EX-13 3 dex13.txt ANNUAL REPORT ANNUAL REPORT EXHIBIT 13 -------------------------------------------------------------------------------- TABLE OF CONTENTS LETTER TO SHAREHOLDERS 2 PERFORMANCE GRAPHS 3 SELECTED FINANCIAL DATA 4 INDEPENDENT AUDITOR'S LETTER 5 CONSOLIDATED FINANCIAL STATEMENTS 6 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10 MANAGEMENT'S DISCUSSION AND ANALYSIS 21 SHAREHOLDER INFORMATION 32 DIRECTORS, OFFICERS, AND EMPLOYEES 33 [LOGO APPEARS HERE] 2 2001 ANNUAL REPORT -------------------------------------------------------------------------------- LETTER TO SHAREHOLDERS To our Shareholders, Customers and Friends, On behalf of the Board of Directors and staff of BOE Financial Services of Virginia, Inc., we are pleased to present our annual report for the year-ended December 31, 2001. 2001 was a challenging yet rewarding year for our company. With the economy slowing, the Federal Reserve relaxed interest rates an unprecedented eleven times during the year, a total of 450 basis points. For community banks, who typically fund loans with certificates of deposit, margins were impacted adversely as loans repriced faster than deposits. Despite these rapid changes in the financial markets, we are happy to report positive results. [PHOTO OF George M. Longest, Jr. APPEARS HERE] [PHOTO OF Alexander F. Dillard, Jr. APPEARS HERE] Our Bank experienced continued growth in 2001. Total assets at year-end were $217,171,685, an increase of $23,238,820 over year-end 2000, or 11.98%. Total deposits at year-end were $188,497,158, an increase of $24,148,958 over year-end 2000, or 14.69%. Total loans increased by 8.95% ending the year at $153,960,748, an increase of $12,650,505. In 2001 earnings were $2,007,122, a record, and resulted in an increase over 2000 of $164,095, or 8.90%. These earnings produced a return on average assets of 1.00% and a return on average equity of 10.97% compared to 2000 results of 1.01% and 11.38%, respectively. Total dividends paid for the year were $0.50 per share, a 6.4% increase over 2000. Earnings per share increased from $1.58 per share in 2000 to $1.71 in 2001, an increase of 8.2%. Growth in earnings was primarily fueled by increases in interest and non-interest income of 3.12% and 16.85% respectively, and by controlling non-interest expenses which increased only 2.16%. Certainly the performance of our stock price in 2001 was a highlight in the year. BOE Financial Services of Virginia, Inc. closed the year at $17.35, up $5.10, or 42%, over the low of $12.25 in January 2001. We are obviously encouraged by this performance and believe investors have moved back to stocks that demonstrate value over the long term. These results were achieved in a year when major changes were taking place within the Bank. In March of 2001, we converted to a new customer data technology system. This was a major change for our Bank and it was very successful. We have already seen the benefits of this change to our company and more importantly to our customers. Prospects for the King William, East Hanover, and Virginia Center markets remain good. Each of our branch locations in these areas is surrounded by significant growth in population and commerce. Our other markets also contributed nicely to growth in 2001 and we feel well positioned for future growth. The September 11th events and the uncertain economy cause some concern for our industry. However, we believe community banking has a bright future and we look forward to the challenge. We want to thank our shareholders, directors, officers, and staff for their support. We especially thank our customers for their continued patronage. Sincerely, /s/ George M. Longest, Jr. George M. Longest, Jr., President, Chief Executive Officer /s/ Alexander F. Dillard, Jr. Alexander F. Dillard, Jr., Chairman, Board of Directors BOE FINANCIAL SERVICES OF VIRGINIA, INC. 3 -------------------------------------------------------------------------------- PERFORMANCE The Bank's continued growth is shown at a glance in these graphs. Assets in thousands [chart] 1997 1998 1999 2000 2001 128,848 145,908 167,296 193,933 217,172 Deposits in thousands [chart] 1997 1998 1999 2000 2001 113,597 129,825 142,891 164,348 188,497 Total Loans in thousands [chart] 1997 1998 1999 2000 2001 88,843 106,604 126,064 141,311 153,961 Dividends [chart] 1997 1998 1999 2000 2001 393,871.80 513,827.60 525,505.50 548,861.30 585,683.00 Capital in thousands [chart] 1997 1998 1999 2000 2001 14,112 15,005 15,383 17,215 19,047 Earnings Per Share [chart] 1997 1998 1999 2000 2001 $1.27 $1.17 $1.20 $1.58 $1.71 4 2001 ANNUAL REPORT ------------------------------------------------------------------------------- SELECTED FINANCIAL DATA SELECTED FINANCIAL DATA (Dollars In Thousands, Except Per Share Data)
As of and for the Years Ended December 31, 2001 2000 1999 1998 1997 STATEMENT OF INCOME INFORMATION Interest income................................. $ 14,749 $ 14,302 $ 11,559 $ 10,459 $ 9,130 Interest expense................................ 7,482 7,106 5,333 4,909 4,347 Net interest income............................. 7,267 7,196 6,226 5,550 4,783 Provision for loan losses....................... 390 455 345 380 250 Noninterest income.............................. 1,120 959 783 646 569 Noninterest expense............................. 5,393 5,280 4,843 4,002 3,478 Income taxes.................................... 597 577 417 453 422 ---------------------------------------------------------------------------------------------------------------- Net income...................................... $ 2,007 $ 1,843 $ 1,404 $ 1,361 $ 1,203 ================================================================================================================ PER SHARE DATA Net income, basic and diluted................... $ 1.71 $ 1.58 $ 1.20 $ 1.17 $ 1.27 Cash dividend................................... 0.50 0.47 0.45 0.44 0.42 Book value at period end........................ 16.22 14.71 13.17 12.85 12.08 Tangible book value at period end............... 15.24 13.62 11.97 11.54 10.67 BALANCE SHEET DATA Total assets.................................... $ 217,172 $ 193,933 $ 167,296 $ 145,908 $ 128,848 Loans, net...................................... 151,877 139,492 124,464 105,260 87,658 Securities...................................... 39,613 36,315 25,220 25,778 27,744 Deposits........................................ 188,497 164,348 142,891 129,825 113,597 Stockholders' equity............................ 19,047 17,215 15,383 15,005 14,112 PERFORMANCE RATIOS Return on average assets........................ 1.00% 1.01% 0.90% 1.00% 1.01% Return on average equity........................ 10.97% 11.38% 9.12% 9.29% 12.09% Net interest margin............................. 4.12% 4.50% 4.63% 4.59% 4.59% Dividend payout................................. 29.18% 29.78% 37.44% 37.75% 32.75% ASSET QUALITY RATIOS Allowance for loan losses to period end loans... 1.35% 1.29% 1.27% 1.26% 1.33% Allowance for loan losses to nonperforming assets 274.21% 190.27% 115.10% 277.11% 262.17% Nonperforming assets to total assets............ 0.35% 0.49% 0.83% 0.33% 0.35% Net chargeoffs to average loans................. 0.08% 0.17% 0.11% 0.22% 0.08% CAPITAL AND LIQUIDITY RATIOS Leverage........................................ 8.41% 8.27% 8.76% 9.29% 9.88% Tier 1 Risk-Based Capital....................... 9.95% 10.51% 11.03% 12.27% 11.04% Total Risk-Based Capital........................ 11.14% 11.73% 12.26% 13.51% 12.06%
BOE FINANCIAL SERVICES OF VIRGINIA, INC. 5 ------------------------------------------------------------------------------- INDEPENDENT AUDITOR'S REPORT INDEPENDENT AUDITOR'S REPORT [LOGO] To the Board of Directors and Stockholders BOE Financial Services of Virginia, Inc. Tappahannock, Virginia We have audited the accompanying consolidated balance sheets of BOE Financial Services of Virginia, Inc. and subsidiaries as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for the three years ended December 31, 2001. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of BOE Financial Services of Virginia, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for the three years ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ Yount, Hyde & Barbour, P.C. Winchester, Virginia January 9, 2002 6 2001 ANNUAL REPORT ------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS December 31, 2001 and 2000
ASSETS 2001 2000 Cash and due from banks...................................... $ 6,093,476 $ 4,353,812 Federal funds sold........................................... 7,617,000 2,413,000 Securities held to maturity (fair value approximates $3,175,885 at December 31, 2000)....................... -- 3,120,778 Securities available for sale, at fair value................. 38,268,475 31,849,597 Equity securities, restricted, at cost....................... 1,345,000 1,345,000 Loans held for sale.......................................... 906,300 223,530 Loans, net of allowance for loan losses of $2,084,091 in 2001 and $1,818,538 in 2000.............. 151,876,657 139,491,705 Bank premises and equipment, net............................. 6,763,862 6,971,375 Accrued interest receivable.................................. 1,447,163 1,366,227 Intangible assets............................................ 1,153,379 1,279,202 Other assets................................................. 1,700,373 1,518,639 ---------------------------------------------------------------------------------------------------- Total assets........................................... $ 217,171,685 $ 193,932,865 ==================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Deposits: Noninterest-bearing.................................... $ 18,010,984 $ 17,509,827 Interest-bearing....................................... 170,486,174 146,838,373 ---------------------------------------------------------------------------------------------------- Total deposits...................................... $ 188,497,158 $ 164,348,200 Federal Home Loan Bank advances........................ 8,000,000 11,000,000 Accrued interest payable............................... 610,395 898,484 Other liabilities...................................... 1,016,653 471,122 ---------------------------------------------------------------------------------------------------- Total liabilities................................... $ 198,124,206 $ 176,717,806 ---------------------------------------------------------------------------------------------------- Commitments and Contingent Liabilities....................... $ -- $ -- ---------------------------------------------------------------------------------------------------- Stockholders' Equity Preferred stock, $5 par value, authorized 100,000 shares; no shares issued and outstanding....................... $ -- $ -- Common stock, $5 par value, authorized 10,000,000 shares; Issued and outstanding 1,174,078 and 1,169,969 shares 5,870,390 5,849,845 Additional paid-in capital................................ 4,874,752 4,827,428 Retained earnings......................................... 7,788,467 6,367,066 Accumulated other comprehensive income.................... 513,870 170,720 ---------------------------------------------------------------------------------------------------- Total stockholders' equity.......................... $ 19,047,479 $ 17,215,059 ---------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity.......... $ 217,171,685 $ 193,932,865 ====================================================================================================
See Notes to Consolidated Financial Statements. BOE FINANCIAL SERVICES OF VIRGINIA, INC. 7 ------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF INCOME Three Years Ended December 31, 2001
2001 2000 1999 Interest and Dividend Income Interest and fees on loans..................... $ 12,700,473 $ 12,422,444 $ 10,180,864 Interest and dividends on securities: U.S. Treasury obligations................... -- -- 57,897 Obligations of U.S. Government agencies..... 504,404 619,534 461,760 Obligations of states and political......... subdivisions, nontaxable................. 828,576 716,436 605,839 Other securities............................ 610,919 371,931 199,841 Interest on federal funds sold................. 104,792 172,164 60,975 ----------------------------------------------------------------------------------------------------------- Total interest and dividend income.......... $ 14,749,164 $ 14,302,509 $ 11,567,176 ----------------------------------------------------------------------------------------------------------- Interest Expense Interest on deposits........................... $ 6,925,134 $ 6,402,591 $ 5,164,543 Interest on borrowings......................... 556,613 703,845 168,187 ----------------------------------------------------------------------------------------------------------- Total interest expense...................... $ 7,481,747 $ 7,106,436 $ 5,332,730 ----------------------------------------------------------------------------------------------------------- Net interest income......................... $ 7,267,417 $ 7,196,073 $ 6,234,446 Provision for loan losses......................... 390,000 455,000 345,000 ----------------------------------------------------------------------------------------------------------- Net interest income after provision for loan losses................ $ 6,877,417 $ 6,741,073 $ 5,889,446 ----------------------------------------------------------------------------------------------------------- Noninterest Income Net security gains............................. $ 2,448 $ 16,077 $ 4,422 Net gains (losses) on sale of loans............ 7,343 (849) (8,555) Service charge income.......................... 726,534 582,161 495,489 Other income................................... 383,867 361,260 283,124 ----------------------------------------------------------------------------------------------------------- Total noninterest income.................... $ 1,120,192 $ 958,649 $ 774,480 ----------------------------------------------------------------------------------------------------------- Noninterest Expenses Salaries....................................... $ 2,161,602 $ 2,077,183 $ 1,775,233 Employee benefits and costs.................... 535,192 477,208 420,949 Occupancy expenses............................. 292,211 284,030 245,637 Furniture and equipment related expenses....... 464,731 490,065 341,120 Data processing................................ 344,672 256,460 348,173 Other operating expenses....................... 1,595,263 1,694,717 1,712,156 ----------------------------------------------------------------------------------------------------------- Total noninterest expenses.................. $ 5,393,671 $ 5,279,663 $ 4,843,268 ----------------------------------------------------------------------------------------------------------- Net income before income taxes.............. $ 2,603,938 $ 2,420,059 $ 1,820,658 Income Taxes...................................... 596,816 577,032 416,925 ----------------------------------------------------------------------------------------------------------- Net income.................................. $ 2,007,122 $ 1,843,027 $ 1,403,733 =========================================================================================================== Earnings Per Share, basic and diluted............. $ 1.71 $ 1.58 $ 1.20 ===========================================================================================================
See Notes to Consolidated Financial Statements. 8 2001 ANNUAL REPORT ------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Three Years Ended December 31, 2001
