-----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, Df3jSyta6MxFc9XkhDHXQ1r0Wz+TeEnzprHIdcjXk+F7w8PNKn/+4gsAb5qNW8KW Ir37xKdqwN4EdSad/z9FHg== 0000950128-00-000629.txt : 20000404 0000950128-00-000629.hdr.sgml : 20000404 ACCESSION NUMBER: 0000950128-00-000629 CONFORMED SUBMISSION TYPE: 10-K/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000403 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-K/A SEC ACT: SEC FILE NUMBER: 001-12949 FILM NUMBER: 592542 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-K/A 1 ONE VALLEY BANCORP, INC. 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] For the fiscal year ended DECEMBER 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to . Commission file number 0-10042 ONE VALLEY BANCORP, INC. (Exact name of registrant as specified in its charter) WEST VIRGINIA 55-0609408 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE VALLEY SQUARE SUMMERS AND LEE STREETS P.O. BOX 1793 CHARLESTON, WEST VIRGINIA 25326 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (304) 348-7000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- COMMON STOCK ($10.00 PAR VALUE) NEW YORK STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Title of class -------------- NONE 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 Exchange Act of 1934 during the preceding 12 months, 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. [ ] 2 REASON FOR AMENDMENT After filing its Annual Report on Form 10-K, the registrant discovered certain typographical errors in Exhibit 13. Accordingly, the registrant is refiling, in its entirety, Exhibit 13. 2 3 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 on its behalf by the undersigned, thereunto duly authorized. ONE VALLEY BANCORP, INC. By: /s/ J. HOLMES MORRISON ------------------------------ J. HOLMES MORRISON, Chairman, President and Chief Executive Officer By: /s/ LAURANCE G. JONES ------------------------------ LAURANCE G. JONES, Executive Vice President and Treasurer (Principal Financial Officer) By: /s/ JAMES A. WINTER ------------------------------ JAMES A. WINTER, Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) March 31, 2000 3 EX-13 2 1999 ANNUAL REPORT 1 Exhibit 13 1999 ANNUAL REPORT ONE VALLEY BANCORP, INC. 2 - ------------------------ ONE VALLEY BANCORP, INC. ANNUAL REPORT 1999 - ------------------------
Contents Financial Highlights. . . . . . . . . . . . . . . . . .1 Report to Customers, Employees, and Owners. . . . . . .2 Management's Discussion and Analysis . . . . . . . . .8 Consolidated Financial Statements . . . . . . . . . . 28 Six-year Financial Summaries. . . . . . . . . . . . . 48 One Valley Bancorp Directors and Senior Management. . 51 Additional Shareholder Information. . . . . . . . . . 52
Financial Highlights (Dollars in thousands, except per share data) 1999 1998 % CHANGE ------------------------------------------------- FOR THE YEAR Net interest income ... $ 235,223 $ 220,724 6.57% Net income ............ 80,824 73,045 10.65 Average balances Total loans - net... 4,132,173 3,641,069 13.48 Total assets ....... 6,218,008 5,648,166 10.09 Deposits ........... 4,556,568 4,283,567 6.37 Equity ............. 571,026 558,289 2.28 AT YEAR-END Year-end balances Total loans - net... $4,337,470 $3,938,849 10.12% Total assets ....... 6,583,061 5,963,580 10.39 Deposits ........... 4,573,435 4,552,888 0.45 Equity ............. 558,729 595,533 (6.18) PER SHARE Net income: Basic .............. $ 2.39 $ 2.19 9.13% Diluted ............ 2.37 2.15 10.23 Cash dividends ........ 1.00 0.90 11.11 Book value ............ 16.72 17.14 (2.45)
1 3 Letter to the Shareholders [List of Employee Names] - --------------- THIS ANNUAL REPORT IS DEDICATED TO THE OVER 2,300 CURRENT EMPLOYEES. - --------------- Continuing a pattern of consistent growth and strong financial performance, One Valley Bancorp recorded its eighteenth consecutive year of increased net income and dividends in 1999, combined with its thirteenth consecutive year of record earnings per share. We are pleased to be one of the few banking companies among the 100 largest in the nation that has had such a record of uninterrupted profitability. Importantly, One Valley's history of year-after-year record performance has not come at the expense of sacrificing balance-sheet quality. We continue to emphasize the sound financial fundamentals of profitability, asset quality, operational efficiency, capital adequacy, liquidity and balanced management of interest rate risk. While achieving this level of performance, One Valley also reached record levels in assets, loans, and deposits in 1999. For the year, One Valley earned a record $80.8 million, representing a 10.7% increase over the $73.0 million earned in 1998. Fully diluted net income per share increased 10.2% to $2.37 from the $2.15 earned the previous year. Return on average equity for 1999 improved to 14.15%, up from the 13.08% reported in 1998, while return on average assets remained consistent at 1.30% compared to 1.29% the prior year. Average shareholders' equity grew 2.3% to $571.0 million resulting in a strong capital ratio as the equity to average assets ratio was 9.18%. Cash dividends per share increased 11.1% to a record $1.00 in 1999. Growth in net income was generated by a 6.6% increase in net interest income and a 15.2% increase in non-interest income. Strong loan volume was the major factor in the growth in net interest income. The growth in non-interest income was fueled by trust and investment income, [List of Employee Names] 2 4 [List of Employee Names] insurance revenues and other fees. Real estate loan fees returned to a more normal level in 1999, after an unusually high level of mortgage refinancing in 1998. Despite continued growth in assets during 1999, One Valley diligently maintained control of operating expenses resulting in improved operational efficiency ratios, as the efficiency and net overhead ratios declined to 55.7% and 1.82%, respectively. One Valley's strong tradition of sound asset quality continued in 1999 as net charge-offs declined to 0.17% of loans, and loans delinquent for 30 days or more declined to only 1.00% of total loans, compared to 1.16% in the previous year. While the non-performing assets ratio increased slightly to 0.27% of total loans in 1999 compared to 0.24% in 1998, the loan loss reserve at year-end of $54.2 million adequately covered the $11.6 million in non-performing assets by 466%. The asset quality ratios mentioned above are among the best in the industry and were achieved while growing the loan-to-deposit ratio at year-end from 86.5% in 1998 to 94.8% in 1999. The "Management's Discussion and Analysis" section on pages 8 through 27 provides a comprehensive review of the financial condition and results of operations of One Valley for 1999 and prior years, and should be read in its entirety. Some of the financial highlights include: o Net income grew at a 9.68% compound annual growth rate over the last five years, while fully diluted earnings per share grew at a 9.15% rate during the same period. o Return on average assets averaged 1.30% over the past five years, while return on equity averaged 13.08% over the same time frame. o Average loans grew 10.91% per year while deposits grew 6.84% per year during the last five years. [List of Employee Names] [Photo of Statue and Building] 3 5 [List of Employee Names] NET INCOME AND DIVIDENDS PER SHARE Net Year Income Dividends - ------------------------------------------ 1994 $1.54 $ .60 1995 $1.69 $ .67 1996 $1.80 $ .74 1997 $2.00 $ .80 1998 $2.19 $ .90 1999 $2.39 $1.00 o Equity has grown at a 9.67% compound annual rate over the last five years producing a strong average equity to assets ratio of 9.18% during this period. o One Valley's consistent profitability has benefited its owners as dividends per share have grown at a 10.76% compound annual rate for the five-year period ending December 31, 1999. Other highlights during 1999 were as follows: o US Banker magazine ranked One Valley as the 10th best performing bank of the 100 largest banks in the nation based upon a composite of profitability, asset quality, operating efficiency and capital adequacy. One Valley's tenth place national ranking is in sharp contrast to its asset size, which ranks 73rd in the country. This was the fourth consecutive year that One Valley has been ranked in the top 15. During the same four-year period our assets grew by 54 percent. o For the third year in a row, One Valley was named to Keefe Bruyette and Woods' "1999 Honor Roll" of banks that have continually reported increases in earnings per share over the last decade. Of the 134 banking companies currently in KBW's active research universe, only 10 have posted a 10-year record that merits selection to the Honor Roll. o Thanks to more than two years of deliberate, thoughtful planning on the part of a great many One Valley employees, all of our banks made it smoothly through the millennium weekend with virtually no Y2K problems. o One Valley's trust revenue increased 19.6% in 1999, while service charges on deposit accounts increased by 8.1%. Increased revenue from investment brokerage and insurance products and services also contributed to this growth. [List of Employee Names] 4 6 [List of Employee Names] - ------------------- ONE VALLEY'S STRONG TRADITION OF SOUND ASSET QUALITY CONTINUED IN 1999. - ------------------- o On January 7, 2000, One Valley acquired Carson Insurance Agency, headquartered in Charleston, West Virginia and recognized as one of the leading agencies in the United States. Founded in 1910, Carson is a full- service insurance agency with gross revenues totaling $5.4 million in fiscal 1999 and was the largest privately owned insurance agency in West Virginia. Late in 1999, Congress passed and President Clinton signed the most significant federal legislation affecting banking and financial services since the Depression. The Financial Services Modernization Act removes barriers to the common ownership of different types of financial service providers. Under this new law, financial holding companies can own insurance, securities and banking firms. Customers' needs can be satisfied more readily with expanded product offerings. Many archaic and cumbersome restrictions on banks' expansion into a broader range of financial products have been eased or eliminated. Competition will likely increase as new delivery channels become available. The Carson Insurance Agency affiliation with One Valley is an example of financial services companies joining together to offer a broader array of products to their customers. Internally, the Y2K effort put forth by a wide range of One Valley employees has further enhanced communication, collaboration and coordination among all of our staff. Y2K was the largest, longest and most laborious project ever undertaken by our company. The thoroughness, perseverance and professionalism displayed by our dedicated employees exemplify our vision of working together to exceed our customers' expectations. [List of Employee Names] 5 7 [List of Employee Names] TEN-YEAR TOTAL RETURN TO SHAREHOLDERS(*) Cumulative Date Value - ------------------------- 12/31/89 1,000.00 1/15/90 989.37 4/16/90 978.00 7/16/90 955.91 10/15/90 886.90 1/15/91 899.67 4/15/91 1,201.00 7/15/91 1,360.16 10/15/91 1,569.94 1/15/92 1,806.30 4/15/92 1,845.17 7/15/92 2,143.40 10/15/92 2,159.34 1/15/93 2,825.10 4/15/93 2,716.71 7/15/93 2,781.73 10/15/93 2,755.54 1/14/94 2,682.06 3/31/94 2,418.13 6/30/94 2,678.62 9/30/94 2,829.44 1/3/95 2,823.36 4/13/95 2,884.73 7/14/95 3,070.44 10/13/95 3,446.89 1/15/96 3,184.72 4/15/96 3,167.72 7/15/96 3,515.34 10/15/96 4,223.56 1/15/97 4,677.11 4/15/97 5,002.87 7/15/97 5,683.49 10/15/97 6,064.73 1/15/98 6,172.50 4/15/98 6,730.74 7/15/98 6,114.04 10/15/98 4,906.46 1/15/99 5,587.40 4/15/99 6,552.73 7/15/99 6,691.57 10/15/99 6,160.16 12/31/99 5,370.96 In accordance with the One Valley Board policy, two directors meet the mandatory retirement age and will become Honorary Directors in 2000. The service of these two gentlemen has been invaluable to our company and their experience and business acumen will be truly missed in the coming years. Lacy I. Rice, Jr. has served as Vice Chairman of One Valley since the 1994 affiliation of Mountaineer Bankshares. Lacy and his family have served the economic and banking interests of Martinsburg and the eastern panhandle of West Virginia with distinction for many years and his leadership will be missed. Thomas D. Wilkerson has served on One Valley's Board and its predecessor Kanawha Valley Bank since 1973. As the long time General Agent of Northwestern Mutual Life Insurance Company in Charleston, Tom brought invaluable insight to the Board and the many committees he served on over the years. His advice and counsel are irreplaceable. On February 7, 2000, One Valley Bancorp, Inc. and BB&T Corporation announced an agreement that will combine two of the country's highest performing bank holding companies. This transaction, which the parties anticipate completing in the third quarter of 2000, has an exchange ratio fixed at 1.28 BB&T shares for each One Valley share. Expected to be accounted for utilizing the pooling-of-interests method, the transaction is subject to, among other things, approval by regulatory authorities and the shareholders of One Valley. The cultural compatibility of One Valley and BB&T is best exemplified in the similarity of their mission statements. The mission statement of each company is based upon constituencies of customers, [List of Employee Names] 6 8 [List of Employee Names] employees, owners and the communities they serve. This common focus on these constituencies has contributed to the success of both companies; and, I believe will continue to be the foundation for future success of the combined companies. If the regulators and shareholders of One Valley approve the proposed merger with BB&T, this will be the final Annual Report to One Valley Shareholders. This 1999 Annual Report is dedicated to the thousands of employees of One Valley Bancorp and its subsidiaries that have made One Valley what it is today. More specifically, it is dedicated to the over 2,300 current employees of One Valley who, operating in One Valley's value-based environment, have been responsible for the recent growth and success of One Valley. It is through the excellence of our employees that our customers, owners and the communities we serve have benefited, and for that we are grateful. Respectfully submitted, /s/ J. HOLMES MORRISON - ---------------------- J. Holmes Morrison Chairman of the Board, President and CEO [Photo of J. Holmes Morrison] [List of Employee Names] 7 9 - --------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - --------------- FORWARD-LOOKING STATEMENTS The following discussion contains statements that refer to future expectations, contain projections of the results of operations or of financial condition, or state other information that is "forward-looking." "Forward-looking" statements are easily identified by the use of words such as "could," "anticipate," "estimate," "believe," and similar words that refer to a future outlook. There is always a degree of uncertainty associated with "forward-looking" statements. One Valley management believes that the expectations reflected in such statements are based upon reasonable assumptions and on the facts and circumstances existing at the time of these disclosures. Actual results could differ significantly from those anticipated. Many factors could cause One Valley's actual results to differ materially from the results contemplated by the forward-looking statements. Some factors, which could negatively affect the results, include: (1) general economic conditions, either nationally or within One Valley's markets, could be less favorable than expected; (2) changes in market interest rates could affect interest margins and profitability; (3) competitive pressures could be greater than anticipated; (4) legal or accounting changes could affect One Valley's results; (5) acquisition cost savings may not be realized or the anticipated income may not be achieved; and (6) adverse changes could occur in the securities and investments markets. In Management's Discussion and Analysis we review and explain the general financial condition and the results of operations for One Valley Bancorp, Inc. and its subsidiaries. The discussion is designed to assist you in understanding the significant changes in One Valley's financial condition and results of operations. Generally accepted accounting principles have been used to prepare the accompanying consolidated financial statements. Included is an independent audit report from Ernst & Young LLP, who were engaged to audit the consolidated financial statements. INTRODUCTION One Valley Bancorp, Inc. is a multi-bank holding company headquartered in Charleston, West Virginia. It operates nine bank subsidiaries ranging in size from $220 million to $2.3 billion in assets. Through these banks, One Valley serves 81 communities with a full range of banking services in 123 locations conveniently located throughout West Virginia and Virginia. At December 31, 1999, One Valley had $6.6 billion in total assets, $4.4 billion in total loans, and $4.6 billion in total deposits. RECENT DEVELOPMENTS On February 6, 2000, One Valley and BB&T Corporation executed an Agreement and Plan of Reorganization providing for the merger of BB&T and One Valley, with BB&T surviving the merger and thereby acquiring One Valley's bank and non-bank subsidiaries. One Valley shareholders will receive 1.28 shares of BB&T stock in exchange for each share of One Valley. Expected to be accounted for under the pooling-of-interests method of accounting, the transaction is subject to, among other things, approval by regulatory authorities and the shareholders of One Valley. The parties presently contemplate closing the acquisition early in the third quarter of 2000. In December 1999, One Valley Bancorp entered into a definitive agreement to acquire Carson Insurance Agency, Inc. On January 7, 2000, the transaction closed and Carson Insurance Agency, Inc. become a wholly owned subsidiary of One Valley Bank, N.A., the Charleston based affiliate of One Valley. Carson is a full-service insurance agency founded in 1910 with annual revenues of approximately $5.4 million. The acquisition includes Carson's two subsidiary agencies, Patterson, Bell & Crane Company in Charleston, West Virginia and Nicholas County Insurance Agency in Summersville, West Virginia. The acquisition provides individual and business customers of both Carson and One Valley access to a greater range of financial service solutions. 8 10 SUMMARY FINANCIAL RESULTS One Valley earned $80.8 million in 1999, a 10.7% increase over the $73.0 million earned in 1998. This follows a 14.5% increase in 1998 over the $63.8 million earned in 1997. Table 1, Summary Statement of Net Income, presents three years of comparative income and expense information. As shown in Table 1, the increase in net income is primarily due to increased net interest income and non-interest income, which more than offsets the increase in operating costs. The February 1998 purchase of fifteen branches from Wachovia Corporation and the August 1998 acquisition of Summit Bankshares, Inc. (Summit) are included only from the dates of acquisition. Diluted earnings per share were $2.37 in 1999, an increase of 10.2% over the $2.15 earned in 1998, which compares with the 10.3% increase over the $1.95 earned in 1997. As shown in Table 2, Six-Year Selected Financial Summary, the average annual growth rate in diluted earnings per share over the past six years (compound growth rate) has been 9.2%. Table 2, Six-Year Selected Financial Summary, reflects summary financial data for the past six years, 1994 through 1999, along with a five-year compound growth rate. This table depicts the expansion of One Valley due to its growth in banking operations and its acquisition activity. Noteworthy are the growth rates in equity, net loans, non-interest income, net income and cash dividends. A key strength of One Valley is our solid capital base as exemplified by the strong average equity-to-average assets ratio for the past six years as shown in Table 2. This is a result of record earnings performances and a sound acquisition strategy. Table 3 compares two basic measures of earnings performance, ROA and ROE, over the previous five years. Return on Average Assets (ROA) measures how effectively One Valley utilizes its assets to produce net income. One Valley's 1999 ROA of 1.30% was up slightly from the 1.29% ROA reported in both 1998 and 1997. As illustrated in Table 3, One Valley's ROA has changed little over the past five years, although the income components of ROA have changed. NET INCOME Net Year Income ---------------------- 1994 50.914 1995 55.580 1996 58.618 1997 63.800 1998 73.045 1999 80.824 Summary Statement of Net Income Table 1
(Dollars in thousands) INCREASE (DECREASE) FROM PRIOR YEAR 1999 1998 1997 1999 1998 -------- -------- -------- ---------------------- --------------------- AMOUNT PERCENT AMOUNT PERCENT -------- ------- ------- ------- Interest income (*) ............. $445,353 $420,019 $376,760 $ 25,334 6.03 $43,259 11.48 Interest expense ................ 210,130 199,295 176,910 10,835 5.44 22,385 12.65 -------- -------- -------- -------- ------ ------- ----- Net interest income ............. 235,223 220,724 199,850 14,499 6.57 20,874 10.44 Other operating income .......... 68,078 59,108 47,836 8,970 15.18 11,272 23.56 Gross securities transactions ... 100 1,125 1,018 (1,025) (91.11) 107 10.51 -------- -------- -------- -------- ------ ------- ----- Total operating income .......... 303,401 280,957 248,704 22,444 7.99 32,253 12.97 Provision for loan losses ....... 9,120 10,063 7,531 (943) (9.37) 2,532 33.62 Other operating expenses ........ 174,048 161,944 144,319 12,104 7.47 17,625 12.21 -------- -------- -------- -------- ------ ------- ----- Income before income taxes ...... 120,233 108,950 96,854 11,283 10.36 12,096 12.49 Income taxes .................... 39,409 35,905 33,054 3,504 9.76 2,851 8.63 -------- -------- -------- -------- ------ ------- ----- Net income ...................... $ 80,824 $ 73,045 $ 63,800 $ 7,779 10.65 $ 9,245 14.49 ======== ======== ======== ======== ====== ======= ===== (*) Fully tax-equivalent interest income using the rate of 35% .... $454,395 $428,151 $384,833 $ 26,244 6.13 $43,318 11.26
