-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QHGOgz8ECuSIfME7pQws2nCcksUo5CoEUrfjCgumR7CG1Wl8rT7hz24xrGO1t99Y b/v4xsrwKM7fWAnZOOjL2w== 0000351616-99-000010.txt : 19990518 0000351616-99-000010.hdr.sgml : 19990518 ACCESSION NUMBER: 0000351616-99-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ONE VALLEY BANCORP INC CENTRAL INDEX KEY: 0000351616 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 550609408 STATE OF INCORPORATION: WV FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-12949 FILM NUMBER: 99625514 BUSINESS ADDRESS: STREET 1: ONE VALLEY SQ STREET 2: SUMMERS & LEE STS PO BOX 1793 CITY: CHARLESTON STATE: WV ZIP: 25326 BUSINESS PHONE: 3043487000 FORMER COMPANY: FORMER CONFORMED NAME: ONE VALLEY BANCORP OF WEST VIRGINIA INC DATE OF NAME CHANGE: 19920703 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended March 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______ to _______. Commission file number 010042 One Valley Bancorp, Inc. (Exact name of registrant as specified in its charter) West Virginia 55-0609408 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) One Valley Square, Charleston, West Virginia 25326 (Address of principal executive offices) (Zip Code) (304) 348-7000 (Registrant's telephone number, including area code) Not applicable (Former name, address, and fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities and 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 XXX No The number of shares outstanding of each of the issuer's classes of common stock as of March 31, 1999 was: Common Stock, $10.00 par value - 34,173,281 shares One Valley Bancorp, Inc. Part I. Financial Information Item 1. Financial Statements. The unaudited interim consolidated financial statements of One Valley Bancorp, Inc. (One Valley) or (Registrant) are included on pages 3 - 6 of this report. These consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for annual year-end financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. Operating results for the three-month period ended March 31, 1999 are not necessarily indicative of the results that may be expected for the year ending December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998. The Private Securities Litigation Act of 1995 indicates that the disclosure of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements by corporate management. This Quarterly Report on Form 10-Q contains forward- looking statements that involve risk and uncertainty. In order to comply with the terms of the safe harbor, the corporation notes that a variety of factors could cause One Valley's actual results and experience to differ materially from the anticipated results or other expectations expressed in those forward-looking statements. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's discussion and analysis of financial condition and results of operations is included on pages 7 - 19 of this report. ONE VALLEY BANCORP, INC. AND SUBSIDIARIES Consolidated Balance Sheets (unaudited in thousands)
March 31 December 31 March 31 1999 1998 1998 ASSETS Cash and Due From Banks $157,688 $155,226 $156,778 Interest Bearing Deposits With Other Banks 2,601 3,150 3,288 Federal Funds Sold 0 50,000 5,364 ---------- ---------- ---------- Cash and Cash Equivalents 160,289 208,376 165,430 Securities Available-for-Sale, at fair value 1,271,366 1,307,825 1,410,300 Held-to-Maturity (Estimated Fair Value, March 31, 1999 - $282,896; December 31, 1998 - $287,441; March 31, 1998 - $249,668) 276,174 278,267 244,379 Loans Total Loans 4,085,086 3,991,121 3,537,802 Less: Allowance For Loan Losses 52,645 52,272 47,871 ---------- ---------- ---------- Net Loans 4,032,441 3,938,849 3,489,931 Premises & Equipment - Net 102,505 102,863 96,742 Other Assets 131,144 127,400 135,054 ---------- ---------- ---------- Total Assets $5,973,919 $5,963,580 $5,541,836 ========== ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non-interest Bearing $567,385 $570,664 $498,437 Interest Bearing 3,985,476 3,982,224 3,750,876 ---------- ---------- ---------- Total Deposits 4,552,861 4,552,888 4,249,313 Short-term Borrowings Federal Funds Purchased 119,281 36,410 41,481 Repurchase Agreements and Other Borrowings 608,199 693,349 610,760 ---------- ---------- ---------- Total Short-term Borrowings 727,480 729,759 652,241 Long-term Borrowings 54,512 35,480 48,872 Other Liabilities 58,246 49,920 51,007 ---------- ---------- ---------- Total Liabilities 5,393,099 5,368,047 5,001,433 Shareholders' Equity: Preferred Stock-$10 par value; 1,000,000 shares authorized but none issued 0 0 0 Common Stock-$10 par value; 70,000,000 shares authorized, Issued 39,221,327 shares at March 31, 1999; 39,135,180 shares at December 31, 1998; 37,085,721 shares at March 31, 1998 392,213 391,352 370,857 Capital Surplus 94,412 94,157 91,390 Retained Earnings 211,908 200,174 167,055 Accumulated Other Comprehensive Income 556 6,450 6,196 Treasury Stock - 5,048,046 shares at March 31, 1999 4,392,546 shares at December 31, 1998; 4,346,846 shares at March 31, 1998; at cost (118,269) (96,600) (95,095) ---------- ---------- ---------- Total Shareholders' Equity 580,820 595,533 540,403 ---------- ---------- ---------- Total Liabilities and Shareholders' Equity $5,973,919 $5,963,580 $5,541,836 ========== ========== ==========
ONE VALLEY BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited in thousands, except per share data)
For The Three Months Ended March 31 1999 1998 INTEREST INCOME Interest and Fees on Loans Taxable $81,768 $73,129 Tax-Exempt 676 680 -------- -------- Total 82,444 73,809 Interest on Investment Securities Taxable 20,049 22,962 Tax-Exempt 3,339 3,124 -------- -------- Total 23,388 26,086 Other Interest Income 134 191 -------- -------- Total Interest Income 105,966 100,086 INTEREST EXPENSE Deposits 39,201 38,438 Short-term Borrowings 8,277 8,970 Long-term Borrowings 633 705 -------- -------- Total Interest Expense 48,111 48,113 -------- -------- Net Interest Income 57,855 51,973 Provision For Loan Losses 2,116 2,594 -------- -------- Net Interest Income After Provision For Loan Losses 55,739 49,379 OTHER INCOME Trust Department Income 3,227 2,890 Service Charges on Deposit Accounts 4,773 4,168 Real Estate Loan Processing & Servicing Fees 1,902 1,845 Other Service Charges and Fees 4,535 3,166 Other Operating Income 1,817 1,738 Securities Transactions 403 537 -------- -------- Total Other Income 16,657 14,344 OTHER EXPENSES Salaries and Employee Benefits 21,925 19,331 Occupancy Expense - Net 2,284 1,879 Equipment Expenses 3,059 2,681 Outside Data Processing 2,525 2,301 Other Operating Expenses 12,748 12,075 -------- -------- Total Other Expenses 42,541 38,267 ------- ------- Income Before Taxes 29,855 25,456 Applicable Income Taxes 9,912 8,945 -------- -------- NET INCOME $19,943 $16,511 ======== ======== NET INCOME PER SHARE Basic $ 0.58 0.52 Diluted $ 0.57 0.51 Average Shares Outstanding (in thousands) Basic 34,569 31,836 Diluted 34,940 32,553
