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FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission file number 1-6580
March 31, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act.) [ 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 March 31, 2003, there were 68,589,105 shares
of common stock outstanding.
This report contains a total of 24 pages.
INDEX
Page
---------
PART I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31,
2003 and 2002, and December 31, 2002 (Unaudited) 3/ 4
Condensed Consolidated Statements of Income - Three
months ended March 31, 2003 and 2002 (Unaudited) 5/ 6
Condensed Consolidated Statements of Shareholders'
Equity - Three months ended March 31, 2003
and 2002 (Unaudited) 7/ 8
Condensed Consolidated Statements of Cash
Flows - Three months ended March 31, 2003
and 2002 (Unaudited) 9
Notes to Condensed Consolidated Financial
Statements (Unaudited) 10/14
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15/20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
Item 4. Controls and Procedures 21
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K 21
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
--------------------
(Dollars in thousands, except per share data)
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
- -------------------------------------------------------------------------------
March 31 December 31 March 31
2003 2002 2002
- -------------------------------------------------------------------------------
ASSETS
Cash and due from banks $ 405,426 $ 370,387 $ 285,248
Money market investments 101,776 210,339 210,084
- -------------------------------------------------------------------------------
Total cash and cash equivalents 507,202 580,726 495,332
- -------------------------------------------------------------------------------
Securities - available for sale 904,044 925,699 1,426,149
Securities - held to maturity (fair values
of $3,076,478, $2,863,619 and $1,768,149) 3,044,607 2,825,013 1,763,626
- -------------------------------------------------------------------------------
Total securities 3,948,651 3,750,712 3,189,775
- -------------------------------------------------------------------------------
Loans, net of unearned income 6,272,838 6,377,866 6,553,729
Allowance for loan losses (69,850) (71,013) (72,823)
- -------------------------------------------------------------------------------
Net loans 6,202,988 6,306,853 6,480,906
- -------------------------------------------------------------------------------
Other earning assets 35,003 36,383 31,768
Premises and equipment 146,276 147,894 152,624
Intangible assets 188,085 190,279 197,686
Accrued income and other assets 217,791 214,740 240,001
- -------------------------------------------------------------------------------
Total assets $11,245,996 $11,227,587 $10,788,092
===============================================================================
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)(Continued)
- -------------------------------------------------------------------------------
March 31 December 31 March 31
2003 2002 2002
- -------------------------------------------------------------------------------
LIABILITIES
Deposits:
Noninterest-bearing $ 2,150,372 $ 2,064,033 $1,867,819
Interest-bearing:
Interest checking 1,897,706 1,878,680 1,716,809
Money market 1,482,164 1,468,356 1,272,783
Savings 1,168,407 1,126,497 1,095,193
Consumer certificates of deposit 2,177,139 2,206,206 2,354,662
Large denomination
certificates of deposit 465,178 466,719 483,503
- -------------------------------------------------------------------------------
Total deposits 9,340,966 9,210,491 8,790,769
- -------------------------------------------------------------------------------
Short-term borrowings 567,898 617,589 638,994
Long-term debt 8,478 13,488 13,516
Accrued interest and other liabilities 161,488 147,674 172,141
- -------------------------------------------------------------------------------
Total liabilities 10,078,830 9,989,242 9,615,420
- -------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock, $10 par value 324 381 416
Common stock, $1 par value 68,589 70,899 71,777
Capital surplus - 19,406 51,470
Retained earnings 1,096,123 1,141,923 1,059,329
Accumulated other comprehensive income (loss) 2,130 5,736 (10,320)
- -------------------------------------------------------------------------------
Total shareholders' equity 1,167,166 1,238,345 1,172,672
- -------------------------------------------------------------------------------
Total liabilities and shareholders' equity $11,245,996 $11,227,587 $10,788,092
===============================================================================
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
- -------------------------------------------------------------------------------
Three Months Ended March 31 2003 2002
- -------------------------------------------------------------------------------
Interest income:
Loans $104,563 $118,364
Securities - available for sale 9,404 18,669
Securities - held to maturity 24,893 20,812
Money market investments 1,800 1,184
Other earning assets 440 418
- -------------------------------------------------------------------------------
Total interest income 141,100 159,447
- -------------------------------------------------------------------------------
Interest expense:
Deposits 24,453 39,182
Short-term borrowings 778 1,546
Long-term debt 142 215
- -------------------------------------------------------------------------------
Total interest expense 25,373 40,943
- -------------------------------------------------------------------------------
Net interest income 115,727 118,504
Provision for loan losses 1,122 3,517