9 11 One Valley's net credit income (net interest income less the provision for loan losses) as a percentage of average earning assets has declined over the past four years. This decline is due to two factors. First, a low interest rate environment tends to decrease the yield on earning assets (assets such as loans and investment securities on which One Valley earns interest or dividend income). Secondly, the increase in the competition for funds tends to prevent the cost of funding earning assets from declining as quickly as asset yields. One Valley however, has been able to offset the decline in net credit income by increasing non-interest income and reducing operating costs (as a percentage of average earning assets). Non-interest expense as a percentage of average earning assets has declined on a year-to-year basis from 1995 through 1999. This consistency is the result of increased operational efficiency and an annual increase in average earning assets. During 1997 and 1998, non-interest income as a percent of average earning assets increased rather significantly as a result of fee increases and fee income from new products and services. As a result, One Valley's net overhead ratio (the amount that operating expenses Six-Year Selected Financial Summary Table 2
(Dollars in thousands) 5-Year Compound Growth 1999 1998 1997 1996 1995 1994 Rate ---------- ---------- ---------- ----------- ---------- ----------- -------- SUMMARY OF OPERATIONS Interest income ............. $ 445,353 $ 420,019 $ 376,760 $ 353,146 $ 320,055 $ 280,763 9.67% Interest expense ............ 210,130 199,295 176,910 160,467 140,292 109,680 13.89 Net interest income ......... 235,223 220,724 199,850 192,679 179,763 171,083 6.57 Provision for loan losses ... 9,120 10,063 7,531 5,264 5,887 5,388 11.10 Non-interest income ......... 68,078 59,108 47,836 42,275 38,484 38,323 12.18 Gross securities transactions 100 1,125 1,018 (162) 144 (849) Non-interest expense ........ 174,048 161,944 144,319 140,984 128,675 127,652 6.40 Net income .................. 80,824 73,045 63,800 58,618 55,580 50,914 9.68 PER SHARE DATA Net income: Basic ..................... $ 2.39 $ 2.19 $ 2.00 $ 1.80 $ 1.69 $ 1.54 9.19% Diluted ................... 2.37 2.15 1.95 1.76 1.67 1.53 9.15 Cash dividends .............. 1.00 0.90 0.80 0.74 0.66 0.60 10.76 Book value .................. 16.72 17.14 15.75 14.82 15.32 13.81 3.90 SELECTED PERIOD-END BALANCES Net loans ................... $4,337,470 $3,938,849 $3,257,488 $ 3,090,442 $2,763,643 $ 2,604,051 10.74% Total assets ................ 6,583,061 5,963,580 5,161,486 4,801,113 4,355,586 4,113,844 9.86 Deposits .................... 4,573,435 4,552,888 3,934,174 3,804,369 3,426,311 3,263,735 6.98 Long-term borrowings ........ 541,824 35,480 48,875 32,892 22,661 28,700 79.97 Equity ...................... 558,729 595,533 503,650 483,058 454,361 412,726 6.24 SELECTED AVERAGE BALANCES Net loans ................... $4,132,173 $3,641,069 $3,135,152 $ 2,958,161 $2,674,893 $ 2,462,509 10.91% Investment securities ....... 1,657,681 1,163,607 1,467,907 1,345,501 1,174,001 1,164,445 7.32 Total assets ................ 6,218,008 5,648,166 4,945,505 4,625,907 4,168,873 3,942,948 9.54 Deposits .................... 4,556,568 4,283,567 3,846,583 3,656,587 3,361,721 3,272,721 6.84 Long-term borrowings ........ 306,636 42,814 52,315 21,951 19,026 22,931 67.97 Equity ...................... 571,026 558,289 487,598 471,443 438,814 359,966 9.67 SELECTED RATIOS Average equity to assets .... 9.18% 9.88% 9.86% 10.19% 10.53% 9.13% Return on average assets .... 1.30 1.29 1.29 1.27 1.33 1.29 Return on average equity .... 14.15 13.08 13.08 12.43 12.67 14.14 Dividend payout ratio ....... 41.84 41.10 40.00 41.11 39.05 38.96
10 12 exceed other operating income as a percentage of average earning assets) has steadily declined to 1.82% in 1999, an improvement from 1.95% in 1998, and 2.08% in 1997. This positive trend in the net overhead ratio has offset the decline in net credit income. Return on average equity (ROE), another measure of earnings performance, indicates the amount of net income earned in relation to the total equity capital invested. One Valley's 1999 ROE was 14.15%, up significantly from the 13.08% ROE in 1998 and 1997, primarily due to One Valley's strong earnings performance and the purchase of $59 million in treasury stock during the first half of 1999. ACQUISITION ACTIVITY Although no acquisitions occurred in 1999, One Valley's strategy in 1998 was to provide additional market diversification by targeting growth areas in Virginia for expansion. This led to three acquisitions during that year. At the close of business on February 19, 1998, One Valley purchased fifteen branches from Wachovia Corporation, half of which were located in and around Charlottesville, Virginia. The acquisition of these branches expanded One Valley's presence into central and north-central Virginia. At the date of purchase, these fifteen branches had total loans of $125 million, total deposits of $283 million and cash equivalents of $112 million. One Valley's consolidated results for 1998 include the operations of the fifteen branches only from the date of purchase. Comparisons of average balances and income statement categories are all affected by the branch purchase. At the close of business on March 30, 1998, One Valley merged with FFVA Financial Corporation (FFVA), a $604 million federal savings bank holding company headquartered in Lynchburg, Virginia. The acquisition of FFVA expanded One Valley's presence in Lynchburg and south-central Virginia, a growing market for financial services. At the date of the acquisition, FFVA had total loans of $319 million, investment securities of $211 million, and total deposits of $418 million. The combination was accounted for as a "pooling-of-interests." The "pooling-of-interests" method of accounting presents financial information as if the operations of One Valley and FFVA had always been combined. At the close of business on August 7, 1998, One Valley acquired Summit Bankshares, Inc., a $199 million bank holding company located in the Lexington, Virginia market with $149 million in loans and $181 million in deposits. One Valley's consolidated results for 1998 include the operations of Summit, operating now as One Valley Bank - Shenandoah, only from the date of acquisition. RETURN ON AVERAGE ASSETS Return on Assets --------- 1994 1.29% 1995 1.33% 1996 1.27% 1997 1.29% 1998 1.29% 1999 1.30% RETURN ON AVERAGE EQUITY Return on Equity --------- 1994 14.14% 1995 12.67% 1996 12.43% 1997 13.08% 1998 13.08% 1999 14.15% Analysis of Return on Assets and Equity Table 3
1999 1998 1997 1996 1995 ----- ----- ----- ----- ----- AS A PERCENT OF AVERAGE EARNING ASSETS: Fully taxable-equivalent net interest income (*) ............... 4.20% 4.33% 4.48% 4.63% 4.80% Provision for loan losses ........... (0.16) (0.19) (0.16) (0.12) (0.15) ----- ----- ----- ----- ----- Net credit income ................. 4.04 4.14 4.32 4.51 4.65 Non-interest income ................. 1.17 1.14 1.05 0.97 0.99 Non-interest expense ................ (2.99) (3.06) (3.11) (3.25) (3.31) Tax equivalent adjustment ........... (0.15) (0.15) (0.17) (0.17) (0.18) Applicable income taxes ............. (0.68) (0.69) (0.71) (0.70) (0.73) ----- ----- ----- ----- ----- RETURN ON AVERAGE EARNING ASSETS ...... 1.39 1.38 1.38 1.36 1.42 Multiplied by average earning assets to average total assets ........... 93.61 93.56 93.81 93.49 93.25 ----- ----- ----- ----- ----- RETURN ON AVERAGE ASSETS .............. 1.30% 1.29% 1.29% 1.27% 1.33% Multiplied by average assets to average equity ................. 10.89X 10.12X 10.14X 9.81X 9.51X ----- ----- ----- ----- ----- RETURN ON AVERAGE EQUITY .............. 14.15% 13.08% 13.08% 12.43% 12.67% ===== ===== ===== ===== =====
(*)Fully tax-equivalent using the rate of 35%. 11 13 BALANCE SHEET ANALYSIS Summary Revenue for a financial institution is primarily generated by its earning assets, those assets which earn interest or dividend income. Its major expenses are produced by the funding of these assets with interest-bearing liabilities. Effective management of these sources and uses of funds is essential to maximizing profits while maintaining a minimum amount of interest rate and credit risk. Information on rate-related sources and uses of funds for years 1997, 1998 and 1999 is provided in Table 4, Average Balance Sheet/Net Interest Income Analysis. In 1999 average earning assets, primarily loans, grew by 10.1% or $536.4 million over 1998, following a 13.9% or $645.1 million increase in 1998 over 1997. Average interest-bearing liabilities, the major source of funds supporting earning assets, increased 11.3% or $510.6 million over 1998. This was due to a 6.4% increase in average deposits with the remainder from short- and long-term borrowings. The 1999 increase follows a $530.9 million or 13.3% increase in 1998 over 1997. Approximately 45% of the asset increase and 75% of the liability increase in 1998 was due to the purchase of the Wachovia branches and the acquisition of Summit. Average Balance Sheet/Net Interest Income Analysis Table 4
(Dollars in thousands) 1999 1998 1997 YIELD/ YIELD/ YIELD/ AVERAGE RATE AVERAGE RATE AVERAGE RATE BALANCE INTEREST (1) (1) BALANCE INTEREST (1) (1) BALANCE INTEREST (1) (1) ---------- ------------ ------ ---------- ------------ ------ ---------- ------------ ------ ASSETS Loans(2) Taxable ...................... $4,129,529 $340,635 8.25% $3,648,141 $315,172 8.64% $3,134,255 $276,520 8.82% Tax-exempt ................... 56,481 5,269 9.33 42,563 4,162 9.78 46,208 4,600 9.95 ---------- -------- ---- ---------- -------- ---- ---------- -------- ---- Total loans ................ 4,186,010 345,904 8.26 3,690,704 319,334 8.65 3,180,463 281,120 8.84 Less: Allowance for losses ... 53,837 49,635 45,311 ---------- ---------- ---------- Total loans-net ............ 4,132,173 8.37 3,641,069 8.77 3,135,152 8.97 Investment securities Taxable ...................... 1,399,457 86,408 6.17 1,374,913 88,136 6.41 1,241,684 83,458 6.72 Tax-exempt ................... 258,224 20,565 7.96 238,694 19,071 7.99 226,223 18,466 8.16 ---------- -------- ---- ---------- -------- ---- ---------- -------- ---- Total securities ........... 1,657,681 106,973 6.45 1,613,607 107,207 6.64 1,467,907 101,924 6.94 Federal funds sold & other ..... 31,078 1,518 4.88 29,889 1,610 5.39 36,401 1,789 4.91 ---------- -------- ---- ---------- -------- ---- ---------- -------- ---- Total earning assets ....... 5,820,932 454,395 7.81 5,284,565 428,151 8.10 4,639,460 384,833 8.29 Other assets ................... 397,076 363,601 306,045 ---------- ---------- ---------- Total assets ............... $6,218,008 $5,648,166 $4,945,505 ========== ========== ========== LIABILITIES AND EQUITY Interest bearing liabilities: Interest bearing demand deposits ................... $ 594,178 8,094 1.36 $ 580,052 9,773 1.68 $ 561,331 10,894 1.94 Savings deposits ............. 1,266,094 42,992 3.40 1,003,638 34,511 3.44 746,879 23,164 3.10 Time deposits ................ 2,140,108 108,143 5.05 2,188,967 116,593 5.33 2,128,170 113,968 5.36 ---------- -------- ---- ---------- -------- ---- ---------- -------- ---- Total interest bearing deposits ................. 4,000,380 159,229 3.98 3,772,657 160,877 4.26 3,436,380 148,026 4.31 Short-term borrowings ........ 733,180 34,357 4.69 714,088 35,841 5.02 510,014 25,466 4.99 Long-term borrowings ......... 306,636 16,544 5.40 42,814 2,577 6.02 52,315 3,418 6.53 ---------- -------- ---- ---------- -------- ---- ---------- -------- ---- Total interest bearing liabilities .............. 5,040,196 210,130 4.17 4,529,559 199,295 4.40 3,998,709 176,910 4.42 Demand deposits ................ 556,188 510,910 410,203 Other liabilities .............. 50,598 49,408 48,995 Shareholders' equity ........... 571,026 558,289 487,598 ---------- ---------- ---------- Total liabilities and equity $6,218,008 $5,648,166 $4,945,505 ========== ========== ========== Net interest earnings .......... $244,265 $228,856 $207,923 ======== ======== ======== Net yield on earning assets .... 4.20% 4.33% 4.48% ==== ==== ====
(1) Fully tax-equivalent using the rate of 35%. (2) Non-accrual loans are included in average balances. 12 14 Additional information on each of the components of earning assets and interest-bearing liabilities is contained in the following sections of this report. Loan Portfolio One Valley's loan portfolio, the largest and most profitable component of its average earning assets, totaled 71.0% of average earning assets during 1999. Growth in the loan portfolio continued with an increase in average net loans of $491.1 million or 13.5% in 1999. The increase in 1999 average loans was fueled by balanced growth in commercial, consumer, and mortgage lending. The 1999 increase follows a 16.1% or $505.9 million increase in 1998. As a result of these increases in loan activity, One Valley's loan-to-deposit ratio maintained its upward trend in 1999, ending the year at 94.8%. This ratio compares to 86.5% at December 31, 1998 and 82.8% at December 31, 1997. Internal growth, as well as One Valley's carefully planned acquisition activity, has resulted in the increase in the loan portfolio. Total loans at December 31, 1999, increased by $400.5 million or 10.0% over the December 31, 1998 total. This increase compares to a $688.6 million or 20.9% increase in 1998 over total loans at December 31, 1997. The 1999 increase in loans was the result of loan volume generated internally, not by acquisition. All of One Valley's major loan classifications experienced growth in 1999, while commercial lending showed the greatest percentage increase compared to last year. Table 5, Loan Summary, presents a five-year comparison of loans by type. With the exception of those categories included in the comparison, there are no loan concentrations that exceed 10% of total loans. Additionally, One Valley's loan portfolio contains no loans to foreign borrowers nor does it have a significant volume of highly leveraged transaction lending. Over the past four years, total loans have increased $1.58 billion, a result of acquisitions and internal growth. While loan growth has been substantial, One Valley imposes underwriting and credit standards that are designed to maintain a quality loan portfolio. Loans secured by real estate, about 72% of One Valley's loan portfolio at December 31, 1999, consist of a diverse mix of predominantly single family residential loans and loans for commercial purposes where real estate is collateral, but not viewed as the primary source of repayment. About 75% of these loans are secured by property located within West Virginia where real estate values have remained relatively stable. Most of the remaining 25% are secured by property located in central Virginia where real estate values have been increasing and are more volatile. Total residential real estate loans increased by $145.7 million or 7.9% since year-end 1998. In addition, during 1999, $80 million of mortgage loans were securitized with a government agency and retained in One Valley's investment portfolio. Commercial real estate loans increased by $91.6 million or 14.8% in 1999, following a $141.9 million or 29.8% increase in 1998 from year-end 1997. Commercial real estate loans have historically averaged about one-sixth of the total loan portfolio. This low concentration of such loans has limited One Valley's exposure to swings in commercial real estate values and the potential for related credit losses. Loans for commercial purposes not secured by real estate increased in 1999 by $105.5 million or 22.5%. One Valley also originates residential real estate loans to be sold in the secondary market. In 1999, $97.1 million in loans were originated to be sold in the secondary market. This figure compares to $261.2 million of new loans originated for sale in the secondary market in 1998 and $111.8 million in 1997. This activity generates considerable processing and servicing fee income for One Valley, as discussed further in the "Income Statement Analysis" section of this report. The number of loans originated for sale will increase if mortgage interest rates decline and, conversely, will decrease if mortgage interest rates rise. Due to a lower interest rate environment in 1998, a higher volume of mortgages were originated as compared to 1999 and 1997. In addition to the loans reported in Table 5, One Valley also offers certain off-balance sheet products such as letters of credit, revolving credit agreements, and other loan commitments. These products are offered under the same credit standards as the loan portfolio and are TOTAL LOANS 1994 1995 1996 1997 1998 1999 --------------------------------------------------- Commercial, Financial & Oth 448 405 418 457 565 683 Commercial Real Estate 392 458 523 552 722 817 Residential Real Estate 1,263 1,366 1,623 1,720 2,078 2,233 Consumer 544 581 572 573 626 659 2,648 2,810 3,135 3,303 3,991 4,392 ------------- TOTAL LOANS INCREASED BY $401 MILLION IN 1999 ------------- 13 15 Loan Summary Table 5
(Dollars in thousands) AS OF DECEMBER 31 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- SUMMARY OF LOANS BY TYPE Commercial, financial, agricultural, and other loans ........... $ 573,844 $ 468,307 $ 396,503 $ 351,409 $ 348,761 Real estate: Construction loans ...................... 108,813 97,175 60,975 66,369 56,420 Revolving home equity ................... 235,641 226,216 192,252 152,006 128,754 Single family residentials .............. 1,997,177 1,851,470 1,527,621 1,471,434 1,237,416 Apartment buildings and complexes ....... 106,854 103,349 75,314 70,990 60,191 Commercial .............................. 710,514 618,958 477,025 451,756 397,821 Consumer installment loans ................ 658,783 625,646 572,846 571,533 580,616 ---------- ---------- ---------- ---------- ---------- Subtotal ................................ 4,391,626 3,991,121 3,302,536 3,135,497 2,809,979 Less: Allowance for loan losses ........... 54,156 52,272 45,048 45,055 42,751 ---------- ---------- ---------- ---------- ---------- Net loans ............................... $4,337,470 $3,938,849 $3,257,488 $3,090,442 $2,767,228 ========== ========== ========== ========== ========== PERCENT OF LOANS BY CATEGORY Commercial, financial, agricultural, and other ................. 13.07% 11.73% 12.01% 11.21% 12.41% Real estate: Construction loans ...................... 2.48 2.43 1.85 2.13 2.01 Revolving home equity ................... 5.36 5.67 5.82 4.85 4.58 Single family residentials .............. 45.48 46.39 46.26 46.91 44.04 Apartment buildings and complexes ....... 2.43 2.59 2.28 2.26 2.14 Commercial .............................. 16.18 15.51 14.44 14.41 14.16 Consumer installment loans ................ 15.00 15.68 17.34 18.23 20.66 ---------- ---------- ---------- ---------- ---------- Total ................................... 100.00% 100.00% 100.00% 100.00% 100.00% ========== ========== ========== ========== ========== NON-PERFORMING ASSETS Non-accrual loans ......................... $ 10,259 $ 8,477 $ 8,052 $ 10,288 $ 9,627 Other real estate owned ................... 1,381 1,089 1,808 1,945 1,565 Restructured loans ........................ 0 0 0 0 0 ---------- ---------- ---------- ---------- ---------- Total non-performing assets ............. $ 11,640 $ 9,566 $ 9,860 $ 12,233 $ 11,192 ========== ========== ========== ========== ========== Non-performing assets as a % of total loans 0.27% 0.24% 0.30% 0.39% 0.40% LOANS PAST DUE OVER 90 DAYS ................. $ 4,959 $ 7,467 $ 6,275 $ 4,959 $ 8,180 As a % of total loans ..................... 0.11% 0.19% 0.19% 0.16% 0.29% ALLOCATION OF LOAN LOSS RESERVE BY LOAN TYPE Commercial, financial, agricultural, and other loans ........... $ 21,966 $ 20,150 $ 18,780 $ 18,585 $ 17,016 Real estate construction loans ............ 510 455 344 367 318 Real estate loans - other ................. 11,876 12,158 9,216 9,753 9,809 Consumer installment loans ................ 19,804 19,509 16,708 16,350 15,608 ---------- ---------- ---------- ---------- ---------- Total ................................... $ 54,156 $ 52,272 $ 45,048 $ 45,055 $ 42,751 ========== ========== ========== ========== ==========