ONE VALLEY BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Shareholders' Equity (unaudited in thousands)
Accumulated Other Common Capital Retained Treasury Comprehensive Stock Surplus Earnings Stock Income Total Balance December 31, 1998 $391,352 $94,157 $200,174 ($96,600) $6,450 $595,533 Three Months Ended March 31, 1999 Comprehensive Income: Net Income 0 0 19,943 0 0 19,943 Other Comprehensive Income, net of tax: Net Unrealized Holding Losses on Available-For-Sale Securities Arising During The Period 0 0 0 0 (5,652) (5,652) Less: Reclassification Adjustment For Gains Realized in Net Income 0 0 0 0 (242) (242) -------- Other Comprehensive Income (5,894) -------- Comprehensive Income 14,049 Cash Dividends ($.24 per share) (8,209) (8,209) Treasury Shares Purchased 0 0 0 (21,669) 0 (21,669) Stock Options Exercised 861 255 0 0 0 1,116 -------- -------- -------- -------- ------- -------- Balance March 31, 1999 $392,213 $94,412 $211,908 ($118,269) $556 $580,820 ======== ======== ======== ======== ======== ======== Balance December 31, 1997 $363,306 $71,782 $157,730 ($95,095) $5,927 $503,650 Three Months Ended March 31, 1998 Comprehensive Income: Net Income 0 0 16,511 0 0 16,511 Other Comprehensive Income, net of tax: Net Unrealized Holding Gains on Available-For-Sale Securities Arising During The Period 0 0 0 0 591 591 Plus: Reclassification Adjustment For Gains Realized in Net Income 0 0 0 0 (322) (322) -------- Other Comprehensive Income 269 -------- Comprehensive Income 16,780 Cash Dividends ($.21 per share) 0 0 (7,186) 0 0 (7,186) FFVA Treasury Shares Reissued 7,087 19,274 0 0 0 26,361 Stock Options Exercised 464 334 0 0 0 798 -------- -------- -------- -------- -------- -------- Balance March 31, 1998 $370,857 $91,390 $167,055 ($95,095) $6,196 $540,403 ======== ======== ======== ======== ======== ========
ONE VALLEY BANCORP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited in thousands)
For The Three Months Ended March 31 1999 1998 OPERATING ACTIVITIES Net Income $19,943 $16,511 Adjustments To Reconcile Net Income To Net Cash Provided by Operating Activities: Provision For Loan Losses 2,116 2,594 Depreciation 2,750 2,385 Amortization and Accretion 1,325 863 Net Gain From Sales of Assets (403) (537) Increase (Decrease) Due to Changes In: Accrued Interest Receivable 1,005 (2,487) Accrued Interest Payable (432) (581) Other Assets and Other Liabilities 6,106 1,581 -------- -------- Net Cash Provided by Operating Activities 32,410 20,329 INVESTING ACTIVITIES Proceeds From Sales of Securities Available for Sale 33,765 29,524 Proceeds From Maturities of Securities Available for Sale 181,621 128,530 Proceeds From Maturities of Securities Held to Maturity 8,498 7,717 Purchases of Securities Available for Sale (189,864) (242,957) Purchases of Securities Held to Maturity (4,905) (7,756) Net Increase In Loans (95,184) (109,891) Acquisition of Branches, Net of Cash Received 0 111,920 Purchases of Premises and Equipment (2,392) (2,124) -------- -------- Net Cash Used in Investing Activities (68,461) (85,037) FINANCING ACTIVITIES Net (Decrease)Increase in Interest Bearing and Non-interest Bearing Deposits (27) 31,923 Net Increase in Federal Funds Purchased 82,871 18,900 Net (Decrease) Increase in Other Short-term Borrowings (85,150) 9,861 Proceeds From Long-term Borrowings 19,150 0 Repayment of Long-term Debt (118) (3) Proceeds From Issuance of Common Stock 1,116 27,159 Purchase of Treasury Stock (21,669) 0 Dividends Paid (8,209) (7,186) -------- -------- Net Cash (Used in) Provided by Financing Activities (12,036) 80,654 -------- -------- (Decrease) Increase in Cash and Cash Equivalents (48,087) 15,946 Cash And Cash Equivalents at Beginning of Year 208,376 149,484 -------- -------- Cash And Cash Equivalents, March 31 $160,289 $165,430 ======== ======== NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note A - Basis of Presentation The accounting and reporting policies of One Valley conform to generally accepted accounting principles and practices in the banking industry. The preparation of the 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. All significant intercompany accounts and transactions have been eliminated in consolidation. The interim financial information included in this report is unaudited. In the opinion of management, all adjustments necessary for a fair presentation of the results of the interim periods have been made. These notes are presented in conjunction with the Notes to Consolidated Financial Statements included in the Annual Report of One Valley. Note B - Net Income Per Common Share Basic net income per common share excludes any dilutive effects of stock options and is computed by dividing net income by the average common shares outstanding during the year. Diluted net income per common share is computed by dividing net income by the average common shares outstanding during the year adjusted for the dilutive effect of options under One Valley's stock option plans. The effect of dilutive stock options on average shares outstanding was 371,000 and 717,000 for the first quarter of 1999 and 1998 respectively. Note C - Accounting Pronouncements In June 1997, the FASB issued Statement No. 131, "Disclosures About Segments of an Enterprise and Related Information," which is effective for fiscal years beginning after December 15, 1997. This statement requires public companies to disclose certain information about reportable operating segments in complete sets of financial statements of the company and in interim condensed financial statements. One Valley's reportable operating segments are currently confined to one segment, which is community banking. In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities," (FAS 133) which requires all derivatives to be recorded on the balance sheet at fair value and establishes "special" accounting for fair value, cash flow, and foreign currency hedges. FAS 133 is effective for years beginning after June 15, 1999 and the impact of adopting this statement by One Valley in year 2000 cannot be determined at this time. One Valley Bancorp, Inc. Management's Discussion and Analysis of Financial Condition and Results of Operations March 31, 1999 INTRODUCTION AND SUMMARY Net income for the first quarter of 1999 totaled $19.9 million, a 20.8% increase over the $16.5 million earned in the same quarter