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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission file number 1-6580
June 30, 2002
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 (Zip Code)
offices)
Registrant's telephone number, including area code
(703) 241-4000
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. [ X ] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
On July 31, 2002, there were 47,784,810 shares
of common stock outstanding.
This report contains a total of 25 pages.
INDEX
Page
---------
PART I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30,
2002 and 2001, and December 31, 2001 (Unaudited) 3/ 4
Condensed Consolidated Statements of Income - Three
months and six months ended June 30, 2002 and
2001 (Unaudited) 5/ 6
Condensed Consolidated Statements of Shareholders'
Equity - Six months ended June 30, 2002
and 2001 (Unaudited) 7/ 8
Condensed Consolidated Statements of Cash
Flows - Six months ended June 30, 2002
and 2001 (Unaudited) 9
Notes to Condensed Consolidated Financial
Statements (Unaudited) 10/15
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 16/23
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 24
PART II - Other Information
Item 4. Submission of Matters to a Vote of
Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 25
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
(Dollars in thousands, except per share data)
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
- -------------------------------------------------------------------------------
June 30 Dec.31 June 30
2002 2001 2001
- -------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 304,704 $ 386,171 $ 312,600
Money market investments 370,485 95,808 280,607
- -------------------------------------------------------------------------------
Total cash and cash equivalents 675,189 481,979 593,207
- -------------------------------------------------------------------------------
Securities - available for sale 1,250,754 1,457,788 58,200
Securities - held to maturity (fair values of
$1,946,703, $1,658,992 and $2,343,893) 1,926,454 1,639,827 2,332,093
- -------------------------------------------------------------------------------
Total securities 3,177,208 3,097,615 2,390,293
- -------------------------------------------------------------------------------
Loans, net of unearned income 6,588,518 6,510,559 6,270,081
Allowance for loan losses (73,345) (71,937) (68,670)
- -------------------------------------------------------------------------------
Net loans 6,515,173 6,438,622 6,201,411
- -------------------------------------------------------------------------------
Other earning assets 30,946 26,872 17,872
Premises and equipment 151,585 153,505 146,279
Intangible assets 194,669 199,948 150,413
Accrued income and other assets 206,382 224,486 206,679
- -------------------------------------------------------------------------------
Total assets $10,951,152 $10,623,027 $9,706,154
===============================================================================
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)(Continued)
- -------------------------------------------------------------------------------
June 30 Dec. 31 June 30
2002 2001 2001
- -------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 1,929,462 $ 1,831,324 $1,652,565
Interest-bearing:
Interest checking 1,723,566 1,711,885 1,504,070
Money market 1,413,241 1,132,998 947,606
Savings 1,117,225 1,048,577 1,002,492
Consumer certificates of deposit 2,280,744 2,418,890 2,321,168
Large denomination
certificates of deposit 486,571 505,962 506,021
- -------------------------------------------------------------------------------
Total deposits 8,950,809 8,649,636 7,933,922
- -------------------------------------------------------------------------------
Short-term borrowings 626,174 639,351 578,938
Long-term debt 13,507 19,526 539
Accrued interest and other liabilities 144,857 162,028 155,647
- -------------------------------------------------------------------------------
Total liabilities 9,735,347 9,470,541 8,669,046
- -------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock, $10 par value 414 421 427
Common stock, $1 par value 47,876 47,827 46,164
Capital surplus 76,241 74,959 1,205
Retained earnings 1,086,257 1,036,257 987,329
Accumulated other comprehensive income (loss) 5,017 (6,978) 1,983
- -------------------------------------------------------------------------------
Total shareholders' equity 1,215,805 1,152,486 1,037,108
- -------------------------------------------------------------------------------
Total liabilities and shareholders' equity $10,951,152 $10,623,027 $9,706,154
===============================================================================
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
- -------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
- -------------------------------------------------------------------------------
Interest income:
Loans $118,317 $123,586 $236,681 $249,831
Securities - available for sale 18,228 880 36,897 1,966
Securities - held to maturity 22,888 28,870 43,700 56,369
Money market investments 1,362 6,660 2,546 12,647
Other earning assets 394 291 812 608
- -------------------------------------------------------------------------------
Total interest income 161,189 160,287 320,636 321,421
- -------------------------------------------------------------------------------
Interest expense:
Deposits 34,878 49,291 74,060 99,757
Short-term borrowings 1,555 4,904 3,101 11,283
Long-term debt 192 21 407 49
- -------------------------------------------------------------------------------
Total interest expense 36,625 54,216 77,568 111,089
- -------------------------------------------------------------------------------
Net interest income 124,564 106,071 243,068 210,332
Provision for loan losses 3,359 2,138 6,876 3,001
- -------------------------------------------------------------------------------
Net interest income after provision
for loan losses 121,205 103,933 236,192 207,331
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Continued)
- -------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
- -------------------------------------------------------------------------------
Net interest income after provision
for loan losses 121,205 103,933 236,192 207,331
- -------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 17,362 16,148 34,283 32,157
Electronic banking service fees 5,135 4,415 9,604 8,344