14 16 included in the risk-based capital ratios used by the Federal Reserve to evaluate capital adequacy. Additional information on off-balance sheet commitments is contained in Note S to the consolidated financial statements. Reported in Table 5 is a five-year comparison of the level of non- performing assets and loans contractually past due over 90 days. Total non- performing assets, which consist of past-due loans on which interest is not being accrued, foreclosed properties in the process of liquidation, and loans with restructured terms to enable a delinquent borrower to repay, were $11.6 million or 0.27% of total loans at year-end 1999. This compares to $9.6 million or 0.24% of total loans at year-end 1998. While levels of non-performing assets can be affected by borrowers experiencing difficulty resulting from fluctuations in the economy, One Valley diligently works to keep its level of non-performing assets at a relatively low level, as demonstrated in Table 5. The amount of loans contractually past due for over 90 days, but which continue to accrue interest, decreased in 1999 to $5.0 million as compared with $7.5 million in 1998. At year-end, these loans constituted 0.11% of total loans, down from 0.19% at year-end 1998 and 1997. One Valley's commitment to a quality loan portfolio is evidenced by the consistently favorable ratio of problem loans to total loans even while the size of the loan portfolio has increased significantly over the last five years. The increase in both the size and the credit quality of the loan portfolio has enabled One Valley to increase its interest income from loans by $26.6 million or 8.3% in 1999 and $38.2 million or 13.6% in 1998. It is One Valley's policy to place loans that are past due for over 90 days on non-accrual status, unless the loans are adequately secured and in the process of collection. Upon repossession of a real estate loan, the balance of the loan is transferred to "Other Real Estate Owned" (OREO). The value is recorded at the lower of the outstanding loan balance or the fair market value of the property, less costs to sell the property, based on current appraisals and other market information. If a writedown of the OREO property is necessary at the time of foreclosure, the amount of the reduction is charged against the allowance for loan losses. A quarterly review of the recorded property value is performed in conjunction with a continuous internal risk review process. If market conditions indicate that the recorded value exceeds the fair market value less costs to dispose, additional writedowns of the property value are charged directly to operations. One Valley had no commitments to provide additional funds on non-accrual loans at December 1999. During 1999, One Valley recognized less than $0.4 million of interest on non-accrual loans, while approximately $0.8 million would have been recognized on these loans if they had been current throughout 1999 in accordance with their original terms. Similarly, during 1998, less than $0.2 million was recognized on non-accrual loans, while approximately $0.8 million would have been recognized in accordance with their original terms. A loan is categorized and reported as impaired when it is probable that the borrower will be unable to pay the principal and interest amounts according to the contractual terms of the loan agreement. In determining whether a loan is impaired, One Valley's management considers such factors as payment history, recent economic events, current and probable financial condition and other available information. Typically, this type of individual loan analysis occurs with large commercial loans. Impaired loans are measured at the present value of expected future cash flows discounted at the loan's original effective interest rate or, as a practical measure, at the loan's observable market price or realizable value of the collateral if the loan is collateral dependent. Additional information on impaired loans is contained in Note I to the consolidated financial statements. The allowance for loan losses is maintained to absorb losses inherent in the loan portfolio as of December 31, 1999. Factors considered in determining the adequacy of the allowance include an individual assessment of risk on large commercial credits, historical charge-off experience, levels of non-performing and impaired loans, and an evaluation of current economic conditions. Commercial, consumer, and mortgage PROVISION FOR LOAN LOSSES AND NET CHARGE-OFFS Net Charge-Offs Provision ------------------------ 1994 0.16% 0.22% 1995 0.14% 0.22% 1996 0.17% 0.18% 1997 0.24% 0.24% 1998 0.18% 0.27% 1999 0.17% 0.22% NON-PERFORMING ASSETS & LOANS 90 DAYS PAST DUE Non- Loans 90 Performing Days Assets Past Due ------------------------ 1994 0.50% 0.24% 1995 0.40% 0.29% 1996 0.39% 0.16% 1997 0.30% 0.19% 1998 0.24% 0.19% 1999 0.27% 0.11% 15 17 loan portfolios are separated for purposes of analysis in determining the adequacy of the allowance for loan losses. Specific loss estimates are derived for individual credits where applicable, while estimated loss factors are applied to pools of similar loans, within each category. Changes in loan concentrations and quality are monitored and could result in adjustments to the allowance during the period of review. The general allowance on graded loans, those loans rated according to associated risk, is determined through a combination of historical loss percentages, as well as inherent risk by grade. Through careful monitoring of the loan portfolios by an internal risk review process, differences between estimated and actual losses are reflected quarterly in the analysis of loan loss category. As part of the holding company structure, One Valley maintains credit analysis and loan review departments. One Valley also maintains a loan administration function to continually identify and monitor problem loans. Management is mindful of the difficulty in being precise in any estimation of credit losses used in analyzing loan loss adequacy. Changes in general economic conditions, as well as specific economic factors in the individual markets in which One Valley operates, present an inherent risk, which involves a higher degree of uncertainty regarding the allowance. Accordingly, One Valley has assigned Comparative Loan Loss Information Table 6
(Dollars in thousands) FOR THE YEAR ENDED DECEMBER 31 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- ALLOWANCE FOR LOAN LOSSES, BEGINNING OF PERIOD ...... $ 52,272 $ 45,048 $ 45,055 $ 42,751 $ 40,492 Charge-offs Commercial, financial, and agricultural loans ..... 1,785 1,533 2,098 1,105 726 Real estate construction loans .................... 0 0 34 0 0 Real estate loans - other ......................... 813 639 888 667 588 Consumer installment loans ........................ 6,794 6,523 6,817 5,293 4,451 ---------- ---------- ---------- ---------- ---------- Total charge-offs ............................... 9,392 8,695 9,837 7,065 5,765 ---------- ---------- ---------- ---------- ---------- Recoveries: Commercial, financial, and agricultural loans ..... 485 398 446 306 519 Real estate mortgage loans ........................ 88 196 399 321 232 Consumer installment loans ........................ 1,583 1,433 1,454 1,252 1,151 ---------- ---------- ---------- ---------- ---------- Total recoveries ................................ 2,156 2,027 2,299 1,879 1,902 ---------- ---------- ---------- ---------- ---------- Net charge-offs ..................................... 7,236 6,668 7,538 5,186 3,863 Provision for loan losses ........................... 9,120 10,063 7,531 5,264 5,887 Balance of acquired subsidiaries .................... 0 3,829 0 2,226 235 ---------- ---------- ---------- ---------- ---------- ALLOWANCE FOR LOAN LOSSES, END OF PERIOD ............ $ 54,156 $ 52,272 $ 45,048 $ 45,055 $ 42,751 ========== ========== ========== ========== ========== Average total loans ................................. $4,186,010 $3,690,704 $3,180,463 $3,002,773 $2,716,839 Total loans at year-end ............................. 4,391,626 3,991,121 3,302,536 3,135,497 2,809,979 AS A PERCENT OF AVERAGE TOTAL LOANS: Net charge-offs ................................... 0.17% 0.18% 0.24% 0.17% 0.14% Provision for loan losses ......................... 0.22 0.27 0.24 0.18 0.22 Allowance for loan losses ......................... 1.29 1.42 1.42 1.50 1.57 AS A PERCENT OF TOTAL LOANS AT YEAR-END: Allowance for loan losses ......................... 1.23% 1.31% 1.36% 1.44% 1.52% AS A MULTIPLE OF NET CHARGE-OFFS: Allowance for loan losses ......................... 7.48X 7.84X 5.98X 8.69X 11.07X Income before tax and provision for loan losses ... 17.88 17.85 13.85 18.09 23.22
16 18 each major loan category a portion of the allowance to address the risk associated with these factors. Based on the analysis performed, it is One Valley's management's opinion that the allowance for loan losses is adequate to absorb the current risk of probable loss in the existing loan portfolio. A summary of the allowance for loan losses allocated by loan type is also included in Table 5. Table 6, Comparative Loan Loss Information, provides a detailed history of the allowance for loan losses, illustrating charge-offs and recoveries by loan type, and the annual provision for loan losses over the past five years. At December 31, 1999, the allowance for loan losses was $54.2 million or 1.23% of loans outstanding compared to the December 31, 1998 level of $52.3 million or 1.31% of total year-end loans. The provision for loan losses in 1999 was $9.1 million, down from the $10.1 million in 1998, and up from the $7.5 million provision in 1997. During 1999, additional financial information on most of the commercial borrowers in the loan portfolios of institutions acquired in 1998 was obtained and the estimated credit losses on a significant number of loans adjusted. The increase in 1998 was to provide for the sharp growth in the loan portfolios. While One Valley experienced considerable loan growth during 1999, 1998, and 1997, the overall credit quality of the portfolio has remained consistent over those years, as evidenced by the low level of non-performing assets and the low level of net charge-offs during those years. One Valley's net charge-offs have remained consistently low over the past five years, a reflection of One Valley's overall asset quality for those years. Net charge-offs are the amount of uncollectible loans charged against the allowance for loan losses, net of any proceeds recovered on loans previously written off. Net charge-offs in 1999 increased $0.5 million to $7.2 million from the $6.7 million net charged off in 1998. However, net-charge offs as a percentage of average total loans declined to 0.17% in 1999, compared to 0.18% in 1998 and 0.24% in 1997. In all three years, these ratios compare favorably with those of peer group banks across the country. Although the dollar amount of net charge-offs has remained historically low, charge-offs could increase in the coming months due to the increase in the total dollar amount of loans, or adverse changes in economic conditions. Investment Portfolio and Other Earning Assets Investment securities averaged $1,657.7 million in 1999, a $44.1 million or 2.7% increase over the $1,613.6 million averaged in 1998. This increase follows a 9.9% increase in 1998 over the $1,467.9 million averaged in 1997. The 1999 increase was due to contingency funding plans made in April 1999 to address the possible liquidity needs associated with customers' concerns with Y2K. Borrowings totaling $200 million were made in April and simultaneously, $200 million in securities were purchased with maturities prior to December 31, - -------------- INVESTMENT SECURITIES AVERAGED $1.7 BILLION IN 1999 - -------------- Remaining Maturities of Loans Table 7
(Dollars in thousands) BALANCE PROJECTED MATURITIES(*) DECEMBER 31, ONE YEAR ONE TO FIVE OVER FIVE 1999 OR LESS YEARS YEARS ------------ -------- ----------- --------- Commercial, financial, and agricultural loans ..... $528,013 $267,148 $188,436 $ 72,429 Real estate construction loans .................... 108,813 49,274 19,721 39,818 Commercial real estate loans ...................... 817,368 126,472 322,546 368,350 Loans with: Floating rates .................................. $687,856 $163,924 $314,977 $208,955 Predetermined rates ............................. 766,338 278,970 215,726 271,642
(*)Based on scheduled or approximate repayments. 17 19 Securities Maturity and Yield Analysis Table 8
(Dollars in thousands) AS OF DECEMBER 31, 1999 AVERAGE TAXABLE AVAILABLE-FOR-SALE MARKET MATURITY EQUIVALENT VALUE (YEARS/ MONTHS) YIELD(*) ---------- --------------- ---------- U. S. TREASURY SECURITIES Maturing within one year .............................. $ 17,966 5.40% After one but within five years ....................... 65,068 5.59 After five but within ten years ....................... 20,311 7.70 ---------- Total U.S. Treasury Securities ...................... 103,345 3/2 5.97 U. S. GOVERNMENT AGENCIES SECURITIES Maturing within one year ............................. 119,515 7.09 After one but within five years ...................... 386,314 6.07 After five but within ten years ...................... 140,860 5.72 After ten years ...................................... 8,788 4.75 ---------- Total U.S. Government Agencies Securities .......... 655,477 5/1 6.16 MORTGAGE-BACKED SECURITIES(**) Maturing within one year .............................. 8,507 6.69 After one but within five years ....................... 2,668 6.99 After five but within ten years ....................... 104,215 6.54 After ten years ....................................... 254,968 6.66 ---------- Total Mortgage-Backed Securities .................... 370,358 14/10 6.63 OTHER DEBT SECURITIES Maturing within one year .............................. 61,628 6.22 After one but within five years ....................... 30,952 5.99 After five but within ten years ....................... 8,736 7.81 ---------- Total Other Debt Securities ......................... 101,316 3/7 6.29 Other Securities ....................................... 58,357 ---------- Total Securities Available-for-Sale .................... $1,288,853 7/5 6.01% ==========
AVERAGE TAXABLE HELD-TO-MATURITY MARKET MATURITY EQUIVALENT VALUE (YEARS/ MONTHS) YIELD(*) ---------- --------------- ---------- STATES AND POLITICAL SUBDIVISIONS SECURITIES Maturing within one year .............................. $ 31,507 11.00% After one but within five years ....................... 134,921 8.08 After five but within ten years ....................... 117,296 7.56 After ten years ....................................... 2,278 7.08 ---------- Total States and Political Subdivisions Securities .. 286,002 9/3 8.18 Other Securities ....................................... 328 ---------- Total Securities Held-to-Maturity ...................... $ 286,330 9/3 8.17% ==========
* Fully tax-equivalent using the rate of 35%. ** Maturities for Mortgage-Backed Securities are based on final maturity. 18 20 1999. If not for this contingency funding plan, securities would have declined due to the deployment of more assets into loans. Nearly 80% of the increase in 1998 was the result of investments and funds available for investment obtained through the Summit acquisition and the branch purchase. As sources of funds (deposits, federal funds purchased, and repurchase agreements with corporate customers) fluctuate, excess funds are initially invested in federal funds sold to other banks and other short-term investments. Based upon analyses of asset/liability repricing, interest rate forecasts, and liquidity requirements, funds are periodically reinvested in high-quality debt securities, which typically mature over a longer period of time. At the time of purchase, management determines whether securities will be classified as available-for-sale or held-to-maturity. As shown in Table 8, Securities Maturity and Yield Analysis, the average maturity period of securities available-for-sale at December 31, 1999 was 7 years 5 months. Table 8 uses a final maturity method to report the average maturity of mortgage-backed securities, which excludes the effect of monthly payments and prepayments. Approximately 59% of the securities available-for-sale at December 31, 1999 were U.S. Government Agency or Treasury securities that had an average maturity of 5 years 1 month and 3 years 2 months respectively. The average expected maturity period of securities held-to-maturity was 9 years 3 months at the end of 1999. The average expected maturity of the investment portfolio is managed at a level to maintain proper matching with One Valley's interest rate risk guidelines. One Valley does not have any securities held for trading and it has no plans to establish such classification at the present time. Other information regarding investment securities may be found in Table 8 and in Note G to the consolidated financial statements. One Valley's average federal funds sold and other short-term investments increased by 4.0% in 1999. This follows a decrease of 17.9% in 1998. Averaging $31.1 million in 1999, federal funds sold and other expected short-term investments increased $1.2 million from the $29.9 million averaged in 1998 as compared to a decrease of $6.5 million from the $36.4 million averaged in 1997. Fluctuations in federal funds sold and other short-term investments reflect management's goal to maximize asset yields while maintaining proper asset/ liability structure, as discussed in greater detail above and in other sections of this report. Funding Sources Despite an increase in market rates in late 1999, the general level in market interest rates remained below the 1998 levels. As a result, the average rate paid on interest-bearing liabilities decreased to 4.17% in 1999, down from the 4.40% average paid in 1998 and the 4.42% average rate paid in 1997. The cost of deposit funds in 1999 also benefited from the lowering of rates paid on certain core deposit products. Due to alternative sources of investment and the increasing sophistication of customers in managing their investments, competition for funds has become more intense. Many customers have shifted balances from higher rate certificates of deposit into indexed money market accounts that currently pay slightly lower rates but have an adjustable rate feature. One Valley also offers periodic special rate products to attract additional deposits. On average, One Valley's deposits increased by 6.4% or $273.0 million in 1999. Slightly less than half of this increase was the result of the acquisitions in 1998. Excluding this effect, One Valley's 1999 average interest-bearing deposits increased by $114.0 million or 3.1%. The majority of the 1999 increase in time and savings deposits resulted from growth in the Valley Index Account, an insured deposit product paying an indexed money market interest rate. One Valley's average non-interest-bearing deposits increased by $45.3 million or 8.9% in 1999. In the past several years, One Valley has been able to attract non-interest-bearing deposits by increasing customer service and convenience through increased electronic banking services and locations. In 1998, One Valley's deposits, on average, increased 11.4% or $437.0 million. Of this increase, $318.9 million resulted from the 1998 Wachovia branch purchase and Summit acquisition. AVERAGE DEPOSITS Demand Time Savings Savings Total Deposits Deposits Regular Checking Deposits ---------------------------------------------------------------------- 1994 412 1,250 817 452 2,931 1995 381 1,450 696 481 3,007 1996 385 2,000 701 571 3,657 1997 410 2,128 747 561 3,847 1998 511 2,189 1,004 580 4,284 1999 556 2,140 1,266 595 4,557 19 21 - ------------ AVERAGE DEPOSITS INCREASED BY 6.4% IN 1999 - ------------ To supplement its funding from deposit growth, One Valley has increasingly utilized borrowed funds to fund loan growth. Short-term borrowings in 1999 increased, on average, by $19.1 million or 2.7%. One Valley's daily overnight repurchase agreements, a collateralized cash management product offered to commercial customers increased $51.9 million or 19.9% allowing for curtailments of $32.8 million in other forms of short-term borrowings. In 1998, average short-term borrowings increased by $204.0 million or 40.0% including a 12.9% or $29.7 million increase in daily overnight repurchase agreements. Long-term borrowings, on average, increased $263.8 million or 616.2% in 1999 following a $9.5 million or 18.2% decrease in 1998. Long-term borrowings have increased by $506.3 million since December 31, 1998. Emphasis was placed on long-term borrowings as part of an interest rate risk management strategy. In addition, in April 1999, a total of $200.0 million was borrowed from the Federal Home Loan Bank (FHLB) to provide adequate liquidity for anticipated customers' year-end cash and liquidity needs related to Y2K concerns. The decrease in 1998 was due to scheduled repayments that occurred during the year. Other information regarding short and long-term borrowings is contained in Note L to the consolidated financial statements. Interest Sensitivity and Liquidity Asset /liability management is a means of optimizing net interest income while minimizing interest rate risk by planning and controlling the mix and maturities of interest earning assets and interest bearing liabilities. This is accomplished through the strategic pricing of asset and liability accounts. The expected result of this process is the development of appropriate maturity and repricing opportunities in those accounts to produce consistent earnings during changing interest rate environments. Table 10 illustrates One Valley's rate-sensitive positions at December 31, 1999, and is not necessarily reflective of positions throughout the year. The carrying amounts of interest-rate-sensitive assets and liabilities and the notional amounts of swaps and other derivative financial instruments are presented in the periods in which they next reprice to market rates or mature and are combined to show the interest rate sensitivity gap. To reflect anticipated prepayments, certain asset and liability categories are included in the table based on estimated rather than contractual maturity dates. Management uses Net Interest Income Simulation Analysis ("Simulation") to measure the sensitivity of projected earnings to changes in interest rates. Simulation takes into account the current contractual agreements that One Valley has made with its customers for deposits, borrowings, loans, investments and any commitments to enter into those transactions. Management monitors One Valley's interest sensitivity by means of a computer model that incorporates current volumes and rates, scheduled maturities and projected payments, repricing opportunities and anticipated growth. The model projects earnings based on current and projected portfolio balances and rates. This level of detail is needed to effectively simulate the effect that changes in interest rates and portfolio balances will have on the earnings of One Valley. This method is subject to the accuracy of the assumptions that underlie the process, but it provides a better illustration of the sensitivity of earnings to changes in interest rates than do other analyses such as static and dynamic gap. Maturity Distribution of Certificates of Deposit Table 9
(Dollars in thousands) AS OF DECEMBER 31, 1999 AS OF DECEMBER 31, 1998 AMOUNT PERCENT AMOUNT PERCENT -------- ------- -------- ------- Three months or less ........... $115,937 30.07% $ 99,067 27.28% Three through six months ....... 52,907 13.72 60,582 16.69 Six through twelve months ...... 93,086 24.14 106,587 29.36 Over twelve months ............. 123,690 32.07 96,848 26.67 -------- ------ -------- ------ Total ........................ $385,620 100.00% $363,084 100.00% ======== ====== ======== ======
20 22 Table 11 represents the results of One Valley's interest sensitivity simulation analysis as of December 31, 1999 and 1998. Key assumptions in the preparation of the table include anticipated prepayment speeds on mortgage-related assets; cash flows and maturities of derivative financial instruments; changes in market conditions including interest rates, loan volumes, and pricing; deposit sensitivity; customer preferences; and capital plans. To attempt to quantify the potential change in net interest income, given a change in interest rates, various interest rate scenarios are applied to projected balances, maturities and repricing opportunities. The resulting change in net interest income reflects the level of sensitivity that net interest income has in relation to changing interest rates. As of year-end 1999, a sharp increase in interest rates of 300 basis points would have a negative impact on One Valley's net interest income in the year 2000. Modest changes in interest rates or an aggressive decrease in interest rates would not have a material impact on net interest earnings. As of year-end 1998, One Valley's interest sensitivity Interest Rate Sensitivity Gap Analysis at December 31, 1999 Table 10