of 1998. On a per share basis, diluted net income per share increased by 11.8% to $0.57 from the $0.51 earned in the first quarter of 1998. The improvement in earnings during the quarter is primarily due to higher net interest income and non- interest income which more than offset the increase in non-interest expense. The first quarter of 1998 was also impacted by one-time charges of $1.1 million with the FFVA merger. Return on average assets (ROA) measures how effectively One Valley utilizes its assets to produce net income. ROA was 1.34% for the first three months of 1999, up from the 1.24% earned during the same period of 1998. Return on average equity (ROE) also increased to 13.44% from the 12.78% reported for the first quarter of 1998. The financial results include the acquisition of fifteen branches from the Wachovia Corporation that occurred on February 19, 1998. At the date of purchase, these fifteen branches had total loans of $125 million and total deposits of $283 million. Consolidated results for 1998 include the operations of the fifteen branches only from the date of purchase. Also, on August 7, 1998, One Valley acquired Summit Bankshares, Inc. (Summit), a bank holding company that operated nine branches in and around Lexington, Virginia. As of August 7, 1998, Summit had $199 million in total assets, $149 million in total loans, and $181 million in total deposits. The transaction was accounted for as a pooling-of-interests. However, due to the immaterial impact on One Valley's financial statements, the balances and results of operations of Summit are included in One Valley's financial statements only from the date of acquisition. The following discussion is an analysis of the financial condition and results of operations of One Valley for the first three months of 1999. This discussion should be read in conjunction with the 1998 Annual Report to Shareholders and the other financial information included in this report. RESULTS OF OPERATIONS Net Interest Income Net interest income for the three months ended March 31, 1999, was $60.0 million on a fully tax-equivalent basis, an 11.1% increase over the $54.0 million earned during the same period in 1998. In total, average earning assets increased by $555.1 million or 11.1% for the first three months of 1999 primarily due to a $627.2 million or 18.7% increase in average net loans while average interest bearing deposits increased by $369.4 million or 10.3%. The increase in average loans and deposits is partially due to the fifteen-branch purchase from the Wachovia Corporation in February 1998 and the Summit Bankshares, Inc. acquisition that occurred in August 1998, while the remainder is attributed to internal growth. Total interest income increased $5.9 million from the prior year while total interest expense remained unchanged. As shown in the consolidated average balance sheets (page 18), the yield on earning assets declined to 7.84% for the first three months of 1999, down from the 8.23% earned during the same period in 1998. Similarly, the cost of interest bearing liabilities dropped to 4.11% for the first three months of 1999, down from the 4.50% cost of funds reported during the first quarter of 1998. Additional discussion of the changes in balance sheet mix is included later in this report. Due to equivalent declines in the yield earned on earning assets and cost of interest bearing liabilities, the net interest margin remained unchanged at 4.33% for the first three months of 1999. Internal interest rate risk simulations indicate that over the next twelve months a sharp rise or sharp decrease in interest rates would have a slight negative influence on net interest income. Normal fluctuations in market interest rates should not have a significant impact on One Valley's net interest margin. Credit Experience The provision for loan losses was $2.1 million for the three months ended March 31, 1999, a $478,000 decrease from the provision during the first quarter of 1998. The decrease in the provision for loan losses was based upon One Valley's continual evaluation process of the adequacy of the allowance for loan losses. Net charge-offs for the first quarter were unchanged at $1.7 million. However, as a percentage of average total loans, net charge-offs in the first three months of 1999 decreased to 0.17% on an annualized basis, down from an annualized 0.21% during the same period in 1998, and from the 0.18% charge-off ratio for the full year of 1998. The decline in the net charge-off ratio is primarily due to a lower percentage of charge-offs. Total non-performing assets at March 31, 1999, were 0.24% of period-end loans, down from the 0.32% at March 31, 1998 and unchanged from December 31, 1998. Non-accrual loans totaled $8.5 million at March 31, 1999, $937,000 or 9.9% below last year's level, while foreclosed properties were $779,000 or 40.0% below last year's level. At March 31, 1999, the allowance for loan losses was sufficient to absorb over five times the amount of those non- performing assets. Loans past due over 90 days were 0.13% of outstanding loans at March 31, 1999, down from the 0.19% at year-end 1998 and unchanged from March 31, 1998. An analysis of the allowance for loan losses and non- performing assets is included on page 17. With the improved credit quality and the continued growth of loans outstanding, the allowance for loan losses in relationship to loans outstanding has declined to 1.29% at March 31, 1999 compared to 1.31% at year-end and 1.35% one year ago. However, in management's opinion, the allowance for loan losses remains adequate to absorb the current estimated risk of loss in the existing loan portfolio. Non-Interest Income and Expense The net overhead ratio (non-interest expense less non-interest income excluding security transactions divided by average earning assets) is a measure of One Valley's ability to control costs and equalizes the comparison of various sized operations. As this ratio decreases, more of the net interest margin flows to net income. One Valley's net overhead ratio for the first three months of 1999 was 1.89%, down from 1.95% during all of 1998 and down from the 1.96% for the first three months of 1998. The improvement in the net overhead ratio during the first three months of 1999 was the result of a 11.1% growth in average earning assets from one year ago while net overhead increased by 7.5% from the same period in 1998. The increase in net overhead is partially due to the additional operations of the fifteen branches purchased in February, 1998 and the nine locations acquired through the merger with Summit Bankshares in August, 1998. Total