-----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, CYO5LmX3sBgU1u6zkeGMVsYq06jhVGrLbOiEvzofcKFA4fFXjv6JJaSj+vUC5CDx iFQNTV51qloXFI3EYfxCtw== 0000950168-98-000747.txt : 19980317 0000950168-98-000747.hdr.sgml : 19980317 ACCESSION NUMBER: 0000950168-98-000747 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980316 SROS: NYSE 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 SEC ACT: SEC FILE NUMBER: 001-12949 FILM NUMBER: 98566137 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 1 ONE VALLEY BANCORP, INC. 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K [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, 1997 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 incorporation (I.R.S. Employer 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) which registered 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. [ ] State the aggregate market value of the voting stock held by non-affiliates of the registrant. The aggregate market value shall be computed by reference to the price at which the stock was sold, or the average bid and asked prices of such stock, as of a specified date within 60 days prior to the date of filing: Aggregate of market value of voting stock Based upon closing price on $607,845,711 MARCH 5, 1998 Indicate the number of shares outstanding of each of the registrant's classes of common stock as of the latest practicable date. Class Outstanding at March 5, 1998 COMMON STOCK ($10.00 PAR VALUE) 22,212,631 DOCUMENTS INCORPORATED BY REFERENCE The following lists the documents which are incorporated by reference in the Form 10-K Annual Report, and the Parts and Items of the Form 10-K into which the documents are incorporated. Part of the Form 10-K into which the Document Document is Incorporated -------- ------------------------ Portions of One Valley Bancorp, Inc., Part III, Item 13; and Part IV, Item 14 1997 7 and 8; Annual Report to Part I, Item 1; Part II, Items 5, 6, Shareholders for the year ended December 31, 1997 Portions of One Valley Bancorp, Inc., Part III, Items 10, 11, 12 and 13 Proxy Statement for the 1998 Annual Meeting of Shareholders 2 ONE VALLEY BANCORP, INC. FORM 10-K INDEX
Page Part I Item 1. Business................................................................................. 4 Item 2. Properties............................................................................... 14 Item 3. Legal Proceedings........................................................................ 14 Item 4. Submission of Matters to a Vote of Security Holders...................................... 14 Item 4A. Executive Officers of the Registrant..................................................... 15 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............................................................ 17 Item 6. Selected Financial Data.................................................................. 17 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................... 17 Item 8. Financial Statements and Supplementary Data.............................................. 17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................................................... 17 Part III Item 10. Directors and Executive Officers of the Registrant....................................... 18 Item 11. Executive Compensation................................................................... 18 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................................................. 18 Item 13. Certain Relationships and Related Transactions........................................... 18 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K................................................................ 19 Signatures ...................................................................................................... 21 Index to Exhibits................................................................................................. 24
3 PART I ITEM 1. BUSINESS One Valley Bancorp, Inc. The Board of Directors of One Valley Bank, National Association, formerly Kanawha Valley Bank, National Association ("One Valley Bank"), caused One Valley Bancorp, Inc. ("One Valley"), a West Virginia corporation, to be formed, through a corporate reorganization, as a single bank holding company holding all of the common stock of One Valley Bank. On September 4, 1981, the effective date of the reorganization, the shareholders of One Valley Bank exchanged their shares of Kanawha Valley Bank common stock for shares of One Valley common stock, $10 par value ("One Valley Common Stock"), and became shareholders of One Valley, and One Valley Bank became a wholly-owned subsidiary of One Valley. As of December 31, 1997, One Valley owned 11 operating banking subsidiaries (the "Banking Subsidiaries") including: One Valley Bank, National Association; One Valley Bank of Huntington, Inc.; One Valley Bank of Mercer County, Inc.; One Valley Bank-East, National Association; One Valley Bank of Oak Hill, Inc.; One Valley Bank of Ronceverte, National Association; One Valley Bank, Inc.; One Valley Bank of Summersville, Inc.; One Valley Bank-North, Inc.; One Valley Bank of Clarksburg, National Association; and One Valley Bank-Central Virginia, National Association. In addition, One Valley owns 100% of the outstanding stock of One Valley Square, Inc., a Texas corporation, which owns the office building in which One Valley Bank and One Valley are located. (All of these subsidiaries, including the Banking Subsidiaries, are collectively referred to as the "Subsidiaries.") On December 16, 1997, One Valley entered into an Agreement and Plan of Merger with FFVA Financial Corporation, a thrift holding company with principal offices in Lynchburg, Virginia ("FFVA Financial"). FFVA Financial is the parent corporation of First Federal Savings Bank of Lynchburg ("Savings Bank"). Under this Agreement, FFVA Financial would merge with and into One Valley. One Valley, as the surviving corporation, would own all of the shares of Savings Bank. It is anticipated that this transaction will close on March 30, 1998. One Valley's principal activities consist of owning and supervising its Subsidiaries. At December 31, 1997, One Valley had consolidated assets of $4.6 billion, deposits of $3.5 billion, and shareholders' equity of $424 million. On February 20, 1998, One Valley purchased from Wachovia Corporation 15 branches located in Virginia and their corresponding loans, assets and deposits. These branches included approximately $127 million in loans and $290 million in deposits. 4 One Valley regularly evaluates acquisition opportunities and conducts due diligence activities in connection with possible acquisitions. As a result, acquisition discussions and, in some cases, negotiations, may take place, and future acquisitions involving cash, debt or equity securities may occur. Acquisitions typically involve the payment of a premium over book and market values and, therefore, some dilution of One Valley's book value and net income per common share may occur in connection with any future acquisitions. One Valley is the largest bank holding company based in West Virginia with 11 affiliate banks and 103 locations (including the branches purchased from Wachovia Corporation on February 20, 1998) - 78 in West Virginia and 25 in Virginia. History of the Banking Subsidiaries One Valley Bank, the principal Banking Subsidiary of One Valley, was incorporated in 1867 as a state bank under the laws of West Virginia, with the name "The Kanawha Valley Bank." On February 10, 1975, Kanawha Valley Bank converted from a state bank to a national banking association, and on September 1, 1987, adopted its present corporate name. One Valley adopted a common corporate identity, primarily to promote a single corporate image for One Valley's diverse banking operations. The other Banking Subsidiaries were incorporated or chartered as state or national banks in the years indicated in the chart below. The chart below also sets forth the percentage of assets and the percentage of income contributed by each of the Banking Subsidiaries in relation to all of One Valley's Banking Subsidiaries as well as the number of branches of each of the Banking Subsidiaries as of December 31, 1997. 5
Year in Percentage of Which Percentage Net Income Number of Name Organized Currently Chartered As of Assets 1 Contributed 1 Branches1 - ---- --------- ---------------------- --------- ----------- -------- One Valley Bank, National Association 1867 National 40.58% 42.20% 21 One Valley Bank, Inc. 1911 State 12.87% 13.04% 14 One Valley Bank of Mercer County, Inc. 1906 State 5.29% 6.44% 4 One Valley Bank of Oak Hill, Inc. 1904 State 3.22% 3.87% 3 One Valley Bank of Huntington, Inc. 1956 State 4.17% 4.12% 4 One Valley Bank of Ronceverte, National Association 1900 National 3.03% 3.91% 3 One Valley Bank of Summersville, Inc. 1910 State 2.59% 3.52% 3 One Valley Bank-East, National Association 1865 National 8.06% 8.52% 11 One Valley Bank of Clarksburg, National Association 1903 National 6.24% 5.04% 8 One Valley Bank-North, Inc. 1903 State 5.19% 5.38% 7 One Valley Bank- Central Virginia, National Association 1914 National 8.76% 3.95% 10
- -------- 1 Does not include 15 branches purchased from Wachovia Corporation on February 20, 1998, and does not reflect the pending merger of FFVA Financial with and into One Valley which includes an additional 12 branches. 6 Operations of the Banking Subsidiaries The Banking Subsidiaries offer all services traditionally offered by full-service commercial banks, including commercial and individual demand and time deposit accounts, commercial and individual loans, credit card (MasterCard and Visa) and drive-in banking services. In addition, One Valley Bank is active in correspondent banking services. Trust services are offered on a statewide basis. One Valley Securities Corporation, a wholly-owned subsidiary of One Valley Bank, provides discount brokerage services and also sells, as agent, mutual funds and annuities. No material portion of any of the Banking Subsidiaries' deposits has been obtained from a single or small group of customers, and the loss of any one customer's deposits or a small group of customers' deposits would not have a material adverse effect on the business of any of the Banking Subsidiaries. Although the market areas of several of the Banking Subsidiaries encompass a portion of the coal fields located in southern West Virginia, an area of the State which has been economically depressed, the coal-related loans in the loan portfolios of the Banking Subsidiaries constitute less than 5% of One Valley's total loans outstanding. The Banking Subsidiaries generally serve the stronger economic areas of the State. The Banking Subsidiaries also offer services to customers at various locations within their service areas by use of automated teller machines ("ATMs"). The ATMs allow customers to make deposits and withdrawals at convenient locations. Customers may also borrow against their revolving lines of credit or transfer funds between deposit accounts at those locations. Customers of any Banking Subsidiary may conduct transactions at any One Valley ATM and, by means of the MAC system, a regional ATM system, through the CIRRUS ATM network, can conduct ATM transactions nationwide. Customers of any of the Banking Subsidiaries may also make deposits or withdrawals at any of One Valley's main office and branch locations. On April 30, 1996, One Valley consummated its acquisition of Co-operative Savings Bank, a federally-chartered savings bank headquartered in Lynchburg, Virginia. Following consummation of the acquisition, the name of the federal savings bank was changed to One Valley Bank-Central Virginia. This transaction was One Valley's first interstate acquisition. At Special Meetings in March 1998, shareholders of One Valley and FFVA Financial approved the Agreement and Plan of Merger dated December 17, 1997, between One Valley and FFVA Financial, which provides for the merger of FFVA Financial with and into One Valley. Under the Merger Agreement, each outstanding share of FFVA Financial will be converted into 1.05 shares of common stock of One Valley. It is anticipated that the closing of this transaction will occur on March 30, 1998, and will be accounted for as a pooling of interests. As of March 10, 1998, One Valley and its Subsidiaries had approximately 1,979 full-time equivalent employees. 7 Competition Vigorous competition exists in all areas where One Valley and the Banking Subsidiaries are engaged in business. The primary market areas served by the Banking Subsidiaries are generally defined as West Virginia, Central Virginia, and certain adjoining areas in Kentucky, Maryland, North Carolina, Ohio, Pennsylvania and Virginia. For most of the services which the Banking Subsidiaries perform, they compete with commercial banks as well as other financial institutions. For instance, savings banks, savings and loan associations, credit unions, finance companies, stock brokers, and issuers of commercial paper and money market funds actively compete for funds and for various types of loans. In addition, insurance companies, investment counseling firms and other business firms and individuals offer personal and corporate trust and investment counseling services. The opening of branch banks within One Valley's market areas has increased competition for the Banking Subsidiaries. Although federal and state banking legislation has provided an opportunity for One Valley to acquire banking subsidiaries in other attractive banking areas, it has increased competition for One Valley in its market areas, and, with interstate banking, One Valley faces additional competition in efforts to acquire other subsidiaries throughout West Virginia, Virginia, and in neighboring states. Until 1993, the various banks and bank-holding companies operating in West Virginia were predominantly owned by shareholders in West Virginia and were financed by operations arising principally in West Virginia. During 1993, Banc One Corp., one of the largest bank holding companies in the United States, consummated its acquisition of Key Centurion Bancshares Inc., and Huntington Bankshares Incorporated consummated its acquisitions of Commerce Banc Corporation and CB&T Financial Corp. It is possible that other large out-of-state banks will, over time, expand their operations into West Virginia. While One Valley believes that it can compete effectively with out-of-state banks, One Valley will face larger competitors which have access to greater capital resources and which have sophisticated marketing structures in place. As of December 31, 1997, there were 53 bank holding companies in the State of West Virginia registered with the Federal Reserve System and the West Virginia Board of Banking and Financial Institutions ("Board of Banking") and 86 bank holding companies in the Commonwealth of Virginia registered with the Federal Reserve System and the Virginia Corporation Commission. These holding companies are headquartered in various West Virginia and Virginia cities and control banks throughout West Virginia and Virginia, including banks which compete with the Banking Subsidiaries in their market areas. One Valley has actively competed with some of these bank holding companies to acquire its Banking Subsidiaries. Supervision and Regulation The following outline of the regulatory framework applicable to bank holding companies and their subsidiaries is qualified by reference to the particular statutory and regulatory provisions. A 8 change in applicable statutes, regulations or regulatory policy may have a material effect on the business of One Valley. General West Virginia adopted legislation effective May 31, 1997, which allows interstate branch banking by mergers and the establishment of de novo branches on a reciprocal basis. Both federal and state laws extensively regulate various aspects of the banking business, such as permissible types and amounts of loans and investments, risk management and controls, permissible activities, rates of interest and fees, and reserve requirements. These regulations are intended primarily for the protection of depositors and customers rather than One Valley's shareholders. Acquisitions and Activities As a bank holding company, One Valley is subject to regulation by the Board of Governors of the Federal Reserve System (the "FRB") under the Bank Holding Company Act of 1956 (the "BHCA"), including examination and reporting requirements. Under the BHCA, bank holding companies may not directly or indirectly acquire the ownership or control of more than 5% of the voting shares or substantially all of the assets of a bank or any other company, without the prior approval of the FRB, subject to certain exceptions. The BHCA generally limits acquisitions by bank holding companies to commercial banks and companies engaged in activities that the FRB has determined to be so closely related to banking as to be a proper incident thereto. One Valley's direct activities are similarly limited. In reviewing applications under the BHCA, the FRB will consider, among other things, the competitive effect of the transaction, financial and managerial issues including the capital position of the combined organization, and convenience and needs factors, including, in the case of a bank or thrift acquisition, the applicant's record under the Community Reinvestment Act. Effective September 29, 1995, the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 ("IBBEA") permitted bank holding companies to acquire banks located in states other than the bank holding company's home state without regard to whether the transaction is permitted under state law. Commencing June 1, 1997, IBBEA allows national banks and state banks with different home states to merge across state lines, unless the home state of a participating bank enacted legislation prior to May 31, 1997, that expressly prohibits interstate mergers. In addition, the IBBEA allows banks to branch across state lines, unless the state where the new branch will be located enacted legislation restricting or prohibiting de novo interstate branching on or before May 31, 1997. Neither West Virginia nor Virginia enacted such legislation restricting interstate branch banking. One Valley is also required to secure the approval of the West Virginia Board of Banking before acquiring ownership or control of more than 5% of the voting shares or substantially all of the 9 assets of any institution, including another bank. West Virginia banking law prohibits any bank holding company from acquiring shares of a bank if the acquisition would cause the bank holding company's consolidated deposits in the State of West Virginia to exceed 25% of the total deposits of all depository institutions in the State of West Virginia. At December 31, 1997, the total deposits of the Banking Subsidiaries were approximately 17% of the total deposits in the State of West Virginia. Federal and state banking laws generally limit the activities of banks to the business of banking. In recent years, a series of judicial decisions and regulatory rulings have increased the range of services and products that can be offered by bank holding companies and banks, and simplified the regulatory process for acquisitions and the offering of new or additional products. Among the new or expanded products and services are sales of annuities, sales of insurance from places with a population of 5,000 or less and underwriting and dealing in securities. Payment of Dividends One Valley is a legal entity separate and distinct from the Banking Subsidiaries. A major portion of One Valley's revenues results from dividends of the Banking Subsidiaries. The Banking Subsidiaries are subject to legal limitations on the amount of dividends they can pay. The prior approval of the Comptroller of the Currency (the "Comptroller") is required if the total of all dividends declared by a national bank in any calendar year will exceed the sum of such bank's net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks from paying dividends which would be greater than the bank's undivided profits after deducting statutory bad debt in excess of the bank's allowance for loan losses. Similar restrictions on dividends are in effect for the Banking Subsidiaries which are not national banks. Under the foregoing dividend restrictions, as of December 31, 1997, the Banking Subsidiaries, without obtaining regulatory approvals, could pay aggregate dividends of $13.4 million, plus retained net profits for the interim periods through the date of declaration, to One Valley during 1998. During 1997, the Banking Subsidiaries paid $58.1 million in cash dividends to One Valley. In addition, both One Valley and the Banking Subsidiaries are subject to various general regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimums. Regulatory authorities are authorized to determine that, under certain circumstances, the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The regulatory authorities have indicated that banking organizations should generally pay dividends only out of current operating earnings. Borrowings by One Valley From the Banking Subsidiaries There are various legal restrictions on the extent to which One Valley and its nonbank subsidiaries can borrow or otherwise obtain credit from the Banking Subsidiaries. In general, these restrictions require that any such extensions of credit must be secured by designated amounts of 10 specified collateral and are limited, as to One Valley or any one of such nonbank subsidiaries, to 10% of the lending bank's capital stock and surplus, and as to One Valley and all such nonbank subsidiaries in the aggregate, to 20% of such lending bank's capital stock and surplus. These restrictions also apply to the Banking Subsidiaries' purchases of assets from and investments in One Valley and its nonbank subsidiaries. Capital Bank regulators have adopted risk-based capital guidelines for bank holding companies and banks. The minimum ratio of qualifying total capital to risk-weighted assets and certain off-balance sheet items ("total capital ratio") is 8%. At least half of the total capital is required to be comprised of common stock, retained earnings, noncumulative perpetual preferred stock, minority interests (and, for bank holding companies, a limited amount of qualifying cumulative perpetual preferred stock), less goodwill and most other intangibles ("Tier 1 capital"). Other qualifying capital ("Tier 2 capital") may consist of other preferred stock, certain other capital instruments, and limited amounts of subordinated debt and allowance for loan losses. In addition, the bank regulators have established minimum leverage ratio requirements for bank holding companies and banks. These requirements provide for a minimum leverage ratio of Tier 1 capital to adjusted average quarterly assets ("leverage ratio") equal to 3% for bank holding companies and banks that meet certain specified criteria, including having the highest regulatory rating. All other bank holding companies and banks will generally be required to maintain a leverage ratio of 4% to 5%. Regulatory capital requirements also provide that bank holding companies and banks experiencing internal growth or making acquisitions will be expected to maintain strong capital positions substantially above the minimum supervisory levels without significant reliance on intangible assets. Federal banking agencies have issued regulations, which become effective in 1998, that may require additional capital in respect of interest rate exposure and other market risk. One Valley does not believe that these modifications will have a significant impact on its capital position. As of December 31, 1997, One Valley had a total capital ratio of 16%, a Tier 1 capital ratio of 14% and a leverage ratio of 9%. Note Q of Notes to the Consolidated Financial Statements appearing at page 39 of One Valley's 1997 Annual Report to Shareholders is incorporated herein by reference. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), among other things, requires the federal banking agencies to take "prompt corrective action" in respect of depository institutions that do not meet minimum capital requirements. FDICIA establishes five capital categories: "well capitalized," "adequately capitalized," "under-capitalized," "significantly undercapitalized" and "critically undercapitalized." 11 The banking regulators have adopted regulations relating to these capital categories. The relevant capital measures are the total capital ratio, a Tier 1 capital ratio (Tier 1 capital to risk-weighted assets) and the leverage ratio. Under the regulations, a bank will generally be: (i) "well capitalized" if it has a total capital ratio of 10% or greater, a Tier 1 capital ratio of 6% or greater and a leverage ratio of 5% or greater; (ii) "adequately capitalized" if it has a total capital ratio of 8% or greater, a Tier 1 capital ratio of 4% or greater and a leverage ratio of 4% or greater (3% in certain circumstances), and is not "well capitalized;" (iii) "undercapitalized" if it has a total capital ratio of less than 8%, a Tier 1 capital ratio of less than 4% or a leverage ratio of less than 4% (3% in certain circumstances); (iv) "significantly undercapitalized" if it has a total capital ratio of less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio of less than 3%; and (v) "critically undercapitalized" if its tangible equity is equal to or less than 2% of average quarterly tangible assets. As of December 31, 1997, One Valley and each of its Banking Subsidiaries had capital levels that qualify them as being "well capitalized" under such regulations. Under FDICIA, a depository institution that is not "well capitalized" is generally prohibited from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rate in its market. FDICIA generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution would thereafter be "undercapitalized." "Undercapitalized" depository institutions are subject to growth limitations and are required to submit a capital restoration plan. The federal banking agencies may not accept a capital plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. In addition, for a capital restoration plan to be acceptable, the depository institution's parent holding company must guarantee that the institution will comply with such capital restoration plan. The aggregate liability of the parent holding company under the guarantee is limited to the lesser of (i) an amount equal to 5% of the depository institution's total assets at the time it became "undercapitalized," and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is "significantly undercapitalized." "Significantly undercapitalized" depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become "adequately capitalized," requirements to reduce total assets and cessation of receipt of deposits from correspondent banks. "Critically undercapitalized" institutions are subject to the appointment of a receiver or conservator. 12 Obligations in Respect of Subsidiary Banks The Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") imposes liability on FDIC-insured depository institutions, such as the Banking Subsidiaries, for losses incurred by the FDIC in connection with assistance to an insured institution under common control. Under the National Bank Act, if the capital stock of a national bank is impaired by losses or otherwise, the Comptroller is authorized to require payment of the deficiency by assessment upon the bank's shareholders, pro rata, and, if any such assessment is not paid by any shareholder after three months' notice, to sell the stock of such shareholder to make good the deficiency. Under FRB policy, One Valley is expected to act as a source of financial strength to each of its Banking Subsidiaries and to commit resources to support each of the Banking Subsidiaries. This support may be required at times when, absent such FRB policy, One Valley may not find itself able to provide it. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company's bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to a priority of payment. Depositor Preference Statute Under federal law, deposits are afforded a priority over other general unsecured claims against a depository institution, including federal funds and letters of credit, in the liquidation or other resolution of such an institution by a receiver. FDIC Assessments The Banking Subsidiaries are subject to deposit insurance assessments by the FDIC. Most of the deposits of the Banking Subsidiaries are insured by the Bank Insurance Fund ("BIF"), but certain deposits of One Valley Bank-Central Virginia, National Association, and an amount of deposits attributed to thrifts acquired by other Banking Subsidiaries are insured by the Savings Association Insurance Fund ("SAIF"). Effective January 1, 1996, the FDIC reduced the insurance premiums it charged on bank deposits insured by the BIF to the statutory minimum of $2,000 annually for banks which qualify for the highest ranking under a risk-based system. On September 30, 1996, the Deposit Insurance Funds Act of 1996 ("DIFA") was enacted and signed into law. DIFA imposed a special assessment to recapitalize SAIF and reduced the amount of FDIC insurance premiums for deposits insured by SAIF to the same levels assessed for deposits insured by BIF. Paragraphs 4 and 6 of the Section of Management's Discussion and Analysis captioned "Income Statement Analysis - Non-Interest Income and Expense" appearing at page 19 and 20, respectively, of One Valley's 1997 Annual Report to Shareholders is incorporated herein by reference. DIFA 13 further provides, however, for assessments to be imposed on deposits at all insured depository institutions to pay for the cost of the Financing Corporation funding. Miscellaneous Under Section 106 of the 1970 Amendments to the Bank Holding Company Act and the regulations of the FRB, the Banking Subsidiaries are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit or any provision of credit, sale or lease of property or furnishing of services. One Valley is required to register annually with the Commissioner of Banking of West Virginia ("Commissioner") and to pay a registration fee to the Commissioner based on the total amount of bank deposits in banks with respect to which One Valley is a bank holding company. Although legislation allows the Commissioner to prescribe the registration fee, it limits the fee to ten dollars per nearest million dollars of deposits. One Valley is also subject to regulation and supervision by the Commissioner. Governmental Policies In addition to the effect of general economic conditions, the earnings and future business activities of the Banking Subsidiaries, both members and non-members of the Federal Reserve, are affected by the fiscal and monetary policies of the federal government and its agencies, particularly the FRB. The FRB regulates the national money supply in order to mitigate recessionary and inflationary pressures. The techniques used by the FRB include setting the reserve requirements of member banks, establishing the discount rate on member bank borrowings and conducting open market operations in United States government securities to exercise control over the supply of money and credit. The policies of the FRB have a direct and indirect effect on the amount of bank loans and deposits, and the interest rates charged and paid thereon. The impact of current economic problems and the policies of the FRB and other regulatory authorities designed to deal with these economic problems upon the future business and earnings of the Banking Subsidiaries cannot be accurately predicted, but those policies can materially affect the revenues and income of the Banking Subsidiaries. Statistical Disclosure by Bank Holding Companies Statistical disclosures required by bank holding companies are included in "Management's Discussion and Analysis of Financial Condition and Results of Operations" set forth on pages four through 23 of One Valley's 1997 Annual Report to Shareholders for the year ended December 31, 1997, and are incorporated herein by reference. 14 ITEM 2. PROPERTIES One Valley and One Valley Bank One Valley Bank owns the site of One Valley Bank's current banking quarters, One Valley Square in the City of Charleston, West Virginia. This land is leased by One Valley Bank to One Valley Square, Inc. One Valley Square, Inc., constructed a 15 story (plus basement) office building on the site, and One Valley Bank leases a portion of the basement and seven floors of One Valley Square for its operations, consisting of approximately 130,000 square feet. In addition, One Valley Bank subleases a portion of the seventh floor to others. One Valley also conducts its operations from the space leased by One Valley Bank in One Valley Square. The remaining space is leased to non-affiliated tenants. Upon expiration of the land lease, all improvements will revert to the owner of the land. One Valley Bank also conducts operations at its operations center, also located in Charleston, and at 20 branch locations throughout Kanawha, Mason, Putnam, Jackson, and Wood Counties. Other Affiliate Banks As of March 10, 1998, the properties owned or leased by the other Banking Subsidiaries consist generally of 10 main bank offices, related drive-in facilities, 72 branch offices (including branches purchased from Wachovia Corporation on February 20, 1998) and such other properties as are necessary to house related support activities of those banks. All of the properties of the Banking Subsidiaries are suitable and adequate for their current operations and are generally being fully utilized. ITEM 3. LEGAL PROCEEDINGS Various legal proceedings are presently pending to which the Banking Subsidiaries are parties; however, these proceedings are ordinary routine litigation incidental to the business of the Banking Subsidiaries. There are no material legal proceedings pending or threatened against One Valley or its Subsidiaries. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None 15 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of One Valley are:
Name Age Banking Experience and Qualifications ---- --- ------------------------------------- Robert F. Baronner 71 1991 to Present, Chairman of the Board, One Valley. 1971 to 1991, One Valley Bank. Previously, President and Chief Executive Officer, One Valley. J. Holmes Morrison 57 1967 to present, One Valley Bank. Vice President and Trust Officer, 1970; Senior Vice President and Senior Trust Officer, 1978; Executive Vice President, 1982; President and Chief Operating Officer, 1985; President and Chief Executive Officer, 1988; Chairman of the Board, 1991. Vice President, One Valley, 1982; Senior Vice President, One Valley, 1984; Executive Vice President, One Valley, 1990; President and Chief Executive Officer, One Valley, 1991. Phyllis H. Arnold 49 1973-1979, One Valley Bank. Credit Officer, 1974-1977; Vice President, 1977-1979. West Virginia State Banking Commissioner, 1979-1983. Executive Vice President, One Valley Bank, 1988; President and Chief Executive Officer, One Valley Bank, 1991; Executive Vice President, One Valley, 1994. Frederick H. Belden, Jr. 59 1968 to present, One Valley Bank. Senior Vice President and Senior Trust Officer, 1982; Executive Vice President, 1986. Executive Vice President, One Valley, 1994. 16 Name Age Banking Experience and Qualifications ---- --- ------------------------------------- Laurance G. Jones 51 1969 to present, One Valley Bank. Controller, 1971; Vice President, Controller and Treasurer, 1979; Senior Vice President, 1980; Executive Vice President, 1992. Treasurer, One Valley, 1981; Treasurer and Chief Financial Officer, One Valley, 1984; Executive Vice President, One Valley, 1994. Finance and Accounting. James A. Winter 45 1975 to present, One Valley Bank. Vice President, Controller and Assistant Treasurer, 1982. Senior Vice President, 1991; Vice President and Chief Accounting Officer, One Valley, 1989. Robert E. Kamm, Jr. 46 1975 to 1978, One Valley Bank, Assistant Investment Officer; 1982 to present, President One Valley Bank of Summersville, Inc.; Senior Vice President, One Valley, 1996. Kenneth R. Summers 47 1963 to 1988, One Valley Bank. Vice President, 1976; Senior Vice President, 1985; 1988 to present, President and Chief Executive Officer One Valley Bank, Inc.; Senior Vice President, One Valley, 1996.
17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS During the second quarter of 1997, One Valley's Common Stock became registered on the New York Stock Exchange under the symbol "OV." Prior to that, One Valley Common Stock was traded over the counter on the Nasdaq National Market under the symbol "OVWV." On March 10, 1998, the total number of holders of One Valley Common Stock was approximately 11,000, including shareholders of record and shares held in nominee name. The information set forth in paragraphs number two and three in the subsection captioned "Balance Sheet Analysis-Capital Resources" on page 17 of One Valley's 1997 Annual Report to Shareholders is incorporated herein by reference. Notes A, C, E, P and U of Notes to the Consolidated Financial Statements appearing at pages 30, 31, 32, 38 and 42 of One Valley's 1997 Annual Report to Shareholders are incorporated herein by reference. Table 2 "Six-Year Selected Financial Summary" on page five of One Valley's 1997 Annual Report to Shareholders is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA Table 2 "Six-Year Selected Financial Summary" on page five of One Valley's 1997 Annual Report to Shareholders is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained on pages four through 23 of One Valley's 1997 Annual Report to Shareholders is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information contained on pages 25 through 45 of One Valley's 1997 Annual Report to Shareholders is incorporated herein by reference. See Item 14 for additional information regarding the financial statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information set forth in the sections captioned "Election of Directors," "Management Nominees to the Board of One Valley," "Directors Continuing to Serve Unexpired Terms" and "Section 16(a) Beneficial Ownership Reporting Compliance" on pages two through five and page 17 of One Valley's definitive Proxy Statement dated March 20, 1998, is incorporated herein by reference. Reference is also made to the information concerning One Valley's executive officers provided in Part I, Item 4A, of this report. ITEM 11. EXECUTIVE COMPENSATION The information set forth in the sections captioned "Executive Compensation", "Change in Control Arrangements," and "Compensation of Directors" on pages 10 through 14 and page 17 of One Valley's definitive Proxy Statement dated March 20, 1998, is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information set forth in the sections captioned "Principal Holders of Voting Securities" and "Ownership of Securities by Directors, Nominees and Officers" on pages seven and eight through page 10 of One Valley's definitive Proxy Statement dated March 20, 1998, is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information set forth in the sections captioned "Certain Transactions with Directors and Officers and Their Associates" and "Compensation Committee Interlocks and Insider Participation" on page 17 of One Valley's definitive Proxy Statement dated March 20, 1998, and Notes G and I of the Notes to the Consolidated Financial Statements appearing at page 34 of One Valley's 1997 Annual Report to Shareholders are incorporated herein by reference. 19 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1997 Annual Report to Shareholders Index Page(s) (a) 1. Financial Statements Consolidated Financial Statements of One Valley Bancorp, Inc., incorporated by reference in Part II, Item 8, of this report. Report of Independent Auditors 25 Consolidated Balance Sheets at December 31, 1997, and 1996 26 Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995 27 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1997, 1996 and 1995 28 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 29 Notes to Consolidated Financial Statements 30-42 (a) 2. Financial Statement Schedules All schedules are omitted, as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or related Notes thereto. 20 (a) 3. Exhibits Required to be Filed by Item 601 of Regulation S-K and Item 14(c) of Form 10-K See Index to Exhibits. 24 (b) Reports on Form 8-K Form 8-K dated October 30, 1997, Item 5. Form 8-K dated December 16, 1997, Item 5. (c) Exhibits See Item 14(a)(3) above. (d) Financial Statement Schedules See Item 14(a)(2) above.
21 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, 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, Vice President and Chief Accounting Officer (Principal Accounting Officer) March 11, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and as of the date indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Phyllis H. Arnold Director March 11, 1998 - ----------------------------- PHYLLIS H. ARNOLD /s/ Charles M. Avampato Director March 11, 1998 - ----------------------------- CHARLES M. AVAMPATO /s/ Robert F. Baronner Director March 11, 1998 - ----------------------------- ROBERT F. BARONNER _____________________________ Director March 11, 1998 C. MICHAEL BLAIR 22 SIGNATURE TITLE DATE --------- ----- ---- /s/ Dennis M. Bone Director March 11, 1998 - ----------------------------- DENNIS M. BONE /s/ James K. Brown Director March 11, 1998 - ----------------------------- JAMES K. BROWN /s/ Nelle Ratrie Chilton Director March 11, 1998 - ----------------------------- NELLE RATRIE CHILTON _____________________________ Director March 11, 1998 H. RODGIN COHEN _____________________________ Director March 11, 1998 RAY MARSHALL EVANS, JR. _____________________________ Director March 11, 1998 JAMES GABRIEL /s/ Phillip H. Goodwin Director March 11, 1998 - ----------------------------- PHILLIP H. GOODWIN _____________________________ Director March 11, 1998 THOMAS E. GOODWIN _____________________________ Director March 11, 1998 BOB M. JOHNSON /s/ Robert E. Kamm, Jr. Director March 11, 1998 - ----------------------------- ROBERT E. KAMM, JR. _____________________________ Director March 11, 1998 JOHN D. LYNCH /s/ Edward H. Maier Director March 11, 1998 - ----------------------------- EDWARD H. MAIER /s/ J. Holmes Morrison President, Chief March 11, 1998 - ----------------------------- Executive Officer and J. HOLMES MORRISON Director 23 SIGNATURE TITLE DATE --------- ----- ---- _____________________________ Director March 11, 1998 CHARLES R. NEIGHBORGALL, III _____________________________ Director March 11, 1998 ROBERT O. ORDERS, SR. _____________________________ Director March 11, 1998 JOHN L. D. PAYNE /s/ Angus E. Peyton Director March 11, 1998 - ----------------------------- ANGUS E. PEYTON /s/ Lacy I. Rice, Jr. Director March 11, 1998 - ----------------------------- LACY I. RICE, JR. _____________________________ Director March 11, 1998 BRENT D. ROBINSON _____________________________ Director March 11, 1998 JAMES W. THOMPSON _____________________________ Director March 11, 1998 J. LEE VAN METRE, JR. /s/ Richard B. Walker Director March 11, 1998 - ----------------------------- RICHARD B. WALKER /s/ H. Bernard Wehrle, III Director March 11, 1998 - ----------------------------- H. BERNARD WEHRLE, III _____________________________ Director March 11, 1998 JOHN H. WICK, III /s/ Thomas D. Wilkerson Director March 11, 1998 - ----------------------------- THOMAS D. WILKERSON 24 INDEX TO EXHIBITS Exhibit No. Description: (3) Articles of Incorporation and Bylaws Exhibit 3.1 Restated Articles of Incorporation of One Valley, filed as part of One Valley's June 30, 1996, Quarterly Report on Form 10-Q and incorporated herein by reference. Exhibit 3.2 Amendments to the Bylaws of One Valley dated October 18 and December 20, 1995, and a complete copy of One Valley's Bylaws as amended and filed as part of One Valley's 1995 Annual Report on Form 10-K and incorporated herein by reference. Exhibit 4.1 Shareholder Protection Rights Agreement, filed as a part of One Valley's current report on Form 8-K, dated October 19, 1995, and incorporated herein by reference. (10) Material Contracts. Exhibit 10.1 Indemnity Agreement between Resolution Trust Corporation and One Valley, filed as part of One Valley's Registration Statement on Form S-2, Registration No. 33-43384, October 22, 1991, and incorporated herein by reference. Exhibit 10.2 Agreement and Plan of Merger, dated December 16, 1997, by and between One Valley and FFVA Financial Corporation, filed as part of One Valley's Registration Statement on Form S-4, Registration No. 333-44657, January 21, 1998, and incorporated herein by reference. Executive Compensation Plans and Arrangements. Exhibit 10.3 Form of Change in Control Severance Agreements between One Valley and certain of its officers, dated as of October 16, 1996, filed as part of One Valley's 1997 Annual Report on Form 10-K and incorporated herein by reference. Exhibit 10.4 One Valley Bancorp, Inc., 1983 Incentive Stock Option Plan, as amended, filed as part of One Valley's Registration Statement on Form S-8, Registration No. 33-3570, July 2, 1990, and incorporated herein by reference. 25 Exhibit 10.5 One Valley Bancorp, Inc., 1993 Incentive Stock Option Plan, filed as part of One Valley's Definitive Proxy Statement, Registration No. 0-10042, and incorporated herein by reference. Exhibit 10.6 One Valley Bancorp, Inc., Management Incentive Compensation Plan, as amended February, 1990, filed as part of One Valley's 1992 Annual Report on Form 10-K and incorporated herein by reference. Exhibit 10.7 One Valley Bancorp, Inc., Supplemental Benefit Plan, as amended April 1990, filed as part of One Valley's 1992 Annual Report on Form 10-K and incorporated herein by reference. Exhibit 10.8 One Valley Bancorp, Inc., Executive Incentive Compensation Plan, dated as of January 1, 1996. (12) Statement Re Computation of Ratios -- found at page 27 herein. (13) 1997 Annual Report to Security Holders -- found at page 28 herein. (21) Subsidiaries of Registrant -- found at page 75 herein. (23) Consent of Independent Auditors -- found at page 76 herein. (27) Financial Data Statement -- Edgar filing only. (99) Proxy Statement for the 1998 Annual Meeting of One Valley -- found at page 77 herein. 26 EX-12 2 EXHIBIT 12 EXHIBIT 12 STATEMENT RE: COMPUTATION OF RATIOS ROA - RETURN ON AVERAGE ASSETS: Return on Average Assets is defined as net income divided by average total assets. ROE - RETURN ON AVERAGE EQUITY: Return on Average Equity is defined as net income divided by average total equity. 28 EX-13 3 EXHIBIT 13 EXHIBIT 13 ONE VALLEY BANCORP, INC.'S ANNUAL REPORT TO SHAREHOLDERS ----------------------------------------------------------------------------- ONE VALLEY BANCORP, INC. ANNUAL REPORT 1997 ----------------------------------------------------------------------------- ----------------------------------------------------------------------------- Contents ----------------------------------------------------------------------------- Financial Highlights........................................................1 Report to Customers, Employees, Owners......................................2 Management's Discussion and Analysis........................................4 Consolidated Financial Statements..........................................25 Six-Year Financial Summaries...............................................43 One Valley Bancorp Directors and Senior Management.........................46 Additional Shareholder Information.........................................47 Directors of Affiliate Banks...............................................48 - -------------------------------------------------------------------------------- Financial Highlights - -------------------------------------------------------------------------------- (Dollars in thousands, except per share data)
1997 1996 % CHANGE For The Year Net interest income................................................. $ 179,186 $ 172,868 3.65% Net income.......................................................... 57,364 53,155 7.92 Average Balances Total loans - net............................................... 2,809,252 2,652,817 5.90 Total assets.................................................... 4,387,065 4,104,520 6.88 Deposits........................................................ 3,438,441 3,270,975 5.12 Equity.......................................................... 413,226 389,705 6.04 At Year-End Year-end Balances Total loans - net............................................... $ 2,926,992 $ 2,768,467 5.73% Total assets.................................................... 4,582,264 4,267,303 7.38 Deposits........................................................ 3,517,562 3,406,016 3.27 Equity.......................................................... 424,275 408,577 3.84 Per Share Net income: Basic........................................................... $ 2.10 $ 1.94 8.25% Diluted......................................................... 2.07 1.91 8.38 Cash dividends...................................................... 0.80 0.74 8.11 Book value.......................................................... 15.61 14.77 7.51
- -------------------------------------------------------------------------------- REPORT TO CUSTOMERS EMPLOYEES OWNERS - -------------------------------------------------------------------------------- (Photo of J. Holmes Morrison) J. Holmes Morrison, President and CEO One Valley Bancorp continued to perform well in 1997 as net income increased for the sixteenth consecutive year, and earnings per share increased for the eleventh consecutive year. The unwavering focus on its three main constituencies of customers, employees and owners, as well as the communities it serves, enabled One Valley to once again reach record levels in assets, loans, deposits and shareholders' equity, while maintaining its excellent asset quality. Likewise, concentration on the basic financial fundamentals of profitability, asset quality, operational efficiency, capital adequacy, liquidity and sound management of interest rate risk positioned One Valley to continue to enhance long-term shareholder value. Net Income increased for the 16th consecutive year Net income per share increased 8.3% to $2.10 in 1997 compared to $1.94 in 1996, restated to reflect the August 19, 1997 25% stock dividend. Net income reached a record level of $57.4 million in 1997 versus the $53.2 million earned in 1996. Return on average assets rose slightly to 1.31% in 1997, while return on equity increased to 13.88% as average shareholders' equity grew 6.0% to $413.2 million. One Valley's capital ratios remained strong as equity to average assets was 9.42%, and the risk based capital ratio, a regulatory measure of capitalization, was 15.69% versus the regulatory requirement of 8.0%. Cash dividends per share increased 8.1% to a record $0.80 in 1997 and represented the sixteenth consecutive annual increase in cash dividends per share. Growth in net income was fueled by a 7.3% increase in average earning assets and a 12.7% increase in non-interest income, which offset a decline in the net interest margin of 4.56% in 1997 versus 4.72% in 1996. The narrowing in the net interest margin was attributable to higher rates paid on deposits and more competitive loan rates, due to the flattening of the yield curve throughout the year. As noted, growth in non-interest income, led by trust income and other fees, partially balanced the decline in the net interest margin. Additionally, good control of operating expenses enabled One Valley to continue to lower its efficiency ratio, which is a measure used to evaluate operational efficiency, to 56.6% in 1997, compared to a three-year long-range plan target of 55.0% by 1998. One Valley continued its tradition of sound asset quality in 1997 despite an increase in net charge-offs from .19% of loans in 1996 to .26%, which is still a relatively low level. Non performing assets declined at the end of 1997 to $9.2 million or 0.31% of total loans, which was more than adequately covered by the loan loss reserve of $41.7 million, or a 452% coverage ratio. The foregoing asset quality ratios have been recognized as among the best in the industry. On page 24 of this report is a definition of terms which should aid in the understanding of this report as well as the management discussion and analysis which follows. The "Management's Discussion and Analysis" section on pages 4 through 23 provides a comprehensive review of the financial condition and results of operations of One Valley for 1997 and prior years, and should be read in its entirety. Some of the highlights include: o Net income grew at a 9.4% compound annual growth rate over the last five years, while earnings per share grew at a 9.1% annual rate during the same period. Return on assets averaged 1.27% over the past five years, while return on equity averaged 13.83% over the same time. o Loans grew 7.8% per year while deposits grew 4.0% per year over the past five years. o One Valley's strong capital position has been maintained over the last five years due to a 9.0% compound growth rate in equity, thereby producing an average equity to assets ratio of 9.2% during this period. o Owners have benefited from One Valley's consistent growth as dividends per share grew at a 12.2% compound annual rate for the five-year period ended December 31, 1997. 2 Other highlights during 1997 were as follows: o In May, U.S. Banker magazine ranked One Valley as the eighth best performing bank of the 100 largest banks in the country based upon a composite quality criteria of profitability, asset quality, operating efficiency and capital adequacy. This is the second year in a row One Valley has been ranked in the top ten. o One Valley was named to Keefe Bruyette and Woods' "1997 Honor Roll" of banks for being one of eleven banks in their universe of 127 banks to report ten consecutive years of increased earnings per share. o The third quarter five-for-four stock split effected in the form of a 25% stock dividend. o Owners realized a 33.7% total return on their investment in One Valley during 1997, and an 18.5% compound annual rate of return over the past five years. o One Valley's market capitalization exceeded $1 billion for the first time in 1997 and One Valley ranked as the 86th largest bank in the country in terms of market capitalization at year-end. o Announced in October the purchase of fifteen branches in Charlottesville, Virginia and surrounding counties from Wachovia Corporation. These branches included $290 million in deposits and $127 million in loans and the purchase was the result of Wachovia's divestiture in connection with its previously announced acquisition of Jefferson National Bank and Central Fidelity National Bank. o Signed a definitive agreement in December to merge with FFVA Financial Corporation, a $553 million thrift holding company headquartered in Lynchburg, Virginia. o Sold One Valley's corporate trust servicing business to the Bank of New York. o Expanded One Valley's ATM network to 235 locations as a result of new ATM's located at quality convenience stores. o Introduced the "Freedom" marketing campaign to highlight consumers' choice of expanded banking convenience and products through PC banking and bill payment together with telephone banking and bill payment -- One Valley customers can now bank anytime, anywhere. In reviewing the year 1997, One Valley experienced another year of growth and profitability, while providing comprehensive products and services that meet our customers' needs. In addition, progress was made on improving our operational efficiency through the use of technology and consolidating those functions that are transparent to the customer. As 1998 unfolds, One Valley must continue those initiatives begun in 1997 to enhance customer relationships by providing solutions to their needs and making operations appear seamless to the customer. Certainly 1998 presents many challenges to One Valley as the newly acquired Virginia offices, which will represent more than 20% of assets, are integrated into the company. Likewise, the continuation of the flat yield curve in 1998, in which the 30-year U. S. Treasury Bond yield is less than 1/2 of one percentage point higher than the overnight Federal Funds rate, will continue to put pressure on the net interest margin. Nevertheless by continuing to focus on the sound financial fundamentals referred to earlier in this report, One Valley should report another good year in 1998. [Bar graph appears here with the following plot points] Net Income and Dividends Per Share Year Net Income Dividends 1992 $1.36 $.45 1993 $1.41 $.54 1994 $1.73 $.60 1995 $1.83 $.66 1996 $1.94 $.74 1997 $2.10 $.80 [Graph appears here with the following plot points] Ten-Year Total Return To Shareholders* 1987 1989 1991 1993 1995 1997 (Need Plot Points here) Assumes initial investment of $1,000 and reinvestment of all dividends. Graph presents past performance and is not indicative of future results. In accordance with One Valley's retirement policy, Robert O. Orders, Sr. will retire from the board in April 1998. Bob has had an outstanding career in building a very successful construction company. With this same entrepreneurial spirit, he has been a valuable member of One Valley's board for many years as well as having provided keen insight to its executive committee. In addition, C. Michael Blair has elected to take early retirement from his position as President and CEO of One Valley Bank - North and completes his term as a member of the board. He will continue to serve as Chairman of the Board of One Valley Bank - North. As we move towards the next century, One Valley will continue to focus on serving its three main constituencies of customers, employees and owners as well as the communities it serves. Respectfully submitted, J. Holmes Morrison President and CEO 3 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- INTRODUCTION One Valley Bancorp, Inc. (One Valley) is a multi-bank holding company headquartered in Charleston, West Virginia. It operates eleven bank subsidiaries ranging in size from $120 million to $1.9 billion and includes five national banks. Through these banks, One Valley serves 56 cities and towns with a full range of banking services in 88 locations strategically located throughout West Virginia and central Virginia. One Valley is also the parent of a real estate management corporation that owns and operates a fifteen-floor office building in Charleston, West Virginia. This office building is the headquarters for One Valley Bancorp and the main office location of its lead bank. At December 31, 1997, One Valley had approximately $4.6 billion in total assets, $3.0 billion in total loans, and $3.5 billion in total deposits. The accompanying consolidated financial statements have been prepared by the management of One Valley in conformity with generally accepted accounting principles. The audit committee of the Board of Directors engaged Ernst & Young LLP, independent auditors, to audit the consolidated financial statements, and their report is included herein. Financial information appearing throughout this annual report is consistent with that reported in the consolidated financial statements. The following discussion is designed to assist readers of the consolidated financial statements in understanding significant changes in One Valley's financial condition and results of operations. Management's objective of a fair presentation of financial information is achieved through a system of strong internal accounting controls. The financial control system of One Valley is designed to provide reasonable assurance that assets are safeguarded from loss and that transactions are properly authorized and recorded in the financial records. As an integral part of that financial control system, One Valley maintains an internal audit staff at the parent company with audit responsibility for all of its subsidiaries. The activities of both the internal and external audit functions are reviewed by the audit committee of the Board of Directors. One Valley's Board of Directors declared a five-for-four stock split in the form a 25% stock dividend in August 1997. Since stock dividends increase the number of shares outstanding while leaving the total dollar amount of equity invested in the company unchanged, generally accepted accounting principles require that all historical per share information be restated to reflect the increase in the number of shares of common stock outstanding. This restatement enables the reader to compare all historical per share information with current operations and market price quotations. Accordingly, all per share information in this discussion and throughout this annual report reflects the increase in the number of shares outstanding as a result of the 25% stock dividend.
