0 million of the increase for the year. Primary contributors to loan growth were the addition of the new Gloucester Point branch office opened in March, 2003, and $28.3 million of loans acquired in the BB&T/First Virginia Bank-Hampton Roads branch acquisitions. At year-end 2002, loans, net of unearned income were $399.1 million, up $51.1 million or 14.7% from $348.0 million at year-end 2001. Loan growth in 2002 was primarily in the real estate portfolio which provided $48.2 million of the $51.1 million increase.

Maturity Schedule of Selected Loans

Year Ended Dcember 31, 2003

Approximately 76.2% of EVB’s loan portfolio at December 31, 2003 was comprised of loans secured by real estate. Residential real estate mortgages made up 48.5 % of the loan portfolio as compared to 49.7% at year-end 2002 and 51.6% at year-end 2000. The Company’s Hanover Bank subsidiary has experienced significant loan growth in both 2003 and 2002 with the dynamics of that market increasing “EVB’s market share of commercial real estate loans and real estate construction loans. Commercial real estate loans increased from 18.7% of the total loan portfolio at year-end 2003 to 23.5% at 2003 year-end. Real estate construction loans accounted for 4.1% of total loans outstanding at year-end 2002 and 3.9% at year-end 2002. The Company’s losses on loans secured by real estate have historically been low, averaging $36 thousand in net charge offs per year over the last five years.

19

Table of Contents

Consumer loans are the second largest component of EVB’s loan portfolio. Consumer loans were 12.4% of the loan portfolio at year-end 2003, 15.8% and 18.4% at year-end 2002 and 2001 respectively. This portfolio component consists primarily of installment loans. Net consumer loans for household, family and other personal expenditures totaled $60.3 million at 2003 year-end, down $2.9 million from $63.2 million at 2002 year-end. General economic conditions and intense competition including zero interest financing by the automotive industry continued the trend that started in 2002, decreasing consumer loans both in absolute amount and percentage of the total loan portfolio. Commercial and agricultural loans are designed specifically to meet the needs of small and medium size business customers. This category of loans increased $8.6 million in total loans outstanding at year-end 2003 compared to 2002, with the percentage to total loans decreasing to 11.4% of the total loan portfolio from 11.8% at year-end 2002.

Consistent with its focus on providing community-based financial services, EVB generally does not make loans outside of its principal market region. The Company does not engage in foreign lending activities; consequently the loan portfolio is not exposed to the sometimes volatile risk from foreign credits. EVB further maintains a policy not to originate or purchase loans classified by regulators as highly-leveraged transactions or loans to foreign entities or individuals. The Company’s unfunded loan commitments, excluding credit card lines and letters of credit, at 2003 year-end totaled $47.0 million, down $200 thousand from $47.2 million at December 31, 2002. Unfunded loan commitments (excluding $6.1 million in home equity lines) are used in large part to meet seasonal funding needs which are generally higher from Spring through Fall than at year-end. Historically, EVB’s loan collateral has been primarily real estate because of the nature of our market region.

Asset Quality

The Company’s allowance for loan losses is an estimate of the amount needed to provide for potential losses in the loan portfolio. In determining adequacy of the allowance, management considers the Company’s historical loss experience, the size and composition of the loan portfolio, specific impaired loans, the overall level of nonaccrual loans, the value and adequacy of collateral and guarantors, and economic conditions. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge offs, net of recoveries. Because the risk of loan loss includes general economic trends as well as conditions affecting individual borrowers, the allowance for loan losses can only be an estimate. EVB’s ratio of nonperforming assets improved slightly in 2003 to a nonperforming asset level of 0.84% at year-end, compared to 0.86% at year-end 2002. Actual nonperforming assets increased to $4.1 million, compared to $3.4 million at year-end 2002. Net charge offs for the year decreased $111 thousand or 11.1% to $890 thousand, compared to $1.0 million for prior year.

Each of EVB’s subsidiary banks has a loan review function consisting of bank officers and board members. Additionally an independent credit review firm performs a review of loans for each of the banks. As a matter of policy, the Company places loans on nonaccrual status when a loan becomes 90 days past due as to principal and interest, regardless of how well the loan may be collateralized. The Company utilizes a risk-based evaluation system based on loan type, and payment history to determine the amount of the allowance for loan losses. Management believes the allowance for loan losses to be adequate based on this loan review process and analysis.

The Company’s decrease in charge offs and nonperforming asset ratio in 2002 allowed EVB to lower its loan loss allowance ratio to 1.33% at year-end, compared to 1.44% at December 31, 2002 and 1.50% at year-end 2001, respectively. For the same periods the loan loss allowance to nonaccrual loans ratio was 159%, 177% and 113%, indicating that the allowance was adequate with respect to nonaccrual loans. The allowance for loan losses is subject to regulatory examinations which may take into account such factors as methodology used to calculate the allowance and the size of the allowance in comparison to peer companies identified by regulatory agencies.

20