ACCUMULATED ADDITIONAL OTHER- COMMON PAID-IN RETAINED COMPREHENSIVE COMPREHENSIVE STOCK CAPITAL EARNINGS INCOME (LOSS) INCOME TOTAL --------------------------------------------------------------------------------------- Balance, December 31, 1998 $ 5,838,950 $ 4,819,994 $ 4,194,673 $ 151,617 $15,005,234 Comprehensive income: Net income -- -- 1,403,733 -- $ 1,403,733 1,403,733 Other comprehensive loss, net of tax: Unrealized loss on securities available for sale, net of deferred taxes of $256,253 (497,432) Less reclassification adjustment, net of taxes of $1,503 (2,919) ------------------------------------------------------------------------------------------------------------------------------------ Other comprehensive loss, net of tax -- -- -- (500,351) (500,351) (500,351) ------------------------------------------------------------------------------------------------------------------------------------ Total comprehensive income $ 903,382 ==================================================================================================================================== Cash dividends, $0.45 per share -- -- (525,506) -- (525,506) ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 1999 $ 5,838,950 $ 4,819,994 $ 5,072,900 $ (348,734) $15,383,110 Comprehensive income: Net income -- -- 1,843,027 -- $ 1,843,027 1,843,027 Other comprehensive income, net of tax: Unrealized gain on securities available for sale, net of deferred taxes of $273,064 530,065 Less reclassification adjustment, net of taxes of $5,466 (10,611) ------------------------------------------------------------------------------------------------------------------------------------ Other comprehensive income, net of tax -- -- -- 519,454 519,454 519,454 ------------------------------------------------------------------------------------------------------------------------------------ Total comprehensive income -- -- -- -- 2,362,481 ==================================================================================================================================== Cash dividends, $0.47 per share -- -- (548,861) -- (548,861) Issuance of common stock under dividend reinvestment plan 10,895 7,434 -- -- 18,329 ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 2000 $ 5,849,845 $ 4,827,428 $ 6,367,066 $ 170,720 $ 17,215,059 Comprehensive income: Net income -- -- 2,007,122 -- $ 2,007,122 2,007,122 Other comprehensive income, net of tax: Unrealized gain on securities available for sale, net of deferred taxes of $177,607 344,766 Less reclassification adjustment, net of taxes of $832 (1,616) ------------------------------------------------------------------------------------------------------------------------------------ Other comprehensive income, net of tax -- -- -- 343,150 343,150 343,150 ------------------------------------------------------------------------------------------------------------------------------------ Total comprehensive income -- -- -- -- 2,350,272 ==================================================================================================================================== Cash dividends, $0.50 per share -- -- (585,683) -- (585,683) Fractional shares purchased under dividend reinvestment plan -- -- (38) -- (38) Issuance of common stock under dividend reinvestment plan 20,545 47,324 -- -- 67,869 ------------------------------------------------------------------------------------------------------------------------------------ Balance, December 31, 2001 $ 5,870,390 $ 4,874,752 $ 7,788,467 $ 513,870 $ 19,047,479 ====================================================================================================================================
See Notes to Consolidated Financial Statements. BOE FINANCIAL SERVICES OF VIRGINIA, INC. 9 ------------------------------------------------------------------------------- CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CASH FLOWS Three Years Ended December 31, 2001
2001 2000 1999 Cash Flows from Operating Activities Net income.......................................................... $ 2,007,122 $ 1,843,027 $ 1,403,733 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization................................. 520,519 509,054 459,512 Origination of loans available for sale....................... (4,362,737) (3,712,700) (2,177,600) Proceeds from sale of loans available for sale................ 3,687,310 3,737,371 1,919,995 Provision for loan losses..................................... 390,000 455,000 345,000 (Gain) from demutualization of insurance company.............. -- -- (64,656) (Gain) on sale of securities.................................. (2,448) (16,077) (4,422) (Gain) on sale of premises and equipment...................... -- -- (5,810) (Gain) loss on sale of loans.................................. (7,343) 849 8,555 Loss on sale of other property................................ -- -- 35,000 Deferred income tax expense (benefit)......................... (123,267) 74,169 (90,588) Amortization of premiums on securities........................ 106,557 69,700 83,774 Accretion of discounts on securities.......................... (56,445) (64,130) (7,479) (Increase) in accrued interest receivable and other assets.... (139,403) (500,195) (43,734) Increase in accrued expenses and other liabilities. 80,667 248,644 43,208 ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities..................... $ 2,100,532 $ 2,644,712 $ 1,904,488 ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Investing Activities Proceeds from principal repayments and calls of securities held to maturity................................................. $ -- $ 574,974 $ 1,045,338 Proceeds from sales, principal repayments and calls of securities available for sale........................... 2,804,658 3,683,295 3,879,755 Proceeds from maturities of securities held to maturity............. -- 470,000 100,000 Proceeds from maturities of securities available for sale........... 6,430,800 80,000 700,000 Purchase of securities held to maturity............................. -- (533,416) (990,130) Purchase of securities available for sale........................... (12,137,381) (14,217,589) (4,708,835) Purchase of equity securities, restricted........................... -- (354,600) (234,200) Net increase in loans to customers.................................. (12,698,868) (15,732,253) (19,448,945) (Increase) decrease in federal funds sold........................... (5,204,000) (2,413,000) 1,879,000 Purchases of premises and equipment................................. (187,183) (79,505) (2,095,586) Proceeds from sale of premises and equipment........................ -- -- 11,000 Proceeds from sale of other real estate............................. -- 72,401 42,414 ----------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities......................... $ (20,991,974) $ (28,449,693) $ (19,820,189) ----------------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Net increase in demand deposits, NOW accounts, and savings accounts $ 6,208,896 $ 803,890 $ 5,036,303 Net increase in time deposits....................................... 17,940,062 20,653,376 8,029,919 Increase (decrease) in federal funds purchased...................... -- (901,000) 901,000 Increase (decrease) from Federal Home Loan Bank advances............ (3,000,000) 4,000,000 7,000,000 Dividends paid...................................................... (585,683) (548,861) (525,506) Net proceeds from issuance of common stock.......................... (67,869 28,069 -- Cash paid for fractional shares..................................... (38) -- -- Stock issuance costs................................................ -- (9,740) -- ----------------------------------------------------------------------------------------------------------------------------- Net cash provided by financing activities..................... $ 20,631,106 $ 24,025,734 $ 20,441,716 ----------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents.......... $ 1,739,664 $ (1,779,247) $ 2,526,015 Cash and Cash Equivalents Beginning of year................................................... 4,353,812 6,133,059 3,607,044 ----------------------------------------------------------------------------------------------------------------------------- End of year......................................................... $ 6,093,476 $ 4,353,812 $ 6,133,059 ============================================================================================================================= Supplemental Disclosure of Cash Flow Information Cash paid during year Interest......................................................... $ 7,769,836 $ 6,670,812 $ 5,386,392 ============================================================================================================================= Income taxes..................................................... $ 447,151 $ 742,977 $ 490,470 ============================================================================================================================= Noncash investing activities Loans transferred to real estate owned during the year........... $ -- $ -- $ 149,815 ============================================================================================================================= Unrealized gain (loss) on securities available for sale.......... $ 519,925 $ 787,052 $ (758,107) ============================================================================================================================= Securities received from demutualization of insurance company.... $ -- $ -- $ 64,656 ============================================================================================================================= Transfer of held to maturity securities to available for sale.... $ 3,120,778 $ -- $ -- =============================================================================================================================
See Notes to Consolidated Financial Statements. 10 2001 ANNUAL REPORT ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES On May 12, 2000, the stockholders of Bank of Essex voted in favor of a merger to become a wholly-owned subsidiary of BOE Financial Services of Virginia, Inc., which became a newly formed one-bank holding company. Upon consummation of the reorganization effective July 1, 2000, each outstanding common share of Bank of Essex was exchanged for one share of BOE Financial Services of Virginia, Inc. common stock, par value $5 per share. The exchange of shares was a tax-free transaction for federal income tax purposes. The merger was accounted for on the same basis as a pooling-of-interests and financial statements for prior periods are identical to the financial statements of the Bank. Stockholders' equity has been restated to reflect this transaction in all prior periods. BOE Financial Services of Virginia, Inc. (the "Corporation") is a bank holding company, which owns all of the stock of its sole subsidiary, Bank of Essex (the "Bank"). The Bank provides commercial, residential and consumer loans, and a variety of deposit products to its customers in the Northern Neck, Middle Peninsula, and Richmond regions of Virginia. Essex Services, Inc. is a wholly-owned subsidiary of the Bank and was formed to sell title insurance to the Bank's mortgage loan customers. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of BOE Financial Services of Virginia, Inc. and its wholly-owned subsidiary, Bank of Essex. All material intercompany balances and transactions have been eliminated in consolidation. SECURITIES Debt securities that management has the positive intent and ability to hold to maturity are classified as "held to maturity" and recorded at amortized cost. Securities not classified as held to maturity, including equity securities with readily determinable fair values, are classified as "available for sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Declines in the fair value of held-to-maturity and availablefor- sale securities below their cost that are deemed to be other than temporary are reflected in earnings as realized losses. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. LOANS The Bank grants mortgage, commercial and consumer loans to customers. A substantial portion of the loan portfolio is represented by mortgage loans. The ability of the Bank's debtors to honor their contracts is dependent upon the real estate and general economic conditions in the Bank's market area. Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well-secured and in process of collection. Consumer loans are typically charged off no later than 180 days past due. In all cases, loans are placed on nonaccrual or charged-off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual or charged-off is reversed against interest income. The interest on these loans is accounted for on the cashbasis or cost-recovery method, until qualifying for return to accrual. Generally, loans are returned to accrual status when all of the principal and interest amounts contractually due are brought current and future payments are reasonably assured. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic con- BOE FINANCIAL SERVICES OF VIRGINIA, INC. 11 ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of the expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures. LOANS HELD FOR SALE Mortgage loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated market in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income. BANK PREMISES AND EQUIPMENT Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation of bank premises and equipment is computed on the straight-line method over estimated useful lives of 10 to 50 years for premises and 5 to 20 years for equipment, furniture and fixtures. Costs of maintenance and repairs are charged to expense as incurred and major improvements are capitalized. Upon sale or retirement of depreciable properties, the cost and related accumulated depreciation are eliminated from the accounts and the resulting gain or loss is included in the determination of income. INTANGIBLES Intangible assets consist of core deposit premiums. Intangible assets are amortized on a straight-line basis over 15 years. Amortization expense for each of the years ended December 31, 2001, 2000 and 1999 was $125,823. OTHER REAL ESTATE Real estate acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at the lower of the loan balance or the fair value at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of the carrying amount or the fair value less costs to sell. Revenues and expenses from operations and changes in the valuation allowance are included in other operating expenses. Costs to bring a property to salable condition are capitalized up to the fair value of the property while costs to maintain a property in salable condition are expensed as incurred. The Bank had no other real estate at December 31 2001 or 2000. INCOME TAXES Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. EARNINGS PER SHARE Basic earnings per share is computed based on the weighted average number of shares outstanding and excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is computed in a manner similar to basic EPS, except for certain adjustments to the numerator and the denominator. Diluted EPS gives effect to all dilutive potential common shares that were outstanding during the period. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options and are determined using the treasury stock method. CASH AND CASH EQUIVALENTS For purposes of the consolidated statements of cash flows, the Corporation has defined cash equivalents as those amounts included in the balance sheet caption "Cash and due from banks." ADVERTISING COSTS The Corporation follows the policy of charging the costs of production of advertising to expense as incurred. Total advertising expense incurred for 2001, 2000 and 1999 was $72,744, $96,548 and $83,659, respectively. USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Management estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, and the valuation of foreclosed real estate and deferred taxes. RECLASSIFICATIONS Certain reclassifcations have been made to prior period balances to conform to the current year provisions. 12 2001 ANNUAL REPORT ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 2. SECURITIES The amortized cost and fair value of securities being held to maturity as of December 31, 2000, are as follows:
Gross Unrealized Gross Unrealized Amortized Cost Gains (Losses) Fair Value -------------------------------------------------------------------------------------------------------------------------- 2000 ========================================================================================================================== U.S. Agency, mortgage-backed securities ....... $ 1,139,647 $ 16,601 $ (2,554) $ 1,153,694 Obligations of state and political subdivisions 1,781,157 41,104 -- 1,822,261 Corporate debt securities ..................... 199,974 -- (44) 199,930 -------------------------------------------------------------------------------------------------------------------------- $ 3,120,778 $ 57,705 $ (2,598) $ 3,175,885 ==========================================================================================================================
As permitted under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," the Corporation transferred securities held to maturity with a book value of $3,120,778 and a market value of $3,175,885 to securities available for sale as of January 1, 2001. The amortized cost and fair value of securities available for sale as of December 31, 2001 and 2000, are as follows:
Gross Unrealized Gross Unrealized Amortized Cost Gains (Losses) Fair Value -------------------------------------------------------------------------------------------------------------------------- 2001 -------------------------------------------------------------------------------------------------------------------------- U.S. Agency, mortgage-backed securities ....... $ 7,083,970 $ 90,289 $ (15,618) $ 7,158,641 Obligations of state and political subdivisions 24,687,269 444,078 (102,424) 25,028,923 Corporate debt securities ..................... 5,653,989 300,204 (6,058) 5,948,135 Other securities............................... 64,656 68,120 -- 132,776 -------------------------------------------------------------------------------------------------------------------------- $ 37,489,884 $ 902,691 $ (124,100) $ 38,268,475 ========================================================================================================================== -------------------------------------------------------------------------------------------------------------------------- 2000 -------------------------------------------------------------------------------------------------------------------------- U.S. Agency, mortgage-backed securities ........ $ 10,168,172 $ 35,550 $ (39,688) $ 10,164,034 Obligations of state and political subdivisions 16,397,963 180,163 (126,270) 16,451,856 Corporate debt securities ..................... 4,960,141 118,139 (4,429) 5,073,851 Other securities............................... 64,656 95,200 -- 159,856 -------------------------------------------------------------------------------------------------------------------------- $ 31,590,932 $ 429,052 $ (170,387) $ 31,849,597 ==========================================================================================================================
The amortized cost and fair value of securities available for sale as of December 31, 2001, by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations without any penalties. Amortized Cost Fair Value ------------------------------------------------------------------------- Due in one year or less ............... $ 2,908,122 $ 2,961,826 Due after one year through five years.. 18,326,452 18,793,199 Due after five years through ten years. 15,609,302 15,803,044 Due after ten years ................... 581,352 577,630 ------------------------------------------------------------------------- $ 37,425,228 $ 38,135,699 Other equity securities ............... 64,656 132,776 ------------------------------------------------------------------------- $ 37,489,884 $ 38,268,475 ========================================================================= There were no sales of securities being held to maturity during 2001, 2000 and 1999. Proceeds from principal repayments and calls of securities held to maturity during 2001, 2000 and 1999 were $0, $574,974 and $1,045,338, respectively. There were no gross gains or losses realized during 2001, 2000 and 1999. Proceeds from sales, principal repayments and calls of securities available for sale during 2001, 2000 and 1999 were $2,804,658, $3,683,295 and $3,879,755, respectively. Gross realized gains of $6,287, $21,757 and $6,668 and gross realized losses of $3,839, $5,680 and $2,246 were recognized on those sales for the years ended December 31, 2001, 2000 and 1999, respectively. The tax provision applicable to these net realized gains amounted to $832, $5,466 and $1,503, respectively. Securities with amortized costs of $1,843,586 and $1,618,537 at December 31, 2001 and 2000 were pledged to secure public deposits and for other purposes required or permitted by law. BOE FINANCIAL SERVICES OF VIRGINIA, INC. 13 ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 3. LOANS Major classifications of loans are summarized as follows: December 31, 2001 2000 ----------------------------------------------------------------- (In Thousands) Mortgage loans on real estate: Residential 1-4 family ....... $ 33,688 $ 29,639 Commercial ................... 70,137 60,352 Construction ................. 3,505 6,242 Equity lines of credit........ 6,511 4,671 Commercial loans .................. 32,714 29,783 Consumer installment loans: Personal ..................... 6,624 9,922 Credit cards ................. 782 702 ----------------------------------------------------------------- $ 153,961 $ 141,311 Less: Allowance for loan losses 2,084 1,819 ----------------------------------------------------------------- Loans, net......................... $ 151,877 $ 139,492 ================================================================= The following is a summary of information pertaining to impaired loans: December 31, 2001 2000 ----------------------------------------------------------------- Impaired loans with a valuation allowance .......... $ 622,810 $ 340,300 Impaired loans without a valuation allowance .......... -- -- ----------------------------------------------------------------- Total impaired loans $ 622,810 $ 340,300 ================================================================= Valuation allowance related to impaired loans ............ $ 160,862 $ 51,045 ================================================================= Years Ended December 31, 2001 2000 1999 -------------------------------------------------------------- Average investment in impaired loans $ 799,282 $ 340,275 $ 291,998 ============================================================== Interest income recognized on impaired loans $ 8,338 $ -- $ 5,552 ============================================================== Interest income recognized on a cash basis on impaired loans $ 8,338 $ -- $ 5,552 ============================================================== Nonaccrual loans excluded from impaired loan disclosure under SFAS No. 114 amounted to $182,100, $616,215 and $959,000 at December 31, 2001, 2000 and 1999, respectively. If interest on these loans would have been accrued, such income would have totaled $8,082, $107,084 and $42,672 in 2001, 2000 and 1999, respectively. The Corporation has not committed to lend additional funds to these debtors. A summary of the transactions affecting the allowance for loan losses is asfollows: 2001 2000 1999 ------------------------------------------------------------------- Balance, beginning of year $1,818,538 $1,600,717 $ 1,344,435 Provision for loan losses 390,000 455,000 345,000 Loans charged off (170,629) (267,174) (132,093) Recoveries of loans previously charged off 46,182 29,995 43,375 ------------------------------------------------------------------- Balance, end of year $2,084,091 $ 1,818,538 $ 1,600,717 =================================================================== NOTE 4. PREMISES AND EQUIPMENT A summary of the cost and accumulated depreciation of bank premises and equipment follows at December 31, 2001 and 2000: 2001 2000 ------------------------------------------------------------------ Premises: Land ....................... $ 2,506,210 $ 2,506,210 Building ................... 3,868,330 3,859,931 Furniture and fixtures ..... 3,696,578 3,517,654 ------------------------------------------------------------------ $ 10,071,118 $ 9,883,795 Accumulated depreciation......... 3,307,256 2,912,420 ------------------------------------------------------------------ $ 6,763,862 $ 6,971,375 ================================================================== Depreciation expense for the years ended December 31, 2001, 2000 and 1999, amounted to $394,696, $383,231 and $333,689, respectively. NOTE 5. DEPOSITS The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2001 and 2000 was $20,809,563 and $18,242,394, respectively. The scheduled maturities of time deposits at December 31, 2001 are as follows: 2002 .................. $ 76,594,066 2003 .................. 31,941,022 2004 .................. 3,715,399 2005 .................. 805,706 2006 .................. 7,738,366 Thereafter ............ 8,119 --------------------------------------------------------- $ 120,802,678 ========================================================= 14 2001 ANNUAL REPORT ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 6. INCOME TAXES The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities follow: 2001 2000 ------------------------------------------------------------------------------- Deferred tax assets: Allowance for loan losses .................... $ 642,485 $ 553,512 Deferred compensation liability .................................. 172,479 160,102 Nonaccrual loan interest ..................... 17,880 55,328 Accrued pension liability .................... -- 1,388 Organizational costs ......................... 23,387 30,069 ------------------------------------------------------------------------------- $ 856,231 $ 800,399 ------------------------------------------------------------------------------- Deferred tax liabilities: Depreciation ................................. $ 294,401 $ 363,448 Discount accretion on securities .............................. 18,871 28,748 Partnership losses............................ 45,324 36,739 Accrued pension liability .................................. 2,904 -- Unrealized gain on securities available for sale ................................... 264,721 87,947 Other ........................................ 21,983 21,983 ------------------------------------------------------------------------------- $ 648,204 $ 538,865 ------------------------------------------------------------------------------- Net deferred tax assets ........................ $ 208,027 $ 261,534 =============================================================================== Allocation of the income tax expense between current and deferred portions is as follows: 2001 2000 1999 ------------------------------------------------------------------------------- Current $ 720,083 $502,863 $507,513 Deferred (123,267) 74,169 (90,588) ------------------------------------------------------------------------------- $ 596,816 $577,032 $416,925 =============================================================================== The following is a reconciliation of the expected income tax expense with the reported expense for each year: 2001 2000 1999 ------------------------------------------------------------------------------- Statutory Federal income tax rate 34.0% 34.0% 34.0% (Reduction) in taxes resulting from: Municipal interest (10.3) (9.3) (10.1) Other, net (0.8) (0.9) (1.0) ------------------------------------------------------------------------------- Effective income tax rate 22.9% 23.8% 22.9% =============================================================================== NOTE 7. FEDERAL HOME LOAN BANK ADVANCES The Bank had lines of credit with the Federal Home Loan Bank of Atlanta that totaled $8,000,000 and $11,000,000 at December 31, 2001 and 2000, respectively. The average interest rate on the fixed-rate advances was 2.75%. Advances on the lines were secured by all of the Bank's first lien loans on one-tofour unit single-family dwellings. As of December 31, 2001, the book value of these loans totaled approximately $33,636,000. The amount of available credit is limited to seventy-five percent of qualifying collateral. Any borrowings in excess of the qualifying collateral require pledging of additional assets. One advance totaling $4,000,000 matures on November 4, 2002 and the other advance totaling $4,000,000 matures on November 3, 2003. NOTE 8. EMPLOYEE BENEFIT PLANS The Corporation has a noncontributory, defined benefit pension plan for all full-time employees over 21 years of age. Benefits are generally based upon years of service and the employees' compensation. The Corporation funds pension costs in accordance with the funding provisions of the Employee Retirement Income Security Act. The following tables provide a reconciliation of the changes in the plan's benefit obligations and fair value of assets over the years ending December 31, 2001, 2000 and 1999, computed as of October 1, 2001, 2000 and 1999, respectively: 2001 2000 1999 ------------------------------------------------------------------------------- Change in Benefit Obligation Benefit obligation, beginning $1,612,875 $1,262,153 $1,289,122 Service cost 152,755 130,666 109,219 Interest cost 120,784 94,479 96,334 Actuarial (gain) loss (67,685) 130,933 32,221 Benefits paid (4,532) (5,356) (264,743) ------------------------------------------------------------------------------- Benefit obligation, ending $1,814,197 $1,612,875 $1,262,153 ------------------------------------------------------------------------------- Change in Plan Assets Fair value of plan assets, beginning $1,509,157 $1,233,214 $1,332,805 Actual return (loss) on plan assets (230,849) 202,705 165,152 Employer contributions 131,560 78,594 -- Benefits paid (4,532) (5,356) (264,743) ------------------------------------------------------------------------------- Fair value of plan assets, ending $1,405,336 $1,509,157 $1,233,214 ------------------------------------------------------------------------------- Funded status $ (408,861) $ (103,718) $ (28,939) Unrecognized net actuarial (gain) loss 266,371 (38,357) (77,357) Unrecognized net obligation at transition (32,008) (35,208) (38,408) Unrecognized prior service cost 34,319 37,750 41,181 ------------------------------------------------------------------------------- Accrued benefit cost at October 1 $ (140,179) $ (139,533) $ (103,523) Contributions made in December 148,722 135,450 -- ------------------------------------------------------------------------------- Prepaid (accrued) benefit cost at December 31 $ 8,543 $ (4,083) $ (103,523) ------------------------------------------------------------------------------- BOE FINANCIAL SERVICES OF VIRGINIA, INC. 15 ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table provides the components of net periodic benefit cost for the plans for the years ended December 31, 2001, 2000 and 1999: 2001 2000 1999 ------------------------------------------------------------------------------- Components of Net Periodic Benefit Cost Service cost $ 152,755 $ 130,666 $109,219 Interest cost 120,784 94,479 96,334 Expected return on plan assets (141,564) (110,772) (119,532) Amortization of prior service cost 3,431 3,431 3,431 Amortization of net obligation at transition (3,200) (3,200) (3,200) ------------------------------------------------------------------------------- Net periodic benefit cost $ 132,206 $114,604 $ 86,252 =============================================================================== The assumptions used in the measurement of the Corporation's benefit obligation are shown in the following table: 2001 2000 1999 ------------------------------------------------------------------------------- Weighted-Average Assumptions Discount rate 7.50% 7.50% 7.50% Expected return on plan assets 9.00% 9.00% 9.00% Rate of compensation increase 5.00% 5.00% 5.00% The Corporation has also adopted a contributory 401(k) profit sharing plan which covers substantially all employees. The employee may contribute up to 15% of compensation, subject to statutory limitations. The Corporation matches 50% of employee contributions up to 4% of compensation. The plan also provides for an additional discretionary contribution to be made by the Corporation as determined each year. The amounts charged to expense under this plan for the years ended December 31, 2001, 2000 and 1999 were $34,611, $36,855 and $28,384, respectively. The Corporation has a nonqualified deferred compensation program which permits key employees and the Board of Directors to defer a portion of their compensation for their retirement. The retirement benefit to be provided is fixed based upon the amount of compensation earned and deferred. Deferred compensation expense amounted to $40,078, $60,276 and $46,905 for the years ended December 31, 2001, 2000 and 1999, respectively. Concurrent with the establishment of the deferred compensation plan, the Corporation purchased life insurance policies on this key management group, with the Corporation named as owner and beneficiary. These life insurance policies are intended to be utilized as a source for funding the deferred compensation plan. The Corporation has recorded in other assets $240,841 and $213,777 representing cash surrender value of these policies for the years ended December 31, 2001 and 2000, respectively. NOTE 9. STOCK OPTION PLANS EMPLOYEE INCENTIVE STOCK PLAN During the year ending December 31, 2000, the Corporation adopted a stock incentive plan for all employees, which is accounted for in accordance with Accounting Principles Board (APB) Opinion 25, "Accounting for Stock Issued to Employees," and related interpretations. The plan provides that 100,000 shares of the Corporation's common stock will be reserved for both incentive and non-statutory stock options to purchase common stock of the Corporation. The exercise price per share for incentive stock options and non-statutory stock options shall not be less than the fair market value of a share of common stock on the date of grant, and may be exercised at such times as may be specified by the Board of Directors in the participant's stock option agreement. Each incentive and non-statutory stock option shall expire not more than ten years from the date the option is granted. The options vest at a rate of one quarter per year from the grant date. There were no stock options granted during 2000. A summary of the status of the employee incentive stock plan follows: 2001 ------------------------------------------------------------------------------- Weighted Average Number Exercise of Shares Price ------------------------------------------------------------------------------- Outstanding at beginning of year -- $ -- Granted 16,288 12.25 Forfeited (1,376) 12.25 ------------------------------------------------------------------------------- Outstanding at year end 14,912 $ 12.25 =============================================================================== Exercisable at year end -- $ -- =============================================================================== Weighted average fair value of options granted during the year $ 5.04 =============================================================================== DIRECTOR INCENTIVE STOCK PLAN During the year ended December 31, 2000, the Corporation adopted a stock option plan for outside directors. The Corporation applies APB Opinion 25 and related interpretations in accounting for the stock option plan. The plan provides that 10,000 shares of the Corporation's common stock will be reserved for non-statutory stock options to purchase common stock of the Corporation. The exercise price per share for each non-statutory stock option shall not be less than the fair market value of a share of common stock on the date of grant, and may be exercised at such times as may be specified by the Board of Directors in the participant's stock option agreement. Each nonstatutory stock option shall expire not more than ten years from the date the option is granted. The options vest at a rate of one quarter per year from the grant date. There were no stock options granted during 2000. 