SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number 1-6580
December 31, 2001
FIRST VIRGINIA BANKS, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-0497561
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
6400 Arlington Boulevard
Falls Church, Virginia 22042-2336
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 703/241-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock, Par Value $1.00 New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Convertible Preferred Stock, Par Value $10.00
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes [_X_] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the common stock of the registrant held by
nonaffiliates as of February 28, 2002, was approximately $2,481,134,000. The
registrant's voting preferred stock is not actively traded and the market
value of such stock is not readily determinable.
On February 28, 2002, there were 47,837,926 shares of common stock
outstanding.
INDEX
Page
----
Part I
Item 1. Business 3
General 3
Segments 3
Competitive Factors 3
Regulation 3
Employees 4
Item 2. Properties 4
Item 3. Legal Proceedings 4
Item 4. Submission of Matters to a Vote of Security Holders 5
Executive Officers 5
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 6
Item 6. Selected Financial Data 7/8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8/45
Item 7A.Quantitative and Qualitative Disclosure About
Market Risk 38/41
Item 8. Financial Statements and Supplementary Data 46/78
Part III
Item 10. Directors and Executive Officers of the Registrant 79
Item 11. Executive Compensation 79
Item 12. Security Ownership of Certain Beneficial Owners
and Management 79
Item 13. Certain Relationships and Related Transactions 79
Part IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 80/82
PART I
------
ITEM 1. BUSINESS
--------
General
- -------
First Virginia Banks, Inc., (FVBI) is a multibank holding company
registered under the Bank Holding Company Act of 1956 (BHC Act), and is
headquartered in Falls Church, Virginia. FVBI was incorporated under the
laws of the Commonwealth of Virginia in October 1949.
FVBI currently operates eight commercial banks, (the banking companies).
In addition, FVBI owns, directly or indirectly through its banking companies,
several nonbanking companies which offer bank-related services. The
nonbanking companies operate offices in the banks' markets which provide
services to customers of the banking companies and in addition have offices
in adjoining states.
FVBI is the largest bank holding company with headquarters in the state
and the fifth largest banking organization in Virginia. Total assets were
$10.623 billion as of December 31, 2001.
FVBI continually evaluates its operations, organizational structure and
product offerings, exploring opportunities to enhance customer service and
increase shareholder value. During 2001, as part of this normal review, FVBI
acquired the $531 million James River Bankshares, Inc. and merged its four
banks into existing First Virginia banks. FVBI also divested its bank
centered in the Knoxville, Tennessee, area.
Segments
- --------
For segment reporting disclosure, reference is made to Note 20 of the
Notes to Consolidated Financial Statements.
Competitive Factors
- -------------------
Other banking organizations have been active in opening new banking
offices through acquisition and control of existing banks, mergers, branching
and formation of new banks and in acquiring or forming bank-related
subsidiaries in areas where FVBI's banking companies compete. Accordingly,
each banking company faces strong competition. Savings and loan associations
and credit unions actively compete for deposits. Such institutions, as well
as consumer finance companies, mortgage companies, loan production offices of
out-of-state banks, factors, insurance companies and pension trusts are
important competitors for various types of loans. The bank-related member
companies also operate in highly competitive fields.
Based on the most recent available data, the service area of our eight
banking companies reached approximately 89% of Virginia's population with 310
offices, approximately 40% of Maryland's population with 56 offices, and
approximately 18% of East Tennessee's population with 13 offices.
Regulation
- ----------
As a bank holding company, FVBI is subject to regulation under the BHC
Act, and to inspection, examination and supervision by the Federal Reserve
Board, the Federal Deposit Insurance Corporation and the state regulators of
Virginia, Maryland and Tennessee which have jurisdiction over financial
institutions. Under the BHC Act, bank holding companies generally may not own
or control more than 5% of the voting shares of any company, including a
bank, without the Federal Reserve Board's prior approval. In addition, bank
holding companies generally may engage, directly or indirectly, only in
banking and such other activities as are determined by the Federal Reserve
Board to be financial in nature or incidental or complementary to a financial
activity.
Various governmental requirements, including Sections 23A and 23B of the
Federal Reserve Act, limit borrowing by FVBI and its nonbank subsidiaries
from the banking companies. These requirements also limit various other
transactions among affiliates.
Under Federal Reserve policy, FVBI is expected to act as a source of
financial strength to each of the banking companies and to maintain resources
adequate to support each such subsidiary bank. This support may be required
at times when FVBI may not have the resources to provide it. In addition, any
capital loans by a bank holding company to any of its bank subsidiaries are
subordinate to the payment of deposits and to certain other indebtedness.
The corporation is subject to capital requirements and guidelines imposed
on bank holding companies by the Federal Reserve Board and the FDIC. These
requirements are discussed in Note 17 of the Notes to Consolidated Financial
Statements.
Various provisions of federal and state law limit the amount of dividends
the banking companies can pay to FVBI without regulatory approval. For
example, approval generally is required for any state-chartered bank that is
a member of the Federal Reserve System to pay any dividend that would cause
the bank's total dividends paid during any calendar year to exceed the sum of
the bank's net income during such calendar year plus the bank's retained net
income for the prior two calendar years (see Note 18 of the Notes to
Consolidated Financial Statements).
Employees
- ---------
As of December 31, 2001, the corporation and its subsidiaries employed
5,394 individuals (4,913 full-time equivalent).
ITEM 2. PROPERTIES
----------
The banking companies operated a total of 379 banking offices on December
31, 2001. Of these offices, 234 were owned and 145 were leased from others.
FVBI owns other properties, including the two corporate headquarters
buildings that house personnel of the corporation and its subsidiaries. The
corporation currently has no mortgage indebtedness.
As of December 31, 2001, a total annual base rental of approximately
$9,579,000 was being paid on leased premises. As of December 31, 2001, total
lease commitments having a term in excess of one year to persons other than
affiliates were approximately $53,084,000.
The majority of the properties are modern and well furnished and provide
adequate parking.
ITEM 3. LEGAL PROCEEDINGS
-----------------
There are no legal proceedings, other than ordinary routine litigation
incidental to the business, to which the corporation is a party or of which
any of their property is subject. Management believes that the liability, if
any, resulting from current litigation will not be material to the financial
statements of the corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
There was no submission of matters to a vote of security holders during
the fourth quarter of 2001.
EXECUTIVE OFFICERS
There are no arrangements or understandings between the executive
officers named below and any other person pursuant to which they were
selected as an officer.
There are no family relationships among the executive officers. All ages,
in parentheses, and positions are as of December 31, 2001.
BARRY J. FITZPATRICK (61)
Chairman of the Board, President and Chief Executive Officer since July,
1995. 32 years of service.
SHIRLEY C. BEAVERS, JR. (56)
Senior Executive Vice President since December 2000; Executive Vice President
from April 1992 to December 2000. 32 years of service.
RICHARD F. BOWMAN (49)
Executive Vice President, Treasurer and Chief Financial Officer since
December 1999; Senior Vice President, Treasurer and Chief Financial Officer
from 1994 to 1999. 26 years of service.
RAYMOND E. BRANN, JR. (61)
Executive Vice President since January, 1995. 37 years of service.
DOUGLAS M. CHURCH, JR. (51)
Senior Vice President since December 1994. 28 years of service.
THOMAS P. JENNINGS (54)
Senior Vice President and General Counsel since December 1995; Secretary from
December 1995 to April 1999. 23 years of service.
JOHN P. SALOP (50)
Senior Vice President since April 1996. 27 years of service.
CYNTHIA A. WILLIAMS (48)
Senior Vice President and General Auditor since October, 2001; Senior Vice
President of First Virginia Bank - Blue Ridge from August, 1995 to October,
2001. 16 years of service.
BARBARA J. CHAPMAN (54)
Vice President and Secretary of the corporation since April 1999 and
Assistant Corporate Secretary from 1993 to 1999. 8 years of service.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
-------------------------------------------------
STOCKHOLDER MATTERS
-------------------
The common stock of the corporation is listed for trading on the New York
Stock Exchange (Trading Symbol: FVB). The dividends declared per share and
the high and low sales price for common shares traded on the New York Stock
Exchange were:
Sales Price Dividends
2001 2000 Per Share
- -----------------------------------------------------------------------
High Low High Low 2001 2000
- -----------------------------------------------------------------------
1st Quarter $49.25 $38.54 $43.25 $29.00 $.38 $.36
2nd Quarter 47.30 41.70 42.75 34.81 .39 .37
3rd Quarter 48.75 40.60 44.75 35.00 .39 .37
4th Quarter 52.15 40.30 48.94 37.00 .40 .38
The corporation's preferred stock is not actively traded. The 5%
cumulative convertible preferred stock, Series A, pays a dividend of 12 1/2
cents per share in each quarter. The 7% cumulative convertible preferred
stock, Series B and C, pays a dividend of 17 1/2 cents per share each
quarter. The 8% cumulative convertible preferred stock, Series D, pays a
dividend of 20 cents per share each quarter. As of December 31, 2001, there
were 20,433 holders of record of the corporation's voting securities, of
which 19,886 were holders of common stock.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
A five-year summary of selected financial data follows:
- ------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------
(Dollar amounts in thousands, except per-share data)
Balance Sheet Data
Cash $ 386,171 $ 322,966 $ 441,825 $ 377,374 $ 386,832
Money market
investments 95,808 190,443 110,598 265,557 243,162
Securities 3,097,615 2,164,108 2,034,788 2,323,052 1,946,944
Loans, net of allowance 6,438,622 6,296,164 6,315,281 6,022,903 5,869,914
Other earning assets 26,872 18,717 28,683 37,164 40,397
Other assets 577,939 524,071 520,638 538,646 524,388
- ------------------------------------------------------------------------------
Total Assets $10,623,027 $9,516,469 $9,451,813 $9,564,696 $9,011,637
==============================================================================
Deposits $ 8,649,636 $7,825,816 $7,863,948 $8,055,078 $7,619,842
Short-term borrowings 639,351 539,469 420,297 385,996 251,687
Long-term debt 19,526 1,116 2,205 3,217 2,826
Other liabilities 162,028 157,362 134,876 130,077 126,126
Shareholders' Equity 1,152,486 992,706 1,030,487 990,328 1,011,156
- ------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity $10,623,027 $9,516,469 $9,451,813 $9,564,696 $9,011,637
==============================================================================
Operating Results
Interest income $ 653,323 $ 643,806 $ 640,622 $ 663,631 $ 631,119
Interest expense 212,769 219,311 206,914 234,332 222,927
- ------------------------------------------------------------------------------
Net interest income 440,554 424,495 433,708 429,299 408,192
Provision for loan losses 6,755 9,428 14,190 20,800 17,177
Noninterest income 149,997 118,030 136,604 116,775 103,552
Noninterest expense 332,740 322,145 327,294 325,678 303,243
- ------------------------------------------------------------------------------
Income before income tax 251,056 210,952 228,828 199,596 191,324
Provision for income tax 86,605 68,921 77,968 69,434 66,479
- ------------------------------------------------------------------------------
Net income $ 164,451 $ 142,031 $ 150,860 $ 130,162 $ 124,845
==============================================================================
Dividends declared $ 73,435 $ 69,233 $ 67,745 $ 61,244 $ 53,751
A five-year summary of selected financial data (Continued):
- ------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------
Operating Results
Diluted earnings per share $ 3.48 $ 3.01 $ 3.00 $ 2.53 $ 2.45
Return on average assets 1.65% 1.51% 1.59% 1.40% 1.44%
Return on average equity 15.18 14.36 14.64 12.81 13.10
Net interest margin 4.87 4.96 5.08 5.13 5.20
Per Share of Common Stock
Dividends declared $ 1.56 $ 1.48 $ 1.36 $ 1.20 $ 1.05
Shareholders' equity 24.09 21.50 20.95 19.76 19.50
Market price - Year-end 50.76 48.00 43.00 47.00 51.69
- High 52.15 48.94 52.63 59.44 53.38
- Low 38.54 29.00 40.50 39.69 30.83
Capital Ratios
Tier 1 leverage 9.39% 8.99% 9.22% 8.73% 9.53%
Ratio of average equity
to average assets 10.87 10.49 10.86 10.95 11.01
Risk-based capital
Tier 1 13.58 12.20 12.67 12.14 12.94
Total capital 14.59 13.22 13.70 13.20 13.99
Dividend payout ratio 44.70 49.01 45.03 47.24 42.59
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
(Dollars in thousands, except per share data)
First Virginia Banks, Inc. reported record earnings for the fifth
consecutive year. For the year ended December 31, 2001, First Virginia's
earnings per share increased 16% to $3.48 compared to $3.01 in 2000. The
return on average assets increased to 1.65% compared to 1.51% in 2000, and
the return on average shareholders' equity rose to 15.18% compared to 14.36%
in 2000. Net income also increased 16% for the full year 2001 and totaled
$164.451 million compared to $142.031 million in 2000. Income in 2001 and
2000 included several nonrecurring gains; however, when these gains are
excluded for both years, earnings per share increased 7% to $3.16 in 2001
compared to $2.95 in 2000. Excluding these gains, the return on average
assets increased to 1.50% in 2001 compared to 1.48% in 2000, and the return
on average shareholders' equity was 13.79% compared to 14.09%. Cash basis
recurring earnings per share, which excludes both the effects of intangible
assets and their related amortization and nonrecurring income items,
increased 6% to $3.41 in 2001 compared to $3.21 in 2000. Cash basis recurring
income produced a return on average tangible assets of 1.65% in 2001 and a
return on average tangible shareholders' equity of 17.86%.
Total assets exceeded $10 billion for the first time in the
corporation's history. Increasing at their fastest annual pace ever, they
were up $1.107 billion over year-end 2000 to $10.623 billion at December 31,
2001. The majority of this growth was internally generated through the
existing branch network, easily maintaining First Virginia's position as the
largest bank holding company headquartered in Virginia. During the year, the
corporation acquired the $531 million James River Bankshares with offices in
Northern Virginia, Richmond-Petersburg and the greater Hampton Roads area.
The corporation also divested its bank centered in the Knoxville, Tennessee,
area after determining it was unlikely it would be able to reach the
corporate objective of becoming the dominant bank in that market.
Total capital increased 16% during 2001 to $1.152 billion, and the book
value per share of common stock rose to $24.09 per share. Consistent with its
philosophy of safety, profitability and growth, always in that order, First
Virginia maintains a capital position that is significantly higher than its
peer group of banks. At December 31, 2001, the corporation's equity to asset
ratio stood at 10.85% compared to 10.43% at the end of the prior year, still
higher than the 8.75% produced by its peer group of banks. Similarly, First
Virginia's capital ratios significantly exceeded regulatory minimums and the
level required to be classified as "well-capitalized." This high level of
capital, coupled with the growth and consistency of First Virginia's net
income, permits the corporation to regularly increase its dividend to
shareholders. During 2001, the corporation increased the dividend for the
25th consecutive year to its current annualized rate of $1.60 per share,
representing a ten-year compounded annual rate of increase of 9.8%. The
corporation also returns capital to its shareholders through a regular
program of share repurchases, and during 2001 it acquired and retired 499,000
shares of stock. It has acquired an average of 1.719 million shares of stock
per year since 1993.
Despite a weakened economy and an increasing number of borrowers
defaulting on their loans nationwide, First Virginia continues to maintain
outstanding asset quality. Nonperforming assets declined and, as a percentage
of outstanding loans, achieved a new record low. Nonperforming assets were
$18.484 million or .28% of outstanding loans at December 31, 2001, compared
to $21.864 million or .34% at December 31, 2000. Net loan charge-offs were
virtually unchanged during 2001 and equaled just .14% of average loans in
both 2001 and 2000, significantly below peer group averages of .35%. As a
result of a lower rate of growth in outstanding loans and relatively
unchanged asset quality, the provision for loan losses declined 28% in 2001
to $6.755 million compared to $9.428 million in 2000. The allowance for loan
losses was 1.10% of total loans at both December 31, 2001 and 2000,
reflecting the stability of net charge-offs and the excellent quality of the
loan portfolio.
With the continuing weakness in the economy and decline in consumer
lending, average loans increased less than 1% in 2001 to $6.420 billion
following a 3% increase in 2000. Average real estate loans increased 12% as
declines in interest rates made these loans very attractive to consumers.
Installment loans to consumers, composed primarily of automobile loans,
declined 3% during 2001, primarily the result of a concentrated effort on
increasing their yield and quality. Late in the year, several of the major
automobile manufacturers offered 0% loans through their finance subsidiaries
as an incentive to increase lagging automobile sales. While this had a
minimal effect on the corporation's loans to consumers to finance the
purchase of automobiles, it did impact the loans to the automobile dealers to
finance their inventory of new cars. The demand created by these special
incentives dramatically increased sales in the latter part of the year and
reduced the inventory carried by the dealers. This contributed to a slowing
in the rate of growth of commercial loans of 3% during 2001 compared to an 8%
growth rate in 2000.
Average deposits increased 4% in 2001, reversing a trend of declines in
deposits in recent years. A two-year decline in the stock market and
uncertainty over the safety of many investment vehicles induced consumers to
increase the proportion of financial assets held in bank deposits. Virtually
all categories of deposits increased during 2001, led by increases in core
accounts such as demand deposits, interest checking accounts and money market
accounts.
- ----------------------------------------------------------------------
Year Ended December 31 2001 2000 1999
- ----------------------------------------------------------------------
Cash basis recurring diluted net
income per share - prior period $3.21 $2.97 $2.72
- ----------------------------------------------------------------------
Change during the year (net of federal taxes)
Interest income (taxable-equivalent) .15 .03 (.28)
Interest expense .09 (.16) .36
Provision for loan losses .04 .06 .09
Noninterest income .16 (.02) .03
Noninterest expense (.15) .07 (.02)
Other income tax effects (.08) .07 .01
Decrease (increase) in average
common shares outstanding (.01) .19 .06
- ----------------------------------------------------------------------
Net increase during the period .20 .24 .25
- ----------------------------------------------------------------------
Cash basis recurring diluted net
income per share - current period $3.41 $3.21 $2.97
Reconciliation of cash basis
recurring net income to GAAP net income
Amortization of intangibles (.25) (.26) (.24)
Gain on bank divestiture .18 - -
Gain on sale of investment in Star Systems .14 - -
Gain on sale of branches - .05 -
Gain on sale of mortgage servicing rights - .01 -
Gain on sale of credit card operations - - .23
Gain on demutualization of insurance company - - .04
- ----------------------------------------------------------------------
Diluted net income per share - current period $3.48 $3.01 $3.00
======================================================================
AVERAGE BALANCE SHEETS AND INTEREST RATES ON
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
- -------------------------------------------------------------------------
2001
- -------------------------------------------------------------------------
Interest
Average Income/
Balance Expense Rate
- -------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Securities-available for sale
U.S. Government and its agencies $ 298,134 $ 15,567 5.22%
Other (1) 12,362 606 4.90
Securities-held to maturity
U.S. Government & its agencies 1,582,783 94,832 5.99
State, municipal and other (1) 351,965 20,871 5.93
---------------------
Total securities 2,245,244 131,876 5.87
---------------------
Loans, net of unearned income (2)
Installment 4,091,862 321,841 7.87
Real estate 1,256,379 102,010 8.12
Commercial and other (1) 1,072,248 83,397 7.78
---------------------
Total loans 6,420,489 507,248 7.90
---------------------
Money market investments 529,679 20,694 3.91
Other earning assets (1) 20,495 1,327 6.48
---------------------
Total earning assets and
interest income 9,215,907 661,145 7.17
--------
Noninterest-earning assets:
Cash and due from banks 280,715
Premises and equipment, net 152,066
Other 393,606
Allowance for loan losses (71,008)
----------
Total Assets $9,971,286
==========
(1) Income from tax-exempt securities and loans is included in interest
income on a taxable-equivalent basis. Interest income has been divided by a
factor comprised of the complement of the incremental tax rate of 35% and
adjusted for the partial disallowance of interest costs incurred to carry the
tax-exempt investments.
(2) Nonaccruing loans are included in their respective categories.
AVERAGE BALANCE SHEETS AND INTEREST RATES ON
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
- -------------------------------------------------------------------------
2001
- -------------------------------------------------------------------------
Interest
Average Income/
Balance Expense Rate
- -------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits
Interest checking $1,555,282 5,801 0.37
Money market 984,523 26,881 2.73
Savings 1,017,800 12,026 1.18
Consumer certificates of deposit 2,396,966 121,878 5.08
Large denomination
certificates of deposit 517,925 27,756 5.36
---------------------
Total interest-bearing deposits 6,472,496 194,342 3.00
Short-term borrowings 589,662 17,806 3.02
Long-term debt 10,553 621 5.88
---------------------
Total interest-bearing liabilities
and interest expense 7,072,711 212,769 3.01
--------
Noninterest-bearing liabilities:
Demand deposits 1,658,469
Other 156,503
Preferred shareholders' equity 432
Common shareholders' equity 1,083,171
----------
Total Liabilities and
Shareholders' Equity $9,971,286
==========
Net interest income and
net interest margin $448,376 4.87%
========
AVERAGE BALANCE SHEETS AND INTEREST RATES ON
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
- -------------------------------------------------------------------------
2000
- -------------------------------------------------------------------------
Interest
Average Income/
Balance Expense Rate
- -------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Securities-available for sale
U.S. Government and its agencies $ 104,152 $ 5,427 5.21%
Other (1) 10,151 540 5.32
Securities-held to maturity
U.S. Government & its agencies 1,505,413 87,677 5.82
State, municipal and other (1) 320,369 18,954 5.92
---------------------
Total securities 1,940,085 112,598 5.81
---------------------
Loans, net of unearned income (2)
Installment 4,221,129 333,333 7.90
Real estate 1,120,414 91,625 8.18
Commercial and other (1) 1,037,884 89,172 8.59
---------------------
Total loans 6,379,427 514,130 8.06
---------------------
Money market investments 352,788 22,195 6.29
Other earning assets (1) 22,499 1,613 7.17
---------------------
Total earning assets and
interest income 8,694,799 650,536 7.48
--------
Noninterest-earning assets:
Cash and due from banks 289,734
Premises and equipment, net 153,755
Other 363,441
Allowance for loan losses (70,066)
----------
Total Assets $9,431,663
==========
(1) Income from tax-exempt securities and loans is included in interest
income on a taxable-equivalent basis. Interest income has been divided by a
factor comprised of the complement of the incremental tax rate of 35% and
adjusted for the partial disallowance of interest costs incurred to carry the
tax-exempt investments.