Trust and asset management fees 3,225 3,243 6,592 6,420
Insurance premiums and commissions 2,455 1,809 4,797 3,708
Other 5,456 4,323 11,602 16,567
Securities gains - 3,035 - 4,503
- -------------------------------------------------------------------------------
Total noninterest income 33,633 32,973 66,878 71,699
- -------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 50,423 46,360 100,804 92,776
Occupancy 6,644 6,443 13,819 13,076
Equipment 8,117 8,206 16,485 16,586
Amortization of intangibles 2,195 3,682 4,457 7,364
Other 17,329 15,514 33,898 30,510
- -------------------------------------------------------------------------------
Total noninterest expense 84,708 80,205 169,463 160,312
- -------------------------------------------------------------------------------
Income before income taxes 70,130 56,701 133,607 118,718
Provision for income taxes 23,564 19,316 44,822 41,071
- -------------------------------------------------------------------------------
Net income $ 46,566 $ 37,385 $ 88,785 $ 77,647
===============================================================================
Net income per share of common stock:
Basic $ .97 $ .81 $ 1.86 $ 1.68
Diluted .97 .81 1.84 1.68
Average shares of common stock outstanding:
Basic 47,864 46,162 47,855 46,157
Diluted 48,169 46,352 48,137 46,353
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY(Unaudited)(Continued)
- -------------------------------------------------------------------------------
Accum-
ulated
Other Total
Pre- Compre- Share-
ferred Common Capital Retained hensive holders'
Stock Stock Surplus Earnings Income Equity
- -------------------------------------------------------------------------------
Balance January 1, 2001 $ 451 $46,143 $ 612 $945,241 $ 259 $ 992,706
Comprehensive income:
Net income 77,647 77,647
Unrealized gains on
securities available for
sale 1,724 1,724
-----------
Total comprehensive income 79,371
-----------
Conversion of preferred
to common stock (24) 5 19 -
Issuance of shares for
stock options 18 687 705
Common stock purchased
and retired (2) (113) (115)
Dividends declared:
Preferred stock (14) (14)
Common stock $.77 per share (35,545) (35,545)
- -------------------------------------------------------------------------------
Balance June 30, 2001 $ 427 $46,164 $1,205 $987,329 $ 1,983 $1,037,108
===============================================================================
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY(Unaudited)(Continued)
- -------------------------------------------------------------------------------
Accum-
ulated
Other
Compre- Total
Pre- hensive Share-
ferred Common Capital Retained Income holders'
Stock Stock Surplus Earnings (Loss) Equity
- -------------------------------------------------------------------------------
Balance January 1, 2002 $ 421 $47,827 $74,959 $1,036,257 $(6,978) $1,152,486
Comprehensive income:
Net income 88,785 88,785
Unrealized gains on
securities available
for sale 11,995 11,995
-----------
Total comprehensive income 100,780
-----------
Conversion of preferred
to common stock (7) 2 5 -
Issuance of shares for
stock options 88 3,327 3,415
Common stock purchased
and retired (41) (2,050) (2,091)
Dividends declared:
Preferred stock (14) (14)
Common stock
$.81 per share (38,771) (38,771)
- -------------------------------------------------------------------------------
Balance June 30, 2002 $ 414 $47,876 $76,241 $1,086,257 $ 5,017 $1,215,805
===============================================================================
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- -------------------------------------------------------------------------------
Six Months Ended June 30 2002 2001
- -------------------------------------------------------------------------------
Net cash provided by operating activities $101,122 $ 93,406
- -------------------------------------------------------------------------------
Investing activities:
Proceeds from the sale of available
for sale securities 234,040 80,191
Proceeds from the maturity of held to
maturity securities 1,161,670 1,906,395
Purchases of available for sale securities (9,972) -
Purchases of held to maturity securities (1,449,153)(2,199,066)
Net(increase) decrease in loans (83,427) 91,753
Purchases of premises and equipment (5,370) (4,114)
Sales of premises and equipment 1,091 1,355
Other (1,808) (2,620)
- -------------------------------------------------------------------------------
Net cash used for investing activities (152,929) (126,106)
- -------------------------------------------------------------------------------
Financing activities:
Net increase in deposits 301,173 108,106
Net increase (decrease) in short-term borrowings (13,177) 39,469
Principal payments on long-term debt (6,019) (577)
Common stock purchased and retired (2,091) (115)
Proceeds from issuance of common stock 3,415 705
Cash dividends paid (38,284) (35,090)
- -------------------------------------------------------------------------------
Net cash provided by financing activities 245,017 112,498
- -------------------------------------------------------------------------------
Net increase in cash and cash equivalents 193,210 79,798
Cash and cash equivalents at beginning of year 481,979 513,409
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period $675,189 $593,207
===============================================================================
Cash paid for:
Interest $ 92,926 $109,136
Income taxes 38,636 43,373
===============================================================================
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(Dollars in thousands, except per share data)
1. GENERAL
The foregoing unaudited consolidated financial statements include the
accounts of the corporation and all of its subsidiaries. The corporation's
subsidiaries are predominantly engaged in banking activities. Foreign banking
activities and operations other than banking are not significant. All material
intercompany transactions and accounts have been eliminated. The unaudited
consolidated financial statements include all adjustments (consisting only of
normal recurring accruals) which, in the opinion of management, are necessary
for a fair presentation of the results of operations for each of the periods
presented. Certain amounts previously reported in 2001 have been reclassified
for comparative purposes. These reclassifications are immaterial and had no
effect on net income or shareholders' equity.