non-interest income excluding securities transactions was $16.3 million through the first three months of 1999, up 17.7% from the $13.8 million non-interest income earned during the same period in 1998. Trust income increased by 11.7% from the same period last year due to new business and increases in the market value of trust assets managed. Service charges on deposit accounts increased by 14.5% in the first three-month comparison mainly due to a higher level of customer activity from the twenty-four new branches acquired in Virginia during 1998. Real estate loan processing and service fees increased by $57,000 over the first three months of 1998. Other service charges and fees increased by 43.2% over the first three months of 1998, primarily due to increases in credit/debit card activity, investment and insurance commissions, and other banking services provided to customers. Total non-interest expense was $42.5 million during the first three months ended March 31, 1999, a 11.2% increase over the $38.3 million during the same period in 1998. This increase is largely due to the operations of the fifteen branches acquired during February 1998 and the nine branches acquired through the Summit merger that occurred in August 1998. Staff costs increased by 13.4% from the level one-year ago primarily due to the additional staff from the new branches and normal salary and benefit increases. Occupancy expense increased by 21.6% from the same period last year principally due to the increased facilities cost related to the twenty- four new branches. Equipment expenses increased 14.1% from last year's level primarily due to higher maintenance and depreciation costs related to the new branches and technology upgrades that occurred in 1998. Outside data processing expense increased by 9.7% from the same period in 1998, primarily due to costs to process the increase in credit/debit card activity. Other operating expenses increased by $673,000 or 5.6% in the first three months of 1999, largely due to increased intangible amortization from the 1998 acquisition activity, as well as costs such as telephone, postage, and courier service associated with the related increase in One Valley's customer base. Income tax expense increased by $967,000, or 10.8%, for the first three months of 1999 compared with the same period in 1998. The increase in taxes is primarily a result of the 17.3% growth in pretax earnings. One Valley's effective income tax rate for the first three months of 1999 was 33.2% compared to 35.1% during the first three months of 1998. The decline in effective tax rate is due to a change in the state taxation of the Virginia affiliates from an income tax to a franchise tax. FINANCIAL CONDITION Asset Structure Total loans at March 31, 1999, were $547.3 million or 15.5% higher than March 31, 1998. Approximately $148.7 million of the loans were acquired through the merger with Summit Bankshares in August 1988, while the remaining increase is due to strong loan demand over the past twelve months. Since year-end 1998 total loans have increased by 2.4% or $94.0 million. As a result, the consolidated loan-to-deposit ratio has increased to 89.7% at March 31, 1999, compared to 83.3% at March 31, 1998. The increase in total loans is primarily in one-to-four family, commercial real estate loans, and consumer auto loans. Investment portfolio assets decreased $38.6 million or 2.4% from the level at year-end and by $107.1 million or 6.5% from the level one-year ago. The decline in the investment portfolio is primarily due to normal security maturity patterns whereby a portion of the proceeds were used to fund One Valley's strong loan growth. Securities designated as available-for-sale at March 31, 1999 had a historical cost of $1.270 billion, with an unrealized gain of approximately $822,000. This unrealized gain increased shareholders' equity by $556,000, net of $266,000 in deferred income taxes. At year-end December 31, 1998, and March 31, 1998, securities available-for-sale had a historical cost of $1.297 billion and $1.400 billion, with an unrealized gain of approximately $10.4 million at year-end, and an unrealized gain of approximately $10.1 million at March 31, 1998. The unrealized gains increased shareholders' equity by $6.5 million and $6.2 million, net of deferred income taxes, respectively. The unrealized loss of $5.6 million was the result of a decline in the market valuation during the first quarter of 1999. At the time of purchase, management determines the appropriate classification of securities. Securities to be held for indefinite periods of time and not intended to be held to maturity or on a long-term basis are classified as available-for-sale and carried at fair value. The corresponding difference between the historical cost and the current fair value of these securities, the unrealized gain or loss, is an adjustment to shareholders' equity, net of deferred income taxes. Securities available- for-sale include securities that management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, resultant prepayment risk, and other related risk factors. If management has the positive intent and One Valley has the ability at the time of purchase to hold securities until maturity, they are classified as held-for-investment and carried at amortized historical cost adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income. In order to improve its fully tax equivalent net interest income and to hedge against higher income tax rates, One Valley increased its holdings of tax-exempt securities that were offering attractive yields over the last several years. As shown on the consolidated average balance sheets (page 18), average tax-exempt securities in the first three months of 1999 increased by 10.6% or $25.2 million over the average during the first three months of 1998. One Valley will continue to monitor its investment opportunities and may purchase additional tax-exempt securities of similar yield and quality. As of March 31, 1999, Federal funds sold were zero. When compared to March 31, 1998, and December 31, 1998, federal funds sold deceased by $5.3 million and $50.0, respectively. Fluctuations in Federal funds sold are normal and largely due to planned changes in One Valley's asset/liability structure in order to maximize the return on investment in response to changes in the interest rate environment. Liability Structure Total deposits at March 31, 1999, remained steady from the level at year-end but increased $303.5 million or 7.1% since March 31, 1998. Approximately $181.0 million in deposits were acquired through the merger with Summit Bancshares in August 