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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission file number 1-6580
December 31, 1998
FIRST VIRGINIA BANKS, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-0497561
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
6400 Arlington Boulevard
Falls Church, Virginia 22042-2336
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 703/241-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
------------------- ------------------------
Common Stock, Par Value $1.00 New York Stock Exchange, Inc.
Securities registered pursuant to Section 12(g) of the Act:
Convertible Preferred Stock, Par Value $10.00
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days. Yes __X__ No_____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the common stock of the registrant held by
nonaffiliates as of February 22, 1999, was approximately $2,346,014,000. The
registrant's voting preferred stock is not actively traded and the market
value of such stock is not readily determinable.
On February 28, 1999, there were 50,101,493 shares of common stock
outstanding.
INDEX
Page
----
Part I
Item 1. Business 3
Competitive Factors 4
Regulation 4
Employees 4
Lines of Business 4
Statistical Disclosure By Bank Holding Companies 5
Executive Officers of the Registrant 5/7
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 9
Item 6. Selected Financial Data 10/11
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 11/47
Item 8. Financial Statements and Supplementary Data 48/80
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 81
Part III
Item 10. Directors and Executive Officers of the Registrant 81
Item 11. Executive Compensation 81
Item 12. Security Ownership of Certain Beneficial Owners
and Management 81
Item 13. Certain Relationships and Related Transactions 81
Part IV Page
----
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 82/83
Signatures 84/85
Financial Statements 48/78
Exhibits:
Exhibit 3(i). Articles of Incorporation
Exhibit 3(ii). Bylaws
Exhibit 10. Contracts
Exhibit 12. Statement RE: Computation of ratios
Exhibit 13. First Virginia Banks, Inc., 1998 Annual
Report to Shareholders
(Not included in Electronic Filing)
Exhibit 21. Subsidiaries of Registrant
Exhibit 23. Consent of Independent Auditors
Exhibit 27. Financial Data Schedules
PART I
------
ITEM 1. BUSINESS
--------
First Virginia Banks, Inc., (the "corporation") is a registered bank
holding company that was incorporated under the laws of the Commonwealth of
Virginia in October 1949. Since its formation in 1949, the corporation has
acquired control of 62 operating commercial banks, with six acquisitions in
the State of Maryland and four in the State of Tennessee, and has organized
seven new banks located in the State of Virginia. Fifty-four (54) of the
banks have been merged or consolidated with other banks controlled by the
corporation and located in the same geographic area, so that, as of
December 31, 1998, the corporation owned all of the outstanding stock of 15
commercial banks (the "banking companies") with combined assets of $9.206
billion. On that date, the banking companies operated 306 offices throughout
the State of Virginia, 59 offices in Maryland and 25 offices in Tennessee.
In addition to the 15 banks, the corporation owns, directly or through
subsidiaries, several bank-related member companies with offices in Virginia
and six other states, making the corporation the largest bank holding company
with headquarters in the state and the fifth largest banking organization in
Virginia, based on total assets of $9.565 billion as of December 31, 1998.
Competitive Factors
- -------------------
Other banking organizations have been active in opening new banking
offices through acquisition and control of existing banks, mergers, branching
and formation of new banks and in acquiring or forming bank-related
subsidiaries in areas where the corporation's banking companies compete.
Accordingly, each banking company faces strong competition. Savings and loan
associations and credit unions actively compete for deposits. Such
institutions, as well as consumer finance companies, mortgage companies, loan
production offices of out-of-state banks, factors, insurance companies and
pension trusts are important competitors for various types of loans. The
bank-related member companies also operate in highly competitive fields.
At midyear 1997, the service area of the 10 banking companies in
Virginia, with 306 offices, reached approximately 86% of Virginia's
population. In Maryland, the service area of the 3 banking companies, with 59
offices, reached approximately 54% of Maryland's population, and in
Tennessee, the service area of the 2 banking companies, with 25 offices,
reached approximately 41% of East Tennessee's population.
Regulation
- ----------
The corporation and its subsidiaries are subject to the supervision and
examination of the Federal Reserve Board, the Federal Deposit Insurance
Corporation and the state regulators of Virginia, Maryland and Tennessee
which have jurisdiction over financial institutions and have obtained
regulatory approval for their various activities to the extent required.
Employees
- ---------
As of December 31, 1998, the corporation and its subsidiaries employed
5,719 individuals (5,165 full-time equivalent).
Business Segments
- -----------------
The corporation maintains two segments: retail banking done through its
affiliated banks in Virginia, Maryland and Tennessee, and "other," consisting
primarily of nonbanking services. Since each of the affiliated banks in the
retail banking segment offer similar products and services to similar types
and classes of customers, operate in the same regulatory environment and have
similar economic characteristics, all the affiliated banks have been
aggregated into one reportable segment, retail banking. Substantially all the
corporation's consolidated assets, revenues and income are derived from this
segment. The corporation has no foreign operations.
Statistical Disclosure by Bank Holding Companies
- ------------------------------------------------
The following statistical information appears in this Form 10-K on the
page indicated:
Page
----
Return on equity and assets, dividend payout
ratio and equity to assets ratio 11
Average balance sheets and interest rates on
earning assets and interest-bearing liabilities 14/19
Average book value of investment securities 14/19
Average demand, savings and time deposits 14/19
Effect of rate-volume changes on net interest income 20/21
Type of loans 29
Maturity ranges of time certificates of
deposit of $100,000 or more 32
Risk elements - loan portfolio 33/35
Summary of loan loss experience 38
Loan maturities and sensitivity to changes in
interest rates 40/42
Executive Officers of the Registrant
- ------------------------------------
There are no arrangements or understandings between the named executive
officers and any other person pursuant to which they were selected as an
officer.
There are no family relationships among the executive officers. All
positions and ages are as of December 31, 1998.
Messrs. Beavers, Hicks and Robbins have held their present positions
with the corporation for more than five years.
BARRY J. FITZPATRICK
Chairman of the Board, President and Chief Executive Officer since July 1,
1995, and Chairman of the Board and Chief Executive Officer, January 1, 1995
through June 30, 1995; 28 years of service; BBA, University of Notre Dame;
MBA, American University, and graduate of The Stonier Graduate School of
Banking. Has held several officer positions with First Virginia
organizations, including Executive Vice President of the corporation,
responsible for banking companies, from 1992 to December 31, 1994; Senior
Vice President and Regional Executive Officer, Eastern Region, from 1982 to
1992; and President and CEO of member banks in the Roanoke Valley from 1972
to 1982. Mr. Fitzpatrick is 58.
SHIRLEY C. BEAVERS, JR.
Executive Vice President since April 1992; President and Chief Executive
Officer of First Virginia Services, Inc., since May 1986; 28 years of
service; BS and MBA, American University. Has held various officer positions
with First Virginia organizations including that of Executive Vice President
and Chief Operating Officer, First Virginia Bank, Falls Church. Mr. Beavers
is 53.
RAYMOND E. BRANN, JR.
Executive Vice President of the corporation since January 1, 1995. Senior
Vice President and Regional Executive Officer, Eastern Region, from April
1992 to January 1995; 33 years of service, BS, University of Virginia; MBA,
Old Dominion University. Has held various officer positions with First
Virginia organizations including that of Senior Vice President and Regional
Executive Officer, Tennessee-Western Virginia Region from December 1986 to
April 1992, and President and CEO of several member banks, including First
Virginia Bank-Colonial and Tri-City Bank and Trust Company. Mr. Brann is 58.
RICHARD F. BOWMAN
Senior Vice President, Treasurer and Chief Financial Officer since 1994; 22
years of service; AB, College of William & Mary; Certified Public Accountant
and Certified Bank Auditor. Employed as Staff Auditor; appointed Assistant
General Auditor in 1978, Vice President and Controller in 1979, and Vice
President and Treasurer in 1992. Mr. Bowman is 46.
MICHAEL G. ANZILOTTI
Senior Vice President and Regional Executive Officer, Northern Region, since
April 1995; President and Chief Executive Officer of First Virginia Bank
since April 1995; Executive Vice President and Chief Administrative Officer,
First Virginia Bank from 1986 to April 1995; 23 years of service; BS,
Virginia Polytechnic Institute; MBA, George Mason University and graduate of
The Stonier Graduate School of Banking. Mr. Anzilotti is 49.
DOUGLAS M. CHURCH, JR.
Senior Vice President since August 1996; Senior Vice President and Regional
Executive Officer, Maryland Region, from December 1994 to August 1996; Senior
Vice President, Marketing from October 1990 to December 1994. 24 years of
service; BS, University of Virginia and graduate of The Stonier Graduate
School of Banking. Has held various officer positions with First Virginia
organizations, including Executive Vice President of First Virginia Services,
Inc., and Executive Vice President of First Virginia Bank. Mr. Church is 47.
HENRY HOWARD HICKS, JR.
Senior Vice President and Regional Executive Officer, Southwest Region, since
1982; 44 years of service; graduate certificate, American Institute of
Banking. Has held various executive officer positions with First Virginia
organizations including President and CEO of First Virginia Bank-Southwest
from 1971 to 1982. Mr. Hicks is 63.
THOMAS P. JENNINGS
Senior Vice President, General Counsel and Secretary since December 1995 and
Vice President, General Counsel and Secretary from January 1993 to December
1995; 19 years of service; BA, Wake Forest University; JD, University of
Virginia. Employed as Assistant Counsel; appointed Associate Counsel in 1979,
General Counsel in 1980, and Vice President and General Counsel from March
1986 to January 1993. Mr. Jennings is 51.
WILLIAM H. McFADDIN
Senior Vice President and Regional Executive Officer, Eastern Region, since
December 1995. President and Chief Executive Officer, First Virginia Bank -
Colonial from 1986 to December 1995. 25 years of service. BS, Presbyterian
College and graduate of the Graduate School of Banking of the South. Mr.
McFaddin is 52.
DAVID F. RITCHIE
Senior Vice President and Regional Executive Officer, Maryland Region, since
August 1996. President and Chief Executive Officer of Farmers Bank of
Maryland since September 1996 and President and Chief Executive Officer of
First Virginia Bank - Central Maryland from January 1990 to March 1997; 33
years of service; BS, American University and graduate of the Banking School
of the South at Louisiana State University. Mr. Ritchie is 53.
CHARLES L. ROBBINS, III
Senior Vice President and Regional Executive Officer, Tennessee-Western
Virginia Region, since April 1992; President and CEO, Tri-City Bank and Trust
Company, Tennessee, since April 1992; 24 years of service; BS, George Mason
University, and graduate of The Stonier Graduate School of Banking. Has held
various officer positions with First Virginia Bank, Falls Church, including
Senior Vice President and Branch Administrator from August 1987 until April
1992. Mr. Robbins is 46.
JOHN P. SALOP
Senior Vice President of the corporation since April 1996; Senior Vice
President of First Virginia Bank since February 1994 and Vice President,
Commercial Credit, First Virginia Bank from 1988 to February 1994; 24 years
of service; BA, The College of William and Mary, and graduate of the Banking
School of the South at Louisiana State University. Mr. Salop is 47.
MELODYE MAYES TOMLIN
Senior Vice President and General Auditor since December 1995; Vice President
and General Auditor from 1986 to December 1995; 19 years of service; BS,
Radford University, and graduate of The Stonier Graduate School of Banking;
Certified Public Accountant and Certified Bank Auditor. Employed as Staff
Auditor; appointed Regional Audit Manager in 1980 and Assistant General
Auditor in 1983. Mrs. Tomlin is 40.
EDWARD S. YATES, III
Senior Vice President and Regional Executive Officer, Shenandoah Valley
Region, since January 1, 1997; Chairman since January 1, 1997 and President
and Chief Executive Officer since June 1996 of First Virginia Bank - Blue
Ridge; and President and Chief Executive Officer of First Virginia Bank -
Central from January 1987 to June 1996; 27 years of service; BS, University
of Virginia; MBA, Virginia Commonwealth University and graduate of the
Banking School of the South at Louisiana State University. Mr. Yates is 50.
ITEM 2. PROPERTIES
----------
The banking subsidiaries operated a total of 390 banking offices on
December 31, 1998. Of these offices, 236 were owned by the banks, one is
owned by the corporation and leased to a bank, two are owned by affiliated
companies and leased to affiliated banks, and 151 were leased from others.
The corporation owns other properties, including the two corporate
headquarters buildings that house personnel of the corporation and its
subsidiaries. On December 31, 1998, the net book value of all real estate
and the unamortized cost of improvements to leased premises totaled
$134,703,000. The corporation currently has no mortgage indebtedness.
As of December 31, 1998, a total annual base rental of approximately
$15,142,000 was being paid on leased premises, of which approximately
$6,178,000 was being paid to affiliated companies which was eliminated in
consolidation. As of December 31, 1998, total lease commitments having a
remaining term in excess of one year to persons other than affiliates were
approximately $40,249,000.
The majority of the properties are modern and well furnished and provide
adequate parking.
ITEM 3. LEGAL PROCEEDINGS
-----------------
There are no legal proceedings, other than ordinary routine litigation
incidental to the business, to which the corporation or any of its
subsidiaries is a party or of which any of their property is subject.
Management believes that the liability, if any, resulting from current
litigation will not be material to the financial statements of the
corporation.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
There was no submission of matters to a vote of security holders during
the fourth quarter of 1998.
PART II
-------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
-----------------------------------------------------
STOCKHOLDER MATTERS
-------------------
The common stock of the corporation is listed for trading on the New York
Stock Exchange (Trading Symbol: FVB). The dividends paid per share and the
high and low sales price for common shares traded on the New York Stock
Exchange were:
Sales Price
------------------------------
Dividends
1998 1997 Per Share
-------------- -------------- -----------
High Low High Low 1998 1997
------ ------ ------ ------ ---- ----
1st Quarter...... $58.50 $44.50 $37.00 $30.83 $.28 $.25
2nd Quarter...... 59.44 50.56 40.33 33.00 .28 .25
3rd Quarter ..... 59.00 43.00 49.38 40.17 .30 .26
4th Quarter...... 47.75 39.69 53.38 44.63 .30 .26
The corporation's preferred stock is not actively traded. The 5% cumulative
convertible preferred stock, Series A, pays a dividend of 12 1/2 cents per
share in each quarter. The 7% cumulative convertible preferred stock, Series
B and C, pays a dividend of 17 1/2 cents per share each quarter. The 8%
cumulative convertible preferred stock, Series D, pays a dividend of 20 cents
per share each quarter. As of December 31, 1998, there were 21,279 holders of
record of the corporation's voting securities, of which 20,618 were holders
of common stock.
ITEM 6. SELECTED FINANCIAL DATA
-----------------------
A five-year summary of selected financial data follows:
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(Dollar amounts in thousands, except per-share data)
Balance Sheet Data
Cash.................. $ 377,374 $ 386,832 $ 378,171 $ 397,858 $ 420,742
Money market
investments.......... 265,557 243,162 323,620 235,000 30,000
Loans held for sale... 14,737 18,953 12,771 19,216 13,291
Other earning assets.. 22,427 21,444 19,672 11,528 8,987
Investment securities:
Available for sale... 20,580 - - 64,546 -
Held to maturity..... 2,302,472 1,946,944 1,820,949 2,128,220 2,086,030
Loans, net............ 6,022,903 5,869,914 5,302,026 4,980,154 4,938,334
Other assets.......... 538,646 524,388 378,847 385,014 367,998
---------- ---------- ---------- ---------- ----------
Total Assets......... $9,564,696 $9,011,637 $8,236,056 $8,221,536 $7,865,382
========== ========== ========== ========== ==========
Deposits ............. $8,055,078 $7,619,842 $7,042,650 $7,056,107 $6,815,841
Short-term borrowings. 385,996 251,687 234,488 209,719 179,409
Long-term indebtedness 3,217 2,826 3,876 2,710 3,814
Other liabilities .... 130,077 126,126 83,765 83,353 59,430
Shareholders' Equity.. 990,328 1,011,156 871,277 869,647 806,888
---------- ---------- ---------- ---------- ----------
Total Liabilities and
Shareholders' Equity $9,564,696 $9,011,637 $8,236,056 $8,221,536 $7,865,382
========== ========== ========== ========== ==========
Operating Results
Interest income ...... $ 663,631 $ 631,119 $ 587,216 $ 573,599 $ 503,642
Interest expense ..... 234,332 222,927 212,298 215,502 161,639
---------- ---------- ---------- ---------- ----------
Net interest income..... 429,299 408,192 374,918 358,097 342,003
Provision for loan loss. 20,800 17,177 17,734 8,341 6,463
Noninterest income...... 116,775 103,552 98,450 89,906 84,700
Noninterest expenses.... 325,678 303,243 279,310 271,384 252,459
---------- ---------- ---------- ---------- ----------
Income before income tax 199,596 191,324 176,324 168,278 167,781
Provision for income tax 69,434 66,479 59,983 56,679 54,560
---------- ---------- ---------- ---------- ----------
Net income ............$ 130,162 $ 124,845 $ 116,341 $ 111,599 $ 113,221
========== ========== ========== ========== ==========
Dividends declared:
Preferred ............$ 35 $ 41 $ 44 $ 47 $ 51
Common................ 61,209 53,710 47,861 46,205 42,108
A five-year summary of selected financial data (Continued):
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
Per Share of Common Stock
Net income - basic..... $ 2.54 $ 2.47 $ 2.34 $ 2.19 $ 2.34
diluted... 2.53 2.45 2.32 2.18 2.33
Dividends declared..... 1.20 1.05 .96 .91 .85
Shareholders' equity... 19.76 19.50 17.91 17.06 15.79
Market price at year-end 47.00 51.69 31.92 27.83 21.33
Range-High........... 59.44 53.38 32.67 29.33 26.92
Low............ 39.69 30.83 25.50 21.33 21.08
Ratios
- ------
Earnings:
Return on average assets 1.40% 1.44% 1.43% 1.41% 1.58%
Return on average equity 12.81 13.10 13.38 13.34 15.76
Net interest margin..... 5.13 5.20 5.06 5.00 5.28
Risk-based capital:
Tier 1.................. 12.14 12.94 13.57 15.42 14.76
Total capital........... 13.20 13.99 14.66 16.57 15.96
Capital strength:
Tier 1 leverage......... 8.73 9.53 9.69 9.63 10.25
Ratio of average equity
to average assets...... 10.95 11.01 10.68 10.53 10.04
Dividends declared as a
percentage of net
income (per share, not
restated for poolings
of interests).......... 47.24 42.59 41.24 41.42 36.41
Data for prior years have been restated for material acquisitions accounted for
as poolings of interests.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
First Virginia achieved a record net income for 1998. Earnings
increased 4% to $130.162 million compared to $124.845 million in 1997 and
$116.341 million in 1996. Diluted earnings per share also set a new record,
rising 3% to $2.53 per share compared to the $2.45 per share earned in 1997
and the $2.32 per share earned in 1996. Earnings per share increased at a
slightly lower rate than net income because of an increase in average
outstanding shares. This was due to the issuance of shares in mid-1997 for
the acquisition of Premier Bankshares.
The return on average equity was 12.81% in 1998 compared to 13.10% in
1997. This is below the 14.32% reported by the corporation's peer group of
similarly sized banks because of the high level of capital the corporation
maintains. First Virginia is one of the best capitalized banks in the nation,
with a capital-to-asset ratio at year-end of 10.35%. The corporation's
philosophy of safety, earnings and growth, in that order, places a high
importance on maintaining a strong capital position and excellent asset
quality.
Other indicators of earnings, expense control and asset quality
continued to place First Virginia in the top tier of performance. The return
on assets equated 1.40% in 1998 compared to 1.44% in 1997 and has averaged
1.43% over the past ten years. This compares favorably to the peer group
average of 1.34% in 1998 and 1.17% for the past ten years. The company marked
its 21st consecutive year with a net interest margin of at least 5.00%,
posting 5.13% for 1998, compared to 5.20% in 1997. This remarkable level is
achieved by only a handful of companies in any one year, much less by any
company over such a long period filled with wide swings in the interest rate
markets.
The corporation's ability to control expenses is reflected in the
efficiency ratio of 57.0% in 1998 compared to 56.7% in 1997 and to the peer
group average of 57.5%. This low expense level is achieved despite the
relatively higher costs incurred by First Virginia in maintaining an
extensive branch network. The low-cost deposits generated by these branches
is one of the primary factors in the corporation's ability to achieve a high
net interest margin.
The corporation's asset quality continues at a high level as the
percentage of nonperforming assets to loans and foreclosed real estate
declined further during 1998 to .36% compared to .44% in 1997, significantly
below the 1998 peer group average of .54%. Net loan charge-offs were
relatively unchanged at .32% in 1998 compared to .31% in 1997 and over the
past ten years have averaged .27% compared to the national peer group average
of .43%.
During 1998, First Virginia experienced a growth in average deposits
of 6% to $7.818 billion compared to $7.357 billion in 1997. Most of that
growth was in low-cost transaction accounts, with average demand deposits up
11% and average money market accounts up 20%. The corporation's
super-community-bank status and reputation for personal service became even
more attractive as all of the other major banks in Virginia were acquired and
merged into large out-of-state banks. By the end of the year, First Virginia
was the largest, independent bank holding company headquartered in Virginia.
The corporation strengthened its position on the Maryland and Virginia
Eastern Shore during 1998 by acquiring 12 offices from competitors, giving it
the number two market share by the end of 1998. Also during 1998, the
corporation sold seven offices in Maryland's Montgomery and Baltimore
counties, after concluding that achieving a meaningful market share in these
communities was not feasible.
Total assets increased 6%, reaching $9.565 billion at the end of 1998
compared to $9.012 billion at the end of 1997 and $8.236 billion at the end
of 1996. The internal growth in deposits was the primary driver of asset
growth in 1998. Most of the growth in assets in 1997 came from the
acquisition of Premier Bankshares Corporation, a $750-million bank holding
company operating in southwest Virginia. Average loans rose 4% in 1998 to
$5.968 billion compared to $5.712 billion in 1997.
Total capital declined $20.828 million in 1998 to $990.328 million at
the end of 1998. During 1998, the corporation repurchased and retired 1.780
million shares of its common stock after purchasing and retiring 2.279
million shares in 1997. In 1997, the corporation issued 5.431 million shares
of stock in connection with the acquisition of Premier Bankshares
Corporation. The cash dividend was increased twice during 1998, marking the
17th consecutive year of two dividend increases during the year and the 22nd
consecutive year of at least one dividend increase. Dividends declared rose
14% in 1998 to $1.20 per share and equaled 47% of diluted earnings per share.