16 2001 ANNUAL REPORT ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of the director incentive stock plan follows: 2001 ------------------------------------------------------------------------------- Weighted Average Number Exercise of Shares Price ------------------------------------------------------------------------------- Outstanding at beginning of year -- $ -- Granted 2,010 12.41 ------------------------------------------------------------------------------- Outstanding at year end 2,010 $ 12.41 =============================================================================== Exercisable at year end -- $ -- =============================================================================== Weighted average fair value of options granted during the year $ 5.11 =============================================================================== As of December 31, 2001, 16,847 stock options were outstanding, but not exercisable at $12.25 per share with a remaining contractual life of 9.04 years, and 75 stock options were outstanding, but not exercisable at $16.51 with a remaining contractual life of 9.58 years. The fair value of each grant is estimated at the grant date using the Black-Scholes option-pricing model with the following weighted-average assumptions for grants: expected volatility of 29.64%, dividend yield of 1.41%, risk-free interest rate of 4.92% and expected lives of 10 years. The Corporation applies APB Opinion 25 and related interpretations in accounting for the stock option plan. Accordingly, no compensation expense has been recognized for 2001 and 2000. Had compensation cost for the Corporation's stock option plan been determined based on the fair value at the grant dates for awards under the plan consistent with the method prescribed by SFAS No. 123, the Corporation's net income and earnings per share would have been adjusted to the pro forma amounts indicated below for the year ended December 31, 2001: Net income As reported ................................................... $ 2,007,122 =============================================================================== Pro forma ..................................................... $ 1,985,767 =============================================================================== Basic earnings per share As reported ................................................... $ 1.71 =============================================================================== Pro forma ..................................................... $ 1.70 =============================================================================== Diluted earnings per share As reported ................................................... $ 1.71 =============================================================================== Pro forma ..................................................... $ 1.69 =============================================================================== NOTE 10. EARNINGS PER SHARE The following shows the weighted average number of shares used in computing earnings per share and the effect on the weighted average number of shares of diluted potential stock. Potential dilutive common stock had no effect on income available to common stockholders. 2001 2000 1999 Shares Per Share Shares Per Share Shares Per Share ------------------------------------------------------------------------------- Basic earnings per share 1,170,973 $ 1.71 1,167,814 $ 1.58 1,167,790 $ 1.20 Effective of dilutive stock options 3,348 -- -- ------------------------------------------------------------------------------- Diluted earnings per share 1,174,321 $ 1.71 1,167,814 $ 1.58 1,167,790 $ 1.20 =============================================================================== NOTE 11. RELATED PARTY TRANSACTIONS In the ordinary course of business, the Bank has and expects to continue to have transactions, including borrowings, with its executive officers, directors, and their affiliates. All such loans are made on substantially the same terms as those prevailing at the time for comparable loans to unrelated persons. Loans to such borrowers are summarized as follows: 2001 2000 ------------------------------------------------------------------------------- Balance, beginning of year ....................... $ 2,542,520 $ 3,030,666 New loans originated ........................... 2,137,680 617,767 Repayments ..................................... (1,110,540) (1,105,913) ------------------------------------------------------------------------------- Balance, end of year ............................. $ 3,569,660 $ 2,542,520 =============================================================================== NOTE 12. COMMITMENTS AND CONTINGENT LIABILITIES In the normal course of business, there are outstanding various commitments and contingent liabilities, such as guarantees, commitments to extend credit, etc., which are not reflected in the accompanying consolidated financial statements. The Bank does not anticipate losses as a result of these transactions. See Note 15 with respect to financial instruments with off-balance-sheet risk. As members of the Federal Reserve System, the Bank is required to maintain certain average reserve balances. For the final weekly reporting period in the years ended December 31, 2001 and 2000, the aggregate amount of daily average required balances were approximately $889,000 and $883,000, respectively. The Bank has unsecured lines of credit with correspondent banks available for overnight borrowings totaling approximately $13,500,000. At December 31, 2001, no amounts had been drawn on these lines of credit. The Bank is required to maintain certain required reserve balances with a correspondent bank. Those required balances were $2,400,000 and $560,000 for 2001 and 2000, respectively. NOTE 13. DIVIDEND LIMITATIONS ON AFFILIATE BANK Transfers of funds from the banking subsidiary to the parent corporation in the form of loans, advances and cash dividends are restricted by federal and state regulatory authorities. BOE FINANCIAL SERVICES OF VIRGINIA, INC. 17 ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS As of December 31, 2001, the aggregate amount of unrestricted funds, which could be transferred from the banking subsidiary to the parent corporation, without prior regulatory approval, totaled $3,509,439. NOTE 14. CONCENTRATION OF CREDIT RISK The Bank has a diversified loan portfolio consisting of commercial, real estate and consumer (installment) loans. Substantially all of the Bank's customers are residents or operate business ventures in its market area consisting of Essex, King William, Hanover, Henrico and adjacent counties. Therefore, a substantial portion of its debtors' ability to honor their contracts and the Bank's ability to realize the value of any underlying collateral, if needed, is influenced by the economic conditions in this market area. The Bank maintains a portion of its cash balances with several financial institutions located in its market area. Accounts at each institution are secured by the Federal Deposit Insurance Corporation up to $100,000. Uninsured balances were approximately $2,415,000 at December 31, 2001. NOTE 15. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK The Bank is party to financial instruments with off-balancesheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. Those instruments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheet. The contract amounts of those instruments reflect the extent of involvement the Bank has in particular classes of financial instruments. The Bank's exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making commitments and conditional obligations as it does for on-balance-sheet instruments. A summary of the contract amounts of the Bank's exposure to off-balance-sheet risk as of December 31, 2001 and 2000, is as follows: 2001 2000 ------------------------------------------------------------------------------- Financial instruments whose contract amounts represent credit risk: Commitments to extend credit $ 32,031,000 $ 18,747,000 Standby letters of credit $ 1,571,000 $ 3,006,000 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral held varies but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. Unfunded commitments under commercial lines of credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines of credit are uncollateralized and usually do not contain a specified maturity date and may not be drawn upon to the total extent to which the Bank is committed. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Those guarantees are primarily issued to support public and private borrowing arrangements, including commercial paper, bond financing, and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's evaluation of the counterparty. Since most of the letters of credit are expected to expire without being drawn upon, they do not necessarily represent future cash requirements. NOTE 16. MINIMUM REGULATORY CAPITAL REQUIREMENTS The Corporation (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Corporation's and Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies. Quantitative measures established by regulation to ensure capital adequacy require the Corporation and the Bank to maintain minimum amounts and ratios (set forth in the table below) of total and Tier 1 capital (as defined in the regulations) to risk weighted assets (as defined in the regulations), and of Tier 1 capital (as defined in the regulations) to average assets (as defined in the regulations). Management believes, as of December 31, 2001 and 2000, that the Corporation and Bank met 18 2001 ANNUAL REPORT ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS all capital adequacy requirements to which they are subject. As of December 31, 2001, the most recent notification from the Federal Reserve Bank categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank's category. The Corporation's and the Bank's actual capital amounts and ratios as of December 31, 2001 and 2000, are also presented in the table.
MINIMUM TO BE WELL CAPITALIZED UNDER MINIMUM CAPITAL PROMPT CORRECTIVE ACTUAL REQUIREMENTS ACTION PROVISIONS --------------------------------------------------------------------------------------------------------------- (Amount in Thousands) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO --------------------------------------------------------------------------------------------------------------- As of December 31, 2001: Total Capital (to Risk Weighted Assets) Consolidated $ 19,464 11.1% $ 13,975 8.0% N/A N/A Bank of Essex $ 19,294 11.1% $ 13,964 8.0% $ 17,455 10.0% Tier I Capital (to Risk Weighted Assets) Consolidated $ 17,380 10.0% $ 6,988 4.0% N/A N/A Bank of Essex $ 17,210 9.9% $ 6,982 4.0% $ 10,473 6.0% Tier I Capital (to Average Assets) Consolidated $ 17,380 8.4% $ 8,267 4.0% N/A N/A Bank of Essex $ 17,210 8.3% $ 8,269 4.0% $ 10,337 5.0% As of December 31, 2000: Total Capital (to Risk Weighted Assets) Consolidated $ 17,564 11.7% $ 11,975 8.0% N/A N/A Bank of Essex $ 17,596 11.8% $ 11,975 8.0% $ 14,969 10.0% Tier I Capital (to Risk Weighted Assets) Consolidated $ 15,745 10.5% $ 5,988 4.0% N/A N/A Bank of Essex $ 15,777 10.5% $ 5,988 4.0% $ 8,981 6.0% Tier I Capital (to Average Assets) Consolidated $ 15,745 8.3% $ 7,626 4.0% N/A N/A Bank of Essex $ 15,777 8.3% $ 7,626 4.0% $ 9,532 5.0%
NOTE 17. FAIR VALUE OF FINANCIAL INSTRUMENTS AND INTEREST RATE RISK The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that value: CASH AND SHORT-TERM INVESTMENTS For those short-term instruments, the carrying amount is a reasonable estimate of fair value. SECURITIES For securities held for investment purposes, fair values are based on quoted market prices or dealer quotes. LOANS HELD FOR SALE Fair value of loans held for sale is based on commitments on hand from investors or prevailing market prices. LOANS RECEIVABLE For certain homogeneous categories of loans, such as some residential mortgages, and other consumer loans, fair value is estimated using the quoted market prices for securities backed by similar loans, adjusted for differences in loan characteristics. The fair value of other types of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. DEPOSIT LIABILITIES The fair value of demand deposits, savings accounts, and certain money market deposits is the amount payable on demand at the reporting date. The fair value of fixed-maturity certificates of deposit is estimated using the rates currently offered for deposits of similar remaining maturities. FEDERAL HOME LOAN BANK ADVANCES The fair values of the Corporation's long-term borrowings are estimated using discounted cash flow analyses based on the Corporation's current incremental borrowing rates for similar types of borrowing arrangements. ACCRUED INTEREST The carrying amounts of accrued interest approximate fair value. OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of stand-by letters of credit is based on fees currently charged for similar agreements or on the estimated BOE FINANCIAL SERVICES OF VIRGINIA, I N C. 19 ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At December 31, 2001 and 2000, the difference between the carrying amounts of loan commitments and stand-by letters of credit and their fair values was deemed to be immaterial. The estimated fair values of the Corporation's financial instruments are as follows:
2001 2000 ----------------------------------------------------------------------------------------------- ESTIMATED ESTIMATED CARRYING FAIR CARRYING FAIR (Amount in Thousands) AMOUNT VALUE AMOUNT VALUE ----------------------------------------------------------------------------------------------- Financial assets: Cash and short-term investments. $ 6,093 $ 6,093 $ 4,354 $ 4,354 Federal funds sold.............. 7,617 7,617 2,413 2,413 Securities......................... 39,613 39,613 36,315 36,370 Loans held for sale............. 906 906 224 224 Loans, net of allowance......... 151,877 158,696 139,492 141,818 Accrued interest receivable..... 1,447 1,447 1,366 1,366 Financial liabilities: Deposits........................ $ 188,497 $ 191,893 $ 164,348 $ 165,149 Federal Home Loan Bank advances. 8,000 7,970 11,000 11,000 Accrued interest payable........ 610 610 898 898
The Corporation assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Corporation's financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Corporation. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk by adjusting terms of new loans and deposits and by investing in securities with terms that mitigate the Corporation's overall interest rate risk. NOTE 18. PARENT CORPORATION ONLY FINANCIAL STATEMENTS BOE FINANCIAL SERVICES OF VIRGINIA, INC.