1998. Due to the current low interest rate environment compared to the early 1990's, deposit customers are shortening the maturities of their deposit reinvestments and seeking higher yielding non-traditional investment alternatives. The majority of the growth in One Valley's core deposits, exclusive of acquisitions, has been in variable rate, index-based deposit accounts. One Valley has also been able to attract non- interest bearing deposits by increasing customer service and convenience through increased electronic banking service and locations. The average rate paid on interest bearing deposits was 4.01% in the first three months of 1999, down from the 4.26% average rate paid for all of 1998, and the 4.34% average rate paid in the first three months of 1998. In an effort to meet customer expectations for an integrated financial service delivery system, One Valley also operates a fully licensed NASD Broker/Dealer subsidiary, an Insurance Agency subsidiary and continues to expand other product lines. Total short-term borrowings decreased by $2.3 million or 0.3% from the year-end level, but increased $75.2 million or 11.5% from the level at March 31, 1998. Short-term borrowings consist of Federal funds purchased from correspondent banks, repurchase agreements with large corporate and public entities, advances on credit lines available to One Valley, and commercial paper. The increased level of short-term borrowings from March 31, 1998, has been used to fund loan growth and optimize the yield and duration of the investment portfolio as planned under One Valley's asset/liability management program. The average rate paid on these short-term borrowings has decreased from 5.27% during the first three months of 1998 to 4.57% during the same period of 1999. By comparison, the yield on the investment portfolio during the same time frame, declined from 6.78% during the first three months of 1998 to 6.43% during the same period of 1999. To hedge against potential rising interest rates on its indexed money market core deposit accounts, One Valley entered into an interest rate swap agreement during 1998. During the first quarter of 1999, One Valley entered into two additional rate swap agreements as part of its asset/liability management strategy. The effect of these derivative financial instruments on One Valley's operating results has been immaterial to date. Long-term borrowings increased by $5.6 million since March 31, 1998 and $19.0 million since December 31, 1998. The increase since year-end is due largely to $14.1 million of amortizing FHLB borrowings used to fund certain mortgage lending activities. As a result, One Valley now has $54.5 million of long-term FHLB borrowings with repayment schedules from one to ten years. Capital Structure and Liquidity One Valley's equity-to-asset ratio was 9.7% at March 31, 1999, down slightly from the 10.0% at December 31, 1998 and the 9.8% at March 31, 1998. During the first quarter of 1999, One Valley's Board of Directors authorized the repurchase of 1.5 million shares of One Valley common stock. The decrease in the equity-to-asset ratio is primarily the result of the 655,500 shares of stock purchased during the first quarter of 1999. One Valley's commitment to a strong capital ratio has facilitated the company's expansion into the central Virginia markets thus increasing prospects for improving long-term profitability and shareholder value. One Valley's cash dividend, totaling $0.24 per share for the first quarter of 1999, was up 14.3% over the $0.21 per share dividend during the same period in 1998. One Valley's dividend policy, coupled with the continued growth in net income, demonstrates management's commitment to a strong equity-to-asset ratio benefiting both the investor and the customer in the local community. One Valley's risk based capital ratio at March 31, 1999 was 15.1%, well above the 8.0% required, while its Tier I capital ratio was 13.9%. One Valley's strong capital position is demonstrated further by its leverage ratio of 8.9% compared to regulatory guidance of 4.0% to 5.0%. The capital ratios of the banking subsidiaries also remain strong and allow them to effectively serve the communities in which they are located. The capital positions of the banks, coupled with proper asset/liability matching and the stable nature of the primarily consumer base of core deposits, results in the maintenance of a strong liquidity position. The liquidity of the parent company is dependent upon dividends from its banking subsidiaries, which, although restricted by banking regulations, are adequate to meet its cash needs. Effects of Changing Prices The results of operations and financial condition presented in this report are based on historical cost, unadjusted for the effects of inflation. Inflation affects One Valley in two ways. One is that inflation can result in increased operating costs, which must be absorbed or recovered through increased prices for services. The second effect is on the purchasing power of the corporation. Virtually all of a bank's assets and liabilities are monetary in nature. Regardless of changes in prices, most assets and liabilities of the banking subsidiaries will be converted into a fixed number of dollars. Non-earning assets, such as premises and equipment, do not comprise a major portion of One Valley's assets; therefore, most assets are subject to repricing on a more frequent basis than in other industries. One Valley's ability to offset the effects of inflation and potential reductions in future purchasing power depends primarily on its ability to maintain capital levels by adjusting prices for its services and to improve net interest income by maintaining an effective asset/liability mix. YEAR 2000 READINESS DISCLOSURE Introduction One Valley recognizes the significant potential risk associated with the Year 2000 or Y2K issue and the challenge its poses. The Y2K problem arose because many existing computer programs use only the last two digits to refer to a year. Consequently, these computer programs do not properly recognize a year that begins with 20XX instead of 19XX. Beginning January 1, 2000, computer applications that use dates for computations, comparisons and sorting may produce incorrect results or fail due to an invalid interpretation of the date. The potential risk is not limited to computers and related software applications, but extends to telephones, security systems, copiers, FAX machines or any apparatus that utilizes computer technology. The full extent of the potential impact of Y2K is not yet known, but it could adversely affect national or global economies. As a financial