Certain information and disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been condensed or omitted, pursuant to the
rules and regulations of the Securities and Exchange Commission. These
unaudited consolidated financial statements should be read in conjunction with
the audited consolidated financial statements and notes thereto included in the
corporation's annual report on Form 10-K for the year ended December 31, 2001.
2. SECURITIES
The following reflects the amortized cost of securities and the related
approximate fair values:
- -------------------------------------------------------------------------------
June 30, 2002 June 30, 2001
- -------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- -------------------------------------------------------------------------------
Available for sale:
U.S. Government and its agencies $ 817,650 $ 819,204 $ 45,583 $ 45,957
Mortgage-backed securities
of U.S. Government agencies 415,895 417,366 - -
Other 9,145 14,184 9,395 12,243
- -------------------------------------------------------------------------------
Total $1,242,690 $1,250,754 $ 54,978 $ 58,200
===============================================================================
Held to maturity:
U.S. Government and its agencies $1,319,075 $1,327,467 $1,965,144 $1,972,566
Mortgage-backed securities
of U.S. Government agencies 285,785 289,906 13,920 14,071
State and municipal obligations 319,533 327,199 353,029 357,256
Other 2,061 2,131 - -
- -------------------------------------------------------------------------------
Total $1,926,454 $1,946,703 $2,332,093 $2,343,893
===============================================================================
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
3. LOANS
Loans consisted of:
- -------------------------------------------------------------------------------
June 30 2002 2001
- -------------------------------------------------------------------------------
Consumer:
Automobile $3,180,845 $3,176,954
Home equity, fixed- and variable-rate 711,237 689,031
Revolving credit loans 34,593 33,409
Other 142,165 157,922
Commercial 874,819 885,784
Construction and land development 123,902 141,181
Real estate:
Commercial mortgage 693,966 490,978
Residential mortgage 826,991 694,822
- -------------------------------------------------------------------------------
Total loans, net of unearned income $6,588,518 $6,270,081
===============================================================================
4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was:
- -------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
- -------------------------------------------------------------------------------
Balance at beginning of period $72,823 $68,914 $71,937 $70,300
Provision charged to operating expense 3,359 2,138 6,876 3,001
- -------------------------------------------------------------------------------
Balance before charge-offs 76,182 71,052 78,813 73,301
Charge-offs 3,986 3,232 7,558 7,264
Recoveries 1,149 850 2,090 2,633
- -------------------------------------------------------------------------------
Balance at June 30 $73,345 $68,670 $73,345 $68,670
===============================================================================
Percentage of annualized net
charge-offs to average loans .17% .15% .17% .15%
Percentage of allowance for loan
losses to period-end loans 1.11 1.10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
5. INTANGIBLE ASSETS
The corporation adopted Statement of Financial Accounting Standards No.
142, "Goodwill and Other Intangible Assets" (SFAS 142) on January 1, 2002. As
of the date of adoption, the corporation had unamortized goodwill of $150.183
million and unamortized identifiable intangible assets of $49.765 million, all
of which are subject to the transition provisions of SFAS 142. The corporation
did not acquire or dispose of any goodwill during the first six months of 2002,
and in accordance with SFAS 142, goodwill is no longer being amortized, but
instead is to be tested for impairment at least annually. The corporation has
evaluated its goodwill and other intangible assets and determined that there is
no impairment as of June 30, 2002. Substantially all of the identifiable
intangible assets are core deposit premiums and there was no adjustment to the
useful lives of these assets as a result of adopting SFAS 142. The carrying
amount of amortizable intangible assets as of June 30, 2002, and the actual and
expected amortization expense are as follows:
- -------------------------------------------------------------------------------
Gross
Carrying Accumulated Carrying
June 30, 2002 Amount Amortization Amount
- -------------------------------------------------------------------------------
Core deposit premiums $ 89,808 $ 44,796 $ 45,012
Other 73 71 2
- -------------------------------------------------------------------------------
Total $ 89,881 $ 44,867 $ 45,014
===============================================================================
- -------------------------------------------------------------------------------
Gross
Carrying Accumulated Carrying
December 31, 2001 Amount Amortization Amount
- -------------------------------------------------------------------------------
Core deposit premiums $ 92,669 $ 43,222 $ 49,447
Other 1,281 963 318
- -------------------------------------------------------------------------------
Total $ 93,950 $ 44,185 $ 49,765
===============================================================================
- -------------------------------------------------------------------------------
Gross
Carrying Accumulated Carrying
June 30, 2001 Amount Amortization Amount
- -------------------------------------------------------------------------------
Core deposit premiums $ 82,739 $ 38,691 $ 44,048
Other 1,749 1,385 364
- -------------------------------------------------------------------------------
Total $ 84,488 $ 40,076 $ 44,412
===============================================================================
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
- ------------------------------------------------------------------------------
Core Deposit
Amortization Expense Goodwill Premiums Other
- -------------------------------------------------------------------------------
Actual:
Six months ended June 30, 2001 $3,265 $4,034 $65
Six months ended June 30, 2002 - 4,435 22
Expected:
Six months ended December 31, 2002 - 4,388 2
Twelve months ended December 31, 2003 - 8,731 -
Twelve months ended December 31, 2004 - 8,731 -
Twelve months ended December 31, 2005 - 7,146 -
Twelve months ended December 31, 2006 - 5,662 -
Twelve months ended December 31, 2007 - 4,704 -
===============================================================================
The following tables compare the corporation's net income and earnings per
share amounts had SFAS 142 been in effect for all periods presented.