BALANCE SHEETS December 31, 2001 and 2000 2001 2000 ASSETS Cash.................................................................. $ 97,613 $ 20,000 Investment in subsidiaries, at cost, plus undistributed net income.... 18,821,957 17,163,759 Securities available for sale......................................... 132,776 159,856 Other assets.......................................................... 6,890 -- ---------------------------------------------------------------------------------------------------------- Total assets....................................................... $ 19,069,236 $ 17,343,615 ========================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities.............................................................. $ 21,757 $ 128,556 ---------------------------------------------------------------------------------------------------------- Stockholders' Equity Common Stock.......................................................... $ 5,870,390 $ 5,849,845 Additional paid-in capital............................................ 4,874,752 4,827,428 Retained earnings..................................................... 7,788,467 6,367,066 Accumulated other comprehensive income................................ 513,870 170,720 ---------------------------------------------------------------------------------------------------------- Total stockholders' equity......................................... $ 19,047,479 $ 17,215,059 ---------------------------------------------------------------------------------------------------------- Total liabilities and stockholders' equity......................... $ 19,069,236 $ 17,343,615 ========================================================================================================== Continued next page
20 2001 ANNUAL REPORT ------------------------------------------------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 18. PARENT CORPORATION ONLY FINANCIAL STATEMENTS, CONTINUED
STATEMENTS OF INCOME For the Two Years Ended December 31, 2001 2001 2000 Income: Dividends from subsidiary........................................................ $ 690,855 $ 583,466 Dividends on other securities.................................................... $ 2,202 -- ---------------------------------------------------------------------------------------------------------------------- Total income.................................................................. $ 693,057 $ 583,466 ---------------------------------------------------------------------------------------------------------------------- Expenses: Other............................................................................ $ -- $ 98,266 ---------------------------------------------------------------------------------------------------------------------- Total expenses................................................................ $ -- $ 98,266 ====================================================================================================================== Income before allocated tax benefits and undistributed income of subsidiary...... $ 693,057 $ 485,200 Allocated income tax benefits....................................................... 6,890 33,800 ---------------------------------------------------------------------------------------------------------------------- Income before equity in undistributed income of subsidiary....................... $ 699,947 $ 519,000 Equity in undistributed income of subsidiary........................................ 1,307,175 1,324,027 ---------------------------------------------------------------------------------------------------------------------- Net income ................................................................... $ 2,007,122 $ 1,843,027 ====================================================================================================================== STATEMENTS OF CASH FLOWS For the Two Years Ended December 31, 2001 2001 2000 Cash Flows from Operating Activities Net income....................................................................... $ 2,007,122 $ 1,843,027 Adjustments to reconcile net income to net cash provided by operating activities: Noncash dividend from subsidiary.............................................. -- (42,674) (Increase) in other assets.................................................... (6,890) -- Deferred tax (benefit)........................................................ (2,525) (33,800) Undistributed earnings of subsidiary.......................................... (1,307,175) (1,324,027) Increase (decrease) in liabilities............................................ (95,067) 108,006 ---------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities.................................. $ 595,465 $ 550,532 ---------------------------------------------------------------------------------------------------------------------- Cash Flows from Financing Activities Stock issuance costs............................................................. $ -- $ (9,740) Cash dividends paid.............................................................. (585,683) (548,861) Net proceeds from issuance of common stock....................................... 67,869 28,069 Cash paid for fractional shares.................................................. (38) -- ---------------------------------------------------------------------------------------------------------------------- Net cash (used in) financing activities.................................... $ (517,852) $ (530,532) ---------------------------------------------------------------------------------------------------------------------- Increase in cash and cash equivalents...................................... $ 77,613 $ 20,000 ---------------------------------------------------------------------------------------------------------------------- Cash and Cash Equivalents Beginning........................................................................ 20,000 -- ---------------------------------------------------------------------------------------------------------------------- Ending........................................................................... $ 97,613 $ 20,000 ======================================================================================================================
BOE FINANCIAL SERVICES OF VIRGINIA, I N C. 21 ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GLOSSARY BASIS POINT--The equivalent of 1/100 of 1%. A unit generally used to measure movements in interest rates. BOOK VALUE PER SHARE-- The value of a share of common stock determined by dividing total shareholders' equity at the end of a period by the total number of shares outstanding at the same date. CORE DEPOSITS--All deposit sources of funds except certificates of deposit $100,000 and over. DIVIDEND PAYOUT RATIO-- The percentage of net income paid to shareholders as cash dividends during a given period. Computed by dividing dividends per share by net income per share. EARNING ASSETS--Loans, investment securities, loans available for sale, federal funds sold, securities purchased under agreement to resell, other money market investments and trading account securities. EFFICIENCY RATIO-- Calculated by dividing noninterest expense, excluding other real estate expense, by taxable equivalent net interest income, excluding securities transactions. INTEREST-SENSITIVE--A characteristic of interest-earning assets and interest-bearing liabilities which are, or will be, repriced as a result of their maturity or changes in interest rates. INTEREST-BEARING LIABILI TIES--All deposit accounts except demand deposits, and federal funds purchased, securities sold under agreements to repurchase, other short-term borrowings, medium-term notes, Federal Home Loan Bank borrowings, long-term debt and capitalized lease obligations. INTEREST SENSITIVITY GAP-- The difference between interestsensitive assets and interestsensitive liabilities. LEVERAGE RATIO--Total commons shareholders' equity, excluding unrealized gains and losses on securities available for sale, less goodwill and deposit intangibles divided by total quarterly average assets, excluding unrealized gains and losses on securities availablefor- sale, less goodwill and deposit intangibles. NET INTEREST MARGIN-- Calculated by dividing taxable equivalent net interest income by total average earning assets. NONPERFORMING ASSETS-- Nonaccrual loans and foreclosed properties. PRIME RATE--The rate per annum set from time to time by the Corporation's banking subsidiary as the prime rate. RETURN ON AVERAGE ASSETS--Net income as a percentage of average total assets. A key profitability ratio that indicates how effectively a bank has used its total resources. RETURN ON AVERAGE EQUITY--Net income as a percentage of average shareholders' equity. Provides a measure of how productively a Corporation's equity has been employed. RISK-BASED CAPITAL RATIOS--Tier 1: Tier 1 capital divided by total risk-weighted assets. Total: Tier 1 plus Tier 2 capital divided by total riskweighted assets. RISK-WEIGHTED ASSETS-- Assets and off-balance-sheet items are assigned to categories with a risk weight ranging from zero to 100 percent being accorded. SPREAD--The difference between the income earned on earning assets and the interest cost of interest-bearing liabilities. TAXABLE EQUIVALENT INCOME--Tax-exempt income which, for comparative purposes, has been increased by an amount equivalent to the taxes that would be paid if this income were fully taxable at the federal statutory rate for the Bank of Essex at 34%. Taxable equivalent income does not include the effect of the disallowance, for income tax purposes, of interest expense allocable to taxexempt obligations acquired after December 31, 1982. TIER 1 CAPITAL--Total common shareholders' equity, excluding unrealized gains and losses on securities available- for-sale, less goodwill and deposit intangibles. TIER 2 CAPITAL--The allowable allowance for loan losses plus the allowable longterm indebtedness of the Corporation. The following discussion is intended to assist the readers in understanding and evaluating the financial condition and results of operations of BOE Financial Services of Virginia, Inc. ("the Corporation") or ("BOE"). This review should be read in conjunction with the Corporation's consolidated financial statements and accompanying notes included elsewhere in this Annual Report. This analysis provides an overview of the significant changes that occurred during the periods presented. OVERVIEW On December 31, 2001 the Corporation had total assets of $217.2 million, total loans of $154.0 million, total deposits of $188.5 million and total stockholder's equity of $19.0 million. BOE had net income of $2,007,000 in 2001, a $164,000, or 8.9% increase over $1,843,000 in net income in 2000. This resulted in a return on average equity of 10.97% in 2001 compared to 22 2001 ANNUAL REPORT ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS 11.38% in 2000. Return of average assets in 2001 was 1.00%, compared to 1.01% in 2000. BOE's total loans increased by $12,651,000 in 2001 over 2000. Total loans, including loans held for sale, were $154,867,000 at December 31, 2001 compared to $141,534,000 at December 31, 2000. The total loan portfolio grew 9.0% in 2001, 12.3% in 2000, 18.3% in 1999, 20.0% in 1998 and 12.2% in 1997. Despite the strong growth in the loan portfolio, the level of nonperforming assets to total assets has remained low. During each of the last five years, BOE has reported a level of nonperforming assets to total assets of 0.83% or lower and a ratio of net chargeoffs to average total loans of 0.22% or lower. At December 31, 2001, the ratio of nonperforming assets to total assets was 0.35% compared to 0.49% at December 31, 2000. Net chargeoffs to average loans were 0.08% in 2001 compared to 0.17% in 2000. The Corporation's allowance for loan losses as a percentage of gross loans at December 31, 2001 was 1.35% compared to 1.29% at December 31, 2000. RESULTS OF OPERATIONS NET INCOME BOE had net income of $2,007,000 in 2001 compared to $1,843,000 in 2000. This represented an increase of 8.9%, or $164,000. Earnings per share in 2001 were $1.71 compared to earnings per share of $1.58 in 2000. These earnings per share are based on average shares outstanding of 1,170,973 in 2001 and 1,167,814 in 2000. With the December 2000 common stock dividend, BOE implemented a Dividend Reinvestment Plan (The "Plan"). This plan has added 6,288 shares to the Corporation's equity since its inception and, net of costs, added approximately $86,000 to total stockholders' equity. BOE improved profitability in 2001 in comparison to 2000 due to increases of $514,000 in loan and securities related income, a $65,000 decrease in provision for loan losses and a $161,000 increase in total noninterest income. These increases were offset by a $375,000 increase in total interest expense, a $114,000 increase in total noninterest expenses and a $20,000 increase in income taxes. NET INTEREST INCOME Net interest income is the major component of the Corporation's earnings and is equal to the amount by which interest income exceeds interest expense. The Corporation's earning assets are composed primarily of loans and securities, while deposits and short-term borrowings represent the major portion of interest-bearing liabilities. Changes in the volume and mix of these assets and liabilities, as well as changes in the yields earned and rates paid, determine changes in net interest income. Net interest income, on a fully tax equivalent basis, was $7.7 million in 2001, 1.3% higher than the $7.6 million reported for 2000. Although the Corporation's level of average earning assets increased in the 2001 period over 2000, net interest income improved only 1.3% due to rate decreases throughout 2001. These decreases in rates typically decrease income from earning assets to a greater degree than the associated decrease in interest expense. The Corporation's level of earning assets increased $18.8 million, or 11.2%, on average, in 2001 to $186.9 million compared to $168.1 million in 2000. Loans receivable were $147.8 million, on average, in 2001 compared to $135.7 million in 2000, an increase of $12.1 million, or 8.9%. The yield on loans receivable decreased from 9.18% in 2000 to 8.60% in 2001. On a fully tax equivalent basis the yield on loans receivable increased $0.2 million in 2001, from $12.5 million in 2000 to $12.7 million in 2001. This represents an increase of 2.0%. Investment securities and federal funds sold increased, on average, 20.7% in 2001 to $39.1 million, up from $32.4 million, on average, in 2000. The yield on investment securities, including equity securities and federal funds sold, was 6.32% in 2001 compared to 6.94% in 2000. On a fully taxable equivalent basis investment securities and federal funds sold income increased 10.0%, or $226,000, from $2.2 million in 2000 to $2.5 million in 2001. This resulted in a yield on earning assets of 8.12% in 2001 based on $15.2 million in fully taxable equivalent income compared to 8.75% in 2000 based on $14.7 million in fully taxable equivalent income. This is a $0.5 million increase from 2000 to 2001, or 3.4%. The Corporation's interest-bearing liabilities increased $15.5 million, or 10.5%, on average, from $147.9 million in 2000 to $163.4 million in 2001. Of this increase, 91.0% came from increases in time deposit accounts. The cost of interest- bearing liabilities decreased from 4.81% in 2000 to 4.58% in 2001, a decrease of 4.8%. The decrease in yield on earning assets of 63 basis points coupled with the decreased cost of interest-bearing liabilities of 23 basis points resulted in a net interest margin for the Corporation of 4.12% in 2001 compared to a net interest margin of 4.52% in 2000. Net interest margin is calculated by dividing the Corporation's net interest income on a tax equivalent basis by the average earning assets. Volume and rate increases in loans and in securities, coupled with greater rate and volume increases in interest-bearing liabilities resulted in a decrease in the interest spread. The Corporation's net interest spread decreased 40 basis points from 3.94% in 2000 to 3.54% in 2001. Spread is calculated by subtracting the cost of interest-bearing liabilities from the yield on earning assets. BOE's net interest margin is affected by changes in the amount and mix of earning assets and interest-bearing liabilities, referred to as a "volume change." It is also affected by changes in yields earned on earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a "rate change." The following table sets forth for each category of earning assets and interest-bearing liabilities, the average amounts outstanding, the interest earned or incurred on such amounts and the average rate earned or incurred for the years ended December 31, 2001 and 2000. The table also sets forth the average rate earned on total earning assets, the average rate paid on total interest-bearing liabilities, and the net interest margin on average total earning assets for the same periods. BOE FINANCIAL SERVICES OF VIRGINIA, I N C. 23 ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS AVERAGE BALANCES, INTEREST INCOME AND EXPENSES, AND AVERAGE YIELDS AND RATES