institution, the ability of One Valley to promptly and accurately capture, record, process and communicate its customers' financial transactions and related data is vital to its ongoing operations. The Y2K problem could impede One Valley's ability to do so in several significant respects. Recognizing this potential risk, One Valley has undertaken a comprehensive project to address the Year 2000 issues that may affect One Valley and its customers. One Valley's preparations began in late 1996 under the guidance of Management and with oversight by the Board of Directors. Project Overview One Valley's project includes five phases: Awareness, Assessment, Renovation (or remediation), Validation (or testing), and Implementation. Each phase is described below. The phases indicate the order and method of One Valley's approach to Year 2000 concerns. Elements of different phases overlap, and different systems are at varying levels of completion within each phase. Systems that are mission critical have been addressed first. The Awareness Phase consisted of formal updates to One Valley management, employees and the Board of Directors about the issues relating to Y2K. In this stage management gathered information and attended conferences, appointed a project steering team and coordinators, began preliminary discussions with third party vendors, and distributed preliminary information to its employees and customers. This phase was completed in October, 1997, however One Valley continues on-going efforts to keep its customers and employees up to date. In the Assessment Phase, One Valley identified its critical information technology (IT) systems and performed a company-wide inventory of all systems, software, hardware, equipment and components that potentially could be affected by Y2K. During this phase, One Valley established project time lines, allocated resources and established the methodology to monitor the Y2K readiness of the IT Systems provided by third parties, as well as its non-IT Systems. One Valley also determined the Y2K readiness of its in-house IT Systems and components, and reported progress to senior management and the Board of Directors on a regular basis. During this phase, One Valley identified four general areas of potential susceptibility to Y2K issues: Major IT Systems provided by third parties, Internal IT Systems, Non-IT Systems, including communications infrastructure and physical facilities, and interruption to customers' business. One Valley also identified which systems were "mission critical" in terms of its operations and customer service. The Assessment Phase was completed in the fourth quarter of 1997. In the Renovation Phase, One Valley's third-party IT providers implemented program changes to accommodate the Y2K issues and conducted internal testing, which was completed for all systems defined as mission critical in 1998. In addition, during this phase One Valley began reprogramming its internal IT and non-IT Systems to accommodate Y2K. Most internal IT Systems and non-IT Systems have not been designated as mission critical to One Valley. Those that were deemed mission critical were renovated or replaced during 1998. During this phase, One Valley is also focusing on its customers' readiness for and susceptibility to Y2K concerns. One Valley anticipates that the remaining renovation of systems that are not mission critical will be completed by the end of the second quarter of 1999. In the Validation Phase, One Valley and its third party IT providers test the renovated applications and components to make sure they are Y2K ready. This phase has been very active during late 1998 and early 1999. The Implementation Phase began during the fourth quarter of 1998. During the first part of this phase, vendors completed upgrading of the applications, systems and other components, and Y2K ready programs for mission critical functions were put into production at One Valley. The balance of this final phase will be completed by the end of the second quarter of 1999. Project Status One Valley's major IT Systems are provided by the companies which are among the largest service providers in the world and are recognized as among the leading firms in their respective lines of business. The major IT Systems provided by these third parties consist of those which process mortgage loans, credit cards, commercial and installment loans, deposits, investments, and trust services. One Valley uses its Internal IT Systems to collect and format data that is then sent to and processed by these third parties. The resulting information is then available to One Valley. The third party service providers, in some cases, also generate statements for mailing directly to customers. One Valley has continually monitored the Y2K progress of these third parties and has determined that progress to date is acceptable. These systems have each been renovated, tested by the vendor, are in use by One Valley now, and are running on the remediated Y2K software. The Y2K upgrading of all mission critical IT Systems provided by third parties is complete. Because most of One Valley's mission critical systems are supplied by third party vendors, validation by the vendors occurred first. The up-graded system was then put into production at One Valley and further testing by One Valley will continue throughout 1999. One Valley is in the process of conducting time dimension testing of these third-party IT Systems, and in doing so utilizes its own testing, proxy testing, logical partition testing, or the most appropriate combination thereof. One Valley's Internal IT Systems are primarily used to capture and prepare data to be transmitted to its third party IT Systems providers. One Valley is in various stages of renovating, validating and implementing these systems, with completion anticipated by the second quarter of 1999. As part of a planned upgrade of its systems, by the end of the second quarter of 1999, One Valley will have replaced all of its personal computers with models that are Y2K ready. In addition, One Valley has over 280 ATMs in its network, all of which have been validated by the vendor and are using Y2K compliant software. It is anticipated that testing of these ATMs by One Valley will be completed by the end of the second quarter of 1999. One Valley's IT Systems also include network servers, routers and related software. The upgrading or replacement of One Valley's servers and routers and related software is approximately 90% to 95% complete and is expected to be finished by the end of the second quarter of 1999. Another important part of One Valley's operations includes its non-IT