Book value per share increased 1% to $19.76 compared to $19.50 at the end of
1997. The price of the corporation's shares achieved a new high in the first
half of the year of $59.44 but declined by year-end along with the price of
all financial industry stocks to $47.00 per share. The recognition of the
corporation's consistently excellent earnings, as well as its location in one
of the most attractive markets in the country, permits its stock to sell at a
multiple to earnings of 18.6 times, slightly higher than the industry
average.
Year Ended December 31
98vs97 97vs96 96vs95
----- ----- -----
Diluted earnings per share - prior period......... $2.45 $2.32 $2.18
----- ----- -----
Net change during the year:
Interest income................................. .41 .56 .17
Interest expense ............................... (.14) (.13) .04
Provision for loan losses....................... (.05) .01 (.12)
Gain on sale of mortgage servicing rights....... (.02) (.02) .05
Gain on sale of branches........................ .01 .03 -
Noninterest income.............................. .18 .05 .06
FDIC expense.................................... - .01 .08
Noninterest expense, excluding FDIC expense..... (.28) (.32) (.18)
Income taxes.................................... - (.02) (.01)
Decrease (increase) in common shares outstanding (.03) (.04) .05
----- ----- -----
Net increase (decrease) during the period..... .08 .13 .14
----- ----- -----
Diluted earnings per share - current period....... $2.53 $2.45 $2.32
===== ===== =====
AVERAGE BALANCE SHEETS AND INTEREST RATES ON
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
1998
------------------------------
Interest
Average Income/
Balance Expense Rate
---------- --------- -------
ASSETS (Dollars in thousands)
Interest-earning assets:
Investment securities-available for
sale:
U.S. Government and its agencies..... $ 10,731 $ 588 5.48%
Other................................ 10,383 296 2.85
Investment securities-held to maturity:
U.S. Government & its agencies 1,765,227 $106,483 6.03%
State and municipal obligations(1) 173,791 11,867 6.83
Other(1) 946 61 6.46
---------- --------
Total investment securities 1,961,078 119,295 6.08
---------- --------
Loans, net of unearned income:(2)
Installment 4,000,503 347,286 8.68
Real estate 1,066,779 93,850 8.80
Other(1) 900,793 78,259 8.71
---------- --------
Total loans 5,968,075 519,395 8.70
---------- --------
Loans held for sale 17,969 1,502 8.36
Money market investments 511,967 27,530 5.38
Other earning assets(1) 21,982 1,512 6.88
---------- --------
Total earning assets and
interest income 8,481,071 699,234 7.89
--------
Noninterest-earning assets:
Cash and due from banks 335,199
Premises and equipment, net 162,580
Other assets 367,406
Allowance for loan losses (68,210)
----------
Total Assets $9,278,046
==========
(1) Income from tax-exempt securities and loans is included in interest
income on a taxable-equivalent basis. Interest income has been divided by a
factor comprised of the complement of the incremental tax rate of 35% and
adjusted for the partial disallowance of interest costs incurred to carry the
tax-exempt investments.
(2) Nonaccruing loans are included in their respective categories.
AVERAGE BALANCE SHEETS AND INTEREST RATES ON
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
1998
------------------------------
Interest
Average Income/
Balance Expense Rate
---------- --------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY (Dollars in thousands)
Interest-bearing liabilities:
Interest checking/savings plan $1,406,375 $ 19,272 1.37%
Money market accounts 886,224 30,003 3.39
Savings deposits 1,141,836 25,632 2.24
Consumer certificates of deposit 2,450,375 121,574 4.96
Large denomination certificates of deposit 432,997 22,884 5.29
---------- --------
Total interest-bearing deposits 6,317,807 219,365 3.47
Short-term borrowings 315,668 14,660 4.64
Long-term indebtedness 3,370 307 9.11
---------- --------
Total interest-bearing liabilities
and interest expense 6,636,845 234,332 3.53
--------
Noninterest-bearing liabilities:
Demand deposits 1,499,935
Other 125,164
Preferred shareholders' equity 549
Common shareholders' equity 1,015,553
----------
Total liabilities and
shareholders' equity $9,278,046
==========
Net interest income and
net interest margin $434,902 5.13%
========
AVERAGE BALANCE SHEETS AND INTEREST RATES ON
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
1997
------------------------------
Interest
Average Income/
Balance Expense Rate
---------- --------- -------
ASSETS (Dollars in thousands)
Interest-earning assets:
Investment securities-available for
sale:
U.S. Government and its agencies.....
Other................................
Investment securities-held to maturity:
U.S. Government & its agencies $1,666,939 $101,710 6.10%
State and municipal obligations(1) 156,908 11,064 7.05
Other(1) 1,157 127 11.01
---------- --------
Total investment securities 1,825,004 112,901 6.19
---------- --------
Loans, net of unearned income:(2)
Installment 3,766,026 327,645 8.70
Real estate 1,096,448 96,137 8.77
Other(1) 849,224 76,956 9.03
---------- --------
Total loans 5,711,698 500,738 8.77
---------- --------
Loans held for sale 13,395 1,089 8.13
Money market investments 385,995 20,944 5.43
Other earning assets 21,656 1,453 6.71
---------- --------
Total earning assets and
interest income 7,957,748 637,125 8.01
--------
Noninterest-earning assets:
Cash and due from banks 320,875
Premises and equipment, net 158,610
Other assets 288,546
Allowance for loan losses (65,934)
----------
Total Assets $8,659,845
==========
(1) Income from tax-exempt securities and loans is included in interest
income on a taxable-equivalent basis. Interest income has been divided by a
factor comprised of the complement of the incremental tax rate of 35% and
adjusted for the partial disallowance of interest costs incurred to carry the
tax-exempt investments.
(2) Nonaccruing loans are included in their respective categories.
AVERAGE BALANCE SHEETS AND INTEREST RATES ON
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
1997
------------------------------
Interest
Average Income/
Balance Expense Rate
---------- --------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY (Dollars in thousands)
Interest-bearing liabilities:
Interest checking/savings plan $1,333,213 $ 23,016 1.73%
Money market accounts 739,184 22,547 3.05
Savings deposits 1,141,337 26,062 2.28
Certificates of deposit:
Consumer 2,403,908 118,654 4.94
Large denomination 385,224 20,392 5.29
---------- --------
Total interest-bearing deposits 6,002,866 210,671 3.51
Short-term borrowings 254,861 12,040 4.72
Long-term indebtedness 3,387 216 6.38
---------- --------
Total interest-bearing liabilities
and interest expense 6,261,114 222,927 3.56
--------
Noninterest-bearing liabilities:
Demand deposits 1,354,254
Other 91,368
Preferred shareholders' equity 629
Common shareholders' equity 952,480
----------
Total liabilities and
shareholders' equity $8,659,845
==========
Net interest income and
net interest margin $414,198 5.20%
========
AVERAGE BALANCE SHEETS AND INTEREST RATES ON
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
1996
------------------------------
Interest
Average Income/
Balance Expense Rate
---------- --------- -------
ASSETS (Dollars in thousands)
Interest-earning assets:
U.S. Government securities- $ 15,343 $ 1,152 7.51%
available for sale
Investment securities-held to maturity:
U.S. Government & its agencies 1,809,771 109,152 6.04
State and municipal obligations(1) 170,331 11,567 6.79
Other(1) 1,491 126 8.45
---------- --------
Total investment securities 1,996,936 121,997 6.10
---------- --------
Loans, net of unearned income:(2)
Installment 3,456,630 299,542 8.67
Real estate 962,892 84,785 8.81
Other(1) 752,135 67,061 8.92
---------- --------
Total loans 5,171,657 451,388 8.73
---------- --------
Loans held for sale 14,140 1,209 8.55
Federal funds sold and securities
purchased under agreements to resell 323,348 17,195 5.32
Other earning assets 15,327 1,019 6.64
---------- --------
Total earning assets and
interest income 7,521,408 592,808 7.88
--------
Noninterest-earning assets:
Cash and due from banks 313,409
Premises and equipment, net 148,623
Other assets 222,103
Allowance for loan losses (59,580)
----------
Total Assets $8,145,963
==========
(1) Income from tax-exempt securities and loans is included in interest
income on a taxable-equivalent basis. Interest income has been divided by a
factor comprised of the complement of the incremental tax rate of 35% and
adjusted for the partial disallowance of interest costs incurred to carry the
tax-exempt investments.
(2) Nonaccruing loans are included in their respective categories.
AVERAGE BALANCE SHEETS AND INTEREST RATES ON
EARNING ASSETS AND INTEREST-BEARING LIABILITIES
1996
------------------------------
Interest
Average Income/
Balance Expense Rate
---------- --------- -------
LIABILITIES AND SHAREHOLDERS' EQUITY (Dollars in thousands)
Interest-bearing liabilities:
Interest checking $1,307,087 $ 24,208 1.85%
Money market accounts 726,790 21,847 3.01
Savings deposits 1,159,475 26,487 2.28
Certificates of deposit:
Consumer 2,233,654 113,565 5.08
Large denomination 321,656 16,263 5.06
---------- --------
Total interest-bearing deposits 5,748,662 202,370 3.52
Short-term borrowings 210,910 9,712 4.60
Long-term indebtedness 2,194 216 9.85
---------- --------
Total interest-bearing liabilities
and interest expense 5,961,766 212,298 3.56
--------
Noninterest-bearing liabilities:
Demand deposits 1,233,132
Other 81,274
Preferred shareholders' equity 671
Common shareholders' equity 869,120
----------
Total liabilities and
shareholders' equity $8,145,963
==========
Net interest income and
net interest margin $380,510 5.06%
========
EFFECT OF RATE-VOLUME CHANGES ON NET INTEREST INCOME
1998 Compared to 1997
Increase (Decrease)
Due to Change in
------------------------------
Total
Average Average Increase
Volume Rate (Decrease)
-------- -------- --------
Interest income (In thousands)
- ---------------
Investment securities-available
for sale:
U.S. Government and its agencies $ 588 $ - $ 588
Other* 296 - 296
Investment securities-held to maturity:
U.S. Government and
its agencies 5,997 (1,224) 4,773
State and municipal obligations* 1,190 (387) 803
Other* (23) (43) (66)
-------- -------- --------
Total investment securities 8,048 (1,654) 6,394
-------- -------- --------
Loans:
Installment 20,400 (759) 19,641
Real estate (2,601) 314 (2,287)
Other* 4,673 (3,370) 1,303
-------- -------- --------
Total loans 22,472 (3,815) 18,657
-------- -------- --------
Loans held for sale 372 41 413
Money market investments 6,835 (249) 6,586
Other earning assets* 22 37 59
-------- -------- --------
Total interest income 37,749 (5,640) 32,109
-------- -------- --------
Interest expense
- ----------------
Interest checking/savings plan 1,263 (5,006) (3,743)
Money market accounts 4,485 2,971 7,456
Savings deposits 11 (441) (430)
Consumer certificates of deposit 2,529 (37) 2,492
Large denomination Cds 2,294 625 2,919
-------- -------- --------
Total interest-bearing deposits 10,582 (1,888) 8,694
Short-term borrowings 2,873 (253) 2,620
Long-term indebtedness (1) 92 91
-------- -------- --------
Total interest expense 13,454 (2,049) 11,405
-------- -------- --------
Net interest income $ 24,295 $ (3,591) $ 20,704
======== ======== ========
*Fully taxable-equivalent basis
The increase or decrease due to a change in average volume has been
determined by multiplying the change in average volume by the average rate
during the preceding period, and the increase or decrease due to a change in
average rate has been determined by multiplying the current average volume by
the change in average rate.
EFFECT OF RATE-VOLUME CHANGES ON NET INTEREST INCOME
1997 Compared to 1996
Increase (Decrease)
Due to Change in
------------------------------
Total
Average Average Increase
Volume Rate (Decrease)
-------- -------- --------
Interest income (In thousands)
- ---------------
Investment securities-available
for sale:
U.S. Government and its agencies.... $ - $ - $ -
Other*.............................. - - -
Investment securities-held to maturity:
U.S. Government and (9,560) 966 (8,594)
its agencies
State and municipal obligations* (912) 409 (503)
Other* (28) 29 1
-------- -------- --------
Total investment securities (10,500) 1,404 (9,096)
-------- -------- --------
Loans:
Installment 26,811 1,292 28,103
Real estate 11,760 (408) 11,352
Other* 8,657 1,238 9,895
-------- -------- --------
Total loans 47,228 2,122 49,350
-------- -------- --------
Loans held for sale (64) (56) (120)
Money market investments 3,333 416 3,749
Other earning assets* 419 15 434
-------- -------- --------
Total interest income 40,416 3,901 44,317
-------- -------- --------
Interest expense
- ----------------
Interest checking/savings plan 484 (1,676) (1,192)
Money market accounts 373 327 700
Savings deposits (414) (11) (425)
Consumer certificates of deposit 8,656 (3,567) 5,089
Large denomination CDs 3,214 915 4,129
-------- -------- --------
Total interest-bearing deposits 12,313 (4,012) 8,301
Short-term borrowings 2,024 304 2,328
Long-term indebtedness 117 (117) -
-------- -------- --------
Total interest expense 14,454 (3,825) 10,629
-------- -------- --------
Net interest income $ 25,962 $ 7,726 $ 33,688
======== ======== ========
*Fully taxable-equivalent basis
The increase or decrease due to a change in average volume has been
determined by multiplying the change in average volume by the average rate
during the preceding period, and the increase or decrease due to a change in
average rate has been determined by multiplying the current average volume by
the change in average rate.
STATEMENT OF INCOME
- -------------------
NET INTEREST INCOME
The table on pages 14 thru 19 details the increase in earning assets,
interest-bearing liabilities and demand deposits for the last three years,
along with the related levels of fully taxable-equivalent interest income and
expense. The variance in interest income and expense caused by differences in
average balances and rates is shown on pages 20 and 21.
The national economy continued to grow in 1998, with the nation
experiencing its longest expansion of the century. The worldwide economic
situation was not as favorable, however, as the Russian and many Asian
economies collapsed, entering into deflationary conditions. While these
international crises do not affect First Virginia directly, they did trigger
a decline in interest rates in the last four months of the year as the
resultant flight to quality drove yields on some U.S. Treasury securities to
record lows. The Federal Reserve lowered the discount rate and target rate
for overnight securities several times and the prime interest rate was
lowered three times in the last four months of the year.
These declines in interest rates resulted in a drop in First
Virginia's net interest margin of seven basis points to 5.13% in 1998,
following an increase of 14 basis points in 1997 when rates were more stable.
First Virginia maintains a very liquid position for both its assets and
liabilities so that movements in interest rates do not have a material impact
on the net interest margin. In addition, First Virginia relies almost
entirely on its branch network to supply it with a relatively low-cost source
of funds and has no purchased funds and does not need to hedge its position
with derivative securities of any kind. This has produced one of the highest
net interest margins among the country's largest banks on a consistent basis,
and 1998 was the 21st consecutive year that First Virginia had a net interest
margin of at least 5.00%.
Net Interest Margin
(the higher, the better)
National
First Southern Peer
Virginia Regionals Group
-------- --------- --------
1998 5.13% 4.27% 4.42%
1997 5.20% 4.51% 4.70%
1996 5.06% 4.44% 4.53%
1995 5.00% 4.46% 4.51%
1994 5.28% 4.45% 4.50%
Southern Regionals: Banking companies with assets over $2 billion (31 in
1998)
National Peer Group: Banking companies with assets of
between $5 and $10 billion (25 in 1998)
Source: Keefe, Bruyette & Woods
The yield on earning assets declined 12 basis points in 1998 to 7.89%
after rising 13 basis points in 1997. Part of this decline in 1998 was caused
by a shift in the mix of earning assets from loans into relatively
lower-yielding short-term investments such as money market investments and
investment securities. Due to the faster 6% deposit growth rate compared to
the 4% growth in loans, the loans to total earning assets percentage dropped
to 70% compared to 72% in 1997. The decline in interest rates in 1998
resulted in lower yields in most categories of earning assets, particularly
in investment securities, which dropped 11 basis points in yield to 6.08%.
The yield on loans declined seven basis points in 1998, following a rise of
four basis points in 1997 with most of the decline occurring on the
commercial side. The yields on consumer installment loans and real estate
loans were relatively unchanged compared to 1997 since these rates are less
sensitive to changes in the interest rate market. However, by the end of
1998, rates for consumer loans began dropping, and the declines in this
category may impact the corporation more adversely in 1999.
After several years of interest-rate stability for deposits, the cost
of these funds began to drop in the last four months of 1998. This resulted
in a slight, three-basis-point decline in the cost of funds to 3.53% for 1998
after remaining unchanged in 1997 and 1996 at 3.56%. The cost of interest
checking deposits dropped 36 basis points to 1.37% as a result of the general
decline in interest rates and as the acquisition of some former competitors
by larger out-of-state banks lessened price competition for these deposits.
The cost of money market deposits increased 34 basis points to 3.39% in 1998
as the corporation began a campaign in late 1997 to attract more of these
relatively low-cost deposits. This resulted in an increase of 20% in average
outstanding balances at a cost considerably less than alternative sources of
funds. Consumer certificates of deposit rose two basis points in cost in 1998
to 4.96% following a 14-basis-point decline in 1997. As it became apparent
that interest rates were declining in 1998, consumers demonstrated a
preference for longer-term instruments and sought to lock in a higher yield
by extending the term of their certificates. In 1997, consumers had shown a
preference for shorter-term certificates following several years of
relatively stable rates. The cost of funds for consumer certificates of
deposit should decline during 1999 as interest rates on these instruments
were cut sharply in the fourth quarter of 1998 and maturing instruments are
repriced at much lower rates.
PROVISION FOR LOAN LOSSES
The provision for loan losses increased $3.623 million in 1998 to
$20.800 million compared to a $.557 million decline in 1997. The provision
covered actual net loan charge-offs in 1998 plus an amount related to loan
growth. The corporation's loan portfolio consists primarily of small,
homogeneous loans to consumers with a consistent pattern of small loss. Net
charge-offs equaled .32% of average loans during 1998, .31% in 1997, and .25%
in 1996, and over the past ten years have averaged .27% of average loans.
The corporation has a lower risk exposure to charge-offs than many
banks because the majority of its loans are made in small amounts to
consumers and are generally well secured by assets such as an automobile or
real estate. These loans also have regular monthly repayment schedules, and
their average duration is substantially less than their stated lives. Credit
card loans are made primarily to the banks' customers located in the
corporation's trade area and contain a lesser degree of risk and delinquency
than many banks' nationally solicited accounts. The balance of the
corporation's loans are made primarily to small- and medium-sized businesses
in the corporation's trade area and are well secured. The corporation does
not have any international, national or highly leveraged credits, nor does it
have any concentration of credit in any one industry that exposes the loan
portfolio to adverse risk. While approximately 47% of the corporation's loan
portfolio is comprised of automobile sector loans, the loans are for
relatively small amounts to consumers and have regular monthly payment
schedules and are of the highest quality so that the risk of exposure is very
limited. The corporation has avoided the sub-prime segment of both the
automobile and home equity loan markets.
NONINTEREST INCOME
Noninterest income, excluding security gains and losses, increased 12%
in 1998 to $115.768 million, compared to a 7% increase to $103.501 million in
1997. First Virginia increased the percentage of its gross income received
from noninterest sources to 21% in 1998 compared to 20% in 1997, furthering
its objective to increase its share of income from noninterest sources in
order to reduce the dependence of net income on net interest income. Because
of the largely consumer nature of the corporation's business, it has been
more historically dependent on net interest income. During 1998, the
corporation made significant strides to improving its noninterest sources of
income, and it anticipates an even greater percentage of income to come from
these activities in 1999.
Income from service charges on deposits increased 11% to $47.078
million and is the single largest component of noninterest income. A part of
the 1998 increase in service charge income was a 9% increase in interest
checking and demand deposits. In the fourth quarter, the corporation began
implementing a customer-value-based approach to service charges. This
approach involved determining the value of each customer's relationship to
the corporation, examining what the customer expected from the relationship
and then setting the appropriate service schedule based on that review. This
review has been well-received by customers and has resulted in a better level
of service value to the customer and higher income for the corporation. It is
anticipated that this approach will increase service fee income by
approximately $12 million in 1999.
Income from insurance activities increased 12% in 1998 after declining
3% in 1997. The corporation has increased its insurance agency sales
significantly in the past several years, and in 1998 commissions and premiums
in this area advanced 39%. Sales of title insurance were particularly strong
due to increased penetration and the higher volume of real estate activity in
1998. Insurance products sold through the member banks, in a combination of
direct mail, telemarketing and agent sales, to consumers and businesses all
increased strongly. Offsetting the strong increase in insurance agency sales
was a 4% decline in premium income from the sale of credit life and
disability insurance. Credit insurance sales have been steadily declining for
a number of years as state-mandated rate reductions and a decreasing volume
of loans generated in the branch offices resulted in fewer sales
opportunities.
Income from trust services increased 9% in 1998 following a 20%
increase in 1997 and a 12% increase in 1996. The net margin in this line of
business has improved significantly over the last several years as more
emphasis has been placed on new sales, larger account balances and more
commercial trust services.
Credit card fee income increased 3% in both 1998 and 1997 as volumes
rose modestly. In the fourth quarter, the corporation was required to sell a
large affinity credit card program that equaled approximately one-third of
the total credit card portfolio. As a result of this sale, credit card income
in 1999 is expected to decline appreciably although overall profitability
will not be materially impacted. In connection with this sale, a gain of
$1.364 million was recorded in other income. Also included in other income
was a gain of $2.081 million from the sale of seven offices in Maryland. In
1997, other income included a gain of $2.066 million from the sale of three
branches in southwest Virginia that were required to be divested as part of
the acquisition of Premier Bankshares Corporation. In prior years, the
corporation regularly made a sale of mortgage servicing rights and realized
gains of $1.5 million in both 1997 and 1996. In late 1997, the servicing
activities of the corporation's mortgage loan subsidiary were largely
eliminated and mortgage loans are now originated and sold with servicing
released so that no servicing gain was recorded in 1998 or will occur in
future years. Other income also includes origination fees for automobile
leases originated and sold to a third-party provider for a fee. After
increasing significantly in 1995 and 1996, fees from this source dropped 56%
in 1997 and another 78% in 1998 as the attractiveness of the leasing product
changed dramatically with the reduction of residual values on the leased
vehicles.