Years Ended December 31, 2001 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- INTEREST AVERAGE INTEREST AVERAGE INTEREST AVERAGE AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/ BALANCE EXPENSE RATE BALANCE EXPENSE RATE BALANCE EXPENSE RATE ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Earning Assets: Loans receivable (1) (2).............. $147,760 $12,700 8.60% $135,703 $12,460 9.18% $115,566 $10,193 8.82% Securities, taxable................... 15,789 1,028 6.51% 12,956 898 6.93% 10,731 661 6.16% Securities, non-taxable (2)........... 18,794 1,255 6.68% 15,403 1,086 7.05% 13,330 918 6.89% Equity securities..................... 1,479 87 5.88% 1,373 93 6.77% 843 58 6.88% Federal funds sold.................... 3,076 105 3.41% 2,663 172 6.46% 1,258 61 4.85% -------- ------- -------- ------- -------- ------- Total earning assets................ $186,898 $15,175 8.12% $168,098 $14,709 8.75% $141,728 $11,891 8.39% -------- ------- -------- ------- -------- ------- Non-Earning Assets: Cash and due from banks............... 4,462 4,281 4,833 Allowance for loan losses............. (1,920) (1,733) (1,467) Other assets.......................... 10,938 11,429 10,867 -------- -------- -------- Total non-earning assets............ 13,480 13,977 14,233 -------- -------- -------- Total assets........................ $200,378 $182,075 $155,961 ======== ======== ======== Interest-Bearing Liabilities: (Deposits:) (Interest-bearing demand) (NOW) deposits................... $ 19,666 339 1.72% $ 19,071 395 2.07% $ 18,027 385 2.14% Money market deposits............... 10,103 294 2.91% 9,906 321 3.24% 10,478 317 3.03% Savings deposits.................... 15,079 390 2.59% 14,429 433 3.00% 14,720 442 3.00% Time deposits....................... 107,750 5,902 5.48% 93,650 5,255 5.61% 78,340 4,021 5.13% (Federal funds) purchased........................ 328 16 4.88% 203 10 4.80% 1,037 53 5.11% (Federal Home Loan) Bank advances.................... 10,507 541 5.15% 10,628 693 6.52% 1,841 115 6.25% -------- ------- -------- ------- -------- ------- (Total interest-bearing) liabilities...................... $163,433 $ 7,482 4.58% $147,887 $ 7,107 4.81% $124,443 $ 5,333 4.29% -------- ------- -------- ------- -------- ------- Non-Interest Bearing Liabilities: Demand deposits....................... 16,903 16,660 14,984 Other liabilities..................... 1,744 1,339 1,137 -------- -------- -------- (Total non-interest) bearing liabilities.............. 18,647 17,999 16,121 -------- -------- -------- Total liabilities..................... 182,080 165,886 140,564 -------- -------- -------- Stockholders' equity.................. 18,298 16,189 15,397 -------- -------- -------- (Total liabilities and) stockholders' equity............. $200,378 $182,075 $155,961 ======== ======== ======== Interest spread....................... 3.54% 3.94% 4.10% Net interest margin................... $ 7,693 4.12% $ 7,602 4.52% $ 6,558 4.63% ======= ======= =======
(1) Non-accrual loan balances are included in the calculation of Average Balances. (2) Income and yields reported on a tax-equivalent basis. Net interest is affected by both (1) changes in the interest rate spread (the difference between the weighted average yield on interest earning assets and the weighted average cost of interest- bearing liabilities) and (2)changes in volume (average balances of interest earning assets and interest-bearing liabilities). For each category of interest-earning assets and interest-bearing liabilities, information is provided regarding changes attributable to (1) changes in volume of balances outstanding (changes in volume multiplied by prior period interest rate) (2) changes in the interest earned or paid on the balances (changes in rate multiplied by prior period volume) and (3) a combination of changes in volume and rate allocated pro rata. 24 2001 ANNUAL REPORT ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS RATE AND VOLUME ANALYSIS
YEAR ENDED DECEMBER 31, 2001 YEAR ENDED DECEMBER 31, 2000 COMPARED TO DECEMBER 31, 2000 COMPARED TO DECEMBER 31, 1999 INCREASE (DECREASE) DUE TO INCREASE (DECREASE) DUE TO -------------------------------------------------------------------------------------------------------- (Dollars in thousands) RATE VOLUME TOTAL RATE VOLUME TOTAL -------------------------------------------------------------------------------------------------------- Interest Earned On: Loans receivable..................... $ (615) $ 855 $ 240 $ 433 $ 1,835 $ 2,268 Securities, taxable.................. (50) 180 130 89 148 237 Securities, non-taxable.............. (53) 222 169 22 146 168 Equity securities.................... (15) 9 (6) (1) 36 35 Interest earning deposits in banks........................... -- -- -- -- -- -- Federal funds sold................... (100) 33 (67) 25 86 111 -------------------------------------------------------------------------------------------------------- Total interest income....... $ (833) $ 1,299 $ 466 $ 568 $ 2,251 $ 2,819 -------------------------------------------------------------------------------------------------------- Interest Paid On: Interest bearing demand (NOW) deposits........................ $ (69) $ 13 $ (56) $ (11) $ 21 $ 10 Money market deposits................ (34) 7 (27) 17 (13) 4 Savings deposits..................... (64) 21 (43) -- (9) (9) Time deposits........................ (122) 769 647 399 835 1,234 Federal funds purchased.............. -- 6 6 (3) (40) (43) Federal Home Loan Bank advances....................... (144) (8) (152) 5 573 578 -------------------------------------------------------------------------------------------------------- Total interest expense...... $ 433 $ 808 $ 375 $ 407 $ 1,367 $ 1,774 -------------------------------------------------------------------------------------------------------- Net interest income.................. $ (400) $ 491 $ 91 $ 161 $ 884 $ 1,045 ======================================================================================================== YEAR ENDED DECEMBER 31, 1999 COMPARED TO DECEMBER 31, 1998 INCREASE (DECREASE) DUE TO --------------------------------------------------------------------- (Dollars in thousands) RATE VOLUME TOTAL --------------------------------------------------------------------- Interest Earned On: Loans receivable..................... $ (194) $ 1,373 $ 1,179 Securities, taxable.................. 3 (187) (184) Securities, non-taxable.............. (26) 299 273 Equity securities.................... 2 9 11 Interest earning deposits in banks........................... (2) (2) (4) Federal funds sold................... (10) (51) (61) --------------------------------------------------------------------- Total interest income....... $ (227) $ 1,441 $ 1,214 Interest Paid On: Interest bearing demand (NOW) deposits........................ $ (114) $ 85 $ (29) Money market deposits................ (15) 37 22 Savings deposits..................... (20) 26 6 Time deposits........................ (196) 474 278 Federal funds purchased.............. -- 32 32 Federal Home Loan Bank advances....................... 4 111 115 --------------------------------------------------------------------- Total interest expense...... $ (341) $ 765 $ 424 --------------------------------------------------------------------- Net interest income.................. $ 114 $ 676 $ 790 =====================================================================
INTEREST RATE SENSITIVITY An important component of both earnings performance and liquidity is management of interest rate sensitivity. Interest rate sensitivity reflects the potential effect on net interest income of a movement in market interest rates. BOE is subject to interest rate sensitivity to the degree that its interest earning assets mature or reprice at a different time interval from that of its interest-bearing liabilities.
INTEREST SENSITIVITY ANALYSIS Maturing or Repricing In: ---------------------------------------------------------------------------------------------------------------------------------- December 31, 2001 (Dollars in thousands) . 3 MONTHS 4-12 MONTHS OVER 1 YEAR TOTAL ---------------------------------------------------------------------------------------------------------------------------------- Interest-sensitive assets: Cash....................................................................... $ 6,093 $ -- $ -- $ 6,093 Loans (1).................................................................. 55,619 18,068 80,254 153,961 Loans held for resale...................................................... 906 -- -- 906 Short-term investments..................................................... 7,617 -- -- 7,617 Securities................................................................. 945 3,373 34,517 38,835 ---------------------------------------------------------------------------------------------------------------------------------- Total interest-sensitive assets............................................ $ 71,180 $ 21,461 $ 114,771 $ 207,412 ---------------------------------------------------------------------------------------------------------------------------------- Interest-sensitive liabilities: .............................................. Non-interest bearing deposits.............................................. $ -- $ -- $ 18,011 $ 18,011 Certificates of deposit.................................................... 16,307 60,287 44,209 120,803 Interest-bearing checking, money market .................................. Deposits, now and savings accounts (2)................................ 4,968 14,905 29,810 49,683 Federal home loan bank advances............................................ -- 4,000 4,000 8,000 ---------------------------------------------------------------------------------------------------------------------------------- Total interest sensitive liabilities....................................... 21,275 79,192 96,030 196,497 ---------------------------------------------------------------------------------------------------------------------------------- Period gap................................................................. 49,905 (57,731) 18,741 10,915 ---------------------------------------------------------------------------------------------------------------------------------- Cumulative gap............................................................. 49,905 (7,826) 10,915 Ratio of cumulative interest sensitive assets to interest sensitive liabilities.......................................... 334.6% 92.2% 105.6% Ratio of cumulative gap to interest sensitive assets .......................... 24.1% -3.8% 5.3%
(1) Excludes non-accrual loans. (2) The Bank has determined that interest-bearing checking, money market deposits, NOW and savings accounts are not as rate-sensitive as other funding sources to change in market rates, and therefore has allocated them evenly over a five-year period. BOE FINANCIAL SERVICES OF VIRGINIA, I N C. 25 ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS PROVISION FOR LOAN LOSSES Provision for loan losses are charged to income to bring the total allowance for loan losses to a level deemed appropriate by management of the Corporation based on such factors as historical experience, the volume and type of lending conducted by the Corporation, the amount of non-performing assets, regulatory policies, generally accepted accounting principles, general economic conditions, and other factors related to the collectibility of loans in the Corporation's portfolio. The provision for loan losses was $390,000 in 2001, a decrease of $65,000, or 14.3%, compared to the $455,000 in provision for 2000. The decrease in provision for loan losses reflects a decrease of $112,000 in net charged-off loans in 2001. Net charged-off loans were $237,000 in 2000 after charging off $267,000 and recovering a total of $30,000. This compares to $125,000 in net charge-offs in 2001 after charging off $171,000 in loans and recognizing $46,000 in recoveries. This decrease in the net charge-offs from 2000 to 2001 is 47.3%. Management believes the allowance for loan losses is adequate to absorb losses inherent in the loan portfolio. In view of the Corporation's plans to continue its loan growth, management will continue to closely monitor the performance of its portfolio and make additional provisions as necessary. NON-INTEREST INCOME Non-interest income in 2001 was $1,120,000, an increase of $161,000, or 16.8%, from non-interest income of $959,000 in 2000. The largest component of the noninterest income increase was $144,000, or 24.7% in service charge income, which was $727,000 in 2001, compared to $582,000 in 2000. This increase in service charge income was the result of greater deposit volumes and greater management focus on collection in noninterest income areas. Other noninterest income was $384,000 in 2001, an increase of 6.4%, or $23,000 over the $361,000 reported in 2000. Net security gains decreased $14,000, from $16,000 in 2000 to $2,000 in 2001.Net gains on sale of loans totaled $7,000 in 2001, compared to net losses of $800 in 2000. NON-INTEREST EXPENSE Non-interest expense was $5.4 million in 2001, an increase of $114,000, or 2.2% over non-interest expense of $5.3 million in 2000. Data processing of $345,000 comprised the largest component the increase, 34.4%, or $89,000 higher than the 2000 data processing total of $256,000. On March 23, 2001 the Bank of Essex converted its core data processing system. The increase in this category primarily reflects conversion costs from this change. Salaries increased $84,000 from $2.1 million in 2000 to $2.2 million in 2001. Employee benefits and costs were $58,000 higher in 2001 than in 2000, increasing from $477,000 in 2000 to $535,000 in 2001. Occupancy expenses increased 2.8%, or $8,000, from $284,000 in 2000 to $292,000 in 2001. Postage costs increased $14,000, or 9.6%, to $156,000 for 2001. Stationery and printing costs increased $9,000, or 8.2%, from $114,000 in 2000 to $123,000 in 2001. Two categories of expenses decreased in 2001 compared to 2000. Other operating expenses decreased $123,000, or 9.3%, from $1.3 million in 2000 to $1.2 million in 2001. Furniture and equipment expenses decreased $25,000 from $490,000 in 2000 to $465,000 in 2001. ANALYSIS OF FINANCIAL CONDITION LOAN PORTFOLIO The loan portfolio is the largest category of the Corporation's earning assets and is comprised of commercial loans, agricultural loans, real estate loans, home equity loans, construction loans, consumer loans, and participation loans with other financial institutions. The primary markets in which the Corporation makes loans include the counties of Essex, King and Queen, King William, Hanover, Henrico and the City of Richmond. The mix of the loan portfolio is weighted toward loans secured by real estate and commercial loans. In management's opinion, there are no significant concentrations of credit with particular borrowers engaged in similar activities. Net loans consist of total loans minus the allowance for loan losses, unearned discounts and deferred loan fees. The Corporation's net loans were $151.9 million at December 31, 2001, representing an increase of 8.9%, or $12.4 million over net loans of $139.5 million at December 31, 2000. The average balance of loans as a percentage of average earning assets was 79.1% in 2001, down slightly from 80.7% in 2000. In the normal course of business, the Corporation makes various commitments and incurs certain contingent liabilities which are disclosed but not reflected in the consolidated financial statements contained in this Annual Report, including standby letters of credit and commitments to extend credit. At December 31, 2001, commitments for standby letters of credit totaled $1.6 million and commitments to extend credit totaled $32.0 million. Commitments for standby letters of credit totaled $3.0 million at December 31, 2000 and commitments to extend credit totaled $18.7 million. LOAN PORTFOLIO (Dollars in thousands)