- -------------------------------------------------------------------------------
Net interest income after provision
for loan losses 114,605 114,987
- -------------------------------------------------------------------------------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Continued)
- -------------------------------------------------------------------------------
Three Months Ended March 31 2003 2002
- -------------------------------------------------------------------------------
Net interest income after provision
for loan losses 114,605 114,987
- -------------------------------------------------------------------------------
Noninterest income:
Service charges on deposit accounts 17,317 16,921
Electronic banking service fees 4,949 4,469
Trust and asset management fees 3,503 3,367
Insurance premiums and commissions 2,198 2,342
Other 7,765 6,146
Securities gains 5,806 -
- -------------------------------------------------------------------------------
Total noninterest income 41,538 33,245
- -------------------------------------------------------------------------------
Noninterest expense:
Salaries and employee benefits 50,709 50,381
Occupancy 6,923 7,175
Equipment 7,863 8,368
Amortization of intangibles 2,194 2,262
Other 15,502 16,569
Merger related expense 2,000 -
- -------------------------------------------------------------------------------
Total noninterest expense 85,191 84,755
- -------------------------------------------------------------------------------
Income before income taxes 70,952 63,477
Provision for income taxes 24,720 21,258
- -------------------------------------------------------------------------------
Net income $ 46,232 $ 42,219
===============================================================================
Net income per share of common stock:
Basic $ .66 $ .59
Diluted .66 .59
Average shares of common stock outstanding:
Basic 69,919 71,769
Diluted 70,405 72,158
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 $71,740 $51,046 $1,036,257 $(6,978) $1,152,486
Comprehensive income:
Net income 42,219 42,219
Unrealized losses on
securities available for
sale (3,342) (3,342)
-----------
Total comprehensive income 38,877
-----------
Conversion of preferred
to common stock (5) 3 2 -
Issuance of shares for
stock options 81 1,914 1,995
Common stock purchased
and retired (47) (1,492) (1,539)
Dividends declared:
Preferred stock (7) (7)
Common stock
$0.2667 per share (19,140) (19,140)
- -------------------------------------------------------------------------------
Balance March 31, 2002 $ 416 $71,777 $51,470 $1,059,329 $(10,320) $1,172,672
===============================================================================
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, 2003 $ 381 $70,899 $19,406 $1,141,923 $ 5,736 $1,238,345
Comprehensive income:
Net income 46,232 46,232
Unrealized losses on
securities available for
sale (3,606) (3,606)
-----------
Total comprehensive income 42,626
-----------
Conversion of preferred
to common stock (57) 18 39 -
Issuance of shares for
stock options 66 1,954 2,020
Common stock purchased
and retired (2,394) (21,399) (72,822) (96,615)
Dividends declared:
Preferred stock (5) (5)
Common stock
$0.28 per share (19,205) (19,205)
- -------------------------------------------------------------------------------
Balance March 31, 2003 $ 324 $68,589 - $1,096,123 $ 2,130 $1,167,166
===============================================================================
See notes to condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
- -------------------------------------------------------------------------------
Three Months Ended March 31 2003 2002
- -------------------------------------------------------------------------------
Net cash provided by operating activities $ 70,411 $ 48,115
- -------------------------------------------------------------------------------
Investing activities:
Proceeds from the sale of available
for sale securities 691,347 35,427
Proceeds from the maturity of held to
maturity securities 1,842,940 264,113
Purchases of available for sale securities (671,575) (9,972)
Purchases of held to maturity securities (2,063,540) (388,314)
Net(increase) decrease in loans 102,742 (45,800)
Purchases of premises and equipment (3,093) (2,906)
Sales of premises and equipment 4,078 943
Other (8,127) (4,337)
- -------------------------------------------------------------------------------
Net cash used for investing activities (105,228) (150,846)
- -------------------------------------------------------------------------------
Financing activities:
Net increase in deposits 130,475 141,133
Net decrease in short-term borrowings (49,691) (357)
Principal payments on long-term debt (5,010) (6,010)
Common stock purchased and retired (96,615) (1,539)
Proceeds from issuance of common stock 2,020 1,995
Cash dividends paid (19,886) (19,138)
- -------------------------------------------------------------------------------
Net cash provided used for financing activities (38,707) 116,084
- -------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (73,524) 13,353
Cash and cash equivalents at beginning of year 580,726 481,979
- -------------------------------------------------------------------------------
Cash and cash equivalents at end of period $507,202 $495,332
===============================================================================
Cash paid for:
Interest $ 26,007 $ 47,323
Income taxes 2,734 3,591
===============================================================================
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 2002 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 to stockholders on Form 10-K/A for the year ended
December 31, 2002.