Electronic banking service fees increased 17% in 1998 following 38%
and 55% increases in 1997 and 1996. Changes in network rules permitted the
assessment of fees on non-First Virginia customers of the corporation's
automated teller machines (ATMs) in mid-1996, and the corporation's extensive
ATM network has proven to be highly convenient to customers who want to use
this service. In addition, the corporation has increased its placement of
ATMs in nonbranch locations such as airports, grocery stores, shopping
centers and other special high-traffic locations in order to increase its
income from these fees. The corporation offers an online debit service that
may be utilized at retailers across the nation, but fraud concerns have
precluded its introducing an off-line debit card.
The corporation recognized gains of $1.007 million from the sale of
equity securities in 1998. The corporation's policy is to hold virtually all
of its fixed income securities to maturity and, accordingly, there were no
security sales producing gains or losses in 1997, with the exception of some
bonds called by the issuer prior to the maturity date. In 1996, the
corporation sold a portfolio of securities in the available for sale category
for a gain of $1.789 million in order to take advantage of certain tax loss
carry-forwards and benefits.
NONINTEREST EXPENSE
Noninterest expense increased 7% in 1998 and 9% in 1997 compared to a
3% increase in 1996. However, excluding the impact of additional expenses in
connection with the 1997 acquisition of Premier Bankshares, accounted for
using the purchase method, and the purchase of 12 branch offices in 1998 on
the Eastern Shore of Maryland and Virginia, expenses in 1997 and 1998 would
have been up less than 3% in each year. The efficiency ratio has been
relatively stable, increasing slightly in 1998 to 57.0% compared to 56.7% in
1997 and the 57.0% achieved in 1996.
Efficiency Ratio
(the lower, the better)
National
First Southern Peer
Virginia Regionals Group
-------- --------- --------
1998 57.0% 58.2% 57.5%
1997 56.7% 58.4% 58.3%
1996 57.0% 59.0% 59.2%
1995 58.2% 61.0% 59.3%
1994 58.5% 63.2% 63.4%
Salaries and employee benefits increased 5% in 1998 and 8% in 1997 due
in part to the additional branch offices purchased and the acquisition of
Premier in 1997. Pension plan expense increased 19% in 1998 after falling 44%
in 1997 as the discount rate assumption for future benefit liabilities
declined in 1998 by 50 basis points after increasing 50 basis points in 1997.
The discount rate assumption changes each year based on current interest rate
levels for long-term investment grade securities. The rising stock market has
created a better-than-expected return on plan assets in recent years, and
this, in turn, has contributed to a lower-than-expected increase in expense
and a full funding of the plan as plan assets exceed projected plan
obligations. Health care costs, after remaining relatively stable in the
mid-1990s, have begun to accelerate, increasing 10% in 1998 and 13% in 1997.
Stock related compensation costs declined 61% in 1998 to $1.316 million after
rising $3.567 million in 1997. This expense fluctuates based on the movement
of the stock price; however, in 1997 the corporation redeemed all outstanding
stock appreciation rights and changed the vesting criteria for future grants
of stock options in order to eliminate the volatility and reduce the absolute
level of this expense in future years.
Occupancy expenses increased only 3% in 1998 despite the increase in
the number of branch offices and the acquisition of Premier Bankshares in
1997. Milder weather reduced utility expenses and the branch offices sold in
Maryland were relatively more expensive to maintain than the branch offices
acquired. Occupancy had increased 5% in 1997 due primarily to the acquisition
of Premier Bankshares. Equipment expense increased 12% in 1998 following an
increase of 14% in 1997 and 12% in 1996. The corporation has updated its
branch automation software over the past several years to the most current
versions now in use and increased the capability of its delivery systems.
Expenses increased in 1998 as a result of equipment and program upgrades
required to prepare the corporation's systems for the Year 2000.
The amortization of intangibles increased $3.297 million in 1998 to
$14.624 million following a rise of $3.288 million in 1997. The increase in
1998 was due in part to the acquisition of 12 branch offices from competitors
and the payment of a deposit intangible of $22.790 million that is being
amortized over a period of ten years. In addition, the 1997 Premier
Bankshares acquisition caused intangibles amortization expense to increase in
1997 and 1998.
Other noninterest expense rose 11% in 1998 and 6% in 1997 due in part
to the inclusion of Premier Bankshares in both years. A 14% increase in
advertising expense also increased noninterest expense as the corporation
capitalized on the consolidations and mergers in its markets to attract new
customers. Legal and professional fees increased $1.349 million with the use
of outside consultants for some Year 2000 conversion work, higher legal fees
related to routine lawsuits and fees related to the corporation's new
approach to service charges on deposit accounts. Telecommunication expenses
also rose 14% in 1998 as a result of increased capabilities of the
corporation's voice and data lines. 1997 noninterest expense had increased
over 1996 as a result of higher bank franchise taxes in Virginia caused by
higher asset and capital levels but declined in 1998 as capital in the
corporation's banks was reduced.
PROVISION FOR INCOME TAXES
Income tax expense in 1998 increased $2.955 million to $69.434 million
as a result of the increase in pretax income. The effective tax rate in both
1998 and 1997 was 34.8% and there were no material changes in the components
of taxable income or tax rates. In 1997, the effective tax rate had increased
.8% from 34.0% in 1996 as a result of a greater amount of nondeductible
expenses for tax purposes.
BALANCE SHEET
- -------------
First Virginia's lending portfolio is its primary earning asset and
generates approximately 66% of gross income. Nearly all earning assets are
funded from deposits originated through the corporation's network of branch
offices or from capital. Other sources of funding include customer repurchase
agreements and commercial paper originated from business customers who
utilize the corporation's cash management products, which are functionally
equivalent to deposits. The corporation does not fund any of its earning
assets from "purchased" deposits or other nondeposit funding sources, nor
does it sell or securitize any of its earning assets. The corporation's
objective is to invest 70-80% of its total deposits and short-term borrowings
in loans. In 1998, the loan to funding liabilities rate was 73.4%, a decline
from the 75.0% funding rate achieved in 1997. This decline was a result of a
faster 7% rate of growth in funding liabilities than the 4% growth in loans.
The table below shows the average balances of the various categories
of earning assets as a percentage of total earning assets for the years
indicated.
1998 1997 1996 1995 1994
------ ------ ------ ------ ------
Loans .................... 70.37% 71.78% 68.76% 67.96% 66.27%
Securities................ 23.12 22.93 26.55 27.36 30.53
Loans held for sale....... .21 .17 .19 .21 .40
Other earning assets...... .26 .27 .20 .13 .10
Money market investments.. 6.04 4.85 4.30 4.34 2.70
------ ------ ------ ------ ------
100.00% 100.00% 100.00% 100.00% 100.00%
====== ====== ====== ====== ======
LOANS
Loans outstanding at the end of 1998 increased 3% over 1997's year-end
numbers following an 11% growth in 1997 over the end of 1996. The growth in
loans outstanding in 1997 was primarily the result of the Premier Bankshares
acquisition, while the 1998 increase came from loans generated internally.
The largest component of First Virginia's loan portfolio is in
automobile-related loans, particularly loans originated through automobile
dealerships. The corporation is a full service provider to the automobile
dealership community and makes loans to consumers to finance their purchase
of automobiles and loans to dealers to finance their inventory of automobiles
and, to a lesser extent, their physical plant and facilities. As the
corporation has exploited this expertise over the past five years, the
percentage of loans that are automobile related increased from 38% of the
loan portfolio at the end of 1994, to 47% at the end of 1998.
Consumer car loans expanded by 11% in 1998, after growing 13% in 1997
and 18% in 1996. During 1998, the corporation consolidated all of its dealer
automobile origination activities into a separate company to enhance its
service capabilities by centralizing management and taking advantage of new
technology. As a consequence, new loan production increased 15% in 1998
compared to a 4% increase in 1997. The corporation did not open any new loan
production offices in 1998; however, two offices will open in the first
quarter of 1999 in Pittsburgh and Atlanta. The corporation plans to continue
its strategy of gradually expanding its market with additional loan
production offices, primarily in the Southeastern and mid-Atlantic regions.
First Virginia concentrates on the highest quality of automobile
loans, primarily "A" and "B" credits. Most of these loans are made to
consumers and are secured by new cars with a maximum term of five years. The
loan portfolio's high quality means net charge-offs are significantly below
industry averages and servicing and funding costs are among the lowest in the
industry, giving the corporation a competitive advantage over less efficient
producers. First Virginia uses an experienced loan reviewer in underwriting
each loan in these local loan production offices and does not rely on
credit-scoring models. This allows the corporation to give highly personal
service and quick approval to the dealer originating the loan. Once made, the
loans are serviced centrally to insure consistency and quality of collection
at the lowest cost.
The corporation also makes loans directly to dealers to finance their
sales inventory (floor plan loans), which are fully secured by specific
automobiles. Average floor plan loans declined 7% in 1998, 2% in 1997, and
12% in 1996 as dealers have been managing their inventories to turn over
vehicles more rapidly. In addition, sales of automobiles have been
consistently strong over the past three years, reducing the time cars spend
on a dealer's lot. The corporation's automotive finance business introduced a
leasing product in late 1995 with a partner who assumed all the risks for the
leases. After growing rapidly through 1996 and early 1997, the leasing
business has declined significantly as consumer terms were tightened. In late
1998, the corporation began offering loans to subprime customers through its
dealer network with the risks assumed by a third-party partner, and it
anticipates generating additional fee income from this product in 1999. First
Virginia is committed to being a full financial service provider to the
automobile market, regardless of swings in the economic cycle, and it devotes
its primary lending resources to this area.
The second largest component of the corporation's lending portfolio is
home equity loans comprising approximately 15% of outstanding loans at the
end of 1998. These loans have declined steadily with the exception of a 7%
increase in 1997 caused by the Premier Bankshares acquisition. In 1998, they
declined an average of 2%, as interest rates on mortgages reached their
lowest level in 30 years. The low mortgage rates generated a strong refinance
market for mortgage loans, and consumers paid off their home equity loans and
consolidated their debt into lower-cost mortgage loans. This refinancing
activity continued throughout the year, driving home equity lending down 15%
at the end of 1998 compared to the end of 1997. First Virginia pursues the
highest quality home equity loans with low loan to value ratios that enable
the corporation to show a nominal net charge-off rate. These loans are
originated through the banks' branches and through First General Mortgage
Company, a home equity mortgage loan company that operates in areas outside
the corporation's banking markets.
In the last three years, the corporation has responded to market
demand and increased the residential real estate percentage of its loan
portfolio to 10% compared to 9% at the end of 1995. Residential real estate
loans increased 21% in 1998 to $637.239 million after rising 5% in 1997 and
7% in 1996. The corporation's real estate loan portfolio has not been as
subject to early prepayment as some other banks' portfolios because it limits
itself primarily to 15-year, fixed rate loans. These loans do not contain the
same prepayment risk as adjustable-rate mortgages or mortgages of longer
contractual lives that are likely to be refinanced when interest rates
decline.
Revolving credit loans, primarily credit cards, declined 32% in 1998
when a large credit card affinity relationship was required to be sold in the
fourth quarter. Internal growth also slowed over the last three years, as
fewer direct mail solicitations have been made both for the corporation's own
portfolio and affinity programs. First Virginia promotes its credit cards by
offering one of the best low fixed-rate, no annual fee card products in its
market. The corporation limits its solicitation efforts to the geographic
area of its banks.
Increased competition from other financial institutions limited the
increase in commercial loans (excluding automobile dealer floor plan loans)
to 3% in 1998 after advancing 34% in 1997. Three quarter-percent decreases in
the prime rate in late 1998 also contributed to more pay-offs in both 1998
and 1997 as borrowers refinanced their commercial loans with competitors. The
exceptional increase in outstanding loans in 1997 was a direct result of the
acquisition of Premier Bankshares, which had a greater percentage of its loan
portfolio in this area. The corporation makes its loans to small- and
medium-sized businesses in the communities served by its member banks,
including loans to government contractors, high-tech companies, hospitals,
churches and country clubs. These loans are typically in amounts between $1
to $5 million, generally with a maximum amount of $15 million.
Construction and land development loans increased 1% in 1998 after
increasing 10% in 1997. Commercial property construction in the corporation's
market increased significantly over the past three years following virtually
no activity in the early 1990s; however, more existing construction projects
financed by the corporation were completed in 1998 compared to 1997.
Commercial real estate loans increased 1% in 1998 and 9% in 1997 and, while
demand for new loans was strong, lower interest rates and competition
increased pay-offs of existing loans. The corporation's commercial real
estate loans are generally made for owner-use properties, carrying primarily
floating or adjustable interest rates.
LOANS
December 31
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(In thousands)
Consumer:
Automobile...........$2,711,582 $2,445,958 $2,167,802 $1,836,603 $1,725,928
Home equity, fixed-
and variable-rate... 892,246 1,054,522 987,514 1,091,858 1,198,087
Revolving credit loans,
including credit cards 136,474 201,830 214,615 207,931 190,103
Other................ 340,424 354,944 317,764 300,157 260,989
Real estate:
Construction and
land development.... 125,667 124,366 113,211 97,974 122,737
Commercial mortgage.. 581,628 572,961 523,251 489,225 465,943
Residential mortgage,
(Excluding loans
held for sale)....... 637,239 528,218 504,962 470,994 504,823
Other................ 104,066 94,964 88,378 68,431 61,876
Commercial............ 563,889 560,215 447,290 474,903 466,708
---------- ---------- ---------- ---------- ----------
Loans, net of
unearned income $6,093,215 $5,937,978 $5,364,787 $5,038,076 $4,997,194
========== ========== ========== ========== ==========
INVESTMENT SECURITIES
The corporation has classified virtually all of its investment portfolio
as held to maturity because it has both the ability and the intention to hold
these securities to their stated maturity. Less than 1% of the portfolio is
classified as available for sale, either to provide additional liquidity in
certain circumstances or because the special nature of the securities
requires that they be classified as available for sale. The corporation has
constructed its portfolio in a "laddered" approach so an approximately equal
amount matures each month. This supplies liquidity to fund loan growth and
provides for a natural hedge against changes in interest rates. The
corporation generally does not invest in mortgage-backed securities,
collateralized mortgage obligations, structured notes or other types of
derivative securities.
The average outstanding held to maturity investment portfolio increased
6% in 1998 to $1.940 billion as deposits grew at a faster pace than loans and
excess funds were placed temporarily in the investment portfolio. In 1997,
average held to maturity securities decreased 8% as a result of the need to
fund loan growth and the acquisition of Premier Bankshares.
The corporation places primary importance on safety and liquidity in
its investment portfolio. Accordingly, the majority of the portfolio is
invested in U.S. Government and agency securities with maximum lives of
approximately five years. At the end of 1998, the average term of these
securities had increased by five months to 34 months compared to the end of
1997. However, because of the callable nature of some of these securities,
the actual duration of this portfolio is slightly less than 34 months. At
December 31, 1998, U.S. Government and agency securities comprised 87% of the
securities portfolio compared to 92% at the end of 1997. This percentage
change reversed a trend since 1982 when changes in federal income tax laws
reduced the tax benefits derived by banks for investments in municipal
securities. In 1998, the collapse of Russian and some Asian bond markets
precipitated a flight to high-quality U.S. Treasury securities, which
decreased the relative yield of these securities compared to municipal
securities. As a result, the corporation was able to purchase more
high-quality municipal securities at a spread over U.S. Treasury securities
that met the corporation's investment criteria.
MONEY MARKET INVESTMENTS
Money market investments, consisting primarily of federal funds sold
and securities repurchase agreements, are generally governed by the size of
normally anticipated deposit swings and loan demand. In 1998, average money
market investments increased 33% to $511.967 million, following a 19%
increase in 1997. The corporation maintained more of its funds in money
market investments over the past two years as a decline in interest rates and
a flat-to-inverted yield curve made these investments relatively more
attractive.
DEPOSITS
Average deposits increased $460.622 million or 6% in 1998, compared to
a 5% growth in 1997. During 1998, the corporation acquired 12 branch offices
with approximately $238 million in deposits and sold eight offices with
approximately $52 million in deposits; the remaining growth originated
through existing offices. The acquisition of all of the other major bank
holding companies headquartered in Virginia in late 1997 and 1998 provided
excellent opportunities to obtain new customers who desired the personal
attention and service offered by First Virginia's super-community-banking
approach. In 1997, much of the increase in deposits was a result of the
acquisition of Premier Bankshares, and there was little internal growth as
competition from nonbank intermediaries limited growth. The growth in
deposits in 1998 occurred in all deposit categories and was strongest in the
lower-cost transaction accounts. Average demand deposits increased 11% in
1998 after increasing 10% in 1997. The corporation offers a variety of
accounts that appeal to different target groups. The FirstVantage Plus
account, which offers an attractive array of features to the high-balance
customer, was enhanced in 1998 and grew substantially. Other accounts
appealing to the typical mid-balance customer provide relationship linkage
that avoids service charges. The corporation's extensive branch office
network creates a strong retail focus, resulting in a higher percentage of
customers maintaining balances in transaction accounts compared to other
banks. In 1998, 37% of the corporation's average deposits were comprised of
demand and interest checking accounts.
Average Deposits
(Millions of Dollars)
1998 1997 1996
------ ------ ------
Noninterest Bearing $1,500 $1,354 $1,233
Interest Checking 1,406 1,333 1,307
Savings 1,142 1,141 1,159
Money Market 886 739 727
Consumer CDs 2,450 2,404 2,234
Large Denomination CDs 433 385 322
------ ------ ------
$7,817 $7,356 $6,982
====== ====== ======
The corporation increased interest rates on its money market accounts in
late 1997, and the growth in these accounts was very strong throughout 1998.
Average money market accounts increased 20% in 1998 after posting modest
growth of 1-2% in the preceding two years. Consumer savings increased
slightly in 1998 after posting modest declines in the preceding three years,
providing further evidence of the corporation's convenient branches and
personal service generating low-cost deposits. Money market and consumer
savings comprised 26% of the corporation's total deposits.
Consumer certificates of deposit increased 2% in 1998 to $2.450 billion
and comprised 31% of total deposits. Internal growth was slightly negative
the past two years so most of the growth in 1998 was a result of the
acquisition of branches in Maryland and Virginia's Eastern Shore and the
growth in 1997 was from the Premier acquisition. The strength of the stock
market and the growth in mutual funds have reduced some of the attractiveness
of certificates of deposit as an investment vehicle at this time. Large
denomination certificates of deposit increased 12% in 1998; however, most of
these funds come from the corporation's core consumer customers and pay
interest at the same rate as other consumer certificates of deposit. State
and political, and negotiated-rate jumbo certificates, which are
traditionally considered to be a more volatile and costly source of funds,
were unchanged from 1997 to 1998. Most of the purchasers of these
certificates maintain other deposit or lending relationships with the
corporation. The corporation does not purchase brokered deposits nor does it
solicit deposits outside of its primary market areas.
Maturity ranges for certificates of deposit with balances of $100,000
or more on December 31, 1998, were (in thousands):
One month or less.............................................. $ 57,641
After one month through three months........................... 77,616
After three through six months ................................ 103,803
After six through twelve months ............................... 113,015
Over twelve months............................................. 86,011
--------
Total....................................................... $438,086
========
OTHER INTEREST-BEARING LIABILITIES
Short-term borrowings consist primarily of securities sold by the member
banks with an agreement to repurchase them on the following business day and
commercial paper issued by the parent company. These short-term obligations
are issued principally as a convenience to commercial customers in connection
with the corporation's cash management services. Average short-term
borrowings from these sources increased 24% in 1998 and 21% in 1997,
reflecting the increase in the number of commercial customers using cash
management services.
Long-term indebtedness is comprised of capitalized lease obligations on
branch office facilities that are not subject to prepayment and on one
equipment note for the purchase of the corporation's mainframe computer.
SHAREHOLDERS' EQUITY
First Virginia has historically been one of the most highly
capitalized banking companies in the nation, a reflection of its principles
of safety, income and growth, in that order. The ratio of total capital to
total assets declined 87 basis points to 10.35% in 1998 as a result of
greater growth in assets, increased dividends to shareholders, and an active
share repurchase program. These factors contributed to a decline in total
equity at the end of 1998 compared to 1997 of $20.828 million to $990.328
million while total assets increased 6%. In 1997, the ratio of shareholders'
equity to total assets had increased 64 basis points from the end of 1996 to
11.22%, primarily as a result of the acquisition of Premier Bankshares. These
ratios are significantly higher than the 9.00% capital to assets ratio
maintained by banks in the corporation's peer group of $5- to $10-billion
asset-sized banks. Despite the decline in capital, the book value per share
of stock increased $.26 to $19.76 in 1998 because there were fewer shares
outstanding.
Return on Total Average Equity
(the higher, the better)
National
First Southern Peer
Virginia Regionals Group
-------- --------- --------
1998 12.81% 14.40% 14.32%
1997 13.10% 15.75% 16.03%
1996 13.38% 14.79% 14.06%
1995 13.34% 15.00% 14.46%
1994 15.76% 15.26% 14.93%
The Tier 1 leverage ratio declined 80 basis points to 8.73% in 1998 as a
result of the same factors affecting the capital to assets ratio; it was also
impacted by the acquisition of deposits from other banks at a premium. This
premium is classified as a deposit intangible and is subtracted from total
capital for regulatory purposes in calculating risk-based and leverage
capital ratios. Each of the corporation's individual banks maintains capital
ratios well in excess of regulatory minimums, and all qualify as
"well-capitalized" banks, allowing them the lowest FDIC premium rate and
freedom to operate without restrictions from regulatory bodies.
The Board of Directors has approved several plans to repurchase the
corporation's common stock since 1993, and the corporation has repurchased an
average of 1.8 million shares per year since 1994 under these programs. The
most recent program, approved by the Board of Directors in 1996, authorized
the purchase of 6.0 million shares. In 1998, 1.779 million shares were
purchased under this program at a total cost of $85.794 million. An
additional 1.487 million shares may be purchased under this authorization,
however, there is no specific time period over which these shares will be
purchased. In the course of its repurchase programs, the corporation has
employed the use of equity put warrants and accelerated share repurchase
contracts.
First Virginia and its subsidiary banks are required to comply with
capital adequacy standards established by the Federal Reserve and the FDIC.