Years Ended December 31, 2001 2000 1999 1998 1997 ------------------------------------------------------------------------------------- Loans: Commercial................. $ 32,714 $ 29,783 $ 25,200 $ 20,387 $ 14,711 Real Estate................ 110,336 94,662 85,254 73,426 62,568 Real Estate-construction .. 3,505 6,242 4,665 4,186 3,628 Installment & other........ 7,406 10,624 9,696 8,605 7,936 ------------------------------------------------------------------------------------- Total loans............ $ 153,961 $ 141,311 $ 125,815 $ 106,604 $ 88,843 Allowance for loan losses... (2,084) (1,819) (1,601) (1,344) (1,185) ------------------------------------------------------------------------------------- Net loans................... $ 151,877 $ 139,492 $ 124,214 $ 105,260 $ 87,658 =====================================================================================
26 2001 ANNUAL REPORT ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS ASSET QUALITY Generally, interest on loans is accrued and credited to income based upon the principal balance outstanding. It is typically the Corporation's policy to discontinue the accrual of interest income and classify a loan on non-accrual when principal or interest is past due 90 days or more and the loan is not wellsecured and in the process of collection, or when, in the opinion of management, principal or interest is not likely to be paid in accordance with the terms of the obligation. The Corporation will generally charge-off loans after 120 days of delinquency unless they are adequately collateralized, in the process of collection and, based on a probable specific event, management believes that the loan will be repaid or brought current within a reasonable period of time. Loans will not be returned to accrual status until future payments of principal and interest appear certain. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Subsequent payments received are applied to the outstanding principal balance. Real estate acquired by the Corporation as a result of foreclosure or in-substance foreclosure is classified as other real estate owned ("OREO"). Such real estate is recorded at the lower of cost or fair market value less estimated selling costs, and the estimated loss, if any, is charged to the allowance for loan losses at that time. Further allowances for losses are recorded as charges to other expenses at the time management believes additional deterioration in value has occurred. The Corporation had no OREO at December 31, 2001 or at December 31, 2000. The Corporation's credit policies generally require a loan-tovalue ratio of 85% for secured loans. Management attributes its low level of non-performing assets to its loan-to-value ratio criterion and other conservative lending policies. At December 31, 2001, loans past due 90 days or more and still accruing interest totaled $988,000, of which $206,000 was secured by real estate. The remainder were secured and unsecured installment and commercial loans. As of December 31, 2000, loans past due 90 days or more and still accruing totaled $303,000, of which $685,000 was secured by real estate with the remainder consisting of secured and unsecured commercial and installment loans. Non-accrual loans at December 31, 2001 were $760,000 and at December 31, 2000 non-accrual loans were $956,000. NON-PERFORMING ASSETS
Years Ended December 31, 2001 2000 1999 1998 1997 ----------------------------------------------------------------------------------------------- (Dollars in thousands) Nonaccrual loans................... $ 760 $ 956 $ 1,319 $ 485 $ 452 Restructured loans................. -- -- -- -- -- ----------------------------------------------------------------------------------------------- Total nonperforming loans........ $ 760 $ 956 $ 1,319 $ 485 $ 452 ----------------------------------------------------------------------------------------------- Foreclosed assets.................... -- -- 72 -- -- Total nonperforming assets....... $ 760 $ 956 $ 1,391 $ 485 $ 452 =============================================================================================== Loans past due 90 or more days accruing interest........... $ 988 $ 303 $ 632 $ 1,216 $ 274 Nonperforming loans to total loans, at period end............. 0.49% 0.68% 1.05% 0.45% 0.51% Nonperforming assets to period end assets................ 0.35% 0.49% 0.83% 0.33% 0.35%
The Bank has reserved $932,675 in the allowance for loan losses for potential problem loans. These loans present potential risk of non-payment and are not included in the numbers above. ALLOWANCE FOR LOAN LOSSES In originating loans, the Corporation recognizes that credit losses will be experienced and the risk of loss will vary with, among other things, general economic conditions, the type of loan being made, the creditworthiness of the borrower over the term of the loan and, in the case of a collateralized loan, the quality of the collateral for such loan. The Corporation maintains an allowance for loan losses based upon, among other things, historical experience, the volume and type of lending conducted by the Corporation, the amount of non-performing assets, regulatory policies, generally accepted accounting principles, general economic conditions, and other factors related to the collectibility of loans in the Corporation's portfolios. In addition to unallocated allowances, specific allowances are provided for individual loans when ultimate collection is considered questionable by management after reviewing the current status of loans, which are contractually past due and after considering the net realizable value of any collateral for the loan. Management actively monitors the Corporation's asset quality in a continuing effort to charge-off loans against the allowance for loan losses when appropriate and to provide specific loss allowances when necessary. Although management believes it uses the best information available to make determinations with respect to the allowance for loan losses, future adjustments may be necessary if economic conditions differ from the assumptions used in making the initial determinations. As of December 31, 2001, the allowance for loan losses amounted to $2.1 million, or 1.35% of total loans. The Corporation's allowance for loan losses was $1.8 million at December 31, 2000, or 1.29% of total loans. BOE FINANCIAL SERVICES OF VIRGINIA, INC. 27 ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS The allowance for loan losses as a percentage of non-performing assets was 274.21% at December 31, 2001. The ratio of allowance for loan losses as a percentage of non-performing assets at December 31, 2000 was 190.27%. ALLOWANCE FOR LOAN LOSSES
Years Ended December 31, 2001 2000 1999 1998 1997 ----------------------------------------------------------------------------------------------------- (Dollars in thousands) Balance, beginning of period.......... $ 1,819 $ 1,601 $ 1,344 $ 1,185 $ 1,004 Less chargeoffs: Commercial........................ 21 85 52 175 -- Installment....................... 150 172 80 79 94 Real estate....................... -- 10 -- -- 20 ----------------------------------------------------------------------------------------------------- Total chargeoffs................ 171 267 132 254 114 ----------------------------------------------------------------------------------------------------- Plus recoveries: Commercial........................ 3 2 2 -- -- Installment....................... 43 28 39 29 31 Real estate....................... -- -- 3 4 14 ----------------------------------------------------------------------------------------------------- Total recoveries................ 46 30 44 33 45 ----------------------------------------------------------------------------------------------------- Net chargeoffs........................ 125 237 88 221 69 ----------------------------------------------------------------------------------------------------- Provision for loan losses............. 390 455 345 380 250 ----------------------------------------------------------------------------------------------------- Balance, end of period................ $ 2,084 $ 1,819 $ 1,601 $ 1,344 $ 1,185 ===================================================================================================== Allowance for loan losses to period end loans.............. 1.35% 1.29% 1.27% 1.26% 1.33% Allowance for loan losses to non performing assets........ 274.21% 190.27% 115.10% 277.11% 262.17% Net chargeoffs to average loans....... 0.08% 0.17% 0.11% 0.22% 0.08%
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
Years Ended December 31, (Dollars in thousands) 2001 Percent(1) 2000 Percent(1) 1999 Percent(1) 1998 Percent(1) ---------------------------------------------------------------------------------------------------------------- Commercial............. $1,863 21.2% $1,301 21.1% $ 683 20.0% $ 646 19.1% Installment............ 18 4.8% 340 7.5% 340 7.7% 209 8.1% Real Estate............ 203 74.0% 178 71.4% 578 72.3% 489 72.8% ---------------------------------------------------------------------------------------------------------------- $2,084 100.0% $1,819 100.0% $1,601 100.0% $1,344 100.0% Years Ended December 31, (Dollars in thousands) 1997 Percent/(1)/ ---------------------------------------------- Commercial............. $ 592 16.6% Installment............ 43 74.5% Real Estate............ 550 8.9% ---------------------------------------------- $1,185 100.0%
(1) Percent of loans in each category to total loans. INVESTMENT ACTIVITIES Securities available-for-sale are used as part of the Corporation's interest rate risk management strategy and may be sold in response to changes in interest rate, changes in prepayment risk, liquidity needs, the need to increase regulatory capital and other factors. The fair value of the Corporation's securities available-for-sale totaled $38.3 million at December 31, 2001, compared to $31.8 million at December 31, 2000. Held-to-maturity securities at amortized cost were $3.1 million at December 31, 2000. On January 1, 2001 the Corporation reclassified $3,120,778 in held-to-maturity securities to the available- for-sale category. There were no held-to-maturity securities at December 31, 2001. The Corporation is required to account for the effect of market changes in the value of securities available-for-sale ("AFS") under Statement of Financial Accounting Standard #115 ("SFAS 115"). The market value of the December 31, 2001 securities available-for-sale portfolio was $779,000 greater than the associated book value of these securities. On December 31, 2000 the market value of securities available-for-sale exceeded their book value by $259,000. As of December 31, 2001 the book balance of the investment portfolio increased $3.3 million, from $35.0 million at December 31, 2000 to $38.3 million at December 31, 2001. This increase in BOE's investment portfolio was accomplished by increased short-term funding through advances from the Federal Home Loan Bank of Atlanta. Management feels this shortterm investment activity reduces interest rate sensitivity. 28 2001 ANNUAL REPORT ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS SECURITIES PORTFOLIO
Years Ended December 31, 2001 2000 ---------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE ---------------------------------------------------------------------------------------------------------------------------------- Available-for-Sale: U.S. Agency, mortgage-backed securities.......... $ 7,084 $ 7,159 $ 10,168 $ 10,164 State, county and municipal...................... 24,687 25,029 16,398 16,451 Other............................................ 5,719 6,080 5,025 5,235 ---------------------------------------------------------------------------------------------------------------------------------- Total Available-for-Sale...................... $37,490 $38,268 $ 31,591 $ 31,850 ---------------------------------------------------------------------------------------------------------------------------------- Held-to-Maturity: U.S. Agency, mortgage-backed securities......... $ -- $ -- $ 1,140 $ 1,154 State, county and municipal..................... -- -- 1,781 1,822 Other........................................... -- -- 200 200 ---------------------------------------------------------------------------------------------------------------------------------- Total Held-to-Maturity ....................... $ -- $ -- $ 3,121 $ 3,176 ---------------------------------------------------------------------------------------------------------------------------------- Total Investment Securities/(1)/................ $37,490 $38,268 $ 34,712 $ 35,026 /(1)/ Excludes Equity Securities. ================================================================================================================================== Years Ended December 31, 1999 -------------------------------------------------------------------------------------------- (Dollars in thousands) AMORTIZED COST FAIR VALUE -------------------------------------------------------------------------------------------- Available-for-Sale: U.S. Agency, mortgage-backed securities.......... $ 5,398 $ 5,230 State, county and municipal...................... 14,534 14,204 Other............................................ 1,185 1,154 -------------------------------------------------------------------------------------------- Total Available-for-Sale...................... $21,117 $20,588 -------------------------------------------------------------------------------------------- Held-to-Maturity: U.S. Agency, mortgage-backed securities......... $ 803 $ 786 State, county and municipal..................... 2,038 2,017 Other........................................... 800 796 -------------------------------------------------------------------------------------------- Total Held-to-Maturity........................ $ 3,641 $ 3,599 -------------------------------------------------------------------------------------------- Total Investment Securities/(1)/................ $24,758 $24,187 /(1)/ Excludes Equity Securities. ============================================================================================
SECURITIES PORTFOLIO--MATURITY AND YIELDS
December 31, 2001 (Dollars in thousands) UNDER 1 YEAR 1 TO 5 YEARS 5 TO 10 YEARS OVER 10 YEARS TOTAL -------------------------------------------------------------------------------------------------------------------------------- Maturity Distribution: U.S. Agency, mortgage-backed securities......... $ 1,877 $ 4,814 $ 393 $ -- $ 7,084 State, county and municipal-tax exempt.......... 531 7,945 12,968 581 22,025 State, county and municipal-taxable............. -- 1,206 1,456 -- 2,662 Other/(1)/...................................... 565 4,361 793 -- 5,719 -------------------------------------------------------------------------------------------------------------------------------- Total Investment Securities................... $ 2,973 $ 18,326 $ 15,610 $ 581 $ 37,490 -------------------------------------------------------------------------------------------------------------------------------- Weighted Average Yield: U.S. Agency, mortgage-backed securities......... 6.39% 5.80% 7.68% -- 6.06% State, county and municipal-tax exempt.......... 7.85% 6.50% 6.50% 6.77% 6.44% State, county and municipal-taxable............. -- 6.14% 6.08% -- 6.15% Other........................................... 7.01% 7.29% 6.82% -- 7.19% -------------------------------------------------------------------------------------------------------------------------------- Weighted Average Yield by Category............. 6.77% 6.47% 6.51% 6.77% 6.47% ================================================================================================================================