The corporation adopted the disclosure only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123) and Statement of Financial Accounting Standards No.
148 "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS
148). These statements allow an entity to continue to measure compensation cost
for these plans using the intrinsic value-based method of accounting prescribed
by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25). The corporation has elected to follow APB 25 and related
interpretations in accounting for its employee stock options.
Pro forma information regarding net income and earnings per share as
required by SFAS 123 and SFAS 148 has been determined as if the corporation had
accounted for its employee stock options under the fair-value method. The fair
value of all currently outstanding options was estimated at the date of the
grant using a Black-Scholes option pricing model. Pro forma results for 2003
and 2002 are as follows:
- ------------------------------------------------------------------------------
Three Months Ended March 31 2003 2002
- ------------------------------------------------------------------------------
Reported net income $46,232 $42,219
Pro forma stock-based compensation expense
based on FAS 123 (net of tax) 460 426
- ------------------------------------------------------------------------------
Pro forma net income $45,772 $41,797
==============================================================================
Net income per share
Basic-as reported $ .66 $ .59
Basic-pro forma .65 .58
Diluted-as reported .66 .59
Diluted-pro forma .65 .58
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
2. PROPOSED MERGER
On January 20, 2003, The corporation entered into an Agreement and Plan of
Reorganization (the "Merger"), with BB&T corporation("BB&T"), pursuant to which
the corporation will merge into BB&T. In the Merger, the corporation's
shareholders will receive 1.26 shares of BB&T common stock for each share of
the corporation's common stock. The transaction, which is subject to regulatory
and shareholder approval, is expected to close in the third quarter of 2003.
3. SECURITIES
The following reflects the amortized cost of securities and the related
approximate fair values:
- -------------------------------------------------------------------------------
March 31, 2003 March 31, 2002
- -------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- -------------------------------------------------------------------------------
Available for sale:
U.S. Government and its agencies $ 671,575 $ 672,877 $ 993,467 $ 980,300
Mortgage-backed securities
of U.S. Government agencies 229,159 231,167 439,328 434,631
Other - - 9,395 11,218
- -------------------------------------------------------------------------------
Total $ 900,734 $ 904,044 $1,442,190 $1,426,149
===============================================================================
- -------------------------------------------------------------------------------
March 31, 2003 March 31, 2002
- -------------------------------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- -------------------------------------------------------------------------------
Held to maturity:
U.S. Government and its agencies $2,544,662 $2,559,614 $1,117,654 $1,120,246
Mortgage-backed securities
of U.S. Government agencies 225,312 234,039 295,145 292,890
State and municipal obligations 272,590 280,678 348,760 352,921
Other 2,043 2,147 2,067 2,092
- -------------------------------------------------------------------------------
Total $3,044,607 $3,076,478 $1,763,626 $1,768,149
===============================================================================
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
4. LOANS
Loans consisted of:
- -------------------------------------------------------------------------------
March 31 2003 2002
- -------------------------------------------------------------------------------
Consumer
Automobile $2,902,562 $3,207,777
Home equity, fixed- and variable-rate 605,747 725,702
Revolving credit loans 35,207 34,399
Other 122,121 148,559
Commercial 774,437 871,888
Construction and land development 108,668 128,644
Real estate
Commercial mortgage 717,216 645,098
Residential mortgage 1,006,880 791,662
- -------------------------------------------------------------------------------
Total loans, net of unearned income $6,272,838 $6,553,729
===============================================================================
5. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was:
- -------------------------------------------------------------------------------
Three Months Ended March 31 2003 2002
- -------------------------------------------------------------------------------
Balance at beginning of period $71,013 $71,937
Provision charged to operating expense 1,122 3,517