(Dollars in thousands) EXPECTED REPRICING OR MATURITY OVER FIVE WITHIN ONE ONE TO THREE TO YEARS/NON YEAR THREE YEARS FIVE YEARS RATE SENSITIVE TOTAL ----------- ----------- ---------- -------------- ---------- ASSETS Securities ..................................... $ 152,479 $ 241,804 $ 338,533 $ 848,087 $1,580,903 Federal funds sold ............................. 185,590 185,590 Loans and leases ............................... 1,854,207 1,058,617 820,421 604,225 4,337,470 Other assets (non-earning) ..................... 479,098 479,098 ----------- ---------- ---------- ---------- ---------- TOTAL ASSETS ............................... $ 2,192,276 $1,300,421 $1,158,954 $1,931,410 $6,583,061 =========== ========== ========== ========== ========== LIABILITIES Savings and interest checking .................. $ 820,564 $1,033,422 $1,853,986 Other time deposits ............................ 1,422,278 $ 668,669 $ 73,768 1,364 2,166,079 Short-term borrowings .......................... 823,734 26,464 72 850,270 Long-term borrowings ........................... 308,340 202,274 10,746 20,464 541,824 Demand deposits ................................ 553,370 553,370 Other liabilities .............................. 58,803 58,803 Equity ......................................... 558,729 558,729 ----------- ---------- ---------- ---------- ---------- TOTAL LIABILITIES .......................... $ 3,374,916 $ 897,407 $ 84,586 $2,226,152 $6,583,061 =========== ========== ========== ========== ========== ASSET-LIABILITY GAP .............................. $(1,182,640) $ 403,014 $1,074,368 $ (294,742) DERIVATIVES AFFECTING INTEREST RATE SENSITIVITY: Pay fixed interest rate swaps .................. 150,000 (150,000) Receive fixed interest rate swaps Caps, floors, and collars ...................... 50,000 (50,000) ----------- ---------- TOTAL DERIVATIVES .......................... 200,000 (200,000) INTEREST RATE SENSITIVITY GAP .................... $ (982,640) $ 203,014 $1,074,368 $ (294,742) =========== ========== ========== ========== CUMULATIVE INTEREST RATE SENSITIVITY GAP ......... $ (982,640) $ (779,626) $ 294,742 $ 0 =========== ========== ========== ==========
21 23 simulation indicated a sharp decrease in interest rates of 275 basis points would have had a negative impact on net interest income while modest changes or an aggressive increase in interest rates would not have had a material impact on net interest earnings. Liquidity represents a bank's continuing ability to meet its funding needs, primarily deposit withdrawals, timely repayment of borrowings and other liabilities and funding of loan commitments. In addition to its level of liquid assets, many other factors affect a bank's ability to meet liquidity needs, including access to a variety of funding sources, capital position and general market conditions. Traditional sources of liquidity include proceeds from maturities of securities, repayment of loans and growth in core deposits. Federal funds purchased, repurchase agreements, FHLB advances and other short-term borrowed funds, as well as long-term debt instruments, supplement these traditional sources. Management believes funds obtainable from these sources is adequate to meet current liquidity requirements. One Valley generated $125.9 million of cash from operations in 1999, which compares to $67.6 million in 1998 and $74.8 million in 1997. Additional cash of $560.5 million was generated through net financing activities in 1999, which compares to $244.6 million in 1998 and $288.1 million in 1997. These proceeds, along with proceeds from the sale and maturity of securities, were used to fund loans and purchase securities during the year. Net cash used in investing activities totaled $489.0 million in 1999, which compares to $253.3 million in 1998 and $380.9 million in 1997. Details on the sources and uses of cash can be found in the Consolidated Statements of Cash Flows in the consolidated financial statements that follow this discussion. Capital Resources One Valley's average equity-to-asset ratio was a strong 9.18% in 1999, down slightly from the 9.88% during 1998, and the 9.86% in 1997. At year-end 1999, One Valley's primary capital ratio was 9.23% compared to 10.77% at year-end 1998. The Federal Reserve's risk-based capital guidelines and leverage ratio measure the capital adequacy of banking institutions. The risk-based capital guidelines weight balance sheet assets and off-balance sheet commitments by credit risk factors, thus eliminating disincentives for holding low-risk assets and requiring more capital for holding higher risk assets. At year-end 1999, One Valley's risk-adjusted capital-to-assets ratio was 14.0% compared to 15.6% at December 31, 1998. Both of these ratios are well above the minimum level of 8.0% prescribed for bank-holding companies of One Valley's size. The leverage ratio is a measure of total tangible equity to total tangible assets. One Valley's leverage ratio at December 31, 1999 was 8.2% compared to 9.0% at December 31, 1998. Both of these ratios are well above the minimum 3.0% and the Interest Sensitivity Simulation Analysis Table 11
AS OF DECEMBER 31, 1999 ANNUALIZED HYPOTHETICAL % INTEREST RATE SCENARIO CHANGE IN NET INTEREST INCOME ---------------------- ----------------------------- Up 300BP -4.39% Up 100BP -2.25% Flat (No Change) N/A Down 100BP 0.85% Down 250BP 1.18%
AS OF DECEMBER 31, 1998 ANNUALIZED HYPOTHETICAL % INTEREST RATE SCENARIO CHANGE IN NET INTEREST INCOME ---------------------- ----------------------------- Up 300BP -1.21% Flat (No Change) N/A Down -275BP -3.72%
22 24 4.0% to 5.0% prescribed by the Federal Reserve. These healthy ratios are the direct result of management's decision to maintain a strong capital position. The primary source of funds for dividends paid by One Valley to its shareholders is the dividends received from its subsidiary banks. Federal regulatory agencies impose restrictions on the payment of dividends and the transfer of assets from the banking subsidiaries to the holding company. These regulatory restrictions have not had an adverse impact on One Valley's dividend policy. Additional information concerning dividend restrictions is discussed in Note D to the consolidated financial statements. In February 1999, One Valley's Board of Directors (the Board) authorized the repurchase of 1.5 million shares of One Valley common stock. This purchase was completed by the end of the second quarter at a cost of $56.5 million. In July 1999, the Board authorized the repurchase of another 1.5 million shares of One Valley common stock. At year end, 70,700 shares of the July authorization had been purchased at a cost of $2.6 million. The repurchases have been halted and the Board rescinded authorization to repurchase shares, pending acquisition by BB&T. INCOME STATEMENT ANALYSIS Net Interest Income Net interest income, the amount by which interest generated from earning assets exceeds the expense associated with funding those assets, is One Valley's most significant component of earnings. Net interest income on a fully tax- equivalent basis was $244.3 million in 1999, up 6.7% over the $228.9 million in 1998. This follows an increase of 10.1% in 1998 over the 1997 level. When net interest income is presented on a fully tax-equivalent basis, interest income from tax-exempt earning assets is increased by the amount equivalent to the federal income taxes which would have been paid if this income were subject to the statutory federal tax rate of 35%. The increase in net interest income in 1999 is largely due to the 13.5% growth in average loans outstanding. One Valley's loan portfolio experienced growth in all major classifications during 1999, with commercial lending showing the greatest increase compared to last year. Funding of One Valley's loan growth came from a 6.4% increase in average deposits with the remainder from increased short and long-term borrowings. As shown in Table 12, Rate Volume Analysis, increases in the volume of earning assets in both 1999 and 1998 have provided a significant increase in net interest income. In 1999, the increase in the volume of earning assets increased interest income by $44.7 million. This increase was offset somewhat by decreases in interest yields on loans and investments due to the overall lower interest rate environment on average for the entire year. As a result, total interest income increased by $26.2 million in 1999 over 1998. Similarly in 1999, an increased volume of interest-bearing liabilities boosted interest expense by $24.6 million. However, a lower cost of interest- bearing liabilities reduced the overall increase in total interest expense to $10.8 million. The increase in total interest income exceeded the increase in overall interest expense by $15.4 million on a fully tax-equivalent basis in 1999 over 1998. In 1998, increases in volumes of interest sensitive assets and liabilities increased total interest income and total interest expense over the previous year. Yet a decline in yields in earning assets and interest-bearing liabilities partially reduced interest income and interest expense. As a result, net interest income grew by $20.9 million. Since 1997, even though net interest income increased due to higher volumes of earning assets, the lower overall interest rate environment and increased competition for deposits and other funds had a dampening effect on the net interest margin percentage on a fully tax-equivalent basis. The yield on all earning assets declined to 7.81% in 1999, down from the 8.10% realized in 1998, and the 8.29% realized during 1997. At the same time, the stiff competition for deposits and the use of borrowings to fund loan and investment growth prevented the cost of all funds from declining as significantly as the yield on earning assets. In 1999, the average cost of funds was 3.61%, down from the 3.77% in 1998, and the 3.81% in 1997. As a result, the net interest margin (net interest income divided by the sum of average earning - -------------- NET INTEREST INCOME INCREASED BY $14.5 MILLION IN 1999 - -------------- 23 25 NET INTEREST MARGIN Yield on Net Cost of Assets Margin Funds ------------------------------- 1994 7.84 4.85 2.99 1995 8.41 4.80 3.61 1996 8.34 4.63 3.71 1997 8.29 4.48 3.81 1998 8.10 4.33 3.77 1999 7.81 4.20 3.61 assets) in 1999 declined to 4.20%, down from the 4.33% and 4.48% earned in 1998 and 1997, respectively. It should be noted that the net interest margin percentage was negatively impacted in 1999 by the additional borrowings and cash levels maintained to meet potential customer cash and liquidity needs related to Y2K. If those factors were excluded from the calculation, the net interest margin percentage would have been 4.31%. The impact on net interest income from the preparations related to Y2K was immaterial. The Net Interest Margin graph shows One Valley's yield on earning assets, cost of all funds and net interest margin over the past six years. Further discussion of net interest income is included in the section of this report entitled "Balance Sheet Analysis." Non-interest Income and Expense Non-interest income is an important factor for improving profitability. Recognizing this importance, management continues to evaluate areas where non-interest income can be enhanced. As shown in Table 13, non-interest income increased by $7.9 million or 13.2% in 1999 compared to 1998, which follows a 23.3% increase in 1998 over 1997. The increase in 1999 was primarily due to growth in trust income, credit/debit card fees, service charges on deposit accounts, investment and insurance services fees, and miscellaneous income. In 1999, trust income totaled $14.0 million, a 19.6% or $2.3 million increase over 1998. This increase follows a 14.2% increase in 1998 over 1997. Trust revenues are increasing primarily due to new business over the past several years and favorable growth trends in the financial markets. Credit/debit card fee income increased by $2.1 million or 40.4% in 1999 and by $1.6 million or 43.5% in 1998 due to increased card usage by customers, and an expanding network of businesses using One Valley to process their merchant transactions. Deposit service charges increased by $1.6 million or 8.1% in 1999 and $3.9 million or 25.1% in 1998. In 1999, the increase in deposit service charges was due primarily to an increase in customer activity. The 1998 increase was due to the introduction of new Rate Volume Analysis of Changes in Interest Income and Expense Table 12
(Dollars in thousands) 1999 VS 1998 1998 VS 1997 INCREASE (DECREASE) INCREASE (DECREASE) IN NET INTEREST INCOME(*) IN NET INTEREST INCOME(*) ------------------------- ------------------------- VOLUME RATE TOTAL VOLUME RATE TOTAL ------ ------- ------- ------ -------- ------- EARNING ASSETS Loans: Taxable .................................. $40,188 $(14,725) $25,463 $44,502 $ (5,850) $38,652 Tax-exempt ............................... 1,306 (199) 1,107 (358) (80) (438) ------- -------- ------- ------- -------- ------- Total loans ............................ 41,494 (14,924) 26,570 44,144 (5,930) 38,214 Investment Securities: Taxable .................................. 1,554 (3,282) (1,728) 8,665 (3,987) 4,678 Tax-exempt ............................... 1,556 (62) 1,494 1,002 (397) 605 ------- -------- ------- ------- -------- ------- Total investment securities ............ 3,110 (3,344) (234) 9,667 (4,384) 5,283 Federal funds sold & other ................. 62 (154) (92) (340) 161 (179) ------- -------- ------- ------- -------- ------- Total earning assets ................... 44,666 (18,422) 26,244 53,471 (10,153) 43,318 ------- -------- ------- ------- -------- ------- INTEREST BEARING LIABILITIES Interest bearing deposits .................. 9,403 (11,051) (1,648) 14,353 (1,502) 12,851 Short-term borrowings ...................... 940 (2,424) (1,484) 10,242 133 10,375 Long-term borrowings ....................... 14,261 (294) 13,967 (587) (254) (841) ------- -------- ------- ------- -------- ------- Total interest bearing liabilities ..... 24,604 (13,769) 10,835 24,008 (1,623) 22,385 ------- -------- ------- ------- -------- ------- NET INTEREST EARNINGS ........................ $20,062 $ (4,653) $15,409 $29,463 $ (8,530) $20,933 ======= ======== ======= ======= ======== =======
* Fully taxable equivalent using the rate of 35%. Note - Changes to rate/volume are allocated to both rate and volume on a proportionate dollar basis. 24 26 products and a new fee structure for deposits, coupled with an increase in the customer base due to the 1998 acquisitions. Electronic banking revenue increased by $866,000 or 30.5% in 1999, largely due to increased ATM usage and a change in the fee structure. At December 31, 1999, One Valley had 269 ATM locations. Revenue from the investment and insurance services increased by $2.1 million or 72.6% in 1999 compared to $544,000 or 23.8% in 1998. One Valley offers these products to fulfill its commitment to provide integrated financial services to its customers. Other operating income increased by $2.0 million or 32.3% in 1999. This increase resulted from fees generated by official check processing, an increase in checkbook sales, and gains resulting from prepayment of loans acquired at a discount. Other operating income increased by $648,000 in 1998 partially due to the sale of a portion of One Valley's student loan portfolio. Real estate fees decreased by $2.4 million or 28.2% in 1999, which compares to a $2.5 million or 43.0% increase in 1998. Real estate loan volume and secondary market sales were extraordinarily high in 1998 due to refinancing activity initiated by a lower interest rate environment. Volume in 1997 and 1999 reflect more typical real estate activity levels. In 1999, One Valley realized $0.1 million in gains on securities sales. This compares to $1.1 million in gains realized in 1998 and $1.0 million in gains realized in 1997. These securities were sold as part of One Valley's management of its asset/liability position. Non-Interest Income and Expense Table 13
(Dollars in thousands) INCREASE (DECREASE) OVER PRIOR YEAR 1999 1998 1997 1999 1998 -------- -------- -------- ------------------ ------------------- AMOUNT PERCENT AMOUNT PERCENT -------- ------- -------- ------- SERVICE CHARGES AND OTHER OPERATING INCOME Trust income .................................... $ 13,957 $ 11,675 $ 10,228 $ 2,282 19.55 $ 1,447 14.15 Credit/debit card fees .......................... 7,422 5,286 3,684 2,136 40.41 1,602 43.49 Service charges on deposit accounts ............. 20,987 19,408 15,511 1,579 8.14 3,897 25.12 Electronic banking .............................. 3,710 2,844 2,350 866 30.45 494 21.02 Investment and insurance services ............... 4,885 2,831 2,287 2,054 72.55 544 23.79 Real estate loan processing & servicing fees .... 6,078 8,471 5,922 (2,393) (28.25) 2,549 43.04 Checkbook sales ................................. 2,657 2,259 2,168 398 17.62 91 4.20 Securities transactions ......................... 100 1,125 1,018 (1,025) (91.11) 107 10.51 Miscellaneous ................................... 8,382 6,334 5,686 2,048 32.33 648 11.40 -------- -------- -------- -------- ----- -------- ----- TOTAL NON-INTEREST INCOME ................... $ 68,178 $ 60,233 $ 48,854 $ 7,945 13.19 $ 11,379 23.29 ======== ======== ======== ======== ===== ======== ===== STAFF AND OTHER OPERATING EXPENSES Salaries & wages ................................ $ 69,434 $ 62,978 $ 57,247 $ 6,456 10.25 $ 5,731 10.01 Employee benefits ............................... 17,473 17,202 16,987 271 1.58 215 1.27 -------- -------- -------- -------- ----- -------- ----- Total staff expenses .......................... 86,907 80,180 74,234 6,727 8.39 5,946 8.01 Other Operating Expenses Advertising ................................... 3,811 4,175 4,083 (364) (8.72) 92 2.25 FDIC insurance ................................ 1,010 879 1,051 131 14.90 (172) (16.37) Occupancy, net ................................ 10,020 8,555 7,614 1,465 17.12 941 12.36 Equipment ..................................... 12,789 11,606 9,377 1,183 10.19 2,229 23.77 Outside data processing ....................... 10,810 10,012 9,115 798 7.97 897 9.84 Taxes not on income ........................... 4,788 4,151 3,382 637 15.35 769 22.74 Supplies and postage .......................... 9,774 8,842 7,404 932 10.54 1,438 19.42 All other ..................................... 34,139 33,544 28,059 595 1.77 5,485 19.55 -------- -------- -------- -------- ----- -------- ----- Total other operating expenses ................ 87,141 81,764 70,085 5,377 6.58 11,679 16.66 -------- -------- -------- -------- ----- -------- ----- TOTAL NON-INTEREST EXPENSE .................. $174,048 $161,944 $144,319 $ 12,104 7.47 $ 17,625 12.21 ======== ======== ======== ======== ==== ======== =====
25 27 NET OVERHEAD RATIO Net Overhead -------- 1994 2.44% 1995 2.32% 1996 2.28% 1997 2.08% 1998 1.95% 1999 1.82% EFFICIENCY RATIO Efficiency Ratio ---------- 1993 63.91% 1994 59.07% 1995 57.15% 1996 58.15% 1997 56.43% 1998 56.24% 1999 55.72% Just as management continues to evaluate areas where non-interest income can be enhanced, it strives to find ways to improve the efficiency of its operations and thus reduce operating costs. In 1999, One Valley's efficiency continued to improve as demonstrated by its declining net overhead ratio. Operating costs increased 7.5% or $12.1 million to accommodate the growth of One Valley's financial services franchise. Yet, when coupled with increases in non-interest income and the growth in earning assets, One Valley's net overhead ratio (non- interest expense less non-interest income excluding securities transactions to average earning assets) improved considerably to 1.82% from 1.95% in 1998. A lower net overhead ratio means more of the net interest margin flows through as net income. Over the past five years, net overhead has grown by a compound rate of only 3.5% whereas net interest income has grown by 6.6%. Total non-interest expense increased by $12.1 million or 7.5% in 1999 from 1998, which compares to an increase of $17.6 million or 12.2% in 1998 versus 1997. The 1999 increase was impacted by the full year operation of Summit versus only five months in 1998. Total staff costs increased by 8.4% in 1999, the result of normal salary increases as well as a 5.4% increase in employees resulting from the growth of One Valley's financial services franchise. Additional information on employee benefits is discussed in Note N to the consolidated financial statements. Advertising expenses decreased by $364,000 or 8.7% in 1999 as compared to 1998, again related to the 1998 expansion in the Virginia market. This follows an increase in 1998 of 2.2%. FDIC insurance expense increased by $131,000 or 14.9% in 1999 resulting from One Valley's expanded deposit base, as compared to a $172,000 or 16.4% decrease in 1998 over 1997. The decrease in 1998 was due to the lowering of deposit insurance rates. Occupancy, equipment and data processing expenses have increased over the last two years largely due to facilities and equipment modernization and the expansion of One Valley's banking network. Net occupancy expense increased by $1.5 million or 17.1% in 1999 over 1998. This compares to a $941,000 or 12.4% increase in 1998 versus 1997. Equipment expense increased by $1.2 million or 10.2% over 1998 compared to a $2.2 million or 23.8% increase in 1998 over 1997. Outside data processing costs increased by $798,000 or 8.0% in 1999 due to expanding operations, versus an $897,000 or 9.8% increase in 1998 over 1997. Taxes not on income increased by $637,000 or 15.4% in 1999, which followed a 1998 increase of $769,000 or 22.7%. These increases are largely due to the central Virginia affiliate's charter change to a national bank and the addition of Summit in the second half of 1998. In Virginia, banks are subject to an equity-based state franchise tax but are exempt from state income tax. In 1997 and earlier years, the central Virginia affiliate was a thrift institution subject to state income tax. Supplies and postage expense increased $932,000 or 10.5% in 1999 as compared to $1.4 million or 19.4% in 1998, primarily related to additional mailings, forms, supplies and courier service for One Valley's expanded Virginia operations. Other expenses remained relatively flat with an increase of $595,000 or 1.8%. This compares to an increase of $5.5 million or 19.6% in 1998. The increase in 1998 was primarily due to increased intangible amortization resulting from the Wachovia branch purchase, and a general increase in costs due to the expanded branch network. An analysis of the allowance for loan losses and related provision for loan losses is included in the Loan Portfolio section of the Balance Sheet Analysis of the report. Applicable Income Taxes Income tax expense in 1999 was $39.4 million compared to $35.9 million in 1998 and $33.1 million in 1997. The increase in 1999 was primarily due to an increase in pretax earnings. One Valley's effective tax rate was 32.8% in 1999 down from 33.0% in 1998 and 34.1% in 1997. Additional information regarding income taxes is contained in Note M to the consolidated financial statements. 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 26 28 increased operating costs that 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 constitute 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 pricing for its services and to improve net interest income by maintaining an effective asset/liability mix. Management's efforts to meet these goals are described in other sections of this report. SUMMARY RESULTS OF OPERATIONS FOURTH QUARTER 1999 Net income for the three months ended December 31, 1999 was $19.7 million, a slight increase from the $19.5 million earned during the fourth quarter of 1998. For the fourth quarter of 1999, diluted earnings per share rose to $0.59, a 7.3% increase from the $0.55 reported for the fourth quarter of 1998. Net interest income rose by 2.0% to $58.4 million when compared to the same three months of 1998. Average earning assets increased 9.1%, primarily due to a 9.9% increase in average loans outstanding. At the same time, average interest-bearing liabilities increased 12.5% primarily due to a $451.0 million increase in long-term borrowings. In April, One Valley borrowed $200.0 million from the Federal Home Loan Bank to provide adequate liquidity for customers' potential year-end cash needs. During the fourth quarter additional cash was also kept available for these anticipated needs. The additional borrowing and liquidity lowered One Valley's net interest margin by 14 basis points in the fourth quarter and 11 basis points for the year. Average deposits increased 2.3% in fourth quarter 1999 versus an increase of 15.4% in fourth quarter 1998 over 1997. This higher growth rate in 1998 is a result of the acquisition activity discussed in earlier sections of this report. The fourth quarter provision for loan losses decreased by $242,000 in 1999 from 1998. This compares to an increase of $342,000 in 1998 when compared to fourth quarter of 1997. These fluctuations are consistent with the 9.4% decrease in loan loss provisions for the full year as computed under One Valley's loan loss reserve adequacy analysis methodology as fully described in previous sections of this report. Non-interest income increased 4.7% in fourth quarter 1999. One Valley's Trust income, service charges on deposits, and other service charges and fees combined for a 19.8% or $2.4 million increase. The increase was primarily due to increased market value of assets held in Trust, revenue from deposit accounts, brokerage and insurance commissions, and credit/debit card revenue. The increase was partially offset by a decline in real estate loan servicing income and other operating income. Non-interest expense increased by 3.0% during the same period as a result of One Valley's expanded branch network, technology upgrades, increased debit/credit card processing and other operating costs. Net overhead for the quarter increased by $371,000 or 1.4% compared to the same period one year ago. Additional quarterly financial data is provided in Note T to the consolidated financial statements. YEAR 2000 COMPLIANCE One Valley completed its Year 2000 readiness project on schedule and within the estimated budget of $5.4 million (which did not include salaries of all personnel involved but did include estimates of the time and corresponding salary allocations of those with primary responsibility for the project). One Valley's systems and the systems of its third party service providers operated without interruption over the Year 2000 date change. One Valley is continuing to monitor and verify the continued operation of its and its vendors' systems through several key dates in the Year 2000, consistent with the guidance of the federal bank regulators. - --------------- NET OVERHEAD DECREASED TO 1.82% OF AVERAGE EARNING ASSETS - --------------- 27 29 Consolidated Balance Sheets ONE VALLEY BANCORP, INC. AND SUBSIDIARIES (Dollars in thousands)