DEPOSITS The Corporation primarily uses deposits to fund its loans and investment portfolio. In 2001 the Corporation's deposits grew $24.1 million, or 14.7%. Total deposits at December 31, 2001 were $188.5 million compared to $164.4 million at December 31, 2000. Average deposits were $169.5 million in 2001 compared to $153.7 million in 2000, an increase of 10.3%. Certificates of deposit showed the largest dollar volume gain at $14.1 million, on average, from 2000 to 2001. Certificates of deposit had an average balance of $107.8 million in 2001 and an average balance of $93.7 million in 2000. The Corporation offers a variety of deposit accounts to individuals and small-to-medium sized businesses. Deposit accounts include checking, savings, money market deposit accounts and certificates of deposit. Certificates of deposit of $100,000 or more totaled $20.8 million at December 31, 2001 and $18.2 million at December 31, 2000, an increase of $2.6 million, or 14.3%. AVERAGE DEPOSITS AND AVERAGE RATES PAID
Years Ended December 31, 2001 2000 1999 ------------------------------------------------------------------------------------------------ (Dollars in thousands) AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE BALANCE RATE BALANCE RATE BALANCE RATE ------------------------------------------------------------------------------------------------ Interest bearing deposits: NOW accounts....................... $ 19,666 1.72% $ 19,071 2.07% $ 18,027 2.14% Money market deposits.............. 10,103 2.91% 9,906 3.24% 10,478 3.03% Regular savings.................... 15,079 2.59% 14,429 3.00% 14,720 3.00% Certificates of deposit............ 107,750 5.48% 93,650 5.61% 78,340 5.13% ------------------------------------------------------------------------------------------------ Total interest bearing deposits.. $152,598 4.54% $137,056 4.67% $121,565 4.25% ----- ----- ----- Noninterest bearing deposits............ 16,903 16,660 14,984 ------------------------------------------------------------------------------------------------ Total deposits................... $169,501 $153,716 $136,549 ================================================================================================
BOE FINANCIAL SERVICES OF VIRGINIA, INC. 29 ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS MATURITIES OF CERTIFICATES OF DEPOSIT OF $100,000 OR MORE AT DECEMBER 31, 2001 (Dollars in thousands) DOLLARS PERCENT ----------------------------------------------------- Three months or less .......... $ 2,824 13.57% Over three months to six months 10,377 49.87% Over six months to one year ... 6,138 29.50% Over one year ................. 1,471 7.07% ----------------------------------------------------- $20,810 100.00% ===================================================== SHORT-TERM BORROWINGS BOE occasionally finds it necessary to purchase funds on a short-term basis due to fluctuations in loan and deposit levels. BOE has several arrangements under which it may purchase funds. Federal Funds guidance facilities are maintained with correspondent banks totaling $13.5 million for the year ending December 31, 2001. No amounts had been drawn on these facilities at December 31, 2001. As another means of borrowing funds, BOE may borrow from the Federal Home Loan Bank of Atlanta. On February 2, 2000 the Corporation entered into an $11.0 million adjustable rate agreement with the Federal Home Loan Bank of Atlanta for twelve months at an initial rate of 6.07%. This note repriced, based on 3 month intervals on May 2, 2000 at 6.36125%, August 2, 2000 at 6.69188%, and November 2, 2000 at 6.73%. Subsequently, on February 2, 2001 that $11.0 million note was renewed for a period of nine months at a fixed rate of 5.26% and matured on November 2, 2001. At that time the note was paid down to $8,000,000 and a Principal Reducing Credit was established with $4,000,000 due November 4, 2002 and $4,000,000 due November 3, 2003. The average cost of this borrowing is 2.75%. Total expense on Federal Home Loan Bank of Atlanta borrowings in 2001 was $541,000 and in 2000 was $693,000. Total expense on Federal Funds purchased and other borrowings was $16,000 in 2001 and $11,000 in 2000. CAPITAL REQUIREMENTS The determination of capital adequacy depends upon a number of factors, such as asset quality, liquidity, earnings, growth trends and economic conditions. The Corporation seeks to maintain a strong capital base to support its growth and expansion plans, provide stability to current operations and promote public confidence in the Corporation. The Corporation's capital position exceeds all regulatory minimums. The federal banking regulators have defined three tests for assessing the capital strength and adequacy of banks, based on two definitions of capital. "Tier 1 Capital" is defined as a combination of common and qualifying preferred stockholders' equity less goodwill. "Tier 2 Capital" is defined as qualifying subordinated debt and a portion of the allowance for loan losses. "Total Capital" is defined as Tier 1 Capital plus Tier 2 Capital. Three risk-based capital ratios are computed using the above capital definitions, total assets and risk-weighted assets and are measured against regulatory minimums to ascertain adequacy. All assets and off-balance sheet risk items are grouped into categories according to degree of risk and assigned a riskweighting and the resulting total is risk-weighted assets. "Total Risk-based Capital" is Total Capital divided by risk-weighted assets. The Leverage ratio is Tier 1 Capital divided by total average assets. The following table shows the Corporation's capital ratios: CAPITAL RATIOS Years Ended December 31, 2001 2000 1999 --------------------------------------------------- Tier 1 Risk-based Capital 9.95% 10.51% 11.03% Total Risk-based Capital 11.14% 11.73% 12.26% Leverage Ratio 8.41% 8.27% 8.76% LIQUIDITY Liquidity represents the Corporation's ability to meet present and future financial obligations through either the sale or maturity of existing assets or the acquisition of additional funds through liability management. Liquid assets include cash, interest- bearing deposits with banks, federal funds sold, and certain investment securities. As a result of the Corporation's management of liquid assets and the ability to generate liquidity through liability funding, management believes that the Corporation maintains overall liquidity sufficient to satisfy its depositors' requirements and meet its customers credit needs. As of December 31, 2001, cash, federal funds sold, held-tomaturity securities maturing within one year and available-forsale securities represented 26.24% of deposits and other liabilities compared to 22.02% at December 31, 2000. At December 31, 2001 100.0% of BOE's total investment securities were available- for-sale with a market value of $779,000 greater than their book value. Asset liquidity is also provided by managing loan maturities. At December 31, 2001 approximately $73.7 in loans would mature or reprice with a one-year period. The following table summarizes the Corporation's liquid assets for the periods indicated: SUMMARY OF LIQUID ASSETS (Dollars in thousands) Years Ended December 31, 2001 2000 1999 ----------------------------------------------------------- Cash and due from banks $ 6,093 $ 4,354 $ 6,133 Federal funds sold 7,617 2,413 -- Investment securities -- 292 801 Available for sale securities, at fair value 38,268 31,850 20,588 ----------------------------------------------------------- Total liquid assets $ 51,978 $ 38,909 $ 27,522 =========================================================== Deposits and other liabilities $ 198,124 $ 176,718 $ 151,913 Ratio of liquid assets to deposits and other liabilities 26.24% 22.02% 18.12% 30 2001 ANNUAL REPORT ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL RATIOS Financial ratios give investors a way to compare corporations within industries to analyze financial performance. Return on average assets is net income as a percentage of average total assets. It is a key profitability ratio that indicates how effectively a bank has used its total resources. Return on average assets was 1.00% in 2001 and 1.01% in 2000. Return on average equity is net income as a percentage of average shareholders' equity. It provides a measure of how productively a Corporation's equity has been employed. BOE's return on average equity was 10.97% in 2001 and 11.38% in 2000. Dividend payout ratio is the percentage of net income paid to shareholders as cash dividends during a given period. It is computed by dividing dividends per share by net income per share. BOE has a dividend payout ratio of 29.18% in 2001 and 29.78% in 2000. The Corporation utilizes leverage within guidelines prescribed by federal banking regulators as described in the section "Capital Requirements" in the preceding section. Leverage is average stockholders' equity divided by total quarterly average assets. This ratio was 8.4% in 2001 and 8.3% in 2000. FINANCIAL RATIOS Years Ended December 31, 2001 2000 1999 --------------------------------------------------- Return on average assets 1.00% 1.01% 0.90% Return on average equity 10.97% 11.38% 9.12% Dividend payout ratio 29.18% 29.78% 37.44% Average equity to average asset ratio 9.13% 8.89% 9.87% IMPACT OF INFLATION, CHANGING PRICES AND MONETARY POLICIES The consolidated financial statements and related financial data concerning the Corporation presented herein have been prepared in accordance with generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. The primary effect of inflation on the operations of the Corporation is reflected in increased operating costs. Unlike industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, changes in interest rates have a more significant effect on the performance of a financial institution than do the effects of changes in the general rate of inflation and changes in prices. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services. Interest rates are highly sensitive to many factors beyond the Corporation's control, including the influence of domestic and foreign economic conditions and the monetary and fiscal policies of the U.S. government and federal agencies, particularly the Federal Reserve. The Federal Reserve implements national monetary policies such as seeking to curb inflation and combat recession by its open market operations in U.S. government securities, control of the discount rate applicable to borrowing by banks, and establishment of reserve requirements against bank deposits. The actions of the Federal Reserve in these areas influence the growth of bank loans, investments and deposits, and affect the interest rates charged on loans and paid on deposits. The nature, timing and impact of any future changes in federal monetary and fiscal policies on the Corporation and its results of operations are not predictable. RECENT ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board issued two statements - Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations," and SFAS No.142, "Goodwill and Other Intangible Assets," which will potentially impact the accounting for goodwill and other intangible assets. SFAS No. 141 eliminates the pooling method of accounting for business combinations and requires that intangible assets that meet certain criteria be reported separately from goodwill. The Statement also requires negative goodwill arising from a business combination to be recorded as an extraordinary gain. SFAS No. 142 eliminates the amortization of goodwill and other intangibles that are determined to have an indefinite life. The Statement requires, at a minimum, annual impairment tests for goodwill and other intangible assets that are determined to have an indefinite life. Upon adoption of these Statements, an organization is required to re-evaluate goodwill and other intangible assets that arose from business combinations entered into before July 1, 2001. If the recorded other intangible assets do not meet the criteria for recognition, they should be classified as goodwill. Similarly, if there are other intangible assets that meet the criteria for recognition but were not separately recorded from goodwill, they should be reclassified from goodwill. An organization also must reassess the useful lives of intangible assets and adjust the remaining amortization periods accordingly. Any negative goodwill must be written-off. The standards generally are required to be implemented by the Corporation in its 2002 financial statements. The adoption of these standards will not have a material impact on the consolidated financial statements. In June 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and associated retirement costs. It requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. This Statement is effective for financial statements issued for fiscal years beginning after June 15, 2002. The Statement is not expected to have a material effect on the Corporation's consolidated financial statements. In August 2001, the Financial Accounting Standards Board BOE FINANCIAL SERVICES OF VIRGINIA, INC. 31 ------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." The Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. It also establishes a single accounting model for long-lived assets to be disposed of by sale, which includes long-lived assets that are part of a discontinued operation. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after December 15, 2001. The Statement is not expected to have a material effect on the Corporation's consolidated financial statements. 32 2001 ANNUAL REPORT ------------------------------------------------------------------------------- SHAREHOLDER INFORMATION CORPORATE HEADQUARTERS BOE Financial Services of Virginia, Inc. P. O. Box 965 323 Prince Street Tappahannock, Virginia 22560 ANNUAL MEETING The Annual Meeting of Stockholders will be held at 11:00 a.m. on Friday, May 10, 2002 at the Tappahannock-Essex Volunteer Fire Department, Tappahannock, Virginia. All stockholders are cordially invited to attend. STOCK TRANSFER/ TRANSFER AGENT Bank of Essex P. O. Box 965 323 Prince Street Tappahannock, Virginia 22560 INDEPENDENT AUDITOR Yount, Hyde & Barbour, P.C 50 South Cameron Street Winchester, Virginia 22604 COMMON STOCK BOE Financial Services of Virginia common stock is traded on the Nasdaq Small Cap Market under the symbol BSXT. On December 31, 2001 there were approximately 1,100 shareholders. CORPORATE COUNSEL McGuire Woods, L.L.P. One James Center 901 East Cary Street Richmond, Virginia 23219-4030 804-775-1000 Phone 804-775-1061 Fax www.mcguirewoods.com Attn: Mr. Joseph C. Carter, III INVESTOR RELATIONS A copy of BOE Financial Services of Virginia's Form 10K will be furnished without charge to stockholders upon written request to: Bruce E. Thomas Senior Vice President and Chief Financial Officer BOE Financial Services of Virginia, Inc. P. O. Box 965 Tappahannock, Virginia 22560 STOCK AND DIVIDEND INFORMATION A total of 1,174,078 shares were outstanding on December 31, 2001 held by approximately 1,100 shareholders of record. The Corporation's stock trades on the Nasdaq Small Cap Market under the symbol BSXT. The Nasdaq Stock Market is a highly regulated electronic securities market whose trading is supported by a communications network liking them to quotation dissemination, trade reporting, and order execution. The Nasdaq is operated by The Nasdaq Stock Market, Inc., a wholly-owned subsidiary of the National Association of Securities Dealers, Inc. Listed below are the high and low prices for the common stock for the last eight quarters ended December 31, 2001.
2001 High Low Close 2000 High Low Close ------------------------------------------------------------------------------------------------- 1st Quarter $15.25 $12.25 $14.38 1st Quarter $14.25 $11.00 $13.00 2nd Quarter 16.50 13.50 15.75 2nd Quarter 13.50 11.18 12.50 3rd Quarter 17.50 15.00 15.50 3rd Quarter 14.00 10.75 11.75 4th Quarter 18.50 15.00 17.35 4th Quarter 13.50 11.00 13.38
DIVIDEND REINVESTMENT PLAN BOE Financial Services of Virginia's Dividend Reinvestment Plan provides each registered stockholder with an economical method of investing cash dividends into additional shares of the Corporation's common stock. Key advantages include reinvestment of dividends without commission and increased ownership. For a prospectus on the Dividend Reinvestment Plan, contact Bruce E. Thomas at 1-800-443-5524 or at the mailing address listed above.