(2) Nonaccruing loans are included in their respective categories.
AVERAGE BALANCE SHEETS AND INTEREST RATES ON
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
- -------------------------------------------------------------------------
2000
- -------------------------------------------------------------------------
Interest
Average Income/
Balance Expense Rate
- -------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits
Interest checking $1,501,243 8,877 0.59
Money market 929,587 29,549 3.18
Savings 1,038,889 15,650 1.51
Consumer certificates of deposit 2,318,151 114,545 4.94
Large denomination
certificates of deposit 469,372 25,402 5.41
---------------------
Total interest-bearing deposits 6,257,242 194,023 3.10
Short-term borrowings 462,764 25,122 5.43
Long-term debt 1,707 166 9.71
---------------------
Total interest-bearing liabilities
and interest expense 6,721,713 219,311 3.26
--------
Noninterest-bearing liabilities:
Demand deposits 1,589,650
Other 131,065
Preferred shareholders' equity 467
Common shareholders' equity 988,768
----------
Total Liabilities and
Shareholders' Equity $9,431,663
==========
Net interest income and
net interest margin $431,225 4.96%
========
AVERAGE BALANCE SHEETS AND INTEREST RATES ON
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
- -------------------------------------------------------------------------
1999
- -------------------------------------------------------------------------
Interest
Average Income/
Balance Expense Rate
- -------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Securities-available for sale
U.S. Government and its agencies $ 76,063 $ 3,938 5.18%
Other (1) 6,869 338 4.93
Securities-held to maturity
U.S. Government & its agencies 1,739,337 100,165 5.76
State, municipal and other (1) 345,038 20,548 5.95
---------------------
Total Securities 2,167,307 124,989 5.77
---------------------
Loans, net of unearned income (2)
Installment 4,126,659 336,579 8.16
Real estate 1,115,877 92,136 8.26
Commercial and other (1) 957,277 78,119 8.18
---------------------
Total loans 6,199,813 506,834 8.17
---------------------
Money market investments 280,736 13,799 4.92
Other earning assets(1) 31,712 2,315 7.30
---------------------
Total earning assets and
interest income 8,679,568 647,937 7.47
--------
Noninterest-earning assets:
Cash and due from banks 343,674
Premises and equipment, net 158,019
Other 373,082
Allowance for loan losses (68,727)
----------
Total Assets $9,485,616
==========
(1) Income from tax-exempt securities and loans is included in interest
income on a taxable-equivalent basis. Interest income has been divided by a
factor comprised of the complement of the incremental tax rate of 35% and
adjusted for the partial disallowance of interest costs incurred to carry the
tax-exempt investments.
(2) Nonaccruing loans are included in their respective categories.
AVERAGE BALANCE SHEETS AND INTEREST RATES ON
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
- -------------------------------------------------------------------------
1999
- -------------------------------------------------------------------------
Interest
Average Income/
Balance Expense Rate
- -------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities:
Interest-bearing deposits
Interest checking $1,480,078 12,396 0.84
Money market 981,337 29,778 3.03
Savings 1,126,918 18,551 1.65
Consumer certificates of deposit 2,343,015 108,651 4.64
Large denomination
certificates of deposit 439,782 21,345 4.85
---------------------
Total interest-bearing deposits 6,371,130 190,721 2.99
Short-term borrowings 381,975 15,905 4.16
Long-term debt 2,755 288 10.45
---------------------
Total interest-bearing liabilities
and interest expense 6,755,860 206,914 3.06
--------
Noninterest-bearing liabilities:
Demand deposits 1,579,752
Other 119,573
Preferred shareholders' equity 502
Common shareholders' equity 1,029,929
----------
Total Liabilities and
Shareholders' Equity $9,485,616
==========
Net interest income and
net interest margin $441,023 5.08%
========
EFFECT OF RATE-VOLUME CHANGES ON NET INTEREST INCOME
- ---------------------------------------------------------------------
2001 Compared to 2000
Increase (Decrease)
Due to Change in
- ---------------------------------------------------------------------
Average Average
Volume Rate Total
- ---------------------------------------------------------------------
Interest income
Securities-available for sale
U.S. Government and its agencies $ 10,106 $ 34 $ 10,140
Other* 118 (52) 66
Securities-held to maturity
U.S. Government and its agencies 4,503 2,652 7,155
State, municipal and other* 1,870 47 1,917
- ---------------------------------------------------------------------
Total securities 16,597 2,681 19,278
- ---------------------------------------------------------------------
Loans, net of unearned income
Installment (10,225) (1,267) (11,492)
Real estate 11,122 (737) 10,385
Commercial and other* 2,952 (8,727) (5,775)
- ---------------------------------------------------------------------
Total loans 3,849 (10,731) (6,882)
- ---------------------------------------------------------------------
Money market investments 11,126 (12,627) (1,501)
Other earning assets* (144) (142) (286)
- ---------------------------------------------------------------------
Total interest income 31,428 (20,819) 10,609
- ---------------------------------------------------------------------
Interest expense
Interest checking 319 (3,395) (3,076)
Money market 1,747 (4,415) (2,668)
Savings (318) (3,306) (3,624)
Consumer certificates of deposit 3,893 3,440 7,333
Large denomination CDs 2,627 (273) 2,354
- ---------------------------------------------------------------------
Total interest-bearing deposits 8,268 (7,949) 319
- ---------------------------------------------------------------------
Short-term borrowings 6,891 (14,207) (7,316)
Long-term debt 859 (404) 455
- ---------------------------------------------------------------------
Total interest expense 16,018 (22,560) (6,542)
- ---------------------------------------------------------------------
Net interest income $ 15,410 $ 1,741 $ 17,151
=====================================================================
*Fully taxable-equivalent basis.
The increase or decrease due to a change in average volume has been
determined by multiplying the change in average volume by the average rate
during the preceding period, and the increase or decrease due to a change in
average rate has been determined by multiplying the current average volume by
the change in average rate.
EFFECT OF RATE-VOLUME CHANGES ON NET INTEREST INCOME
- ---------------------------------------------------------------------
2000 Compared to 1999
Increase (Decrease)
Due to Change in
- ---------------------------------------------------------------------
Average Average
Volume Rate Total
- ---------------------------------------------------------------------
Interest income:
Securities-available for sale
U.S. Government and its agencies $ 1,455 $ 34 $ 1,489
Other* 162 40 202
Securities-held to maturity
U.S. Government and its agencies (13,471) 983 (12,488)
State, municipal and other* (1,468) (126) (1,594)
- ---------------------------------------------------------------------
Total securities (13,322) 931 (12,391)
- ---------------------------------------------------------------------
Loans, net of unearned income
Installment 7,705 (10,951) (3,246)
Real estate 375 (886) (511)
Commercial and other* 6,594 4,459 11,053
- ---------------------------------------------------------------------
Total loans 14,674 (7,378) 7,296
- ---------------------------------------------------------------------
Money market investments 3,542 4,854 8,396
Other earning assets* (673) (29) (702)
- ---------------------------------------------------------------------
Total interest income 4,221 (1,622) 2,599
- ---------------------------------------------------------------------
Interest expense
Interest checking 178 (3,697) (3,519)
Money market (1,568) 1,339 (229)
Savings (1,452) (1,449) (2,901)
Consumer certificates of deposit (1,154) 7,048 5,894
Large denomination CDs 1,435 2,622 4,057
- ---------------------------------------------------------------------
Total interest-bearing deposits (2,561) 5,863 3,302
- ---------------------------------------------------------------------
Short-term borrowings 3,361 5,856 9,217
Long-term debt (110) (12) (122)
- ---------------------------------------------------------------------
Total interest expense 690 11,707 12,397
- ---------------------------------------------------------------------
Net interest income $ 3,531 $(13,329) $ (9,798)
=====================================================================
*Fully taxable-equivalent basis.
The increase or decrease due to a change in average volume has been
determined by multiplying the change in average volume by the average rate
during the preceding period, and the increase or decrease due to a change in
average rate has been determined by multiplying the current average volume by
the change in average rate.
STATEMENT OF INCOME
- -------------------
NET INTEREST INCOME
The table on pages 11 through 16 details the increase in earning assets,
interest-bearing liabilities and demand deposits for the last three years,
along with the related levels of fully taxable-equivalent interest income and
expense. The variance in interest income and expense caused by differences in
average balances and rates is shown on pages 17 and 18.
In contrast to the record long expansion in 1999 and 2000, the economy
weakened steadily throughout 2001 and entered a recessionary phase in March.
The impact of the September 11 terrorist acts served to further weaken the
economy, particularly certain sectors such as travel, hotel and leisure and
the industries that service them. While First Virginia has no significant
direct exposure to these industries, the decline in general economic activity
has some impact on the corporation. In response to this weakening in the
economy and the lack of any inflationary pressures, the Federal Reserve
reversed its policy of increasing rates as it had in 1999 and 2000 and
lowered rates a record 11 times during 2001 for a total of 4.75%.
This rapid decline in rates resulted in a slight decrease in First
Virginia's net interest margin as the corporation adjusted its rates
continuously throughout the year to match both changes implemented by the
Federal Reserve and market conditions. In maintaining a very liquid portfolio
of both assets and liabilities, First Virginia attempts to mitigate the risk
inherent in changing rates. Due to the nature of its deposit base, however,
First Virginia will generally perform better in periods of higher rather than
lower interest rates. First Virginia is relatively unaffected by movements in
interest rates since it attempts to balance its rate-sensitive assets and
liabilities; although when rates are moving upward, it will have a period of
time when liabilities reprice at a faster pace than assets. The rapid changes
in interest rates in 2001 resulted in only a nine basis point decline in the
net interest margin to 4.87% compared to 4.96% in 2000. However, by the
fourth quarter of 2001, the net interest margin had increased to 4.91%,
higher than the prior year's fourth quarter margin of 4.88%. The 12 basis
point decline of the net interest margin in 2000 compared to 1999 was caused
by a combination of rising interest rates and a more active share repurchase
program that reduced investable funds.
First Virginia relies almost entirely on its branch network to supply it
with a relatively low-cost source of funds, and it has no purchased funds and
does not need to hedge its position with derivative securities of any kind.
This has produced one of the highest net interest margins among the country's
largest banks on a consistent basis. A comparison of First Virginia's net
interest margin to its peer group of banks is illustrated in the graph on
this page.
The yield on earning assets declined 31 basis points during 2001 to
7.17%, while the cost of funds declined at a slightly lower pace of 25 basis
points to 3.01%. Despite the general decline in interest rates, the yield on
total investment securities rose six basis points in 2001 to 5.87% compared
to 5.81% in 2000 and 5.77% in 1999. This was the result of the corporation's
decision to increase the proportion of securities in tax-exempt municipal
securities and U.S. Government agency securities, which generally have higher
yields than the U.S. Government securities that have comprised much of the
corporation's securities portfolio in the past. With rapid downward movements
in interest rates by the Federal Reserve, the shape of the interest rate
curve changed dramatically from its inverted position in 2000 to a more
traditional positive slope in 2001. As a result, the yield on money market
instruments, which closely follows the daily interest rate markets, declined
238 basis points to 3.91%, following a 137 basis point increase in 2000. The
yield on the loan portfolio declined at a slower rate during 2001 compared to
money market rates as a consequence of the longer term of these assets. The
yield on loans declined 16 basis points to 7.90% in 2001 following an 11
basis point decline in 2000. Commercial and other loans declined at a faster
pace than fixed-rate installment or real estate loans since these loans tend
to be for shorter durations with variable rates that float with changes in
prime or other short-term indices. As a result, the yield on commercial loans
declined 81 basis points in 2001 to 7.78%, while the yield on installment
loans declined only three basis points to 7.87% and on real estate loans by
six basis points to 8.12%.
Net Interest Margin
(the higher, the better)
- ----------------------------------------
National
First Southern Peer
Virginia Regionals Group
- ----------------------------------------
2001 4.87% 4.07% 4.27%
2000 4.96 4.03 4.28
1999 5.08 4.21 4.23
1998 5.13 4.27 4.42
1997 5.20 4.51 4.70
Southern Regionals: Banking companies with assets over $2 billion (23 in
2001)
National Peer Group: Banking companies with assets of between $5 and $10
billion for years 1997-2000. Banking companies with
assets between $10 and $25 billion for the year 2001
(19 in 2001)
Source: Keefe, Bruyette & Woods
The 25 basis point decline in the cost of funds during 2001 occurred
primarily in shorter-term categories whose movements correspond more closely
to changes in general interest rate levels. As interest rates dropped to
their lowest level in more than 40 years, interest rates on interest checking
deposits dropped 22 basis points to .37%, following declines of 25 basis
points in 2000 and 53 basis points in 1999. Similarly, the cost of money
market accounts declined 45 basis points to 2.73% in 2001 after increasing 15
basis points in 2000 when interest rates were rising. The cost of consumer
savings deposits also declined during 2001, dropping 33 basis points
following a 14 basis point drop in 2000. The only category of deposits that
showed an increase in the cost of funds was consumer certificates of deposit,
which increased 14 basis points to 5.08% following a 30 basis point increase
in 2000. The entire increase in 2001 is a consequence of higher interest
rates offered on new certificates in 2000, which peaked at 7.25% mid-year
before beginning the drop-off that continued throughout 2001. Most of these
higher-cost certificates will mature in the first half of 2002, which will
result in a significant drop in the cost of funds in this category in 2002.
Large denomination certificates of deposit declined five basis points in
2001, reflecting the general decline in interest rates. While interest rates
for jumbo CDs were dramatically lower during the year, most of the holders of
the corporation's large denomination certificates of deposit are regular
customers with large balances; they are not bid certificates. The cost of
short-term borrowings, composed of repurchase agreements and commercial paper
with customers using First Virginia's cash management programs, declined 241
basis points to 3.02% in 2001. These funds are priced based on the rates the
corporation receives on its own short-term money market investments to
produce a positive spread.
PROVISION FOR LOAN LOSSES
The provision for loan losses declined 28% in 2001 following a 34%
decline in 2000. The decline in both years was primarily the result of a
decline in the rate of growth of outstanding loans since asset quality was
relatively unchanged. In 2001, net charge-offs were virtually unchanged from
2000, while 2000 net charge-offs had declined 8% compared to 1999. In prior
years, net charge-offs were higher because the corporation maintained a
portfolio of credit card loans, which traditionally carried a higher loss
incidence than other categories of loans. The corporation sold its credit
card portfolio in late 1998 and early 1999, and net charge-offs were reduced
significantly as a consequence. Approximately 50% of the corporation's loan
portfolio is composed of high-quality indirect automobile loans, and the net
charge-off rate on these loans was unchanged at 20 basis points in 2001 and
2000. Overall, the net charge-off rate was unchanged at .14%.
The corporation has a lower risk exposure to charge-offs than many banks
because most of its loans are made in small amounts to consumers and are
generally well secured by assets such as automobiles or real estate. These
loans also have regular monthly repayment schedules, and their average
duration is substantially less than their stated lives. The balance of the
corporation's loans are made primarily to small- and medium-sized businesses
in the corporation's trade area and are well secured. The corporation does
not have any international, syndicated, national or highly leveraged credits,
nor does it have any concentration of credit in any one industry that exposes
the loan portfolio to adverse risk.
NONINTEREST INCOME
Noninterest income increased 27% in 2001 to $149.997 million after
declining 14% in 2000. If the impacts of nonrecurring income items are
excluded, then noninterest income increased 10% in 2001 and 3% in 2000. First
Virginia receives approximately 22% of its gross income from noninterest
sources, primarily from service charges on deposit accounts, electronic
banking service fees and asset management fees.
Income from service charges increased 12% in 2001 following increases of
5% and 20% in 2000 and 1999, respectively. The increase in 2001 was primarily
a result of a continued increase in fees from commercial accounts and from
the growth of service charges for consumer and business internet banking.
Commercial service charges increased 32% compared to 2000 as a result of an
increased customer base, an increase in fees from business deposit accounts
for large customers with multiple locations, such as food stores, convenience
stores and retailers, and from businesses using the corporation's cash
management services. Internet banking fees increased 212% in 2001, reflecting
the increasing popularity of the corporation's online banking service for
consumers and the 2000 introduction of a similar online banking service for
small- to medium-sized business customers not needing the full power of the
corporation's cash management product for large businesses.
Income from electronic banking services increased 28% in 2001 and 19% in
2000, benefiting from the introduction in the second quarter of 2000 of the
Visa CheckCard. It produced revenues of $7.0 million in 2001 and $2.9 million
in 2000, demonstrating its popularity with First Virginia's customers. Income
from ATM fees declined slightly in 2001 and 2000 after rising sharply in the
late 1990s, typical of a maturing product.
As the decline in the stock market impacted values in customers'
accounts, income from trust and asset management services declined 1% in 2001
following two years of 13% growth. Fees in this area are directly impacted by
changes in market value of the underlying assets in customers' accounts.
Insurance income increased 15% in 2001 after declining 10% in 2000. In
contrast to 2000 when interest rates were increasing and mortgage lending
declining, 2001 real estate lending increased strongly, which also increased
the sale of title insurance by 76%. The corporation continues to have success
in selling insurance to its business customers as part of its commitment to a
total relationship banking, and as a consequence, income from the sale of
commercial insurance products increased 25% in 2001 following a 54% increase
in 2000. Income from the sale of annuities rose 15% in 2001 following a 10%
increase in 2000, and the sale of credit life insurance products grew 5%
following several years of declines.
In 2001, there were two nonrecurring income items totaling $24.570
million compared to two nonrecurring items in 2000, which produced $4.232
million in income, and two items in 1999 which produced $21.146 million. In
2001, the corporation sold its banking affiliate serving the Knoxville,
Tennessee, market and recorded a gain of $13.789 million. The sale was made
after the corporation determined it unlikely that it could achieve its
strategic goal of being the dominant bank in that area either through
internal growth or acquisition. The corporation recognized a gain of $10.781
million ($3.032 million included in securities gains mentioned on the next
page) upon the sale of its interest in Star Systems, Inc. to Concord EFS,
Inc. The corporation was one of the founders of Star Systems in the early
1980s, which grew into one of the largest regional electronic switch
processors in the country. The 2000 nonrecurring income was a result of the
sale of six small and slower-growth banking offices in Virginia, Maryland and
Tennessee and the sale of the remainder of the corporation's mortgage banking
activities as it began offering mortgage loans only through its website. By
the end of 2001, the corporation was generating as much net income from its
web-based mortgage loan products as it had through its full-line mortgage
brokerage company. Nonrecurring income in 1999 was composed of proceeds
received from the demutualization of an insurance company in which the
corporation had purchased insurance policies and from a gain on the sale of
the balance of its direct credit card activities, which were relinquished
when the corporation determined credit card activities no longer met its
strategic objectives or desired returns. The reinvestment of funds from this
sale and the partnering with other companies to continue offering credit card
products to the corporation's customers also has produced more net income
than the corporation's previous stand-alone credit card activities.
The corporation recognized securities gains of $4.547 million in 2001,
$.198 million in 2000, and $.852 million in 1999 primarily from the sale of
equity securities. The corporation's policy is to hold virtually all of its
fixed-income securities to maturity, and it generally does not have income
from this source except for some bonds called by the issuer prior to the
maturity date.
NONINTEREST EXPENSE
Noninterest expense increased 3% in 2001 after decreasing 2% in 2000 and
rising less than 1% in 1999. On July 2, 2001, the corporation acquired James
River Bankshares and accounted for the acquisition using the purchase method
of accounting. As a consequence, expenses in 2001 include the expenses of
James River for six months. If the expenses for James River were excluded
from 2001 expenses, total noninterest expenses would have increased less than
1%. In 2000, the decline in noninterest expenses was primarily the result of
the disposition of the credit card division in 1999, the closure or sale of
24 branches and the discontinuation of the mortgage banking unit in 2000. The
efficiency ratio improved to 55.4% in 2001 compared to 56.3% in both 2000 and
1999, placing it more than three percentage points better than the peer group
average of 58.7%. The corporation considers this an excellent result
considering the much larger size of its branch network. The network tends to
increase costs, but it is also responsible for generating a large number of
low-cost core deposits that give the corporation a significantly higher net
interest margin than its peer group of banks.
Efficiency Ratio
(the lower, the better)
- ----------------------------------------
National
First Southern Peer
Virginia Regionals Group
- ----------------------------------------
2001 55.4% 58.8% 58.7%
2000 56.3 58.9 58.1
1999 56.3 58.2 58.3
1998 57.0 58.2 57.5
1997 56.7 58.4 58.3
Salaries and employee benefits increased 4% during 2001 compared to 2%
and 1% increases in 2000 and 1999. However, excluding the additional costs of
James River for six months, which are not reflected in 2000 expenses,
salaries and employee benefits increased less than 2% in 2001. Despite the
addition of 284 James River employees, total employment was up by only 26
employees to 4,913 (full-time equivalent) at year-end. The cost of employee
health insurance has increased dramatically in the last two years as medical
care inflation appears to have resumed nationwide after several years of
modest increases. Employee health insurance increased 31% in 2001 to $14.108
million after rising a similar 31% in 2000. As the return on the
corporation's pension assets declined slightly following several years of
higher than average returns, pension expense increased $.882 million in 2001
following the $1.548 million decline in 2000. Pension expense in 2002 is
expected to increase $2.1 million as a consequence of the lower pension
assets and a decline in the interest rate used to discount future pension
obligations.