- -------------------------------------------------------------------------------
Balance before charge-offs 72,135 75,454
Charge-offs 3,325 3,572
Recoveries 1,040 941
- -------------------------------------------------------------------------------
Balance at March 31 $69,850 $72,823
===============================================================================
Percentage of annualized net
charge-offs to average loans .14% .16%
Percentage of allowance for loan
losses to period-end loans 1.11 1.11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
6. FEDERAL INCOME TAX
A reconcilement of income tax computed at the federal statutory tax rates
to the provision for income taxes is as follows:
- -------------------------------------------------------------------------------
Three Months Ended March 31 2003 2002
- -------------------------------------------------------------------------------
Amount Pct Amount Pct
- -------------------------------------------------------------------------------
Statutory rate $24,833 35.0% $22,217 35.0%
Nontaxable interest on
municipal obligations (1,160)(1.6) (1,313)(2.0)
State taxes, net of
Federal tax benefit 540 0.7 273 0.4
Other items 507 0.7 81 0.1
- -------------------------------------------------------------------------------
Effective rate $24,720 34.8% $21,258 33.5%
===============================================================================
7. 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 stock
were outstanding:
- -------------------------------------------------------------------------------
March 31 December 31 March 31
Series Dividends 2003 2002 2002
- -------------------------------------------------------------------------------
A 5% 12,210 14,357 15,490
B 7% 2,430 2,950 3,290
C 7% 3,840 4,936 5,036
D 8% 13,923 15,825 17,748
- -------------------------------------------------------------------------------
Total preferred shares 32,403 38,068 41,564
===============================================================================
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. The corporation redeemed all
preferred stock outstanding as of May 1, 2003, for $10 per share.
There are 175,000,000 shares of common stock, par value $1.00 per share,
authorized and 68,589,105, 70,898,919 and 71,776,776 shares were outstanding at
March 31, 2003, December 31, 2002, and March 31, 2002, respectively. Options
to purchase 1,805,194 shares of common stock were outstanding on March 31,
2003. A total of 4,340,353 shares of common stock were reserved at March 31,
2003: 106,766 shares for the conversion of preferred stock and 4,233,587 shares
for stock options.
The corporation completed a three-for-two stock split through a 50% stock
dividend issued on August 16, 2002. All share and per-share amounts have been
adjusted accordingly.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
8. EARNINGS PER SHARE
Earnings per share computations are as follows:
- -------------------------------------------------------------------------------
Three Months Ended March 31 2003 2002
- -------------------------------------------------------------------------------
Basic:
Net income $46,232 $42,219
Preferred stock dividends 5 7
- -------------------------------------------------------------------------------
Net income applicable to common stock $46,227 $42,212
- -------------------------------------------------------------------------------
Average common shares outstanding (000s) 69,919 71,769
Earnings per share of common stock $ .66 $ .59
===============================================================================
Diluted:
Net income $46,232 $42,219
Average common shares outstanding (000s) 69,919 71,769
Dilutive effect of stock options (000s) 124 138
Conversion of preferred stock (000s) 362 251
- -------------------------------------------------------------------------------
Total average common shares (000s) 70,405 72,158
- -------------------------------------------------------------------------------
Earnings per share of common stock $ .66 $ .59
===============================================================================
Options which were not included in the calculation of diluted earnings per
share because the options' exercise price was greater than the average market
price were:
- -------------------------------------------------------------------------------
Three Months Ended March 31 2003 2002
- -------------------------------------------------------------------------------
Options (000s) - 269
Weighted average price - $ 34.87
- -------------------------------------------------------------------------------
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 12% increase in 2003 first quarter
earnings per share to $.66 compared to $.59 earned in the 2002 first quarter.