- -------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
- -------------------------------------------------------------------------------
Net income $46,566 $37,385 $ 88,785 $ 77,647
Goodwill amortization - 1,633 - 3,265
- -------------------------------------------------------------------------------
Adjusted net income $46,566 39,018 $ 88,785 $ 80,912
===============================================================================
Basic earnings per share:
Net income $ .97 $ .81 $ 1.86 $ 1.68
Goodwill amortization - .04 - .07
- -------------------------------------------------------------------------------
Adjusted net income $ .97 $ .85 $ 1.86 $ 1.75
===============================================================================
Diluted earnings per share:
Net income $ .97 $ .81 $ 1.84 $ 1.68
Goodwill amortization - .03 - .07
- -------------------------------------------------------------------------------
Adjusted net income $ .97 $ .84 $ 1.84 $ 1.75
===============================================================================
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
6. PREFERRED AND COMMON STOCK
There are 3,000,000 shares of preferred stock, par value $10.00 per
share, authorized. The following four series of cumulative convertible
preferred stock were outstanding:
- -------------------------------------------------------------------------------
June 30 December 31 June 30
Series Dividends 2002 2001 2001
- -------------------------------------------------------------------------------
A 5% 15,325 15,551 15,935
B 7% 3,290 3,290 3,290
C 7% 5,036 5,072 5,072
D 8% 17,712 18,148 18,350
- -------------------------------------------------------------------------------
Total preferred shares 41,363 42,061 42,647
===============================================================================
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.
There are 175,000,000 shares of common stock, par value $1.00 per share,
authorized and 47,876,260, 47,826,531 and 46,164,117 shares were outstanding at
June 30, 2002, December 31, 2001, and June 30, 2001, respectively. Options to
purchase 1,099,677 shares of common stock were outstanding on June 30, 2002. A
total of 2,986,137 shares of common stock were reserved at June 30, 2002:
90,799 shares for the conversion of preferred stock and 2,895,338 shares for
stock options.
7. FEDERAL INCOME TAX
The reconcilement of income tax computed at the federal statutory tax
rates to the provision for income taxes was as follows:
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
- -------------------------------------------------------------------------------
Amount Pct Amount Pct Amount Pct Amount Pct
- -------------------------------------------------------------------------------
Statutory rate $24,546 35.0% $19,845 35.0% $46,763 35.0% $41,551 35.0%
Nontaxable interest on
municipal obligations (1,259)(1.8) (1,199)(2.1) (2,572)(1.9) (2,335)(2.0)
State taxes, net of
Federal tax benefit 239 0.3 406 0.7 512 0.4 1,064 0.9
Nondeductible goodwill - 572 0.9 - 1,143 1.0
Other items 38 0.1 (308)(0.5) 119 0.1 (352)(0.3)
- -------------------------------------------------------------------------------
Effective rate $23,564 33.6% $19,316 34.0% $44,822 33.6% $41,071 34.6%
===============================================================================
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
8. OTHER NONINTEREST INCOME
Other noninterest income for the six months ended June 30, 2001 includes
$7.749 million from the sale of the corporation's interest in Star Systems,
Inc., which was exchanged for shares of Concord EFS, Inc.