Equipment expense increased 1% in 2001 compared to 4% in 2000 and 8% in
1999. During 2001, the corporation was able to keep the cost virtually
unchanged as it upgraded its mainframe computer to accommodate future growth
and converted James River's systems to First Virginia's. Equipment expenses
had grown at a rapid pace in the late 1990s as the corporation prepared for
Y2K, and it is benefiting from those upgrades today. Occupancy expenses
increased less than 2% in 2001 following 3% increases in 2000 and 1999.
Amortization of intangibles declined slightly in 2000 and 2001 as the
expense on deposit intangibles added in 2000 and 2001 were less than the
expense on intangible items that became fully amortized in those years. As a
consequence of the full adoption in 2002 of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets," goodwill will no
longer be amortized but will be evaluated periodically for impairment. As of
December 31, 2001, goodwill that will no longer be subject to amortization
amounts to $150.183 million. This will result in a reduction of recurring
amortization of goodwill of $5.669 million per year.
Other noninterest expenses increased 3% in 2001 with virtually all of
that increase attributable to the inclusion of James River expenses for six
months in 2001 but not in 2000. There were no significant changes in
individual expense categories from 2001 compared to 2000. In 2000, other
noninterest expenses had declined 15% as a result of lower credit card
related expenses following the sale of that area in 1999 and lower legal and
professional fees as a result of a reduced level of routine lawsuits and
consulting fees related to Y2K conversions.
PROVISION FOR INCOME TAXES
Income tax expense increased $17.684 million in 2001 to $86.605 million,
primarily the result of a 19% increase in pretax income and a $3.006 million
increase in state income taxes. In Virginia, banks do not pay state income
taxes but are taxed on net capital instead. However, the parent company and
its nonbanking subsidiaries pay taxes on net income, and during 2001 the
corporation generated taxable income from the sale of equity securities and
the sale of a former bank subsidiary, resulting in an increase in state
income taxes. Income tax expense in 2000 was $68.921 million, a 12% decline
compared to 1999, primarily the result of an 8% decline in pretax income.
The effective tax rate increased in 2001 to a more normal level of 34.5%
compared to 32.7% in 2000 and 34.1% in 1999. The decline in the effective tax
rate in 2000 was caused by the recapitalization of a subsidiary company in
2000, which allowed the corporation to benefit from some state tax net
operating losses accumulated in prior years and which will also reduce future
years' state taxes. In addition, greater investments in low income housing
partnerships, generating federal tax credits, higher investments in tax-
exempt securities and an adjustment to deferred income taxes also contributed
to a reduction in the effective tax rate in 2000.
BALANCE SHEET
- -------------
First Virginia's loan portfolio is its primary earning asset, generating
approximately 63% of the corporation's total revenue. Nearly all earning
assets are funded from deposits originated through the corporation's network
of banking offices or from capital. Other sources of funding include customer
repurchase agreements and commercial paper originated from business customers
who utilize the corporation's cash management products, which are
functionally equivalent to deposits. The corporation does not fund any of its
earning assets from "purchased" deposits or other nondeposit funding sources,
nor does it sell or securitize any of its earning assets. The corporation's
objective is to invest 70-85% of its total deposits and short-term borrowings
in loans. In 2001, the loan to funding liabilities rate was 74%, a decline
from the 77% funding rate in 2000 but equal to the funding rate achieved in
1999. The 2000 increase was due to a 3% rate of growth for average loans and
a slight decline in average funding liabilities.
The table below shows the average balances of the various categories of
earning assets as a percentage of total earning assets for the years
indicated.
- ---------------------------------------------------------------------
December 31 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------
Loans 69.67% 73.37% 71.43% 70.37% 71.78%
Securities 24.36 22.31 24.97 23.12 22.93
Money market investments 5.75 4.06 3.23 6.04 4.85
Other earning assets .22 .26 .37 .47 .44
- ---------------------------------------------------------------------
Total 100.00% 100.00% 100.00% 100.00% 100.00%
=====================================================================
LOANS
Average loans grew less than 1% in 2001 to $6.420 billion following a
growth rate of 3% in 2000 and 4% in 1999. The slowdown in consumer loan
demand, which began in the second half of 2000, continued in 2001 as the
impact of the recession began to be felt. Contributing to the decline in
growth was a slowdown in the growth of commercial loans, which had been
strong in the preceding two years, particularly in the final quarter of 2001.
At December 31, 2001, total loans, including changes resulting from the James
River acquisition and the First Vantage Bank-Tennessee divestiture, had
increased to $6.511 billion. Excluding those actions, total loans would have
shown a decline of approximately 2% following a slight drop at the end of
2000 compared to 1999. In late 1998 and early 1999, the corporation made the
strategic decision to exit the credit card business and sold the entire
portfolio in this area.
The largest component of First Virginia's loan portfolio is automobile-
related loans, particularly loans originated through automobile dealerships.
The corporation is a full service provider to the automobile dealership
community and makes loans to consumers to finance their purchase of
automobiles and loans to dealers to finance their inventory of automobiles
and, to a lesser extent, their facilities, as well as serving their cash
management, insurance and other financial needs. The corporation is one of
the 25 largest automobile lenders in the nation. As the corporation has
leveraged its historic expertise, the percentage of auto-related loans
increased from 38% of the loan portfolio at the end of 1994, to 50% at the
end of 2001. First Virginia is committed to being a full financial-service
provider to the automobile market, regardless of swings in the economic
cycle, and it devotes its primary lending resources to this area.
First Virginia concentrates on the highest quality automobile loans,
primarily "A" and "B" credits. Most of these loans are made to consumers and
are secured by new cars with a maximum term of 66 months. The corporation
does not participate in the sub-prime or leasing markets. The loan
portfolio's high quality means net charge-offs are significantly below
industry averages, and servicing and funding costs are among the lowest in
the industry, giving the corporation a competitive advantage over less
efficient producers. First Virginia uses an experienced loan reviewer in
underwriting each loan in its local loan production offices and does not rely
on credit-scoring models. This allows the corporation to give highly personal
service and quick approval, generally in less than 16 minutes, to the dealer
originating the loan. Once made, the loans are serviced centrally to ensure
consistency and quality of collection at the lowest cost.
Demand for automobiles slowed in both 2001 and 2000, prompting the
automobile manufacturers to offer low-rate financing through their automotive
finance subsidiaries, including a very aggressive zero-rate program in the
last four months of 2001. While this had some impact on the corporation's
ability to generate new loans, it was minimal because of the breadth of
dealers and models covered by First Virginia. More importantly, the
corporation, anticipating increased weakness in the economy, made an
intentional decision to lower volumes in mid-2000 in order to improve the
yield and quality of its portfolio. As a result, year-end automobile loan
balances from 1999 to 2000 and from 2000 to 2001 declined approximately 1%
following double-digit increases in the two preceding years. The corporation
has consolidated all of its automotive-related lending under one company,
which permits it to maximize its service capabilities and take full advantage
of new technology. After opening several new sales offices in the late 1990s,
the corporation did not open any in 2001 and 2000, but it remains committed
to a strategy of gradually expanding its market, primarily in the
Southeastern and mid-Atlantic regions.
The corporation also makes loans directly to dealers to finance their
sales inventory (floor plan loans), which are fully secured by specific
automobiles and subject to periodic inspection. Average floor plan loans
declined 7% in 2001 following an 18% increase in 2000. Concerned that the
recession would reduce sales, dealers deliberately reduced their inventories
in 2001. This was exacerbated in the final quarter of the year when extremely
attractive interest-rate inducements to consumers increased automobile sales
dramatically, further reducing dealers' inventory of stock on hand. Dealers
increased their inventories in 2000 as a result of the strong sales in 1999
that had left them unable to satisfy consumer demand.
Home equity loans are the second largest component of the corporation's
consumer lending portfolio, comprising approximately 12% of outstanding loans
at the end of 2001. After several years of declining balances, these loans
increased slightly in 2001 as a result of attractive low rates that induced
many customers to refinance outstanding loans or take on new credit.
- ----------------------------------------------------------------------------
December 31 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------
Consumer
Automobile $3,156,680 $3,169,269 $3,214,659 $2,771,579 $2,494,879
Home equity, fixed-
and variable-rate 748,888 743,542 831,952 898,748 1,063,861
Revolving credit,
including credit card 35,365 31,907 28,505 136,445 201,779
Other 160,697 170,482 184,930 210,080 254,913
Commercial 862,794 954,925 852,140 824,475 775,241
Construction and
land development 158,575 181,575 151,776 121,338 120,276
Real estate
Commercial mortgage 619,356 432,053 409,590 401,330 376,753
Residential mortgage
(excluding loans
held for sale) 768,204 682,711 711,848 729,220 650,276
- ----------------------------------------------------------------------------
Total loans, net of
unearned income $6,510,559 $6,366,464 $6,385,400 $6,093,215 $5,937,978
============================================================================
Residential real estate loans, primarily fixed-rate loans with terms of 15 to
20 years, increased 13% at the end of 2001 over 2000 after several years of
small declines. The corporation has made an effort to increase its share of
loans in the home equity and consumer real estate categories and has several
attractively priced programs offering fixed-rate loans for 15 years or less.
Mortgage loans with terms greater than 20 years are available to the
corporation's customers through its website but are immediately sold to an
unaffiliated party. First Virginia pursues the highest quality home equity
loans with low loan-to-value ratios, enabling it to show a nominal net
charge-off rate. These loans are originated through the corporation's banking
office network. In the first quarter of 2000, the corporation closed the
offices of First General Mortgage Company, its home equity lending
subsidiary. It operated in areas where the corporation did not have a banking
presence, and the possibility of cross-selling additional services and
building a total customer relationship was impractical.
Average commercial loans, excluding construction loans, increased 4% in
both 2001 and 2000, following a 7% increase in 1999. However, by the end of
the year, this category had declined 10% compared to the end of 2000,
primarily the result of the weakness in dealer floor plan loans mentioned
above. The corporation has been emphasizing commercial loans over the last
several years, stressing the relationship nature of its program, and it has
been successful in cross-selling its cash management, insurance and asset
management services. The corporation makes its loans to small- and medium-
sized businesses in the communities served by its affiliate banks, including
loans to government contractors, high-tech companies, hospitals, churches and
country clubs. These loans are typically in amounts between $1 and $5
million. The corporation originates and retains all of its own loans to
businesses headquartered within its market footprint and does not participate
in loans with other organizations nor in nationally syndicated credits.
Construction loans declined 13% in 2001 following two years of 20% or
better growth as several projects were completed and transferred to
commercial real estate loans with permanent financing. This category of loan
comprises only 2% of outstanding loans and is primarily for residential
development projects or commercial office space that is built for the
borrower's own use. The corporation does not make construction loans for
speculative or unleased properties. Commercial real estate loans increased
43% in 2001 following a 5% increase in 2000 and 2% in 1999. The majority of
this increase was a result of the acquisition of James River Bankshares and
its loan portfolio. The corporation's commercial real estate loans are mostly
made for owner-use properties, generally carrying floating or adjustable
interest rates.
SECURITIES
The corporation has historically classified virtually its entire
securities portfolio as held to maturity because it has both the ability and
the intention to hold these securities to their stated maturity. However, in
the latter part of 2001, the corporation classified a greater proportion of
newly purchased securities as available for sale in order to provide
additional liquidity for potential loan growth in 2002. By the end of 2001,
securities classified as available for sale represented 47% of the securities
portfolio compared to 5% at the end of 2000. It is the corporation's
intention to return to its historical classification of securities as held to
maturity for securities purchased in 2002 as liquidity is increased.
- ----------------------------------------------------------------------------
December 31 2001 2000 1999
- ----------------------------------------------------------------------------
Available for sale
U.S. Government and its agencies $ 999,819 $ 99,275 $ 106,130
Mortgage-backed securities
of U.S. Government agencies 447,385 - -
Other 10,584 11,714 10,271
Held to maturity
U.S. Government and its agencies 1,173,365 1,720,667 1,542,175
Mortgage-backed securities
of U.S. Government agencies 94,214 16,707 24,877
State and municipal 370,175 315,745 351,086
Other 2,073 - 249
- ----------------------------------------------------------------------------
Total securities $3,097,615 $2,164,108 $2,034,788
============================================================================
- ----------------------------------------------------------------------------
Book Average
Value Yield(1)
- ----------------------------------------------------------------------------
Available for sale
U.S. Government and its agencies:
One year or less $ 30,160 5.24%
After five through ten years 969,659 5.15
- ----------------------------------------------------------------------------
Total U.S. Government and its agencies 999,819 5.15
- ----------------------------------------------------------------------------
Mortgage-backed securities
of U.S. Government agencies:(2)
After one through five years 97,855 4.76
After five through ten years 168,752 5.34
After ten years 180,778 5.35
- ----------------------------------------------------------------------------
Total mortgage-backed securities
of U.S. Government agencies 447,385 5.22
- ----------------------------------------------------------------------------
Total available for sale $1,447,204 5.15%
============================================================================
Held to maturity
U.S. Government and its agencies:
One year or less $ 138,642 6.31%
After one through five years 519,962 5.88
After five through ten years 514,761 5.42
- ----------------------------------------------------------------------------
Total U.S. Government and its agencies 1,173,365 5.73
- ----------------------------------------------------------------------------
Mortgage-backed securities
of U.S. Government agencies:(2)
One year or less 108 4.54
After one through five years 2,926 6.38
After five through ten years 46,729 5.50
After ten years 44,451 6.11
- ----------------------------------------------------------------------------
Total mortgage-backed securities
of U.S. Government agencies 94,214 5.81
- ----------------------------------------------------------------------------
State and municipal obligations:
One year or less 118,197 5.89
After one through five years 237,019 5.79
After five through ten years 13,852 7.14
After ten years 1,107 8.32
- ----------------------------------------------------------------------------
Total state and municipal obligations 370,175 5.88
- ----------------------------------------------------------------------------
Other securities:
After one through five years 2,073 5.88
- ----------------------------------------------------------------------------
Total held to maturity $1,639,827 5.77%
============================================================================
(1) Fully taxable-equivalent basis.
(2) Based on contractual maturity.
The corporation has constructed its portfolio in a "laddered" approach so an
approximately equal amount matures each month. This supplies liquidity to
fund loan growth and provides for a natural hedge against changes in interest
rates. The corporation does not invest in structured notes or other types of
derivative securities.
Average outstanding securities increased 16% in 2001 following a 10%
decrease in 2000 and an 11% increase in 1999. The increase in the securities
in 2001 was a result of a stronger than normal growth in deposits and a
reduction in loan demand that served to increase the funds available for
investment in the securities portfolio. The decline in the securities
portfolio in 2000 was the result of reducing the build-up in the portfolio at
the end of 1999, created to provide liquidity for potential Y2K-related
deposit withdrawals that did not occur. Despite the sharp drop in interest
rates in 2001 and the rapid growth in the securities portfolio, the yield on
the portfolio actually increased six basis points to 5.87%. This was a
result of the maturity of lower yielding securities purchased years earlier,
a reduction in the percentage of securities invested in lower-yielding U.S.
Treasury securities, and an increase in the proportion of U.S. Government
agency and mortgage-backed securities.
The corporation places primary importance on safety and liquidity in its
securities portfolio. Accordingly, the majority of the portfolio is invested
in U.S. Government and agency securities with maximum lives of approximately
five years. At the end of 2001, the 55-month average expected duration of
these securities was greater than the 25-month average expected duration at
the end of 2000, the result of the rapid growth in the portfolio and the
reinvestment of called U.S. Government agency securities. Because of the
callable nature of these securities, the actual duration of the portfolio
will likely be less than 55 months.
At December 31, 2001, U.S. Government and agency securities comprised
70% of the securities portfolio compared to 84% at the end of 2000. During
2001, the corporation designated approximately $500 million of its securities
portfolio as eligible for investment in short duration mortgage-backed
securities with average lives of less than five years, and these securities
comprised 17% of the portfolio at the end of 2001. The remainder of the
portfolio is invested primarily in taxable and tax-exempt municipal
securities. Over the past several years, a greater proportion of new
securities have been placed in U.S. Government agency securities and less in
U.S. Treasury securities. This is due to the lower yields available on U.S.
Treasury securities and their lack of availability in certain maturity
ranges, a direct consequence of the reduction of the federal deficit and
federal debt. This trend is expected to continue over the next several years
as the supply of U.S. Government notes and bonds is reduced.
MONEY MARKET INVESTMENTS
Money market investments, consisting primarily of federal funds sold and
securities repurchase agreements, are generally governed by the size of
normally anticipated deposit swings and loan demand. In 2001, average money
market investments increased 50% to $529.679 million as a consequence of a
reduced demand for loans and strong growth in deposits. In 2000, average
money market investments increased 26%, driven in part by a reduction in loan
demand, but primarily by an increase in average available investable funds.
The funds became available when the corporation significantly reduced the
level of cash held in its banking offices to take advantage of declines in
required regulatory reserves, the result of programs implemented in the
preceding three years.
DEPOSITS
Average deposits increased 4% in 2001 to $8.131 billion after falling 1%
in 2000. Total deposits increased 11% from the end of 2000 to the end of
2001. Growth was steady throughout the year and picked up in the second half
due to a number of factors. On July 2, the corporation acquired James River
Bankshares with approximately $433 million in deposits, and in August it sold
its former affiliate in Knoxville, Tennessee, with approximately $136 million
in deposits. The Federal Reserve lowered rates aggressively throughout the
year and added to the money supply, particularly after the terrorist events
of September 11. The continued effects of the recession and decline in the
stock markets, combined with these other events, induced a general movement
to safety, and the corporation's reputation for safety and soundness
attracted investors' financial assets. The small decline in 2000 was a result
of the sale of six banking offices with $39.756 million in deposits and the
consolidation of 18 offices into other nearby First Virginia offices. These
closed or sold offices were located in slower-growth markets, near other
First Virginia offices or were isolated in markets where First Virginia could
not gain a major market presence.
The corporation offers a variety of accounts that appeal to different
target groups. The FirstVantage Plus account, which offers an attractive
array of features to the high-balance customer, was enhanced in 1998 and has
grown substantially in the past three years. Other accounts, appealing more
to the typical mid-balance customer, provide relationship linkages that avoid
service charges. The corporation's extensive branch office network creates a
strong retail focus, resulting in a higher percentage of customers'
maintaining balances in transaction accounts compared to other banks.
Approximately 40% of the corporation's average deposits were composed of
demand and interest checking accounts.
Average demand deposits and interest checking accounts increased 4% in
2001 following a 1% increase in 2000. The corporation's extensive branch
network, which is responsible for the greater mix of lower-cost transaction
accounts, permits the corporation to maintain one of the lowest cost of funds
among the 50 largest banks in the country. Average money market accounts
increased 6% in 2001 to $984.523 million, after declining 5% in 2000 and
rising 11% in 1999 and 20% in 1998. These funds were rising rapidly at the
end of 2001, and it has been part of the corporation's long-term strategy to
increase this relatively lower-cost source of funds by offering interest
rates slightly higher than competing banks. Traditional consumer savings
accounts declined 2% on average during 2001 to $1.018 billion following an 8%
decline in 2000. The decline in interest rates and the desire for the safety
and liquidity provided by these accounts slowed their long-term downward
trend during 2001, and these balances were rising in the fourth quarter.
Consumer savings accounts comprise 13% of total deposits.
Average Deposits
- ----------------------------------------------------------------------------
(Millions of Dollars) 2001 2000 1999
- ----------------------------------------------------------------------------
Noninterest-Bearing $1,658 $1,590 $1,580
Interest Checking 1,555 1,501 1,480
Money Market 985 930 981
Savings 1,018 1,039 1,127
Consumer CDs 2,397 2,318 2,343
Large Denomination CDs 518 469 440
- ----------------------------------------------------------------------------
Total Deposits $8,131 $7,847 $7,951
============================================================================
The rapid decreases in interest rates engineered by the Federal Reserve
in 2001 reversed the upward movement in rates they had implemented in 1999
and 2000 in an effort to slow down the economy. As a result of the increased
money supply and the liquidity in banks in general caused by slower loan
demand, the competition for more volatile and interest-sensitive funds such
as certificates of deposit was greatly reduced in 2001 compared to 2000 when
competition was especially strong. This permitted the corporation to reduce
the interest rates on consumer certificates of deposit dramatically during
the year, however, the cost of these funds actually increased 14 basis points
to 5.08% during 2001 because of the high rates offered in the latter part of
2000. These higher-cost certificates issued in 2000 will mostly mature in the
first half of 2002 and the cost of funds from this source will decline
sharply. Average outstanding consumer certificates of deposit increased 3%
during 2001 to $2.397 billion after dropping 1% in 2000 and 4% in 1999 when
competition for these funds was higher.
Large denomination certificates of deposit increased 10% to $517.925
million after rising 7% in 2000. The cost of funds in this category declined
five basis points to 5.36% in 2001 following an increase of 56 basis points
in 2000 and a decline of 44 basis points in 1999. Most of these deposits come
from the corporation's core consumer customers and a smaller amount from
state and political jurisdictions that maintain other relationships with the
corporation. The consumer certificates tend to mirror the rates of the
regular certificates of deposit category. However, the state and political
certificates are generally for much shorter average duration and their rates
move more quickly in response to changes in interest rates. The corporation
does not purchase brokered deposits nor does it solicit deposits outside of
its primary market areas.