The corporation exceeded the additional regulatory risk-based capital
requirements by wide margins, due both to its high level of capital and the
conservative nature of its assets. The Tier 1 risk-based capital ratio
declined 80 basis points in 1998 to 12.14% as a result of the growth in
risk-based assets and the decline in total equity. In 1997, the Tier 1 ratio
declined 63 basis points, caused primarily by a shift in risk-based assets
into loans and out of investment securities. Regulatory minimums of 4.0% and
8.0%, respectively, are exceeded by substantial margins.
Asset Quality
- -------------
The corporation has a number of policies, reviewed regularly by senior
management, to ensure that the risk in lending and investment activities is
minimal, while the profit is consistent with the exposure to risk. Each
member bank's internal loan monitoring system also provides a detailed
monthly report of production, delinquencies and nonperforming and potential
problem loans. This careful monitoring has resulted in a consistent record of
low delinquencies and charge-offs, as well as few nonperforming loans in
relation to the entire loan portfolio.
The corporation has no foreign or highly leveraged transaction loans,
and loans are only made within the trade areas of the member banks or in
adjacent states where the corporation maintains loan production offices
generating high-quality consumer installment loans. Loans are generally not
participated with nor purchased from banks outside of the First Virginia
system. In addition, participations between banks within the First Virginia
system must first be shared with the corporation's lead bank, where a second
comprehensive loan review process is performed. Approximately 78% of the
corporation's loans are made to consumers and are normally secured by
personal or real property.
First Virginia has no significant concentrations of credit to a single
industry or borrower, and its loans are spread throughout its market area.
The corporation's legal lending limit to any one borrower is approximately
$112 million; however, it generally limits its loans to any one borrower and
related interests to $15 million. In special cases, the corporation may
exceed its internal guideline.
One of the corporation's specialty loan areas is the automobile finance
area, and loans are made to consumers, both directly in the member bank
branches and indirectly through automobile dealerships. Roughly 45% of the
total loan portfolio is comprised of consumer automobile loans, but because
loan amounts are relatively small and spread across many individual
borrowers, the risk of any major charge-offs is minimized. The corporation's
automobile loans consist primarily of the highest quality loans, commonly
referred to in the industry as "A" and "B" quality loans. These loans contain
substantially fewer risk characteristics than lower quality "C" and "D"
subprime loans and have lower delinquencies, charge-offs and collection
costs. During periods of economic weakness, subprime loan categories generate
very high delinquencies and charge-offs, while the high-quality loans the
corporation specializes in experience only modestly higher delinquencies and
charge-offs. The corporation also makes loans directly to high-quality
automobile dealers to finance their inventories.
NONPERFORMING ASSETS
Nonperforming assets declined $4.634 million in 1998 to $21.790 million
compared to $26.424 million at the end of 1997. As a percentage of total
loans and real estate acquired by foreclosure, nonperforming assets declined
eight basis points to .36%, its lowest historic level. In 1997, nonperforming
assets had increased $.841 million over 1996 as a result of the acquisition
of Premier Bankshares and the inclusion of their nonperforming assets.
However, as a percentage of total loans and foreclosed real estate,
nonperforming assets declined four basis points in 1997 to .44% compared to
the end of 1996. The ratio of nonperforming assets has steadily declined
since peaking in 1990 at 1.07% and has consistently been much lower than the
average for similar sized banks in the corporation's national and regional
peer groups. There were no concentrations of foreclosed real estate or
nonaccruing loans in any specific geographic location or type of property,
and the majority of nonperforming assets were comprised of smaller-balance
loans to consumers that are liquidated on a regular basis.
Nonperforming Assets Ratio
(the lower, the better)
National
First Southern Peer
Virginia Regionals Group
-------- --------- --------
1998 0.36% 0.51% 0.54%
1997 0.44 0.55 0.62
1996 0.48 0.56 0.54
1995 0.57 0.66 0.58
1994 0.52 0.66 0.67
The table below shows the total of nonperforming assets at the end of
each of the past five years. Experience has shown that actual losses on
nonperforming assets are only a small percentage of such assets. The
corporation expects to recover virtually all of its nonperforming assets,
many with full interest. Included in the allowance for loan losses is an
allocation of $.458 million to provide for possible losses of nonperforming
loans.
December 31
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(In thousands)
Nonaccruing loans ........ $14,654 $16,281 $14,906 $17,066 $15,286
Restructured loans........ 2,441 4,861 5,537 4,260 2,478
Properties acquired
by foreclosure........... 4,695 5,282 5,140 7,680 8,478
------- ------- ------- ------- -------
Total................... $21,790 $26,424 $25,583 $29,006 $26,242
======= ======= ======= ======= =======
Percentage of total loans and
foreclosed real estate .36% .44% .48% .57% .52%
Loans 90 days past due.... $17,162 $14,734 $ 8,919 $ 6,262 $ 4,881
======= ======= ======= ======= =======
Percentage of total loans. .29% .25% .17% .12% .10%
Loans past due 90 days or more have increased steadily over the past
five years and rose $2.428 million to $17.162 million at the end of 1998.
This represented .29% of outstanding loans, a four-basis-point increase
compared to the end of 1997. Most of the increase in 1997 and 1998 came from
the inclusion of loans from Premier Bankshares, which had higher risk
profiles and delinquency rates than loans traditionally originated by First
Virginia. Despite the increase, these levels of delinquencies are
significantly below industry averages and reflect the high overall quality of
the corporation's loan portfolio.
A loan generally is classified as nonaccrual when full collectibility of
principal or interest is in doubt; when repossession, foreclosure or
bankruptcy proceedings are initiated; or when other legal actions are taken.
In the case of installment loans, a loan is placed in nonaccrual if payments
are delinquent 120 days, and for other loans, after payments are delinquent
for 90 days. Credit card loans are charged off if they are 180 days past due.
If collateral on a loan is sufficient to ensure full collection of principal
and interest, an exception to the general policy might be made. Loans are
also placed in a nonaccruing status at any time prior to that indicated above
if the corporation anticipates that interest or principal will not be
collected.
Potential problem loans consist of loans that are currently performing
in accordance with contractual terms but for which management has concerns
about the ability of an obligor to continue to comply with repayment terms
because of the obligor's potential operating or financial difficulties. At
the end of 1998, loans of this type that are not included in the preceding
table of nonperforming and past due loans amounted to approximately $33.384
million. The majority of these loans represent commercial or property-related
loans. Depending on changes in the economy and other future events, these
loans and others not presently identified as problem loans could be
reclassified as nonperforming loans in the future.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that management
believes is adequate to absorb inherent losses in the loan portfolio. The
provision for loan losses is the periodic cost of maintaining an adequate
allowance. Due to the homogeneous nature of a large percentage of the
corporation's outstanding loans, a significant portion of the allowance is
not determined by individual loan reviews. Rather the adequacy of the
allowance and related provision for loan losses are evaluated by management
based on the value of underlying collateral, economic conditions and unique
marketplace factors that might affect the collectibility of the loans. As a
result, these judgments involve an inherently higher degree of uncertainty.
Historical results and loss experience may not reflect this risk to the
extent it might currently exist. For other portions of the corporation's loan
portfolio, management assesses the adequacy of the allowance based on a
review of individual loans and commitments where internal credit evaluations
result in ratings that are below standards adopted and periodically updated
by the corporation. Other risk factors taken into account include recent loss
experience in specific portfolio segments, underwriting standards and changes
in credit quality, and changes in volumes or concentrations of credit risk.
Reserve Coverage Ratios
(the higher, the better)
National
First Southern Peer
Virginia Regionals Group
-------- --------- --------
1998 411% 377% 338%
1997 322 359 307
1996 307 364 326
1995 272 354 326
1994 331 336 321
Net Charge-Off Ratios
(the lower, the better)
National
First Southern Peer
Virginia Regionals Group
-------- --------- --------
1998 0.32% 0.29% 0.29%
1997 0.31 0.30 0.29
1996 0.25 0.29 0.27
1995 0.19 0.22 0.20
1994 0.11 0.17 0.20
In the case of construction, commercial and commercial real estate
loans, each loan is reviewed and rated at least annually, and trends in the
total portfolio are examined for potential deterioration in overall quality.
Each loan in excess of $25,000 is examined individually and a specific
allocation determined if full collectibility is in doubt. This component of
the overall allowance is relatively small and totaled $3.590 million at the
end of 1998, including $.458 million for loans classified as nonperforming.
These loans comprise 23% of the total loan portfolio, and the allocated
allowance for these loans represented approximately 5% of the total allowance
for loan losses.
The remainder of the allowance is a general reserve that is determined
considering macro and micro economic conditions, past loss experience, the
nature of credit and geographic concentration risks and collateral value
inherent in the corporation's portfolio of direct and indirect auto lending,
credit card and other consumer loans that are homogenous in nature and
comprise over 77% of the corporation's loan portfolio. No specific allocation
of the allowance is made for individual loans in these categories and they
are evaluated as a common group with similar characteristics. These loans
tend to be for relatively short durations of two to seven years and are
either unsecured or secured by automobiles or residential real estate and
have fairly consistent charge-off experience. In 1998, net charge-offs were
up one basis point to .32% of average loans compared to 1997, after
increasing six basis points to .25% in 1996. Over the past ten years, the
annual net charge-off rate has averaged .27%. Based on the stability of the
corporation's actual experience with its homogeneous loans, stable economic
conditions and the relatively small component required for specifically
allocated loans, the allowance for loan losses remained at 1.15% of average
outstanding loans in 1998 compared to the end of 1997. The allowance covered
net charge-offs 3.66 times at the end of 1998 compared to 3.91 times at the
end of 1997. This is approximately equal to the average duration of the
corporation's loan portfolio.
An analysis of the activity in the allowance for loan losses for each of
the last five years is presented in the following table.
December 31
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
(In thousands)
Balance at beginning of year $68,064 $62,761 $57,922 $58,860 $50,927
Increase attributable
to acquisitions............ 679 5,551 - - 6,412
Provision charged to
operating expense.......... 20,800 17,177 17,734 8,341 6,463
------- ------- ------- ------- -------
Total .................... 89,543 85,489 75,656 67,201 63,802
------- ------- ------- ------- -------
Charge-offs:
Credit card............... 9,594 9,675 7,744 6,326 4,677
Indirect automobile....... 9,743 7,706 5,539 3,288 2,396
Other consumer............ 3,644 2,640 2,287 1,551 1,222
Real estate............... 215 113 176 155 98
Commercial................ 384 1,412 865 1,401 363
------- ------- ------- ------- -------
Total .................. 23,580 21,546 16,611 12,721 8,756
------- ------- ------- ------- -------
Recoveries:
Credit card............... 1,273 1,195 979 845 856
Indirect automobile....... 2,034 1,581 1,595 1,644 1,988
Other..................... 925 739 655 696 730
Real estate............... 47 242 1 6 3
Commercial................ 70 364 486 251 237
------- ------- ------- ------- -------
Total .................. 4,349 4,121 3,716 3,442 3,814
------- ------- ------- ------- -------
Net charge-offs deducted... 19,231 17,425 12,895 9,279 4,942
------- ------- ------- ------- -------
Balance at end of year ..... $70,312 $68,064 $62,761 $57,922 $58,860
======= ======= ======= ======= =======
Net Loan Losses (Recoveries) to
Average Loans by Category:
Credit card............... 5.66% 4.81% 3.75% 3.19% 2.61%
Indirect automobile....... .32 .29 .22 .10 .03
Other consumer............ .19 .13 .11 .06 .03
Real estate............... .02 (.01) .02 .02 .01
Commercial................ .03 .12 .05 .16 .02
Total Loans................. .32% .31% .25% .19% .11%
Percentage of allowance for loan
losses to year-end loans. 1.15% 1.15% 1.17% 1.15% 1.18%
LIQUIDITY AND SENSITIVITY TO INTEREST RATES
- -------------------------------------------
The primary functions of asset/liability management are to ensure adequate
liquidity and maintain an appropriate balance between interest-sensitive
assets and interest-sensitive liabilities. Interest-sensitive assets and
liabilities are those that can be repriced to current market rates within a
relatively short time period. Liquidity management involves the ability to
meet the cash flow requirements of the corporation's loan and deposit
customers. Interest-rate-sensitivity management seeks to avoid fluctuating
net interest margins and to enhance consistent growth of net interest income
through periods of changing interest rates. The corporation does not hedge
its position with swaps, options or futures but instead maintains a highly
liquid and short-term position in substantially all of its earning assets and
interest-bearing liabilities.
One of the primary ways the corporation meets its liquidity needs is by
scheduling the maturity of its investment securities so that approximately an
equal amount will mature each month. The weighted-average life of the
securities portfolio at the end of 1998 was 34 months, a slight increase from
the 29 months at the end of 1997. Because the corporation views its
securities portfolio primarily as a source of liquidity and safety, it does
not necessarily react to changes in the yield curve in an attempt to enhance
its yield. Accordingly, the average life of the portfolio remains relatively
stable as the corporation maintains a constant approach to its portfolio and
invests primarily in U.S. Government and agency securities with a life
generally no greater than five years. Municipal securities are also generally
limited to lives of no more than five years, but availability and other
factors mean they are occasionally purchased in serial issues with longer
lives.
A cash reserve consisting primarily of overnight investments is also
maintained by the parent company to meet any contingencies and to provide
additional capital, if needed, to the member banks.
Most of the corporation's loans are fixed-rate installment loans to
consumers and mortgage loans with maturities longer than the deposits by
which they are funded. A degree of interest-rate risk is incurred if the
interest rate on deposits should rise before the loans mature. However, the
substantial liquidity provided by the monthly repayments on these loans can
be reinvested at higher rates that largely reduce the interest-rate risk.
Home equity lines of credit have adjustable rates that are tied to the prime
rate. Many of the loans not in the installment or mortgage categories have
maturities of less than one year or have floating rates that may be adjusted
periodically to reflect current market rates. These loans are summarized in
the following table.
Between
1 year 1 and 5 After
or less years 5 years Total
-------- -------- ------- --------
(In thousands)
Maturity ranges:
Commercial, financial and other... $357,255 $244,379 $ 84,024 $685,658
Construction and land development. 45,028 68,341 12,298 125,667
-------- -------- -------- --------
Total ............................. $402,283 $312,720 $ 96,322 $811,325
======== ======== ======== ========
Floating-rate loans:
Commercial, financial,
Agricultural and other........... $148,253 $ 28,739 $176,992
Construction and land development. 10,747 2,365 13,112
-------- -------- --------
Total ............................. $159,000 $ 31,104 $190,104
======== ======== ========
First Virginia's Asset/Liability Committee is responsible for reviewing
the corporation's liquidity requirements and maximizing the corporation's net
interest income consistent with capital requirements, liquidity, interest
rate and economic outlooks, competitive factors and customer needs. Liquidity
requirements are reviewed in detail for each of the corporation's individual
banks; however, overall asset/liability management is performed on a
consolidated basis to achieve a consistent and coordinated approach.
One of the tools the corporation uses to determine its interest-rate
risk is gap analysis. Gap analysis attempts to examine the volume of
interest-rate-sensitive assets minus interest- rate-sensitive liabilities.
The difference between the two is the interest-sensitivity gap, and it
indicates how future changes in interest rates may affect net interest
income. Regardless of whether interest rates are expected to increase or
decrease, the objective is to maintain a gap position that will minimize any
changes in net interest income. A negative gap exists when the corporation
has more interest-sensitive liabilities maturing within a certain time period
than interest-sensitive assets. Under this scenario, if interest rates were
to increase it would tend to reduce net interest income.
At December 31, 1998, the corporation was liability-sensitive in the
short term (under six months) by approximately 28% of earning assets, which
declines to 22% in 12 months. Technically, the corporation may reprice
interest checking, savings and insured money markets at any time and,
accordingly, they have been classified in the 1-30 day sensitivity category
in the accompanying table. While these accounts have in the last two years
been somewhat more subject to repricing than in prior years, the degree and
frequency of movement is limited, and they are much less sensitive than
contractually possible.
The table below shows the corporation's interest-sensitivity position at
December 31, 1998:
INTEREST-SENSITIVITY ANALYSIS
1 to 30-Day 1 to 90-Day 1 to 180-Day
Sensitivity Sensitivity Sensitivity
------------ ------------ ------------
(Dollars in thousands)
Earning assets:
Loans, net of unearned income.... $ 917,682 $ 1,326,739 $ 1,859,805
Investment securities............ 368,735 436,986 564,816
Money market investments......... 265,557 265,557 265,557
Other earning assets............. - - -
------------ ------------ ------------
Total earning assets......... 1,551,974 2,029,282 2,690,178
------------ ------------ ------------
Funding sources:
Noninterest bearing
demand deposits................ - - -
Interest checking/savings plan... 1,508,511 1,508,511 1,508,511
Money market accounts............ 958,966 958,966 958,966
Savings deposits................. 1,134,108 1,134,108 1,134,108
Consumer certificates of deposit. 227,839 512,461 944,361
Large denomination certificates
of deposit..................... 57,641 135,257 239,060
Short-term borrowings............ 385,996 385,996 385,996
Long-term indebtedness........... - - -
------------ ------------ ------------
Total funding sources........ 4,273,061 4,635,299 5,171,002
------------ ------------ ------------
Interest-sensitivity gap........... $(2,721,087) $(2,606,017) $(2,480,824)
============ ============ ============
Interest-sensitivity gap as a
percentage of earning assets..... (31.21)% (29.89)% (28.45)%
Ratio of interest-sensitive assets
to interest-sensitive liabilities .36x .44x .52x
INTEREST-SENSITIVITY ANALYSIS (Continued)
Beyond One
1 to 365-Day Year or
Sensitivity Nonsensitive Total
------------ ----------- -----------
(Dollars in thousands)
Earning assets:
Loans, net of unearned income.... $2,856,275 $3,251,677 $6,107,952
Investment securities............ 794,574 1,528,478 2,323,052
Money market investments......... 265,557 - 265,557
Other earning assets............. - 22,427 22,427
------------ ----------- -----------
Total earning assets......... 3,916,406 4,802,582 8,718,988
------------ ----------- -----------
Funding sources:
Noninterest-bearing
demand deposits................ 1,601,041 1,601,041
Interest checking/savings plan... 1,508,511 - 1,508,511
Money market accounts............ 958,966 - 958,966
Savings deposits................. 1,134,108 - 1,134,108
Consumer certificates of deposit. 1,475,131 939,235 2,414,366
Large denomination certificates
of deposit..................... 352,075 86,011 438,086
Short-term borrowings............ 385,996 - 385,996
Long-term indebtedness........... 3,217 3,217
Other funding sources............ 274,697 274,697
------------ ----------- -----------
Total funding sources........ 5,814,787 2,904,201 8,718,988
------------ ----------- -----------
Interest-sensitivity gap........... $(1,898,381) $1,898,381 $ 0
============ =========== ===========
Interest-sensitivity gap as a
percentage of earning assets..... (21.77)% 21.77% 0.00%
Ratio of interest-sensitive assets
to interest-sensitive liabilities .67x 1.65x 1.00x
First Virginia also uses simulation analysis to monitor and manage
interest rate sensitivity. Under this analysis, changes in interest rates and
volumes are used to test the sensitivity of First Virginia's net interest
income. Simulation analysis uses a more detailed version of the information
shown in the table on pages 41 and 42 that includes adjustments for the
expected timing and magnitude of changes in assets and liabilities. These
adjustments take into account that interest rates on individual asset and
liability categories may change at a different pace from their contractual
rate. A large part of First Virginia's loans and deposits come from its
retail base, and they do not automatically reprice on a contractual basis in
reaction to changes in interest rates. While First Virginia's liability
sensitivity in the short term indicates that an increase in interest rates
may negatively affect short-term net interest income, management would likely
take actions to minimize its exposure to negative results and within a
relatively short period of time would make adjustments so that net interest
income would not be materially impacted. For example, despite wide changes in
rates since 1978, First Virginia has maintained a net interest margin above
5.00% every year and has been able to maintain adequate liquidity to provide
for changes in loan and deposit demands.
Using shock analysis of a hypothetical, immediate increase in all
interest rates of 200 basis points and comparing that to a stable
interest-rate environment over the next 12 months indicates that net interest
income would decrease by 10% while an immediate and hypothetical decrease in
rates of 200 basis points would increase net interest income by 6%. Such an
immediate change in all rates would be highly unlikely in management's
opinion. The corporation's dynamic simulation modeling takes into account the
effects such changes may have on overall economic activity, the reaction of
individual categories of assets and liabilities, and the impact that
different management actions may have on net interest income. Accordingly,
First Virginia has not experienced the volatility its interest-sensitive gap
position or shock analysis may indicate.
Over time, or under stable interest rate conditions, net interest income
will tend to be greater at higher interest rate levels. This is due to the
large proportion of low-cost core deposits such as demand, interest checking,
savings and money market accounts comprising the corporation's funding
sources, which can be invested in relatively higher-yielding loans and
investments.
YEAR 2000
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Any of the corporation's
computer programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in a
system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
First Virginia began preparing its computer systems and applications for
the Year 2000 in 1993. This process involves modifying or replacing the
corporation's affected hardware and software as well as ensuring that
external service providers, significant vendors and large customers are
taking the appropriate action to remedy their own Year 2000 issues. First
Virginia developed a five-phase approach to resolve its Year 2000 issues.
This approach involves the following phases: awareness, assessment,
renovation, validation and implementation. The awareness and assessment
phases involve identifying the systems affected, analyzing the scope and
magnitude of the problem, and developing an action plan to address each area
affected. Management has identified 66 systems as "mission-critical," which
are defined as those systems that would severely impair operations or cause a
significant loss of revenue if not remediated. The 66 systems include those
maintained on the corporation's own computers as well as those systems
processed by external service providers. To date, First Virginia has
completed all aspects of the awareness and assessment phases.
The renovation phase involves modifying or replacing the corporation's
affected systems. Of the systems identified as mission-critical, 94% have
completed the renovation phase. The final two phases, validation and
implementation, involve testing and certification that the mission-critical
systems are compliant with all Year 2000 issues and 91% are completed. The
remainder of the mission-critical systems are expected to be tested and
certified by the end of March 1999.
First Virginia has contacted non-mission-critical external service
providers, significant suppliers and large customers to determine the extent
to which they may be affected by Year 2000 issues and to determine whether
they are taking the appropriate steps to remedy their own Year 2000 issues.