9. EARNINGS PER SHARE
Earnings per share computations are as follows:
- -------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
- -------------------------------------------------------------------------------
Basic:
Net income $46,566 $37,385 $88,785 $77,647
Preferred stock dividends 7 7 14 14
- -------------------------------------------------------------------------------
Net income applicable to common stock $46,559 $37,378 $88,771 $77,633
- -------------------------------------------------------------------------------
Average common shares outstanding (000s) 47,864 46,162 47,855 46,157
Earnings per share of common stock $ .97 $ .81 $ 1.86 $ 1.68
===============================================================================
Diluted:
Net income $46,566 $37,385 $88,785 $77,647
Average common shares outstanding (000s) 47,864 46,162 47,855 46,157
Dilutive effect of stock options (000s) 214 95 191 99
Conversion of preferred stock (000s) 91 95 91 97
- -------------------------------------------------------------------------------
Total average common shares (000s) 48,169 46,352 48,137 46,353
- -------------------------------------------------------------------------------
Earnings per share of common stock $ .97 $ .81 $ 1.84 $ 1.68
===============================================================================
Options which were not included in the calculation of diluted earnings per
share because the options' exercise prices were greater than the average market
price were:
- -------------------------------------------------------------------------------
Three Months Ended Six Months Ended
June 30 June 30
2002 2001 2002 2001
- -------------------------------------------------------------------------------
Options (000s) - 327 90 254
Weighted average price $ - $ 49.25 $ 52.31 $ 50.34
- -------------------------------------------------------------------------------
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
-----------------------------------------------------------
AND RESULTS OF OPERATIONS
-------------------------
(Dollars in thousands, except per share data)
QUARTERLY RESULTS:
First Virginia Banks, Inc. reported a 26% increase in 2002 second quarter
earnings per share from recurring operations to $.97 or $46.566 million
compared to $.77 or $35.532 million earned in the second quarter of 2001. The
prior year's second quarter total earnings of $.81 per share included an after-
tax gain of $.04 per share or $1.853 million from the sale of the corporation's
interest in an electronic switch network. Excluding the gain in the 2001
second quarter, the return on average assets increased to 1.72% compared to
1.47% in the prior year, and the return on average shareholders' equity
increased to 15.65% compared to 13.83%. Cash basis recurring income, which
excludes both the effects of intangible assets and their related amortization
and the gain on the sale of the switch network in the 2001 second quarter,
equaled $48.091 million or $1.00 per share compared to $38.583 million or $.83
per share in the prior year's second quarter. Cash basis recurring income
produced a return on average tangible assets of 1.81% in the second quarter and
a return on average tangible shareholders' equity of 19.37%, placing First
Virginia among the best performing banks in the country.
For the first six months of 2002, earnings per share from recurring
operations increased 20% to $1.84 or $88.785 million compared to $1.53 or
$71.059 million earned in the comparable period of 2001. Excluding the gain in
the first half of 2001 of $.14 per share or $6.588 million from the sale of the
corporation's interest in the electronic switch network mentioned above, the
return on average assets increased to 1.66% compared to 1.49% in the prior
year, and the return on average shareholders' equity increased to 15.06%
compared to 13.98%. Cash basis recurring income produced a return on average
tangible assets of 1.75% for the first six months of 2002 and a return on
average tangible shareholders' equity of 18.72% compared to 1.64% and 17.88%,
respectively, in the prior year.
Total assets and deposits achieved new highs and have increased 13% in the
past year. Total assets at June 30, 2002, were $10.951 billion compared to
$9.706 billion a year ago. Spurring the growth in total assets was a strong
growth in deposits, particularly in lower-cost transaction-oriented accounts.
Average total deposits increased 12% to $8.874 billion in the second quarter of
2002 compared to $7.907 billion in the prior year's second quarter. Average
money market accounts led the growth in deposits, advancing 46% over the prior
year's second quarter, followed by a 16% growth in average demand deposits and
a 14% growth in average interest checking deposits. Despite a significant
downward repricing in interest rates for maturing certificates of deposit,
which lowered the average cost of the total portfolio of consumer certificates
by 152 basis points in the second quarter, average balances in this category
declined less than 1% compared to the prior year's quarter.
Average loans increased 5% in the second quarter compared to the prior
year's second quarter. Most of the increase came in real estate loans, which
increased 28% as consumers took advantage of historically low interest rates
and refinanced existing mortgages into the corporation's 10- and 15-year fixed-
rate products. Average installment loans to consumers advanced modestly
compared to the prior year's second quarter, but declined slightly compared to
the first quarter, as a faster pace of repayment of home equity loans exceeded
the growth of automobile loans. Average commercial loans increased at a 5%
annualized pace over the first quarter.
An increase of 20 basis points drove the corporation's net interest margin
to 5.04% in the second quarter compared to 4.84% in 2001, and to 5.00% for the
first six months of the year compared to 4.86% in 2001. Contributing to the
improvement in the net interest margin in the second quarter was a decline in
the cost of funds of 30 basis points compared to the first quarter and a
decline of 126 basis points compared to the previous year's second quarter.
The cost of consumer certificates of deposit also declined as higher-rate
certificates issued in previous years matured in the first half of the year.
The corporation will likely continue to benefit in the third quarter from this
continued reduction in the cost of maturing certificates, but by the end of the
quarter the majority of higher-rate certificates will have been repriced and
the decline in yields on earning assets will limit further improvements in the
net interest margin. The yield on earning assets declined 16 basis points
compared to the first quarter of 2002 and was down 77 basis points compared to
the prior year's second quarter. First Virginia has historically maintained an
interest rate neutral position in its assets and liabilities so market rate
swings do not have a dramatic impact on the net interest margin. The
corporation has achieved a net interest margin in excess of 5.00% for 23 of the
past 25 years.
First Virginia's asset quality continues to be one of the best among the
100 largest banks in the United States. During the second quarter,
nonperforming assets declined 13% compared to the first quarter and achieved a
new record low of .26% of outstanding loans compared to .30% at the end of the
previous quarter and .29% at June 30, 2001. Total nonperforming assets at June
30, 2002 were $17.278 million compared to $19.898 million at March 31, 2002,
and $17.992 million at the end of the prior year's second quarter. Net loan
charge-offs also remain low and were $2.837 million or .17% of average loans in
the second quarter compared to $2.631 million or .16% in the first quarter and
$2.382 million or .15% of loans in the prior year's second quarter. These
rates are less than one-half the level of First Virginia's peer group of banks.