The return on average assets increased to 1.68% compared to 1.60% in the prior
year's first quarter, and the return on average shareholders' equity increased
to 15.23% compared to 14.47% in 2002. Net income for the quarter totaled
$46.232 million compared to $42.219 million in 2002's first quarter. All 2002
per-share numbers have been adjusted to reflect the August 16, 2002, three-for-
two stock split.
Total assets at the end of the quarter hit a new high of $11.246 billion
compared to $10.788 billion a year ago. Average loans during the first quarter
declined 3% to $6.314 billion compared to $6.506 billion in the prior year's
first quarter and were down 2% compared to $6.433 billion in the fourth quarter
of 2002. However, the lowest interest rates in years encouraged both consumers
and businesses to refinance their existing real estate loans, producing strong
demand in that area. Average outstanding real estate loans increased by 19%
compared to the prior year's first quarter and were up at an annualized rate of
17% over the fourth quarter. In the current economic climate, businesses have
sufficient capacity and liquidity to handle most routine cash needs, so
commercial loan demand continues to be weak. Consumer lending was negatively
impacted by the severe weather in the corporation's market area during the
first quarter and by a spending slowdown reflecting concerns associated with
the war in Iraq. As a result, average installment loans declined 9% compared to
the prior year's first quarter, with automobile loans down 7%. Home equity
loans were down 22% representing refinance activity into longer-term real
estate loans.
Average deposits increased 5% to $9.082 billion compared to the prior
year's first quarter of $8.622 billion and were up slightly compared to the
fourth quarter. The majority of the growth came in lower cost transaction and
savings accounts. Average demand deposit and interest checking accounts
increased 10% compared to the prior year's first quarter while money market
accounts increased 22%. Average consumer savings accounts also showed
moderately strong growth, increasing 7% compared to the prior year. Higher cost
certificates of deposit declined 8% during the first quarter compared to the
prior year's first quarter. While interest rates were stable during the first
quarter, they were at 40-year lows, placing significant downward pressure on
First Virginia's net interest margin. Loans and investments made in prior years
at higher rates continued to mature and proceeds were reinvested at these lower
rates. As a consequence, the yield on earning assets, led by a 125 basis point
drop in the yield on the corporation's investment portfolio, declined 105 basis
points in the first quarter compared to the prior year's first quarter. The
cost of funds, on the other hand, declined 89 basis points and, combined with
the decline in the yield on earning assets, lowered the net interest margin to
4.61%.
First Virginia continues to maintain its record for excellent asset
quality. Net charge-offs in the first quarter were $2.285 million or .14% of
average loans compared to $2.631 million or .16% of average loans in the first
quarter of 2002. Nonperforming assets remained at a record low level, declining
to .20% of outstanding loans or $12.803 million compared to .30% or $19.898
million at the end of the prior year's first quarter. Loans past due 90 days or
more declined to $8.842 million or .14% of loans at March 31, 2003, compared to
$10.105 million or .16% of loans at December 31, 2002, and $11.249 million or
..17% of loans at March 31, 2002. All of these ratios are significantly below
national peer group averages. The allowance for loan losses remained unchanged
at 1.11%. The provision for loan losses declined during the quarter to $1.122
million compared to $3.517 million in the prior year's first quarter as a
consequence of lower net charge-offs, lower nonperforming and delinquent loans
as well as a slowdown in new loan demand. The corporation continues to have no
exposure to international loans or shared national credits.