Systems, primarily facilities and equipment. Basic utilities, such as telephone, gas and electrical service, as well as heating and cooling systems, could be adversely affected by the Y2K. One Valley has performed an inventory of its facilities and has tested or developed plans to test, to the extent possible, applicable equipment for Year 2000 compliance. One Valley has determined that all of its vaults are Y2K ready. Outside companies, primarily utilities, which provide these non-IT services, have indicated to One Valley that they plan to be Y2K ready by the end of 1999, and to date One Valley is not aware of any non-IT system provider with a Y2K issue that would materially impact One Valley's operations. However, beyond these assurances, One Valley has no means of insuring or verifying that these non-IT Systems will be Y2K ready, and the impact of a failure in these systems is not determinable. Another area that could potentially impact One Valley is interruption of its customers' business, which among other things could potentially affect the ability of its commercial loan and other customers to repay loans from One Valley, thus increasing One Valley's delinquency ratios, non-performing assets and loans losses. To help minimize these problems and heighten customer awareness, One Valley has established a Y2K Corporate Customer Action Plan. As part of this plan, One Valley has mailed Year 2000 brochures to all commercial customers, hosted Y2K information seminars featuring a nationally known expert for its customers, made FDIC Year 2000 brochures available in the lobby of all its branches, and published a Year 2000 questions and answer sheet. One Valley has also incorporated a Y2K readiness assessment in its credit risk evaluations of corporate borrowers falling within certain parameters. As of June 30, 1998, corporate borrowers were preliminarily assessed as to their level of Year 2000 risk based upon their line of business, their degree of reliance on computer hardware and software, and their historic response to strategic challenges. A full assessment of medium and high-risk customers and industries was undertaken, including a questionnaire and a site visit in some instances. In addition, the results of One Valley's evaluations have been analyzed by industry segment to provide Y2K risk profiles by industry. Corporate borrowers in those industries with a significant inherent Y2K risk receive greater scrutiny. One Valley plans to monitor closely customers and industries judged to be high risk, and credit analyses on new and existing credits include evaluation of Year 2000 readiness. Although One Valley has implemented and made significant progress toward completing its Y2K project, there are uncertainties which, due to their unprecedented nature, simply cannot be fully evaluated. For example, the extent of interplay between payment systems is unclear, and it is not known how the potential failure of one aspect of that complex system might adversely impact other elements. In addition, although testing will be completed for each significant system, it is not possible to independently verify each vendor's vendors. It is unknown how a problem at one discrete point in the chain of service could impact an entire system. Management believes it has an effective project in place to resolve the Y2K issues within One Valley in a timely manner. In the event of a vendor, governmental, utility, customer or other Y2K failure, the Company may be unable to perform some or all of the functions related to its customers' financial transactions. The impact and duration of such inability would depend upon the extent of the Y2K-related failure or failures. While One Valley believes that it is taking the steps appropriate to prevent a Y2K failure on its part, because One Valley's ability to perform is linked to the performance of others, certainty is not possible. In addition, the potential for disruptions in the economy generally resulting from Y2K issues remains unknown and could also materially adversely affect One Valley and its customers. If system failures occur for any reason, One Valley and its customers could also be subject to litigation. The likelihood of such events and their impact on One Valley cannot be reasonably estimated at this time. One Valley has completed, and is in the process of testing, the contingency plan for the possibility of business disruption due to Y2K issues. The Y2K contingency plan expands existing business continuity plans, contemplating specific Y2K scenarios. As part of that process One Valley has assessed the potential business impact of a failure of each of its important systems and determined the need for contingency planning on a system by system basis. One Valley's contingency plans focus upon IT Systems failures by its vendors, as well as widespread disruptions of telecommunications and electrical power, all of varying duration. There can be no assurance, however, that contingency planning will be adequate for all possible events. Project Costs Expenses directly related to Y2K have been incurred, such as staff costs and informational conferences and seminars for employees and customers. These costs have been immaterial to date. Since third party vendors provide most of One Valley's IT Systems under the terms of fixed price contracts, One Valley has had to date, no material direct expense as a result of vendor's upgrades to those systems as a result of Y2K concerns. It is possible, however, that these vendors may attempt to recover some of their Y2K-related costs by way of future price increases upon renewal of their respective contracts. One Valley has been very aggressive in upgrading its internal IT Systems infrastructure, most of which are capital improvements attributed to planned upgrades in technology to modernize the way One Valley performs its day-to-day operations, and not solely the result of Y2K concerns. The total cost of the Y2K project, consisting primarily of computer upgrades for One Valley's IT Systems which were the result of or accelerated by Y2K concerns, is estimated to be approximately $5.4 million, which includes estimated payroll costs of those with significant responsibility for the Y2K project. To date, One Valley has incurred over $4.0 million of these total estimated expenditures. One Valley does not separately track all internal costs incurred for the Y2K project, which are principally payroll costs for its information technology employees and others involved in the Y2K project. Virtually all of the project costs are attributable to the purchase of new software and operations equipment, which will be capitalized.