- ----------------------------------------------------------------------------------------------------------------------------------- Summary Statement of Net Income Table 1 - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) Increase (Decrease) From Prior Year ------------------------------------------ 1997 1996 ------------------ ------------------ 1997 1996 1995 AMOUNT PERCENT AMOUNT PERCENT -------- -------- -------- -------- ------- ------- ------- Interest income *........................ $332,937 $312,153 $282,372 $20,784 6.66 $29,781 10.55 Interest expense......................... 153,751 139,285 121,080 14,466 10.39 18,205 15.04 -------- -------- -------- -------- ------- ------- ------- Net interest income...................... 179,186 172,868 161,292 6,318 3.65 11,576 7.18 Other operating income................... 46,453 41,205 37,639 5,248 12.74 3,566 9.47 Gross securities transactions............ 709 (413) (65) 1,122 (348) 535.38 -------- -------- -------- -------- ------- ------- ------- Total operating income .................. 226,348 213,660 198,866 12,688 5.94 14,794 7.44 Provision for loan losses................ 7,381 5,204 5,632 2,177 41.83 (428) (7.60) Other operating expenses................. 132,349 128,415 119,591 3,934 3.06 8,824 7.38 -------- -------- -------- -------- ------- ------- ------- Income before taxes...................... 86,618 80,041 73,643 6,577 8.22 6,398 8.69 Income taxes ............................ 29,254 26,886 24,537 2,368 8.81 2,349 9.57 -------- -------- -------- -------- ------- ------- ------- Net income............................... $ 57,364 $ 53,155 $ 49,106 $ 4,209 7.92 $ 4,049 8.25 ======== ======== ======== ======== ======= ------- ------- * FULLY TAX-EQUIVALENT INTEREST INCOME USING THE RATE OF 35%.......................... $ 341,010 $ 319,632 $ 289,272 $ 21,378 6.69 $ 30,360 10.50
SUMMARY FINANCIAL RESULTS Net Income grew at a 9.4% compound growth rate over the last five years One Valley earned $57.4 million in 1997, a 7.9% increase over the $53.2 million earned in 1996. The increase is primarily due to increased net interest income and non-interest income which more than offset increased operating costs. This increase in earnings follows an increase in 1996 of 8.3% over the $49.1 million earned in 1995. Earnings comparisons are impacted by the April 1996 acquisition of CSB Financial Corporation (CSB) discussed below. Basic earnings per share was $2.10 in 1997, an increase of 8.3% over the $1.94 earned in 1996, which compares to the 6.0% increase in 1996 over the $1.83 earned in 1995. As shown in Table 2, the five-year compound growth rate in earnings per share since 1992 has been 9.1%. Table 2, Six-Year Selected Financial Summary, presents summary financial data for the past six years, 1992 through 1997, along with a five-year compound growth rate. This table shows the expansion of One Valley due to its growth in banking operations and its acquisition activity. Particular attention should be paid to the growth rates in equity, net loans, net income and cash dividends. The management of One Valley believes balanced sustainable growth in its financial position enhances shareholder value. A solid capital base is a key strength of One Valley. As shown in Table 2, the average equity-to-assets ratio has remained consistently strong over the past six years. This is a result of record earnings performances and a judicious acquisition strategy. Table 1, Summary Statement of Net Income, presents three years of comparative income statement information. Table 3 comparatively illustrates the components of ROA and ROE over the previous five years. Return on average assets (ROA) measures how effectively One Valley utilizes
- ----------------------------------------------------------------------------------------------------------------------------------- Six-Year Selected Financial Summary Table 2 - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 5-Year Compound Growth 1997 1996 1995 1994 1993 1992 Rate ----------- ----------- ----------- ----------- ----------- ---------- ------- Summary of Operations Interest income..................... $ 332,937 $ 312,153 $ 282,372 $ 251,383 $ 247,699 $ 263,484 4.79% Interest expense.................... 153,751 139,285 121,080 94,897 99,786 120,039 5.07 Net interest income................. 179,186 172,868 161,292 156,486 147,913 143,445 4.55 Provision for loan losses........... 7,381 5,204 5,632 4,788 5,788 11,389 (8.31) Non-interest income................. 46,453 41,205 37,639 37,445 39,192 36,801 4.77 Gross securities transactions....... 709 (413) (65) (867) 113 (35) Non-interest expense................ 132,349 128,415 119,591 120,156 125,150 115,538 2.75 Net income.......................... 57,364 53,155 49,106 46,211 37,954 36,638 9.38 Per Share Data Net income: Basic............................ $ 2.10 $ 1.94 $ 1.83 $ 1.73 $ 1.41 $ 1.36 9.08% Diluted.......................... 2.07 1.91 1.82 1.72 1.40 1.35 8.92 Cash dividends...................... 0.80 0.74 0.66 0.60 0.54 0.45 12.20 Book value.......................... 15.61 14.77 13.74 12.11 11.33 10.42 8.41 Selected Average Balances Net loans........................... $2,809,252 $2,652,817 $2,392,572 $2,199,686 $2,026,748 $1,926,773 7.83% Investment securities............... 1,261,887 1,152,981 997,269 1,050,980 1,074,467 1,049,459 3.76 Total assets........................ 4,387,065 4,104,520 3,689,211 3,540,451 3,467,261 3,373,245 5.40 Deposits............................ 3,438,441 3,270,975 3,006,906 2,930,555 2,895,131 2,829,263 3.98 Long-term borrowings ............... 28,610 18,602 11,416 22,931 36,088 25,703 2.17 Equity.............................. 413,226 389,705 348,273 315,724 294,733 269,007 8.96 Selected Ratios Average equity to assets............ 9.42% 9.49% 9.44% 8.92% 8.50% 7.97% Return on average assets............ 1.31 1.30 1.33 1.31 1.09 1.09 Return on average equity............ 13.88 13.64 14.10 14.64 12.88 13.62 Dividend payout ratio............... 38.10 38.14 36.07 34.68 38.30 33.09
5 [Graph appears here with the following plot points] Net Income Dollars in millions Net Year Income - ---- ------- 1992 $36,638 1993 $37,954 1994 $46,211 1995 $49,106 1996 $53,155 1997 $57,364 its assets to produce net income. One Valley's 1997 ROA of 1.31% was a slight increase from the 1.30% ROA reported in 1996, down slightly from the 1.33% ROA in 1995. As shown in Table 3, the increase in ROA is attributed primarily to an increase in non-interest income and a decrease in non-interest expense. Non-interest expense as a percent of average earning assets has consistently declined in years 1993 through 1997 from their previous years' results. This is the result of increased operational efficiency and an increase in average earning assets. During 1997, non-interest income as a percent of average earning assets increased rather significantly as a result of fee income from new products and services. These two positive trends offset the decline in net credit income. The decline in net credit income (net interest income less the provision for loan losses) as a percent of average earning assets is due to two factors. The current low interest rate environment tends to decrease the yield on earning assets, while the increase in the competition for funds tends to increase the cost of funding earning assets. However, as One Valley's net overhead ratio (non-interest expense less non-interest income as a percent of average earning assets) has steadily declined to 2.08% in 1997, down from 2.28% in 1996 and 2.39% in 1995, ROA has remained consistent. 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 1997 ROE was 13.88%, compared to the 13.64% earned in 1996 and 14.10% reported in 1995. ROE increased in 1997, primarily due to One Valley's strong earnings performance and a more efficient use of the equity generated from the CSB acquisition in 1996. ACQUISITION ACTIVITY At the close of business on April 30, 1996, One Valley acquired CSB Financial Corporation, a $336 million Federal Savings Bank holding company headquartered in Lynchburg, Virginia. The acquisition of CSB expanded One Valley's presence into central Virginia, a growing market for financial services which provides additional geographical diversification for One Valley. Pursuant to the merger agreement, One Valley exchanged 0.6774 shares of One Valley common stock for each share of CSB common stock. At the date of acquisition, CSB had total loans of $164 million, investment securities of $136 million, and total deposits of $257 million. The combination was accounted for under the purchase method of accounting. Accordingly, consolidated results for 1996 include the operations of CSB only from the date of acquisition. Comparisons of average balances and income statement categories are all affected by the CSB acquisition.
- --------------------------------------------------------------------------------------------------------------------------------- Analysis of Return on Assets and Equity Table 3 - --------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1997 1996 1995 1994 1993 ------ ------- ------ ------ ------ As a percent of average earning assets: Fully taxable-equivalent net interest income *........................... 4.56% 4.72% 4.91% 4.98% 4.77% Provision for loan losses..................... (0.18) (0.14) (0.16) (0.15) (0.18) ------ ------- ------ ------ ------ Net credit income........................... 4.38 4.58 4.75 4.83 4.59 Non-interest income........................... 1.15 1.07 1.10 1.12 1.22 Non-interest expense.......................... (3.23) (3.35) (3.49) (3.67) (3.91) Tax equivalent adjustment..................... (0.19) (0.20) (0.20) (0.20) (0.15) Applicable income taxes....................... (0.71) (0.71) (0.72) (0.67) (0.57) ------ ------- ------ ------ ------ Return on average earning assets ................ 1.40 1.39 1.44 1.41 1.18 Multiplied by average earning assets to average total assets..................... 93.49 93.13 92.77 92.59 92.33 ------ ------- ------ ------ ------ Return on average assets ........................ 1.31% 1.30% 1.33 % 1.31 % 1.09 % Multiplied by average assets to average equity........................... 10.62X 10.53X 10.59X 11.21X 11.76X ------ ------- ------ ------ ------ Return on average equity ........................ 13.88% 13.64% 14.10% 14.64% 12.88% ====== ======= ====== ====== ======
*FULLY TAX-EQUIVALENT USING THE RATE OF 35% 6 BALANCE SHEET ANALYSIS SUMMARY A financial institution's primary sources of revenue are generated by its earning assets, while 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 in attaining a financial institution's optimal profitability while maintaining a minimum amount of interest rate and credit risk. Information on rate-related sources and uses of funds for each of the three years in the period ended December 31, 1997, is provided in Table 4, Average Balance Sheet/Net Interest Income Analysis. In 1997, average earning assets grew by 7.3% or $278.7 million over 1996, following an 11.7% or $400.2 million increase in 1996 over 1995. Average interest bearing liabilities, the primary source of funds supporting earning assets, increased 7.0% or $231.0 million over 1996, which follows a $361.2 million or 12.3% increase in 1996 over 1995. Approximately one-third of the increase in 1997 and one-half of the increase in 1996 was due to the purchase of CSB. The remaining 1997 and 1996 increases in interest bearing assets and liabilities were the result of increases in banking operations as more fully explained below. Additional information on each of the components of earning assets and interest bearing liabilities is contained in the following sections of this report.