Maturity ranges for certificates of deposit with balances of $100,000 or
more on December 31, 2001, were:
- ----------------------------------------------------------------------------
Maturity Ranges Amount
- ----------------------------------------------------------------------------
One month or less $ 59,834
After one through three months 103,569
After three through six months 131,839
After six through twelve months 107,059
Over twelve months 103,661
- ----------------------------------------------------------------------------
Total $505,962
============================================================================
OTHER INTEREST-BEARING LIABILITIES
Short-term borrowings consist primarily of securities sold by the
affiliate banks with an agreement to repurchase them on the following
business day and commercial paper issued by the parent company, primarily as
a convenience to commercial customers in connection with the corporation's
cash management services. The corporation does not borrow from other banks or
debt markets. Average short-term borrowings from these sources increased by
27% in 2001 to $589.662 million and have increased between 21% and 24% in
each of the preceding four years. These increases are a result of the
corporation's success in increasing the number of commercial customers
utilizing its sophisticated cash management services, including Treasury
Workstation for larger businesses and Business Express, an internet product
introduced in 2000 for small- and medium-sized businesses.
Long-term debt consists of capitalized lease obligations on branch
office facilities that are not subject to prepayment. In addition, long-term
debt at December 31, 2001, includes $19.000 million in advances from the
Federal Home Loan Bank incurred by James River Bankshares prior to its
affiliation with First Virginia. Normally, the corporation does not borrow
from the Federal Home Loan Bank although it is eligible to do so.
SHAREHOLDERS' EQUITY
First Virginia has historically been one of the most highly capitalized
banking companies in the nation, a reflection of its principles of safety,
profitability and growth, in that order, and it maintains a capital position
significantly higher than its peer group of banks. The ratio of total capital
to total assets increased to 10.85% compared to 10.43% at the end of 2000 and
10.90% in 1999. The increase in the equity to asset ratio in 2001 was a
consequence of the retention of a greater amount of income offset by a faster
rate of growth in total assets. The corporation distributes its net income to
shareholders through the payment of cash dividends and through the repurchase
of its own shares in the open market. In 2001, the corporation increased its
dividend twice during the year for the 20th consecutive year and declared
dividends of $1.56 per share, a 5% increase over the $1.48 declared in 2000,
which represented 45% of net income. Book value per share increased 12%
during 2001 to $24.09 compared to a 3% increase in 2000 when less income was
retained.
Return on Total Average Equity
(the higher, the better)
- ---------------------------------------
National
First Southern Peer
Virginia Regionals Group
- ---------------------------------------
2001 15.18% 14.79% 15.77%
2000 14.36 14.63 17.43
1999 14.64 15.15 15.86
1998 12.81 14.40 14.32
1997 13.10 15.75 16.03
During 2001, the corporation purchased 499,000 shares of its stock at a
total cost of $21.891 million compared to 3,074,200 shares purchased in 2000.
Since 1993, the corporation has purchased an average of 1.719 million shares
of stock each year and intends to purchase additional shares as market
conditions dictate. The corporation's Board of Directors approved a six
million share repurchase program in 1999 and there were 1.626 million shares
eligible for repurchase at the end of 2001.
First Virginia's subsidiary banks are required to comply with capital
adequacy standards established by the Federal Reserve and the FDIC. Because
of the high level of capital and the conservative nature of its assets, the
corporation exceeded the additional regulatory risk-based capital
requirements by wide margins. The Tier 1 risk-based capital ratio increased
138 basis points to 13.58% after declining 47 basis points in 2000 to 12.20%,
the result of a decline in equity caused by the corporation's share
repurchase program. The Total capital ratio increased by 137 basis points in
2001 to 14.59% due to the higher retention of earnings as a result of the
decline in share repurchases during 2001. Each of the corporation's
individual banks maintains capital ratios well in excess of regulatory
minimums, and all qualify as "well capitalized" banks, allowing them the
lowest FDIC premium rate and freedom to operate without restrictions from
regulatory bodies.
ASSET QUALITY
- -------------
The corporation has a number of policies, reviewed regularly by senior
management, to ensure that the risk in lending and investment activities is
minimal, while the profit is consistent with the exposure to risk. Each
affiliate bank's internal loan monitoring system also provides a detailed
monthly report of production, delinquencies, and nonperforming and potential
problem loans. This careful monitoring has resulted in a consistent record of
low delinquencies and charge-offs, as well as few nonperforming loans in
relation to the entire loan portfolio.
The corporation has no foreign, nationally syndicated or highly
leveraged transaction loans, and loans are only made within the trade areas
of the affiliated banks or in adjacent states where the corporation maintains
loan production offices generating high quality consumer installment loans.
Loans are generally not participated with nor purchased from banks outside of
the First Virginia affiliated group. In addition, participations between
banks within the First Virginia group must first be shared with the
corporation's lead bank, where a second comprehensive loan review is
performed. Approximately 75% of the corporation's loans are made to consumers
and are normally secured by personal or real property.
First Virginia has no significant concentrations of credit to a single
industry or borrower, and its loans are spread throughout its market area.
The corporation's legal lending limit to any one borrower is approximately
$103 million; however, it generally limits its loans to any one borrower and
related interests to $15 million. In special cases, the corporation may
exceed its internal guideline.
One of the corporation's specialty loan areas is the automobile finance
area, and loans are made to consumers, both directly through the
corporation's branch network and indirectly through automobile dealerships.
Roughly half of the total loan portfolio is comprised of consumer automobile
loans, but because loan amounts are relatively small and spread across many
individual borrowers, the risk of any major charge-offs is minimized. The
corporation's automobile loans consist primarily of the highest quality
loans, commonly referred to in the industry as "A" and "B" quality loans.
These loans contain substantially fewer risk characteristics than lower
quality "C" and "D" subprime loans and have lower delinquencies, charge-offs
and collection costs. During periods of economic weakness, subprime loan
categories generate very high delinquencies and charge-offs, while the high-
quality loans the corporation specializes in experience only modestly higher
delinquencies and charge-offs. The corporation also makes loans directly to
high-quality automobile dealers to finance their inventories.
NONPERFORMING ASSETS
Nonperforming Assets Ratio
(the lower, the better)
- ---------------------------------------
National
First Southern Peer
Virginia Regionals Group
- ---------------------------------------
2001 0.28% 0.74% 0.64%
2000 0.34 0.65 0.57
1999 0.31 0.51 0.48
1998 0.36 0.51 0.54
1997 0.44 0.55 0.62
Nonperforming assets declined 15% to $18.484 million in 2001 and were at
a record low of only .28% of outstanding loans at December 31, 2001, compared
to $21.864 million or .34% of loans at the end of 2000. The ratio of
nonperforming assets has been generally trending downward since 1990 and has
consistently been much lower than the average for similar sized banks in the
corporation's national and regional peer groups. There were no concentrations
of foreclosed real estate or nonaccruing loans in any specific geographic
location or type of property, and the majority of nonperforming assets were
comprised of smaller-balance loans to consumers.
The table below shows total nonperforming assets at the end of each of
the past five years. Experience has shown that actual losses on nonperforming
assets are only a small percentage of such assets. The corporation expects to
recover virtually all of its nonperforming assets, many with full interest.
- ----------------------------------------------------------------------------
December 31 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------
Nonaccruing loans $15,576 $14,954 $14,507 $14,654 $16,281
Restructured loans 912 1,814 1,829 2,441 4,861
Properties acquired
by foreclosure 1,996 5,096 3,503 4,695 5,282
- ----------------------------------------------------------------------------
Total $18,484 $21,864 $19,839 $21,790 $26,424
============================================================================
Percentage of total loans and
foreclosed real estate .28% .34% .31% 36% .44%
Loans 90 days past due
and still accruing interest $14,365 $11,111 $12,401 $17,162 $14,734
Percentage of total loans .22% .17% .19% .29% .25%
============================================================================
Loans past due 90 days or more increased $3.254 million to $14.365
million or .22% of outstanding loans at December 31, 2001, compared to
$11.111 million or .17% of total loans at the end of 2000 and $12.401 million
or .19% of total loans at the end of 1999. The corporation's delinquency
ratio is significantly below industry averages, reflecting the high overall
quality of its loan portfolio.
Loans are classified as nonaccrual when full collectibility of principal
or interest is in doubt; when repossession, foreclosure or bankruptcy
proceedings are initiated; or when other legal actions are taken. Installment
loans are generally placed in a nonaccrual status when payments are
delinquent 120 days. All other loans are generally placed in nonaccrual
status when they are 90 days delinquent. Loans may be classified as
nonaccrual sooner if specific conditions indicate impairment is probable. A
nonaccrual loan may be restored to an accruing status when principal and
interest are no longer past due and future collection of principal and
interest are not in doubt.
Potential problem loans consist of loans that are currently performing
in accordance with contractual terms but for which management has concerns
about the ability of an obligor to continue to comply with repayment terms
because of the obligor's potential operating or financial difficulties. At
the end of 2001, loans of this type that are not included in the table of
nonperforming and past due loans on page 23 amounted to approximately $42.816
million. The majority of these loans represent commercial or property-related
loans. Depending on changes in the economy and other future events, these
loans and others not presently identified as problem loans could be
reclassified as nonperforming or impaired loans in the future.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that represents
management's best estimate of credit losses for specifically identified loans
as well as losses inherent in the remainder of the loan portfolio. The
provision for loan losses is the periodic cost of maintaining an appropriate
allowance. At December 31, 2001, the allowance for loan losses was $71.937
million and remained unchanged from the 1.10% of total loans at the end of
2000. Net charge-offs also were unchanged in 2001 at .14% of average loans,
slightly less than the .16% in 1999. Net charge-offs of indirect automobile
loans was unchanged at .20% in 2001 and 2000. Other consumer loan net charge-
offs increased 12 basis points to .26% in 2001 from the .14% posted in 2000,
which had dropped significantly from the .69% level in 1998 before the
corporation sold its credit card portfolio in late 1998 and early 1999. All
other categories of loans had slight decreases in net charge-offs in 2001 as
credit quality remained at high levels.
Reserve Coverage Ratio
(the higher, the better)
- ---------------------------------------
National
First Southern Peer
Virginia Regionals Group
- ---------------------------------------
2001 436% 235% 251%
2000 419 250 282
1999 429 308 359
1998 411 377 338
1997 322 359 307
Net Charge-Off Ratio
(the lower, the better)
- ---------------------------------------
National
First Southern Peer
Virginia Regionals Group
- ---------------------------------------
2001 0.14% 0.35% 0.35%
2000 0.14 0.32 0.31
1999 0.16 0.28 0.26
1998 0.32 0.29 0.29
1997 0.31 0.30 0.29
An analysis of the activity in the allowance for loan losses for each of the
last five years is presented in the following table:
- --------------------------------------------------------------------------
December 31 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------
Balance at beginning of year $70,300 $70,119 $70,312 $68,064 $62,761
Provision charged to
operating expense 6,755 9,428 14,190 20,800 17,177
Increase attributable
to acquisitions 5,479 - - 679 5,551
Decrease attributable
to divestiture (1,331) - - - -
Reserve on loans sold - - (4,323) - -
- --------------------------------------------------------------------------
Total balance before
charge-offs 81,203 79,547 80,179 89,543 85,489
- --------------------------------------------------------------------------
Charge-offs
Indirect automobile 8,041 7,894 8,654 9,743 7,706
Other consumer (including 4,235 3,241 4,663 13,238 12,315
credit cards)
Real estate 445 518 188 215 113
Commercial 1,140 1,138 679 384 1,412
- --------------------------------------------------------------------------
Total charge-offs 13,861 12,791 14,184 23,580 21,546
- --------------------------------------------------------------------------
Recoveries
Indirect automobile 2,146 1,938 2,145 2,034 1,581
Other consumer (including 1,386 1,521 1,891 2,198 1,934
credit cards)
Real estate 104 28 29 47 242
Commercial 959 57 59 70 364
- --------------------------------------------------------------------------
Total recoveries 4,595 3,544 4,124 4,349 4,121
- --------------------------------------------------------------------------
Net charge-offs 9,266 9,247 10,060 19,231 17,425
- --------------------------------------------------------------------------
Balance at end of year $71,937 $70,300 $70,119 $70,312 $68,064
==========================================================================
Net loan losses (recoveries) to
average loans
Indirect automobile .20% .20% .23% .32% .29%
Other consumer (including .26 .14 .21 .69 .64
credit cards)
Real estate .03 .04 .01 .02 (.01)
Commercial .02 .10 .06 .03 .12
Total loans .14 .14 .16 .32 .31
Allowance for loan losses
to year-end loans 1.10% 1.10% 1.10% 1.15% 1.15%
==========================================================================
During 2001, the corporation refined its methodology for allocating the
reserve for loan losses. The allowance for loan losses is composed of three
elements: a general allowance based on historical loan loss experience and
current trends, a specific allowance established on specific loans, and an
unallocated allowance based on general economic conditions and other risk
factors in the corporation's individual markets. The general allowance is the
largest component of the total allowance and is determined by the mix of loan
products within the overall loan portfolio, an internal loan grading process
and associated allowance factors. These factors are reviewed and updated
periodically to reflect current charge-off and credit quality trends and
specific risks associated with each loan category.
The consumer loan portfolio is separated by loan type, and each type is
treated as a homogeneous pool. Specific consumer pools include indirect
installment loans, direct installment loans, revolving credit and residential
mortgages. A general allowance is allocated to each of these pools based upon
historical trends in charge-off rates, current delinquency ratios and loan
characteristics. Consumer loans tend to be for relatively short durations of
three to seven years and have fairly consistent charge-off experience. A
general allowance is also allocated to a portion of the commercial loan
portfolio. Each commercial and commercial real estate loan is assigned a risk
rating by the loan officer based on established credit policy guidelines.
These risk ratings are periodically reviewed, and all ratings are subject to
independent review. Loans receiving a risk rating of average or above are
aggregated and assigned an allocation percentage which when multiplied by the
dollar amount of loans results in a general allowance for these loans. The
allocation percentage is based upon historical loss rates adjusted for
current conditions.
Loans receiving a below average rating, excluding nonperforming loans in
excess of $25,000, are assigned a specific allowance based upon the level of
classification. Each nonperforming loan in excess of $25,000 is reviewed and
a specific allowance established. The amount of specific allowance assigned
is based upon an assessment of probable sources of repayment including cash
flow, collateral value, and the capacity of guarantors, if any.
The unallocated allowance comprised 6% of the total allowance as of
December 31, 2001, and is based on management's evaluation of various
conditions that are not directly measured by any component of the allowance.
This evaluation includes but is not limited to general economic trends,
business conditions affecting key lending areas, changes in credit quality,
collateral values, loan volumes, concentrations of credit risk, results of
internal credit reviews and regulatory examinations. The amount of reserves
allocated to the major loan categories as of December 31, 2001, is indicated
in the following table:
- --------------------------------------------------------------------------
Percent Allowance
December 31 of Loans Allocation
- --------------------------------------------------------------------------
Consumer
Indirect installment 46% $29,469
Direct installment 13 10,143
Revolving credit 1 7,073
Commercial 13 10,407
Construction and land development 2 694
Real estate
Commercial mortgage 10 5,961
Residential mortgage 15 3,515
Unallocated - 4,675
- --------------------------------------------------------------------------
Total allowance for loan losses 100% $71,937
==========================================================================
LIQUIDITY AND SENSITIVITY TO INTEREST RATES
- -------------------------------------------
The primary functions of asset/liability management are to ensure
adequate liquidity and maintain an appropriate balance between interest-
sensitive assets and interest-sensitive liabilities. Interest-sensitive
assets and liabilities are those that can be repriced to current market rates
within a relatively short time period. Liquidity management involves the
ability to meet the cash flow requirements of the corporation's loan and
deposit customers. Interest-rate-sensitivity management seeks to avoid
fluctuating net interest margins and to enhance consistent growth of net
interest income through periods of changing interest rates. The corporation
does not hedge its position with swaps, options or futures but instead
maintains a highly liquid and short-term position in substantially all of its
earning assets and interest-bearing liabilities.
One of the primary ways the corporation meets its liquidity needs is by
scheduling the maturity of its securities so that approximately an equal
amount will mature each month. The weighted-average expected duration of the
securities portfolio at the end of 2001 was 55 months, up from 25 months at
the end of 2000. Because the corporation views its securities portfolio
primarily as a source of liquidity and safety, it does not necessarily react
to changes in the yield curve in an attempt to enhance its yield.
Accordingly, the average life of the portfolio is typically between two and
three years as the corporation maintains a constant approach to its portfolio
and invests primarily in U.S. Government and agency securities with a life
generally no greater than five years. Municipal securities are also generally
limited to lives of no more than five years, but availability and other
factors mean they are occasionally purchased in serial issues with longer
lives.
A cash reserve consisting primarily of overnight investments is also
maintained by the parent company to meet any contingencies and to provide
additional capital, if needed, to the affiliate banks.
Most of the corporation's loans are fixed-rate installment loans to
consumers and mortgage loans with maturities longer than the deposits by
which they are funded. A degree of interest-rate risk is incurred if the
interest rate on deposits should rise before the loans mature. However, the
substantial liquidity provided by the monthly repayments on these loans can
be reinvested at higher rates that largely reduce the interest-rate risk.
- -----------------------------------------------------------------------------
Between After
Maturity ranges and One Year One And Five
interest-rate sensitivity or Less Five Years Years Total
- -----------------------------------------------------------------------------
Commercial $ 279,251 $ 316,103 $ 267,440 $ 862,794
Construction and land development 56,742 65,303 36,530 158,575
- -----------------------------------------------------------------------------
Total $ 335,993 $ 381,406 $ 303,970 $1,021,369
=============================================================================
Fixed-rate loans $ 313,801 $ 129,379 $ 443,180
Floating-rate loans 67,605 174,591 242,196
- -----------------------------------------------------------------------------
Total $ 381,406 $ 303,970 $ 685,376
=============================================================================
Home equity lines of credit have adjustable rates that are tied to the prime
rate. The majority of the loans not in the installment or mortgage categories
have maturities of less than one year or have floating rates that may be
adjusted periodically to reflect current market rates. These loans are
summarized in the table on the preceding page.
First Virginia's Asset/Liability Committee is responsible for reviewing
the corporation's liquidity requirements and maximizing the corporation's net
interest income consistent with capital requirements, liquidity, interest
rate and economic outlooks, competitive factors and customer needs. Liquidity
requirements are reviewed in detail for each of the corporation's affiliate
banks; however, overall asset/liability management is performed on a
consolidated basis to achieve a consistent and coordinated approach. One of
the tools the corporation uses to determine its interest-rate risk is gap
analysis. Gap analysis attempts to examine the volume of interest-rate-
sensitive assets minus interest-rate-sensitive liabilities. The difference
between the two is the interest-sensitivity gap, and it indicates how future
changes in interest rates may affect net interest income. Regardless of
whether interest rates are expected to increase or decrease, the objective
- --------------------------------------------------------------------------
1 to 30-Day 1 to 90-Day 1 to 180-Day
Sensitivity Sensitivity Sensitivity
- --------------------------------------------------------------------------
Earning assets
Loans, net of unearned income $ 802,809 $ 1,260,500 $ 1,868,682
Securities 32,525 118,923 231,887
Money market investments 95,808 95,808 95,808
Other earning assets - - -
- --------------------------------------------------------------------------
Total earning assets 931,142 1,475,231 2,196,377
- --------------------------------------------------------------------------
Funding sources
Noninterest-bearing
demand deposits - - -
Interest checking 1,711,885 1,711,885 1,711,885
Money market 1,132,998 1,132,998 1,132,998
Savings 1,048,577 1,048,577 1,048,577
Consumer certificates of deposit 220,858 566,952 1,201,682
Large denomination certificates
of deposit 59,834 163,403 295,242
Short-term borrowings 639,351 639,351 639,351
Long-term debt 6,000 - -
Other funding sources - - -
- --------------------------------------------------------------------------
Total funding sources 4,819,503 5,263,166 6,029,735
- --------------------------------------------------------------------------
Interest-sensitivity gap $(3,888,361) $(3,787,935) $(3,833,358)
==========================================================================
Interest-sensitivity gap as a
percentage of earning assets (39.96)% (38.93)% (39.39)%
Ratio of interest-sensitive assets
to interest-sensitive liabilities .19x .28x .36x
==========================================================================
- --------------------------------------------------------------------------
Beyond One
1 to 365-Day Year or
Sensitivity Nonsensitive Total
- --------------------------------------------------------------------------
Earning assets
Loans, net of unearned income $ 2,986,869 $3,523,690 $6,510,559
Securities 387,247 2,710,368 3,097,615
Money market investments 95,808 - 95,808
Other earning assets - 26,872 26,872
- --------------------------------------------------------------------------
Total earning assets 3,469,924 6,260,930 9,730,854
- --------------------------------------------------------------------------
Funding sources
Noninterest-bearing
demand deposits - 1,831,324 1,831,324
Interest checking 1,711,885 - 1,711,885
Money market 1,132,998 - 1,132,998
Savings 1,048,577 - 1,048,577
Consumer certificates of deposit 1,821,581 597,309 2,418,890
Large denomination certificates
of deposit 402,301 103,661 505,962
Short-term borrowings 639,351 - 639,351
Long-term debt - 13,526 13,526
Other funding sources - 428,341 428,341
- --------------------------------------------------------------------------
Total funding sources 6,756,693 2,974,161 9,730,854
- --------------------------------------------------------------------------
Interest-sensitivity gap $(3,286,769) $3,286,769 $ -
==========================================================================
Interest-sensitivity gap as a
percentage of earning assets (33.78)% 33.78% 0.00%
Ratio of interest-sensitive assets
to interest-sensitive liabilities .51x 2.11x 1.00x
==========================================================================
is to maintain a gap position that will minimize any changes in net interest
income. A negative gap exists when the corporation has more interest-
sensitive liabilities maturing within a certain time period than interest
sensitive assets. Under this scenario, if interest rates were to increase it
would tend to reduce net interest income.