DECEMBER 31 1999 1998 ----------- ----------- ASSETS Cash and due from banks ................................................ $ 214,535 $ 155,226 Interest-bearing deposits in other banks ............................... 5,720 3,150 Federal funds sold ..................................................... 185,590 50,000 ----------- ----------- Cash and cash equivalents ............................................ 405,845 208,376 Securities: Available-for-sale, at fair value .................................... 1,288,853 1,307,825 Held-to-maturity (fair value approximated $278,792 and $287,441 at December 31, 1999 and 1998) ..................................... 286,330 278,267 Total loans ............................................................ 4,391,626 3,991,121 Allowance for loan losses .............................................. (54,156) (52,272) ----------- ----------- Net loans ............................................................ 4,337,470 3,938,849 Premises and equipment ................................................. 99,661 102,863 Accrued interest receivable ............................................ 42,012 40,916 Other assets ........................................................... 122,890 86,484 ----------- ----------- Total assets ......................................................... $ 6,583,061 $ 5,963,580 =========== =========== LIABILITIES Deposits: Non-interest bearing ................................................. $ 553,370 $ 570,664 Interest bearing ..................................................... 4,020,065 3,982,224 ----------- ----------- Total deposits ..................................................... 4,573,435 4,552,888 Short-term borrowings: Federal funds purchased .............................................. 12,662 36,410 Securities sold under agreements to repurchase and other ............. 837,608 693,349 ----------- ----------- Total short-term borrowings ........................................ 850,270 729,759 Long-term borrowings ................................................... 541,824 35,480 Other liabilities ...................................................... 58,803 49,920 ----------- ----------- Total liabilities .................................................... 6,024,332 5,368,047 SHAREHOLDERS' EQUITY Preferred stock - $10 par value; authorized 1,000,000 shares; none issued and outstanding Common stock - $10 par value; authorized 70,000,000 shares; 39,449,061 and 39,135,180 shares issued at December 31, 1999 and 1998, including 6,022,746 and 4,392,546 shares in treasury ................. 394,491 391,352 Capital surplus ........................................................ 96,817 94,157 Retained earnings ...................................................... 247,394 200,174 Accumulated other comprehensive income, net of deferred income taxes ... (24,274) 6,450 Treasury stock ......................................................... (155,699) (96,600) ----------- ----------- Total shareholders' equity ........................................... 558,729 595,533 ----------- ----------- Total liabilities and shareholders' equity ........................... $ 6,583,061 $ 5,963,580 =========== ===========
See notes to consolidated financial statements. 28 30 Consolidated Statements of Income ONE VALLEY BANCORP, INC. AND SUBSIDIARIES (Dollars in thousands, except per share data)
YEAR ENDED DECEMBER 31 1999 1998 1997 -------- -------- -------- INTEREST INCOME Interest and fees on loans: Taxable .............................................. $340,635 $315,172 $276,520 Tax-exempt ........................................... 3,425 2,705 2,990 -------- -------- -------- Total .............................................. 344,060 317,877 279,510 Interest and dividends on securities: Taxable .............................................. 86,408 88,136 83,458 Tax-exempt ........................................... 13,367 12,396 12,003 -------- -------- -------- Total .............................................. 99,775 100,532 95,461 Other .................................................. 1,518 1,610 1,789 -------- -------- -------- Total interest income .............................. 445,353 420,019 376,760 INTEREST EXPENSE Deposits ............................................... 159,229 160,877 148,026 Short-term borrowings .................................. 34,357 35,841 25,466 Long-term borrowings ................................... 16,544 2,577 3,418 -------- -------- -------- Total interest expense ............................. 210,130 199,295 176,910 -------- -------- -------- NET INTEREST INCOME ...................................... 235,223 220,724 199,850 PROVISION FOR LOAN LOSSES ................................ 9,120 10,063 7,531 -------- -------- -------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES ...... 226,103 210,661 192,319 OTHER INCOME Trust income ........................................... 13,957 11,675 10,228 Service charges on deposit accounts .................... 20,987 19,408 15,511 Real estate loan processing and servicing fees ......... 6,078 8,471 5,922 Other service charges and fees ......................... 20,746 14,271 11,216 Securities gains ....................................... 100 1,125 1,018 Other .................................................. 6,310 5,283 4,959 -------- -------- -------- Total other income ................................. 68,178 60,233 48,854 OTHER EXPENSES Salaries and employee benefits ......................... 86,907 80,180 74,234 Net occupancy .......................................... 10,020 8,555 7,614 Equipment .............................................. 12,789 11,606 9,377 Outside data processing ................................ 10,810 10,012 9,115 Other .................................................. 53,522 51,591 43,979 -------- -------- -------- Total other expenses ............................... 174,048 161,944 144,319 -------- -------- -------- INCOME BEFORE INCOME TAXES ............................... 120,233 108,950 96,854 Applicable income taxes .................................. 39,409 35,905 33,054 -------- -------- -------- NET INCOME ............................................... $ 80,824 $ 73,045 $ 63,800 ======== ======== ======== Net income per common share: Basic .................................................. $ 2.39 $ 2.19 $ 2.00 Diluted ................................................ $ 2.37 $ 2.15 $ 1.95 Average common shares outstanding (in thousands): Basic .................................................. 33,810 33,356 31,921 Diluted ................................................ 34,164 33,940 32,686
See notes to consolidated financial statements. 29 31 Consolidated Statements of Shareholders' Equity ONE VALLEY BANCORP, INC. AND SUBSIDIARIES (Dollars in thousands, except per share data)
ACCUMULATED OTHER COMMON CAPITAL RETAINED COMPREHENSIVE TREASURY STOCK SURPLUS EARNINGS INCOME STOCK TOTAL --------- ------- -------- -------- --------- -------- BALANCES AT JANUARY 1, 1997 ................................... $ 298,493 $66,652 $183,226 $ 2,065 $ (67,378) $483,058 Comprehensive income: Net income ................................................ 63,800 63,800 Other comprehensive income, net of deferred income taxes of $2,495: Unrealized gains on securities of $4,473, net of reclassification adjustment for gains included in net income of $611 ................................. 3,862 3,862 ------- Total comprehensive income ................................ 67,662 Purchase of treasury stock (856,396 shares) ................. (27,717) (27,717) Five-for-four stock split in the form of a 25% stock dividend ........................................ 62,960 (62,960) Stock options exercised (303,698 shares) and adjustment for fractional shares .......................... 3,015 1,783 4,798 Cash dividends on One Valley shares ($.80 per share) ........ (22,009) (22,009) Cash dividends on FFVA shares ............................... (2,005) (2,005) FFVA repurchase of treasury stock ........................... (1,807) 140 (2,322) (3,989) Allocated/earned FFVA ESOP and MSBP shares .................. 3,810 3,810 Exercise of FFVA stock options .............................. 47 (5) 42 Issuance of common stock to FFVA MSBP plan .................. 598 (598) --------- ------- -------- -------- --------- -------- BALANCES AT DECEMBER 31, 1997 ................................. 363,306 71,782 157,730 5,927 (95,095) 503,650 Comprehensive income: Net income ................................................ 73,045 73,045 Other comprehensive income, net of deferred income taxes of $225: Unrealized gains on securities of $1,198, net of reclassification adjustment for gains included in net income of $675 ................................. 523 523 -------- Total comprehensive income ................................ 73,568 Purchase of treasury stock (45,700 shares) .................. (1,505) (1,505) Stock options exercised (269,519 shares) and adjustment for fractional shares .......................... 2,695 841 3,536 Cash dividends on One Valley shares ($.90 per share) ........ (30,601) (30,601) Issuance of common stock (1,826,600 shares) ................. 18,264 2,260 20,524 FFVA treasury shares reissued (708,600 shares) .............. 7,087 19,274 26,361 --------- ------- -------- -------- --------- -------- BALANCES AT DECEMBER 31, 1998 ................................. 391,352 94,157 200,174 6,450 (96,600) 595,533 Comprehensive income: Net income ................................................ 80,824 80,824 Other comprehensive income, net of deferred income taxes of $19,614: Unrealized losses on securities of $30,784, net of reclassification adjustment for gains included in net income of $60 .................................. (30,724) (30,724) -------- Total comprehensive income ................................ 50,100 Purchase of treasury stock (1,630,200 shares) ............... (59,099) (59,099) Stock options exercised (313,881 shares) and adjustment for fractional shares .......................... 3,139 2,660 5,799 Cash dividends on One Valley shares ($1.00 per share) ....... (33,604) (33,604) --------- ------- -------- -------- --------- -------- BALANCES AT DECEMBER 31, 1999 ................................. $ 394,491 $96,817 $247,394 $(24,274) $(155,699) $558,729 ========= ======= ======== ======== ========= ========
See notes to consolidated financial statements. 30 32 Consolidated Statements of Cash Flows ONE VALLEY BANCORP, INC. AND SUBSIDIARIES (Dollars in thousands)
YEAR ENDED DECEMBER 31 1999 1998 1997 --------- --------- --------- OPERATING ACTIVITIES Net income ................................................................. $ 80,824 $ 73,045 $ 63,800 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses .............................................. 9,120 10,063 7,531 Depreciation ........................................................... 12,033 10,365 9,013 Amortization, net of accretion ......................................... 670 3,530 3,371 Deferred income tax (benefit) expense .................................. (836) (2,372) 842 Net gains from sales of assets ......................................... (65) (407) (1,003) Loans originated for sale .............................................. (97,137) (261,199) (111,837) Proceeds from loans sold ............................................... 136,165 231,333 112,823 Net change in accrued interest receivable .............................. (1,096) (377) (581) Net change in accrued interest payable ................................. 5,556 (3,112) 3,182 Net change in other assets and other liabilities ....................... (19,290) 6,714 (12,385) --------- --------- --------- Net cash provided by operating activities ............................ 125,944 67,583 74,756 INVESTING ACTIVITIES Proceeds from sales of available-for-sale securities ....................... 51,845 53,045 92,165 Proceeds from maturities of available-for-sale securities .................. 711,233 616,627 278,877 Purchases of available-for-sale securities ................................. (791,798) (617,443) (522,292) Proceeds from maturities of held-to-maturity securities .................... 23,990 42,916 37,740 Purchases of held-to-maturity securities ................................... (30,210) (62,431) (86,621) Net cash received in purchase of subsidiary ................................ 118,371 Net increase in loans ...................................................... (445,167) (390,634) (171,993) Purchases of premises and equipment ........................................ (8,866) (13,732) (8,781) --------- --------- --------- Net cash used in investing activities .................................... (488,973) (253,281) (380,905) FINANCING ACTIVITIES Net change in deposits ..................................................... 20,547 154,144 129,805 Net change in federal funds purchased ...................................... (23,748) 13,829 5,303 Net change in other short-term borrowings .................................. 144,259 92,450 184,103 Repayment of long-term borrowings .......................................... (4,306) (13,622) (9,017) Proceeds from long-term borrowings ......................................... 510,650 25,000 Proceeds from issuance of common stock ..................................... 5,799 29,895 4,840 Purchase of treasury stock ................................................. (59,099) (1,505) (27,895) Cash dividends ............................................................. (33,604) (30,601) (24,014) --------- --------- --------- Net cash provided by financing activities ................................ 560,498 244,590 288,125 --------- --------- --------- Increase (decrease) in cash and cash equivalents ............................. 197,469 58,892 (18,024) Cash and cash equivalents at beginning of year ............................... 208,376 149,484 167,508 --------- --------- --------- Cash and cash equivalents at end of year ..................................... $ 405,845 $ 208,376 $ 149,484 ========= ========= =========
See notes to consolidated financial statements. 31 33 Notes to Consolidated Financial Statements ONE VALLEY BANCORP, INC. AND SUBSIDIARIES DECEMBER 31, 1999 (Dollars in thousands, except per share data) NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES The accounting and reporting policies of One Valley Bancorp, Inc. and its subsidiaries (One Valley) conform to accounting principles generally accepted in the United States and to general practices within the banking industry. The preparation of the financial statements in conformity with accounting principles generally accepted in the United States 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. The following is a summary of the more significant accounting and reporting policies. PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts of One Valley Bancorp, Inc. and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated. CASH AND CASH EQUIVALENTS One Valley considers cash and due from banks, interest-bearing deposits in other banks, and federal funds sold as cash and cash equivalents. SECURITIES Management determines the appropriate classification of securities at the time of purchase. Debt securities are classified as held-to-maturity when One Valley has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. Debt securities not classified as held-to-maturity are classified as available-for-sale. Available-for-sale securities are stated at fair value with the unrealized gains and losses, net of deferred income taxes, reported in other comprehensive income. Unrealized gains and losses represent the difference between the estimated fair value and amortized cost of available-for-sale securities. The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts, which are recognized as adjustments to interest income. The specific identification method is used to determine realized gains and losses on sales of securities. LOANS HELD FOR SALE Mortgage loans originated and held for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. MORTGAGE SERVICING RIGHTS The value of mortgage servicing rights, regardless of how obtained, is capitalized and amortized in proportion to and over the period of estimated net servicing revenues. Impairment of mortgage servicing rights is assessed quarterly based on the fair value of those rights. To determine fair value, One Valley estimates the present value of future cash flows incorporating various assumptions including servicing income, cost of servicing, discount rates, prepayment speeds, and default rates. For purposes of determining impairment, the mortgage servicing rights are stratified based upon predominant risk characteristics of the underlying loans. DERIVATIVE FINANCIAL INSTRUMENTS As part of managing its interest rate risk, One Valley periodically uses financial instruments such as interest rate swaps and cap contracts, frequently referred to as derivative financial instruments. These derivative instruments provide an off-balance sheet method of managing earnings fluctuations due to changes in interest rates. As with any financial instrument, derivatives have inherent risks, primarily market and credit risk. Market risk includes the risk of gains and losses that result from changes in interest rates. Credit risk is the risk that a counterparty to a derivative contract with an unrealized gain fails to perform according to the terms of the agreement. One Valley monitors these risks through its asset/liability committee policy. ALLOWANCE FOR LOAN LOSSES In determining the adequacy of the allowance for loan losses, as well as the appropriate provision for loan losses, management takes into consideration the results of internal review procedures, historical loan loss experience, an assessment of the effect of current economic conditions on the loan portfolio, the financial condition of the borrower and such other factors which, in management's judgment, deserve recognition. Impaired loans, primarily consisting of non-accrual 32 34 SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES NOTE A - CONTINUED and restructured loans, are evaluated based on the discounted value of expected future cash flows or on the estimated fair value of the collateral if repayment of the loan is expected to be provided by the collateral. In management's judgment, the allowance for loan losses is maintained at a level adequate to absorb losses in the loan portfolio. LOAN FEES AND COSTS Loan origination and commitment fees and direct loan origination costs are being recognized as collected and incurred. The use of this method of recognition does not produce results that are materially different from results which would have been produced if such costs and fees were deferred and amortized as an adjustment of the loan yield over the life of the related loan. PREMISES AND EQUIPMENT Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally on the straight-line method over the estimated useful lives of the assets. INCOME TAXES Income taxes are provided using the liability method in which deferred income taxes (included in other assets) are provided for temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements at the statutory tax rate. REVENUE RECOGNITION Interest income on loans, amortization of unearned income, and accretion of discounts are computed by methods which generally result in level rates of return on principal amounts outstanding. The accrual of interest income generally is discontinued when the contractual payment of principal or interest has become 90 days past due. When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed and interest accrued in prior years is charged against the allowance for loan losses. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral exceeds the principal balance and accrued interest, and the loan is in the process of collection. Interest received on nonaccrual loans is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of the remaining unpaid principal. Generally, a loan is restored to accrual status when it is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the collectibility of the total contractual principal and interest is no longer in doubt. STOCK-BASED COMPENSATION One Valley has nonqualified and incentive stock option plans for certain key employees and directors. Because the exercise price of One Valley's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized. 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. 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 354,000, 584,000, and 765,000 in 1999, 1998, and 1997. SEGMENT REPORTING One Valley's only defined business segment is community banking as One Valley primarily evaluates its performance and allocates resources based on the financial information of its community banking operations. As a community bank, One Valley offers its customers a full range of products through traditional and in-store branches, offices, ATMs, telephones, personal computers, and other delivery channels throughout various geographic areas. The consolidated financial information presented in the financial statements represents the consolidated financial information of One Valley's community banking segment. 33 35 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES CONCLUDED NEW ACCOUNTING PRONOUNCEMENTS In June 1998, the FASB issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. The provisions of this statement require that derivative instruments be carried at fair value on the balance sheet and allows hedge accounting when specific criteria are met. Any changes in fair value or cash flow that represent the ineffective portion of a hedge are required to be recognized in earnings and cannot be deferred. For derivative instruments not accounted for as hedges, changes in fair value are required to be recognized in earnings. The provisions of this statement become effective for quarterly and annual reporting beginning January 1, 2001. The impact of adopting the provisions of this statement on One Valley's financial position or results of operations, subsequent to the effective date, is not currently estimable and will depend on the financial position of One Valley and the nature and purpose of the derivative instruments in use by management at that time. - -------------------------------------------------------------------------------- NOTE B PENDING MERGER On February 7, 2000, One Valley and BB&T Corp. (BB&T), based in Winston-Salem, North Carolina, announced an agreement whereby BB&T will acquire One Valley in a transaction that is expected to close during the third quarter of 2000. Under the terms of the agreement, One Valley shareholders will receive 1.28 shares of BB&T's common stock for each share of One Valley's common stock. This transaction is expected to be accounted for as a pooling-of-interests. - -------------------------------------------------------------------------------- NOTE C RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS Bank subsidiaries are required to maintain average balances with the Federal Reserve Bank. The average amount of those balances for the year ended December 31, 1999, was approximately $16,103. - -------------------------------------------------------------------------------- NOTE D RESTRICTIONS ON SUBSIDIARY DIVIDENDS The primary source of funds for the dividends paid by One Valley Bancorp, Inc. is dividends received from its subsidiary banks. Dividends paid by the subsidiary banks are subject to restrictions by banking regulations. The most restrictive provision requires regulatory approval if dividends declared in any year exceed the year's retained net profits, as defined, plus the retained net profits of the two preceding years. At December 31, 1999, the retained net profits available for distribution to One Valley Bancorp, Inc. as dividends without regulatory approval approximated $44,350. 34 36 MERGERS AND ACQUISITIONS NOTE E In 1998, One Valley acquired certain Virginia branches from the Wachovia Corporation in a purchase transaction and Summit Bankshares, Inc. in an immaterial pooling of interests. As a result of these transactions, One Valley acquired $274 million in loans and $464 million in deposits. The balances and operations of these acquisitions are included in the financial statements of One Valley from the dates of acquisition and did not materially impact One Valley's financial position, results of operations, or cash flows for any period. Prior to 1998 One Valley acquired other financial institutions accounted for using the purchase method of accounting. The purchase price of these acquisitions and the branch acquisition noted above were allocated to the identifiable tangible and intangible assets acquired based upon their fair value at the acquisition date. Intangible assets representing the present value of future net income to be earned from deposits of acquired banks are being amortized on an accelerated basis over a ten-year period. Deposit intangibles, included in other assets, approximated $3,900 and $5,800 at December 31, 1999 and 1998. Deposit intangible amortization approximated $1,900 in 1999, $2,000 in 1998, and $1,100 in 1997. The excess of purchase price over the fair market value of assets of subsidiary banks acquired (goodwill) is being amortized on a straight-line basis over periods ranging from 15 to 25 years. Goodwill, included in other assets, approximated $45,100 and $49,000 at December 31, 1999 and 1998. Goodwill amortization approximated $3,900 in 1999, $3,400 in 1998, and $1,400 in 1997. - -------------------------------------------------------------------------------- SHAREHOLDER RIGHTS PLAN NOTE F One Valley has a Shareholder Protection Rights Plan (the Plan). The Plan provides that each share of common stock carries with it one right. The rights would be exercisable only if a person or group, as defined, acquired 10% or more of One Valley's common stock, or after a person commences a tender offer for such stock. If a person or group acquires 10% or more of One Valley's common stock, holders of rights, other than the 10% holder, could acquire shares of One Valley's common stock at half price or the Board could exchange each such right for one share of common stock. In addition, under certain circumstances, holders of rights could acquire shares of common stock of the 10% holder at half price. However, these rights are not and will not become exercisable by the holders as a result of executing the merger agreement with BB&T or consummation of the merger with BB&T. 35 37 NOTE G SECURITIES The following is a summary of available-for-sale and held-to-maturity securities:
Available-for-Sale --------------------------------------------------- Gross Unrealized Estimated Amortized Fair Cost Gains Losses Value --------------------------------------------------- December 31, 1999 U.S. Treasury securities and obligations of U.S. government agencies and corporations ................ $ 787,905 $ 132 $(29,215) $ 758,822 Obligations of states and political subdivisions .......... Mortgage-backed securities ........ 379,576 1,159 (10,377) 370,358 Other securities .................. 160,981 396 (1,704) 159,673 ---------- ------- -------- ---------- Total securities ................ $1,328,462 $ 1,687 $(41,296) $1,288,853 ========== ======= ======== ========== December 31, 1998 U.S. Treasury securities and obligations of U.S. government agencies and corporations ................ $ 845,155 $ 6,541 $ (1,687) $ 850,009 Obligations of states and political subdivisions .......... Mortgage-backed securities ........ 324,538 5,103 (173) 329,468 Other securities .................. 127,694 807 (153) 128,348 ---------- ------- -------- ---------- Total securities ................ $1,297,387 $12,451 $ (2,013) $1,307,825 ========== ======= ======== ========== December 31, 1997 U.S. Treasury securities and obligations of U.S. government agencies and corporations ................ $ 857,928 $ 4,322 $ (793) $ 861,457 Obligations of states and political subdivisions .......... Mortgage-backed securities ........ 298,231 5,984 (295) 303,920 Other securities .................. 50,899 494 (21) 51,372 ---------- ------- -------- ---------- Total securities ................ $1,207,058 $10,800 $ (1,109) $1,216,749 ========== ======= ======== ==========
Held-to-Maturity --------------------------------------------------- Gross Unrealized Estimated Amortized -------------------- Fair Cost Gains Losses Value --------------------------------------------------- December 31, 1999 U.S. Treasury securities and obligations of U.S. government agencies and corporations ................ Obligations of states and political subdivisions .......... $286,002 $1,286 $(8,824) $278,464 Mortgage-backed securities ........ Other securities .................. 328 328 -------- ------ ------- -------- Total securities ................ $286,330 $1,286 $(8,824) $278,792 ======== ====== ======= ======== December 31, 1998 U.S. Treasury securities and obligations of U.S. government agencies and corporations ................ Obligations of states and political subdivisions .......... $277,929 $9,537 $ (363) $287,103 Mortgage-backed securities ........ Other securities .................. 338 338 -------- ------ ------- -------- Total securities ................ $278,267 $9,537 $ (363) $287,441 ======== ====== ======= ======== December 31, 1997 U.S. Treasury securities and obligations of U.S. government agencies and corporations ................ $ 46,443 $ 476 $ (28) $ 46,891 Obligations of states and political subdivisions .......... 237,290 6,557 (127) 243,720 Mortgage-backed securities ........ 62,756 389 (192) 62,953 Other securities .................. 5,783 22 5,805 -------- ------ ------- -------- Total securities ................ $352,272 $7,444 $ (347) $359,369 ======== ====== ======= ========
Gross realized gains and losses on available-for-sale securities approximated $412 and $312 in 1999, $1,125 and $0 in 1998, and $1,130 and $112 in 1997. The amortized cost and estimated fair value of debt securities at December 31, 1999, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Available-for-Sale Held-to-Maturity ------------------------------ ---------------------------- Estimated Estimated Amortized Fair Amortized Fair Cost Value Cost Value ---------- ---------- --------- --------- Due in one year or less ................. $ 209,468 $ 207,616 $ 31,507 $ 31,474 Due after one year through five years ... 502,124 485,002 134,921 134,284 Due after five years through ten years .. 287,838 274,122 117,296 110,592 Due after ten years ..................... 270,797 263,756 2,278 2,114 ---------- ---------- -------- -------- 1,270,227 1,230,496 286,002 278,464 Other ................................... 58,235 58,357 328 328 ---------- ---------- -------- -------- Total securities ...................... $1,328,462 $1,288,853 $286,330 $278,792 ========== ========== ======== ========
At December 31, 1999 and 1998, securities carried at approximately $904,594 and $754,000 were pledged to secure public deposits, repurchase agreements, and for other purposes as required or permitted by law. 36 38 LOANS NOTE H Loans are summarized as follows:
December 31 1999 1998 ---------- ---------- Commercial, financial and agricultural ............. $ 528,013 $ 433,935 Real estate: Revolving home equity ............................ 235,641 226,216 Single family residential ........................ 1,997,177 1,851,470 Apartment buildings and complexes ................ 106,854 103,349 Commercial ....................................... 710,514 618,958 Construction ..................................... 108,813 97,175 Installment loans to individuals ................... 658,783 625,646 Other .............................................. 45,831 34,372 ---------- ---------- Total loans net of unearned income ............. 4,391,626 3,991,121 Less allowance for loan losses ..................... 54,156 52,272 ---------- ---------- Loans--net ..................................... $4,337,470 $3,938,849 ========== ==========
One Valley originates and sells fixed rate mortgage loans primarily to governmental agencies on a servicing retained basis. Interest rates are determined at the date of the commitment to sell the loans and the commitment period generally ranges from 60 to 90 days. At December 31, 1999 and 1998, One Valley held loans for sale of approximately $6,353 and $44,105 and had commitments to originate and sell loans of approximately $5,461 and $36,771, respectively. The mortgage loan portfolio serviced by One Valley for the benefit of others approximated $839,432, $863,457, and $890,327 at December 31, 1999, 1998, and 1997. Custodial escrow balances maintained in connection with the foregoing loan servicing and One Valley's own mortgage loan portfolio were approximately $7,992 and $8,862 at December 31, 1999 and 1998, respectively. One Valley and its subsidiaries have granted loans to officers and directors of One Valley and its subsidiaries and to their associates. Related party loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and did not involve more than normal risk of collectibility. The following presents the activity with respect to related party loans aggregating $60 or more to any one related party:
1999 1998 --------- -------- Balance, January 1 ....... $ 85,282 $ 86,140 Additions ................ 30,595 24,455 Amount collected ......... (16,774) (13,647) Other changes ............ 8,575 (11,666) --------- -------- Balance, December 31 ..... $ 107,678 $ 85,282 ========= ========
Other changes represent changes in the composition of related parties at the various affiliates. - -------------------------------------------------------------------------------- ALLOWANCE FOR LOAN LOSSES NOTE I Changes in the allowance for loan losses for each of the three years in the period ended December 31, 1999, were as follows:
1999 1998 1997 ------- ------- ------- Balance, January 1 ................ $52,272 $45,048 $45,055 Charge-offs ....................... (9,392) (8,695) (9,837) Recoveries ........................ 2,156 2,027 2,299 ------- ------- ------- Net charge-offs ................. (7,236) (6,668) (7,538) Provision for loan losses ......... 9,120 10,063 7,531 Balance of acquired subsidiaries... 3,829 ------- ------- ------- Balance, December 31 .............. $54,156 $52,272 $45,048 ======= ======= =======
Impaired loans approximated $6,960 and $3,700 (of which $2,300 and $2,100 were on a nonaccrual basis) at December 31, 1999 and 1998. Included in these amounts are $3,190 and $780 of impaired loans for which the related allowance for loan losses is $510 and $310, and $3,770 and $2,920 of impaired loans that, as a result of write-downs or being well secured, do not have an allowance for loan losses. The average recorded investment in impaired loans during the years ended December 31, 1999, 1998 and 1997, was approximately $7,100, $4,600 and $8,500. For the years ended December 31, 1999, 1998 and 1997, One Valley recognized interest income on those impaired loans of $790, $340, and $560. The amount of interest income recognized in 1999, 1998, and 1997 on those impaired loans using the cash basis method of income recognition was $310, $150, and $360. 37 39 NOTE J DEPOSITS Included in interest-bearing deposits are various time deposit products of approximately $2,167,900 at December 31, 1999. The scheduled maturities are as follows: 2000 - $1,422,300; 2001 - $518,300; 2002 - $150,400; 2003 - $44,800; 2004 - $28,900; and $3,200 thereafter. The aggregate amount of time deposits exceeding $100 at December 31, 1999, approximated $385,600. As of December 31, 1999 and 1998, One Valley had deposits from related parties of approximately $67,500 and $77,200. Interest paid on deposits, short-term borrowings, and long-term borrowings approximated $204,574 in 1999, $200,012 in 1998, and $172,511 in 1997. - -------------------------------------------------------------------------------- NOTE K PREMISES AND EQUIPMENT The major categories of premises and equipment and accumulated depreciation are summarized as follows:
December 31 1999 1998 --------- --------- Land ........................... $ 22,138 $ 22,559 Buildings and improvements ..... 102,721 101,022 Equipment ...................... 67,826 64,939 --------- --------- Total ........................ 192,685 188,520 Less accumulated depreciation .. (93,024) (85,657) --------- --------- Premises and equipment--net .. $ 99,661 $ 102,863 ========= =========
One Valley has entered into noncancelable lease agreements (operating leases) for certain premises and equipment and outside data processing services. The minimum annual rental commitment under these lease and service agreements, exclusive of taxes and other charges payable by the lessees, is: 2000 - $6,580; 2001 - $4,970; 2002 - $2,250; 2003 - $890 and 2004 - $740 with $3,410 of commitments extending beyond 2004. Total expense under these lease agreements, including cancelable and noncancelable leases, was $10,453 in 1999, $9,212 in 1998, and $8,300 in 1997. - -------------------------------------------------------------------------------- NOTE L SHORT-TERM AND LONG-TERM BORROWINGS Federal funds purchased and securities sold under agreements to repurchase represent borrowings with maturities primarily from overnight to 90 days. The securities underlying the repurchase agreements are under the control of One Valley. Additional details regarding short-term borrowings are set forth below:
Federal Repurchase Funds Agreements Purchased and Other --------- ---------- 1999 Average amount outstanding during year ................. $ 50,133 $683,047 Maximum amount outstanding at any month-end ............ 119,281 837,608 Weighted average interest rate: During year ................. 5.01% 4.66% End of year ................. 5.99% 5.00% 1998 Average amount outstanding during year ................. $ 47,912 $666,894 Maximum amount outstanding at any month-end ............ 91,781 875,880 Weighted average interest rate: During year ................. 5.47% 4.99% End of year ................. 4.94% 4.45% 1997 Average amount outstanding during year ................. $ 33,806 $497,631 Maximum amount outstanding at any month-end ............ 69,801 609,426 Weighted average interest rate: During year ................. 5.46% 4.97% End of year ................. 5.72% 5.06%
38 40 Short-term and Long-term Borrowings NOTE L-CONTINUED Several of One Valley's banking subsidiaries are members of the Federal Home Loan Bank (FHLB). A benefit of membership in the FHLB is the availability of short-term and long-term borrowings, in the form of collateralized advances. The advances are collateralized by U.S. Treasury and agency securities, other debt securities, and residential and multi-family mortgage loans. At December 31, 1999, approximately $82,808 of U.S. Treasury and other debt securities were pledged as collateral. The available lines of credit for short-term and long-term borrowings, at prevailing market interest rates, as of December 31, 1999, approximated $1,037,000. Long-term borrowings of $541,824 and $35,480 at December 31, 1999 and 1998, primarily consist of FHLB advances. The estimated maturities are as follows: 2000 - $308,341; 2001 - $111,034; 2002 - $91,240; 2003 - $3,958; 2004 - $6,788 and $20,463 thereafter. The weighted average interest rate of these advances at December 31, 1999, was 5.46%. - -------------------------------------------------------------------------------- INCOME TAXES NOTE M The income tax provisions (benefits) included in the consolidated statements of income are summarized as follows:
1999 1998 1997 -------- -------- -------- Current: Federal ..................... $ 37,005 $ 34,568 $ 28,282 State ....................... 3,240 3,709 3,930 Deferred Federal and State .... (836) (2,372) 842 -------- -------- -------- Total ......................... $ 39,409 $ 35,905 $ 33,054 ======== ======== ========
Income taxes related to securities gains approximated $40, $450, and $407 in 1999, 1998, and 1997. One Valley made income tax payments of approximately $38,020 in 1999, $32,874 in 1998, and $34,193 in 1997. Significant components of One Valley's deferred tax assets and liabilities are as follows:
December 31 1999 1998 ------- ------- Deferred tax assets: Allowance for loan losses ............ $20,877 $20,078 Available-for-sale securities......... 15,626 -- Accrued employee benefits ............ 1,106 2,224 Other ................................ 4,566 4,472 ------- ------- Total deferred tax assets........... 42,175 26,774 Deferred tax liabilities: Loans................................. 6,460 6,685 Available-for-sale securities......... -- 3,988 Premises and equipment................ 2,741 3,059 Other................................. 1,418 1,936 ------- ------- Total deferred tax liabilities...... 10,619 15,668 ------- ------- Net deferred tax assets........... $31,556 $11,106 ======= =======
- -------------------------------------------------------------------------------- A reconciliation between the amount of reported income tax expense and the amount computed by applying the statutory federal income tax rate to income before income taxes is as follows:
1999 1998 1997 ----------------- ----------------- ----------------- Amount Percent Amount Percent Amount Percent ------- ------- ------ ------- ------ ------- Computed tax at statutory federal rate................. $42,082 35.0% $38,133 35.0% $33,796 35.0% Plus: State income taxes, net of federal tax benefits.. 1,979 1.7 2,306 2.1 2,666 2.7 ------- ---- ------- ---- ------- ---- 44,061 36.7 40,439 37.1 36,462 37.7 Increase (decrease) in taxes resulting from: Tax-exempt interest.................................. (5,018) (4.2) (4,554) (4.2) (4,535) (4.7) Other--net........................................... 366 .3 20 0.1 1,127 1.1 ------- ---- ------- ---- ------- ---- Actual tax expense................................. $39,409 32.8% $35,905 33.0% $33,054 34.1% ======= ==== ======= ==== ======= ====
39 41 NOTE N EMPLOYEE BENEFIT PLANS One Valley has a defined benefit pension plan covering substantially all of its employees. One Valley also has a defined benefit postretirement plan covering all employees who qualify for and elect to retire with a normal or early retirement benefit under the defined benefit pension plan. This plan provides medical and dental benefits. The following table summarizes the benefit obligation and plan asset activity for each of the plans.