- ----------------------------------------------------------------------------------------------------------------------------------- Average Balance Sheet/Net Interest Income Analysis Table 4 - ----------------------------------------------------------------------------------------------------------------------------------- (Dollars in thousands) 1997 1996 1995 ------------------------------- ----------------------------- ----------------------------- Average Yield/ Average Yield/ Average Yield/ Balance Interest (1) Rate (1) Balance Interest(1) Rate(1) Balance Interest(1) Rate(1) --------- ------------ -------- --------- ----------- ------- --------- ----------- ------- Assets Loans(2) Taxable......................... $2,805,019 $247,662 8.83% $2,650,425 $235,153 8.87% $2,397,405 $217,034 9.05% Tax-exempt...................... 46,208 4,600 9.95 43,740 4,328 9.89 33,977 3,774 11.11 ---------- -------- ---- --------- ------- ---- ---------- -------- Total loans................... 2,851,227 252,262 8.85 2,694,165 239,481 8.89 2,431,382 220,808 9.08 Less: Allowance for losses...... 41,975 41,348 38,810 ---------- -------- ---- --------- ------- ---- ---------- -------- Total loans-net............... 2,809,252 8.98 2,652,817 9.03 2,392,572 9.23 Investment securities Taxable......................... 1,035,664 68,798 6.64 948,239 62,447 6.59 810,089 50,693 6.26 Tax-exempt...................... 226,223 18,466 8.16 204,742 17,040 8.32 187,180 15,941 8.52 ---------- -------- ---- --------- ------- ---- ---------- -------- Total securities ............. 1,261,887 87,264 6.92 1,152,981 79,487 6.89 997,269 66,634 6.68 Federal funds sold & other......... 30,140 1,484 4.92 16,815 664 3.95 32,595 1,830 5.61 ---------- -------- ---- --------- ------- ---- ---------- -------- Total earning assets.......... 4,101,279 341,010 8.31 3,822,613 319,632 8.36 3,422,436 289,272 8.45 Other assets ...................... 285,786 281,907 266,775 ---------- --------- ---------- Total assets.................. $4,387,065 $4,104,520 $3,689,211 ========== ========== ========== Liabilities and Equity Interest bearing liabilities: Interest bearing demand deposits..................... $ 475,060 8,594 1.81 $ 488,256 9,717 1.99 $ 480,528 11,018 2.29 Savings deposits................ 710,022 21,238 2.99 668,836 18,407 2.75 695,603 19,349 2.78 Time deposits................... 1,843,156 99,078 5.38 1,729,066 91,741 5.31 1,449,779 76,126 5.25 ---------- -------- ---- --------- ------- ---- ---------- -------- Total interest bearing deposits.................. 3,028,238 128,910 4.26 2,886,158 119,865 4.15 2,625,910 106,493 4.06 Short-term borrowings.......... 461,725 23,076 5.00 382,821 18,276 4.77 289,103 13,899 4.81 Long-term borrowings ........... 28,610 1,765 6.17 18,602 1,144 6.15 11,416 688 6.03 ---------- -------- ---- --------- ------- ---- ---------- -------- Total interest bearing liabilities................. 3,518,573 153,751 4.37 3,287,581 139,285 4.24 2,926,429 121,080 4.14 Demand deposits.................... 410,203 384,817 380,996 Other liabilities.................. 45,063 42,417 33,513 Shareholders' equity............... 413,226 389,705 348,273 ---------- --------- ---------- Total liabilities and equity.. $4,387,065 $4,104,520 $3,689,211 ========== ========== ========== Net interest earnings.............. $187,259 $180,347 $168,192 ======== ======== ======== Net yield on earning assets........ 4.56% 4.72% 4.91% ===== =====
(1) FULLY TAX-EQUIVALENT USING THE RATE OF 35%. (2) NON-ACCRUAL LOANS ARE INCLUDED IN AVERAGE BALANCES. 7 [Graph appears here with the following plot points) Total Loans Dollars in millions 1992 1993 1994 1995 1996 1997 - -------------------------------------------------------------------------------- Commercial, Financial & Other 345 370 442 396 405 448 Commerical Real Estate 329 362 349 410 474 505 Residential Real Estate 871 972 1,050 1,146 1,392 1,487 Consumer 454 465 532 561 539 529 - -------------------------------------------------------------------------------- 1,998 2,169 2,373 2,512 2,810 2,969 LOAN PORTFOLIO Total loans increased by $158 million in 1997 One Valley's loan portfolio is its largest and most profitable component of average earning assets, totaling 68.5% of average earning assets during 1997. One Valley continued to emphasize increasing its loan portfolio in 1997. Average net loans increased by $156.4 million or 5.9% in 1997. $59.0 million of the increase was from the effect of the CSB acquisition and subsequent loan growth in the Virginia market. The remaining increase in 1997 average loans was fueled primarily by increases in residential and commercial real estate loans. The 1997 increase follows a 10.9% or $260.2 million increase in 1996. Approximately 40% of the 1996 increase resulted from the CSB acquisition. The remaining increase in 1996 average loans was also primarily in residential and commercial real estate loans. As a result of these increases in loan activity, One Valley's loan-to-deposit ratio maintained its upward trend in 1997, ending the year at 83.2%. This ratio compares to 81.3% at December 31, 1996 and 81.1% at December 31, 1995. 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, 1997, increased by $158.5 million or 5.6% over the total at December 31, 1996. This increase compares to a $298.3 million or 11.9% increase in 1996 over total loans at December 31, 1995. As mentioned above, $164.4 million in loans was acquired in 1996 through the CSB acquisition. The increase in 1997 lending was primarily from internal growth focused in real estate loans. Residential real estate loans including revolving home equity loans increased by $94.3 million or 6.8% during 1997, compared to a $245.7 million or 21.4% increase in 1996. Approximately one-half of the 1996 increase in residential real estate loans was acquired through the CSB purchase. Commercial real estate loans increased by $26.7 million or 6.4% in 1997, following a $53.8 million or 14.7% increase in 1996 from year-end 1995. Approximately 25% of the 1996 increase in that category was acquired through the CSB acquisition. 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 1997 by $45.1 million or 12.8%. This follows a slight increase during 1996 of $2.6 million or 0.8%. The increase in 1997 was primarily due to increases in the levels of credit line usage by large commercial customers. Consumer installment loans decreased by $9.7 million or 1.8% in 1997 primarily due to declines in automobile loans. This decrease follows a $21.6 million or 3.9% decrease during 1996. 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 which exceed 10% of total loans. Additionally, One Valley's loan portfolio contains no loans to foreign borrowers nor does it have a material volume of highly leveraged transaction lending. Over the past four years, total loans have increased $799 million, a result of acquisitions and internal growth. While loan growth has been substantial, One Valley imposes underwriting and credit standards which are designed to maintain a quality loan portfolio. Loans secured by real estate, which in total constituted approximately 69% of One Valley's loan portfolio at December 31, 1997, consist of a diverse portfolio of predominantly single family residential loans and loans for commercial purposes where real estate is merely collateral, not the primary source of repayment. The majority of these loans is secured by property located within West Virginia, where real estate values have remained relatively stable over the past ten years. One Valley also originates residential real estate loans to be sold in the secondary market. In 1997, $95.4 million of loans were originated to be sold in the secondary market. This compares to $62.9 million of new loan volume originated for sale in the secondary market in 1996 and $52.4 million in 1995. This activity generates considerable processing and servicing fee income for One Valley, as discussed further in the "Income Statement Analysis" section of this report. Volumes of loans originated for sale fluctuate inversely with mortgage interest rates. Due to a lower interest rate environment in 1997, a higher volume of mortgage activity was realized when compared to 1996 and 1995. 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 included in the risk-based capital ratios
- ---------------------------------------------------------------------------------------------------------------------------------- Loan Summary Table 5 - ---------------------------------------------------------------------------------------------------------------------------------- Dollars in Thousands 1997 1996 1995 1994 1993 ----------- ----------- ----------- ---------- ---------- Summary of Loans by Type Commercial, financial, agricultural, and other loans................ $ 396,503 $ 351,409 $ 348,761 $ 398,105 $ 334,068 Real estate: Construction loans............................ 51,927 53,815 46,967 42,746 33,682 Revolving home equity......................... 192,252 152,006 128,754 113,142 102,648 Single family residentials.................... 1,293,446 1,239,406 1,016,983 936,698 869,502 Apartment buildings and complexes............. 59,656 55,764 44,830 37,475 41,465 Commercial.................................... 445,400 418,668 364,913 311,691 320,668 Bankers' acceptances............................ 0 0 0 849 2,123 Consumer installment loans...................... 529,494 539,144 560,754 532,251 465,216 ----------- ----------- ----------- ---------- ---------- Subtotal...................................... 2,968,678 2,810,212 2,511,962 2,372,957 2,169,372 Less: Allowance for loan losses................ 41,686 41,745 39,534 37,438 36,484 ----------- ----------- ----------- ---------- ---------- Net loans..................................... $2,926,992 $2,768,467 $2,472,428 $2,335,519 $2,132,888 =========== =========== =========== ========== ========== Percent of Loans by Category Commercial, financial, agricultural, and other....................... 13.36% 12.50% 13.88% 16.78% 15.40% Real estate: Construction loans............................ 1.75 1.92 1.87 1.80 1.55 Revolving home equity......................... 6.48 5.41 5.13 4.77 4.73 Single family residentials.................... 43.57 44.10 40.49 39.46 40.09 Apartment buildings and complexes............. 2.01 1.98 1.78 1.58 1.91 Commercial.................................... 15.00 14.90 14.53 13.14 14.78 Bankers' acceptances............................ 0.00 0.00 0.00 0.04 0.10 Consumer installment loans...................... 17.83 19.19 22.32 22.43 21.44 ----------- ----------- ----------- ---------- ---------- Total......................................... 100.00% 100.00% 100.00% 100.00% 100.00% =========== =========== =========== ========== ========== Non-Performing Assets Non-accrual loans............................... $ 7,418 $ 8,528 $ 7,174 $ 7,664 $ 8,819 Other real estate owned......................... 1,808 1,791 1,565 1,436 3,124 Restructured loans.............................. 0 0 0 552 597 ----------- ----------- ----------- ---------- ---------- Total non-performing assets................... $ 9,226 $ 10,319 $ 8,739 $ 9,652 $ 12,540 =========== =========== =========== ========== ========== Non-performing assets as a % of total loans..... 0.31% 0.37% 0.35% 0.41% 0.58% Loans Past Due Over 90 Days ....................... $ 5,641 $ 4,273 $ 5,582 $ 3,827 $ 3,180 As a % of total loans........................... 0.19% 0.15% 0.22% 0.16% 0.15% Allocation of Loan Loss Reserve by Loan Type Commercial, financial, and unallocated portion........................... $ 16,868 $ 16,939 $ 15,638 $ 14,765 $ 16,698 Real estate construction loans.................. 305 285 250 220 180 Real estate loans - other....................... 8,270 8,583 8,298 8,036 8,277 Consumer installment loans...................... 16,243 15,938 15,348 14,417 11,329 ----------- ----------- ----------- ---------- ---------- Total......................................... $ 41,686 $ 41,745 $ 39,534 $ 37,438 $ 36,484 =========== =========== =========== ========== ==========
9 used by the Federal Reserve to evaluate capital adequacy. Additional information on off-balance sheet commitments is contained in Note T to the consolidated financial statements. In spite of some increases in net charge-offs over the last two years, overall asset quality for the year was sound. 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 $9.2 million or 0.31% of total loans at year-end 1997, a decrease from the percentage at December 31, 1996. While levels of non-performing assets are susceptible to increases 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 over 90 days, but which continue to accrue interest, increased in 1997. At year-end, these loans constituted 0.19% of total year-end loans, a slight increase from the 0.15% at December 31, 1996, but lower than the 0.22% at December 31, 1995. The consistently favorable ratio of problem loans to total loans has occurred while the loan portfolio has increased significantly over the
- ---------------------------------------------------------------------------------------------------------------------------------- Comparative Loan Loss Information Table 6 - ---------------------------------------------------------------------------------------------------------------------------------- For the Year Ended December 31 1997 1996 1995 1994 1993 ------------ ----------- ----------- ----------- ----------- Allowance for Loan Losses, Beginning of Period ........... $ 41,745 $ 39,534 $ 37,438 $ 36,484 $ 35,679 Charge-offs Commercial, financial, and agricultural loans.......... 2,098 1,105 726 1,207 2,644 Real estate construction loans......................... 34 0 0 0 0 Real estate loans - other.............................. 809 652 574 1,118 1,320 Consumer installment loans............................. 6,796 5,281 4,311 3,660 3,417 ------------ ----------- ----------- ----------- ----------- Total charge-offs.................................... 9,737 7,038 5,611 5,985 7,381 ------------ ----------- ----------- ----------- ----------- Recoveries: Commercial, financial, and agricultural loans.......... 446 306 519 793 930 Real estate construction loans......................... 0 0 0 0 0 Real estate loans - other.............................. 399 315 224 274 373 Consumer installment loans............................. 1,452 1,198 1,097 1,084 1,095 ------------ ----------- ----------- ----------- ----------- Total recoveries..................................... 2,297 1,819 1,840 2,151 2,398 ------------ ----------- ----------- ----------- ----------- Net charge-offs........................................... 7,440 5,219 3,771 3,834 4,983 Provision for loan losses................................. 7,381 5,204 5,632 4,788 5,788 Balance of acquired subsidiaries.......................... 0 2,226 235 0 0 ------------ ----------- ----------- ----------- ----------- Allowance for Loan Losses, End of Period ................. $ 41,686 $ 41,745 $ 39,534 $ 37,438 $ 36,484 ============ =========== =========== =========== =========== Average total loans....................................... $2,851,227 $2,694,165 $2,431,382 $2,237,146 $2,063,680 Total loans at year-end................................... 2,968,678 2,810,212 2,511,962 2,372,957 2,169,372 As a Percent of Average Total Loans: Net charge-offs........................................ 0.26% 0.19% 0.16% 0.17% 0.24% Provision for loan losses.............................. 0.26 0.19 0.23 0.21 0.28 Allowance for loan losses.............................. 1.46 1.55 1.63 1.67 1.77 As a Percent of Total Loans at Year-end: Allowance for loan losses.............................. 1.40% 1.49% 1.57% 1.58% 1.68% As a Multiple of Net Charge-offs: Allowance for loan losses.............................. 5.60X 8.00X 10.48X 9.76X 7.32X Income before tax and provision for loan losses........ 12.63 16.33 21.02 19.02 12.46
10 last five years, and thus the favorable ratio is indicative of One Valley's commitment to a quality loan portfolio. Both the increase in the size and the credit quality of the loan portfolio have enabled One Valley to increase its net credit income by $4.1 million or 2.5% in 1997 and $12.0 million or 7.7% in 1996. It is One Valley's policy to place loans that are past due over 90 days on non-accrual status, unless the loans are adequately secured and in the process of collection. For real estate loans, upon repossession, the balance of the loan is transferred to "Other Real Estate Owned" (OREO) and carried at the lower of the outstanding loan balance or the fair market value of the property less costs to dispose based on current appraisals and other current market trends. If a writedown of the OREO property is necessary at the time of foreclosure, the amount is charged off against the allowance for loan losses. A quarterly review of the recorded property value is performed in conjunction with normal loan reviews, and 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 31, 1997. During 1997, One Valley recognized less than $0.1 million of interest on non-accrual loans, while approximately $0.8 million would have been recognized on these loans had they been current throughout 1997 in accordance with their original terms. Similarly, during 1996, less than $0.1 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 creditor will be unable to pay all of the principal and interest amounts according to the contractual terms of the loan agreement. In determining whether a loan is impaired, management considers such factors as past payment history, recent economic events, current and projected financial condition and other relevant information that is available. Impairment is determined on a loan-by-loan basis and generally consists of 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 expedient, at the loan's observable market price or the fair value of the collateral if the loan is collateral dependent. Additional information on impaired loans is contained in Note H to the consolidated financial statements. The allowance for loan losses is maintained to absorb probable losses associated with lending activities. 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. As a part of the holding company structure, One Valley maintains a credit analysis and review department to evaluate large commercial credit requests and to complete loan follow-up procedures. One Valley also maintains a loan administration function to continually identify and monitor problem loans. At December 31, 1997, the allowance for loan losses was $41.7 million or 1.40% of total year-end loans. This ratio is a decrease from the prior year's 1.49% and the 1.57% at the end of 1995. In management's opinion, the allowance for loan losses is adequate to absorb the current estimated risk of 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. The provision for loan losses in 1997 was $7.4 million, up from the $5.2 million provision in 1996 and the $5.6 million provision in 1995. The increase in 1997 was in response to a change in the risk profile of the consumer loan portfolio early in 1997 and to provide for the continued growth of the loan portfolio. One Valley continually evaluates the adequacy of its allowance for loan losses, and changes in the provision are based on the estimated inherent risk of the loan portfolio. While One Valley experienced considerable loan growth during 1997, 1996 and 1995, the overall credit quality of the portfolio has remained consistent [Graph appears here with the following plot points) Provision for Loan Losses and Net Charge-offs As a percent of average total loans Net Charge- Offs Provision ---- --------- 1992 0.32% 0.58% 1993 0.24% 0.28% 1994 0.17% 0.21% 1995 0.16% 0.23% 1996 0.19% 0.19% 1997 0.26% 0.26% [Graph appears here with the following plot points) Non-Performing Assets & Loans 90 Days Past Due As a percent of average total loans Non Loans 90 Performing Days Assets Past Due ---- --------- 1992 1.16% 0.21% 1993 0.58% 0.15% 1994 0.41% 0.16% 1995 0.35% 0.22% 1996 0.37% 0.15% 1997 0.31% 0.19% 11 INVESTMENT SECURITIES INCREASED BY $109 MILLION IN 1997 over those years, as evidenced by the low level of non-performing assets and the low level of net charge-offs during those years. While net charge-offs in 1997 increased by $2.2 million from 1996 net charge-offs, largely due to a $1.3 million increase in consumer loan net charge-offs and a $0.9 million increase in commercial net charge-offs, net charge-offs as a percentage of average total loans increased only slightly to 0.26%, compared to 0.19% in 1996 and 0.16% in 1995. In all three years, these ratios compare consistently with peer group banks across the country. The increase in 1997 charge-offs follows a $1.4 million increase in 1996 from the level of 1995 net charge-offs, primarily in consumer loans. 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. These factors are considered in determining the adequacy of the allowance for loan losses, which at December 31, 1997, was sufficient to absorb over five and one-half times the amount of net charge-offs experienced during 1997. INVESTMENT PORTFOLIO AND OTHER EARNING ASSETS Investment securities averaged $1,261.9 million in 1997, a $108.9 million or 9.4% increase over the $1,153.0 million averaged in 1996. This increase follows a 15.6% increase over the $997.3 million averaged in 1995. Just over one-half of the increase in 1996 was a result of the CSB purchase. The increase in the average balance during 1997 was primarily the result of One Valley's asset/liability strategy to use borrowed funds to purchase higher yielding investments to mitigate the risk of a decline in interest rates. As sources of funds (deposits, federal funds purchased, and repurchase agreements with corporate customers) fluctuate, excess funds are initially invested in federal funds sold and other short-term investments. Based upon continual 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 (Table 8). At the time of purchase, management determines whether securities will be classified as available-for-sale or held-to-maturity. If classified as held-to-maturity, securities are
- ----------------------------------------------------------------------------------------------------------------------------------- REMAINING MATURITIES OF LOANS TABLE 7 - ----------------------------------------------------------------------------------------------------------------------------------- Balance Projected Maturities* December 31 One Year One to Five Over Five 1997 or Less Years Years ----------- ---------- ---------- ---------- Commercial, financial, and agricultural loans............. $373,651 $191,569 $135,657 $ 46,425 Real estate construction loans............................ 51,927 29,235 10,689 12,003 Commercial real estate loans.............................. 505,056 94,920 250,906 159,230 Loans with: Floating rates......................................... $419,328 $ 95,628 $244,980 $ 78,720 Predetermined rates.................................... 511,306 220,096 152,272 138,938
*BASED ON SCHEDULED OR APPROXIMATE REPAYMENTS. 12 recorded at historical cost and adjusted monthly over their remaining lives for the accretion or amortization of the difference between the cost and maturity value of the investments. Thus at the time of maturity, the proceeds from maturity and the book value of the investment are equivalent and no gain or loss is recognized. One Valley, through its size and the stable nature of its deposit base, is able to purchase securities with a wide variety of maturities. As shown in Table 8, Securities Maturity and Yield Analysis, the average maturity period of securities available-for-sale at December 31, 1997 was 6 years 8 months, lengthened primarily by the 14-year 7-month average final maturity of the mortgage-backed securities portfolio. 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 75% of the securities available-for-sale are U.S. Government agency or Treasury securities that have an average maturity of 3 years 5 months. The average maturity period of securities held-to-maturity was 9 years 7 months at the end of 1997. The
- ---------------------------------------------------------------------------------------------------------------------------- Securities Maturity and Yield Analysis TABLE 8 - ---------------------------------------------------------------------------------------------------------------------------- As of December 31, 1997 Average Taxable Available-for-Sale Market Maturity Equivalent Value (Years/ Months) Yield* ----------- --------------- ---------- U. S. Treasury Securities Within one year......................................... $ 69,047 6.11% After one but within five years......................... 180,182 6.40 After five but within ten years......................... 21,223 7.06 ----------- Total U.S. Treasury Securities ........................ 270,452 1/10 6.38 U. S. Government Agencies Securities Within one year......................................... 33,204 6.57 After one but within five years......................... 219,853 6.33 After five but within ten years......................... 254,810 6.65 Over ten years.......................................... 45,549 7.10 ----------- Total U.S. Government Agencies Securities.............. 553,416 5/3 6.56 Mortgage-Backed Securities** Within one year ........................................ 1,656 6.81 After one but within five years......................... 9,820 6.75 After five but within ten years......................... 22,650 6.81 Over ten years.......................................... 198,191 7.17 ---------- Total Mortgage-Backed Securities....................... 232,317 14/7 7.06 Other Securities ......................................... 45,829 ---------- Total Securities Available-for-Sale ...................... $1,102,014 6/8 6.35% ========== As of December 31, 1997 Average Taxable Held-to-Maturity Book Maturity Equivalent Value (Years/ Months) Yield* ------------- --------------- ---------- States and Political Subdivisions Securities Within one year......................................... $ 6,299 11.44% After one but within five years......................... 21,062 8.61 After five but within ten years......................... 101,066 7.72 Over ten years.......................................... 108,863 7.97 ----------- Total States and Political Subdivisions Securities .... 237,290 9/7 8.01 Other Securities ......................................... 342 ----------- Total Securities Held-to-Maturity ........................ $ 237,632 9/7 8.01% ===========