First Virginia lends to only the most highly qualified individuals and
organizations in the communities in which it operates to effectively control
risk and limit its exposure to losses, and it has no exposure to international
or national shared credits. At June 30, 2002, the allowance for loan losses
represented 1.11% of outstanding loans and covered annualized net charge-offs
6.71 times compared to 1.10% and 7.42 times at the end of June 2001. The
provision for loan loss expense increased to $3.359 million in the second
quarter of 2002 compared to $2.138 million in the prior year's second quarter
and is up 129% in the first six months of 2002 primarily as a result of the
growth that occurred in the loan portfolio compared to a year ago when
outstanding loans were declining. Loans past due 90 days or more were
virtually unchanged from the end of the first quarter of 2002 and the second
quarter of 2001 and totaled $11.022 million or .17% of outstanding loans at
June 30, 2002.
A summary of nonperforming and delinquent loans is as follows:
- -----------------------------------------------------------------------------
June 30 2002 2001
- -----------------------------------------------------------------------------
Nonaccruing loans $14,701 $13,600
Restructured loans 535 929
Properties acquired by foreclosure 2,042 3,463
- -----------------------------------------------------------------------------
Total nonperforming assets $17,278 $17,992
=============================================================================
Percentage of total loans and foreclosed real estate .26% .29%
Loans 90 days past due and still accruing interest $11,022 $11,057
Percentage of total loans .17% .18%
=============================================================================
Excluding a $3.032 million gain on the sale of the corporation's interest
in the electronic switch network in the prior year's second quarter,
noninterest income increased 12% in the second quarter of 2002. The
corporation continued to have significant increases in the sales and usage of
its electronic banking products, with income from this area increasing 16% in
the second quarter. The sale of insurance products, spurred by increased sales
of annuities, title insurance on real estate, and commercial lines to
businesses in the corporation's market area, has been particularly strong,
rising 36% in the second quarter. Service charges on deposit accounts
increased 8% in the second quarter, primarily from the fees generated by
commercial customers. The corporation has developed a specialty in providing
cash processing and deposit services to large multi-location retail businesses
operating in its markets. In the second quarter a new remittance facility was
established, utilizing the latest technology for high-speed, high-volume
payment processing, to further enhance the corporation's presence in this
market.
Continued efforts to control costs resulted in further improvements in the
corporation's efficiency ratio. Total noninterest expense was down slightly
from the first quarter despite the growth in the corporation's sales and, as a
consequence, the efficiency ratio declined to 51.7% compared to 55.5% in the
prior year's second quarter and outperformed a peer group average of 58.4% in
2001. The corporation has fewer employees today than it did in 1994 despite a
39% increase in assets and several acquisitions. This has been accomplished
through gradual improvements in technology and operating procedures and without
the layoffs and reductions in service so frequently seen in other companies
today.
Total shareholders' equity was $1.216 billion at June 30, 2002, compared
to $1.037 billion at June 30, 2001. Net book value per share increased 13% to
$25.39 compared to $22.46 at the end of the prior year's second quarter.
Despite the growth in total assets and deposits, First Virginia, already one of
the best capitalized banks in the nation, increased its capital ratios further
over the past year. The corporation's Tier 1 capital leverage ratio at June
30, 2002, was 9.58%, a 26-basis-point increase compared to 9.32% at the end of
the second quarter of 2001. During the second quarter, the corporation
repurchased 4,500 shares of stock, leaving 1.595 million shares remaining in
its currently authorized share repurchase program. At June 30, 2002, there
were 47.876 million shares outstanding.
CRITICAL ACCOUNTING POLICIES:
The accounting and reporting policies of the corporation are in accordance
with accounting principles generally accepted in the United States of America
and conform with general practices in the banking industry. The preparation of
financial statements in conformity with these principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. These estimates and
assumptions are based on information available at the date of the financial
statements and could differ from actual results. The more critical of the
accounting policies involves the determination of the 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
allowance is reduced by actual credit losses and is increased by the provision
for loan losses and recoveries of previous losses. The provision for loan
losses is charged to earnings and is the periodic cost of maintaining an
appropriate allowance. Estimates for determining the proper level of the
allowance for loan losses are based on historical loss rates, changes in credit
quality, business conditions affecting key lending areas, collateral values,
loan volumes and internal credit reviews. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the corporation's allowance for loan losses. These agencies may require the
corporation to record additions to the allowance for loan losses based on their
judgements about information available to them at the time of their
examination. While management believes that the assumptions and judgements
used in developing these estimates are accurate as of the date of the financial
statements, changes in any of the factors affecting the allowance for loan
losses could result in material changes in the corporation's financial position
and results of operations.
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.