At December 31, 2001, the corporation was liability sensitive in the
short term (under six months) by approximately 39% of earning assets, which
declines to 34% in 12 months. Technically, the corporation may reprice
interest checking, savings and insured money market accounts at any time and,
accordingly, they have been classified in the 1-30 day sensitivity category
in the preceding table. However, the degree and frequency of movement are
more limited in practice, and they are much less sensitive than contractually
possible. The table beginning on the previous page shows the corporation's
interest-sensitivity position at December 31, 2001.
First Virginia also uses simulation analysis to monitor and manage
interest-rate sensitivity. Under this analysis, changes in interest rates and
volumes are used to test the sensitivity of First Virginia's net interest
income. Simulation analysis uses a more dynamic version of the information
shown in the preceding table that includes adjustments for the expected
timing and magnitude of changes in assets and liabilities. These adjustments
take into account that interest rates on individual asset and liability
categories may change at a different pace from their contractual rate. A
large part of First Virginia's loans and deposits come from its retail base,
and they do not automatically reprice on a contractual basis in reaction to
changes in interest rates. While First Virginia's liability sensitivity in
the short term indicates that an increase in interest rates may negatively
affect short-term net interest income, management would likely take actions
to minimize its exposure to negative results and within a relatively short
period of time make adjustments so that net interest income would not be
materially impacted. For example, the corporation's net interest margin has
averaged 5.15% over the past ten years and has exceeded 4.87% every year
since 1978, despite wide changes in interest rates. During 2001, short-term
interest rates declined a total of 475 basis points yet the corporation's net
interest margin declined only nine basis points, and by the fourth quarter,
it exceeded the net interest margin in the prior year's fourth quarter before
interest rate levels had begun to decline. At the same time, the corporation
has been able to maintain adequate liquidity to provide for changes in loan
and deposit demands.
Using shock analysis of a hypothetical, immediate increase in all
interest rates of 200 basis points and comparing that to the anticipated
interest-rate environment over the next 12 months also indicates that net
interest income would decrease by 12%, while an immediate and hypothetical
decrease in rates of 200 basis points would increase net interest income by
2%. Such an immediate change in all rates would be highly unlikely in
management's opinion. The corporation's dynamic simulation modeling takes
into account the effects such changes may have on overall economic activity,
the reaction of individual categories of assets and liabilities, and the
impact that different management actions may have on net interest income.
Accordingly, First Virginia has not experienced the volatility its interest-
sensitive gap position or shock analysis may indicate.
Over time, or under stable interest rate conditions, net interest income
will tend to be greater at higher interest rate levels. This is due to the
large proportion of low-cost core deposits such as demand, interest checking,
savings and money market accounts comprising the corporation's funding
sources, which can be invested in relatively higher-yielding loans and
investments.
FORWARD-LOOKING STATEMENTS
- --------------------------
Certain statements in this discussion may constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks
including, but not limited to, changes in general economic and business
conditions, interest-rate fluctuations, competition within and without the
banking industry, new products and services in the banking industry, risks
inherent in making loans, including repayment risks and fluctuating
collateral values, changing trends in customer profiles and changes in laws
and regulations applicable to the corporation. Although the corporation
believes that its expectations with respect to the forward-looking statements
are based upon reasonable assumptions within the bounds of its knowledge of
its business and operations, there can be no assurance that actual results,
performance or achievements of the corporation will not differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements.
QUARTERLY RESULTS
- -----------------
The results of operations for the first three quarters of 2001 have been
analyzed in quarterly reports to shareholders. The results of operations for
each of the quarters during the two years ended December 31, 2001, are
summarized in the table on pages 44 and 45. The results of operations for the
fourth quarter are highlighted below.
For the fourth quarter of 2001, First Virginia's earnings per share
increased 8% to $.84 compared to $.78 earned in the 2000 fourth quarter,
excluding $1.981 million in nonrecurring after-tax gains from the sale of
five branch offices in the 2000 fourth quarter. The return on average assets
was 1.54% compared to 1.53% in the prior year's fourth quarter, and the
return on average shareholders' equity was 13.96% compared to 14.69%,
excluding the 2000 nonrecurring income. Net income for the quarter, including
the nonrecurring income in 2000, increased 6% to $40.284 million or $.84 per
share compared to $38.025 million or $.82 per share in 2000. Cash basis
recurring income increased 10% to $43.244 million in the fourth quarter
compared to $39.349 million in the prior year's fourth quarter. Cash basis
recurring income produced a return on average tangible assets of 1.68% in the
fourth quarter of 2001 and a return on average tangible shareholders' equity
of 18.01%.
Average deposit growth was strong in the fourth quarter, increasing at
an annualized rate of 5% to $8.479 billion compared to $8.365 billion in the
third quarter, and was up 9% over the prior year's fourth quarter of $7.794
billion. Average short-term borrowings, consisting almost entirely of
commercial customers utilizing the corporation's cash management services,
increased 24% during the fourth quarter to $650.738 million compared to
$525.421 million in the prior year's fourth quarter. The combination of the
recession and zero-interest loans by the automobile manufacturers impacted
the corporation's new loan originations. Average loans declined at a 3%
annualized rate in the fourth quarter to $6.548 billion compared to $6.592
billion in the third quarter, but were up 3% compared to the fourth quarter
of 2000. The 32% annualized decline in average commercial loans in the fourth
quarter was caused by seasonal lower demand from automobile dealers for floor
plan loans coupled with reduced dealer inventories as a result of strong auto
sales. Average consumer loans rose at an annualized rate of 1% compared to
the third quarter and real estate loans increased at an annualized rate of 9%
as consumers took advantage of historically low interest rates.
The net interest margin increased eight basis points to 4.91% during the
fourth quarter compared to 4.83% in the third quarter and was up three basis
points compared to 4.88% in the fourth quarter of 2000. During the fourth
quarter the Federal Reserve lowered interest rates three times, totaling
1.25%, following eight previous reductions in rates in the year for a total
of 4.75% during 2001.
Excluding a $3.134 million nonrecurring gain on the sale of five branch
offices in the 2000 fourth quarter, noninterest income increased at a 13%
rate to $33.293 million in the fourth quarter of 2001. Service charges on
deposit accounts increased at a 16% pace in the fourth quarter, led by a 32%
increase in commercial service charges and by a 12% increase in retail
service charges. The growth in commercial service charges was a result of an
increased customer base, higher volumes of business, and expanded utilization
of the corporation's transaction processing and cash management services. The
increase in retail fees was primarily a consequence of an increase in the
number of customers utilizing the corporation's internet banking services.
Electronic banking service fees increased 17% compared to the prior year's
fourth quarter as a result of increased penetration and usage of the
corporation's debit card programs. The 29% increase in income from the sale
of insurance products in the fourth quarter was the result of increases in
the sale of commercial insurance lines and in title insurance caused by a
higher volume of real estate loan originations. Other income, excluding the
gain from the sale of branch offices in the 2000 fourth quarter, increased
13% on the strength of higher sales of co-branded credit card products and
deposit-oriented programs.
Noninterest expense increased 6% compared to the fourth quarter of 2000
but was up only 3% for the full year. The 9% increase in salaries and
employee benefits in the fourth quarter of 2001 is attributed to higher
insurance expenses and the addition of James River Bankshares employees who
were not included in the 2000 fourth quarter. Most other categories of
expense were relatively unchanged compared to the prior year's fourth
quarter. The efficiency ratio, which continued to improve, was 54.6% in the
2001 fourth quarter compared to 58.0% in 2000.
- ----------------------------------------------------------------------
2001 Quarter Ended
- ----------------------------------------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31
- ----------------------------------------------------------------------
Condensed Statements of Income
Interest and fees on loans $124,348 $129,814 $123,586 $126,245
Income from securities 36,880 32,095 29,750 28,585
Other interest income 2,588 6,177 6,951 6,304
- ----------------------------------------------------------------------
Total interest income 163,816 168,086 160,287 161,134
- ----------------------------------------------------------------------
Interest on deposits 44,322 50,263 49,291 50,466
Interest on borrowed funds 2,557 4,538 4,925 6,407
- ----------------------------------------------------------------------
Total interest expense 46,879 54,801 54,216 56,873
- ----------------------------------------------------------------------
Net interest income 116,937 113,285 106,071 104,261
Provision for loan losses 2,046 1,708 2,138 863
Noninterest income 33,293 45,005 32,973 38,726
Noninterest expense 87,366 85,062 80,205 80,107
Provision for income taxes 20,534 25,000 19,316 21,755
- ----------------------------------------------------------------------
Net income $ 40,284 $ 46,520 $ 37,385 $ 40,262
======================================================================
Net income per share
Basic $ .84 $ .96 $ .81 $ .87
Diluted .84 .96 .81 .87
Average Quarterly Balances (in millions)
Securities $ 2,684 $ 2,243 $ 2,061 $ 1,985
Loans 6,548 6,592 6,245 6,292
Total earning assets 9,672 9,514 8,930 8,733
Total assets 10,473 10,307 9,643 9,448
Demand deposits 1,754 1,707 1,617 1,553
Interest-bearing deposits 6,725 6,658 6,290 6,209
Total deposits 8,479 8,365 7,907 7,762
Total shareholders' equity 1,154 1,145 1,028 1,005
Key Ratios
Yield on earning assets 6.83% 7.12% 7.27% 7.52%
Cost of funds 2.52 2.98 3.18 3.42
Net interest margin 4.91 4.83 4.84 4.88
Return on average assets 1.54 1.81 1.55 1.70
Return on average equity 13.96 16.25 14.54 16.03
- ----------------------------------------------------------------------
2000 Quarter Ended
- ----------------------------------------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31
- ----------------------------------------------------------------------
Condensed Statements of Income
Interest and fees on loans $128,928 $129,266 $127,410 $125,974
Income from securities 28,405 26,780 26,146 27,353
Other interest income 6,740 7,092 5,964 3,748
- ----------------------------------------------------------------------
Total interest income 164,073 163,138 159,520 157,075
- ----------------------------------------------------------------------
Interest on deposits 51,454 50,022 46,813 45,734
Interest on borrowed funds 7,617 6,870 5,825 4,976
- ----------------------------------------------------------------------
Total interest expense 59,071 56,892 52,638 50,710
- ----------------------------------------------------------------------
Net interest income 105,002 106,246 106,882 106,365
Provision for loan losses 2,761 1,225 3,135 2,307
Noninterest income 32,478 30,019 28,568 26,965
Noninterest expense 82,705 80,508 79,640 79,292
Provision for income taxes 13,989 19,198 18,196 17,538
- ----------------------------------------------------------------------
Net income $ 38,025 $ 35,334 $ 34,479 $ 34,193
======================================================================
Net income per share
Basic $ .82 $ .76 $ .73 $ .70
Diluted .82 .76 .73 .70
Average Quarterly Balances (in millions)
Securities $ 1,973 $ 1,900 $ 1,895 $ 1,992
Loans 6,341 6,357 6,425 6,395
Total earning assets 8,724 8,687 8,713 8,655
Total assets 9,446 9,407 9,444 9,429
Demand deposits 1,598 1,610 1,602 1,549
Interest-bearing deposits 6,196 6,225 6,293 6,316
Total deposits 7,794 7,835 7,895 7,865
Total shareholders' equity 981 966 986 1,021
Key Ratios
Yield on earning assets 7.57% 7.56% 7.43% 7.37%
Cost of funds 3.50 3.37 3.15 3.03
Net interest margin 4.88 4.95 5.00 5.02
Return on average assets 1.61 1.50 1.46 1.45
Return on average equity 15.50 14.63 13.99 13.39
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
(In thousands, except per share data)
CONSOLIDATED BALANCE SHEETS
- ----------------------------------------------------------------------------
December 31 2001 2000
- ----------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 386,171 $ 322,966
Money market investments 95,808 190,443
- ----------------------------------------------------------------------------
Total cash and cash equivalents - Note 3 481,979 513,409
- ----------------------------------------------------------------------------
Securities-available for sale - Note 4 1,457,788 110,989
Securities-held to maturity (fair
values-$1,658,992-2001 and
$2,045,431-2000)- Note 4 1,639,827 2,053,119
Loans, net of unearned income - Note 5 6,510,559 6,366,464
Allowance for loan losses - Note 6 (71,937) (70,300)
- ----------------------------------------------------------------------------
Net loans 6,438,622 6,296,164
- ----------------------------------------------------------------------------
Other earning assets 26,872 18,717
Premises and equipment - Note 7 153,505 150,323
Intangible assets - Note 2 199,948 157,777
Accrued income and other assets 224,486 215,971
- ----------------------------------------------------------------------------
Total assets $10,623,027 $ 9,516,469
============================================================================
CONSOLIDATED BALANCE SHEETS (Continued)
- --------------------------------------------------------------------------
December 31 2001 2000
- --------------------------------------------------------------------------
LIABILITIES
Deposits
Noninterest-bearing $ 1,831,324 $ 1,618,901
Interest-bearing
Interest checking 1,711,885 1,524,943
Money market 1,132,998 874,421
Savings 1,048,577 983,781
Consumer certificates of deposit 2,418,890 2,323,733
Large denomination certificates of deposit 505,962 500,037
- --------------------------------------------------------------------------
Total deposits 8,649,636 7,825,816
- --------------------------------------------------------------------------
Short-term borrowings - Note 8 639,351 539,469
Long-term debt - Note 9 19,526 1,116
Accrued interest and other liabilities 162,028 157,362
- --------------------------------------------------------------------------
Total liabilities 9,470,541 8,523,763
- --------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock, $10 par value (authorized
3,000 shares; outstanding 42 shares -
2001 and 45 shares - 2000) - Note 10 421 451
Common stock, $1 par value (authorized
175,000 shares; outstanding 47,827 shares -
2001 and 46,163 shares - 2000) - Note 10 47,827 46,143
Capital surplus 74,959 612
Retained earnings 1,036,257 945,241
Accumulated other comprehensive income (loss) (6,978) 259
- --------------------------------------------------------------------------
Total shareholders' equity 1,152,486 992,706
- --------------------------------------------------------------------------
Total liabilities and shareholders' equity $10,623,027 $ 9,516,469
==========================================================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
- -----------------------------------------------------------------------------
Year Ended December 31 2001 2000 1999
- -----------------------------------------------------------------------------
Interest income
Loans $503,993 $511,316 $503,995
Securities-available for sale 16,007 5,967 4,276
Securities-held to maturity 111,303 102,717 116,238
Money market investments 20,694 22,195 13,799
Other earning assets 1,326 1,611 2,314
- -----------------------------------------------------------------------------
Total interest income 653,323 643,806 640,622
- -----------------------------------------------------------------------------
Interest expense
Deposits 194,342 194,023 190,721
Short-term borrowings 17,806 25,122 15,905
Long-term debt 621 166 288
- -----------------------------------------------------------------------------
Total interest expense 212,769 219,311 206,914
- -----------------------------------------------------------------------------
Net interest income 440,554 424,495 433,708
Provision for loan losses - Note 6 6,755 9,428 14,190
- -----------------------------------------------------------------------------
Net interest income after provision
for loan losses 433,799 415,067 419,518
- -----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME (Continued)
- -----------------------------------------------------------------------------
Year Ended December 31 2001 2000 1999
- -----------------------------------------------------------------------------
Net interest income after provision
for loan losses 433,799 415,067 419,518
- -----------------------------------------------------------------------------
Noninterest income
Service charges on deposit accounts 66,796 59,408 56,334
Electronic banking service fees 17,619 13,746 11,561
Trust and asset management fees 12,878 13,069 11,552
Insurance premiums and commissions 7,703 6,674 7,413
Other - Note 12 40,454 24,935 48,892
Securities gains - Note 4 4,547 198 852
- -----------------------------------------------------------------------------
Total noninterest income 149,997 118,030 136,604
- -----------------------------------------------------------------------------
Noninterest expense
Salaries and employee
benefits - Notes 11 and 13 194,376 186,213 182,345
Occupancy 26,890 26,405 25,588
Equipment 33,140 32,784 31,470
Amortization of intangibles 14,836 14,974 15,048
Other 63,498 61,769 72,843
- -----------------------------------------------------------------------------
Total noninterest expense 332,740 322,145 327,294
- -----------------------------------------------------------------------------
Income before income taxes 251,056 210,952 228,828
Provision for income taxes - Note 14 86,605 68,921 77,968
- -----------------------------------------------------------------------------
Net income $164,451 $142,031 $150,860
=============================================================================
Net income per share of common stock - Note 15
Basic $ 3.49 $ 3.02 $ 3.02
Diluted 3.48 3.01 3.00
Average shares of common stock outstanding - Note 15
Basic 47,100 47,065 49,979
Diluted 47,317 47,257 50,238
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
- ------------------------------------------------------------------------------
Accumulated
Other
Compre- Total
Pre- hensive Share-
ferred Common Capital Retained Income holders'
Stock Stock Surplus Earnings (Loss) Equity
- ------------------------------------------------------------------------------
Balance January 1, 1999 $ 534 $50,094 $ 4,004 $934,703 $ 993 $ 990,328
Comprehensive income
Net income 150,860 150,860
Unrealized losses on
securities available
for sale, net of tax
of $(1,075) (1,971) (1,971)
Reclassification for gains
realized in net income,
net of tax of $(290) (539) (539)
----------
Total comprehensive income 148,350
Conversion of preferred
to common stock (35) 8 27 -
Issuance of shares for
stock options 94 4,226 4,320
Preferred stock retired (14) (26) (40)
Common stock purchased
and retired (1,034) (8,231)(35,461) (44,726)
Dividends declared
Preferred stock (33) (33)
Common stock $1.36 per share (67,712) (67,712)
- ------------------------------------------------------------------------------
Balance December 31, 1999 485 49,162 - 982,357 (1,517) 1,030,487
- ------------------------------------------------------------------------------
Comprehensive income
Net income 142,031 142,031
Unrealized gains on
securities available
for sale, net of tax
of $1,065 1,899 1,899
Reclassification for gains
realized in net income,
net of tax of $(67) (123) (123)
----------
Total comprehensive income 143,807
Conversion of preferred
to common stock (34) 6 28 -
Issuance of shares for
stock options 70 1,756 1,826
Common stock purchased
and retired (3,095) (1,172)(109,914) (114,181)
Dividends declared
Preferred stock (31) (31)
Common stock $1.48 per share (69,202) (69,202)
- ------------------------------------------------------------------------------
Balance December 31, 2000 451 46,143 612 945,241 259 992,706
- ------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
- ------------------------------------------------------------------------------
Accumulated
Other
Compre- Total
Pre- hensive Share-
ferred Common Capital Retained Income holders'
Stock Stock Surplus Earnings (Loss) Equity
- ------------------------------------------------------------------------------
Balance December 31, 2000 451 46,143 612 945,241 259 992,706
Comprehensive income
Net income 164,451 164,451
Unrealized losses on
securities available
for sale, net of tax
of $(2,281) (4,459) (4,459)
Reclassification for gains
realized in net income,
net of tax of $(1,764) (2,778) (2,778)
----------
Total comprehensive income 157,214
Issuance of shares for
an acquisition 2,104 93,428 95,532
Conversion of preferred
to common stock (30) 7 23 -
Issuance of shares for
stock options 86 3,057 3,143
Common stock purchased
and retired (513)(22,161) (22,674)
Dividends declared
Preferred stock (30) (30)
Common stock $1.56 per share (73,405) (73,405)
- ------------------------------------------------------------------------------
Balance December 31, 2001 $ 421 $47,827 $74,959 $1,036,257 $(6,978)$1,152,486
==============================================================================
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
- -----------------------------------------------------------------------------
Year Ended December 31 2001 2000 1999
- -----------------------------------------------------------------------------
Operating activities
Net income $164,451 $142,031 $150,860
Adjustments to reconcile net income to
net cash provided by operating activities
Amortization of investment
securities premiums 3,999 5,393 9,969
Accretion of investment securities discounts (1,194) (1,427) (1,502)
Gain on sale of premises and equipment (264) (829) (131)
Gain on nonrecurring transactions (21,538) (4,232) (21,146)
Gain on sale of securities (4,547) (198) (852)
Depreciation of premises and equipment 13,681 13,975 13,390
Amortization of goodwill and other
intangible assets 14,836 14,974 15,048
Provision for loan losses 6,755 9,428 14,190
Net decrease in loans held for sale 366 5,192 9,179
(Increase) decrease in interest receivable 5,753 (5,419) (679)
(Increase) decrease in prepaid expenses (4,758) 1,356 (414)
Increase (decrease) in interest payable (3,304) 8,856 (3,080)
Increase (decrease) in deferred income taxes 3,618 (4,443) (5,543)
Increase (decrease) in other accrued expenses (4,915) 3,346 1,068
- -----------------------------------------------------------------------------
Net cash provided by operating activities 172,939 188,003 180,357
- -----------------------------------------------------------------------------
Investing activities
Proceeds from the sale of available
for sale securities 202,809 7,440 1,988
Proceeds from the maturity of held
to maturity securities 4,002,003 1,187,707 1,072,881
Purchase of available for sale securities (1,439,125) - (101,482)
Purchase of held to maturity securities (3,609,949)(1,325,461) (696,613)
Net (increase) decrease in loans 86,906 9,689 (288,668)
Sales of premises and equipment 6,213 7,642 3,950
Purchases of premises and equipment (12,586) (10,707) (12,600)
Intangible assets acquired - (2,203) (711)
Net cash from acquisition 20,257 - -
Net cash from bank divestiture 12,527 - -
Other 68 696 14,701
- -----------------------------------------------------------------------------
Net cash used for investing activities (730,877) (125,197) (6,554)
- -----------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
- -----------------------------------------------------------------------------
Year Ended December 31 2001 2000 1999
- -----------------------------------------------------------------------------
Financing activities
Net increase (decrease) in deposits 525,423 (38,132) (191,130)
Net increase in short-term borrowings 97,042 119,172 34,301
Principal payments on long-term debt (4,590) (1,089) (1,012)
Proceeds from issuance of common stock 3,143 1,826 4,320
Common stock purchased and retired (22,674) (114,181) (44,726)
Cash dividends paid (71,836) (69,416) (66,064)
- -----------------------------------------------------------------------------
Net cash (used for) provided
by financing activities 526,508 (101,820) (264,311)
-----------------------------------------------------------------------------
Net decrease in cash and
cash equivalents (31,430) (39,014) (90,508)
Cash and cash equivalents at
beginning of year 513,409 552,423 642,931
- -----------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 481,979 $513,409 $552,423
=============================================================================
Cash paid for
Interest $ 214,864 $210,455 $209,995
Income taxes 85,642 68,584 78,752
=============================================================================
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
(Dollars in thousands, except per share data)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
First Virginia Banks, Inc. ("FVBI" or "parent company") is a bank
holding company and conducts its operations primarily through its eight
commercial banking subsidiaries. These banking subsidiaries provide a broad
array of traditional banking products and services through offices located
primarily in Virginia, Maryland and Tennessee. To a lesser extent, other
subsidiaries also provide financial products and services including credit
insurance products and property and casualty insurance on an agency basis.