A summary of nonperforming and delinquent loans is as follows:
- -----------------------------------------------------------------------------
March 31 2003 2002
- -----------------------------------------------------------------------------
Nonaccruing loans $10,482 $17,801
Restructured loans 497 915
Properties acquired by foreclosure 1,824 1,902
- -----------------------------------------------------------------------------
Total nonperforming assets $12,803 $19,898
=============================================================================
Percentage of total loans and foreclosed real estate .20% .30%
Loans 90 days past due and still accruing interest $ 8,842 $11,249
Percentage of total loans .14% .17%
=============================================================================
Noninterest income increased 25% compared to the first quarter of 2002.
Excluding a $5.806 million pretax gain from the sale of equity securities of a
bank acquired by another financial institution, noninterest income increased 7%
from the prior year's first quarter. Service charge income from commercial
accounts increased 9% and internet banking income rose 30%; however, overall
service fee income on deposit accounts increased only 2% as adverse weather
negatively impacted consumer activity-based fees. Electronic banking income
increased 11%, led by a 29% increase in income from the corporation's CheckCard
product. Insurance income declined 6% compared to the prior year's first
quarter, the result of a 41% decline in credit insurance fees that were
impacted by new regulations effective in late 2002 which dramatically reduced
the corporation's ability to sell credit insurance on consumer debt. Commission
income from insurance brokerage sales increased 20% during the quarter,
confirming the success of the corporation's sales effectiveness of these
products. Other miscellaneous income increased 26% due to increases in credit
card commissions, mortgage fee income and other miscellaneous categories of
income.
Noninterest expense was virtually unchanged compared to the prior year's
first quarter, with total expenses of $85.191 million in 2003 versus $84.755
million in 2002. Excluding a $2.000 million non-tax-deductible investment
banking fee paid in connection with the proposed merger with BB&T Corporation,
noninterest expense actually declined 2% compared to the prior year,
maintaining the corporation's tradition of strong expense control and producing
an efficiency ratio of 52.9% versus 53.7% in 2002. Total employment costs
increased less than 1% as lower health care costs offset a 125% increase in
pension expense to $1.679 million. The corporation's effective tax rate for the
first quarter of 2003 increased to 34.8% compared to 33.5% in the prior year's
first quarter. This increase was a result of the investment banking fee and
state income taxes on the securities gains.
Total shareholders' equity was $1.167 billion at March 31, 2003, compared
to $1.173 billion at March 31, 2002. Net book value per share increased 4% to
$17.01 compared to $16.33 at the end of the prior year's first quarter. The
corporation's Tier 1 capital leverage ratio was 9.05%, maintaining First
Virginia's position as one of the best capitalized banks in the nation. During
the first quarter, the corporation repurchased 2,381,150 shares of stock, thus
completing the program authorized by the Board of Directors in September 1999.
In February, a new repurchase program of 3,000,000 shares was approved and on
March 31, 2003 the corporation had 2,053,400 shares remaining in this program.
At the end of the quarter, there were 68.589 million shares of common stock
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 March 31, 2003 Balance Expense Rate
- -------------------------------------------------------------------------
ASSETS
Interest-earning assets
Securities
Available for sale* $ 991,230 $ 9,398 3.79%
Held to maturity* 2,343,964 25,894 4.42
---------- --------
Total securities 3,335,194 35,292 4.23
---------- --------
Loans, net of unearned income
Installment 3,747,437 61,438 6.63
Real estate 1,678,406 29,975 7.23
Other* 888,173 13,900 6.33
---------- --------
Total loans 6,314,016 105,313 6.75
---------- --------
Money market investments 583,568 1,800 1.25
Other earning assets* 35,049 441 5.03
---------- --------
Total earning assets and income $10,267,827 142,846 5.61
========== --------
Interest-bearing liabilities
Interest checking $ 1,859,292 965 0.21
Money market 1,478,669 3,700 1.01
Savings 1,143,388 932 0.33
Consumer certificates of deposit 2,190,379 15,474 2.87
Large denomination
certificates of deposit 456,995 3,382 3.00