To date, First Virginia is not aware of any external service providers,
vendors or large customers whose failure to resolve their own Year 2000
issues would have a material adverse effect on First Virginia's results of
operations. However, the corporation has no means of ensuring that external
agents or large customers will be ready and the effect of their noncompliance
is not determinable. The corporation will continue to monitor the progress of
non-mission-critical external service providers, significant suppliers and
large customers throughout 1999 and will determine if a contingency plan is
necessary for those external parties by September 30, 1999.
Management of the corporation believes it has an effective program in
place to resolve the Year 2000 issue in a timely manner. The services of an
independent third party have been engaged to review the corporation's plan
and readiness for Year 2000 mission-critical issues. In addition, the
corporation's primary regulator, the Federal Reserve, conducts a quarterly
examination and evaluation of the corporation's progress.
As noted above, all phases have not yet been completed. In the event that
First Virginia is unable to complete all necessary phases of the plan, First
Virginia may be unable to process transactions, invoice customers or collect
payments and perform other operations. In addition, disruptions in the
economy generally resulting from Year 2000 issues could also materially
adversely affect the corporation. The corporation has developed contingency
plans for 80% of its mission-critical systems and is developing plans for the
remaining systems that will be completed by June 30, 1999. These plans
involve, among other actions, manual work-arounds, temporary postponement of
certain functions and alternative computer systems. Some of these plans
incorporate parts of the corporation's existing disaster recovery programs
involving offsite data processing and detailed plans for each function within
the corporation.
First Virginia estimates that the total cumulative cost of the project
will be approximately $22 million of which $20 million has already been
expended. This includes both internal and external personnel costs related to
modifying the systems and the cost of purchasing or leasing hardware or
software. Purchased hardware and software will be capitalized in accordance
with normal policy. Personnel and all other costs related to the project are
being expensed as incurred. These costs are not expected to have a material
effect on the corporation's results of operations.
The cost of the project and the expected completion dates are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources and other factors. However, there can be no guarantee that these
estimates will be achieved, and actual results could differ materially from
those anticipated. Specific factors that could influence the results may
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant computer
codes, the availability of alternative systems in the event of failure of
mission-critical systems, the ability of third-party intermediaries to be
Year 2000 ready, and similar uncertainties.
FORWARD-LOOKING STATEMENTS
Certain statements in this discussion may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements involve known and unknown risks
including, but not limited to, changes in general economic and business
conditions, interest-rate fluctuations, competition within and without the
banking industry, new products and services in the banking industry, risks
inherent in making loans, including repayment risks and fluctuating
collateral values, changing trends in customer profiles and changes in laws
and regulations applicable to the corporation. Although the corporation
believes that its expectations with respect to the forward-looking statements
are based upon reasonable assumptions within the bounds of its knowledge of
its business and operations, there can be no assurance that actual results,
performance or achievements of the corporation will not differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements.
Quarterly Results
- -----------------
The results of operations for the first three quarters of 1998 have been
analyzed in quarterly reports to shareholders. The results of operations for
each of the quarters during the two years ended December 31, 1998, are
summarized in the table on pages 46 and 47. The results of operations for the
fourth quarter are highlighted below.
Earnings per share in the 1998 fourth quarter rose 21% to a record $.68
compared to $.56 earned in the prior year's quarter. Net income rose 17% to
$34.232 million compared to $29.377 million earned in the fourth quarter of
1997. A lower number of outstanding shares, a direct result of the
corporation's share repurchase program, caused diluted earnings per share to
increase at the faster pace. The return on assets during the fourth quarter
was 1.45% compared to the 1.31% earned in the prior year, while the return on
equity was 13.92% compared to 11.71% in the prior year's fourth quarter.
Total assets at the end of 1998 were $9.565 billion, an increase of 6%
compared to the $9.012 billion at the end of 1997.
Loans grew at an annualized rate of increase of 6% over the end of the
third quarter. All categories of loans increased with loans to automobile
dealers to finance inventory rising a seasonally strong 42% (unannualized)
over the third quarter and automobile loans to consumers rising at a 10%
annualized pace over the third quarter. The net interest margin declined 13
basis points to 5.05% compared to the prior year's fourth quarter of 5.18%
and was down from the 5.14% achieved in the third quarter. During the last
four months of the year there were three quarter-point drops in the prime
rate and reductions in interest rates in general, the result of the
international bond crisis, which caused yields on the corporation's earning
assets to decline at a faster pace than the cost of funds.
Noninterest income increased 26% in the fourth quarter compared to the
1997 fourth quarter. A one-time gain of $1.364 million was recorded on the
sale of $51.5 million in credit card loans that were required to be sold by
the bank's affinity card partner. Excluding the nonrecurring gain,
noninterest income was up 21%. During the quarter, a customer value-based
approach to service charges was implemented, resulting in a 27% increase in
service charges on deposits. Insurance activities were also strong with
insurance premiums and commissions up 16%. Electronic banking income rose 14%
during the quarter as ATM and POS income increased and the corporation's
PC-based home banking products increased in popularity.
Noninterest expense declined slightly compared to the third quarter and
was up 2% over the prior year's fourth quarter. The prior year's noninterest
expense had included a $2.2 million charge for stock-related employee
compensation as performance targets for the vesting of certain stock options
were met.
Total shareholders' equity increased slightly to $.990 billion at December
31, 1998, compared to $.985 billion at the end of September, but was down
slightly compared to the $ 1.011 billion at the end of 1997. During the
fourth quarter of 1998, 266,200 shares were purchased under the company's
share repurchase program.
QUARTERLY RESULTS
1998
--------------------------------------
Quarter Ended
--------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31
-------- -------- -------- --------
Condensed Statements of Income
(Dollar amounts in thousands, except per-share data)
Interest and fees on loans $128,999 $131,467 $128,951 $127,349
Interest on loans
held for sale 630 275 330 268
Income from securities-
available for sale 271 239 232 141
held to maturity 28,892 29,844 30,119 26,584
Other interest income 6,556 7,313 7,441 7,730
-------- -------- -------- --------
Total interest income 165,348 169,138 167,073 162,072
-------- -------- -------- --------
Interest on deposits 53,977 56,093 55,143 54,152
Interest on borrowed funds 3,995 4,199 3,515 3,258
-------- -------- -------- --------
Total interest expense 57,972 60,292 58,658 57,410
-------- -------- -------- --------
Net interest income 107,376 108,846 108,415 104,662
Provision for loan losses 5,149 5,512 6,055 4,084
Noninterest income 32,243 28,913 29,172 26,447
Noninterest expense 82,962 83,023 80,933 78,760
Provision for income taxes 17,276 17,280 18,155 16,723
-------- -------- -------- --------
Net income $ 34,232 $ 31,944 $ 32,444 $ 31,542
======== ======== ======== ========
Net income per share
Basic $ .68 $ .62 $ .63 $ .61
Diluted .68 .62 .62 .61
Average Quarterly Balances (in millions):
Securities $ 2,008 $ 2,003 $ 2,031 $ 1,800
Loans 6,060 6,018 5,890 5,901
Total earning assets 8,609 8,553 8,469 8,289
Total assets 9,411 9,356 9,275 9,063
Demand deposits 1,542 1,513 1,515 1,428
Interest-bearing deposits 6,392 6,355 6,309 6,212
Total deposits 7,934 7,869 7,823 7,639
Total shareholders' equity 984 1,020 1,037 1,020
Key Ratios
Rates earned on assets 7.72% 7.94% 7.97% 7.95%
Rates paid on liabilities 3.40 3.57 3.56 3.59
Net interest margin 5.05 5.14 5.19 5.14
Return on average assets 1.45 1.37 1.40 1.39
Return on average equity 13.92 12.53 12.51 12.37
QUARTERLY RESULTS (Continued)
1997
--------------------------------------
Quarter Ended
--------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31
-------- -------- -------- --------
Condensed Statements of Income
(Dollar amounts in thousands, except per-share data)
Interest and fees on loans $129,655 $131,226 $122,607 $114,297
Interest on loans
held for sale 380 241 302 166
Income from securities-
available for sale - - - -
held to maturity 26,488 27,182 29,116 27,064
Other interest income 6,793 6,252 4,316 5,034
-------- -------- -------- --------
Total interest income 163,316 164,901 156,341 146,561
-------- -------- -------- --------
Interest on deposits 54,929 55,130 51,638 48,974
Interest on borrowed funds 3,339 3,275 3,009 2,633
-------- -------- -------- --------
Total interest expense 58,268 58,405 54,647 51,607
-------- -------- -------- --------
Net interest income 105,048 106,496 101,694 94,954
Provision for loan losses 4,756 3,831 5,248 3,342
Noninterest income 25,505 29,807 25,007 23,233
Noninterest expense 81,251 78,891 73,360 69,741
Provision for income taxes 15,169 18,863 16,740 15,707
-------- -------- -------- --------
Net income $ 29,377 $ 34,718 $ 31,353 $ 29,397
======== ======== ======== ========
Net income per share:
Basic $ .57 $ .67 $ .63 $ .60
Diluted .56 .66 .63 .60
Average Quarterly Balances (in millions):
Securities $ 1,763 $ 1,803 $ 1,920 $ 1,821
Loans 5,935 5,954 5,611 5,338
Total earning assets 8,202 8,218 7,858 7,550
Total assets 8,962 8,974 8,532 8,169
Demand deposits 1,424 1,402 1,341 1,248
Interest-bearing deposits 6,155 6,187 5,938 5,725
Total deposits 7,579 7,589 7,279 6,973
Total shareholders' equity 1,004 1,000 913 872
Key Ratios
Rates earned on assets 8.00% 8.08% 8.02% 7.87%
Rates paid on liabilities 3.60 3.59 3.54 3.51
Net interest margin 5.18 5.26 5.23 5.10
Return on average assets 1.31 1.55 1.47 1.44
Return on average equity 11.71 13.89 13.74 13.49
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
CONSOLIDATED BALANCE SHEETS
December 31
1998 1997
---------- ----------
(In thousands)
ASSETS
Cash and due from banks....................... $ 377,374 $ 386,832
Money market investments...................... 265,557 243,162
---------- ----------
Total cash and cash equivalents - Note 3 642,931 629,994
---------- ----------
Loans held for sale........................... 14,737 18,953
Investment securities-available for sale
-Note 4.................................... 20,580 -
Investment securities-held to maturity (market
value-$2,316,922-1998 and
$1,954,155-1997)- Note 4................... 2,302,472 1,946,944
Loans, net of unearned income - Note 5........ 6,093,215 5,937,978
Allowance for loan losses - Note 6............ (70,312) (68,064)
---------- ----------
Net loans.................................. 6,022,903 5,869,914
---------- ----------
Other earning assets.......................... 22,427 21,444
Premises and equipment - Note 7............... 160,781 164,301
Intangible assets - Note 8.................... 184,695 174,976
Accrued income and other assets............... 193,170 185,111
---------- ----------
Total Assets............................... $9,564,696 $9,011,637
========== ==========
CONSOLIDATED BALANCE SHEETS (Continued)
December 31
1998 1997
---------- ----------
(In thousands)
LIABILITIES
Deposits:
Noninterest-bearing........................ $1,601,041 $1,460,784
Interest-bearing:
Interest checking/savings plan.......... 1,508,511 1,391,962
Money market accounts................... 958,966 772,067
Savings deposits........................ 1,134,108 1,124,058
Consumer certificates of deposit........ 2,414,366 2,444,132
Large denomination CDs.................. 438,086 426,839
---------- ----------
Total deposits....................... 8,055,078 7,619,842
Short-term borrowings - Note 9................ 385,996 251,687
Long-term indebtedness........................ 3,217 2,826
Accrued interest and other liabilities........ 130,077 126,126
---------- ----------
Total Liabilities.......................... 8,574,368 8,000,481
---------- ----------
SHAREHOLDERS' EQUITY
Preferred stock - Note 10..................... 534 583
Common stock - Note 10........................ 50,094 51,817
Capital surplus............................... 4,004 92,971
Retained earnings............................. 934,703 865,785
Accumulated other comprehensive income........ 993 -
---------- ----------
Total Shareholders' Equity................. 990,328 1,011,156
---------- ----------
Total Liabilities and Shareholders' Equity. $9,564,696 $9,011,637
========== ==========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31
1998 1997 1996
-------- -------- --------
(In thousands, except per share data)
Interest income:
Loans................................. $516,766 $497,785 $448,900
Loans held for sale................... 1,503 1,089 1,209
Investment securities-available for sale 883 - 1,152
Investment securities-held to maturity 115,439 109,850 117,744
Money market investments.............. 27,530 20,944 17,195
Other earning assets.................. 1,510 1,451 1,016
-------- -------- --------
Total interest income............ 663,631 631,119 587,216
-------- -------- --------
Interest expense:
Deposits.............................. 219,365 210,671 202,370
Short-term borrowings................. 14,660 12,040 9,712
Long-term indebtedness................ 307 216 216
-------- -------- --------
Total interest expense........... 234,332 222,927 212,298
-------- -------- --------
Net interest income...................... 429,299 408,192 374,918
Provision for loan losses................ 20,800 17,177 17,734
-------- -------- --------
Net interest income after provision
for loan losses......................... 408,499 391,015 357,184
-------- -------- --------
CONSOLIDATED STATEMENTS OF INCOME (Continued)
Year Ended December 31
1998 1997 1996
-------- -------- --------
(In thousands, except per share data)
Net interest income after provision
for loan losses......................... $408,499 $391,015 $357,184
-------- -------- --------
Noninterest income:
Service charges on deposit accounts... 47,078 42,340 39,791
Insurance premiums and commissions.... 7,191 6,407 6,573
Credit card service charges and fees.. 12,235 11,866 11,576
Trust services........................ 10,192 9,317 7,749
Electronic banking service fees....... 11,962 10,195 7,390
Income from other customer services... 14,116 14,224 14,125
Securities gains before income tax
provisions of $352-1998, $18-1997,
and $626-1996....................... 1,007 51 1,789
Other................................. 12,994 9,152 9,457
-------- -------- --------
Total noninterest income......... 116,775 103,552 98,450
-------- -------- --------
Noninterest expense:
Salaries and employee benefits-Notes 11/12 180,163 171,578 158,966
Occupancy............................. 24,870 24,217 23,000
Equipment............................. 29,218 26,067 22,816
Advertising........................... 8,863 7,790 7,476
Printing and supplies................. 7,131 7,167 6,882
Credit card processing fees........... 8,884 8,430 8,299
Amortization of intangibles........... 14,624 11,327 8,039
Other................................. 51,925 46,667 43,832
-------- -------- --------
Total noninterest expense........ 325,678 303,243 279,310
-------- -------- --------
Income before income taxes............... 199,596 191,324 176,324
Provision for income taxes - Note 13..... 69,434 66,479 59,983
-------- -------- --------
NET INCOME............................... $130,162 $124,845 $116,341
======== ======== ========
Net income per share of common stock
Basic................................. $ 2.54 $ 2.47 $ 2.34
Diluted.............................. 2.53 2.45 2.32
Average shares of common stock outstanding
Basic................................. 51,233 50,622 49,788
Diluted............................... 51,529 50,880 50,042
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumul-
ated
Pre- Other Total
ferred Common Compre- Share-
Stock Stock Capital Retained hensive holders'
$10 Par $1 Par Surplus Earnings Income Equity
------- ------- -------- -------- ------- --------
(Dollars in thousands)
Balance January 1, 1996... $ 695 $50,927 $ 90,136 $726,255 $ 1,634 $869,647
Comprehensive income:
Net income............ - - - 116,341 - 116,341
Unrealized gains on
securities available for
sale, net of tax of $(880) (1,634) (1,634)
--------
Total comprehensive income. 114,707
Conversion of preferred
to common stock......... (48) 10 38 - - -
Issuance of shares for
stock options and stock
appreciation rights..... - 72 1,067 - - 1,139
Common stock purchased
and retired............. - (2,397) (63,914) - - (66,311)
Dividends declared:
Preferred stock......... - - - (44) - (44)
Common stock $0.96 per share - - - (47,861) - (47,861)
------- ------- -------- -------- ------- --------
Balance December 31, 1996. 647 48,612 27,327 794,691 - 871,277
Increase attributable to
an acquisition.......... - 5,431 157,193 - - 162,624
Net income................ 124,845 124,845
Conversion of preferred
to common stock......... (64) 14 50 - - -
Issuance of shares for
stock options and stock
appreciation rights..... - 48 885 - - 933
Common stock purchased
and retired............. - (2,288) (92,484) - - (94,772)
Dividends declared:
Preferred stock......... - - - (41) - (41)
Common stock
$1.05 per share - - - (53,710) - (53,710)
------- ------- -------- -------- ------- --------
Balance December 31, 1997. $ 583 $51,817 $ 92,971 $865,785 $ - $1,011,156
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued)
Accumul-
ated
Pre- Other Total
ferred Common Compre- Share-
Stock Stock Capital Retained hensive holders'
$10 Par $1 Par Surplus Earnings Income Equity
------- ------- -------- -------- ------- ----------
Balance December 31, 1997.$ 583 $51,817 $ 92,971 $865,785 $ - $1,011,156
Comprehensive income:
Net income............ - - - 130,162 - 130,162
Unrealized gains on
securities available
for sale, net of tax
of $543............... 993 993
----------
Total comprehensive income 131,155
Conversion of preferred
to common stock......... (49) 11 38 - - -
Issuance of shares for
stock options and stock
appreciation rights..... - 47 850 - - 897
Common stock purchased
and retired............. - (1,781) (89,855) - - (91,636)
Dividends declared:
Preferred stock......... - - - (35) - (35)
Common stock
$1.20 per share...... - - - (61,209) - (61,209)
------- ------- -------- -------- ------- ----------
Balance December 31, 1998.$ 534 $50,094 $ 4,004 $934,703 $ 993 $ 990,328
======= ======= ======== ======== ======= ==========
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
1998 1997 1996
-------- -------- --------
(In thousands)
Operating activities
- --------------------
Net income.................................... $130,162 $124,845 $116,341
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation of premises and equipment..... 13,842 13,838 13,488
Gain on sale of premises and equipment..... (2,438) (2,331) (1,263)
Provision for loan losses.................. 20,800 17,177 17,734
Amortization of investment
securities premiums..................... 5,656 6,431 9,965
Accretion of investment
securities discounts.................... (3,568) (2,608) (3,426)
Net decrease (increase) in loans held for
sale.................................... 4,216 (6,182) 6,445
Gain on sale of securities................. (1,007) (51) (1,789)
Amortization of goodwill and other
intangible assets....................... 14,624 11,327 8,039
Deferred income taxes...................... (1,672) (319) (1,123)
Increase in prepaid expenses............... (9,883) (2,801) (5,840)
Decrease (increase) in interest receivable. (944) (426) 11,110
Increase (decrease) in interest payable.... (134) 754 (4,320)
Increase in other accrued expenses......... 5,443 8,152 4,309
-------- -------- --------
Net cash provided by operating activities 175,097 167,806 169,670
-------- -------- --------
Investing activities
- --------------------
Proceeds from the sale of available
for sale securities......................... 2,641 - 64,682
Proceeds from the maturity of held
to maturity securities......................3,099,834 1,324,632 790,173
Purchase of available for sale securities..... (12,853) - -
Purchase of held to maturity securities......(3,457,337)(1,289,206) (489,422)
Net increase in loans......................... (173,790) (80,751) (339,606)
Purchases of premises and equipment........... (15,977) (14,849) (14,860)
Sales of premises and equipment............... 6,675 3,891 4,506
Mortgage servicing rights acquired............ (158) (267) (1,351)
Other intangible assets acquired.............. (22,790) (179) (5,869)
Net cash of acquired banks.................... - 38,908 -
Other......................................... (7,884) (5,987) (8,774)
-------- -------- --------
Net cash used for investing activities... (581,639) (23,808) (521)
-------- -------- --------
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
Year Ended December 31
1998 1997 1996
-------- -------- --------
(In thousands)
Financing activities
- --------------------
Net (decrease) increase in deposits...........$ 435,236 $(76,309) $(13,457)
Net increase in short-term borrowings......... 134,309 7,027 24,769
Principal payments on long-term borrowings.... (937) (1,050) (2,097)
Proceeds from long-term borrowings............ 1,328 - 3,263
Common stock purchased and retired............ (91,636) (94,772) (66,311)
Proceeds from issuance of common stock........ 897 819 1,139
Cash dividends paid:
Common $1.16 per share-1998, $1.02 per
share-1997 and $.95 per share-1996........ (59,682) (51,468) (47,477)
Preferred................................... (36) (42) (45)
-------- -------- --------
Net cash (used for) provided
by financing activities................ 419,479 (215,795) (100,216)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents..................... 12,937 (71,797) 68,933
Cash and cash equivalents at
beginning of year...................... 629,994 701,791 632,858
-------- -------- --------
Cash and cash equivalents at end of year. $642,931 $629,994 $701,791
======== ======== ========
See notes to consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- ------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of the corporation conform with
generally accepted accounting principles and prevailing industry practices.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates. A description of the
significant accounting policies is presented below:
Principles of Consolidation: The consolidated financial statements
include the accounts of the corporation and all of its subsidiaries. All
material intercompany transactions and accounts have been eliminated. Certain
amounts for years prior to 1998 have been reclassified for comparative
purposes.
Cash and Cash Equivalents: Cash and cash equivalents include cash and due
from banks, federal funds sold, securities purchased under agreement to
resell and other short-term investments.
Securities Available for Sale: Management determines the appropriate
classification of debt securities at the time of purchase and reevaluates
such designation as of each balance sheet date. Securities available for sale
are stated at the estimated fair value, with the unrealized gains and losses,
net of tax, reported as a net amount in accumulated other comprehensive
income. Quoted market prices are used to determine the estimated fair value.
The adjusted cost basis of a specific security is used to compute gains or
losses on the sale or early redemption of these securities.
Securities Held to Maturity: Debt securities are classified as held to
maturity when the corporation has the positive intent and ability to hold the
securities to maturity. Securities held to maturity are carried at amortized
cost. The adjusted carrying value of a specific security is used to compute
gains or losses on the early redemption of these securities.
Loans Held for Sale: Loans held for sale consist mainly of mortgage
loans, which are carried at the lower of cost (net of discounts) or market,
as determined in the aggregate. Market is determined by investor commitment
prices or current auction rates at the date of the financial statements.
Loans: Interest on installment loans is recorded as income in amounts
that will provide an approximate level yield over the terms of the loans.
Accrual of interest on other loans is based generally on the daily amount of
principal outstanding. Interest is not accrued on loans if the collection of
such interest is doubtful. Loan fees are amortized over the life of the
loans, using methods that approximate level yields. The corporation is
generally amortizing these amounts over the contractual life.