AVERAGE BALANCES AND INTEREST RATES (Unaudited)
- -------------------------------------------------------------------------
Interest
Average Income/
Three Months Ended June 30, 2002 Balance Expense Rate
- -------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Securities-available for sale:
U.S. Government and its agencies $ 1,388,449 $18,114 5.22%
Other* 11,316 156 5.52
Securities-held to maturity:
U.S. Government and its agencies 1,395,298 19,226 5.51
State, municipal and other* 328,235 4,789 5.84
----------- --------
Total securities 3,123,298 42,285 5.42
----------- --------
Loans, net of unearned income:
Installment 4,102,576 73,578 7.19
Real estate 1,484,854 28,608 7.72
Commercial and other 1,000,346 16,900 6.77
----------- --------
Total loans 6,587,776 119,086 7.25
----------- --------
Money market investments 312,645 1,362 1.75
Other earning assets 30,685 394 5.14
----------- --------
Total earning assets and income $10,054,404 163,127 6.50
=========== --------
Interest-bearing liabilities:
Interest checking $ 1,740,533 1,040 0.24
Money market 1,360,652 5,779 1.70
Savings 1,109,795 2,070 0.75
Consumer certificates of deposit 2,316,383 21,458 3.72
Large denomination
certificates of deposit 475,343 4,531 3.82
----------- --------
Total interest-bearing deposits 7,002,706 34,878 2.00
Short-term borrowings 619,018 1,555 1.01
Long-term debt 13,512 192 5.69
----------- --------
Total interest-bearing liabilities
and interest expense $ 7,635,236 36,625 1.92
=========== --------
Net interest income and net interest margin $126,502 5.04%
========
*Fully taxable-equivalent basis
Other average balances:
Demand deposits $ 1,871,272
Preferred shareholders' equity 416
Common shareholders' equity 1,189,935
Total assets 10,846,922
AVERAGE BALANCES AND INTEREST RATES (Unaudited)
- -------------------------------------------------------------------------
Interest
Average Income/
Three Months Ended June 30, 2001 Balance Expense Rate
- -------------------------------------------------------------------------
ASSETS
Interest-earning assets:
Securities-available for sale:
U.S. Government and its agencies $ 59,622 $ 771 5.19%
Other* 16,252 109 3.70
Securities-held to maturity:
U.S. Government and its agencies 1,658,415 25,030 6.04
State, municipal and other* 326,549 4,820 5.90
---------- --------
Total securities 2,060,838 30,730 5.97
---------- --------
Loans, net of unearned income:
Installment 4,040,482 80,240 7.96
Real estate 1,163,821 23,675 8.15
Other* 1,040,658 20,405 7.93
---------- --------
Total loans 6,244,961 124,320 7.98
---------- --------
Money market investments 605,634 6,660 4.41
Other earning assets 18,619 291 6.26
---------- --------
Total earning assets and income $8,930,052 162,001 7.27
========== --------
Interest-bearing liabilities:
Interest checking $1,523,337 1,560 0.41
Money market 931,008 7,077 3.05
Savings 998,277 3,167 1.27
Consumer certificates of deposit 2,325,116 30,382 5.24
Large denomination
certificate of deposits 512,299 7,105 5.56
---------- --------
Total interest-bearing deposits 6,290,037 49,291 3.14
Short-term borrowings 554,282 4,904 3.55
Long-term debt 729 21 11.86
---------- --------
Total interest-bearing liabilities
and interest expense $6,845,048 54,216 3.18
========== --------
Net interest income and net interest margin $107,785 4.84%
========
*Fully taxable-equivalent basis
Other average balances:
Demand deposits $1,617,300
Preferred shareholders' equity 433
Common shareholders' equity 1,027,914
Total assets 9,642,866
AVERAGE BALANCES AND INTEREST RATES (Unaudited)
- -------------------------------------------------------------------------
Interest
Average Income/
Six Months Ended June 30, 2002 Balance Expense Rate
- -------------------------------------------------------------------------
Interest-earning assets:
Securities-available for sale:
U.S. Government and its agencies $ 1,408,708 $ 36,666 5.21%
Other* 10,962 318 5.80
Securities-held to maturity:
U.S. Government and its agencies 1,285,667 35,994 5.60
State, municipal and other* 343,510 10,049 5.85
----------- --------
Total Securities 3,048,847 83,027 5.45
----------- --------
Loans, net of unearned income:
Installment 4,107,861 148,376 7.27
Real estate 1,445,687 56,198 7.83
Other* 993,809 33,602 6.81
----------- --------
Total loans 6,547,357 238,176 7.32
----------- --------
Money market investments 293,661 2,546 1.75
Other earning assets 29,532 812 5.50
----------- --------
Total earning assets and income $ 9,919,397 324,561 6.58
=========== --------
Interest-bearing liabilities:
Interest checking $ 1,711,756 2,055 0.24
Money market 1,286,895 11,169 1.75
Savings 1,088,961 4,046 0.75
Consumer certificates of deposit 2,354,705 46,864 4.01
Large denomination
certificates of deposit 484,749 9,926 4.13
----------- --------
Total interest-bearing deposits 6,927,066 74,060 2.16
Short-term borrowings 620,460 3,101 1.01
Long-term debt 14,412 407 5.65
----------- --------
Total interest-bearing liabilities
and interest expense $ 7,561,938 77,568 2.07
=========== --------
Net interest income and net interest margin $246,993 5.00%
========
*Fully taxable-equivalent basis
Other average balances:
Demand deposits $ 1,821,862
Preferred shareholders' equity 418
Common shareholders' equity 1,178,533
Total assets 10,716,216
AVERAGE BALANCES AND INTEREST RATES (Unaudited)
- -------------------------------------------------------------------------
Interest
Average Income/
Six Months Ended June 30, 2001 Balance Expense Rate
- -------------------------------------------------------------------------
Interest-earning assets:
Securities-available for sale:
U.S. Government and its agencies $ 67,960 $ 1,748 5.19%
Other* 12,744 218 4.72
Securities-held to maturity:
U.S. Government and its agencies 1,621,676 48,736 6.02
State, municipal and other* 320,934 9,513 5.93
---------- --------
Total Securities 2,023,314 60,215 5.97
---------- --------
Loans, net of unearned income:
Installment 4,055,723 161,768 8.03
Real estate 1,143,495 46,451 8.18
Other* 1,069,376 43,030 8.16
---------- --------
Total loans 6,268,594 251,249 8.07
---------- --------
Money market investments 521,721 12,647 4.89
Other earning assets 18,625 609 6.52
---------- --------
Total earning assets and income $8,832,254 324,720 7.40
========== --------
Interest-bearing liabilities:
Interest checking $1,513,881 3,320 0.44
Money market 910,118 14,235 3.15
Savings 990,669 6,766 1.38
Consumer certificates of deposit 2,329,833 61,200 5.30
Large denomination
certificates of deposit 505,171 14,236 5.68
---------- --------
Total interest-bearing deposits 6,249,672 99,757 3.22
Short-term borrowings 545,091 11,283 4.17
Long-term debt 871 49 11.33
---------- --------
Total interest-bearing liabilities
and interest expense $6,795,634 111,089 3.30
========== --------
Net interest income and net interest margin $213,631 4.86%
========
*Fully taxable-equivalent basis
Other average balances:
Demand deposits $1,585,504
Preferred shareholders' equity 439
Common shareholders' equity 1,016,261
Total assets 9,545,867
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
As of June 30, 2002, there have been no material changes
in information regarding quantitative and qualitative
disclosures about market risk from the information presented
as of December 31, 2001 in the corporation's annual report
on Form 10-K.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
a) An Annual Meeting of Shareholders was held on Friday, May 3, 2002.
Proxies for the meeting were solicited pursuant to Regulation 14
under the Act.
b) There was no solicitation in opposition to the management nominees
as listed in the proxy statement and all such nominees were elected.
The following directors were elected at the meeting:
Management nominee: Voted For Withheld
Paul H. Geithner, Jr. 39,040,708 441,300
L.H. Ginn, III 39,073,196 408,812
Edward M. Holland 39,090,981 391,027
Lynda S. Vickers-Smith 39,063,272 418,736
c) Among other matters voted on at the meeting was the following:
i) The appointment of KPMG LLP as independent auditors.
Voted For Voted Against Abstained
38,480,885 794,574 206,549
There were no "broker non-votes" with respect to any of the director
nominees or the ratification of auditors.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K
----------------------------------
a) The following exhibits are filed as part of this report:
99-1 Certification of Periodic Report by Barry J. Fitzpatrick
99-2 Certification of Periodic Report by Richard F. Bowman
b) No reports on Form 8-K were filed during the quarter
ended June 30, 2002.
Pursuant to the requirements of the Securities Exchange
Act of 1934, the registrant has duly caused this report to
be signed on its behalf by its principal financial officer
hereunto duly authorized.
FIRST VIRGINIA BANKS, INC.
/s/ Richard F. Bowman
August 14, 2002 --------------------------
Richard F. Bowman,
Executive Vice President,
Treasurer and
Chief Financial Officer
Exhibit 99-1
Certification of Periodic Report
I, Barry J. Fitzpatrick, Chairman, President and Chief Executive Officer of
First Virginia Banks, Inc. (the Corporation), certify, pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
1. the Quarterly Report on Form 10-Q of the Corporation for the quarterly
period ended June 30, 2002 (the Report) fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (15 U.S.C. 78m or 78o(d)); and
2. the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Corporation.
Dated: August 14, 2002
/s/ Barry J. Fitzpatrick
_________________________
Barry J. Fitzpatrick
Chairman, President and Chief
Executive Officer
Exhibit 99-2
Certification of Periodic Report
I, Richard F. Bowman, Executive Vice President, Treasurer and Chief Financial
Officer of First Virginia Banks, Inc. (the Corporation), certify, pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that:
1. the Quarterly Report on Form 10-Q of the Corporation for the quarterly
period ended June 30, 2002 (the Report) fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934 (15 U.S.C. 78m or 78o(d)); and
2. the information contained in the Report fairly presents, in all material
respects, the financial condition and results of operations of the
Corporation.
Dated: August 14, 2002
/s/ Richard F. Bowman
_________________________
Richard F. Bowman
Executive Vice President,
Treasurer and Chief Financial
Officer