Pension Benefits Other Benefits 1999 1998 1999 1998 ------- ------- ------- ------- Change in fair value of plan assets: Balance at beginning of measurement period......... $61,080 $54,090 Actual return on plan assets....................... 5.083 7,891 Employer contribution.............................. 5,593 1,702 Benefits paid...................................... (3,951) (1,478) Settlement......................................... (1,125) Balance at end of measurement period................. 67,805 61,080 Change in benefit obligation: Balance at beginning of measurement period......... 61,460 55,161 $ 5,198 $ 6,322 Service cost....................................... 2,708 2,632 315 252 Interest cost...................................... 4,158 3,904 377 342 Actuarial (gain) loss.............................. (7,371) 2,356 (495) (1,492) Benefits paid...................................... (3,951) (1,478) (252) (248) Settlement......................................... (1,115) Plan change........................................ (636) 22 ------- ------- ------- ------- Balance at end of measurement period................. 56,368 61,460 5,143 5,198 ------- ------- ------- ------- Funded status........................................ 11,437 (380) (5,143) (5,198) Unamortized prior service cost....................... 1,444 2,320 173 185 Unrecognized net actuarial (gain) loss............... (1,088) 6,184 (1,921) (1,493) Unrecognized net (asset) obligation.................. (1,191) (1,453) 2,840 3,059 ------- ------- ------- ------- Prepaid (accrued) benefit cost....................... $10,602 $ 6,671 $(4,051) (3,447) ======= ======= ======= ======= Weighted-average assumptions as of December 31: Discount rate...................................... 7.75% 6.75% 7.75% 6.75% Expected return on plan assets..................... 8.50% 8.50% Rate of compensation increase...................... 4.75% 4.75% 4.75% 4.75%
Plan assets of the defined benefit pension plan consist primarily of cash, listed stocks, and U.S. government and agency obligations. The following table presents the components of net defined benefit pension and post-retirement benefit plans costs:
Pension Benefits Other Benefits 1999 1998 1997 1999 1998 1997 ------ ------ ------ ---- ---- ---- Components of net periodic benefit cost: Service cost........................ $2,708 $2,632 $2,358 $315 $252 $260 Interest cost....................... 4,158 3,904 3,543 377 342 440 Expected return on plan assets...... (5,359) (4,533) (3,275) Net amortization and deferral....... 153 425 95 178 147 231 ------ ------ ------ ---- ---- ---- Benefit cost...................... $1,660 $2,428 $2,721 $870 $741 $931 ====== ====== ====== ==== ==== ====
For measurement purposes, an 8.00% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2001. The rate was assumed to decrease gradually to 5.75% for 2002 and remain at that level thereafter. The health care trend rate assumption does not have a significant effect on the medical plan; therefore, a one percentage point change in the trend rate is not material in the determination of the accumulated postretirement benefit obligation or the ongoing expense. FFVA had an Employee Stock Option Plan (ESOP) covering all full-time employees, over the age of 21, with at least one year of service, and a Management Stock Bonus Plan (MSBP). The ESOP and MSBP were terminated in 1998. The total amount charged to compensation expense related to the ESOP and MSBP for the year ended December 31, 1997, was $825 and $2,077, respectively. 40 42 STOCK OPTION PLANS NOTE O Pursuant to its nonqualified and incentive stock option plans, One Valley has an aggregate maximum of 1,500,000 shares of common stock reserved for issuance at December 31, 1999 and 1998. All options granted have 10-year terms and vest immediately. The fair value for the options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
1999 1998 1997 ---- ---- ---- Risk-free interest rate................... 5.2% 4.5% 5.7% Dividend yields........................... 2.9% 2.5% 3.4% Volatility factor......................... 0.196 0.193 0.187 Weighted-average life of options.......... 3 yrs. 3 yrs. 4 yrs.
Pro forma information has not been presented herein because the effect of applying the fair value method to One Valley's stock-based awards in 1999, 1998 and 1997 results in net income and net income per common share that are not materially different from amounts reported herein. A summary of One Valley's stock option activity and related information for the years ended December 31 follows:
1999 1998 1997 ---------------------- --------------------- --------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ---------------------- --------------------- --------------------- Outstanding at beginning of year......... 1,182,674 $19.59 1,290,056 $16.12 1,495,055 $13.73 Granted.................................. 168,000 37.78 161,900 38.18 167,500 30.60 Exercised................................ (313,881) 13.26 (269,282) 13.17 (372,499) 13.03 --------- --------- --------- Outstanding at end of year............... 1,036,793 24.52 1,182,674 19.59 1,290,056 16.12 ========= ========= ========= Exercisable at end of year............... 1,036,793 24.52 1,182,674 19.59 1,290,056 16.12 ========= ===== ========= ===== ========= ===== Weighted-average fair value of options granted during the year................ $5.66 $5.83 $4.96
Additional information regarding stock options outstanding and exercisable at December 31, 1999, is provided in the following table:
Options Outstanding and Exercisable ----------------------------------- Weighted Average Weighted Remaining Average Contractual Exercise Prices Shares Life (Years) Price - ---------------- -------------------------------------------------------- $7.47 to $9.45 39,853 3 $ 8.90 $11.91 to $16.96 321,210 7 12.89 $18.16 to $22.40 193,766 6 19.33 $30.60 to $38.22 481,964 9 35.65 - ---------------- -------------------------------------------------------- $7.45 to $38.22 1,036,793 8 $24.52 ================ ========================================================
41 43 NOTE P REGULATORY MATTERS One Valley and its banking subsidiaries are subject to various regulatory capital requirements administered by the banking regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on One Valley's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, One Valley and each of its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of One Valley and each of its banking subsidiaries' assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. One Valley and each of its banking subsidiaries' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require One Valley and each of its banking subsidiaries to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). One Valley and each of its banking subsidiaries met all capital adequacy requirements to which they were subject at December 31, 1999. As of December 31, 1999, the most recent notifications from the banking regulatory agencies categorized One Valley and each of its banking subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, One Valley and each of its banking subsidiaries must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since these notifications that management believes have changed the One Valley's category. The following table sets forth regulatory capital ratios for One Valley and its significant banking subsidiaries, One Valley Bank, National Association and One Valley Bank-Central Virginia, NA.
Well 1999 1998 Capitalized Minimum Amount Ratio Amount Ratio Ratio Ratio -------------------- ------------------- --------------------- Total Capital (to Risk Weighted Assets) One Valley................................. $586,400 14% $580,900 16% > 10% 8% One Valley Bank, National Association...... 180,200 12 158,600 12 > 10 8 One Valley Bank-Central Virginia, NA....... 101,700 14 95,700 15 > 10 8 Tier I Capital (to Risk Weighted Assets) One Valley................................. $534,000 13% $534,200 14% > 6% 4% One Valley Bank, National Association...... 161,200 10 141,800 11 > 6 4 One Valley Bank-Central Virginia, NA....... 92,800 13 87,900 14 > 6 4 Tier I Capital (to Average Assets) One Valley................................. $534,000 9% $534,200 9% > 5% 4% One Valley Bank, National Association...... 161,200 7 141,800 7 > 5 4 One Valley Bank-Central Virginia, NA....... 92,800 8 87,900 7 > 5 4
42 44 PARENT COMPANY CONDENSED FINANCIAL INFORMATION NOTE Q CONDENSED BALANCE SHEETS
December 31 1999 1998 -------- -------- Assets: Cash................................................. $ -- $ 269 Repurchase agreement with a subsidiary bank.......... 29,007 38,912 Securities: Available-for-sale................................. 41,790 83,990 Held-to-maturity................................... 6,746 6,754 Premises and equipment............................... 1,285 1,279 Investment in subsidiaries: Banks.............................................. 484,679 479,768 Non banks.......................................... 7,719 7,243 Other assets......................................... 14,565 6,155 -------- -------- Total assets....................................... $585,791 $624,370 ======== ======== Liabilities and Shareholders' equity: Liabilities: Short-term borrowings................................ $ 8,459 $ 10,968 Other liabilities.................................... 18,603 17,869 -------- -------- Total liabilities.................................. 27,062 28,837 Shareholders' equity................................. 558,729 595,533 -------- -------- Total liabilities and shareholders' equity......... $585,791 $624,370 ======== ========
CONDENSED STATEMENTS OF INCOME
Year Ended December 31 1999 1998 1997 ------- ------- ------- Income: Dividends from bank subsidiaries...................... $50,360 $86,750 $58,130 Other income.......................................... 8,304 7,856 6,134 ------- ------- ------- Total income........................................ 58,664 94,606 64,264 Expenses: Salaries and employee benefits........................ 10,509 9,387 7,727 Other expenses........................................ 6,793 8,741 8,487 Interest expense...................................... 712 501 479 ------- ------- ------- Total expenses...................................... 18,014 18,629 16,693 ------- ------- ------- Income before income taxes and equity in undistributed earnings of subsidiaries.............. 40,650 75,977 47,571 Applicable income tax benefits........................ (4,688) (5,016) (3,716) ------- ------- ------- Income before equity in undistributed earnings of subsidiaries..................................... 45,338 80,993 51,287 Equity in undistributed earnings (excess dividends) of subsidiaries.......................... 35,486 (7,948) 12,513 ------- ------- ------- Net income.......................................... $80,824 $73,045 $63,800 ======= ======= =======
CONDENSED STATEMENTS OF CASH FLOWS
Year Ended December 31 1999 1998 1997 -------- -------- -------- Operating Activities: Net income............................................ $ 80,824 $ 73,045 $ 63,800 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization....................... 148 458 324 (Equity in undistributed earnings) excess dividends of subsidiaries........................ (35,486) 7,948 (12,513) Net change in other assets and other liabilities...................................... (1,926) 1,424 1,471 -------- -------- -------- Net cash provided by operating activities........... 43,560 82,875 53,082 Investing Activities: Net decrease in loans receivable...................... 14,750 6,250 Purchase of securities: Available-for-sale.................................. (18,050) (75,759) (8,715) Held-to-maturity.................................... (6,756) Proceeds from maturities and sale of securities: Available-for-sale.................................. 59,216 3,370 4,083 Held-to-maturity.................................... 3,779 Other investments..................................... (5,000) Investment in subsidiaries............................ (12,668) Purchase of equipment................................. (487) (722) (387) -------- -------- -------- Net cash provided by (used in)investing activities.. 35,679 (74,006) 1,231 Financing Activities: Net change in short-term borrowings................... (2,509) 4,863 312 Proceeds from issuance of common stock................ 5,799 29,895 4,840 Purchase of treasury stock............................ (59,099) (1,505) (27,895) Cash dividends........................................ (33,604) (30,601) (24,014) Other................................................. (1,808) -------- -------- -------- Net cash (used in) provided by financing activities................................ (89,413) 2,652 (48,565) -------- -------- -------- (Decrease) increase in cash and cash equivalents...... (10,174) 11,521 5,748 Cash and cash equivalents at beginning of year........ 39,181 27,660 21,912 -------- -------- -------- Cash and cash equivalents at end of year.............. $ 29,007 $ 39,181 $ 27,660 ======== ======== ========
43 45 NOTE R FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by One Valley in estimating its fair value disclosures for financial instruments: CASH AND CASH EQUIVALENTS The carrying values of cash and cash equivalents approximate their fair values. SECURITIES Fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. LOANS The fair values of fixed rate commercial, mortgage, and consumer loans are estimated using discounted cash flow analyses at interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. ACCRUED INTEREST The carrying value of accrued interest approximates its fair value. DEPOSITS The fair values of demand deposits (i.e., interest and non-interest bearing checking, regular savings, and other types of money market demand accounts) are, by definition, equal to their carrying values. Fair values of certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities of time deposits. FASB Statement No. 107 defines the fair value of demand deposits as the amount payable on demand and prohibits adjusting fair value for any value derived from retaining those deposits for an unexpected future period of time (commonly referred to as a deposit base intangible). Accordingly, the deposit base intangible is not considered in the estimated fair value of total deposits at December 31, 1999 and 1998. SHORT-TERM BORROWINGS The carrying values of federal funds purchased and securities sold under agreements to repurchase approximate their fair values. LONG-TERM BORROWINGS The fair values of long-term borrowings are estimated using discounted cash flow analyses based on One Valley's current incremental borrowing rates for similar types of borrowing arrangements. OFF-BALANCE SHEET DERIVATIVE FINANCIAL INSTRUMENTS The fair values for the derivative financial instruments were computed using discounted cash flows at current interest rates. Unrealized gains and losses on derivative financial instruments at December 31, 1999 and 1998, were not material. COMMITMENTS The fair values of commitments (standby letters of credit and loan commitments) are estimated based on fees currently charged to enter into similar agreements, taking into consideration the remaining terms of the agreements and the counterparties' credit standing. The estimated fair value of these commitments at December 31, 1999 and 1998, approximates their carrying value. --------------------------------------------------------------------- The fair values of One Valley's financial instruments are summarized below:
December 31, 1999 December 31, 1998 -------------------------- ------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- --------- ---------- Cash and cash equivalents............... $ 405,845 $ 405,845 $ 208,376 $ 208,376 Securities.............................. 1,575,183 1,567,645 1,586,092 1,595,266 Loans................................... 4,337,470 4,290,605 3,938,849 3,969,731 Accrued interest receivable............. 42,012 42,012 40,916 40,916 Deposits................................ 4,573,435 4,558,109 4,552,888 4,563,730 Short-term borrowings................... 850,270 849,453 729,759 730,041 Long-term borrowings.................... 541,824 537,422 35,480 35,806 Accrued interest payable................ 24,117 24,117 18,561 18,561
44 46 COMMITMENTS, CONTINGENT LIABILITIES, AND DERIVATIVES NOTE S In the normal course of business, One Valley offers certain financial products to its customers to aid them in meeting their requirements for liquidity and credit enhancement. Generally accepted accounting principles require that these products be accounted for as contingent liabilities and, accordingly, they are not reflected in the accompanying consolidated financial statements. One Valley's exposure to loss in the event of nonperformance by the counterparty for commitments to extend credit and standby letters of credit is the contract or notional amounts of these instruments. Management does not anticipate any material losses as a result of these commitments and contingent liabilities. Following is a discussion of these commitments and contingent liabilities. STANDBY LETTERS OF CREDIT These agreements are used by One Valley's customers as a means of improving their credit standing in their dealings with others. Under these agreements, One Valley guarantees certain financial commitments in the event that its customers are unable to satisfy their obligations. One Valley has issued standby letters of credit of approximately $25,780 as of December 31, 1999. Management conducts regular reviews of these commitments on an individual customer basis, and the results are considered in assessing the adequacy of One Valley's allowance for loan losses. LOAN COMMITMENTS As of December 31, 1999, One Valley had commitments outstanding to extend credit at prevailing market rates approximating $782,790. These commitments generally require the customers to maintain certain credit standards. The amount of collateral obtained, if deemed necessary by One Valley upon extension of credit, is based on management's credit evaluation of the customer. Collateral held varies but may include accounts receivable, inventory, property, plant and equipment, and income producing commercial properties. LOANS SOLD WITH RECOURSE One Valley is contingently liable on certain loans previously sold by an acquired company. At December 31, 1999, there was approximately $13,060 in outstanding loans sold with recourse. Pursuant to the terms of an Indemnity Agreement with the Federal Deposit Insurance Corporation (FDIC), successor to the obligations of the Resolution Trust Corporation, the FDIC is obligated to indemnify any and all costs, losses, liabilities and expenses, including legal fees, resulting from certain third-party claims. DERIVATIVES
Remaining Notional Pay Rate Receive Strike Life Amounts (1) Rate (1) Rate (Months) ---------- -------- ------- ------ --------- Interest Rate Swaps Pay fixed rate swaps.............. $ 150,000 5.61% 6.22% 43 Receive fixed rate swaps.......... 200,000 5.51 5.21 3 Interest Rate Cap................. 50,000 6.00% 19
(1) The weighted average rates are those in effect in the specified contracts at December 31, 1999. The contribution of derivatives to net interest income for the years ended December 31, 1999 and 1998, was not material. 45 47 NOTE T QUARTERLY FINANCIAL DATA (UNAUDITED) Quarterly financial data for 1999 and 1998 is summarized below:
1999 1998 Three Months Ended Three Months Ended March 31 June 30 Sept 30 Dec 31 March 31 June 30 Sept 30 Dec 31 -------- -------- -------- -------- -------- -------- -------- -------- Interest income............ $105,966 $111,281 $113,089 $115,017 $100,086 $104,290 $108,237 $107,406 Interest expense........... 48,111 51,351 54,071 56,597 48,113 49,372 51,669 50,141 -------- -------- -------- -------- -------- -------- -------- -------- Net interest income...... 57,855 59,930 59,018 58,420 51,973 54,918 56,568 57,265 Provision for loan losses.. 2,116 2,339 2,325 2,340 2,594 2,294 2,593 2,582 -------- -------- -------- -------- -------- -------- -------- -------- Net interest income after provision for loan losses 55,739 57,591 56,693 56,080 49,379 52,624 53,975 54,683 Other income, excluding securities gains......... 16,254 17,235 17,880 16,709 13,807 14,417 15,061 15,823 Securities transactions.... 403 -- (303) -- 537 186 266 136 Other expenses............. 42,541 43,983 43,659 43,865 38,267 40,161 40,908 42,608 -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes. 29,855 30,843 30,611 28,924 25,456 27,066 28,394 28,034 Applicable income taxes.... 9,912 10,214 10,091 9,192 8,945 9,047 9,409 8,504 -------- -------- -------- -------- -------- -------- -------- -------- Net income............... $ 19,943 $ 20,629 $ 20,520 $ 19,732 $ 16,511 $ 18,019 $ 18,985 $ 19,530 ======== ======== ======== ======== ======== ======== ======== ======== Average shares outstanding: Basic.................... 34,569 33,876 33,429 33,399 31,836 32,754 34,058 34,736 Diluted.................. 34,940 34,248 33,736 33,688 32,553 33,434 34,635 35,252 Per share data: Net income: Basic.................. $ .58 $ .61 $ .61 $ .59 $ .52 $ .55 $ .56 $ .56 Diluted................ .57 .60 .61 .59 .51 .54 .55 .55 Dividends................ .24 .24 .26 .26 .21 .21 .24 .24 Market Price: High................... 35.13 40.00 39.38 36.75 38.81 40.13 36.31 34.00 Low.................... 29.88 34.00 33.50 29.63 33.75 33.25 29.50 28.75
46 48 ----------- REPORT OF INDEPENDENT AUDITORS ----------- The Board of Directors and Shareholders One Valley Bancorp, Inc. We have audited the accompanying consolidated balance sheets of One Valley Bancorp, Inc. and subsidiaries (One Valley) as of December 31, 1999 and 1998, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of One Valley's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the 1997 consolidated financial statements of FFVA Financial Corporation and subsidiary (FFVA) which statements reflect total income constituting 11% of the 1997 consolidated total. Those statements were audited by other auditors whose report has been furnished to us, and our opinion, insofar as it relates to data included for FFVA, is based solely on the report of the other auditors. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and, for 1997, the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of One Valley Bancorp, Inc. and subsidiaries at December 31, 1999 and 1998, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States. Charleston, West Virginia January 18, 2000, except for Note B, the date as to which is February 7, 2000 47 49 Six-Year Net Interest Income Summary ONE VALLEY BANCORP, INC. AND SUBSIDIARIES (Dollars in thousands)
1999 1998 1997 1996 1995 1994 % OF % OF % OF % OF % OF % OF TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL INTEREST INTEREST INTEREST INTEREST INTEREST INTEREST $ INCOME $ INCOME $ INCOME $ INCOME $ INCOME $ INCOME ------------- ------------- -------------- ------------- ------------- --------------- Interest Income(*): Loans: Taxable.................. 340,635 75.0 315,172 73.6 276,520 71.8 262,354 72.7 242,174 74.1 210,775 73.3 Tax-exempt............... 5,269 1.1 4,162 1.0 4,600 1.2 4,328 1.2 3,774 1.1 3,618 1.3 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total loans............ 345,904 76.1 319,334 74.6 281,120 73.0 266,682 73.9 245,948 75.2 214,393 74.6 Securities Taxable.................. 86,408 19.0 88,136 20.6 83,458 21.7 75,956 21.1 62,813 19.2 56,526 19.6 Tax-exempt............... 20,565 4.6 19,071 4.4 18,466 4.8 17,040 4.7 15,941 4.9 15,497 5.4 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total securities....... 106,973 23.6 107,207 25.0 101,924 26.5 92,996 25.8 78,754 24.1 72,023 25.0 Funds sold & other......... 1,518 0.3 1,610 0.4 1,789 0.5 947 0.3 2,253 0.7 1,037 0.4 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total interest income.. 454,395 100.0 428,151 100.0 384,833 100.0 360,625 100.0 326,955 100.0 287,453 100.0 Interest Expense: Deposits................... 159,229 35.0 160,877 37.5 148,026 38.5 138,247 38.3 123,753 37.9 99,115 34.5 Short-term borrowings...... 34,357 7.6 35,841 8.4 25,466 6.6 21,076 5.9 15,851 4.8 9,380 3.3 Long-term borrowings....... 16,544 3.6 2,577 0.6 3,418 0.9 1,144 0.3 688 0.2 1,185 0.4 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total interest expense. 210,130 46.2 199,295 46.5 176,910 46.0 160,467 44.5 140,292 42.9 109,680 38.2 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Tax equivalent net interest income........ 244,265 53.8 228,856 53.5 207,923 54.0 200,158 55.5 186,663 57.1 177,773 61.8 Tax equivalent adjustment.... 9,042 2.0 8,132 1.9 8,073 2.1 7,479 2.1 6,900 2.1 6,690 2.3 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Net interest income.......... 235,223 51.8 220,724 51.6 199,850 51.9 192,679 53.4 179,763 55.0 171,083 59.5 ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== SUMMARY OF AVERAGE RATES EARNED & PAID(*) Taxable loans................ 8.25% 8.64% 8.82% 8.87% 9.03% 8.54% Tax-exempt loans............. 9.33 9.78 9.95 9.89 11.11 10.51 Net loans.................. 8.37 8.77 8.97 9.02 9.19 8.71 Taxable securities........... 6.17 6.41 6.72 6.66 6.37 5.72 Tax-exempt securities........ 7.96 7.99 8.16 8.32 8.52 8.80 Total securities........... 6.45 6.64 6.94 6.91 6.71 6.19 Funds sold & deposits........ 4.88 5.39 4.91 4.47 5.85 2.60 Total earning assets....... 7.81% 8.10% 8.29% 8.34% 8.41% 7.84% Time & savings deposits...... 3.98 4.26 4.31 4.23 4.15 3.46 Short-term borrowings........ 4.69 5.02 4.99 4.90 5.08 3.67 Long-term borrowings......... 5.40 6.02 6.53 5.21 3.62 5.17 Total interest cost........ 4.17 4.40 4.42 4.31 4.24 3.49 Total cost of all funds.... 3.61 3.77 3.81 3.71 3.61 2.99 Net interest margin...... 4.20% 4.33% 4.48% 4.63% 4.80% 4.85%
(*) Interest income and yields are computed on a fully taxable equivalent basis using the rate of 35%. 48 50 Six-Year Operating Income Summary ONE VALLEY BANCORP, INC. AND SUBSIDIARIES (Dollars in thousands, except per share data)
1999 1998 1997 1996 1995 1994 % OF % OF % OF % OF % OF % OF ADJUSTED ADJUSTED ADJUSTED ADJUSTED ADJUSTED ADJUSTED OPERATING OPERATING OPERATING OPERATING OPERATING OPERATING $ INCOME $ INCOME $ INCOME $ INCOME $ INCOME $ INCOME ------------- ------------- -------------- ------------- ------------- ------------- Interest income............. 445,353 86.7 420,019 87.5 376,760 88.5 353,146 89.3 320,055 89.2 280,763 88.2 Interest expense............ 210,130 40.9 199,295 41.5 176,910 41.6 160,467 40.5 140,292 39.1 109,680 34.5 ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- Net interest income......... 235,223 45.8 220,724 46.0 199,850 46.9 192,679 48.8 179,763 50.1 171,083 53.7 Provision for loan losses... 9,120 1.8 10,063 2.1 7,531 1.8 5,264 1.3 5,887 1.6 5,388 1.7 ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- Net interest income after provision for loan losses. 226,103 44.0 210,661 43.9 192,319 45.1 187,415 47.5 173,876 48.5 165,695 52.0 Other Income: Trust Department income... 13,957 2.7 11,675 2.4 10,228 2.4 9,322 2.4 8,203 2.3 7,892 2.5 Service charges on deposit accounts........ 20,987 4.1 19,408 4.0 15,511 3.7 14,934 3.8 14,109 3.9 11,441 3.6 Other service charges and fees........ 26,824 5.2 22,742 4.8 17,138 4.0 14,275 3.6 12,346 3.5 13,671 4.3 Other operating income.... 6,310 1.3 5,283 1.1 4,959 1.2 3,744 0.9 3,826 1.1 5,319 1.7 Securities transactions... 100 0.0 1,125 0.2 1,018 0.2 (162) (0.0) 144 0.0 (849 (0.3) ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- Total other income...... 68,178 13.3 60,233 12.5 48,854 11.5 42,113 10.7 38,628 10.8 37,474 11.8 Operating Expenses: Salaries & benefits....... 86,907 16.9 80,180 16.7 74,234 17.4 70,408 17.8 67,022 18.7 67,079 21.0 Occupancy expense......... 10,020 2.0 8,555 1.8 7,614 1.8 7,380 1.9 6,777 1.9 6,937 2.2 Equipment expense......... 12,789 2.5 11,606 2.4 9,377 2.2 9,683 2.4 9,233 2.6 8,468 2.7 External computer......... 10,810 2.1 10,012 2.1 9,115 2.1 6,632 1.7 6,073 1.6 5,981 1.9 Other expense............. 53,522 10.4 51,591 10.7 43,979 10.3 46,881 11.9 39,570 11.0 39,187 12.4 ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- Total operating expenses 174,048 33.9 161,944 33.7 144,319 33.8 140,984 35.7 128,675 35.8 127,652 40.2 ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- Income before tax........... 120,233 23.4 108,950 22.7 96,854 22.8 88,544 22.5 83,829 23.5 75,517 23.6 Applicable income taxes..... 39,409 7.7 35,905 7.5 33,054 7.8 29,926 7.6 28,249 7.9 24,603 7.7 ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- ------- ---- Net income.................. 80,824 15.7 73,045 15.2 63,800 15.0 58,618 14.9 55,580 15.6 50,914 15.9 ======= ==== ======= ==== ======= ==== ======= ==== ======= ==== ======= ====
(*) Adjusted operating income equals interest income plus other income.
PER SHARE SUMMARY 1999 1998 1997 1996 1995 1994 -------------------------------------------------------------------------------------------- Net income: Basic.................. 2.39 2.19 2.00 1.80 1.69 1.54 Diluted................ 2.37 2.15 1.95 1.76 1.67 1.53 Cash dividends........... 1.00 0.90 0.80 0.74 0.66 0.60 Stock dividends.......... 0 0 25% 25% 0 0 Basic average shares..... 33,810,000 33,356,000 31,921,000 32,600,000 32,934,000 33,059,000 Diluted average shares... 34,164,000 33,940,000 32,686,000 33,221,000 33,203,000 33,219,000
49 51 Six-Year Average Balance Sheet Summary ONE VALLEY BANCORP, INC. AND SUBSIDIARIES (Daily averages in thousands)
1999 1998 1997 1996 1995 1994 % OF % OF % OF % OF % OF % OF $ TOTAL $ TOTAL $ TOTAL $ TOTAL $ TOTAL $ TOTAL -------------- -------------- -------------- -------------- -------------- -------------- ASSETS Loans: Taxable.................... 4,129,529 66 3,648,141 65 3,134,255 63 2,959,033 64 2,682,862 64 2,468,354 63 Tax-exempt................. 56,481 1 42,563 1 46,208 1 43,740 1 33,977 1 34,430 1 --------- --- --------- --- --------- --- --------- --- --------- --- --------- --- Total loans.............. 4,186,010 67 3,690,704 66 3,180,463 64 3,002,773 65 2,716,839 65 2,502,784 64 Less: Allowance for losses................... 53,837 1 49,635 1 45,311 1 44,612 1 41,946 1 40,275 1 --------- --- --------- --- --------- --- --------- --- --------- --- --------- --- Total loans-net.......... 4,132,173 66 3,641,069 65 3,135,152 63 2,958,161 64 2,674,893 64 2,462,509 63 Investment Securities: Taxable.................... 1,399,457 23 1,374,913 24 1,241,684 25 1,140,759 25 986,821 24 988,366 25 Tax-exempt................. 258,224 4 238,694 4 226,223 5 204,742 4 187,180 4 176,079 4 --------- --- --------- --- --------- --- --------- --- --------- --- --------- --- Total securities......... 1,657,681 27 1,613,607 28 1,467,907 30 1,345,501 29 1,174,001 28 1,164,445 29 Federal funds sold & other... 31,078 1 29,889 1 36,401 1 21,176 0 38,540 1 39,833 1 --------- --- --------- --- --------- --- --------- --- --------- --- --------- --- Total earning assets..... 5,820,932 94 5,284,565 94 4,639,460 94 4,324,838 93 3,887,434 93 3,666,787 93 Other assets................. 397,076 6 363,601 6 306,045 6 301,069 7 281,439 7 276,161 7 --------- --- --------- --- --------- --- --------- --- --------- --- --------- --- Total assets............. 6,218,008 100 5,648,166 100 4,945,505 100 4,625,907 100 4,168,873 100 3,942,948 100 ========= === ========= === ========= === ========= === ========= === ========= === LIABILITIES & SHAREHOLDERS' EQUITY Interest Bearing Liabilities: Time & savings deposits.... 4,000,380 64 3,772,657 67 3,436,380 70 3,271,770 71 2,980,725 71 2,860,705 73 Short-term borrowings...... 733,180 12 714,088 12 510,014 10 429,708 9 312,195 8 255,503 6 Long-term borrowings....... 306,636 5 42,814 1 52,315 1 21,951 0 19,026 0 22,931 1 --------- --- --------- --- --------- --- --------- --- --------- --- --------- --- Total interest bearing liabilities............ 5,040,196 81 4,529,559 80 3,998,709 81 3,723,429 80 3,311,946 79 3,139,139 80 Demand deposits.............. 556,188 9 510,910 9 410,203 8 384,817 8 380,996 9 412,016 10 Other liabilities............ 50,598 1 49,408 1 48,995 1 46,218 1 37,117 1 31,827 1 --------- --- --------- --- --------- --- --------- --- --------- --- --------- --- Total Liabilities........ 5,646,982 91 5,089,877 90 4,457,907 90 4,154,464 89 3,730,059 89 3,582,982 91 Shareholders' equity......... 571,026 9 558,289 10 487,598 10 471,443 11 438,814 11 359,966 9 --------- --- --------- --- --------- --- --------- --- --------- --- --------- --- Total liabilities & shareholders' equity... 6,218,008 100 5,648,166 100 4,945,505 100 4,625,907 100 4,168,873 100 3,942,948 100 ========= === ========= === ========= === ========= === ========= === ========= ===
50 52 PHYLLIS H. ARNOLD ------------ Senior Executive Vice President DIRECTORS OF Chief Operating Officer One Valley Bancorp, Inc. ONE VALLEY President & Chief Executive Officer One Valley Bank, N.A. BANCORP ------------ CHARLES M. AVAMPATO President Clay Foundation, Inc. DENNIS M. BONE President & Chief Executive Officer Bell Atlantic - West Virginia, Inc. JAMES K. BROWN Attorney Jackson & Kelly PLLC JAMES K. CANDLER President Candler Oil Company, Inc. NELLE RATRIE CHILTON Vice President and Director Dickinson Fuel Company, Inc. and TerraCo., Inc. H. RODGIN COHEN Attorney Sullivan & Cromwell JAMES L. DAVIDSON, JR. Chairman of the Board One Valley Bank-Central Virginia, N.A. RAY MARSHALL EVANS, JR. President, Dickinson Company, LLC Chesapeake Mining Company and Hubbard Properties, Inc. Vice President, Geary Securities BOB M. JOHNSON Vice Chairman of the Board One Valley Bank-Central Virginia, N.A. ROBERT E. KAMM, JR. Senior Vice President One Valley Bancorp, Inc. President & Chief Executive Officer One Valley Bank-South, Inc. JOHN D. LYNCH Vice President Davis Lynch Glass Co. EDWARD H. MAIER President General Corporation JOHN F. MORK President, Chief Executive Officer & Director Energy Corporation of America J. HOLMES MORRISON Chairman of the Board President & Chief Executive Officer One Valley Bancorp, Inc. Chairman of the Board One Valley Bank, N.A. CHARLES R. NEIGHBORGALL, III President The Neighborgall Construction Company JOHN L. D. PAYNE President Payne-Gallatin Mining Co. LACY I. RICE, JR. Vice Chairman of the Board One Valley Bancorp, Inc. Attorney Bowles, Rice, McDavid, Graff & Love PLLC WILLIAM A. RICE, JR. President Airgas, Inc. BRENT D. ROBINSON Senior Vice President One Valley Bancorp, Inc. President & Chief Executive Officer One Valley Bank-East, NA. W. LOWRIE TUCKER, III President & Chief Executive Officer One Valley Bank-Shenandoah J. LEE VAN METRE, JR. Attorney Steptoe & Johnson RICHARD B. WALKER Chairman of the Board and CEO Cecil I. Walker Machinery Co. EDWIN H. WELCH President University of Charleston JOHN H. WICK, III Vice President Dickinson Fuel Company, Inc. THOMAS D. WILKERSON Senior Agent Northwestern Mutual Life Insurance Co. HONORARY MEMBERS Robert F. Baronner James Gabriel Thomas E. Goodwin Cecil B. Highland, Jr. Robert O. Orders, Sr. Angus E. Peyton James W. Thompson J. HOLMES MORRISON --------------- Chairman of the Board, President ONE VALLEY and Chief Executive Officer BANCORP PHYLLIS H. ARNOLD Senior Executive Vice President and SENIOR Chief Operating Officer MANAGEMENT FREDERICK H. BELDEN, JR. --------------- Executive Vice President and Assistant Secretary LAURANCE G. JONES Executive Vice President and Chief Financial Officer ROY EON Senior Vice President and Chief Operations Officer BRIAN J. FOX Senior Vice President and Chief Technology Officer ROBERT E. KAMM, JR. Senior Vice President WILLIAM M. KIDD Senior Vice President - Credit Policy and Loan Administration MERRELL S. MCILWAIN II Senior Vice President, General Counsel and Secretary HAROLD E. NEELY, JR. Senior Vice President TERRY T. PUSTER Senior Vice President BRENT D. ROBINSON Senior Vice President JOHN F. SAPP Senior Vice President W. DAN STEGALL Senior Vice President KENNETH R. SUMMERS Senior Vice President JOHN RANDY VALENTINE Senior Vice President JAMES A. WINTER Senior Vice President and Chief Accounting Officer JACK B. YOUNG Senior Vice President ANTHONY N. CILIBERTI General Auditor 51 53 - ----------- SHAREHOLDER INFORMATION - ----------- MARKET REGISTRATION One Valley is registered on the New York Stock Exchange under the symbol "OV". CORPORATE HEADQUARTERS One Valley Bancorp, Inc. One Valley Square P.O. Box 1793 Charleston, WV 25326 INTERNET ADDRESS: www.onevalley.com FINANCIAL STATEMENTS During the year, One Valley distributes four interim quarterly financial reports and an annual report. Additionally, One Valley files an annual report with the Securities and Exchange Commission on Form 10-K and quarterly reports on Form 10-Q. A copy of the reports may be obtained without charge upon written request to: Rebecca W. Prokity, Investor Relations Manager One Valley Bancorp P.O. Box 1793 Charleston, WV 25326 NUMBER OF SHAREHOLDERS There were approximately 8,500 shareholders of record of One Valley Common Stock at December 31, 1999. STOCK TRANSFER AGENT Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016 DIVIDEND REINVESTMENT PLAN One Valley Bancorp maintains a dividend reinvestment plan. Shareholders may increase their ownership in One Valley by automatically reinvesting their quarterly dividends into additional shares of common stock. There are no commission costs or administration charges to the shareholder. Shareholders can enroll in the Dividend Reinvestment Plan by contacting : Linda S. Dugan, Shareholder Relations Representative, at (304) 348-7023. CONTACTS Analysts, portfolio managers, and others seeking financial information about One Valley Bancorp, Inc. should contact: Laurance G. Jones, Executive Vice President and Chief Financial Officer, at (304) 348-7062 or Rebecca W. Prokity, Investor Relations Manager, at (304) 348-7207. News media representatives and others seeking general information should contact: Terry Puster, Senior Vice President, at (304) 348-1442. Shareholders seeking assistance should contact: Linda S. Dugan, Shareholder Relations Representative, at (304) 348-7023. INDEPENDENT AUDITORS Ernst & Young LLP 900 United Center Charleston, West Virginia 25301 - --------- AFFILIATE MARKETS - --------- [MAP GRAPHIC] 52 54 {ONE VALLEY BANCORP LOGO} P.O. Box 1793 o Charleston, West Virginia 25326 o (304)348-7000 EX-23.A 3 CONSENT OF INDEPENDENT AUDITORS 1 Exhibit 23A CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this amended Annual Report (Form 10-K/A) of One Valley Bancorp, Inc., of our report dated January 18, 2000, included in the 1999 Annual Report to Shareholders of One Valley Bancorp, Inc. We also consent to the incorporation by reference in the Registration Statements, pertaining to the Amended 1983 Incentive Stock Option Plan (Form S-8, No. 2-90738) and pertaining to the 1993 Incentive Stock Option Plan (Form S-8, No. 33-66700) of One Valley Bancorp, Inc., of our report dated January 18, 2000, with respect to the consolidated financial statements of One Valley Bancorp, Inc. and Subsidiaries incorporated by reference in the Annual Report on Form 10-K/A for the year ended December 31, 1999. /s/ Ernst & Young LLP Charleston, West Virginia March 31, 2000 EX-23.B 4 CONSENT OF INDEPENDENT AUDITORS 1 Exhibit 23B CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8, Nos. 2-90738 and 33-66700) of One Valley Bancorp, Inc. of our report dated January 30, 1998, relating to the consolidated statement of financial condition of FFVA Financial Corporation and subsidiary as of December 31, 1997, and the related consolidated statements of income, changes in stockholders' equity and cash flows for the year ended December 31, 1997, which report appears in this December 31, 1999 annual report on Form 10-K/A of One Valley Bancorp, Inc. /s/ Cherry, Bekaert & Holland, L.L.P. Lynchburg, Virginia March 31, 2000 -----END PRIVACY-ENHANCED MESSAGE-----