* FULLY TAX-EQUIVALENT USING THE RATE OF 35%. ** MATURITIES FOR MORTGAGE-BACKED SECURITIES ARE BASED ON FINAL MATURITY. 13 average maturity of the investment portfolio is managed at a level to maintain a proper matching with interest rate risk guidelines. During 1997, One Valley sold a portion of the securities classified as available-for-sale as part of its management of interest rate risk, as shown in the Statements of Cash Flows. One Valley does not have any securities classified as 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 F to the consolidated financial statements. DEPOSITS INCREASED BY 5.1% IN 1997 Due to unfavorable laws relating to investments in tax-exempt assets and corporate minimum tax regulations, levels of tax-exempt securities held by One Valley, as well as their average maturity period, declined in the years from 1986 to 1993. However, due to the lower interest rate environment, overall yields on tax-exempt securities have become attractive once again. During 1997, One Valley increased its tax-exempt securities by $20.4 million, or 9.4%, over the level of tax-exempt securities held at December 31, 1996. This increase followed an increase in 1996 of $12.2 million, or 6.0%, over the level held at December 31, 1995. Future investments in tax-exempt securities will generally depend upon comparisons to taxable yields and the liquidity needs of One Valley. One Valley's average investment in federal funds sold and other short-term investments increased 79.3% in 1997. This follows a 48.4% decrease in 1996. Averaging $30.1 million in 1997, federal funds sold and other short-term investments increased $13.3 million from the $16.8 million averaged in 1996, but was less than the $32.6 million averaged during 1995. 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 In 1997, One Valley once again increased the rates paid on its interest bearing deposits. The average rate paid on interest bearing liabilities increased to 4.37% in 1997, up from the 4.24% average rate paid in 1996 and the 4.14% average rate paid in 1995. The increase in 1997 is largely due to a $114.1 million or 6.6% increase in longer term but more costly time deposits and a seven basis point increase in the average rate paid on those deposits. Due to alternative sources of investment and an increasing sophistication of customers in funds management techniques to maximize return on their money, competition for funds has become
- ---------------------------------------------------------------------------------------- Maturity Distribution of Certificates of Deposit Table 9 - ---------------------------------------------------------------------------------------- As of December 31, 1997 As of December 31, 1996 Amount Percent Amount Percent --------- ------- -------- ------- Three months or less................................... $ 89,545 31.42% $118,825 42.58% Three through six months............................... 48,886 17.16 45,256 16.21 Six through twelve months.............................. 76,303 26.78 48,863 17.51 Over twelve months..................................... 70,217 24.64 66,136 23.70 -------- ------- -------- ------- Total................................................ $284,951 100.00 % $279,080 100.00 % ======== ====== ======== =======
14 more intense. One Valley has offered new core deposit products as well as periodic special rate products to attract additional deposits. One Valley's deposits, on average, increased by 5.1% or $167.5 million in 1997. $93.0 million of this increase was the effect of the CSB acquisition and subsequent deposit growth in the Virginia market. The 1997 increase compares to an 8.8% or $264.1 million increase in 1996. Approximately $173.4 million of the 1996 increase was acquired through the CSB acquisition. The remaining 3.0% increase in 1996 compares to a 2.6% or $76.4 million increase in 1995. Non-interest bearing deposits increased by 6.6% or $25.4 million on average when compared to 1996, primarily due to increases in predominantly consumer based deposit accounts. Interest bearing deposits increased by 4.9% or $142.1 million over 1996, primarily in longer-term time deposits. Excluding the effect of the CSB acquisition, during 1996 non-interest bearing deposits remained relatively flat on average when compared to 1995, while interest bearing deposits increased by 3.5% or $91.4 million over 1995. These trends are reflective of customer trends to keep more funds in interest bearing accounts, thus reducing their balances in checking and other non-interest bearing deposit products, and the stiff competition for interest bearing investments in a lower interest rate environment. One Valley anticipates that similar trends will continue into the foreseeable future. To supplement modest deposit growth, One Valley has increasingly turned to short-term borrowings. Short-term borrowings increased, on average, by $78.9 million or 20.6% from 1996, following a 32.4% or $93.7 million increase in 1996 over 1995. Only $3.4 million of the increase in 1996 was the result of the CSB purchase. Repurchase agreements and other short-term borrowings increased, on average, by $71.7 million or 20.1% in 1997, primarily to fund loan and investment growth. This increase follows a $91.7 million or 34.6% increase in 1996. One Valley continues to evaluate the use of short-term borrowings in local and national markets as a resource to fund loan growth and investment strategies, as deposit growth has not kept pace with the growth in loans. Long-term borrowings, on average, increased by $10.0 million, or 53.8%, in 1997, following a $7.2 million or 62.9% increase in 1996. The increases in 1996 and 1997 were entirely the result of the CSB acquisition on April 30, 1996 and additional borrowings at that affiliate during the year, as One Valley integrated the acquisition into its existing asset/liability management strategy. As a result, One Valley now has $21.9 million of long-term debt, primarily Federal Home Loan Bank (FHLB) borrowings, with repayment schedules from one to six years. Other information regarding short- and long-term borrowings is contained in Note K to the consolidated financial statements. INTEREST SENSITIVITY AND LIQUIDITY Asset/liability management is a means of maximizing net interest income while minimizing interest rate risk by planning and controlling the mix and maturities of interest related assets and liabilities. One Valley has established an Asset/Liability Management Committee for the purpose of monitoring and managing interest rate risk. Interest rate risk is the earnings variation that could occur due to changes in market interest rates. [Chart appears on right side of page with the following plot points:] AVERAGE DEPOSITS (Dollars in millions) Demand Time Savings Savings Total Deposits Deposits Regular Checking Deposits -------- -------- ------- -------- -------- 1992 373 1,401 692 363 2,829 1993 397 1,247 800 451 2,895 1994 412 1,453 614 452 2,931 1995 381 1,613 532 481 3,007 1996 385 1,729 669 488 3,271 1997 410 1,843 710 475 3,438 15 A commonly used measure of interest rate risk is a gap report. A gap report identifies the ratio of earning assets to interest bearing liabilities that will mature or reprice within a given time period. In addition to the gap report, One Valley uses computer simulations of the next twelve months as a primary tool for analyzing interest rate risk and modeling business strategies in a dynamic framework. The simulations begin with the gap report information and use various assumptions, such as expected changes in the interest rate environment; the shape of the yield curve; pricing strategies for loans and deposits; the growth, volume and mix of interest sensitive assets and liabilities; and potential hedging strategies. These simulations assist management in minimizing risk and maintaining a conservative sensitivity position. Based on current simulations, One Valley anticipates that over the next twelve months a declining interest rate scenario would have a slight positive influence on net interest income whereas increasing rates would have a slight negative influence on net interest income. One Valley's investments have been limited to traditional investment securities and it does not currently have any investments in derivative instruments. However, One Valley continually evaluates all investment alternatives in its management of interest rate risk and asset/liability structure. Table 10, Interest Rate Sensitivity Summary, provides information about One Valley's financial instruments that are sensitive to changes in interest rates. For loans, securities and liabilities with contractual maturities, the table presents principal cash flows and related weighted-average interest rates by contractual maturity as well as One Valley's estimate of the impact of interest rate fluctuations on the
- --------------------------------------------------------------------------------------------------------------------------------- Interest Rate Sensitivity Summary Table 10 - --------------------------------------------------------------------------------------------------------------------------------- 1998 1999 2000 2001 2002 Thereafter Total Fair Value ---- ---- ---- ---- ---- ---------- ----- ---------- Rate Sensitive Assets Fixed interest rate loans..... $ 426,166. $298,991 $225,213 $183,646 $137,294 $281,088 $1,552,398 $1,561,147 Average interest rate....... 9.32%. 9.22% 8.90% 8.60% 8.52% 7.60% 8.77% Variable interest rate loans.. 359,300. 135,650 90,954 62,973 58,580 708,823 1,416,280 1,417,237 Average interest rate....... 8.63%. 8.55% 8.66% 8.80% 9.09% 8.20% 8.41% Fixed interest rate securities 329,729. 288,998 69,273 73,183 47,482 530,981 1,339,646 1,336,223 Average interest rate....... 6.35%. 6.49% 6.48% 6.52% 6.59% 6.04% 6.28% Rate Sensitive Liabilities Non interest-bearing deposits. $ 130,026. $ 74,301 $ 55,726 $ 51,546 $ 36,222 $116,559 $ 464,380 $ 464,380 Average interest rate.......- . - - - - - - Savings and interest- bearing checking............ 167,172. 162,454 130,907 111,209 95,615 574,638 1,241,995 1,241,995 Average interest rate....... 2.67%. 2.67% 2.67% 2.67% 2.67% 2.67% 2.67% Fixed interest rate time deposits............... 1,034,564. 347,481 90,513 24,389 17,572 2,176 1,513,695 1,520,095 Average interest rate....... 5.41%. 5.72% 5.98% 5.72% 5.89% 4.06% 5.52% Variable interest rate time deposits............... 297,492. - - - - - 297,492 297,492 Average interest rate....... 4.84%. - - - - - 4.84% Fixed interest rate borrowings 137,474. 143,321 5,006 6 6 2,837 288,650 288,779 Average interest rate....... 5.73%. 5.50% 5.73% 8.76% 8.76% 5.84% 5.62% Variable interest rate borrowings.................. 301,705. - - - - - 301,705 301,705 Average interest rate....... 4.68%. - - - - - 4.68%
THIS TABLE INCLUDES VARIOUS ASSUMPTIONS AND ESTIMATES BY MANAGEMENT OF MATURITY AND REPAYMENT PATTERNS. 16 prepayment of residential real estate loans, home equity loans and mortgage backed securities. For core deposits that have no contractual maturity, the table presents principal cash flows and, as applicable, related weighted-average interest rates based on historical experience, management's judgement, and statistical analysis, as applicable, concerning their most likely withdrawal behaviors. Liquidity is the ability to satisfy demands for deposit withdrawals, lending commitments, and other corporate needs. One Valley's liquidity is based on the stable nature of consumer core deposits held by the banking subsidiaries. Likewise, additional liquidity is available from holdings of investment securities and short-term investments which can be readily converted to cash. Furthermore, One Valley continues to have the ability to attract short-term sources of funds such as federal funds and repurchase agreements, and to arrange credit lines to meet its cash needs. One Valley generated $72.3 million of cash from operations in 1997, which compares to $73.6 million in 1996 and $65.7 million in 1995. Additional cash of $250.0 million was generated through net financing activities in 1997, which compares to $24.3 million in 1996 and $57.9 million in 1995. 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 $339.5 million in 1997, which compares to $102.7 million in 1996 and $166.0 million in 1995. Details on the sources and uses of cash can be found in the Consolidated Statements of Cash Flows in the consolidated financial statements. CAPITAL RESOURCES One Valley's average equity-to-asset ratio remained strong at 9.42% during 1997, down slightly from 9.49% during 1996 and 9.44% in 1995. The decrease in 1997 primarily resulted from a slight leveraging of the balance sheet to purchase investments prior to the anticipated decline in interest rates. At year-end 1997, One Valley's primary capital ratio was 10.08% compared to 10.45% at year-end 1996. 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 prescribed factors relative to credit risk, thus eliminating disincentives for holding low risk assets and requiring more capital for holding higher risk assets. At year-end 1997, One Valley's risk adjusted capital-to-assets ratio was 15.7% compared to 15.8% at December 31, 1996. 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, 1997 was 8.8% compared to 9.1% at December 31, 1996. Both of these ratios are well above the minimum 3.0% and the recommended 4.0 to 5.0% prescribed by the Federal Reserve. These healthy ratios are the direct result of management's desire 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 certain restrictions on the payment of dividends and the transfer of assets from the banking subsidiaries to the holding company. Historically, these restrictions have not had an adverse impact on One Valley's dividend policy, and it is not anticipated that they will in the future. Additional information concerning dividend restrictions is discussed in Note C to the consolidated financial statements. Simultaneous with the January 1996 announced merger agreement between One Valley and CSB, the Board of Directors authorized management to purchase up to 2.8 million shares of One Valley Bancorp common stock in the open market. During 1997, 820,403 shares (post 25% stock dividend) and 1,976,075 shares in 1996 (post two 25% stock dividends) were repurchased under this program. At December 31, 1997, One Valley held 4,346,846 shares in its treasury. Due to the pending FFVA merger in 1998, all remaining unfulfilled treasury stock authorizations have been cancelled. (Two charts appear on right side of page with the following plot points:) RETURN ON AVERAGE ASSETS Return on Assets --------- 1992 1.09% 1993 1.09% 1994 1.31% 1995 1.33% 1996 1.30% 1997 1.31% RETURN ON AVERAGE EQUITY Return on Equity --------- 1992 13.62% 1993 12.88% 1994 14.64% 1995 14.10% 1996 13.64% 1997 13.88% 17 INCOME STATEMENT ANALYSIS NET INTEREST INCOME NET INTEREST INCOME INCREASED BY $6.9 MILLION IN 1997 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 $187.3 million in 1997, up 3.8% over the 1996 level, following a 7.2% increase in 1996 over 1995. 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 taxable at the statutory federal tax rate of 35%. The increase in net interest income in 1997 is largely due to the increase in the volume of earning assets, primarily loans. As shown in Table 11, Rate Volume Analysis, increases in the volume of earning assets in both 1997 and 1996 have provided a significant increase in net interest income. In 1997, the increase in the volume of earning assets increased interest income by $22.1 million. This increase was dampened somewhat by decreases in interest yields on loans due to the lower overall interest rate environment on average for the entire year. As a result, total interest income increased by $21.4 million in 1997 over 1996. Similarly in 1997, an increased volume of interest bearing liabilities boosted interest expense by $10.5 million, and the higher cost of interest bearing liabilities resulted in an overall increase in total interest expense of $14.5 million. However, the increase in total interest income exceeded the increase in overall interest expense by $6.9 million on a fully tax-equivalent basis in 1997 over 1996. In 1996, increases in volumes of interest sensitive assets and liabilities increased total interest income and total interest expense over the previous year. Yet, as in 1997, the decline in yields on loans partially reduced overall interest income while the increase in rates paid on deposits increased interest expense. As the increase in the volume of earning assets outpaced the increase in interest bearing liabilities in 1996, net interest income increased by $12.2 million in 1996 over 1995. During both years, the increase in loan volume was the most significant factor contributing to increased net interest income. - -------------------------------------------------------------------------------- RATE VOLUME ANALYSIS OF CHANGES IN INTEREST INCOME AND EXPENSE TABLE 11 - --------------------------------------------------------------------------------
1997 vs 1996 1996 vs 1995 Increase (Decrease) Increase (Decrease) In Net Interest Income In Net Interest Income ---------------------------------- ---------------------------------- Volume Rate Total Volume Rate Total -------- ---------- -------- -------- ---------- --------- Earning Assets Loans: Taxable................................ $ 13,655 $ (1,146) $ 12,509 $ 22,521 $ (4,402) $ 18,119 Tax-exempt............................. 246 26 272 999 (445) 554 -------- ---------- -------- -------- ---------- --------- Total loans.......................... 13,901 (1,120) 12,781 23,520 (4,847) 18,673 Investment Securities: Taxable................................ 5,803 548 6,351 8,992 2,762 11,754 Tax-exempt............................. 1,759 (333) 1,426 1,468 (369) 1,099 -------- ---------- -------- -------- ---------- --------- Total investment securities ......... 7,562 215 7,777 10,460 2,393 12,853 Federal funds sold & other............... 625 195 820 (723) (443) (1,166) -------- ---------- -------- -------- ---------- --------- Total earning assets................. 22,088 (710) 21,378 33,257 (2,897) 30,360 Interest Bearing Liabilities Time and savings deposits ............... 5,999 3,046 9,045 10,759 2,613 13,372 Short-term borrowings ................... 3,911 889 4,800 4,475 (98) 4,377 Long-term borrowings .................... 617 4 621 442 14 456 -------- ---------- -------- -------- ---------- --------- Total interest bearing liabilities . 10,527 3,939 14,466 15,676 2,529 18,205 -------- ---------- -------- -------- ---------- --------- Net Interest Earnings ...................... $ 11,561 $ (4,649) $ 6,912 $ 17,581 $ (5,426) $ 12,155 ======== ========== ========= ======== ========== =========
* 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. 18 In 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. In 1997, a decrease in the yield on loans was only partially offset by an increase in the yield on the investment portfolio; thus the yield on all earning assets declined to 8.31% in 1997, down from the 8.36% realized during 1996. At the same time, the stiff competition for deposits and the use of short-term borrowings to fund loan and investment growth pushed the cost of all funds up to 4.37% in 1997, from the 4.24% average cost in 1996. As a result, the net interest margin in 1997 declined to 4.56%, down from the 4.72% earned in 1996 and the 4.91% earned in 1995. 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 has been and will continue to be 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 12, non-interest income increased by $6.4 million or 15.6% in 1997 compared to 1996, which follows an 8.6% increase in 1996 over 1995. The increase in 1997 was primarily due to an increase in trust income, credit/debit card fees and electronic banking. In 1997, trust income increased to $10.2 million, a 9.7% or $906,000 increase over 1996. This increase follows a 13.6% increase in 1996 over 1995. Trust revenues are increasing primarily due to new business over the past several years and favorable results in the bond and equity markets. Credit/debit card fees increased by $1.2 million or 48.6% in 1997, and by $468,000 or 23.3% in 1996, as One Valley introduced a new debit card product late in 1996. Electronic banking revenue increased by $1.1 million or 94.9% in 1997 largely due to increased ATM usage. In 1997, One Valley increased its number of ATM locations from 97 at the end of 1996 to 235 at the end of 1997 through arrangements reached with several retail convenience store chains. Deposit service charges increased by $471,000 or 3.2% in 1997, and increased $485,000 (excluding the CSB acquisition) or 3.5% in 1996, primarily due to an increase in customer activity. Real estate servicing fees remained unchanged in 1997, which compares to an $816,000 or 16.9% increase in 1996 from the level earned in 1995. As mortgage loan activity and sales in the secondary market improved in 1996 due to lower mortgage interest rates, One Valley's processing and servicing fees also increased. In 1997, mortgage loan activity increased again over the prior year. However, the increased revenue generated from the originations was offset by lower servicing revenue on loans serviced for others. Revenue from the sale of investment products, such as discount brokerage, mutual funds and annuities, increased by $143,000 or 15.1% in 1997. This compares to a $189,000 or 24.9% increase in 1996. One Valley began offering such products as part of its committment to provide integrated financial services to its customers. (Graph appears on right side of page with the following plot points:) NET INTEREST MARGIN FULLY TAXABLE EQUIVALENT % OF AVERAGE EARNING ASSETS Yield on Net Cost of Assets Margin Funds ------ ------ ------- 1992 8.64 4.77 3.87 1993 7.88 4.77 3.11 1994 7.87 4.98 2.89 1995 8.45 4.91 3.54 1996 8.36 4.72 3.64 1997 8.31 4.56 3.75 19 (Two graphs appear on left side of page with the following plot points:) NET OVERHEAD RATIO NET OVERHEAD AS A % OF AVERAGE EARNING ASSETS Net Overhead ------ 1992 2.56% 1993 2.68% 1994 2.52% 1995 2.39% 1996 2.28% 1997 2.09% EFFICIENCY RATIO NON-INTEREST EXPENSE AS A % OF TOTAL ADJUSTED REVENUES* Efficiency Ratio ----- 1992 62.66% 1993 65.27% 1994 59.89% 1995 58.10% 1996 57.96% 1997 56.63% In 1997, One Valley realized $709,000 in gains on securities sales. This compares to $413,000 in losses realized in 1996 and $65,000 in losses realized in 1995. These securities were sold as part of One Valley's management of its asset/liability position. Other operating income increased by $1.3 million or 26.4% in 1997 partially due to the sale of One Valley's corporate trust business. This compares to a $271,000 or 5.8% increase in 1996 primarily due to increases in several miscellaneous banking services. 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 1997, additional efficiencies were achieved in the operations of One Valley's affiliates by realigning processes and reallocating resources. One Valley's 1997 net overhead ratio, or non-interest expense less non-interest income excluding securities transactions to average earning assets, was 2.09%, a decrease from the 2.28% realized in 1996, and down further still from the 2.39% ratio realized in 1995. For the year 1997, net overhead was $85.9 million, a decrease of $1.3 million or 1.5% below the 1996 overhead of $87.2 million. The current year decrease follows an increase in 1996 of 6.4% or $5.3 million from the 1995 overhead of $82.0 million. A large portion of the increase in 1996 was due to a $3.8 million one-time assessment on certain financial institutions to recapitalize the Savings Association Insurance Fund (SAIF). Also included in the 1996 increase was the cost of operations associated with the CSB purchase, which are included in the consolidated financial statements only from the date of acquisition. 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 1.8% whereas net interest income has grown by 4.6%. Total non-interest expense increased by $3.9 million, or 3.1% from 1996. During the fourth quarter of 1997, One Valley recognized non-recurring expenses of $1.8 million related to the consolidation and growth of its expanding banking operations in Virginia and West Virginia. This year's increase compares to an $8.8 million or 7.4% increase in 1996 versus 1995. Approximately 70% of the 1996 increase was due to the operational costs of CSB. Total staff costs increased by 3.2% in 1997, a result of normal salary increases and increased pension costs. Total staff costs increased by $2.5 million or 4.0% in 1996, compared to 1995. Staff costs increased in 1996 primarily due to the additional staff costs from the CSB acquisition. Additional information on employee benefits is discussed in Note M to the consolidated financial statements. Advertising expense increased by $405,000 in 1997 due to additional advertising related to the new debit card and electronic banking products. Advertising expense increased by $1.2 million or 57.0% in 1996 due to a new image campaign resulting from One Valley's expansion into Virginia. FDIC insurance decreased by $4.1 million or 83.6% in 1997 following a $1.0 million or 25.6% increase in 1996. Both changes are largely due to a $3.8 million one-time special assessment on thrift based deposits to replenish the Savings Association Insurance Fund in 1996. FDIC insurance also decreased in 1997 as the rate assessed on banking deposits was decreased. Net occupancy expense increased by $186,000 or 2.7% in 1997 compared to a 9.2% increase in 1996. Most of the increase in 1997 and approximately one-half of the increase in 1996 was the result of the CSB purchase. The remaining portion of the 1996 increase was due to additional building depreciation expense resulting from improvements completed in 1996 and 1995. In 1997, equipment expense decreased by $334,000 or 3.7%, largely due to lower equipment depreciation costs. Equipment expense increased by 4.3% in 1996 primarily due to the CSB acquisition and increased equipment depreciation due to technology improvements. Outside data processing costs increased by $2.6 million or 45.2% in 1997 due to conversion and data processing costs related to the Lynchburg affiliate and the upcoming Wachovia branch purchase, as well as the additional processing costs associated with the expansion of One Valley's ATM network. Outside data processing costs increased by 7.7% in 1996 largely due to the CSB acquisition and the cost associated with the increased electronic banking activity in 1996. Taxes not on income remained relatively unchanged in 1997 following a $539,000 or 18.8% increase in 1996. The increase in 1996 was primarily due to increases in local taxes on gross receipts and equity. Supplies and 20 postage expense increased by $401,000 or 5.8% in 1997, primarily related to additional mailings, normal increases in supply costs, and courier service for One Valley's expanded Virginia operations. This increase compares to a 2.1% increase in 1996. Other expenses increased by $2.8 million or 11.8% in 1997 compared to a $2.0 million or 9.6% increase in 1996. The increase in 1997 was largely due to increased professional service costs, increased employee travel and intangible amortization resulting from the CSB acquisition, and a planned increase in employee training and development. The increase in 1996 was primarily due to the CSB acquisition, increased collection costs associated with the higher level of consumer charge-offs, and increased amortization of mortgage servicing rights. 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 this report. APPLICABLE INCOME TAXES Income tax expense in 1997 was $29.3 million compared to $26.9 million in 1996 and $24.5 million in 1995. The increase in 1997 was primarily due to an increase in pretax earnings, which was compounded by an increase in nondeductible goodwill amortization. One Valley's effective tax rate was 33.8% in 1997, up from the 33.6% in 1996, and the 33.3% in 1995. Additional information regarding income taxes is contained in Note L to the consolidated financial statements.