---------- --------
Total interest-bearing deposits 7,128,723 24,453 1.39
Short-term borrowings 577,889 778 .55
Long-term debt 9,928 142 5.73
---------- --------
Total interest-bearing liabilities
and interest expense $ 7,716,540 25,373 1.33
========== --------
Net interest income and net interest margin $117,473 4.61%
========
*Fully taxable-equivalent basis
Other average balances
Noninterest-bearing deposits $ 1,053,336
Preferred shareholders' equity 378
Common shareholders' equity 1,213,704
Total assets 11,029,927
AVERAGE BALANCES AND INTEREST RATES (Unaudited)
- -------------------------------------------------------------------------
Interest
Average Income/
Three Months Ended March 31, 2002 Balance Expense Rate
- -------------------------------------------------------------------------
ASSETS
Interest-earning assets
Securities
Available for sale* $ 1,439,798 $ 18,714 5.20%
Held to maturity* 1,533,772 22,028 5.75
---------- --------
Total securities 2,973,570 40,742 5.48
---------- --------
Loans, net of unearned income
Installment 4,113,205 74,798 7.35
Real estate 1,406,085 27,590 7.94
Other* 987,198 16,702 6.85
---------- --------
Total loans 6,506,488 119,090 7.40
---------- --------
Money market investments 274,466 1,184 1.75
Other earning assets* 28,365 418 5.89
---------- --------
Total earning assets and income $ 9,782,889 161,434 6.66
========== --------
Interest-bearing liabilities
Interest checking $ 1,682,658 1,015 0.24
Money market 1,212,319 5,390 1.80
Savings 1,067,896 1,976 0.75
Consumer certificates of deposit 2,393,453 25,406 4.30
Large denomination
certificates of deposit 494,260 5,395 4.43
---------- --------
Total interest-bearing deposits 6,850,586 39,182 2.32
Short-term borrowings 621,918 1,546 1.01
Long-term debt 15,323 215 5.62
---------- --------
Total interest-bearing liabilities
and interest expense $ 7,487,827 40,943 2.22
========== --------
Net interest income and net interest margin $120,491 4.96%
========
*Fully taxable-equivalent basis
Other average balances
Noninterest-bearing deposits $ 1,771,902
Preferred shareholders' equity 420
Common shareholders' equity 1,167,005
Total assets 10,584,058
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
As of March 31, 2003, there have been no material changes
in information regarding quantitative and qualitative
disclosures about market risk from the information presented
as of December 31, 2002 in the corporation's annual report
on Form 10-K/A.
ITEM 4. CONTROLS AND PROCEDURES
-----------------------
The corporation's management, including the Chief Executive Officer
and Chief Financial Officer, has evaluated the effectiveness of the
design and operation of the corporation's disclosure controls and
procedures within 90 days of the filing of this quarterly report,
and, based on their evaluation, the Chief Executive Officer and
Chief Financial Officer have concluded that these disclosure
controls and procedures are effective. There were no significant
changes in the corporation's internal controls or in other factors
that could significantly affect these controls subsequent to the
date of their evaluation.
PART II - OTHER INFORMATION
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) The following reports on Form 8-K were filed during the quarter
ended March 31, 2003:
January 22, 2003, reporting a proposed merger with BB&T
Corporation.
February 26, 2003, reporting a new authorization for a stock
repurchase program.
March 12, 2003, reporting a call for redemption of all outstanding
shares of preferred stock.
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
May 9, 2003 --------------------------
Richard F. Bowman,
Executive Vice President,
Treasurer and
Chief Financial Officer
I, Barry J. Fitzpatrick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Virginia Banks,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
May 9, 2003
/s/ Barry J. Fitzpatrick
--------------------------
Barry J. Fitzpatrick
Chairman, President and
Chief Executive Officer
I, Richard F. Bowman, certify that:
1. I have reviewed this quarterly report on Form 10-Q of First Virginia Banks,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
May 9, 2003
/s/ Richard F. Bowman
--------------------------
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 March 31, 2003, (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: May 9, 2003
/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 March 31, 2003, (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: May 9, 2003
/s/ Richard F. Bowman
_________________________
Richard F. Bowman
Executive Vice President, Treasurer
and Chief Financial Officer