Allowance for Loan Losses: The allowance for loan losses is maintained at
a level considered adequate to absorb inherent losses in the loan portfolio.
The provision for loan losses is the periodic cost of maintaining an adequate
allowance. Due to the homogeneous nature of a large percentage of the
corporation's outstanding loans, a significant portion of the allowance is
not determined by individual loan reviews. Rather the adequacy of the
allowance and related provision for loan losses are evaluated by management
based on the value of the underlying collateral, the economic conditions and
factors unique to their marketplaces that might affect the collectibility of
the loans as well as other factors. As a result, these judgments involve an
inherently higher degree of uncertainty. Historical results and loss
experience may not reflect this risk to the extent it might currently exist.
For other portions of the corporation's loan portfolio, management assesses
the adequacy of the allowance based on a review of individual loans and
commitments where internal credit evaluations result in ratings that are
below certain standards adopted and periodically updated by the corporation.
Other risk factors taken into account include recent loss experience in
specific portfolio segments, underwriting standards and changes in credit
quality, and changes in volumes or concentrations of credit risks.
Premises and Equipment: Premises and equipment are carried at cost less
accumulated depreciation computed principally on the straight-line method
over lives not exceeding 50 and 20 years for buildings and equipment,
respectively. Gains and losses on disposition are reflected in current
operations. Maintenance and repairs are charged to operating expenses, and
major alterations and renovations are capitalized.
Other Real Estate Owned: Other real estate owned is stated at the lesser
of the loan balance prior to foreclosure plus the costs incurred for
improvements to the property, or fair value, less the estimated selling costs
of the property. At the time of foreclosure, any excess of cost over the
estimated fair value is charged to the allowance for loan losses. After
foreclosure, the estimated fair value is reviewed periodically by management.
Any further declines in fair value are charged against current earnings.
Income Taxes: Deferred tax assets and liabilities are based on the
difference between financial reporting and tax bases of assets and
liabilities and are measured at the enacted income tax rates applicable to
the period in which the deferred tax assets or liabilities are expected to be
realized or settled.
Net Income per Share: Basic net income per share of common stock is
computed on the basis of the weighted average number of shares of common
stock outstanding. Diluted net income per share is computed based on the
weighted-average number of common and common equivalent shares and dilutive
stock options outstanding during the year.
Comprehensive Income: Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), establishes standards for
the reporting and display of the components of comprehensive income. The
corporation adopted the provisions of this standard in 1998, which require
unrealized gains and losses from available for sale securities, net of taxes,
be included in other comprehensive income. Prior to the adoption, such
amounts were reported separately in shareholders' equity. The provisions of
SFAS 130 were applied retroactively.
Business Segments: Effective January 1, 1998, the corporation adopted
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" (SFAS 131). SFAS 131
defines an operating segment as a component of an enterprise that engages in
business activities that generate revenue and incur expenses, whose operating
results are reviewed by the chief operating decision maker in the
determination of resource allocation and performance, and for which discrete
financial information is available. Pursuant to this definition the
corporation maintains two segments: retail banking done through its
affiliated banks in Virginia, Maryland and Tennessee, and "other," consisting
primarily of nonbanking services. Since each of the affiliated banks in the
retail banking segment offer similar products and services to similar types
and classes of customers, operate in the same regulatory environment and have
similar economic characteristics, all the affiliated banks have been
aggregated into one reportable segment, retail banking. Substantially all the
corporation's consolidated assets, revenues and income are derived from this
segment. The corporation has no foreign operations.
2. ACQUISITIONS
On June 19, 1998, five branches were acquired by Atlantic Bank from the
Bank of Maryland. On February 6, 1998, seven branches were acquired from the
former Signet Bank by Atlantic Bank, Farmers Bank of Maryland and First
Virginia Bank of Tidewater. These transactions resulted in the acquisition of
an aggregate of $238 million in deposits and $58 million in loans. Core
deposit premiums of $23 million were recorded and are being amortized over
ten years.
On May 24, 1997, the merger of Premier Bankshares Corporation into the
corporation was consummated. Premier Bankshares Corporation was the bank
holding company for Premier Bank-South, N.A., in Wytheville, Virginia;
Premier Bank- Central, N.A., in Honaker, Virginia; and Premier Bank, N.A.,
in Tazewell, Virginia. These banks became wholly owned subsidiary banks and
have merged into various existing banks of First Virginia. Shares of the
corporation's stock totaling 5.431 million were issued and were valued at
$29.96 per share. The acquisition was accounted for using the purchase method
of accounting, and goodwill and other intangible assets of $82.701 million
were recorded and are being amortized over 10 to 25 years. The allocated fair
value of other assets and liabilities acquired, which generally approximated
carrying value, was $756.130 million and $676.205 million, respectively. The
results of operations of the acquisition are included in the consolidated
statements of income from the date of acquisition.
3. CASH AND CASH EQUIVALENTS
All securities underlying the money market investments were under the
corporation's control, and the maximum amount of outstanding money market
investments at any month end during 1998 and 1997 was $654.339 million and
$527.729 million, respectively.
The corporation's banking affiliates are required by Federal Reserve
regulations to maintain certain minimum cash balances consisting of vault
cash and deposits in the Federal Reserve Bank or in other commercial banks.
Such restricted balances totaled $44.798 million and $73.637 million as of
December 31, 1998 and 1997, respectively.
4. INVESTMENT SECURITIES
The following reflects the carrying amounts of investment securities and
the related approximate market values (in thousands):
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- -------- -------- ----------
Available for sale:
December 31, 1998:
U.S. Government and its agencies.. $ 12,053 $ 130 $ - $ 12,183
Other............................. 6,991 1,406 - 8,397
---------- -------- -------- ----------
Total......................... $ 19,044 $ 1,536 $ - $ 20,580
========== ======== ======== ==========
Investment securities held
to maturity:
December 31, 1998:
U.S. Government and its agencies.. $2,002,528 $ 13,651 $ 3,492 $2,012,687
State and municipal obligations.. 299,662 4,396 109 303,949
Other............................ 282 4 - 286
---------- -------- -------- ----------
Total........................ $2,302,472 $ 18,051 $ 3,601 $2,316,922
========== ======== ======== ==========
December 31,1997:
U.S. Government and its agencies...$1,783,106 $ 6,177 $ 1,868 $1,787,415
State and municipal obligations.... 162,242 2,932 34 165,140
Other ............................. 1,596 5 1 1,600
---------- -------- ------- ----------
Total............................$1,946,944 $ 9,114 $ 1,903 $1,954,155
========== ======== ======= ==========
December 31,1996:
U.S. Government and its agencies...$1,673,069 $ 4,729 $ 4,476 $1,673,322
State and municipal obligations.... 146,872 2,378 191 149,059
Other ............................. 1,008 15 - 1,023
---------- -------- ------- ----------
Total............................$1,820,949 $ 7,122 $ 4,667 $1,823,404
========== ======== ======= ==========
Securities having a carrying value of $653.484 million and $578.886
million at December 31, 1998 and 1997, respectively, were pledged to secure
public deposits and for other purposes required by law. The maturity ranges
of securities, excluding equity securities, average yield and fair value by
maturity range as of December 31, 1998, are as follows (in thousands):
U.S. Government
and its Agencies
-----------------------------
Amortized
Cost Fair Value Yield
---------- ---------- -----
Available for sale:
One year or less...................... $ 5,266 $ 5,282 5.4%
After one through five years.......... 6,787 6,901 5.6
--------- ----------
Total.............................. 12,053 12,183 5.5
--------- ----------
Weighted average maturity 15 months
Held to maturity:
One year or less........................$ 758,716 $ 761,627 5.5%
After one year through five years....... 562,247 572,336 5.8
After five through ten years............ 670,734 667,897 5.8
After ten years......................... 10,831 10,827 7.2
---------- ----------
Total................................$2,002,528 $2,012,687 5.7%
---------- ----------
Weighted average maturity............... 34 months
Total................................$2,014,581 $2,024,870 5.7%
========== ==========
Weighted average maturity............... 34 months
State and
Municipal Obligations
-----------------------------
Amortized
Cost Fair Value Yield
---------- ---------- -----
Held to maturity:
One year or less........................$ 30,592 $ 30,756 4.8%
After one year through five years....... 258,434 262,190 4.6
After five through ten years............ 8,646 8,905 5.3
After ten years......................... 1,990 2,098 6.1
---------- ----------
Total................................ 299,662 303,949 4.6
========== ==========
Weighted average maturity............... 36 months
Other
-----------------------------
Amortized
Cost Fair Value Yield
---------- ---------- -----
Held to maturity:
After one year through five years.......$ 282 $ 286 6.0%
---------- ---------- -----
Total................................$ 282 $ 286 6.0%
========== ========== =====
Weighted average maturity...............15 months
5. LOANS
Loans consisted of (in thousands): December 31
1998 1997
---------- ----------
Consumer:
Automobile installment ........................... $2,711,582 $2,445,958
Home equity, fixed and variable rate............... 892,246 1,054,522
Revolving credit loans, including credit cards..... 136,474 201,830
Other.............................................. 340,424 354,944
Real estate:
Construction and land development.................. 125,667 124,366
Commercial mortgage................................ 581,628 572,961
Residential mortgage............................... 637,239 528,218
Other, including Industrial Development Authority.. 104,066 94,964
Commercial........................................... 563,889 560,215
---------- ----------
Total loans, net of unearned income
of $147,659 and $185,895 6,093,215 5,937,978
Less allowance for loan losses....................... 70,312 68,064
---------- ----------
Net loans .........................................$6,022,903 $5,869,914
========== ==========
Loans on which interest is not being accrued or whose terms have been
modified to provide for a reduced rate of interest because of financial
difficulties of borrowers, and interest income earned with respect to such
loans were (in thousands):
December 31
1998 1997 1996
------- ------- -------
Nonaccruing loans........................ $14,654 $16,281 $14,906
Restructured loans ...................... 2,441 4,861 5,537
------- ------- -------
Total................................... $17,095 $21,142 $20,443
======= ======= =======
Average balance of nonaccruing loans..... $15,245 $15,511 $15,814
Allocation of the allowance for loan
losses for nonaccruing loans........... 458 362 1,273
Income recorded.......................... 169 415 256
Income anticipated under
original loan agreements..... 1,342 1,771 1,504
There were no formal commitments of a material amount to lend
additional funds under these agreements, but additional advances may be made
in the future if it is in the interest of the corporation to do so. Loans
modified for reasons other than a reduction in the interest rate were not
material in amount.
The corporation's loans are widely dispersed among individuals and
industries. On December 31, 1998, there was no concentration of loans in any
single industry that exceeded 10% of total loans.
The corporation, in the normal course of business, has made commitments
to extend loans and has written standby letters of credit that are not
recognized in the financial statements. On December 31, 1998 and 1997,
standby letters of credit totaled $23.109 million and $21.231 million,
respectively, and the unfunded amounts of loan commitments were (in
thousands):
December 31
1998 1997
---------- ----------
Fixed-rate revolving credit lines .................. $ 389,296 $ 699,758
Adjustable-rate loans:
Home equity lines ............................... 452,369 421,925
Commercial loans................................. 568,937 579,727
Construction and land development loans.......... 118,624 77,254
Other ........................................... 75,784 52,153
---------- ----------
Total .......................................... $1,605,010 $1,830,817
========== ==========
As of December 31, 1998, the corporation had mortgage loans held for
sale of $14.737 million and additional commitments to fund mortgage loans
totaling $18.435 Million, with a corresponding commitment to purchase by
outside investors. The commitments to sell mortgage loans to outside
investors are intended to reduce the corporation's interest rate exposure.
Mortgage loans being serviced for the benefit of nonaffiliated parties
were $341.426 million, $346.483 million and $613.568 million at December 31,
1998, 1997 and 1996, respectively.
A majority of the commercial, construction and land development
commitments and letters of credit will expire within one year, and all loan
commitments can be terminated by the corporation if the borrower violates any
condition of the commitment agreement.
The credit risk associated with loan commitments and letters of credit
is essentially the same as that involved with loans that are funded and
outstanding. The corporation uses the same credit standards on a case-by-case
basis in evaluating loan commitments and letters of credit as it does when
funding loans, including the determination of the type and amount of
collateral, if required.
6. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was (in thousands):
Year ended December 31
1998 1997 1996
------- ------- -------
Balance January 1...............................$68,064 $62,761 $57,922
Increase attributable to acquisitions.. ........ 679 5,551 -
Provision charged to operating expense ......... 20,800 17,177 17,734
------- ------- -------
89,543 85,489 75,656
------- ------- -------
Deduct:
Loans charged off............................. 23,580 21,546 16,611
Less recoveries............................... 4,349 4,121 3,716
------- ------- -------
Net charge-offs............................... 19,231 17,425 12,895
------- ------- -------
Balance December 31.............................$70,312 $68,064 $62,761
======= ======= =======
7. PREMISES, EQUIPMENT AND LEASES
Premises and equipment consisted of (in thousands):
December 31
1998 1997
-------- --------
Land .................................................$ 37,021 $ 38,099
Premises and improvements............................. 170,910 169,101
Furniture and equipment............................... 115,858 113,855
-------- --------
Total cost......................................... 323,789 321,055
Accumulated depreciation.............................. 163,008 156,754
-------- --------
Carrying value ..................................... 160,781 $164,301
======== ========
The corporation's subsidiaries have entered into lease agreements with
unaffiliated persons for premises, principally banking offices. Many of the
leases have one or more renewal options, generally for five or ten years, and
some contain a provision for increased rent during the renewal period. Leases
containing a provision for contingent payments are not significant in either
number or amount. Portions of a few premises are subleased, and the amount of
rent received is not material. There are no significant restrictions imposed
on the corporation or its subsidiaries by the lease agreements. The
subsidiaries also lease a portion of their computer systems and other
equipment. Leases on five banking offices have been recorded as capital
leases. The effect of capitalizing such leases on net income has not been
material.
During 1998, 1997 and 1996, occupancy and equipment expense included
the rent paid on operating leases of $16.073 million, $14.472 million and
$12.541 million, respectively, and was reduced by rental income of $2.016
million, $1.906 million and $1.792 million, respectively, applicable to
leases to unaffiliated persons, generally for a five-to-ten-year duration.
Minimum rental payments over the noncancelable term of operating and
capital leases having a remaining term in excess of one year are (in
thousands):
1999..............................................$11,369
2000.............................................. 8,034
2001.............................................. 5,147
2002.............................................. 3,936
2003.............................................. 3,256
Thereafter........................................ 15,876
-------
Total minimum lease payments......................$47,618
=======
8. INTANGIBLE ASSETS
Total intangible assets were (in thousands):
December 31
1998 1997
-------- --------
Goodwill ...........................................$130,251 $136,640
Core deposit premiums............................... 53,186 36,937
Other............................................... 1,258 1,399
-------- --------
Total intangible assets.............................$184,695 $174,976
======== ========
Goodwill related to acquisitions prior to 1976 is being amortized on a
straight-line basis over 40 years, and goodwill related to acquisitions after
1975 is being amortized over 10 to 25 years. Core deposit premiums are being
amortized over 10 years. Other intangible assets are being amortized over 5
to 20 years.
9. SHORT-TERM BORROWINGS
Short-term borrowings consisted of (in thousands):
December 31
1998 1997
-------- --------
Securities sold under agreements to repurchase .......$319,069 $203,310
Commercial paper ..................................... 66,927 48,377
-------- --------
Total short-term borrowings...........................$385,996 $251,687
======== ========
Securities sold under agreements to repurchase generally mature within
one business day from the transaction date. The maximum amount of outstanding
agreements for any month-end during 1998 and 1997 was $319.069 million and
$226.805 million, respectively. The securities underlying the agreements were
under the corporation's control. Commercial paper maturities range from 1 to
270 days. Bank lines of credit available to the corporation amounted to $50
million at December 31, 1998 and 1997. Such lines were not being used on
either of those dates.
Interest paid on deposits and indebtedness during the years 1998, 1997 and
1996 totaled $234.466 million, $219.623 million and $216.618 million,
respectively.
10. PREFERRED AND COMMON STOCK
The corporation is authorized to issue three million shares of preferred
stock, par value $10 per share. As of December 31, the following four series
of cumulative convertible preferred stock were outstanding:
Number of Shares
Series Dividends 1998 1997
------ ------
A 5% 18,615 20,111
B 7% 3,340 4,890
C 7% 9,788 9,788
D 8% 21,612 23,534
The Series A, Series B and Series D shares are convertible into two and
one-fourth shares of common stock, and the Series C shares are convertible
into one and eight-tenths shares of common stock. All of the preferred stock
may be redeemed at the option of the corporation for $10.00 per share.
The corporation is authorized to issue 175 million shares of common
stock, par value $1 per share, and 50.094 million shares and 51.817 million
shares were outstanding on December 31, 1998 and 1997, respectively. At
December 31, 1998, 3,258,131 shares of common stock were reserved: 115,642
for the conversion of preferred stock and 3,142,489 for stock options.
The corporation has adopted a shareholder rights plan that, under
certain circumstances, will give the holders of the corporation's common
stock the right to purchase shares of its preferred stock or other
securities. The rights will become exercisable if a person or entity acquires
20% or more of the corporation's voting Stock, unless it is acquired pursuant
to an offer for all outstanding shares of common stock at a price and on
terms determined by the Board of Directors to be adequate and in the best
interests of the corporation and its shareholders.
If the rights become exercisable, the holder of each share of common
stock, except the person or entity acquiring 20% or more of the voting stock,
will have the right to receive upon exercise that number of one
one-hundredths share of preferred stock equal to the number of shares of
common stock having a market value of two times the exercise price of the
right, to the extent available, and then an equal number of an equivalent
security. The exercise price for each right is $450.00.
The corporation may redeem the rights, at its option, at any time prior
to the date they become exercisable. The rights expire on August 8, 2008. As
of December 31, 1998, each outstanding share of common stock had 4/9 of a
right attached thereto.
11. STOCK INCENTIVE PLANS
On December 31, 1998, options to purchase 787,014 shares of common
stock were outstanding under employee stock option plans. An additional
2,355,475 shares are authorized for further granting of options. Options for
245,805 shares were exercisable on December 31, 1998, at a weighted-average
price of $19.31. Additional options becoming exercisable in subsequent years,
including those options whose exercisability depends on achieving performance
targets as discussed below, total 150,296 in 1999 at an average price of
$38.63; 115,363 in 2000 at an average price of $42.69; 112,300 in 2001 at an
average price of $42.34; 89,050 in 2002 at an average price of $46.11; and
74,200 in 2003 at an average price of $48.54. For options outstanding at
December 31, 1998, the option price per share ranged from $10.17 to $52.31.
Options Unexercised Average
Available Or Option
To Outstanding Price Per
Grant Options Share
--------- -------- --------
Balance, January 1, 1996..... 303,150 480,428 $19.49
Forfeited.................... 5,625 (5,625) 24.45
Granted...................... (59,250) 59,250 31.25
Exercised.................... - (77,367) 14.37
--------- --------
Balance, December 31, 1996... 249,525 456,686 22.41
Forfeited.................... - (4,815) 14.94
Granted...................... (195,000) 195,000 52.31
Attributable to
an acquisition............ - 46,266 18.29
Exercised ................... - (49,495) 16.12
--------- --------
Balance, December 31, 1997... 54,525 643,642 31.30
Authorized under 1998 plan...2,500,000 - -
Forfeited.................... 1,450 (9,928) 22.66
Granted...................... (200,500) 200,500 44.63
Exercised.................... - (47,200) 20.13
--------- --------
Balance, December 31, 1998...2,355,475 787,014 $35.47
========= ========
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" (SFAS 123), requires entities that have followed
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB 25), and related interpretations to either adopt a fair value
method of accounting for stock-based compensation (as described by SFAS 123)
or continue to follow APB 25 and provide additional pro forma disclosures in
the footnotes to the financial statements.
Pro forma information regarding net income and earnings per share as
required by SFAS 123 has been determined as if the corporation had accounted
for its employee stock options under the fair value method. The fair value
for these options was estimated at the date of the grant using a
Black-Scholes option pricing model. The weighted average remaining
contractual life of these options is 8.8 years. A summary of the assumptions
used and pro forma results for 1998, 1997 and 1996 is as follows:
December 31
1998 1997 1996
Assumptions -------- -------- --------
Risk-free interest rate 5.02% 5.93% 6.81%
Dividend yield 4.20% 2.70% 3.30%
Volatility factor .163 .194 .193
Weighted average expected life (years) 8.0 8.0 8.0
Pro forma results
Net income (millions) $130.659 $126.657 $116.182
Basic earnings per share 2.55 2.50 2.33
Diluted earnings per share 2.54 2.49 2.32
Fair value of options 6.42 13.38 7.76
The effects of applying SFAS 123 for providing pro forma disclosures
are not likely to be representative of the effects on reported net income for
future years.
The corporation continues to follow APB 25 in accounting for its stock
options. All options are granted at full market price on the date of the
grant and generally vest within five years of the grant date and expire after
ten years. In certain instances, the corporation must achieve established
performance targets in order for the options to become exercisable. In those
instances where vesting is dependent upon achieving certain performance
targets, the corporation begins recognizing compensation expense when it
becomes probable that the targets will be achieved and the options will
become exercisable, for the difference between the exercise price and the
current market price.
In some cases, an option holder could elect to exercise the option as a
stock appreciation right. Compensation expense was recognized in connection
with stock appreciation rights based on the difference in the current market
value of the common stock and the previously accrued amounts.
In 1997, the corporation redeemed all stock appreciation rights. As a
result, the corporation had no stock appreciation rights or options that
could be exercised as stock appreciation rights as of December 31, 1997.
Total stock-related compensation expense for 1998, 1997 and 1996 was
$1,316,000, $3,351,000, and ($216,000), respectively.
12. EMPLOYEE BENEFIT PLANS
The corporation has a noncontributory, defined-benefit pension plan
covering substantially all qualified employees. The benefits are based on
years of service and the employee's compensation during the last ten years of
employment. The corporation's funding policy is to make annual contributions
in amounts necessary to satisfy the Internal Revenue Service's funding
standards to the extent they are deductible against taxable income.
Contributions are intended to provide not only for benefits attributed to
service to date, but also for those expected to be earned in the future.
Contributions include normal costs of the plan and amortization for periods
of up to 40 years of unfunded past service cost.