FVBI and its subsidiaries are collectively referred to as the "corporation."
The accounting and reporting policies of the corporation are in accordance
with accounting principles generally accepted in the United States of America
and conform with general practices in the banking industry. The following is
a summary of the significant accounting policies used in the preparation of
the accompanying consolidated financial statements.
Principles of Consolidation: The consolidated financial statements include
the accounts of FVBI and its subsidiaries. All significant intercompany
balances and transactions have been eliminated. Certain amounts for prior
years have been reclassified for comparative purposes. These
reclassifications are immaterial and had no effect on net income or
shareholders' equity.
Use of Estimates: The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements,
and the reported amounts of revenues and expenses during the reporting
period. These estimates and assumptions are based on information available as
of the date of the financial statements and could differ from actual results.
In particular, the allowance for loan losses involves estimates that are
susceptible to change in the
near term.
Cash and Cash Equivalents: Cash and cash equivalents include cash and due
from banks, federal funds sold, securities purchased under agreements to
resell and other short-term investments.
Securities: Securities are classified as either available for sale or held to
maturity at the time of purchase. Debt securities which may be sold to meet
liquidity needs arising from unanticipated deposit or loan fluctuations,
changes in regulatory capital requirements, or unforseen changes in market
conditions, are classified as available for sale. In addition, investments in
equity securities are classified as available for sale. Securities available
for sale are reported at estimated fair value as determined from quoted
market prices. Unrealized holding gains and losses are excluded from earnings
and reported in accumulated other comprehensive income within shareholders'
equity, net of deferred income taxes. Gains or losses realized from the sale
of securities available for sale are determined by specific identification
and reported as a component of noninterest income.
Debt securities acquired with both the intent and ability to be held to
maturity are classified as held to maturity and reported at cost adjusted for
amortization of premiums and accretion of discounts on the constant yield
method. Any gains or losses realized from the early redemption of securities
held to maturity are determined by specific identification and are included
as a component of noninterest income.
Loans: Loans are carried at the principal amount outstanding including
deferred loan origination fees and costs. Loan origination fees and direct
loan origination costs typically are deferred and the net amount is amortized
as an adjustment to the loan's yield over the contractual life of the loan.
Interest income on loans is primarily accrued based on the principal amount
outstanding.
Loans are classified as nonaccrual when full collectibility of principal
or interest is in doubt, when repossession, foreclosure or bankruptcy
proceedings are initiated, or when legal actions are taken. Installment loans
are generally placed in nonaccrual status when payments are delinquent 120
days. All other loans are generally placed in nonaccrual status when they are
90 days delinquent. Loans may be classified as nonaccrual sooner if specific
conditions indicate impairment is probable. The decision to place a loan in
nonaccrual status is also based on an evaluation of the borrower's financial
condition, the collateral and other factors that may affect the borrower's
ability to pay. A nonaccrual loan may be restored to an accruing status when
principal and interest are no longer past due and future collection of
principal and interest is not in doubt.
The corporation identifies commercial, construction and commercial real
estate loans as impaired when it is probable that the payments of principal
and interest due under the loan agreement will not be collected. Since many
of the corporation's loans are secured by real estate, the value of impaired
loans in most cases is based upon the fair value of the collateral. If the
value of the collateral is less than the recorded investment in the loan, the
corporation includes this deficiency in evaluating the adequacy of the
allowance for loan losses.
Allowance for Loan Losses: The allowance for loan losses is maintained at a
level that represents management's best estimate of credit losses for
specifically identified loans as well as losses inherent in the remainder of
the loan portfolio. The provision for loan losses is the periodic cost of
maintaining an appropriate allowance.
The allowance is composed of general reserves, specific reserves and an
unallocated reserve. The consumer loan portfolio is separated by loan type,
and each type is treated as a homogeneous pool. A general allowance is
allocated to each of these pools based upon historical trends in charge-off
rates, current delinquency ratios and loan characteristics. Every commercial
and commercial real estate loan is assigned a risk rating by the loan officer
based on established credit policy guidelines. These risk ratings are
periodically reviewed, and all ratings are subject to independent review.
Loans receiving a risk rating of average or above are aggregated and assigned
an allocation percentage which, when multiplied by the dollar amount of
loans, results in a general allowance for these loans. The allocation
percentage is based upon historical loss rates adjusted for current
conditions. Loans receiving a below average rating, excluding nonperforming
loans in excess of $25,000, are assigned a specific allowance based upon the
level of classification. Each nonperforming loan in excess of $25,000 is
reviewed and a specific allowance established.
The unallocated reserve consists of an amount based on management's
evaluation of various conditions that are not directly measured by any
component of the allowance. This evaluation includes general economic
conditions and business conditions affecting key lending areas, credit
quality trends, collateral values, loan volumes, concentrations of credit
risk, seasoning of the loan portfolio, results of internal credit reviews and
regulatory examinations.
Premises and Equipment: Premises and equipment are carried at cost less
accumulated depreciation computed principally on the straight-line method
over lives generally not exceeding 40 and 10 years for buildings and
equipment, respectively. Gains and losses on disposition are reflected in
current operations. Maintenance and repairs are charged to operating
expenses, and major alterations and renovations are capitalized.
Other Real Estate Owned: Other real estate owned is stated at the lesser of
the loan balance prior to foreclosure plus the costs incurred for
improvements to the property, or fair value, less the estimated selling costs
of the property. At the time of foreclosure, any excess of cost over the
estimated fair value is charged to the allowance for loan losses. After
foreclosure, the estimated fair value is reviewed periodically. Any further
declines in fair value are charged against current earnings.
Intangible Assets: Goodwill related to acquisitions prior to 1976 is being
amortized on a straight-line basis over 40 years; goodwill related to
acquisitions after 1975 and before June 30, 2001, is being amortized over 10
to 25 years; goodwill related to acquisitions after June 30, 2001, is not
being amortized. Core deposit premiums are being amortized over 10 years. The
corporation periodically considers the potential impairment of intangible
assets.
Stock-Based Compensation: The corporation adopted the disclosure only
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS 123), which allows an entity
to continue to measure compensation cost for these plans using the intrinsic
value-based method of accounting prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). The
corporation has elected to follow APB 25 and related interpretations in
accounting for its employee stock options.
Income Taxes: Deferred tax assets and liabilities are based on the difference
between financial reporting and tax bases of assets and liabilities and are
measured at the enacted income tax rates applicable to the period in which
the deferred tax assets or liabilities are expected to be realized or
settled.
Net Income per Share: Basic net income per share of common stock is computed
on the basis of the weighted-average number of shares of common stock
outstanding. Diluted net income per share is computed based on the weighted-
average number of common and common equivalent shares and dilutive stock
options outstanding during
the year.
Recent Accounting Pronouncements: In July 2001, Statement of Financial
Accounting Standards No. 141, "Business Combinations" (SFAS 141), and
Statement No. 142, "Goodwill and Other Intangible Assets" (SFAS 142), were
issued. SFAS 141 requires that the purchase method of accounting be used for
all business combinations initiated after June 30, 2001. SFAS 142 adopts a
more aggregate view of goodwill and bases the accounting for goodwill on the
units of the combined entity into which the acquired entity is integrated.
Furthermore, goodwill and other intangible assets that have indefinite useful
lives will not be amortized but rather will be tested at least annually for
impairment using specific guidelines. The provisions of SFAS 142 are required
to be applied starting with fiscal years beginning after December 15, 2001.
As a result of SFAS 142, the corporation will no longer amortize its
goodwill, but will be required to determine if the value of the goodwill is
impaired. If such impairment exists, a write down of goodwill will be made at
that time. The corporation has not yet evaluated impairment under SFAS 142.
Beginning January 1, 2002, annual amortization expense will be reduced by
approximately $5.669 million.
In October 2001, Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS 144),
was issued. SFAS 144 addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and broadens the presentation of
discontinued operations to include more disposal transactions. SFAS 144 is
effective for fiscal years beginning after December 15, 2001. The adoption of
this statement will not have a material effect on the corporation's financial
statements.
2. ACQUISITIONS AND INTANGIBLE ASSETS
On July 2, 2001, James River Bankshares, Inc. merged into the
corporation. Shares of the corporation's stock totaling 2.104 million were
issued, valued at $45.46 per share. James River shareholders who elected to
receive cash in lieu of stock received $11.208 million. The acquisition was
accounted for using the purchase method of accounting; goodwill of $49.236
million was recorded, which is not being amortized, along with a core deposit
premium of $9.930 million, which is being amortized over ten years. The
allocated fair values of the assets and liabilities acquired were $518.430
million and $470.737 million, respectively. The results of operations of the
acquisition are included in the consolidated statements of income from the
date of acquisition.
On April 21, 2000, three branches were acquired from Wilmington Trust
FSB including $22.523 million in deposits. A core deposit premium of $2.159
million was recorded and is being amortized over ten years.
Total intangible assets, net of accumulated amortization of $83.968
million and $76.516 million as of December 31, 2001 and 2000, respectively,
are as follows:
- --------------------------------------------------------------------------
December 31 2001 2000
- --------------------------------------------------------------------------
Goodwill $150,183 $109,266
Core deposit premiums 49,447 48,082
Other 318 429
- --------------------------------------------------------------------------
Total intangible assets $199,948 $157,777
==========================================================================
3. CASH AND CASH EQUIVALENTS
The corporation's banking affiliates are required by Federal Reserve
regulations to maintain certain minimum cash balances consisting of vault
cash and deposits in the Federal Reserve Bank or in other commercial banks.
Such restricted balances totaled $35.850 million and $30.565 million as of
December 31, 2001 and 2000, respectively.
All securities underlying the money market investments were under the
corporation's control, and the maximum amount of outstanding money market
investments at any month-end during 2001 and 2000 was $843.837 million and
$460.040 million, respectively.
4. INVESTMENT SECURITIES
- ----------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ----------------------------------------------------------------------------
Available for sale
December 31, 2001:
U.S. Government and its agencies $1,005,533 $ 1,733 $ 7,447 $ 999,819
Mortgage-backed securities of
U.S. Government agencies 453,706 - 6,321 447,385
Other 9,395 1,189 - 10,584
- ----------------------------------------------------------------------------
Total $1,468,634 $ 2,922 $ 13,768 $1,457,788
============================================================================
December 31, 2000:
U.S. Government and its agencies $ 99,472 $ 28 $ 225 $ 99,275
Other 11,081 1,469 836 11,714
- ----------------------------------------------------------------------------
Total $ 110,553 $ 1,497 $ 1,061 $ 110,989
============================================================================
Held to maturity
December 31, 2001:
U.S. Government and its agencies $1,173,365 $ 14,389 $ 147 $1,187,607
Mortgage-backed securities of
U.S. Government agencies 94,214 483 859 93,838
State and municipal obligations 370,175 5,363 90 375,448
Other 2,073 26 - 2,099
- ----------------------------------------------------------------------------
Total $1,639,827 $ 20,261 $ 1,096 $1,658,992
============================================================================
December 31, 2000:
U.S. Government and its agencies $1,720,667 $ 3,699 $ 11,355 $1,713,011
Mortgage-backed securities of
U.S. Government agencies 16,707 50 98 16,659
State and municipal obligations 315,745 991 975 315,761
- ----------------------------------------------------------------------------
Total $2,053,119 $ 4,740 $ 12,428 $2,045,431
============================================================================
Securities having a carrying value of $856.762 million and $814.133
million at December 31, 2001 and 2000, respectively, were pledged to secure
public deposits and for other purposes. Gains of $4.547 million, $.198
million and $.852 million were realized in 2001, 2000 and 1999, respectively,
on the sale of securities and consisted entirely of gross gains.
The maturity ranges of securities as of December 31, 2001, were as follows:
- -----------------------------------------------------------------------------
Amortized
Cost Fair Value
- -----------------------------------------------------------------------------
Available for sale
One year or less $ 29,884 $ 30,161
After five through ten years 975,649 969,658
- ----------------------------------------------------------------------------
Total 1,005,533 999,819
- ----------------------------------------------------------------------------
Mortgage-backed securities
of U.S. Government agencies 453,706 447,385
Equity securities 9,395 10,584
- ----------------------------------------------------------------------------
Total available for sale $1,468,634 $1,457,788
============================================================================
Held to maturity
One year or less $ 256,838 $ 260,625
After one through five years 759,055 770,743
After five through ten years 528,613 532,640
After ten years 1,107 1,146
- ----------------------------------------------------------------------------
Total 1,545,613 1,565,154
- ----------------------------------------------------------------------------
Mortgage-backed securities
of U.S. Government agencies 94,214 93,838
- ----------------------------------------------------------------------------
Total held to maturity $1,639,827 $1,658,992
============================================================================
5. LOANS
- ---------------------------------------------------------------------------
December 31 2001 2000
- ---------------------------------------------------------------------------
Consumer
Automobile $3,156,680 $3,169,269
Home equity, fixed- and variable-rate 748,888 743,542
Revolving credit 35,365 31,907
Other 160,697 170,482
Commercial 862,794 954,925
Construction and land development 158,575 181,575
Real estate
Commercial mortgage 619,356 432,053
Residential mortgage 768,204 682,711
- ---------------------------------------------------------------------------
Total loans, net of unearned income 6,510,559 6,366,464
Less allowance for loan losses 71,937 70,300
- ---------------------------------------------------------------------------
Net loans $6,438,622 $6,296,164
===========================================================================
The corporation's loans are widely dispersed among individuals and
industries. On December 31, 2001, there was no concentration of loans in any
single industry that exceeded 10% of total loans.
Loans on which interest is not being accrued or whose terms have been
modified to provide for a reduced rate of interest because of financial
difficulties of borrowers, and interest income earned with respect to such
loans were:
- --------------------------------------------------------------------------
December 31 2001 2000 1999
- --------------------------------------------------------------------------
Nonaccruing loans $15,576 $14,954 $14,507
Restructured loans 912 1,814 1,829
- --------------------------------------------------------------------------
Total $16,488 $16,768 $16,336
==========================================================================
Income anticipated under
original loan agreements $ 1,231 $ 1,411 $ 1,384
Income recorded 457 795 156
==========================================================================
There were no formal commitments of a material amount to lend additional
funds under these agreements, but additional advances may be made if it is in
the interest of the corporation to do so. Loans modified for reasons other
than a reduction in the interest rate were not material in amount. All loans
which the corporation has classified as impaired are nonaccruing and have
been allocated a specific reserve in the allowance for loan losses. No income
was recorded while the loans were impaired.
- ---------------------------------------------------------------------------
December 31 2001 2000 1999
- ---------------------------------------------------------------------------
Impaired loans $ 1,083 $ 1,209 $ 872
Related allowance for loan losses 131 966 490
Average balance of impaired loans 846 781 754
===========================================================================
A total of $3.766 million, $5.145 million and $2.907 million of loans
were transferred to foreclosed property during 2001, 2000 and 1999,
respectively.
The corporation, in the normal course of business, has made commitments
to extend loans and has written standby letters of credit that are not
recognized in the financial statements. On December 31, 2001 and 2000,
standby letters of credit totaled $30.482 million and $25.829 million,
respectively, and the unfunded amounts of loan commitments were:
- ---------------------------------------------------------------------------
December 31 2001 2000
- ---------------------------------------------------------------------------
Adjustable-rate loans
Home equity lines $ 431,936 $ 446,150
Commercial loans 683,322 609,114
Construction and land development loans 127,266 147,913
Fixed-rate revolving credit lines 140,581 114,047
- ---------------------------------------------------------------------------
Total $1,383,105 $1,317,224
===========================================================================
A majority of the commercial, construction and land development
commitments and letters of credit will expire within one year, and all loan
commitments can be terminated by the corporation if the borrower violates any
condition of the commitment agreement.
The credit risk associated with loan commitments and letters of credit
is essentially the same as that involved with loans that are funded and
outstanding. The corporation uses the same credit standards on a case-by-case
basis in evaluating loan commitments and letters of credit as it does when
funding loans, including the determination of the type and amount of
collateral, if required.
The corporation essentially ceased the servicing of mortgage loans for
nonaffiliated parties in 2000. On December 31, 1999, such mortgages were
$339.194 million.
6. ALLOWANCE FOR LOAN LOSSES
- -------------------------------------------------------------------------
Year Ended December 31 2001 2000 1999
- -------------------------------------------------------------------------
Balance at beginning of year $70,300 $70,119 $70,312
Provision charged to operating expense 6,755 9,428 14,190
Increase attributable to acquisition 5,479 - -
Decrease attributable to divestiture (1,331) - -
Reserve on loans sold - - (4,323)
- -------------------------------------------------------------------------
Balance before charge-offs 81,203 79,547 80,179
- -------------------------------------------------------------------------
Charge-offs 13,861 12,791 14,184
Recoveries 4,595 3,544 4,124
- -------------------------------------------------------------------------
Net charge-offs 9,266 9,247 10,060
- -------------------------------------------------------------------------
Balance at end of year $71,937 $70,300 $70,119
=========================================================================
7. PREMISES, EQUIPMENT AND LEASES
- -------------------------------------------------------------------------
December 31 2001 2000
- -------------------------------------------------------------------------
Land $ 36,924 $ 36,500
Premises and improvements 178,712 171,048
Furniture and equipment 123,008 118,107
- -------------------------------------------------------------------------
Total cost 338,644 325,655
Accumulated depreciation 185,139 175,332
- -------------------------------------------------------------------------
Carrying value $153,505 $150,323
=========================================================================
The corporation has entered into lease agreements with unaffiliated
persons for premises, principally banking offices. Many of the leases have
one or more renewal options, generally for five or ten years, and some
contain a provision for increased rent during the renewal period. Leases
containing a provision for contingent payments are not significant in either
number or amount. Portions of a few premises are subleased, and the amount of
rent received is not material. There are no significant restrictions imposed
on the corporation by any of the lease agreements. The corporation also
leases a portion of its computer systems and other equipment. Leases on two
banking offices are currently recorded as capital leases. The effect of
capitalizing such leases on net income has not been material.
During 2001, 2000 and 1999, occupancy and equipment expense included the
rent paid on operating leases of $17.587 million, $17.287 million and $17.187
million, respectively.
Minimum rental payments over the noncancelable term of operating and
capital leases having a term in excess of one year are:
- --------------------------------------------------------------------------
Year Ended December 31 Amount
- --------------------------------------------------------------------------
2002 $12,295
2003 13,395
2004 10,859
2005 9,207
2006 7,326
Thereafter 20,118
- --------------------------------------------------------------------------
Total minimum lease payments $73,200
==========================================================================
8. SHORT-TERM BORROWINGS
- -------------------------------------------------------------------------
December 31 2001 2000
- -------------------------------------------------------------------------
Securities sold under agreements to repurchase $552,019 $442,332
Commercial paper 87,332 97,137
- -------------------------------------------------------------------------
Total short-term borrowings $639,351 $539,469
=========================================================================
Securities sold under agreements to repurchase generally mature within
one business day from the transaction date. The maximum amount of outstanding
agreements for any month-end during 2001 and 2000 was $571.018 million and
$447.612 million, respectively. The securities underlying the agreements were
under the corporation's control. Commercial paper generally matures within
one business day but may be issued for a term up to 270 days. Bank lines of
credit available to the corporation amounted to $50 million and $100 million
at December 31, 2001 and 2000, respectively. Such lines were not being used
on either of those dates.
9. LONG-TERM DEBT
Long-term debt at December 31, 2001, included $19.000 million in advances
from the Federal Home Loan Bank with rates ranging from 5.21% to 5.48%. Of
this amount $6.000 million matures in 2002, with the balance maturing over
the next nine years. The remainder of long-term debt consists primarily of
capitalized lease obligations.
10. PREFERRED AND COMMON STOCK
The corporation is authorized to issue three million shares of preferred
stock, par value $10 per share. As of December 31, the following four series
of cumulative convertible preferred stock were outstanding:
- ------------------------------------------------------------------------
Number of Shares
Dividends 2001 2000
- ------------------------------------------------------------------------
Series A 5% 15,551 16,548
Series B 7% 3,290 3,290
Series C 7% 5,072 5,372
Series D 8% 18,148 19,927
- ------------------------------------------------------------------------
Total preferred shares 42,061 45,137
========================================================================
The Series A, Series B and Series D shares are convertible into two and
one-fourth shares of common stock, and the Series C shares are convertible
into one and eight-tenths shares of common stock. All of the preferred stock
may be redeemed at the option of the corporation for $10.00 per share.