- ----------------------------------------------------------------------------------------------------------------------------------- NON-INTEREST INCOME AND EXPENSES TABLE 12 - ----------------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) Over Prior Year 1997 1996 1995 1997 1996 -------- -------- --------- ------------------ --------------------- Amount Percent Amount Percent ------ ------- --------- -------- Service Charges and Other Operating Income Trust income..................................... $ 10,228 $ 9,322 $ 8,203 $ 906 9.72 $ 1,119 13.64 --------- ---------- ---------- --------- ------- --------- -------- Credit/debit card income......................... 3,684 2,479 2,011 1,205 48.61 468 23.27 Service charges on deposit accounts.............. 15,043 14,572 13,877 471 3.23 695 5.01 Electronic banking............................... 2,350 1,206 1,065 1,144 94.86 141 13.24 Investment services.............................. 1,092 949 760 143 15.07 189 24.87 Real estate loan processing & servicing fees..... 5,642 5,642 4,826 0 0.00 816 16.91 Checkbook sales.................................. 2,168 2,095 2,228 73 3.48 (133) (5.97) Securities transactions.......................... 709 (413) (65) 1,122 (348) (535.38) Miscellaneous.................................... 6,246 4,940 4,669 1,306 26.44 271 5.80 --------- ---------- ---------- --------- ------- --------- -------- Total Non-Interest Income ..................... $ 47,162 $ 40,792 $ 37,574 $ 6,370 15.62 $ 3,218 8.56 ========= ========= ========= ========= ======= ========= ======== Staff and Other Operating Expenses Salaries & wages................................. $ 51,352 $ 49,951 $ 49,184 $ 1,401 2.80 $ 767 1.56 Employee benefits................................ 15,350 14,680 12,942 670 4.56 1,738 13.43 --------- ---------- ---------- --------- ------- --------- -------- Total staff expenses........................... 66,702 64,631 62,126 2,071 3.20 2,505 4.03 Other Operating Expenses Advertising.................................... 3,794 3,389 2,159 405 11.95 1,230 56.97 FDIC insurance................................. 808 4,917 3,916 (4,109) (83.57) 1,001 25.56 Occupancy, net................................. 7,073 6,887 6,305 186 2.70 582 9.23 Equipment...................................... 8,803 9,137 8,761 (334) (3.66) 376 4.29 Outside data processing........................ 8,264 5,692 5,285 2,572 45.19 407 7.70 Taxes not on income............................ 3,382 3,400 2,861 (18) (0.53) 539 18.84 Supplies and postage........................... 7,320 6,919 6,778 401 5.80 141 2.08 All other...................................... 26,203 23,443 21,400 2,760 11.77 2,043 9.55 --------- ---------- ---------- --------- ------- --------- -------- Total other operating expenses................. 65,647 63,784 57,465 1,863 2.92 6,319 11.00 --------- ---------- ---------- --------- ------- --------- -------- Total Non-Interest Expense .................. $132,349 $128,415 $119,591 $ 3,934 3.06 $ 8,824 7.38 ========= ========= ========= ========= ======= ========= ========
21 NET OVERHEAD DECREASED TO 2.08% OF AVERAGE EARNING ASSETS EFFECTS OF CHANGING PRICES The results of operations and financial condition presented in this report are based on historical cost, unadjusted for the effects of inflation. Inflation affects One Valley in two ways. One is that inflation can result in increased operating costs which must be absorbed or recovered through increased prices for services. The second effect is on the purchasing power of the corporation. Virtually all of a bank's assets and liabilities are monetary in nature. Regardless of changes in prices, most assets and liabilities of the banking subsidiaries will be converted into a fixed number of dollars. Non-earning assets, such as premises and equipment, do not comprise a major portion of One Valley's assets; therefore, most assets are subject to repricing on a more frequent basis than in other industries. One Valley's ability to offset the effects of inflation and potential reductions in future purchasing power depends primarily on its ability to maintain capital levels by adjusting prices for its services and to improve net interest income by maintaining an effective asset/liability mix. Management's efforts to meet these goals are described in other sections of this report. SUMMARY RESULTS OF OPERATIONS FOURTH QUARTER 1997 Net income for the three months ended December 31, 1997 was $13.5 million, a decrease of 6.7% from the $14.5 million earned during the fourth quarter of 1996. On a per share basis, 1997 fourth quarter earnings were $0.50 compared to $0.52 in 1996, a decrease of 3.9%. Net interest income increased by 2.1% when compared to the same three months of 1996. The provision for loan losses increased by $722,000 when compared to the fourth quarter of 1996. Non-interest income excluding securities transactions increased by $1.2 million or 11.4% as all categories of non-interest income increased. One Valley also realized $633,000 in securities gains in the fourth quarter of 1997. Non-interest expense increased by 11.9% when compared to the same quarter last year. The increase is largely due to increased staff costs, costs related to One Valley's expanded ATM network and the non-recurring expenses related to the consolidation of its banking operations. Additional quarterly financial data is provided in Note U to the consolidated financial statements. YEAR 2000 COMPLIANCE One Valley continually monitors the Year 2000 activity of its service organizations, significant suppliers, large customers and other financial institutions to ensure that those parties have appropriate plans to remediate Year 2000 issues where their systems interface with One Valley's systems or otherwise impact its operations. One Valley's primary service organizations are among the nationally recognized leaders in the products and services they provide and have indicated their intention to fully remediate the Year 2000 issues. One Valley's comprehensive Year 2000 initiative is managed by a team of internal staff members and outside consultants, as needed. The team's activities are designed to ensure that there is no adverse effect on One Valley's core business operations and that transactions with customers, suppliers, and other financial institutions are fully supported. One Valley has assessed the extent to which its operations would be impacted should it and these organizations fail to remediate properly their computer systems. One Valley is well under way with these efforts and has established December 31, 1998, as the date to have all Year 2000 changes in place with extensive testing to take place in 1999. While One Valley believes its planning efforts are adequate to address its Year 2000 concerns, there can be no guarantee that the systems of other companies on which One Valley's systems and operations rely will be converted on a timely basis and will not have a material effect. However, at this stage of the process, there are no indications that those companies will not meet their Year 2000 goals and objectives to be compliant when the new millennium arrives. The cost of the Year 2000 initiatives is not expected to be material to One Valley's results of operations or financial position. FORWARD-LOOKING STATEMENTS The Private Securities Litigation Act of 1995 indicates that the disclosure of forward-looking information is desirable for investors and encourages such disclosure by providing a safe harbor for forward-looking statements by corporate management. This Annual Report, including the Letter to Shareholders and the Management's Discussion and Analysis of Financial Condition and Results of Operations, contains forward-looking statements that involve risk and uncertainty. In order to comply with the terms of the safe harbor, the 22 corporation notes that a variety of factors could cause One Valley's actual results and experience to differ materially from the anticipated results or other expectations expressed in those forward-looking statements. PENDING ACQUISITIONS In October 1997, One Valley entered into an agreement with Wachovia Corporaton to purchase fifteen branches located in Virginia and their corresponding loans, assets and deposits. The transaction was completed on February 20, 1998. These branches included approximately $127 million in loans and $290 million in deposits. In December 1997, One Valley entered into a definitive agreement with FFVA Financial Corporation, headquartered in Lynchburg, Virginia, to merge. Under the terms of the agreement, One Valley will exchange 1.05 shares of its common stock for each share of FFVA Financial Corporation's common stock outstanding. The transaction, valued at approximately $204 million, is expected to be accounted for under the pooling-of-interests method and is subject to, among other things, approval by regulatory authorities and the stockholders of One Valley and FFVA Financial Corporation. FFVA had $580 million in total assets, $416 million in deposits and $327 million in loans at December 31, 1997. LONG-RANGE PLAN As part of achieving One Valley's mission "to establish mutually beneficial relationships with its customers by offering a complete range of services and products that meet or exceed their expectations; to share responsibility as employees for the success of our company and ourselves by committing to continuous improvement and self-development; and, to deliver long-term value on the investment made by our owners," One Valley has developed a long-range plan that outlines specific goals for the three years ending December 31, 1998. The long-range plan outlines goals for each of the constituencies outlined in One Valley's mission statement, namely its customers, employees and owners. Table 13 below lists the plan's owner objectives and how the 1997 and 1996 financial results of One Valley compare to those objectives. The goals and owner objectives under the plan are forward-looking statements and are strategic goals One Valley hopes to achieve. They are not historical facts and involve risks and uncertainties, including, but not limited to, the demand for One Valley's products and services, the effect of economic conditions on borrowers' ability to repay loans, changes in the general level of interest rates, and the impact of continued competitive pressure from bank and non-bank providers of traditional banking services.
- --------------------------------------------------------------------------------------------------------- 1996 TO 1998 LONG RANGE PLAN TABLE 13 - --------------------------------------------------------------------------------------------------------- Plan Goals 1997 1996 ---------------- ------- ------ Owner Objectives Profitability: Return on average assets.................... 1.20% to 1.40% 1.31% 1.30% Return on average equity.................... 13.00% to 15.00% 13.88% 13.64% Earnings per share growth rate.............. 6.00% to 10.00% 8.25% 6.01% Asset Quality: Loan delinquency ratio...................... 1.25% to 2.00% 1.30% 1.38% Non-performing assets to total assets....... 0.50% to 0.90% 0.20% 0.24% Net charge-off to average total loans....... 0.20% to 0.40% 0.26% 0.19% Allowance for loan losses as a % of non-performing assets..................... 150% to 250% 452% 405% Resource Utilization: Efficiency ratio............................ 55% or lower 56.63% 57.96% Net operating expenses to average assets.... 1.70% to 2.00% 2.09% 2.12% Capital: Average equity to total assets.............. 7.50% to 9.50% 9.42% 9.49% Liquidity: Loan to deposit ratio....................... 78% to 84% 83.21% 81.10% Net loans to total assets................... 65% to 70% 64.03% 64.63% Wholesale funds to total assets............. up to 25% 14.67% 11.71%
23 - ----------- GLOSSARY OF TERMS - ----------- ALLOWANCE FOR LOAN LOSSES The cumulative reserve established to absorb losses on loans. Increases to the reserve are charged against earnings and are listed in the income statement as "provision for loan losses." AVERAGE BALANCE SHEET A balance sheet showing the average of the daily ending balances of all assets, liabilities and shareholders' equity. An average is used to smooth the fluctuations in balances due to the timing of customer loan proceeds, loan payments, deposits and withdrawals. The average balance sheet is used to calculate the yield on earning assets and the rates paid on deposit accounts and other borrowed funds. BASIC EARNINGS PER SHARE Net income divided by the average shares outstanding during the year or period. COMPOUND ANNUAL GROWTH RATE The average annual increase of an item over a given period of time usually greater than a year. The growth rate is expressed as a percentage of the item's total at the beginning of the period. COST OF ALL FUNDS The sum of all interest expense divided by the sum of average earning assets. This percentage shows the interest rate paid to fund interest earning assets and is compared to the Yield on Earning Assets. The Yield minus the Cost is referred to as the Net Interest Margin. DILUTED EARNINGS PER SHARE Net income divided by the average possible shares outstanding during the year or other period assuming all options to buy stock had actually been exercised and the cash proceeds were used to redeem shares at an average market value. DIVIDEND PAYOUT RATIO Dividends paid per share divided by net income earned per share, which shows the percentage of net income earned returned to the shareholder in the form of dividends. EARNING ASSETS Assets such as loans and investment securities on which the company earns interest or dividend income. EFFICIENCY RATIO Designed to show the operational efficiency of a organization. This ratio shows the percentage of each dollar earned that is expended to operate the business. It is calculated by dividing total operating expenses by the sum of fully tax-equivalent net interest income plus other operating income. As this ratio decreases, more of each dollar earned flows to Net Income. FULLY TAXABLE EQUIVALENT Certain investments earn interest that is exempt from Federal income tax. Since they are exempt, the investments generally pay a lower percentage rate of interest. To compare this rate, or the dollars of income earned, to investments subject to income tax, an amount is added to the tax-exempt investment's income that represents the tax dollars saved. The total becomes a "fully taxable-equivalent" yield or income and enables a comparison of taxable and tax-exempt investments. NET CHARGE-OFFS The amount of uncollectible loans written-off against the Allowance for Loan Losses net of any proceeds recovered on loans previously written-off. NET CHARGE-OFF RATIO The amount of net charge-offs divided by the average total loans outstanding. This ratio helps to compare the dollar amounts of net charge-offs of differently sized loan portfolios. NET INCOME The amount that total revenues exceed total expenses during a given time period. This amount increases total shareholders' equity. NET INTEREST INCOME The sum of all interest income less all interest expense. NET INTEREST MARGIN The sum of all interest income less all interest expense divided by the sum of average earning assets. This percentage shows the average interest rate earned on those assets less the interest cost paid to fund those assets. NET OVERHEAD The amount operating expenses exceed other operating income. This amount shows the net dollar cost to conduct business operations. NET OVERHEAD RATIO The amount of Net Overhead divided by average earning assets. This percentage is compared to the Net Interest Margin percentage to show how much of the margin is used to cover operating expenses. As this ratio decreases, more of the Net Interest Margin flows to Net Income. SHAREHOLDER'S EQUITY The amount that the assets of a corporation exceed its liabilities. Also represents the book value owned by the shareholders of a corporation. YIELD ON EARNING ASSETS The sum of all interest income divided by the sum of average earning assets. This percentage shows the average rate earned on those earning assets and is compared to the Cost of All Funds. The Yield minus the Cost is referred to as the Net Interest Margin. 24 - -------------------------------------------------------------------------------- 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, 1997 and 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1997. 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 conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Charleston, West Virginia January 21, 1998 25 CONSOLIDATED BALANCE SHEETS ONE VALLEY BANCORP, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS)
December 31 1997 1996 ---- ---- Assets Cash and due from banks $ 122,615 $ 146,152 Interest-bearing deposits in other banks 2,162 9,897 Federal funds sold 18,900 4,825 ------ ----- Cash and cash equivalents 143,677 160,874 Securities: Available-for-sale, at fair value 1,102,014 952,908 Held-to-maturity (fair value approximated $244,062 and $219,841 at December 31, 1997 and 1996) 237,632 217,322 Loans, net 2,926,992 2,768,467 Premises and equipment 84,451 84,087 Accrued interest receivable 34,145 34,129 Other assets 53,353 49,516 ------ ----- Total assets $4,582,264 $4,267,303 ========== ========== Liabilities Deposits: Non-interest bearing $ 464,380 $ 406,630 Interest bearing 3,053,182 2,999,386 --------- --------- Total deposits 3,517,562 3,406,016 Short-term borrowings: Federal funds purchased 22,581 17,278 Securities sold under agreements to repurchase and other 545,899 360,796 ------- ------- Total short-term borrowings 568,480 378,074 Long-term borrowings 21,875 28,892 Other liabilities 50,072 45,744 ------ ------ Total liabilities 4,157,989 3,858,726 Shareholders' equity PREFERRED STOCK--$10 PAR VALUE; AUTHORIZED 1,000,000 SHARES; NONE ISSUED Common stock--$10 par value; authorized 40,000,000 shares; 31,520,688 and 24,923,176 shares issued at December 31, 1997 and 1996, including 4,346,846 and 2,792,360 shares in treasury at December 31, 1997 and 1996 315,207 249,232 Capital surplus 75,617 73,834 Retained earnings 124,401 152,006 Unrealized gain on available-for-sale securities, net of deferred income taxes 4,145 883 Treasury stock (95,095) (67,378) ------- ------- Total shareholders' equity 424,275 408,577 ------- ------- Total liabilities and shareholders' equity $4,582,264 $4,267,303 ========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 26 CONSOLIDATED STATEMENTS OF INCOME ONE VALLEY BANCORP, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended December 31 1997 1996 1995 ---- ---- ---- Interest Income Interest and fees on loans: Taxable $247,662 $235,153 $217,034 Tax-exempt 2,990 2,813 2,453 Total 250,652 237,966 219,487 ------- ------- ------- Interest and dividends on securities: Taxable 68,798 62,447 50,693 Tax-exempt 12,003 11,076 10,362 ------- ------- ------- Total 80,801 73,523 61,055 Other 1,484 664 1,830 ------- ------- ------- Total interest income 332,937 312,153 282,372 Interest Expense Deposits 128,910 119,865 106,493 Short-term borrowings 23,076 18,276 13,899 Long-term borrowings 1,765 1,144 688 ------- ------- ------- Total interest expense 153,751 139,285 121,080 ------- ------- ------- Net Interest Income 179,186 172,868 161,292 Provision For Loan Losses 7,381 5,204 5,632 ------- ------- ------- Net Interest Income After Provision For Loan Losses 171,805 167,664 155,660 Other Income Trust Department 10,228 9,322 8,203 Service charges on deposit accounts 15,043 14,572 13,877 Real estate loan processing and servicing fees 5,642 5,642 4,826 Other service charges and fees 10,732 8,078 7,025 Securities gains (losses) 709 (413) (65) Other 4,808 3,591 3,708 ------- ------- ------- Total other income 47,162 40,792 37,574 Other Expenses Salaries and employee benefits 66,702 64,631 62,126 Net occupancy 7,073 6,887 6,305 Equipment 8,803 9,137 8,761 Federal deposit insurance assessments 808 4,917 3,916 Outside data processing 8,264 5,692 5,285 Other 40,699 37,151 33,198 ------- ------- ------- Total other expenses 132,349 128,415 119,591 ------- ------- ------- Income Before Income Taxes 86,618 80,041 73,643 Applicable Income Taxes 29,254 26,886 24,537 ------- ------- ------- Net Income $ 57,364 $ 53,155 $ 49,106 ========= ========= ========= Net income per common share: Basic $ 2.10 $ 1.94 $ 1.83 Diluted $ 2.07 $ 1.91 $ 1.82 Average common shares outstanding (in thousands): Basic 27,354 27,370 26,835 Diluted 27,760 27,814 27,039
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 27 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY ONE VALLEY BANCORP, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
UNREALIZED GAIN (LOSS) ON AVAILABLE COMMON CAPITAL RETAINED FOR SALE TREASURY STOCK SURPLUS EARNINGS SECURITIES STOCK ----- ------- -------- ---------- ----- Balances at January 1, 1995 $ 175,384 $ 25,954 $ 137,437 $ (6,535) $ (10,373) Change in unrealized gains and losses, net of deferred income taxes of $(8,524) 12,787 Net income 49,106 Issuance of common stock (411,602 shares) 4,116 8,130 Purchase of treasury stock (420,700 shares) (12,971) Stock options exercised (66,614 shares) and adjustment for fractional shares 666 519 Cash dividends ($.66 per share) (17,918) ------- ------ ------- ----- ------- Balances at December 31, 1995 180,166 34,603 168,625 6,252 (23,344) Change in unrealized gains and losses, net of deferred income taxes of $3,585 (5,369) Net income 53,155 Issuance of common stock (1,789,000 shares) 17,890 37,817 Purchase of treasury stock (1,318,988 shares) (44,034) Five-for-four stock split in the form of a 25% stock dividend 49,746 (49,746) Stock options exercised (144,958 shares) and adjustment for fractional shares 1,430 1,414 Cash dividends ($.74 per share) (20,028) ------- ------ ------- ----- ------- Balances at December 31, 1996 249,232 73,834 152,006 883 (67,378) Change in unrealized gains and losses, net of deferred income taxes of $2,175 3,262 Net income 57,364 Purchase of treasury stock (856,396 shares) (27,717) Five-for-four stock split in the form of a 25% stock dividend 62,960 (62,960) Stock options exercised (303,698 shares) and adjustment for fractional shares 3,015 1,783 Cash dividends ($.80 per share) (22,009) ------- ------ ------- ----- ------- Balances at December 31, 1997 $315,207 $ 75,617 $124,401 $ 4,145 $ (95,095) === ==== ======== ========= ======== ========== =========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 28 CONSOLIDATED STATEMENTS OF CASH FLOWS ONE VALLEY BANCORP, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS)