The corporation also has an unfunded nonqualified plan that provides
retirement benefits to certain officers in accordance with the same
computational terms as the qualified plan when those terms provide benefits
in excess of the amounts payable under the IRS-qualified rules. The projected
and accumulated benefit obligations under this plan were $2.248 million and
$1.247 million, respectively, at December 31, 1998.
The corporation sponsors a defined-benefit health care plan that
provides postretirement medical benefits to full-time employees who have
worked at least ten years and have attained age 55 while in service with the
corporation. The benefits are based on years of service and are contributory,
with retiree contributions adjusted annually, and contain other cost-sharing
features such as deductibles and coinsurance. Employees hired after December
31, 1993, may participate in the plan but must pay 100% of the cost. The
accounting for the plan anticipates future cost-sharing changes to the
written plan that are consistent with the corporation's expressed intent to
increase the retiree contribution rate annually for the expected increase in
medical costs for that year. The corporation has set a maximum amount that it
will contribute per year of approximately three times the 1993 contribution
level. Terminated employees may elect to receive medical benefits for a
limited period.
The benefit obligation and plan asset activity for each of the plans is
summarized below (in thousands):
Postretirement
Pension Benefits Medical Benefits
----------------- ----------------
1998 1997 1998 1997
------- -------- -------- --------
Change in benefit obligation:
Benefit obligation at beginning
year............................ $115,231 $ 97,788 $ 17,884 $ 15,755
Service cost.................... 4,751 3,667 712 687
Interest cost................... 8,117 7,556 1,188 1,190
Plan participants'contributions. - - 351 332
Actuarial loss (gain)........... 8,798 10,383 (353) 663
Benefits paid................... (4,178) (4,163) (655) (743)
-------- -------- ------- --------
Benefit obligation at end of
year............................ 132,719 115,231 19,127 17,884
-------- -------- ------- --------
Change in plan assets:
Fair value of plan assets at
beginning of year............... 119,172 102,869
Actual return on plan assets.... 19,834 16,638
Company contributions........... - 3,828
Plan participants' contributions - -
Benefits paid................... (4,178) (4,163)
-------- --------
Fair value of plan assets at end
of year......................... 134,828 119,172
-------- --------
Funded (unfunded) status........ 2,109 3,941 (19,127) (17,884)
Unrecognized actuarial loss
(gain).......................... 11,499 12,012 (1,296) (1,000)
Unamortized prior service cost.. (240) (367) - -
Unrecognized transition obli-
gation........................ 16 30 8,547 9,157
-------- -------- ------- -------
Prepaid (accrued) benefit cost.. $ 13,384 $ 15,616 $(11,876) $(9,727)
======== ======= ======= =======
Weighted average assumptions as
of December 31:
Discount rate................... 6.75% 7.25% 6.75% 7.25%
Expected return on plan assets.. 9.00 9.00
Rate of compensation increase... 4.75 4.75
The assets of the pension plan consist of U.S. Government and agency
securities - 48.4%, other debt obligations - 9.3%, stocks - 40.5%, and cash
and equivalents - 1.8%.
The net periodic benefit cost of the plans includes the following
components (in thousands):
Pension Benefits
----------------
1998 1997 1996
-------- -------- --------
Service cost.................... $ 4,751 $ 3,667 $ 3,840
Interest cost................... 8,117 7,556 6,989
Expected return on plan assets.. (10,541) (9,288) (8,278)
Amortization of prior service
cost and net transition obli-
gation........................ (113) (113) (113)
Recognized actuarial loss (gain). 18 34 847
-------- -------- -------
Net periodic benefit cost........ $ 2,232 $ 1,856 $ 3,285
======== ======== =======
Postretirement
Medical Benefits
----------------
1998 1997 1996
-------- -------- --------
Service cost.................... $ 712 $ 687 $ 768
Interest cost................... 1,188 1,190 1,120
Expected return on plan assets.. - - -
Amortization of prior service
cost and net transition obli-
gation........................ 610 611 611
Recognized actuarial loss (gain). (58) (36) -
-------- -------- -------
Net periodic benefit cost........ $ 2,452 $ 2,452 $ 2,499
======== ======== =======
The weighted-average annual assumed rate of increase in the per capita
cost of covered benefits (i.e., health Care cost-trend rate) is 9.2% for 1998
and is assumed to decrease gradually to 5.0% for 2005 and to remain at that
level thereafter. The health care cost-trend rate assumption has a
significant effect on the amounts reported. The corporation has limited its
exposure to increases in health care cost-trend rates by setting a cap on the
maximum amount it will ever pay on any one retiree and by passing through
100% of the cost of retiree health care to new employees hired after December
31, 1993. The following table represents the effect of a one percentage -
point change in the assumed health care cost trend rate (in thousands):
One-Percent One-Percent
Increase Decrease
----------- -----------
Effect on service and interest cost components......$ 80 $ (106)
Effect on benefit obligation........................ 887 (1,108)
The corporation has deferred compensation agreements with certain
officers and directors. Benefits under these agreements are being funded by
life insurance policies. The accrued liability for these agreements as of
December 31, 1998, and 1997, was $21.440 million and $19.965 million,
respectively. For the years ended December 31, 1998, 1997, and 1996, expenses
related to these agreements were $1.356 million, $0.868 million, and $1.038
million, respectively.
The corporation has a thrift plan to which employees with one year of
service may elect to contribute up to 12% of their salary. The corporation
contributes to the plan to the extent of 50% of the employees' first 6% of
contributions, and an additional 25% contribution is made if a specified
profit objective is met. A 75% employer match was made in each of the years
1998, 1997 and 1996 when the corporation's contributions to the plan totaled
$4.252 million, $3.989 million and $3.713 million, respectively. The plan is
administered under the provisions of Section 401(k) of the Internal Revenue
Code.
13. INCOME TAXES
The provision for income taxes includes amounts currently payable and
amounts deferred to or from other years as a result of differences in the
timing of the recognition of income and expense for financial reporting and
tax purposes. The income tax provision includes the following amounts (in
thousands):
Year Ended December 31
1998 1997 1996
------- ------- -------
Current:
Federal income taxes ..............................$69,819 $65,108 $59,529
State income taxes................................. 1,287 1,690 1,577
------- ------- -------
Total current...................................... 71,106 66,798 61,106
------- ------- -------
Deferred (benefit):
Federal income taxes .............................. (1,555) (336) (1,206)
State income taxes................................. (117) 17 83
------- ------- -------
Total deferred .................................... (1,672) (319) (1,123)
------- ------- -------
Provision for income taxes...........................$69,434 $66,479 $59,983
======= ======= =======
Income taxes paid during the year....................$72,485 $69,540 $59,100
======= ======= =======
The exclusion of certain categories of income and expense from taxable net
income results in an effective tax rate that is lower than the statutory
federal rate. The differences in the rates are as follows (dollars in
thousands):
Year Ended December 31
1998 1997 1996
--------------- --------------- ---------------
Amount Percent Amount Percent Amount Percent
------- ------- ------- ------- ------- -------
Statutory rate................$69,859 35.0% $66,963 35.0% $61,713 35.0%
Nontaxable interest on
municipal obligations....... (3,992) (2.0) (3,958) (2.1) (3,769) (2.1)
Other items .................. 3,567 1.8 3,474 1.9 2,039 1.1
------- ------- ------- ------- ------- -------
Effective rate................$69,434 34.8% $66,479 34.8% $59,983 34.0%
======= ======= ======= ======= ======= =======
The corporation's federal income tax returns are closed through December
31, 1994. Significant components of the corporation's deferred-tax liabilities
and assets are as follows (in thousands):
December 31
1998 1997
------- -------
Deferred-tax assets:
Allowance for loan losses..............................$24,021 $23,472
Deferred compensation.................................. 6,943 6,700
Other.................................................. 6,212 5,708
------- -------
Total deferred-tax assets.............................. 37,176 35,880
------- -------
Deferred-tax liabilities:
Depreciation.......................................... 5,717 5,742
Core deposit intangibles............................... 2,731 3,082
Life insurance reserves................................ 2,671 2,671
------- -------
Total deferred-tax liabilities......................... 11,119 11,495
------- -------
Net deferred-tax assets .................................$26,057 $24,385
======= =======
14. NET INCOME PER SHARE
Net income per share computations are as follows (in thousands, except per
share data):
1998 1997 1996
-------- -------- --------
Basic:
Average common shares outstanding 51,233 50,622 49,788
======== ======== ========
Net income $130,162 $124,845 $116,341
Preferred stock dividends 35 41 44
-------- -------- --------
Net income applicable to
common stock $130,127 $124,804 $116,297
======== ======== ========
Net income per share of common stock $ 2.54 $ 2.47 $ 2.34
Diluted:
Average common shares outstanding 51,233 50,622 49,788
Dilutive effect of stock options 177 123 108
Conversion of preferred stock 119 135 146
-------- -------- --------
Total average common shares 51,529 50,880 50,042
======== ======== ========
Net income $130,162 $124,845 $116,341
======== ======== ========
Net income per share of common stock $ 2.53 $ 2.45 $ 2.32
======== ======== ========
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments" (SFAS 107), requires disclosure of fair
value information about financial instruments, whether or not recognized in the
balance sheet. In cases where quoted market prices are not available, fair
values are based on estimates using discounted cash flow analyses or other
valuation techniques. Those techniques involve subjective judgment and are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. As a result, the derived fair value estimates
cannot be substantiated by comparison to independent markets, and in many
cases, could not be realized in immediate settlement of the instrument.
1998 1997
---------------------- ----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
Financial assets:
Cash and cash equivalent $ 642,931 $ 642,931 $ 629,944 $ 629,994
Investment securities.... 2,323,052 2,337,502 1,946,944 1,954,155
Loans, net............... 6,037,640 6,172,091 5,888,867 6,021,649
Other earning assets..... 22,427 22,427 21,444 21,444
Financial liabilities:
Deposits................. 8,055,078 8,080,408 7,619,842 7,640,492
Short-term borrowings.... 385,996 385,996 251,687 251,687
Long-term indebtedness... 2,648 2,648 2,241 2,241
SFAS 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. The disclosures also do not
include certain intangible assets such as core deposit intangibles, mortgage
servicing rights and goodwill. Accordingly, the aggregate fair value amount
presented should not be interpreted as representing the underlying value of the
corporation.
The following methods and assumptions were used by the corporation in
estimating the fair value of its financial instruments. All of the
corporation's financial instruments were held or issued for purposes other than
trading.
Cash and Cash Equivalents: The carrying amounts reported in the balance
sheet for cash and short-term instruments approximate those assets' fair value.
Investment Securities: Fair values for investment securities are based on
quoted market prices.
Loans: For variable-rate loans that reprice frequently and with no
significant change in credit risk, fair values are based on carrying values.
The fair values for certain mortgage loans (e.g., one-to-four family
residential) and credit cards are based on quoted market prices of similar
loans sold in conjunction with securitization transactions and adjusted for
differences in loan characteristics. The fair values for other loans were
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality.
Other Earning Assets: The carrying amount of other earning assets as
reported on the balance sheet approximates fair value.
Deposits: For deposits with no defined maturity, SFAS 107 defines the fair
value as the amount payable on demand and prohibits adjusting fair value for
any value derived from retaining those deposits for an expected future period
of time. Accordingly, the fair value of demand, interest checking, regular
savings and money market deposits is equivalent to their carrying value as of
the reporting date. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies interest rates
currently being offered on certificates to a schedule of aggregated expected
monthly maturities.
Short-Term Borrowings: The carrying amounts of federal funds purchased,
borrowings under repurchase agreements and other short-term borrowings
approximate their fair values.
Long-term Indebtedness: The corporation's long-term indebtedness includes
capital leases, which are exempt from the disclosure requirements of SFAS 107.
The fair value of the remaining long-term debt is estimated based on interest
rates currently available for debt with similar terms and remaining maturities.
Off-Balance Sheet Instruments: The estimated fair value of off- balance
sheet items was not material at December 31, 1998. The corporation does not
engage in hedging or swap transactions nor does it employ any derivative
securities.
16. CONTINGENCIES
The corporation, in the normal course of its business, is the subject of
legal proceedings instituted by customers and others. In the opinion of the
corporation's management, there were no legal matters pending as of December
31, 1998, that would have a material effect on its financial statements.
17. RELATED-PARTY TRANSACTIONS
Directors and officers of the corporation and their affiliates were
customers of, and had other transactions with, the corporation in the ordinary
course of business. The corporation has made residential mortgage loans at
favorable rates to officers of the corporation and its subsidiaries who have
been relocated for the convenience of the corporation. Other loan transactions
with directors and officers were made on substantially the same terms as those
prevailing for comparable loans to other persons and did not involve more than
normal risk of collectibility or present other unfavorable features. As of
December 31, 1998 and 1997, loans to directors and executive officers of the
corporation and its three largest subsidiary banks, First Virginia Bank, First
Virginia Bank-Southwest and Farmers Bank of Maryland, where the aggregate of
such loans exceeded $60 thousand, totaled $38.803 million and $53.350 million,
respectively. During 1998, $161.236 million of new loans were made and
repayments totaled $179.383 million. These totals include loans to certain
business interests and family members of the directors and executive officers,
and no losses are anticipated in connection with any of the loans.
18. RESTRICTIONS ON LOANS AND DIVIDENDS FROM SUBSIDIARIES
The corporation's banking affiliates and its life insurance subsidiary
are subject to federal and/or state statutes that prohibit or restrict certain
of their activities, including the transfer of funds to the corporation. There
are restrictions on loans from banks to their parent company, and banks and
life insurance companies are limited as to the amount of cash dividends that
they can pay. As of December 31, 1998, the corporation's equity in the net
assets of its subsidiaries, after elimination of intercompany deposits and
loans, totaled $761.634 million. Of that amount, $745.930 million was
restricted as to the payment of dividends.
19. REGULATORY CAPITAL ADEQUACY REQUIREMENTS
The corporation and its subsidiary banks are subject to various
regulatory capital requirements administered by the federal banking agencies.
Quantitative measures established by regulation to ensure capital adequacy
require the corporation and its subsidiaries to maintain minimum amounts and
ratios (set forth in the following table) of Total and Tier 1 Capital (as
defined in the regulations) to risk-weighted assets (as defined), and of Tier 1
Capital (as defined) to average assets (as defined). Management believes, as of
December 31, 1998, that the corporation and its subsidiary banks meet all
capital adequacy requirements to which it is subject.
The most recent notification from the federal banking agencies categorized
the corporation and its subsidiaries as well capitalized under the regulatory
framework. There are no conditions or events since that notification that
management believes have changed the institution's category. To be categorized
as adequately capitalized, the corporation and its subsidiary banks must
maintain minimum Total risk-based, Tier 1 risk-based and Tier 1 leverage ratios
as set forth in the table. The regulatory requirement for the Tier 1 leverage
ratio is 3% for the highest-rated banks with an additional 100-200 basis points
for all other banks.
The actual capital amounts and ratios of the corporation and its largest
subsidiary bank are presented in the following table (in thousands):
For To Be Well
Capital Capitalized Under
Adequacy Prompt Corrective
Actual Purposes Action Provisions
-------------- -------------- ---------------
Capital Ratio Capital Ratio Capital Ratio
-------- ----- -------- ----- -------- -----
As of December 31, 1998:
Tier 1 leverage ratio:
Consolidated............. $805,842 8.73% $276,840 3.00% $461,400 5.00%
Largest subsidiary bank.. 234,643 7.13 98,733 3.00 164,555 5.00
Tier 1 risk-based capital:
Consolidated............. 805,842 12.14 265,469 4.00 398,204 6.00
Largest subsidiary bank.. 234,643 8.93 105,070 4.00 157,605 6.00
Total risk-based capital:
Consolidated............. 876,154 13.20 530,938 8.00 663,673 10.00
Largest subsidiary bank.. 262,812 10.01 210,140 8.00 262,675 10.00
As of December 31, 1997:
Tier 1 leverage ratio:
Consolidated............. $837,522 9.53% $263,640 3.00% $439,400 5.00%
Largest subsidiary bank.. 234,363 7.58 92,731 3.00 154,522 5.00
Tier 1 risk-based capital:
Consolidated............. 837,522 12.94 258,954 4.00 388,431 6.00
Largest subsidiary bank.. 234,363 9.79 95,764 4.00 143,646 6.00
Total risk-based capital:
Consolidated............. 905,586 13.99 517,908 8.00 647,385 10.00
Largest subsidiary bank.. 260,367 10.88 191,528 8.00 239,410 10.00
Failure to meet minimum capital requirements can initiate certain
mandatory, and possibly discretionary actions by regulators that, if
undertaken, could have a direct material effect on the corporation's financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the corporation and its subsidiary banks must meet
specific capital guidelines that involve quantitative measures of assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The capital amounts and classification are also subject
to qualitative judgments by the regulators about components, risk weightings
and other factors.
21. FIRST VIRGINIA BANKS, INC. (PARENT COMPANY ONLY)
CONDENSED FINANCIAL INFORMATION (IN THOUSANDS)
BALANCE SHEETS
December 31
1998 1997
---------- --------
Assets
Cash and noninterest-bearing deposits
principally in affiliated banks.....................$ 276 $ 2,795
Money market investments.............................. 68,038 110,748
Investment in affiliates based on the corporation's
equity in their net assets:
Banking companies.................................. 748,768 699,985
Bank-related companies............................. 12,866 13,916
Investment securities - (market value $23,061 and
$24,138)........................................... 23,028 21,554
Loans (including $18,903-1998 and $15,671-1997
to affiliated companies) ........................ 29,674 30,700
Premises and equipment................................ 33,251 34,990
Intangible assets..................................... 135,787 142,993
Accrued income and other assets....................... 51,394 44,566
---------- --------
Total Assets .......................................$1,103,082 $1,102,247
========== ==========
Liabilities and Shareholders' Equity
Commercial paper......................................$ 66,927 $ 48,377
Accrued interest and other liabilities................ 45,827 42,714
---------- --------
Total Liabilities .................................. 112,754 91,091
---------- --------
Shareholders' Equity 990,328 1,011,156
---------- --------
Total Liabilities and Shareholders' Equity..........$1,103,082 $1,102,247
========== =========
STATEMENTS OF INCOME
Year Ended December 31
1998 1997 1996
-------- -------- --------
Income
Dividends from affiliates:
Banking companies...............................$112,337 $169,459 $108,016
Bank-related companies ......................... 2,000 1,400 1,700
Service fees from affiliates...................... 15,540 11,360 12,364
Rental income:
Affiliates ..................................... 5,457 5,624 5,662
Other .......................................... 1,585 1,450 1,327
Interest and dividends on investment securities... 6,192 5,699 5,884
Other income:
Affiliates ..................................... 2,495 2,259 1,356
Other .......................................... 1,125 1,175 368
-------- -------- --------
Total income.................................. 146,731 198,426 136,677
-------- -------- --------
Expenses
Salaries and employee benefits.................... 19,269 20,754 15,257
Interest ......................................... 2,552 2,006 1,484
Other expense:
Paid to affiliates.............................. 877 692 674
Other .......................................... 17,973 15,853 13,003
-------- -------- --------
Total expense................................. 40,671 39,305 30,418
-------- -------- --------
Income before income taxes and equity in
undistributed income of affiliates .......... 106,060 159,121 106,259
Federal income tax (credits)...................... (1,023) (2,459) (492)
-------- -------- --------
Income before equity in
undistributed income of affiliates........... 107,083 161,580 106,751
Equity in undistributed income of affiliates ..... 23,079 (36,735) 9,590
-------- -------- --------
Net income........................................$130,162 $124,845 $116,341
======== ======== ========
STATEMENTS OF CASH FLOWS
Year Ended December 31
1998 1997 1996
-------- -------- --------
Net cash provided by operating activities..........$110,833 $173,404 $113,975
-------- -------- --------
Investing activities:
Proceeds from the sale of available for sale
securities................................... 1,891 - -
Proceeds from maturity of
held to maturity securities................... 22,250 12,035 10,917
Purchase of investment securities ............... (23,270) (20,150) (7,097)
Net (increase) decrease in loans................. 1,431 (7,023) 1,586
Purchases of premises and equipment ............. (568) (4,540) (999)
Sales of premises and equipment ................. 96 (60) 22
Investment in affiliates......................... (25,750) (164) (9,140)
Other............................................ 170 (2,244) (8,699)
-------- -------- --------
Net cash used for investing activities........ (23,750) (22,146) (13,410)
-------- -------- --------
Financing activities:
Net increase in short-term borrowings............ 18,145 12,195 4,252
Common stock purchased and retired............... (91,636) (94,772) (66,311)
Proceeds from issuance of common stock........... 897 819 1,139
Cash dividends - common.......................... (59,682) (51,468) (47,477)
Cash dividends - preferred....................... (36) (42) (45)
-------- -------- --------
Net cash used for financing activities .......(132,312) (133,268)(108,442)
-------- -------- --------
Net increase (decrease) in cash and
cash equivalents................... (45,229) 17,990 (7,877)
Cash and cash equivalents at beginning of year 113,543 95,553 103,430
-------- -------- --------
Cash and cash equivalents at end of year......$ 68,314 $113,543 $ 95,553
======== ======== ========
Net cash provided by operating activities has been
reduced (increased) by the following
cash payments (receipts):
Interest on indebtedness.........................$ 2,551 $ 1,934 $ 1,431
Income taxes..................................... 1,676 (3,355) 705
22. SUBSEQUENT EVENTS
On February 25, 1999, the corporation reached a preliminary agreement with
MBNA America Bank, N.A. for MBNA to acquire the corporation's $103 million
portfolio of credit card loans. The sale is expected to occur in the first
quarter, subject to regulatory approval. In connection with the sale, the
corporation expects to recognize a net after-tax gain of approximately $11
million. As part of the agreement, MBNA will offer credit card products to the
corporation's customers using the corporation's existing brand names.
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
- ---------------------------------------------------
The management of First Virginia Banks, Inc., has prepared and is
responsible for the accompanying financial statements, together with the
financial data and other information presented in this annual report.
Management believes that the financial statements have been prepared in
conformity with generally accepted accounting principles appropriate under
the circumstances. The financial statements include amounts that are based on
management's best estimates and judgments.
Management maintains and depends upon an internal accounting control
system designed to provide reasonable assurance that transactions are
executed in accordance with management's authorization, that financial
records are reliable as the basis for the preparation of all financial
statements, and that the corporation's assets are safeguarded. The design and
implementation of all systems of internal control are based on judgments
required to evaluate the costs of control in relation to the expected
benefits and to determine the appropriate balance between these costs and
benefits. The corporation maintains a professional internal audit staff to
monitor compliance with the system of internal accounting control.