The corporation is authorized to issue 175 million shares of common stock,
par value $1 per share. At December 31, 2001, 3,078,624 shares of common
stock were reserved: 92,353 for the conversion of preferred stock and
2,986,271 for stock options.
The corporation has adopted a shareholder rights plan that, under
certain circumstances, will give the holders of the corporation's common
stock the right to purchase shares of its preferred stock or other
securities. The rights will become exercisable if a person or entity acquires
20% or more of the corporation's voting stock, unless it is acquired pursuant
to an offer for all outstanding shares of common stock at a price and on
terms determined by the Board of Directors to be adequate and in the best
interests of the corporation and its shareholders.
If the rights become exercisable, the holder of each share of common
stock, except the person or entity acquiring 20% or more of the voting stock,
will have the right to receive upon exercise that number of one one-
hundredths share of preferred stock equal to the number of shares of common
stock having a market value of two times the exercise price of the right, to
the extent available, and then an equal number of an equivalent security. The
exercise price for each right is $450.00.
The corporation may redeem the rights, at its option, at any time prior
to the date they become exercisable. The rights expire on August 8, 2008. As
of December 31, 2001, each outstanding share of common stock had 4/9 of a
right attached thereto.
11. STOCK INCENTIVE PLANS
Under the company's stock incentive plans, options may be granted to key
employees to purchase the corporation's common stock. All options are granted
at full market price on the date of the grant and generally vest within five
years of the grant date and expire after ten years. In certain instances, the
corporation must achieve established performance targets in order for the
options to become exercisable. In those instances where vesting is dependent
upon achieving certain performance targets, the corporation begins
recognizing compensation expense when it becomes probable that the targets
will be achieved and the options will become exercisable, for the difference
between the exercise price and the current market price. Total stock-related
compensation expense for 2001, 2000 and 1999 was $.225 million, $.636
million, and $.477 million, respectively. A summary of the corporation's
stock option activity and related information follows:
- -----------------------------------------------------------------------------
Available Weighted Excer- Weighted
To Average cise- Average
Grant Outstanding Price able Price
- -----------------------------------------------------------------------------
Balance, January 1, 1999 2,355,475 787,014 $35.47 245,805 $19.31
Granted (267,000) 267,000 42.75
Forfeited 16,300 (16,300) 44.96
Exercised - (94,688) 15.65
- -----------------------------------------------------------------------------
Balance, December 31, 1999 2,104,775 943,026 39.36 298,813 29.92
Granted (145,500) 145,500 45.44
Forfeited 12,500 (12,500) 47.55
Exercised - (69,573) 20.88
- -----------------------------------------------------------------------------
Balance, December 31, 2000 1,971,775 1,006,453 41.41 384,187 36.51
Granted (182,000) 182,000 49.45
Attributable to acquisition - 104,682 25.97
Expired (10,814) - -
Forfeited 15,700 (15,700) 42.24
Exercised - (85,825) 23.62
- -----------------------------------------------------------------------------
Balance, December 31, 2001 1,794,661 1,191,610 $ 42.55 587,378 $ 38.58
=============================================================================
- -----------------------------------------------------------------------------
Weighted
Average
Contractual Weighted Excer- Weighted
Life in Average cise- Average
Range of Exercise Prices Outstanding Years Price able Price
- -----------------------------------------------------------------------------
$14.25 - 15.37 6,442 4.2 $14.46 6,442 $ 14.46
21.42 - 31.25 225,423 5.2 26.31 213,873 26.04
42.06 - 52.31 959,745 9.0 46.56 367,063 46.31
- -----------------------------------------------------------------------------
$14.25 - 52.31 1,191,610 8.2 $42.55 587,378 $ 38.58
=============================================================================
Pro forma information regarding net income and earnings per share as
required by SFAS 123 has been determined as if the corporation had accounted
for its employee stock options under the fair-value method. The fair value of
all currently outstanding options was estimated at the date of the grant
using a Black-Scholes option pricing model. A summary of the assumptions used
and pro forma results for 2001, 2000 and 1999 is as follows:
- --------------------------------------------------------------------------
December 31 2001 2000 1999
- --------------------------------------------------------------------------
Assumptions
Risk-free interest rate 5.05% 5.11% 6.22%
Dividend yield 3.19% 3.15% 3.09%
Volatility factor .168 .174 .155
Weighted average expected life (years) 8.0 8.0 8.0
Pro forma results
Net income $163,332 $141,405 $150,372
Basic earnings per share 3.47 3.00 3.01
Diluted earnings per share 3.45 2.99 2.99
Fair value of options per share 9.38 8.97 9.30
==========================================================================
12. OTHER NONINTEREST INCOME
- --------------------------------------------------------------------------
Year Ended December 31 2001 2000 1999
- --------------------------------------------------------------------------
Mortgage banking fees $ - $ 1,311 $ 4,025
Credit card fees - - 5,439
Other noninterest income 18,916 19,392 18,282
Gain on bank divestiture 13,789 - -
Gain on sale of investment in Star Systems 7,749 - -
(excluding $3,032 recorded in securities gains)
Gain on sale of branches - 3,134 -
Gain on sale of mortgage servicing rights - 1,098 -
Gain on sale of credit card operations - - 17,899
Gain on demutualization of insurance company - - 3,247
- --------------------------------------------------------------------------
Total other noninterest income $40,454 $24,935 $48,892
==========================================================================
13. EMPLOYEE BENEFIT PLANS
The corporation has a noncontributory, defined-benefit pension plan
covering substantially all qualified employees. The benefits are based on
years of service and the employee's compensation during the last ten years of
employment. The corporation's funding policy is to make annual contributions
in amounts necessary to satisfy the Internal Revenue Service's funding
standards to the extent they are deductible against taxable income.
Contributions are intended to provide not only for benefits attributed to
service to date, but also for those expected to be earned in the future.
Contributions include normal costs of the plan and amortization for periods
of up to 40 years of unfunded past service cost. The assets of the pension
plan consist of U.S. Government and agency securities - 46.2%, other debt
obligations - 12.4%, equity securities - 35.7%, and cash and equivalents -
5.7%.
The corporation also has an unfunded nonqualified plan that provides
retirement benefits to certain officers in accordance with the same
computational terms as the qualified plan when those terms provide benefits
in excess of the amounts payable under the IRS-qualified rules. The projected
and accumulated benefit obligations under this plan were $3.307 million and
$1.954 million, respectively, at December 31, 2001.
- -------------------------------------------------------------------------
Postretirement
Pension Benefits Medical Benefits
- -------------------------------------------------------------------------
December 31 2001 2000 2001 2000
- -------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning
of year $135,397 $131,250 $ 17,748 $ 17,197
Service cost 5,223 4,563 416 660
Interest cost 9,986 9,333 1,316 1,231
Plan participants'contributions - - 628 455
Actuarial loss (gain) 6,129 (4,586) 879 (79)
Benefits paid (5,715) (5,163) (1,479) (1,716)
- -------------------------------------------------------------------------
Benefit obligation at end of
year 151,020 135,397 19,508 17,748
- -------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at
beginning of year 150,634 146,236
Actual return on plan assets (1,025) 9,545
Company contributions 3 257 16
Benefits paid (5,715) (5,163)
- ------------------------------------------------------
Fair value of plan assets at end
of year 147,151 150,634
- ------------------------------------------------------
Funded (unfunded) status (3,869) 15,237 (19,508) (17,748)
Unrecognized actuarial loss (gain) 18,481 (2,885) (3,445) (4,471)
Unamortized prior service cost 156 13 - -
Unrecognized transition obligation - - 6,715 7,326
- -------------------------------------------------------------------------
Prepaid (accrued) benefit cost $ 14,768 $ 12,365 $(16,238) $(14,893)
=========================================================================
Weighted average assumptions as of December 31
Discount rate 7.25% 7.50% 7.25% 7.50%
Expected return on plan assets 9.50 9.50
Rate of compensation increase 4.75 4.75
=========================================================================
The corporation sponsors a defined-benefit health care plan that
provides postretirement medical benefits to full-time employees who have
worked at least ten years and have attained age 55 while in service with the
corporation. The benefits are based on years of service and are contributory,
with retiree contributions adjusted annually, and contain other cost-sharing
features such as deductibles and coinsurance. Employees hired after December
31, 1993, may participate in the plan but must pay 100% of the cost. The
accounting for the plan anticipates future cost-sharing changes to the
written plan that are consistent with the corporation's expressed intent to
increase the retiree contribution rate annually for the expected increase in
medical costs for that year. The corporation has set a maximum amount that it
will contribute per year of approximately three times the 1993 contribution
level. Terminated employees may elect to receive medical benefits for a
limited period.
The benefit obligation and plan asset activity for each of the plans is
summarized above.
The net periodic benefit cost of the plans includes the following components:
- ---------------------------------------------------------------------
Pension Benefits
- ---------------------------------------------------------------------
Year Ended December 31 2001 2000 1999
- ---------------------------------------------------------------------
Service cost $ 5,223 $ 4,563 $ 5,033
Interest cost 9,986 9,333 9,135
Expected return on plan assets (14,208) (13,782) (12,685)
Amortization of prior service
cost and net transition obligation (143) (125) (113)
Recognized actuarial loss (gain) (4) (17) 150
- ---------------------------------------------------------------------
Net periodic benefit cost $ 854 $ (28) $ 1,520
=====================================================================
- ---------------------------------------------------------------------
Postretirement
Medical Benefits
- ---------------------------------------------------------------------
Year Ended December 31 2001 2000 1999
- ---------------------------------------------------------------------
Service cost $ 416 $ 660 $ 732
Interest cost 1,316 1,231 1,153
Expected return on plan assets - - -
Amortization of prior service
cost and net transition obligation 610 610 610
Recognized actuarial loss (gain) (147) (241) (91)
- ---------------------------------------------------------------------
Net periodic benefit cost $ 2,195 $ 2,260 $ 2,404
=====================================================================
The weighted-average annual assumed rate of increase in the per capita
cost of covered benefits (i.e., health care cost-trend rate) is 7.10% for
2001 and is assumed to decrease gradually to 5.0% for 2006 and to remain at
that level thereafter. The health care cost-trend rate assumption has a
significant effect on the amounts reported. The corporation has limited its
exposure to increases in health care cost-trend rates by setting a cap on the
maximum amount it will ever pay on any one retiree and by passing through
100% of the cost of retiree health care to new employees hired after December
31, 1993. The following table represents the effect of a one-percent change
in the assumed health care cost-trend rate:
- ---------------------------------------------------------------------------
One-Percent One-Percent
Increase Decrease
- ---------------------------------------------------------------------------
Effect on benefit obligation $ 1,436 $(1,591)
Effect on service and interest cost components 140 (159)
===========================================================================
The corporation has deferred compensation agreements with certain
officers and directors. Benefits under these agreements are being funded by
life insurance policies. The accrued liability for these agreements as of
December 31, 2001 and 2000, was $27.686 million and $26.000 million,
respectively. For the years ended December 31, 2001, 2000, and 1999, expenses
related to these agreements were $1.483 million, $1.402 million, and $1.471
million, respectively.
The corporation has a thrift plan to which employees with six months of
service may elect to contribute up to 12% of their salary. For employees with
more than one year of service, the corporation contributes to the plan to the
extent of 50% of the employees' first 6% of contributions, and an additional
25% contribution is made if a specified profit objective is met. A 75%
employer match was made in each of the years 2001, 2000 and 1999 when the
corporation's contributions to the plan totaled $4.718 million, $4.466
million and $4.253 million, respectively. The plan is administered under the
provisions of Section 401(k) of the Internal Revenue Code.
14. INCOME TAXES
The provision for income taxes includes amounts currently payable and
amounts deferred to or from other years as a result of differences in the
timing of the recognition of income and expense for financial reporting and
tax purposes. The income tax provision includes the following amounts:
- ----------------------------------------------------------------------------
Year Ended December 31 2001 2000 1999
- ----------------------------------------------------------------------------
Current
Federal taxes $80,171 $72,022 $81,921
State taxes 2,816 1,342 1,590
- ----------------------------------------------------------------------------
Total current 82,987 73,364 83,511
- ----------------------------------------------------------------------------
Deferred (benefit)
Federal taxes 3,641 (2,888) (5,538)
State taxes (23) (1,555) (5)
- ----------------------------------------------------------------------------
Total deferred 3,618 (4,443) (5,543)
- ----------------------------------------------------------------------------
Provision for income taxes $86,605 $68,921 $77,968
============================================================================
The exclusion of certain categories of income and expense from taxable
net income results in an effective tax rate that is lower than the statutory
federal rate. The differences in the rates are shown below:
- -----------------------------------------------------------------------------
Year Ended December 31 2001 2000 1999
- -----------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
- -----------------------------------------------------------------------------
Statutory rate $87,869 35.0% $73,833 35.0% $80,090 35.0%
Nontaxable interest on
municipal obligations (5,346) (2.1) (5,274) (2.5) (5,469) (2.4)
State taxes, net of
federal tax benefit 1,815 0.7 (138) (0.1) 1,030 0.5
Nondeductible goodwill 2,156 0.9 2,362 1.1 2,361 1.0
Other items 111 0.0 (1,862) (0.8) (44) 0.0
- -----------------------------------------------------------------------------
Effective rate $86,605 34.5% $68,921 32.7% $77,968 34.1%
=============================================================================
The corporation's federal income tax returns are closed through December
31, 1996. Based on management's estimates of future taxable income, the full
amount of the corporation's deferred tax asset will more likely than not be
realized, and a valuation allowance is not deemed necessary. Significant
components of the corporation's deferred-tax liabilities and assets are as
follows:
- --------------------------------------------------------------------------
December 31 2001 2000
- --------------------------------------------------------------------------
Deferred-tax assets
Allowance for loan losses $23,432 $24,605
Deferred compensation 8,700 8,026
Postretirement benefits 5,748 6,226
Unrealized loss on securities 3,868 -
Other 8,759 12,649
- --------------------------------------------------------------------------
Total deferred-tax assets 50,507 51,506
- --------------------------------------------------------------------------
Deferred-tax liabilities
Depreciation 3,134 5,112
Pension 4,028 4,328
Life insurance reserves 2,117 2,035
Unrealized gain on securities - 177
Purchase accounting timing differences 2,377 1,343
Other 4,289 4,290
- --------------------------------------------------------------------------
Total deferred-tax liabilities 15,945 17,285
- --------------------------------------------------------------------------
Net deferred-tax assets $34,562 $34,221
==========================================================================
15. NET INCOME PER SHARE
- -----------------------------------------------------------------------
Year Ended December 31 2001 2000 1999
- -----------------------------------------------------------------------
Computation of basic net income per share:
Net income $164,451 $142,031 $150,860
Preferred stock dividends 30 31 33
- -----------------------------------------------------------------------
Net income applicable to common stock $164,421 $142,000 $150,827
- -----------------------------------------------------------------------
Average common shares outstanding 47,100 47,065 49,979
Net income per share of common stock $ 3.49 $ 3.02 $ 3.02
=======================================================================
Computation of diluted net income per share:
Net income $164,451 $142,031 $150,860
Average common shares outstanding 47,100 47,065 49,979
Dilutive effect of stock options 122 90 149
Conversion of preferred stock 95 102 110
- -----------------------------------------------------------------------
Total average common shares 47,317 47,257 50,238
- -----------------------------------------------------------------------
Net income per share of common stock $ 3.48 $ 3.01 $ 3.00
=======================================================================
Options to purchase 224,043, 653,245 and 194,000 shares in 2001, 2000
and 1999, respectively, at weighted average prices of $51.11, $46.06 and
$52.31, respectively, were not included in the calculation of diluted
earnings per share on the previous page because the options' exercise price
was greater than the average market price.
16. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS 107), requires disclosure of fair
value information about financial instruments, whether or not recognized in
the balance sheet. In cases where quoted market prices are not available,
fair values are based on estimates using discounted cash flow analyses or
other valuation techniques. Those techniques involve subjective judgment and
are significantly affected by the assumptions used, including the discount
rate and estimates of future cash flows. As a result, the derived fair value
estimates cannot be substantiated by comparison to independent markets, and
in many cases, could not be realized in immediate settlement of the
instrument.
SFAS 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. The disclosures also do not
include certain intangible assets such as core deposit intangibles and
goodwill. Accordingly, the aggregate fair value amount presented below should
not be interpreted as representing the underlying value of the corporation.
- ---------------------------------------------------------------------------
December 31 2001 2000
- ---------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- ---------------------------------------------------------------------------
Financial assets
Cash and cash equivalents $ 481,979 $ 481,979 $ 513,409 $ 513,409
Securities 3,097,615 3,116,780 2,164,108 2,156,420
Loans, net 6,438,622 6,645,744 6,296,530 6,283,637
Other 83,522 83,522 78,446 78,446
Financial liabilities
Deposits 8,649,636 8,709,054 7,825,816 7,848,795
Short-term borrowings 639,351 639,351 539,469 539,469
Other 62,531 63,842 46,196 46,196
===========================================================================
The following methods and assumptions were used by the corporation in
estimating the fair value of its financial instruments. All of the
corporation's financial instruments were held or issued for purposes other
than trading.
Cash and Cash Equivalents: The carrying amounts reported in the balance sheet
for cash and short-term instruments approximate those assets' fair value.
Securities: Fair values for securities are based on quoted market prices.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair values for other loans were estimated using discounted cash flow
analyses, using interest rates currently being offered for loans with similar
terms to borrowers of similar credit quality.
Other Financial Assets: Other financial assets consist primarily of accrued
interest receivable, Federal Reserve Bank stock and Federal Home Loan Bank
stock, for which the carrying amount approximates fair value.
Deposits: For deposits with no defined maturity, SFAS 107 defines the fair
value as the amount payable on demand and prohibits adjusting fair value for
any value derived from retaining those deposits for an expected future period
of time. Accordingly, the fair value of demand, interest checking, regular
savings and money market deposits is equivalent to their carrying value as of
the reporting date. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest
rates currently being offered on certificates to a schedule of aggregated
expected monthly maturities.
Short-Term Borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements and other short-term borrowings
approximate their fair values.
Other Financial Liabilities: Other financial liabilities consist of accrued
interest payable and long-term debt, excluding capital leases. The carrying
amount of accrued interest approximates its fair value. The fair value of
long-term debt was estimated using a discounted cash flow analysis, using
interest rates currently available to the corporation for borrowings with
similar terms.
Off-Balance Sheet Instruments: The majority of commitments to extend credit
and standby letters of credit are at variable rates and have relatively short
maturities. Therefore, the fair value of these instruments is immaterial. In
addition, the corporation does not engage in hedging or swap transactions nor
does it employ any derivative securities.
17. REGULATORY CAPITAL ADEQUACY REQUIREMENTS
The corporation and its subsidiary banks are subject to various
regulatory capital requirements administered by the federal banking agencies.
Failure to meet minimum capital requirements can initiate certain mandatory,
and possibly discretionary, actions by regulators that, if undertaken, could
have a direct material effect on the corporation's financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the corporation and its subsidiary banks must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities and certain off-balance sheet items as calculated under
regulatory accounting practices. The capital amounts and classification are
also subject to qualitative judgments by the regulators about components,
risk weightings and other factors. Quantitative measures established by
regulation to ensure capital adequacy require the corporation and its
subsidiary banks to maintain at least the minimum amounts and ratios (set
forth in the following table) of Total and Tier 1 capital (as defined in the
regulations) to risk-weighted assets (as defined), and of Tier 1 capital (as
defined) to average assets (as defined). Management believes that, as of
December 31, 2001, the corporation and its subsidiary banks exceeded all
capital adequacy requirements to which they are subject.
To be categorized as "well capitalized," a bank must maintain minimum
Total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth
in the table. The most recent notification from the federal banking agencies
categorized all of the corporation's bank subsidiaries as "well capitalized"
under the regulatory framework. There are no conditions or events since the
last notification that management believes have changed the subsidiary banks'
category. Actual capital amounts and ratios are presented in the table below
for the consolidated corporation and First Virginia Bank, the largest bank
subsidiary.
- ----------------------------------------------------------------------------
To Be "Well
Capitalized"
For Capital Under Prompt
Adequacy Corrective
Actual Purposes Action Provisions*
- -----------------------------------------------------------------------------
Capital Ratio Capital Ratio Capital Ratio
- -----------------------------------------------------------------------------
December 31, 2001
Tier 1 leverage ratio
Consolidated Corporation $965,089 9.39% $308,348 3.00%
First Virginia Bank 275,392 7.01 117,857 3.00 $196,428 5.00%
Tier 1 risk-based capital
Consolidated Corporation 965,089 13.58 284,272 4.00
First Virginia Bank 275,392 9.33 118,074 4.00 177,111 6.00
Total risk-based capital
Consolidated Corporation 1,037,026 14.59 568,544 8.00
First Virginia Bank 304,055 10.30 236,149 8.00 295,186 10.00
December 31, 2000
Tier 1 leverage ratio
Consolidated Corporation $835,485 8.99% $278,658 3.00%
First Virginia Bank 254,053 7.23 105,390 3.00 $175,649 5.00%
Tier 1 risk-based capital
Consolidated Corporation 835,485 12.20 273,968 4.00
First Virginia Bank 254,053 9.09 111,762 4.00 167,643 6.00
Total risk-based capital
Consolidated Corporation 905,785 13.22 547,936 8.00
First Virginia Bank 282,038 10.09 223,524 8.00 279,406 10.00
============================================================================
* This requirement applies only to the bank subsidiaries.
18. RESTRICTIONS ON LOANS AND DIVIDENDS FROM SUBSIDIARIES
The corporation's banking affiliates and its life insurance subsidiary
are subject to federal and/or state statutes that prohibit or restrict
certain of their activities, including the transfer of funds to the parent
company. There are restrictions on loans from the affiliate banks to the
parent company, and the banks and life insurance subsidiaries are limited as
to the amount of cash dividends that they can pay. As of December 31, 2001,
the parent company's equity in the net assets of its subsidiaries, after
elimination of intercompany deposits and loans, totaled $750.923 million. Of
that amount, $36.773 million was unrestricted as to the payment of dividends.