ONE VALLEY BANCORP, INC. AND SUBSIDIARIES Analysis of Loan Losses and Non-Performing Assets (unaudited in thousands)
For The Three Months Ended March 31 1999 1998 ALLOWANCE FOR LOAN LOSSES Balance, Beginning of Period $52,272 $45,048 Loan Losses 2,236 2,252 Loan Recoveries 493 509 ------- ------- Net Charge-offs 1,743 1,743 Balance of Acquired Subsidiary 0 1,972 Provision For Loan Losses 2,116 2,594 ------- ------- Balance, End of Period $52,645 $47,871 ======= ======= Total Loans, End of Period $4,085,086 $3,537,802 Allowance For Loan Losses As a % of Total Loans 1.29 1.35 ========== ========== NON-PERFORMING ASSETS AT QUARTER END Non-Accrual Loans $8,519 $9,456 Foreclosed Properties 1,171 1,950 ------- ------- Total Non-Performing Assets $9,690 $11,406 ======= ======= Non-Performing Assets As a % of Total Loans 0.24 0.32 Loans Past Due Over 90 Days $5,249 $4,574 Loans Past Due Over 90 Days As a % of Total Loans 0.13 0.13
ONE VALLEY BANCORP, INC. AND SUBSIDIARIES Consolidated Average Balance Sheets (unaudited in thousands)
Three Months Ended March 31 1999 1998 Amount Yield/Rate Amount Yield/Rate (pct.) (pct.) ASSETS Loans Taxable $3,984,124 8.29 $3,352,058 8.82 Tax-Exempt 44,856 9.40 43,042 9.86 ---------- ---------- Total 4,028,980 8.30 3,395,100 8.83 Less: Allowance for Losses 52,876 46,226 ---------- ---------- Net Loans 3,976,104 8.41 3,348,874 8.95 Securities Taxable 1,304,919 6.15 1,399,441 6.56 Tax-Exempt 262,807 7.82 237,641 8.09 ---------- ---------- Total 1,567,726 6.43 1,637,082 6.78 Federal Funds Sold & Other 11,075 4.91 13,833 5.60 ---------- ---------- Total Earning Assets 5,554,905 7.84 4,999,789 8.23 Other Assets 377,977 343,108 ---------- ---------- Total Assets $5,932,882 $5,342,897 ========== ========== LIABILITIES AND EQUITY Interest Bearing Liabilities Deposits $3,965,195 4.01 $3,595,839 4.34 Short-term Borrowings 734,717 4.57 690,599 5.27 Long-term Borrowings 43,766 5.87 47,057 6.08 ---------- ---------- Total Interest Bearing Liabilities 4,743,678 4.11 4,333,495 4.50 Non-interest Bearing Deposits 542,757 445,032 Other Liabilities 52,692 47,699 ---------- ---------- Total Liabilities 5,339,127 4,826,226 Shareholders' Equity 593,755 516,671 ---------- ---------- Total Liabilities & Equity $5,932,882 $5,342,897 ========== ========== Interest Income To Earning Assets 7.84 8.23 Interest Expense To Earning Assets 3.51 3.90 ------ ------ Net Interest Margin 4.33 4.33 ====== ====== Note: Yields are computed on a fully taxable equivalent basis using the rate of 35%.
One Valley Bancorp, Inc. Part II. Other Information Item 6. Exhibits and Reports on Form 10-Q a) Exhibit 27. Financial Data Schedule - electronic filing only b) Reports on Form 8-K One Valley did not file any reports on Form 8-K during the three months ended March 31, 1999. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. One Valley Bancorp, Inc. DATE: May 17, 1999 BY /s/ Laurance G. Jones Laurance G. Jones Executive Vice President and Chief Financial Officer BY /s/ James A. Winter James A. Winter Senior Vice President and Chief Accounting Officer EX-27 2
9 This schedule contains summary financial information extracted from the consolidated balance sheets and statements of income of One Valley Bancorp as well as supplemental schedule of the analysis of loan losses and non-performing assets and the consolidated average balance sheets and is qualified in it entirety by reference to such financial statements and supplemental schedules. 3-MOS 3-MOS DEC-31-1999 DEC-31-1998 MAR-31-1999 MAR-31-1998 157688 156778 2601 3288 0 5364 0 0 1271366 1410300 276174 244379 282896 249668 4085086 3537802 52645 47871 5973919 5541836 4552861 4249313 727480 652241 58246 51007 54512 48872 0 0 0 0 392213 370857 188607 169546 5973919 5541836 82444 73809 23388 26086 134 191 105966 100086 39201 38438 48111 48113 57855 51973 2116 2594 403 537 42541 38267 29855 25456 29855 25456 0 0 0 0 19943 16511 0.58 0.52 0.57 0.51 7.84 8.23 9690 11406 5249 4574 0 0 0 0 52272 45048 2236 2252 493 509 52645 47871 52645 47871 0 0 0 0
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