Operational and special audits are conducted, and internal audit reports are
submitted to appropriate management.
The Audit Committee of the Board of Directors, comprised solely of
outside directors, meets periodically with the independent public
accountants, management and internal auditors to review accounting, auditing
and financial reporting matters. The independent public accountants and
internal auditors have free access to the committee, without management
present, to discuss the results of their audit work and their evaluations of
the adequacy of internal controls and the quality of financial reporting.
The financial statements in this annual report have been audited by the
corporation's independent auditors, Ernst & Young LLP, for the purpose of
determining that the financial statements are presented fairly. Their
independent professional opinion on the corporation's financial statements is
presented on the following page.
/S/ Barry J. Fitzpatrick
________________________
Barry J. Fitzpatrick
Chairman, President and
Chief Executive Officer
/S/ Richard F. Bowman
________________________
Richard F. Bowman
Senior Vice President,
Treasurer and
Chief Financial Officer
REPORT OF ERNST & YOUNG LLP INDEPENDENT AUDITORS
- -------------------------------------------------
To the Shareholders and Board of Directors
First Virginia Banks, Inc.
We have audited the accompanying consolidated balance sheets of First
Virginia Banks, Inc. as of December 31, 1998 and 1997, and the related
consolidated statements of income, shareholders' equity, and cash flows for
each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the corporation's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
First Virginia Banks, Inc. at December 31, 1998 and 1997, and the
consolidated results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles.
/S/ Ernst & Young LLP
Washington, D.C.
January 19, 1999
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
-----------------------------------------------------------
AND FINANCIAL DISCLOSURE
------------------------
Incorporated by reference from the corporation's Form 8-K/A dated
February 24, 1999.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
Incorporated by reference from the corporation's proxy statement dated
March 9, 1999.
ITEM 11. EXECUTIVE COMPENSATION
----------------------
Incorporated by reference from the corporation's proxy statement dated
March 9, 1999.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
---------------------------------------------------
MANAGEMENT
----------
The corporation has two classes of stock, common and convertible
preferred. No person is known by management to own beneficially, directly or
indirectly, more than five percent of the common stock. One person is known
to own, as of February 28, at least five percent of the convertible preferred
stock, as follows:
Title Name and Amount and Percent
of Address of Nature of of
Class Owner Ownership Class
----------- --------------- ------------ -------
Convertible Mary S. Harvell 2,636 Shares 5.07%
Preferred 7129 Taylor Rd Owned
Stock Lynchburg, VA Directly
The number of shares of the corporation's voting securities beneficially
owned by each of the corporation's directors and by all of its directors and
officers as a group is incorporated by reference from the corporation's proxy
statement dated March 9, 1999.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
Incorporated by reference from the corporation's proxy statement dated
March 9, 1999.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
FINANCIAL STATEMENTS:
The following consolidated financial statements and report of
independent auditors of the Corporation and its subsidiaries are in Part II,
item 8 on the following pages:
Page
Consolidated Balance Sheets - December 31, 1998 and 1997 48/49
Consolidated Statements of Income - Three Years Ended
December 31, 1998 50/51
Consolidated Statements of Shareholders' Equity - Three Years
Ended December 31, 1998 52/53
Consolidated Statements of Cash Flows - Three Years Ended
December 31, 1998 54/55
Notes to Consolidated Financial Statements 56/78
Report of Ernst & Young LLP Independent Auditors 80
EXHIBITS:
The following exhibits are filed as a part of this report:
(3)(i) Restated Articles of Incorporation are incorporated by reference
to Exhibit 3 of Form 10Q for June 30, 1998.
(3)(ii) Restated Bylaws are incorporated by reference to Exhibit 3 of
Form 10Q for September 30, 1998.
(4) Reference is made to First Virginia's Amendment to Form 8-A filed
with the Commission on September 29, 1997 for a complete copy of
the Amended and Restated Rights Agreement which describes the
Rights which are attached to all common stock certificates.
Instruments defining the rights of holders of the Corporation's
long-term debt are not filed herein because the total amount of
securities authorized thereunder does not exceed 10% of
consolidated total assets. The corporation hereby agrees to furnish
a copy of such instruments to the Commission upon its request.
(10) Management contract for Mr. Barry J. Fitzpatrick is incorporated by
reference to Exhibit 10 of the 1994 Annual Report on Form 10-K.
Management contracts for Messrs. Ralph A. Beeton, Paul H. Geithner,
Jr., Edwin T. Holland, Thomas K. Malone, Jr. and Robert H. Zalokar
are incorporated by reference to Exhibit 10 of the 1992 Annual
Report on Form 10-K. Also incorporated from that exhibit are: (1)
Key Employee Salary Reduction Deferred Compensation Plans and
Directors' Deferred Compensation Plans for 1983 and 1986 and (2) A
compensatory plan known as the Collateral Assignment Split Dollar
Life Insurance Agreement and Plan. (3) There are also four plans
relating to options and rights. The 1982 Incentive Stock Option
Plan is incorporated by reference to Post-effective Amendment
Number 2 to Registration Statement Number 2-77151 on Form S-8 dated
October 30, 1987. The 1986 Incentive Stock Option Plan,
Nonqualified Stock Option Plan and Stock Appreciation Rights
Planare incorporated by reference to Registration Statement Number
33-17358 on Form S-8 dated September 28, 1987. The 1991 Incentive
Stock Option Plan, Nonqualified Stock Option Plan and Stock
Appreciation Rights Plan is incorporated by reference to
Registration Statement Number 33-54802 on Form S-8 dated
November 20, 1992.
Also incorporated by reference to Exhibit 10 of the 1995 Annual
Report on Form 10K are Amendments to (1) Paragraph 1(a) of Barry J.
Fitzpatrick's Supplemental Compensation Agreement, which was
included in Exhibit 10 of the 1994 Annual Report on Form 10-K, (2)
Article VI, Section 6.03 of the Key Employee Salary Reduction
Deferred Compensation Plan, which was included in Exhibit 10 of the
1992 Annual Report on Form 10-K, and (3) the third paragraph of
Section 9 of the Collateral Assignment Split Dollar Life Insurance
Agreement and Plan, which was included in Exhibit 10 of the 1992
Annual Report on Form 10-K. These amendments are to include a
uniform "change in control" definition.
Incorporated by reference to Exhibit 10 of the 1996 Annual Report
on Form 10K is the Second Amendment to the Management Contract for
Mr. Barry J. Fitzpatrick, dated December 17, 1996. Also
incorporated by reference is Mr. Fitzpatrick's Supplemental
Compensation Agreement, which was included in Exhibit 10 of the
1994 Annual Report on Form 10K and an amendment to (1) Paragraph
1(a) which was included in Exhibit 10 of the 1995 Annual Report on
Form 10-K. Also incorporated by reference to Exhibit 10 of the 1996
Annual Report on Form 10K are employment agreements regarding
"Change of Control" for Mr. Barry J. Fitzpatrick, Shirley C.
Beavers, Jr., Richard F. Bowman, Raymond E. Brann, Jr. and Thomas
P. Jennings.
(12) Statement RE: Computation of Ratios.
(13) First Virginia Banks, Inc., 1998 Annual Report to its Shareholders
. (Not included in the electronic filing).
(16) Letter re Change in Certifying Accountants.
Incorporated by reference from the corporation's Form 8-K/A
dated February 24, 1999.
(21) Subsidiaries of the Registrant.
(23) Consent of Independent Auditors.
(27) Financial Data Schedule.
REPORTS ON FORM 8-K:
No reports on Form 8-K were required to be filed during the last quarter of
1998.
SIGNATURES
- ----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed as of
March 24, 1999, on its behalf by the undersigned, thereunto duly authorized.
FIRST VIRGINIA BANKS, INC.
/s/ Barry J. Fitzpatrick
___________________________________
Barry J. Fitzpatrick, Chairman, President
and Chief Executive Officer
/s/ Richard F. Bowman
___________________________________
Richard F. Bowman, Senior Vice President,
Treasurer and Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons as of March 24, 1999 on
behalf of the registrant and in the capacities indicated.
SIGNATURE TITLE
--------- -----
/s/ Barry J. Fitzpatrick
____________________________ Chairman, President,
Barry J. Fitzpatrick Chief Executive Officer
and Director
/s/ Richard F. Bowman
____________________________ Principal Financial
Richard F. Bowman and Accounting
Officer
/s/ Edward L. Breeden III
____________________________ Director
Edward L. Breeden, III
/s/ Paul H. Geithner, Jr.
____________________________ Director
Paul H. Geithner, Jr.
/s/ L. H. Ginn III
____________________________ Director
L. H. Ginn, III
SIGNATURE TITLE
--------- -----
/s/ Gilbert R. Giordano
____________________________ Director
Gilbert R. Giordano
/s/ T. Keister Greer
____________________________ Director
T. Keister Greer
/s/ Elsie C. Gruver
____________________________ Director
Elsie C. Gruver
/s/ Edward M. Holland
____________________________ Director
Edward M. Holland
/s/ Eric C. Kendrick
____________________________ Director
Eric C. Kendrick
/s/ W. Lee Phillips, Jr.
____________________________ Director
W. Lee Phillips, Jr.
/s/ Robert M. Rosenthal
____________________________ Director
Robert M. Rosenthal
/s/ Josiah P. Rowe III
____________________________ Director
Josiah P. Rowe, III
/s/ Robert H. Zalokar
____________________________ Director
Robert H. Zalokar
/s/ Albert F. Zettlemoyer
____________________________ Director
Albert F. Zettlemoyer
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1998
ITEM 14
EXHIBITS
The Exhibits filed with this annual report are
included herein.
FIRST VIRGINIA BANKS, INC.
6400 Arlington Boulevard
Falls Church, Virginia 22042-2336
EXHIBIT 12
FIRST VIRGINIA BANKS, INC.
STATEMENT RE: COMPUTATION OF RATIOS
Year Ended December 31
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data and ratios)
Ratios - Page 11
- ----------------
Book Value Per Share:
Total shareholders'
equity $ 990,328 $1,011,156 $ 871,277 $ 869,647 $ 806,888
Preferred stock 534 583 647 695 746
---------- ---------- ---------- ---------- ----------
Common shareholders'
equity 989,794 1,010,573 870,630 868,952 806,142
Common shares
outstanding 50,094 51,817 48,612 50,927 51,075
Book value per share $ 19.76 $ 19.50 $ 17.91 $ 17.06 $ 15.79
========== ========== ========== ========== ==========
Ratios - Page 11
- ----------------
Return on Average Assets:
Net income $ 130,162 $ 124,845 $ 116,341 $ 111,599 $ 113,221
Average assets 9,278,046 8,659,845 8,145,963 7,941,224 7,157,784
Return on average
assets ratio 1.40% 1.44% 1.43% 1.41% 1.58%
========== ========== ========== ========== ==========
Return on Average Equity:
Net income $ 130,162 $ 124,845 $ 116,341 $ 111,599 $ 113,221
Average shareholders'
equity 1,016,102 953,109 869,791 836,387 718,442
Return on average
equity ratio 12.81% 13.10% 13.38% 13.34% 15.76%
========== ========== ========== ========== ==========
Net Interest Margin:
Net interest income
(taxable equivalent) $ 434,902 $ 414,198 $ 380,510 $ 365,142 $ 349,469
Total average
earning assets 8,481,071 7,957,748 7,521,408 7,291,540 6,619,785
Net interest margin
ratio 5.13% 5.20% 5.06% 5.00% 5.28%
========== ========== ========== ========== ==========
FIRST VIRGINIA BANKS, INC.
STATEMENT RE: COMPUTATION OF RATIOS (Continued)
Year Ended December 31
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(in thousands, except ratios)
Risk-Based Capital:
Tier 1:
Tier 1 risk-based
capital $ 805,842 $ 837,522 $ 780,695 $ 777,501 $ 725,258
Risk weighted assets 6,636,728 6,473,851 5,754,997 5,042,824 4,912,312
Tier 1 risk-based
capital ratio 12.14% 12.94% 13.57% 15.42% 14.76%
========== ========== ========== ========== ==========
Total Capital:
Total risk-based
capital $ 876,154 $ 905,586 $ 843,456 $ 835,423 $ 784,118
Risk weighted assets 6,636,728 6,473,851 5,754,997 5,042,824 4,912,312
Total risk-based
capital ratio 13.20% 13.99% 14.66% 16.57% 15.96%
========== ========== ========== ========== ==========
Tier 1 Leverage Ratio:
Tier 1 risk-based
capital $ 805,842 $ 837,522 $ 780,695 $ 777,501 $ 725,258
Total quarterly
average assets 9,228,001 8,788,009 8,055,381 8,071,746 7,078,376
Tier 1 leverage ratio 8.73% 9.53% 9.69% 9.63% 10.25%
========== ========== ========== ========== ==========
Capital Strength:
Average shareholders'
equity 1,016,102 953,109 869,791 836,387 718,442
Average assets 9,278,046 8,659,845 8,145,963 7,941,224 7,157,784
Capital strength ratio 10.95% 11.01% 10.68% 10.53% 10.04%
========== ========== ========== ========== ==========
Dividends Declared:
Common dividends
declared, per share 1.20 1.05 0.96 0.91 0.85
Net income, per share 2.54 2.47 2.34 2.19 2.34
Dividends as percent
of net income 47.24% 42.59% 41.24% 41.42% 36.41%
========== ========== ========== ========== ==========
FIRST VIRGINIA BANKS, INC.
STATEMENT RE: COMPUTATION OF RATIOS (Continued)
Year Ended December 31
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(in thousands, except ratios)
Ratios - Page 38
- ----------------
Net Loan Losses to Average Loans:
Net charge-offs:
Credit card $ 8,321 $ 8,480 $ 6,765 $ 5,481 $ 3,821
Indirect automobile 7,709 6,125 3,944 1,644 408
Other 2,719 1,901 1,632 855 492
Real estate 168 (129) 175 149 95
Commercial 314 1,048 379 1,150 126
---------- ---------- ---------- ---------- ----------
Net charge-offs $ 19,231 $ 17,425 $ 12,895 $ 9,279 $ 4,942
---------- ---------- ---------- ---------- ----------
Average loans:
Credit card $ 147,104 $ 176,296 $ 180,577 $ 171,585 $ 146,429
Indirect automobile 2,390,889 2,111,638 1,812,105 1,666,029 1,493,932
Other 1,462,509 1,478,092 1,463,948 1,454,779 1,448,672
Real estate 1,066,779 1,096,448 962,891 924,763 667,382
Commercial 900,794 849,224 752,135 738,337 630,724
---------- ---------- ---------- ---------- ----------
Average loans $5,968,075 $5,711,698 $5,171,656 $4,955,493 $4,387,139
---------- ---------- ---------- ---------- ----------
Ratios by category:
Credit card 5.66% 4.81% 3.75% 3.19% 2.61%
Indirect automobile 0.32 0.29 0.22 0.10 0.03
Other 0.19 0.13 0.11 0.06 0.03
Real estate 0.02 (0.01) 0.02 0.02 0.01
Commercial 0.03 0.12 0.05 0.16 0.02
---------- ---------- ---------- ---------- ----------
Total net charge-offs
to average loans 0.32 0.31% 0.25% $ 0.19% 0.11%
========== ========== ========== ========== ==========
FIRST VIRGINIA BANKS, INC.
STATEMENT RE: COMPUTATION OF RATIOS (Continued)
1998
----------------------------------------------
Quarter Ended
----------------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31
---------- ---------- ---------- ----------
(in thousands, except ratios)
Ratios - Page 46
- ----------------
Rates Earned on Assets:
Interest income
(taxable equivalent) $ 166,878 $ 170,457 $ 168,430 $ 163,470
Total earning assets 8,609,006 8,553,295 8,468,660 8,289,012
Rates earned on assets 7.72% 7.94% 7.97% 7.95%
========== ========== ========== ==========
Rates Paid on Liabilities:
Interest expense $ 57,973 $ 60,291 $ 58,658 $ 57,410
Total interest-bearing
liabilities 6,758,642 6,695,840 6,599,980 6,487,545
Rates paid on liabilities 3.40% 3.57% 3.56% 3.59%
========== ========== ========== ==========
Net Interest Margin:
Net interest income
(taxable equivalent) $ 108,905 $ 110,166 $ 109,772 $ 106,060
Total average
earning assets 8,609,006 8,553,295 8,468,660 8,289,012
Net interest margin ratio 5.05% 5.14% 5.19% 5.14%
========== ========== ========== ==========
Return on Average Assets:
Net income $ 34,232 $ 31,944 $ 32,444 $ 31,542
Average assets 9,411,494 9,356,096 9,274,741 9,063,163
Return on average
assets ratio 1.45% 1.37% 1.40% 1.39%
========== ========== ========== ==========
Return on Average Equity:
Net income $ 34,232 $ 31,944 $ 32,444 $ 31,542
Average shareholders'
equity 983,522 1,019,750 1,037,212 1,020,276
Return on average
equity ratio 13.92% 12.53% 12.51% 12.37%
========== ========== ========== ==========
FIRST VIRGINIA BANKS, INC.
STATEMENT RE: COMPUTATION OF RATIOS (Continued)
1997
----------------------------------------------
Quarter Ended
----------------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31
---------- ---------- ---------- ----------
(in thousands, except ratios)
Ratios - Page 47
- ----------------
Rates Earned on Assets:
Interest income
(taxable equivalent) $ 164,890 $ 166,587 $ 157,787 $ 146,561
Total earning assets 8,202,358 8,217,963 7,857,720 7,550,354
Rates earned on assets 8.02% 8.08% 8.02% 7.87%
========== ========== ========== ==========
Rates Paid on Liabilities:
Interest expense $ 58,268 $ 58,405 $ 54,647 $ 51,607
Total interest-bearing
liabilities 6,429,625 6,455,955 6,192,191 5,959,376
Rates paid on liabilities 3.60% 3.59% 3.54% 3.46%
========== ========== ========== ==========
Net Interest Margin:
Net interest income
(taxable equivalent) $ 106,621 $ 108,181 $ 103,141 $ 96,245
Total average
earning assets 8,202,358 8,217,963 7,857,720 7,550,354
Net interest margin ratio 5.20% 5.26% 5.23% 5.10%
========== ========== ========== ==========
Return on Average Assets:
Net income $ 29,377 $ 34,718 $ 31,353 $ 29,397
Average assets 8,961,643 8,974,147 8,532,192 8,169,319
Return on average
assets ratio 1.31% 1.55% 1.47% 1.44%
========== ========== ========== ==========
Return on Average Equity:
Net income $ 29,377 $ 34,718 $ 31,353 $ 29,397
Average shareholders'
equity 1,003,669 999,916 912,709 871,591
Return on average
equity ratio 11.71% 13.89% 13.74% 13.49%
========== ========== ========== ==========
SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21
December 31, 1998
State of Incorporation and
Headquarters Location
---------------------------
First Virginia Banks, Inc. Falls Church, Virginia
Banking Subsidiaries:
Northern Region:
First Virginia Bank Falls Church, Virginia
First General Mortgage Company Falls Church, Virginia
First Virginia Mortgage Company Falls Church, Virginia
First Virginia Commercial Corporation Falls Church, Virginia
First Virginia Card Services, Inc. Falls Church, Virginia
First Virginia Credit Services, Inc. Falls Church, Virginia
Maryland Region:
First Virginia Bank-Maryland Upper Marlboro, Maryland
Farmers Bank of Maryland Annapolis, Maryland
Colonial Securities Corporation Wilmington, Delaware
Atlantic Bank Ocean City, Maryland
Eastern Region:
First Virginia Bank of Tidewater Norfolk, Virginia
First Virginia Bank-Colonial Richmond, Virginia
First Virginia Bank-Commonwealth Grafton, Virginia
Southwest Region:
First Virginia Bank-Southwest Roanoke, Virginia
First Virginia Bank-Franklin County Rocky Mount, Virginia
First Virginia Bank-Piedmont Lynchburg, Virginia
First Virginia Bank-Clinch Valley Tazewell, Virginia
Shenandoah Valley Region:
First Virginia Bank-Blue Ridge Staunton, Virginia
Tennessee-Western Virginia Region:
First Virginia Bank-Mountain Empire Abingdon, Virginia
Tri-City Bank and Trust Company Blountville, Tennessee
First Vantage Bank-Tennessee Knoxville, Tennessee
Nonbanking Subsidiaries
First Virginia Insurance Services, Inc. Falls Church, Virginia
First Virginia Insurance Services of
Maryland, Inc. Falls Church, Virginia
First Virginia Services, Inc. Falls Church, Virginia
First Virginia Life Insurance Company Falls Church, Virginia
Springdale Advertising Agency, Inc. Falls Church, Virginia
Northern Operations Center, Inc. Falls Church, Virginia
Southwest Operations Center, Inc. Falls Church, Virginia
Eastern Operations Center, Inc. Falls Church, Virginia
United Land Corporation Upper Marlboro, Maryland
Springdale Temporary Services, Inc. Falls Church, Virginia
First General Leasing Company Falls Church, Virginia
Farmers National Land Corporation Annapolis, Maryland
Maryland Operations Center, Inc. Annapolis, Maryland
All of the organizations listed above are 100% owned by First Virginia Banks,
Inc., or one of its subsidiary banks.
Exhibit 23
Consent of Independent Auditors
Board of Directors
First Virginia Banks, Inc.
We consent to the incorporation by reference in the Registration Statement
Number 33-30465 on Form S-8 dated June 30, 1997, Post-effective Amendment No.
1 to Registration Statement Number 33-38024 on Form S-8 dated January 10,
1994, Registration Statement Number 33-51587 on Form S-3 dated December 20,
1993, Registration Statement Number 33-54802 on Form S-8 dated November 20,
1992, Registration Statement Number 33-31890 on form S-3 dated November 1,
1989, Post-effective Amendment Number 2 to Registration Statement Number
2-77151 on Form S-8 dated October 30, 1987, and Registration Statement Number
33-17358 on Form S-8 dated September 28, 1987, and related prospectuses, of
our report dated January 19, 1999, with respect to the consolidated financial
statements of First Virginia Banks, Inc. included in this Annual Report
(Form 10-K) for the year ended December 31, 1998.
/s/ Ernst & Young LLP
Washington, D.C.
March 24, 1999