19. RELATED-PARTY TRANSACTIONS
Directors and officers of the corporation were customers of, and had
other transactions with, the corporation in the ordinary course of business.
The corporation has made residential mortgage loans at favorable rates to
officers who have been relocated for the convenience of the corporation.
Other loan transactions with directors and officers were made on
substantially the same terms as those prevailing for comparable loans to
other persons and did not involve more than normal risk of collectibility or
present other unfavorable features. As of December 31, 2001 and 2000, loans
to directors and executive officers of the parent company and
its significant subsidiaries totaled $42.193 million and $95.857 million,
respectively. During 2001, $306.407 million of new loans were made and
repayments totaled $360.744 million. These totals include loans to certain
business interests and family members of the directors and executive
officers. No losses are anticipated in connection with any of the loans.
20. BUSINESS SEGMENTS
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," defines an operating
segment as a component of an enterprise that engages in business activities
that generate revenue and incur expenses, whose operating results are
reviewed by the chief operating decision maker in the determination of
resource allocation and performance, and for which discrete financial
information is available. Pursuant to this definition the corporation
maintains two segments: retail banking done through its affiliated banks with
offices in Virginia, Maryland and Tennessee, and "other," which consists
primarily of nonbanking services and is immaterial for segment reporting
purposes. Since each of the affiliated banks in the retail banking segment
offers similar products and services to similar types and classes of
customers, operates in the same regulatory environment and has similar
economic characteristics, all the affiliated banks are managed as one
reportable segment, retail banking. Substantially all of the corporation's
consolidated assets, revenues and income are derived from this segment. The
corporation has no foreign operations.
21. CONTINGENCIES
The corporation, in the normal course of its business, is the subject of
legal proceedings instituted by customers and others. In the opinion of the
corporation's management, there were no legal matters pending as of December
31, 2001, that would have a material effect on the financial statements.
22. PARENT COMPANY CONDENSED FINANCIAL INFORMATION
BALANCE SHEETS
- -----------------------------------------------------------------------------
December 31 2001 2000
- -----------------------------------------------------------------------------
Assets
Cash and noninterest-bearing deposits
principally in affiliated banks $ 269 $ 173
Money market investments 160,180 121,230
Investment in affiliates based on the corporation's
equity in their net assets
Banking companies 737,714 748,629
Bank-related companies 13,209 13,153
Securities (fair value $27,515 and $28,030) 27,532 28,108
Loans (including $139,158 and $12,310
to affiliated companies) 148,566 22,233
Premises and equipment 28,420 28,741
Intangible assets 109,200 119,562
Accrued income and other assets 63,732 55,483
- -----------------------------------------------------------------------------
Total assets $1,288,822 $1,137,312
=============================================================================
Liabilities and Shareholders' Equity
Commercial paper $ 87,332 $ 97,137
Accrued interest and other liabilities 49,004 47,469
- -----------------------------------------------------------------------------
Total liabilities 136,336 144,606
Shareholders' equity 1,152,486 992,706
- -----------------------------------------------------------------------------
Total liabilities and shareholders' equity $1,288,822 $1,137,312
=============================================================================
STATEMENTS OF INCOME
- ----------------------------------------------------------------------------
Year Ended December 31 2001 2000 1999
- ----------------------------------------------------------------------------
Income
Dividends from affiliates
Banking companies $258,041 $175,303 $129,964
Bank-related companies 1,350 700 1,375
Service fees from affiliates 8,878 18,242 18,087
Rental income
Affiliates 4,636 4,251 4,405
Other 1,859 1,780 1,668
Interest and dividends
Affiliates 635 932 1,296
Other 6,569 6,518 5,997
Gain on bank divestiture 13,789 - -
Gain on sale of investment in Star Systems 10,781 - -
Other 1,880 492 4,223
- ----------------------------------------------------------------------------
Total income 308,418 208,218 167,015
- ----------------------------------------------------------------------------
Expense
Salaries and employee benefits 22,660 20,049 19,976
Interest
Affiliates 1 42 130
Other 2,736 4,713 3,103
Other expense
Affiliates 822 859 931
Other 17,660 17,408 19,800
- ----------------------------------------------------------------------------
Total expense 43,879 43,071 43,940
- ----------------------------------------------------------------------------
Income before income taxes and equity in
undistributed income of affiliates 264,539 165,147 123,075
Provision for income taxes 4,884 (3,108) (1,208)
- ----------------------------------------------------------------------------
Income before equity in
undistributed income of affiliates 259,655 168,255 124,283
Equity in undistributed income of affiliates (95,204) (26,224) 26,577
- ----------------------------------------------------------------------------
Net income $164,451 $142,031 $150,860
============================================================================
STATEMENTS OF CASH FLOWS
- ----------------------------------------------------------------------------
Year Ended December 31 2001 2000 1999
- ----------------------------------------------------------------------------
Net cash provided by operating activities $245,699 $174,601 $140,746
- ----------------------------------------------------------------------------
Investing activities
Proceeds from the sale of available
for sale securities 14,418 - 2,317
Proceeds from maturity of held to
maturity securities 35,405 - 2,850
Purchase of available for sale securities - - (5,579)
Purchase of held to maturity securities (36,320) (875) (3,720)
Net (increase) decrease in loans (126,333) 5,763 1,964
Purchases of premises and equipment (3,248) (612) (666)
Sales of premises and equipment 16,786 (19) 1,842
Net cash from bank divestiture 32,000 - -
Net cash for acquisition (8,680) - -
Other (29,509) 2,186 (9,392)
- ----------------------------------------------------------------------------
Net cash (used for) provided
by investing activities (105,481) 6,443 (10,384)
- ----------------------------------------------------------------------------
Financing activities
Net increase (decrease) in
short-term borrowings (9,805) 4,889 25,035
Common stock purchased and retired (22,674) (114,181) (44,726)
Proceeds from issuance of common stock 3,143 1,826 4,320
Cash dividends (71,836) (69,416) (66,064)
- ----------------------------------------------------------------------------
Net cash used for financing activities (101,172) (176,882) (81,435)
- ----------------------------------------------------------------------------
Net increase in cash and cash equivalents 39,046 4,162 48,927
Cash and cash equivalents at beginning of year 121,403 117,241 68,314
- ----------------------------------------------------------------------------
Cash and cash equivalents at end of year $160,449 $121,403 $117,241
============================================================================
Cash paid (refunded)for
Interest $ 2,780 $ 4,675 $ 3,105
Income taxes 9,625 (5,185) (3,949)
============================================================================
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
- ---------------------------------------------------
The management of First Virginia Banks, Inc. has prepared and is
responsible for the accompanying financial statements, together with the
financial data and other information presented in this annual report.
Management believes that the financial statements have been prepared in
conformity with generally accepted accounting principles appropriate under
the circumstances. The financial statements include amounts that are based on
management's best estimates and judgments.
Management maintains and depends upon an internal accounting control
system designed to provide reasonable assurance that transactions are
executed in accordance with management's authorization, that financial
records are reliable as the basis for the preparation of all financial
statements, and that the corporation's assets are safeguarded. The design and
implementation of all systems of internal control are based on judgments
required to evaluate the costs of control in relation to the expected
benefits and to determine the appropriate balance between these costs and
benefits. The corporation maintains a professional internal audit staff to
monitor compliance with the system of internal accounting control.
Operational and special audits are conducted, and internal audit reports are
submitted to appropriate management.
The Audit Committee of the Board of Directors, comprised solely of
outside directors, meets periodically with the independent public
accountants, management and internal auditors to review accounting, auditing
and financial reporting matters. The independent public accountants and
internal auditors have free access to the committee, without management
present, to discuss the results of their audit work and their evaluations of
the adequacy of internal controls and the quality of financial reporting.
The 2001 financial statements in this annual report have been audited by
the corporation's independent auditors, KPMG LLP, for the purpose of
determining that the financial statements are presented fairly. Their
independent professional opinion on the corporation's financial statements is
presented on the following page.
/S/ Barry J. Fitzpatrick
________________________
Barry J. Fitzpatrick
Chairman, President and
Chief Executive Officer
/S/ Richard F. Bowman
________________________
Richard F. Bowman
Executive Vice President,
Treasurer and
Chief Financial Officer
REPORT OF KPMG LLP INDEPENDENT AUDITORS
- ---------------------------------------
To the Shareholders and Board of Directors
First Virginia Banks, Inc.
We have audited the accompanying consolidated balance sheets of First
Virginia Banks, Inc. and subsidiaries (the Corporation) as of December 31,
2001 and 2000, and the related consolidated statements of income,
shareholders' equity, and cash flows for each of the years in the three-year
period ended December 31, 2001. These consolidated financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Virginia Banks, Inc. and subsidiaries as of December 31, 2001 and 2000, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
Richmond, Virginia
January 15, 2002
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Information relating to directors is incorporated by reference to the
corporation's proxy statement dated March 11, 2002.
Information relating to executive officers can be found in Part I on
page 5.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Incorporated by reference from the corporation's proxy statement dated
March 11, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT
----------
Incorporated by reference from the corporation's proxy statement dated
March 11, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Incorporated by reference from the corporation's proxy statement dated
March 11, 2002.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
FINANCIAL STATEMENTS:
The following consolidated financial statements and reports of
independent auditors of the corporation and its subsidiaries are in Part II,
item 8 on the following pages:
Page
Consolidated Balance Sheets - December 31, 2001 and 2000 46/47
Consolidated Statements of Income - Years Ended
December 31, 2001, 2000 and 1999 48/49
Consolidated Statements of Shareholders' Equity - Years
Ended December 31, 2001, 2000 and 1999 50/51
Consolidated Statements of Cash Flows - Years Ended
December 31, 2001, 2000 and 1999 52/53
Notes to Consolidated Financial Statements 54/76
Report of KPMG LLP Independent Auditors 78
EXHIBITS:
The following exhibits are filed as a part of this report:
(3)(i) Restated Articles of Incorporation are incorporated by reference
to Exhibit 3 of Form 10-Q for June 30, 1998.
(3)(ii) Restated Bylaws are incorporated by reference to Exhibit 3 of
Form 10-K for the year ended December 31, 2000.
(4) Reference is made to First Virginia's Amendment to Form 8-A filed
with the Commission on September 29, 1997 for a complete copy of
the Amended and Restated Rights Agreement which describes the
Rights which are attached to all common stock certificates.
Instruments defining the rights of holders of the corporation's
long-term debt are not filed herein because the total amount of
securities authorized thereunder does not exceed 10% of
consolidated total assets. The corporation hereby agrees to furnish
a copy of such instruments to the Commission upon its request.
(10) Supplemental compensation agreement for Mr. Barry J. Fitzpatrick is
incorporated by reference to Exhibit 10 of the 1994 Annual Report
on Form 10-K.
Amendment to Paragraph 1(a) of Barry J. Fitzpatrick's Supplemental
Compensation Agreement is incorporated by reference to Exhibit 10
of the 1995 Annual Report on Form 10-K.
Second Amendment to the Management Contract for Mr. Barry J.
Fitzpatrick is incorporated by reference to Exhibit 10 of the 1996
Annual Report on Form 10-K.
Supplemental compensation agreement for Mr. Paul H. Geithner, Jr.
is incorporated by reference to Exhibit 10 of the 1992 Annual
Report on Form 10-K.
Supplemental compensation agreement for Mr. Thomas K. Malone, Jr.
is incorporated by reference to Exhibit 10 of the 1992 Annual
Report on Form 10-K.
Supplemental compensation agreement for Mr. Robert H. Zalokar is
incorporated by reference to Exhibit 10 of the 1992 Annual Report
on Form 10-K.
Employment agreements regarding "Change of Control" for Mr. Barry
J. Fitzpatrick, Shirley C. Beavers, Jr., Richard F. Bowman, Raymond
E. Brann, Jr. and Thomas P. Jennings are incorporated by reference
to Exhibit 10 of the 1996 Annual Report on Form 10-K.
Key Employee Salary Reduction Deferred Compensation Plans for 1983
and 1986 are incorporated by reference to Exhibit 10 of the 1992
Annual Report on Form 10-K.
Amendment to Article VI, Section 6.03 of the Key Employee Salary
Reduction Deferred Compensation Plan is incorporated by reference
to Exhibit 10 of the 1995 Annual Report on Form 10-K.
Directors' Deferred Compensation Plans for 1983 and 1986 are
incorporated by reference to Exhibit 10 of the 1992 Annual Report
on Form 10-K.
1998 Directors' Deferred Compensation Plan is incorporated by
reference to Exhibit 10 of the 1999 Annual Report on Form 10-K.
First Virginia Thrift Restoration and Deferred Compensation Plan is
incorporated by reference to Exhibit 10 of the 1999 Annual Report
on Form 10-K.
Collateral Assignment Split Dollar Life Insurance Agreement and
Plan is incorporated by reference to Exhibit 10 of the 1992 Annual
Report on Form 10-K.
Amendment to the third paragraph of Section 9 of the Collateral
Assignment Split Dollar Life Insurance Agreement and Plan is
incorporated by reference to Exhibit 10 of the 1995 Annual Report
on Form 10-K.
1986 Incentive Stock Option Plan, Nonqualified Stock Option Plan
and Stock Appreciation Rights Plan is incorporated by reference to
Registration Statement Number 33-17358 on Form S-8 dated September
28, 1987.
1991 Incentive Stock Option Plan, Nonqualified Stock Option Plan
and Stock Appreciation Rights Plan is incorporated by reference to
Registration Statement Number 33-54802 on Form S-8 dated November
20, 1992.
1998 Stock Incentive Plan is incorporated by reference to
Registration Statement Number 333-53698 on Form S-8 dated January
12, 2001.
(13) First Virginia Banks, Inc., 2001 Annual Report to its Shareholders
(Not included in the electronic filing)
(21) Subsidiaries of the Registrant
(23) Consent of Independent Auditors
(24) Power of Attorney concerning Directors' signatures
REPORTS ON FORM 8-K:
No reports on Form 8-K were required to be filed during the last quarter of
2001.
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed as of
March 28, 2002, on its behalf by the undersigned, thereunto duly authorized.
FIRST VIRGINIA BANKS, INC.
/s/ Barry J. Fitzpatrick
_________________________________________
Barry J. Fitzpatrick, Chairman, President
and Chief Executive Officer
/s/ Richard F. Bowman
_________________________________________
Richard F. Bowman, Executive Vice
President, Treasurer and Chief Financial
Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons as of March 28, 2002 on
behalf of the registrant and in the capacities indicated.
SIGNATURE TITLE
--------- -----
/s/ Barry J. Fitzpatrick
_____________________________ Chairman, President,
Barry J. Fitzpatrick Chief Executive Officer
Principal Executive Officer and Director
/s/ Richard F. Bowman
_____________________________ Executive Vice President,
Richard F. Bowman Treasurer and Chief Financial
Principal Financial and Officer
Accounting Officer
Jennifer S. Banner*
_____________________________ Director
Jennifer S. Banner
Edward L. Breeden III*
_____________________________ Director
Edward L. Breeden, III
Paul H. Geithner, Jr.*
_____________________________ Director
Paul H. Geithner, Jr.
SIGNATURE TITLE
--------- -----
L. H. Ginn III*
_____________________________ Director
L. H. Ginn, III
Edward M. Holland*
_____________________________ Director
Edward M. Holland
Lawrence T. Jennings*
_____________________________ Director
Lawrence T. Jennings
Eric C. Kendrick*
_____________________________ Director
Eric C. Kendrick
W. Lee Phillips, Jr.*
_____________________________ Director
W. Lee Phillips, Jr.
Joseph W. Richmond, Jr.*
_____________________________ Director
Joseph W. Richmond, Jr.
Lynda S. Vickers-Smith*
_____________________________ Director
Lynda S. Vickers-Smith
Robert H. Zalokar*
_____________________________ Director
Robert H. Zalokar
Albert F. Zettlemoyer*
_____________________________ Director
Albert F. Zettlemoyer
* By: /s/Thomas P. Jennings
____________________________________
Thomas P. Jennings, Attorney-in-fact
March 28, 2002
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2001
ITEM 14
EXHIBITS
The Exhibits filed with this annual report are
included herein.
FIRST VIRGINIA BANKS, INC.
6400 Arlington Boulevard
Falls Church, Virginia 22042-2336
SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21
December 31, 2001
State of Incorporation and
Headquarters Location
---------------------------
First Virginia Banks, Inc. Falls Church, Virginia
Banking Subsidiaries:
First Virginia Bank Falls Church, Virginia
First General Mortgage Company Falls Church, Virginia
First Virginia Mortgage Company Falls Church, Virginia
First Virginia Commercial Corporation Falls Church, Virginia
First Virginia Card Services, Inc. Falls Church, Virginia
First Virginia Credit Services, Inc. Falls Church, Virginia
State Bank Services Corporation Remington, Virginia
Farmers Bank of Maryland Annapolis, Maryland
Atlantic Bank Ocean City, Maryland
First Virginia Bank-Hampton Roads Norfolk, Virginia
The Mortgage Company of James River Inc Suffolk, Virginia
East Bank Services Corporation Suffolk, Virginia
Bankers Title of Hampton Roads, LLC Chesapeake, Virginia (7.78%)
JRB Service Corporation Waverly, Virginia
JRB/C Services Corporation Smithfield, Virginia
Bankers Title of Hampton Roads, LLC Chesapeake, Virginia (3.33%)
First Virginia Bank-Colonial Richmond, Virginia
Family Finance Corporation Petersburg, Virginia
Family Finance of Virginia, Inc. Petersburg, Virginia
First Colonial Financial Corporation Hopewell, Virginia
First Virginia Bank-Southwest Roanoke, Virginia
First Virginia Bank-Blue Ridge Staunton, Virginia
First Vantage Bank/Tri-Cities Bristol, Virginia
Nonbanking Subsidiaries
First Virginia Insurance Services, Inc. Falls Church, Virginia
First Virginia Insurance Services of
Maryland, Inc. Falls Church, Virginia
First Virginia Services, Inc. Falls Church, Virginia
First Virginia Life Insurance Company Falls Church, Virginia
Springdale Advertising Agency, Inc. Falls Church, Virginia
First Virginia Operations Services, Inc. Falls Church, Virginia
Springdale Temporary Services, Inc. Falls Church, Virginia
First General Leasing Company Falls Church, Virginia
Farmers National Land Corporation Annapolis, Maryland
James River Support, Inc. Waverly, Virginia
All of the organizations listed above are 100% owned by First Virginia Banks,
Inc., or one of its subsidiary banks, except as indicated.
Exhibit 23
Consent of Independent Auditors
Board of Directors
First Virginia Banks, Inc.
We consent to the incorporation by reference in the Registration Statement No.
33-30465 on Form S-8 dated June 30, 1997, Post-effective Amendment No. 1 to
Registration Statement No. 33-38024 on Form S-8 dated January 10, 1994,
Registration Statement No. 33-51587 on Form S-3 dated December 20, 1993,
Registration Statement No. 33-54802 on Form S-8 dated November 20, 1992,
Registration Statement No. 33-31890 on form S-3 dated November 1, 1989, Post-
effective Amendment No. 2 to Registration Statement No. 2-77151 on Form S-8
dated October 30, 1987, Registration Statement No. 33-17358 on Form S-8 dated
September 28, 1987, Registration Statement Number 333-53698 on Form S-8 dated
January 12, 2001 and Registration Statement No. 333-60346 on Form S-4 dated May
7, 2001 and Post-effective Amendment No. 1 to Registration Statement No. 333-
60346 on Form S-8 dated July 30, 2001 of First Virginia Banks, Inc. of our
report dated January 15, 2002, relating to the consolidated balance sheets of
First Virginia Banks, Inc. and subsidiaries as of December 31, 2001 and 2000,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
2001, which report appears in the December 31, 2001, annual report on Form
10-K of First Virginia Banks, Inc.
/s/ KPMG
Richmond, Virginia
March 27, 2002
EXHIBIT 24
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that we, the undersigned directors of
First Virginia Banks, Inc., and each of us, do hereby make, constitute and
appoint Thomas P. Jennings and Christopher M. Cole, and each of them (either of
whom may act without the consent or joinder of the other), our attorneys-in-
fact and agents with full power of substitution for us and in our name, place
and stead, in any and all capacities, to execute for us in our behalf the
Annual Report on Form 10-K of First Virginia Banks, Inc. for the year ended
December 31, 2001 and any and all amendments to the foregoing Report and any
other documents and instruments incidental thereto, and to file the same, with
all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as we might or could do in
person, hereby ratifying and confirming all that said attorneys-in-fact and
agents and/or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, we the undersigned have executed this Power of
Attorney this 27th day of February, 2002.
/s/ Jennifer S. Banner /s/ Eric C. Kendrick
_________________________ ___________________________
Jennifer S. Banner Eric C. Kendrick
/s/ Edward L. Breeden /s/ W. Lee Phillips Jr.
_________________________ ___________________________
Edward L. Breeden W. Lee Phillips, Jr.
/s/ Paul Geithner Jr /s/ Joseph W. Richmond, Jr.
_________________________ ___________________________
Paul Geithner, Jr. Joseph W. Richmond, Jr.
/s/ L. H. Ginn III /s/ Lynda S. Vickers-Smith
_________________________ ___________________________
L. H. Ginn III Lynda S. Vickers-Smith
/s/ Edward M. Holland /s/ Robert H. Zalokar
_________________________ ___________________________
Edward M. Holland Robert H. Zalokar
/s/ Lawrence T. Jennings /s/ Albert F. Zettlemoyer
_________________________ ___________________________
Lawrence T. Jennings Albert F. Zettlemoyer