Year Ended December 31 1997 1996 1995 ---- ---- ---- Operating Activities Net income $ 57,364 $ 53,155 $ 49,106 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 7,381 5,204 5,632 Depreciation 8,391 9,134 8,049 Amortization, net of accretion 3,363 2,368 3,544 Deferred income tax (benefit) expense (278) 35 (9) Net (gains) losses from sales of assets (688) 362 (270) Loans originated for sale (95,404) (62,870) (52,440) Proceeds from loans sold 96,390 63,932 49,523 Net change in accrued interest receivable (16) 603 (3,727) Net change in accrued interest payable 2,546 (500) 4,738 Net change in other assets and other liabilities (6,759) 2,175 1,531 ------ ------ ------ Net cash provided by operating activities 72,290 73,598 65,677 Investing Activities Proceeds from sales of available-for-sale securities 49,855 105,496 103,279 Proceeds from maturities of available-for-sale securities 278,877 266,629 222,599 Purchases of available-for-sale securities (473,021) (327,060) (338,306) Proceeds from maturities of held-to-maturity securities 10,027 8,574 30,141 Purchases of held-to-maturity securities (30,404) (20,815) (55,796) Purchase of subsidiary, net of cash received 10,866 4,454 Net increase in loans (166,052) (139,266) (127,053) Purchases of premises and equipment (8,776) (7,173) (5,301) ------ ------ ------ Net cash used in investing activities (339,494) (102,749) (165,983) Financing Activities Net change in deposits 111,546 100,548 79,712 Net change in federal funds purchased 5,303 (36,727) 860 Net change in other short-term borrowings 185,103 14,265 13,581 Repayment of long-term borrowings (7,017) (7,526) (11,539) Proceeds from long-term borrowings 15,007 5,000 Proceeds from issuance of common stock 4,798 2,844 1,185 Purchase of treasury stock (27,717) (44,034) (12,971) Cash dividends (22,009) (20,028) (17,918) ------- ------ ------ Net cash provided by financing activities 250,007 24,349 57,910 ------- ------ ------ Decrease in cash and cash equivalents (17,197) (4,802) (42,396) Cash and cash equivalents at beginning of year 160,874 165,676 208,072 ------- ------ ------ Cash and cash equivalents at end of year $143,677 $160,874 $165,676 ======== ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ONE VALLEY BANCORP, INC. AND SUBSIDIARIES DECEMBER 31, 1997 (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 generally accepted accounting principles and to general practices within the banking industry. The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. 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 a separate component of shareholders' equity. 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. 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 and anticipated future 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 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 potential 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. INCOME TAXES Income taxes have been 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. 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. 30 - -------------------------------------------------------------------------------- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES NOTE A - CONCLUDED - ------------------ NET INCOME PER COMMON SHARE In 1997, the Financial Accounting Standards Board (FASB) issued Statement No. 128, "Earnings Per Share." Statement 128 requires the reporting of basic and diluted net income per common share. Basic net income per common share excludes any dilutive effects of stock options and is computed by dividing net income by the average common shares outstanding during the year. Diluted net income per common share is computed by dividing net income by the average common shares outstanding during the year adjusted for the dilutive effect of options under One Valley's stock option plans. The effect of dilutive stock options on average shares outstanding was 406,000, 444,000, and 204,000 in 1997, 1996, and 1995. Net income per common share amounts for all periods presented have been restated to conform to Statement 128. NEW ACCOUNTING PRONOUNCEMENTS In June 1996, the FASB issued statement no. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," which was applicable to One Valley effective January 1, 1997. However, in late 1996, the FASB agreed to defer the effective date for one year for the following transactions: securities lending, repurchase agreements, dollar rolls and other similar secured transactions. The adoption of the 1997 provisions did not have a significant impact on the financial position or results of operations of one valley and management anticipates the same results for the provisions adopted on January 1, 1998. During 1997, the FASB issued several new statements which will also become effective in 1998. These pronouncements include Statement No. 129, "Disclosure of Information about Capital Structure;" Statement No. 130, "Reporting Comprehensive Income;" and Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." The Company is in the process of fully evaluating these new pronouncements and will adopt them as required in 1998. The adoption of these new statements is not expected to have a significant impact on the financial position or results of operations of One Valley. RECLASSIFICATIONS Certain amounts in the 1996 and 1995 financial statements have been reclassified to conform to the 1997 presentation. Such reclassifications had no impact on net income or shareholders' equity. 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. - -------------------------------------------------------------------------------- RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS NOTE B - ------ 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, 1997, was approximately $11,000. - -------------------------------------------------------------------------------- RESTRICTIONS ON CASH AND DUE FROM BANK ACCOUNTS NOTE C - ------ 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, 1997, the retained net profits available for distribution to One Valley Bancorp, Inc. as dividends without regulatory approval approximated $13,400. 31 - -------------------------------------------------------------------------------- NOTE D - ------ MERGERS AND ACQUISITIONS On April 30, 1996, One Valley acquired all of the outstanding stock of CSB Financial Corporation, headquartered in Lynchburg, Virginia. Under terms of the agreement, One Valley exchanged 0.6774 shares of its common stock for each share of CSB Financial Corporation's common stock outstanding. This resulted in the issuance of approximately 1,789,000 shares valued at approximately $55.7 million. This transaction was accounted for under the purchase method of accounting. Accordingly, consolidated results include the operations of CSB Financial Corporation only from the date of acquisition. CSB had $336 million in total assets, $257 million in deposits, and $164 million in loans at April 30, 1996. Pro forma financial information is not presented because the above transaction was immaterial to One Valley. In October 1997, One Valley reached an agreement to acquire 15 branches in Virginia from Wachovia Corporation and expects to close the purchase of these branches in February 1998. In addition, in December 1997, One Valley entered into a definitive agreement to merge with FFVA Financial Corporation, also based in Lynchburg, Virginia. Under terms of the agreement, One Valley will exchange 1.05 shares of its common stock for each share of FFVA Financial Corporation's common stock outstanding, which will result in the issuance of approximately 5,500,000 shares valued at $206 million. It is anticipated that this transaction will be consummated in the second quarter of 1998 and be accounted for under the pooling of interests method. Once these two transactions are completed, One Valley's total assets will approximate $5.4 billion, with $4.1 billion in West Virginia and $1.3 billion in Virginia. In years prior to 1995, One Valley acquired several financial institutions accounted for using the purchase method of accounting. The purchase price of these acquisitions and those previously noted was 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 $2,700 and $3,800 at December 31, 1997 and 1996. Deposit intangible amortization approximated $1,100 in 1997, $900 in 1996, and $600 in 1995. 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 $15,900 and $18,000 at December 31, 1997 and 1996. Goodwill amortization approximated $1,300 in 1997, $1,100 in 1996, and $500 in 1995. - -------------------------------------------------------------------------------- NOTE E - ------ SHAREHOLDER RIGHTS PLAN In 1995, the Board of Directors approved 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. 32 - -------------------------------------------------------------------------------- SECURITIES NOTE F - ------ The following is a summary of available-for-sale and held-to-maturity securities:
Available-for-Sale Held-to-Maturity ------------------------------------------ ------------------------------------------ Estimated Estimated Amortized Gross Unrealized Fair Amortized Gross Unrealized Fair Cost Gains Losses Value Cost Gains Losses Value ------------------------------------------ ------------------------------------------ December 31, 1997 U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 820,721 $ 3,933 $ (786) $ 823,868 $ 0 $ 0 $ 0 $ 0 Obligations of states and political subdivisions 237,290 6,557 (127) 243,720 Mortgage-backed securities 228,660 3,952 (295) 232,317 Other securities 45,724 126 (21) 45,829 342 342 ------------------------------------------ ------------------------------------------ Total securities $1,095,105 $ 8,011 $(1,102) $1,102,014 $237,632 $6,557 $ (127) $ 244,062 ========================================== ========================================== December 31, 1996 U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 662,302 $ 4,068 $(4,738) $ 661,632 $ 0 $ 0 $ 0 $ 0 Obligations of states and political subdivisions 216,874 3,596 (1,073) 219,397 Mortgage-backed securities 245,734 3,117 (1,407) 247,444 Other securities 43,400 508 (76) 43,832 448 (4) 444 ------------------------------------------ ------------------------------------------ Total securities $ 951,436 $ 7,693 $(6,221) $ 952,908 $217,322 $3,596 $(1,077) $219,841 ========================================== ========================================== December 31, 1995 U.S. Treasury securities and obligations of U.S. government agencies and corporations $ 627,471 $ 8,254 $ (570) $ 635,155 $ 0 $ 0 $ 0 $ 0 Obligations of states and political subdivisions 204,694 7,334 (447) 211,581 Mortgage-backed securities 208,883 3,479 (940) 211,422 Other securities 24,919 203 25,122 459 1 (1) 459 ------------------------------------------ ------------------------------------------ Total securities $ 861,273 $11,936 $(1,510) $ 871,699 $205,153 $7,335 $ (448) $ 212,040 ========================================== ==========================================
Gross realized gains and losses on available-for-sale securities approximated $814 and $105 in 1997, $83 and $496 in 1996, and $87 and $152 in 1995. The amortized cost and estimated fair value of debt securities at December 31, 1997, by contractual maturity, are shown below. Expected maturities may 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 $ 101,895 $ 102,251 $ 6,299 $ 6,349 Due after one year through five years 397,634 400,036 21,062 21,636 Due after five years through ten years 275,861 276,033 101,066 103,578 Due after ten years 45,331 45,548 108,863 112,157 ------ ------ ------- ------- 820,721 823,868 237,290 243,720 Mortgage-backed securities 228,660 232,317 0 0 Other 45,724 45,829 342 342 ------ ------ ------- ------- Total securities $1,095,105 $1,102,014 $237,632 $244,062 ========== ========== ======== ========
At December 31, 1997 and 1996, securities carried at approximately $676,000 and $600,000 were pledged to secure public deposits, repurchase agreements, and for other purposes as required or permitted by law. 33 - -------------------------------------------------------------------------------- NOTE G - ------ LOANS Loans are summarized as follows: December 31 1997 1996 ---- ---- Commercial, financial and agricultural $ 372,933 $ 323,146 Real estate: Revolving home equity 192,252 152,006 Single family residential 1,293,446 1,239,406 Apartment buildings and complexes 59,656 55,764 Commercial 445,400 418,668 Construction 51,927 53,815 Installment loans to individuals 529,494 539,144 Other 23,570 28,263 ------ ------ Total loans net of unearned income 2,968,678 2,810,212 Less allowance for loan losses 41,686 41,745 ------ ------ Loans - net $2,926,992 $2,768,467 ========== ========== 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, 1997 and 1996, One Valley held loans for sale of approximately $11,500 and $10,000 and had commitments to originate and sell loans of approximately $11,000 and $10,500, respectively. The mortgage loan portfolio serviced by One Valley for the benefit of others approximated $886,000, $902,000, and $968,000 at December 31, 1997, 1996, and 1995. Custodial escrow balances maintained in connection with the foregoing loan servicing and One Valley's own mortgage loan portfolio were approximately $8,500 at December 31, 1997 and 1996. 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: 1997 1996 ---- ---- Balance, January 1 $106,358 $ 71,927 Additions 27,985 61,639 Amount collected (48,495) (27,208) -------- -------- Balance, December 31 $ 85,848 $106,358 ======== ======== - -------------------------------------------------------------------------------- NOTE H - ------ ALLOWANCE FOR LOAN LOSSES Changes in the allowance for loan losses for each of the three years in the period ended December 31, 1997, were as follows: 1997 1996 1995 ---- ---- ---- Balance, January 1 41,745 $39,534 $37,438 Charge-offs (9,737) (7,038) (5,611) Recoveries 2,297 1,819 1,840 ----- ----- ----- Net charge-offs (7,440) (5,219) (3,771) Provision for loan losses 7,381 5,204 5,632 Balance of acquired subsidary 2,226 235 ----- ----- ----- Balance, December 31 $41,686 $41,745 $39,534 ======= ======= ======= Impaired loans approximated $6,600 and $8,900 (of which $3,400 and $3,300 were on a nonaccrual basis) at december 31, 1997 and 1996. Included in these amounts are $4,900 and $5,900 of impaired loans for which the related allowance for loan losses is $830 and $500, and $1,700 and $3,000 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, 1997, 1996 and 1995, was approximately $8,500, $9,000 and $9,500. For the years ended december 31, 1997, 1996 and 1995, one valley recognized interest income on those impaired loans of $560, $880 and $780. The amount of interest income recognized in 1997, 1996 and 1995 included less than $100 of interest income recognized using the cash basis method of income recognition. - -------------------------------------------------------------------------------- NOTE I - ------ DEPOSITS Included in interest-bearing deposits are various time deposit products. Time deposits outstanding at December 31, 1997, have scheduled maturities of $1,030,000 in 1998, $347,000 in 1999, $91,000 in 2000, $24,000 in 2001, $18,000 in 2002, and $1,000 thereafter. The aggregate amount of time deposits exceeding $100 at December 31, 1997 approximated $285,000. As of December 31, 1997 and 1996, One Valley had deposits from related parties of approximately $76,000 and $73,000. Interest paid on deposits, short-term borrowings, and long-term borrowings approximated $151,000 in 1997, $139,000 in 1996, and $116,000 in 1995. 34 - -------------------------------------------------------------------------------- PREMISES AND EQUIPMENT NOTE J - ------ The major categories of premises and equipment and accumulated depreciation are summarized as follows: 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: 1998-$5,000; 1999-$4,400; 2000-$3,900; 2001-$3,800; and 2002-$2,300; with $2,600 of commitments extending beyond 2002. Total expense under these lease agreements, including cancelable and noncancelable leases, was $8,200 in 1997, $7,000 in 1996, and $6,600 in 1995. December 31 1997 1996 ---- ---- Land $ 18,093 $ 18,245 Buildings and improvements 84,768 83,686 Equipment 52,605 58,971 ------ ------ Total 155,466 160,902 Less accumulated depreciation (71,015) (76,815) ------ ------ Premises and equipment-net $ 84,451 $ 84,087 ========= ========= - -------------------------------------------------------------------------------- SHORT-TERM AND LONG-TERM BORROWINGS NOTE K - ------ 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: 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, residential mortgage loans, and multi-family mortgage loans with an aggregate book value approximating $133,000 at December 31, 1997. The available lines of credit for short-term and long-term borrowings, at prevailing market interest rates, as of December 31, 1997, approximated $1.1 billion. Long-term borrowings of $21,875 and $28,892 at December 31, 1997 and 1996, primarily consist of FHLB advances. The advances mature as follows: 1998-$12,000; 1999-$2,000; 2001-$5,000; and $2,900 thereafter. The weighted average interest rate of these advances at December 31, 1997, was 6.31%. Federal Repurchase Funds Agreements Purchased and Other --------- --------- 1997 Average amount outstanding during year $33,806 $425,637 Maximum amount outstanding at any month-end 69,801 527,426 Weighted average interest rate: During year 5.46% 4.95% End of year 5.72% 5.05% 1996 Average amount outstanding during year $26,612 $359,667 Maximum amount outstanding at any month-end 71,563 468,966 Weighted average interest rate: During year 5.38% 4.74% End of year 5.40% 4.67% 1995 Average amount outstanding during year $24,642 $264,461 Maximum amount outstanding at any month-end 54,005 357,501 Weighted average interest rate: During year 5.89% 4.71% End of year 5.76% 4.71% 35 - -------------------------------------------------------------------------------- NOTE L - ------ INCOME TAXES The income tax provisions (benefits) included in the consolidated statements of income are summarized as follows: 1997 1996 1995 ---- ---- ---- Current: Federal $25,886 $23,095 $20,822 State 3,646 3,756 3,724 Deferred Federal and State (278) 35 (9) ---- -- -- Total $29,254 $26,886 $24,537 ======= ======= ======= Income taxes (benefit) related to securities gains (losses) approximated $284, $(165), and $(26) in 1997, 1996, and 1995. One Valley made tax payments of approximately $30,000 in 1997, $25,000 in 1996, and $26,000 in 1995. Significant components of One Valley's deferred tax assets and liabilities are as follows: December 31 1997 1996 ---- ---- Deferred tax assets: Allowance for loan losses $16,048 $15,484 ACCRUED EMPLOYEE BENEFITS 1,480 3,840 Other 4,581 1,680 ----- ----- Total deferred tax assets 22,109 21,004 Deferred tax liabilities: Loans 6,804 6,026 Available-for-sale securities 2,763 583 Premises and equipment 2,831 3,032 Other 250 0 --- - Total deferred tax liabilities 12,648 9,641 ------ ----- Net deferred tax assets $ 9,461 $11,363 ======== ======= - -------------------------------------------------------------------------------- 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:
1997 1996 1995 ---- ---- ---- Computed tax at statutory federal rate $30,316 35.0% $28,014 35.0% $25,775 35.0% Plus: State income taxes, net of federal tax benefits 2,479 2.9 2,465 3.12 2,450 3.3 ----- --- ----- ---- ----- --- 32,795 37.9 30,479 38.1 28,225 38.3 Increase (decrease) in taxes resulting from: Tax-exempt interest (4,535) (5.2) (4,861) (6.1) (4,484) (6.1) Other--net 994 1.1 1,268 1.6 796 1.1 --- --- ----- --- --- --- Actual tax expense $29,254 33.8% $26,886 33.6% $24,537 33.3% ======= ==== ======= ==== ======= ====
- -------------------------------------------------------------------------------- NOTE M - ------ EMPLOYEE BENEFIT PLANS One Valley has a defined benefit pension plan covering substantially all of its employees. The benefits are based on years of service and the employee's compensation during the last five years of employment. The funding policy of One Valley is to contribute annually the maximum amount that can be deducted for income tax purposes. The following table presents the funded status of the combined plans and amounts recognized in the consolidated balance sheets at December 31:
1997 1996 ---- ---- Actuarial present value of accumulated benefit obligation, including vested benefits of $32,820 in 1997 and $24,454 in 1996 $ 38,372 $ 26,951 ======== ======== Actuarial present value of projected benefit obligation for services rendered to date $(48,571) $(36,573) Plan assets at fair value, consisting primarily of cash, listed stocks, and U.S. Government and agency obligations 48,234 33,080 ------ ------ Projected benefit obligation in excess of plan assets (337) (3,493) Unrecognized transition asset, net of amortization (1,629) (1,873) Unrecognized net loss from past experience different from that assumed and effects of changes in assumptions 7,183 2,843 Unrecognized prior service cost 2,025 624 ----- --- Prepaid (accrued) pension cost included in other assets (other liabilities) $ 7,242 $ (1,899) ========= ========
Following is a summary of the components of net periodic pension cost:
1997 1996 1995 ---- ---- ---- Service cost--benefits earned during the period $ 2,071 $ 2,133 $ 1,529 Interest cost on projected benefit obligation 3,122 2,461 2,088 Actual return on plan assets (4,724) (2,674) (4,332) Net amortization and deferral 2,114 385 2,209 ----- --- ----- Net periodic pension cost $ 2,583 $ 2,305 $ 1,494 ======= ======= =======
36 - -------------------------------------------------------------------------------- EMPLOYEE BENEFIT PLANS NOTE M - CONCLUDED - ------------------ The weighted-average discount rate used in determining the actuarial present value of projected benefit obligations was 7.0% and 7.5% at December 31, 1997 and 1996. The rate of increase in future compensation levels used in determining the actuarial present value of projected benefit obligations was 5.0% and 5.5% in 1997 and 1996. The expected long-term rate of return on plan assets was 8.5% in 1997, 1996, and 1995. The unrecognized net loss increased in 1997 due to actual experience different from that assumed and the change in the weighted-average discount rate. One Valley 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. The plan provides medical and dental benefits. This plan is contributory and contains cost sharing features such as deductibles and co-insurance. One Valley's policy is to fund the cost of the plan in amounts determined at the discretion of management. The following table presents the plan's funded status and amounts recognized in the consolidated balance sheets at December 31:
1997 1996 ---- ---- Accumulated postretirement benefit obligation: Active plan participants fully eligible for benefits $ 0 $ 0 Other active participants (3,463) (3,147) Current retirees (2,859) (2,598) ------ ------ (6,322) (5,745) Plan assets 0 0 ------ ------ Accumulated postretirement benefit obligation in excess of plan assets (6,322) (5,745) Unrecognized transition obligation 3,277 3,496 Unrecognized prior service cost 197 208 Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (84) (239) ------ ------ Accrued postretirement benefit cost included in other liabilities $(2,932) $(2,280) ======= =======
Net periodic postretirement benefit cost included the following components:
1997 1996 1995 ---- ---- ---- Service cost $ 260 $ 230 $ 188 Interest cost 440 421 403 Amortization of transition obligation over 20 years 231 231 230 --- --- --- Net periodic postretirement benefit cost $ 931 $ 882 $ 821 ======== ======== ========
The weighted-average annual assumed rate of increase in the per capita cost of covered benefits (i.e. health care cost trend rate) is 8% for 1998 and is assumed to decrease gradually to 5% in 2001 and remain at that level thereafter. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation for the plan as of December 31, 1997 by $386 and the aggregate of the service and interest cost components of net periodic postretirement benefit costs for 1997 by $60. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.0% and 7.5% at December 31, 1997 and 1996. - -------------------------------------------------------------------------------- OTHER EXPENSES NOTE N - ------ Included in other expenses is supplies expense which approximated $3,600 in 1997, $3,500 in 1996, and $3,600 in 1995. 37 - -------------------------------------------------------------------------------- NOTE O - ------ STOCK OPTION PLANS One Valley has nonqualified and incentive stock option plans for certain key employees and directors. One Valley has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," (APB 25) and related Interpretations in accounting for its employee stock options instead of applying FASB Statement No. 123, "Accounting for Stock-Based Compensation." Under APB 25, 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. Pursuant to these plans, at December 31, 1997 and 1996, an aggregate maximum of 1,500,000 shares of common stock were reserved for issuance, although no more than 150,000 shares, plus any shares carried over from the prior year, may be issued in any calendar year. All options granted have 10 year terms and vest immediately. Pro forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if One Valley had accounted for its employee stock options under the fair value method of that Statement. However, pro forma information has not been presented herein because the effect of applying Statement 123's fair value method to One Valley's stock-based awards in 1997, 1996 and 1995 results in net income and net income per common share that are not materially different from amounts reported. A summary of One Valley's stock option activity, and related information for the years ended December 31, follows:
1997 1996 1995 ----------------- ------------------ ------------------ Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ----------------- ------------------ ------------------ Outstanding at beginning of year 857,500 $14.86 657,500 $15.09 611,250 $13.41 Balance of acquired subsidiary 257,500 10.38 Granted 167,500 30.60 152,500 19.85 155,000 19.39 Exercised (369,000) 13.04 (210,000) 12.83 (103,750) 11.38 Forfeited (5,000) 19.36 Outstanding at end of year 656,000 19.90 857,500 14.86 657,500 15.09 Exercisable at end of year 656,000 19.90 857,500 14.86 657,500 15.09 Weighted-average fair value of options granted during the year $4.96 $3.36 $3.00
Exercise prices for options outstanding at December 31, 1997, ranged from $6.58 to $30.60. The weighted-average remaining contractual life of those options at December 31, 1997, was 7.5 years. - -------------------------------------------------------------------------------- NOTE P - ------ STOCK SPLIT On August 19, 1997, One Valley's Board of Directors authorized a five-for-four stock split of common shares effected in the form of a 25% stock dividend to shareholders of record on August 29, 1997. Average shares outstanding and per share amounts included in the consolidated financial statements have been restated to give effect to the stock split. 38 - -------------------------------------------------------------------------------- REGULATORY MATTERS NOTE Q - ------ 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, 1997. As of December 31, 1997, 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. There are no conditions or events since these notifications that management believes have changed the institutions' 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, Inc.
Well 1997 1996 Capitalized Minimum Amount Ratio Amount Ratio Ratio Ratio ------ ----- ------ ----- ----- ----- Total Capital (to Risk Weighted Assets) One Valley $436,200 16% $419,400 16% (greater than or equal to) 10% 8% One Valley Bank, National Association 150,000 13 150,100 14 (greater than or equal to) 10 8 One Valley Bank, Inc. 48,600 13 47,100 14 (greater than or equal to) 10 8 Tier I Capital (to Risk Weighted Assets) One Valley $401,300 14% $386,100 15% (greater than or equal to) 6% 4% One Valley Bank, National Association 135,500 12 136,900 13 (greater than or equal to) 6 4 One Valley Bank, Inc. 43,800 12 42,800 13 (greater than or equal to) 6 4 Tier I Capital (to Average Assets) One Valley $401,300 9% $386,100 9% (greater than or equal to) 5% 4% One Valley Bank, National Association 135,500 7 136,900 8 (greater than or equal to) 5 4 One Valley Bank, Inc. 43,800 7 42,800 8 (greater than or equal to) 5 4
39 - -------------------------------------------------------------------------------- NOTE R - ------ PARENT COMPANY CONDENSED FINANCIAL INFORMATION CONDENSED BALANCE SHEETS December 31 Assets: 1997 1996 ---- ---- Repurchase agreement with a subsidiary bank $ 26,696 $ 21,469 AVAILABLE-FOR-SALE SECURITIES 12,959 9,978 Premises and equipment 967 893 Investment in subsidiaries: Commercial and federal savings banks 391,501 382,678 Non-banks 6,925 6,391 Other assets 6,794 4,922 ----- ----- Total assets $445,842 $426,331 ======== ======== Liabilities and Shareholders' Equity: Liabilities: Short-term borrowings $ 6,105 $ 5,793 Other liabilities 15,462 11,961 ------ ------ Total liabilities 21,567 17,754 ====== ====== Shareholders' equity 424,275 408,577 ------- ------- Total liabilities and shareholders' equity $445,842 $426,331 ======== ======== CONDENSED STATEMENTS OF INCOME Year Ended December 31 1997 1996 1995 ------- ------- ------- Income: Dividends from subsidiaries $58,130 $51,258 $47,290 Other income 4,907 4,222 3,788 ------- ------- ------- Total income 63,037 55,480 51,078 Expenses: Salaries and EMPLOYEE BENEFITS 7,727 8,108 6,749 Other expenses 7,788 4,804 5,028 Interest expense 479 280 18 ------- ------- ------- Total expenses 15,994 13,192 11,795 ------- ------- ------- Income before income taxes and equity in undistributed earnings of subsidiaries 47,043 42,288 39,283 Applicable income tax (benefit) (4,116) (3,403) (3,034) ------- ------- ------- Income before equity in undistributed earnings of subsidiaries 51,159 45,691 42,317 Equity in undistributed earnings of subsidiaries 6,205 7,464 6,789 ------- ------- ------- Net income $57,364 $53,155 $49,106 ======= ======= ======= CONDENSED STATEMENTS OF CASH FLOWS Year Ended December 31 1997 1996 1995 ------- ------- ------- Operating Activities: Net income $57,364 $53,155 $49,106 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 325 245 238 Equity in undistributed earnings of subsidiaries (6,205) (7,464) (6,789) Net change in other assets and other liabilities 1,800 1,441 3,396 ------- ------- ------- Net cash provided by operating activities 53,284 47,377 45,951 INVESTING ACTIVITIES: Purchase of securities available-for-sale (6,715) (8,028) (6,210) Proceeds from maturities and sales of securities: Available-for-sale 3,661 10,982 196 Held-to-maturity 860 Investment in subsidiaries (5,139) Purchase of equipment (387) (427) (292) ------- ------- ------- Net cash (used in) provided by investing activities (3,441) 3,387 (11,445) Financing Activities: Net change in short-term borrowings 312 5,793 Proceeds from issuance of common stock 4,798 2,844 1,185 Purchase of treasury stock (27,717) (44,034)(12,971) Cash dividends paid (22,009) (20,028)(17,918) ------- ------- ------- Net cash used in financing activities (44,616) (55,425)(29,704) ------- ------- ------- Increase (decrease) in cash 5,227 (4,661) 4,802 Cash at beginning of year 21,469 26,130 21,328 ------ ------ ------ Cash at end of year $26,696 $21,469 $26,130 ======= ======= ======= 40 - -------------------------------------------------------------------------------- FAIR VALUE OF FINANCIAL INSTRUMENTS NOTE S - ------ 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, 1997 and 1996. 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. 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, 1997 and 1996, approximate their carrying value. The fair values of One Valley's financial instruments are summarized below:
December 31, 1997 December 31, 1996 ----------------- ----------------- Carrying Fair Carrying Fair Amount Value Amount Value ------ ----- ------ ----- Cash and cash equivalents............... $ 143,677 $ 143,677 $ 160,874 $ 160,874 Securities.............................. 1,339,646 1,336,223 1,170,230 1,172,749 Loans................................... 2,926,992 2,937,639 2,768,467 2,780,519 Accrued interest receivable............. 34,145 34,145 34,129 34,129 Deposits................................ 3,517,562 3,523,962 3,406,016 3,408,753 Short-term borrowings................... 568,480 568,473 378,074 378,074 Long-term borrowings.................... 21,875 22,011 28,892 28,802 Accrued interest payable................ 18,185 18,185 15,639 15,639
41 - -------------------------------------------------------------------------------- COMMITMENTS AND CONTINGENT LIABILITIES NOTE T - ------ 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 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 $28,700 as of December 31, 1997. 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, 1997, the Bank had commitments outstanding to extend credit at prevailing market rates approximating $514,000. 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, 1997, there was approximately $24,200 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. - -------------------------------------------------------------------------------- QUARTERLY FINANCIAL DATA (UNAUDITED) NOTE U - ------ Quarterly financial data for 1997 and 1996 is summarized below:
1997 1996 Three Months Ended Three Months Ended March 31 June 30 Sept 30 Dec 31 March 31 June 30 Sept 30 Dec 31 -------- ------- ------- ------ -------- --------------- ------ Interest income.............. $80,979 $82,454 $84,249 $85,255 $72,860 $77,874 $80,463 $80,956 Interest expense............. 36,661 37,627 39,484 39,979 32,022 34,361 36,306 36,596 Net interest income....... 44,318 44,827 44,765 45,276 40,838 43,513 44,157 44,360 Provision for loan losses.... 1,458 1,834 1,999 2,090 1,149 1,334 1,353 1,368 Net interest income after provision for loan losses. 42,860 42,993 42,766 43,186 39,689 42,179 42,804 42,992 Other income, excluding securities gains ......... 11,014 11,379 12,210 11,850 9,778 10,381 10,408 10,638 Securities transactions...... (84) 108 52 633 (294) 28 (147) 0 Other expenses............... 31,898 32,151 32,848 35,452 30,217 31,378 35,143 31,677 ------ ------ ------ ------ ------ ------ ------ ------ Income before income taxes... 21,892 22,329 22,180 20,217 18,956 21,210 17,922 21,953 Applicable income taxes...... 7,421 7,579 7,523 6,731 6,308 7,170 5,902 7,506 ------ ------ ------ ------ ------ ------ ------ ------ Net income................ $14,471 $14,750 $14,657 $13,486 $12,648 $14,040 $12,020 $14,447 ======= ======= ======= ======= ======= ======= ======= ======= Average shares outstanding: Basic..................... 27,563 27,384 27,261 27,212 26,240 27,481 27,950 27,798 Diluted................... 27,977 27,726 27,569 27,542 26,403 27,765 28,290 28,214 Per Share Data: Net income: Basic................... $ .53 $ .53 $ .54 $ .50 $ .48 $ .51 $ .43 $ .52 Diluted................. .52 .53 .53 .49 .48 .50 .42 .51 Dividends................. .19 .19 .21 .21 .18 .18 .19 .19 High ..................... 32.20 33.60 37.00 40.94 20.96 22.24 25.28 30.20 Low ...................... 28.60 28.60 32.50 36.31 19.76 19.60 21.60 25.00
42 - -------------------------------------------------------------------------------- SIX-YEAR AVERAGE BALANCE SHEET SUMMARY - -------------------------------------------------------------------------------- ONE VALLEY BANCORP, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS)
1997 1996 1995 1994 1993 1992 % of % of % of % of % of % of $ Total $ Total $ Total $ Total $ Total $ Total --------------- --------------- --------------- --------------- --------------- --------------- Assets Loans: Taxable.................... 2,805,019 64 2,650,425 65 2,397,405 65 2,202,716 62 2,032,527 58 1,929,592 57 Tax-exempt................. 46,208 1 43,740 1 33,977 1 34,430 1 31,153 1 30,351 1 ------ - ------ - ------ - ------ - ------ - ------ - Total loans ............. 2,851,227 65 2,694,165 66 2,431,382 66 2,237,146 63 2,063,680 59 1,959,943 58 Less: Allowance for losses. 41,975 1 41,348 1 38,810 1 37,460 1 36,932 1 33,170 1 ------ - ------ - ------ - ------ - ------ - ------ - Total loans-net ......... 2,809,252 64 2,652,817 65 2,392,572 65 2,199,686 62 2,026,748 58 1,926,773 57 Investment Securities: Taxable .................. 1,035,664 24 948,239 23 810,089 22 874,901 25 973,890 28 966,198 29 Tax-exempt ................ 226,223 5 204,742 5 187,180 5 176,079 5 100,577 3 83,261 2 ------ - ------ - ------ - ------ - ------ - ------ - Total securities ........ 1,261,887 29 1,152,981 28 997,269 27 1,050,980 30 1,074,467 31 1,049,459 31 Federal funds sold & other... 30,140 1 16,815 0 32,595 1 27,363 1 100,270 3 119,696 4 ------ - ------ - ------ - ------ - ------ - ------ - Total earning assets..... 4,101,279 94 3,822,613 93 3,422,436 93 3,278,029 93 3,201,485 92 3,095,928 92 Other assets ................ 285,786 6 281,907 7 266,775 7 262,422 7 265,776 8 277,317 8 ------ - ------ - ------ - ------ - ------ - ------ - Total assets .......... 4,387,065 100 4,104,520 100 3,689,211 100 3,540,451 100 3,467,261 100 3,373,245 100 Liabilities & Shareholders' Equity Interest Bearing Liabilities: Time & savings deposits... 3,028,238 69 2,886,158 70 2,625,910 71 2,518,539 71 2,498,420 72 2,455,775 73 Short-term borrowings..... 461,725 11 382,821 9 289,103 8 242,304 6 214,460 6 221,601 6 Long-term borrowings..... 28,910 1 18,602 0 11,416 0 22,931 1 36,088 1 25,703 1 ------ - ------ - ------ - ------ - ------ - ------ - Total interest bearing liabilities ........... 3,518,573 81 3,287,581 79 2,926,429 79 2,783,774 78 2,748,968 79 2,703,079 80 Demand deposits .............. 410,203 9 384,817 9 380,996 10 412,016 12 396,711 11 373,488 11 Other liabilities............. 45,063 1 42,417 1 33,513 1 28,937 1 26,849 1 27,671 1 ------ - ------ - ------ - ------ - ------ - ------ - Total Liabilities....... 3,973,839 91 3,714,815 89 3,340,938 90 3,224,727 91 3,172,528 91 3,104,238 92 Shareholders' equity......... 413,226 9 389,705 11 348,273 10 315,724 9 294,733 9 269,007 8 ------ - ------ - ------ - ------ - ------ - ------ - Total liabilities & shareholders' equity.. 4,387,065 100 4,104,520 100 3,689,211 100 3,540,451 100 3,467,261 100 3,373,245 100 ========= === ========= === ========= === ========= === ========= === ========= ===
43 - -------------------------------------------------------------------------------- SIX-YEAR NET INTEREST INCOME SUMMARY - -------------------------------------------------------------------------------- ONE VALLEY BANCORP, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS)
1997 1996 1995 1994 1993 1992 % 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.................. 247,662 72.6 235,153 73.6 217,034 75.0 189,040 73.2 179,971 71.3 186,681 69.7 Tax-exempt............... 4,600 1.4 4,328 1.3 3,774 1.3 3,618 1.4 3,255 1.3 3,133 1.2 ----- --- ----- --- ----- --- ----- --- ----- --- ----- --- Total loans............ 252,262 74.0 239,481 74.9 220,808 76.3 192,658 74.6 183,226 72.6 189,814 70.9 Securities Taxable ................. 68,798 20.2 62,447 19.5 50,693 17.6 48,881 19.0 55,868 22.2 64,466 24.1 Tax-exempt............... 18,466 5.4 17,040 5.4 15,941 5.5 15,497 6.0 10,146 4.0 9,059 3.4 ------ --- ------ --- ------ --- ------ --- ------ --- ----- --- Total securities ...... 87,264 25.6 79,487 24.9 66,634 23.1 64,378 25.0 66,014 26.2 73,525 27.5 Funds sold & other......... 1,484 0.4 664 0.2 1,830 0.6 1,037 0.4 3,104 1.2 4,290 1.6 ------ --- ------ --- ------ --- ------ --- ------ --- ----- --- Total interest income.. 341,010 100.0 319,632 100.0 289,272 100.0 258,073 100.0 252,344 100.0 267,629 100.0 Interest Expense: Deposits................... 128,910 37.8 119,865 37.5 106,493 36.8 85,221 33.0 90,807 36.0 109,713 41.0 Short-term borrowings..... 23,076 6.8 18,276 5.7 13,899 4.8 8,491 3.3 6,270 2.5 8,203 3.1 Long-term borrowings.......... 1,765 0.5 1,144 0.4 688 0.3 1,185 0.5 2,709 1.1 2,123 0.8 ------ --- ------ --- ------ --- ------ --- ------ --- ----- --- Total interest expense........ 153,751 45.1 139,285 43.6 121,080 41.9 94,897 36.8 99,786 39.6 120,039 44.9 ------- ---- ------- ---- ------- ---- ------ ---- ------ ---- ------- ---- Tax equivalent net interest income........ 187,259 54.9 180,347 56.4 168,192 58.1 163,176 63.2 152,558 60.4 147,590 55.1 Tax equivalent adjustment..... 8,073 2.4 7,479 2.3 6,900 2.4 6,690 2.6 4,645 1.8 4,145 1.5 ------- ---- ------- ---- ------- ---- ------ ---- ------ ---- ------- ---- Net interest income........... 179,186 52.5 172,868 54.1 161,292 55.7 156,486 60.6 147,913 58.6 143,445 53.6 ======= ==== ======= ==== ======= ==== ======= ==== ======= ==== ======= ==== Summary of Average Rates Earned & Paid* Taxable loans................. 8.83% 8.87% 9.05% 8.58% 8.85% 9.67% Tax-exempt loans ............. 9.95 9.89 11.11 10.51 10.45 10.32 Net loans ................. 8.98 9.03 9.23 8.76 9.04 9.85 Taxable securities .......... 6.64 6.59 6.26 5.59 5.74 6.67 Tax-exempt securities ....... 8.16 8.32 8.52 8.80 10.09 10.88 Total securities........... 6.92 6.89 6.68 6.13 6.14 7.01 Funds sold & deposits ....... 4.92 3.95 5.61 3.79 3.10 3.58 Total earning assets....... 8.31% 8.36% 8.45% 7.87% 7.88% 8.64% Time & savings deposits...... 4.26 4.15 4.06 3.38 3.63 4.47 Short-term borrowings ........ 5.00 4.77 4.81 3.50 2.92 3.70 Long-term borrowings ......... 6.17 6.15 6.03 5.17 7.51 8.26 Total interest cost........ 4.37 4.24 4.14 3.41 3.63 4.44 Total cost of all funds.... 3.75 3.64 3.54 2.89 3.11 3.87 Net interest margin ..... 4.56% 4.72% 4.91% 4.98% 4.77% 4.77%
* INTEREST INCOME AND YIELDS ARE COMPUTED ON A FULLY TAXABLE EQUIVALENT BASIS USING THE RATES OF 35% FOR 1997 THROUGH 1993 AND 34% FOR 1992. 44 - -------------------------------------------------------------------------------- SIX-YEAR OPERATING INCOME SUMMARY - -------------------------------------------------------------------------------- ONE VALLEY BANCORP, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
1997 1996 1995 1994 1993 1992 % 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................ 332,937 87.6 312,153 88.4 282,372 88.3 251,383 87.3 247,699 86.3 263,484 87.7 Interest expense............... 153,751 40.5 139,285 39.4 121,080 37.8 94,897 33.0 99,786 34.8 120,039 39.9 ------- ---- ------- ---- ------- ---- ------ ---- ------ ---- ------- ---- Net interest income............ 179,186 47.1 172,868 49.0 161,292 50.5 156,486 54.3 147,913 51.5 143,445 47.8 Provision for loan losses...... 7,381 1.9 5,204 1.5 5,632 1.8 4,788 1.7 5,788 2.0 11,389 3.8 ------- ---- ------- ---- ------- ---- ------ ---- ------ ---- ------- ---- Net interest income after provision for loan losses... 171,805 45.2 167,664 47.5 155,660 48.7 151,698 52.6 142,125 49.5 132,056 44.0 Other Income: Trust Department income..... 10,228 2.7 9,322 2.7 8,203 2.5 7,892 2.7 7,272 2.5 6,041 2.0 Service charges on deposit accounts.......... 15,043 3.9 14,572 4.1 13,877 4.3 11,441 4.0 11,963 4.2 11,281 3.7 Other service charges and fees.......... 16,374 4.3 13,720 3.9 11,851 3.7 13,175 4.5 14,912 5.2 14,744 4.9 Other operating income...... 4,808 1.3 3,591 1.0 3,708 1.2 4,937 1.7 5,045 1.8 4,735 1.6 Securities transactions..... 709 0.2 (413) (0.1) (65) (0.0) (867) (0.3) 113 0.0 (35) (0.0) ------- ---- ------- ---- ------- ---- ------ ---- ------ ---- ------- ---- Total other income........ 47,162 12.4 40,792 11.6 37,574 11.7 36,578 12.6 39,305 13.7 36,766 12.2 Operating Expenses: Salaries & benefits......... 66,702 17.5 64,631 18.3 62,126 19.4 63,042 21.8 61,511 21.4 55,457 18.4 Occupancy expense........... 7,073 1.9 6,887 2.0 6,305 2.0 6,014 2.1 6,206 2.2 6,199 2.1 Equipment expense........... 8.803 2.3 9,137 2.6 8,761 2.7 8,468 2.9 10,604 3.7 10,503 3.5 External computer costs..... 8,264 2.2 5,692 1.6 5,285 1.6 5,304 1.8 5,041 1.8 2,962 1.0 Other expense............... 41,507 10.9 42,068 11.9 37,114 11.6 37,328 13.1 41,788 14.5 40,417 13.5 ------- ---- ------- ---- ------- ---- ------ ---- ------ ---- ------- ---- Total operating expenses.. 132,349 34.8 128,415 36.4 119,591 37.3 120,156 41.7 125,150 43.6 115,538 38.5 ------- ---- ------- ---- ------- ---- ------ ---- ------ ---- ------- ---- Income before tax.............. 86,618 22.8 80,041 22.7 73,643 23.1 68,120 23.5 56,280 19.6 53,284 17.7 Applicable income taxes........ 29,254 7.7 26,886 7.6 24,537 7.7 21,909 7.6 18,326 6.4 16,646 5.5 ------- ---- ------- ---- ------- ---- ------ ---- ------ ---- ------- ---- Net income..................... 57,364 15.1 53,155 15.1 49,106 15.4 46,211 15.9 37,954 13.2 36,638 12.2 ====== ==== ====== ==== ====== ==== ====== ==== ====== ==== ====== ====
* ADJUSTED OPERATING INCOME EQUALS INTEREST INCOME PLUS OTHER INCOME.
Per Share Summary 1997 1996 1995 1994 1993 1992 ---- ---- ---- ---- ---- ---- Net income: Basic...................... 2.10 1.94 1.83 1.73 1.41 1.36 Diluted.................... 2.07 1.91 1.82 1.72 1.40 1.35 Cash dividends................ 0.80 0.74 0.66 0.60 0.54 0.45 Stock dividends............... 25% 25% 0 0 50%/20% 0 Average shares................ 27,354,000 27,370,000 26,835,000 26,769,000 26,933,000 26,893,000
45 - ------------- DIRECTORS OF ONE VALLEY BANCORP - ------------- PHYLLIS H. ARNOLD Executive Vice President One Valley Bancorp, Inc. President & Chief Executive Officer One Valley Bank, N.A. CHARLES M. AVAMPATO President, Clay Foundation, Inc. ROBERT F. BARONNER Chairman of the Board One Valley Bancorp, Inc. C. MICHAEL BLAIR Chairman of the Board President & Chief Executive Officer One Valley Bank - North DENNIS M. BONE President & Chief Executive Officer Bell Atlantic - West Virginia, Inc. JAMES K. BROWN Attorney, Jackson & Kelly NELLE RATRIE CHILTON Vice President and Director Dickinson Fuel Company, Inc. and Terra Co., Inc. H. RODGIN COHEN Attorney, Sullivan & Cromwell RAY MARSHALL EVANS, JR. President, Dickinson Company, Chesapeake Mining Company and Hubbard Properties, Inc., Vice President, Geary Securities JAMES GABRIEL President & Chief Executive Officer Gabriel Brothers, Inc. PHILLIP H. GOODWIN President & Chief Executive Officer CAMCARE, Inc. THOMAS E. GOODWIN Chairman of the Board One Valley Bank of Ronceverte, N.A. BOB M. JOHNSON Vice Chairman of the Board One Valley Bank - Central Virginia, NA ROBERT E. KAMM, JR. Senior Vice President One Valley Bancorp, Inc. President & Chief Executive Officer One Valley Bank of Summersville JOHN D. LYNCH Vice President Davis Lynch Glass Co. EDWARD H. MAIER President, General Corporation J. HOLMES MORRISON 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 ROBERT O. ORDERS, SR. Chief Executive Officer Orders Construction Company JOHN L. D. PAYNE President, Payne-Gallatin Mining Co. ANGUS E. PEYTON Attorney, Brown & Peyton LACY I. RICE, JR. Vice Chairman of the Board One Valley Bancorp, Inc. Attorney, Bowles, Rice, McDavid Graff & Love BRENT D. ROBINSON President & Chief Executive Officer, One Valley Bank - East, N.A. JAMES W. THOMPSON Chairman of the Board One Valley Bank of Mercer County JOHN L. VAN METRE, JR. Attorney, Steptoe & Johnson RICHARD B. WALKER Chairman of the Board and CEO Cecil I. Walker Machinery Co. H. BERNARD WEHRLE, III President, McJunkin Corporation JOHN H. WICK, III Vice President, Dickinson Fuel Company, Inc. THOMAS D. WILKERSON Senior Agent Northwestern Mutual Life Insurance Co. Honorary Members John T. Chambers Cecil B. Highlind, Jr. - ----------- ONE VALLEY BANCORP SENIOR MANAGEMENT - ----------- J. HOLMES MORRISON President and Chief Executive Officer PHYLLIS H. ARNOLD Executive Vice President FREDERICK H. BELDEN, JR. Executive Vice President and Assistant Corporate Secretary LAURANCE G. JONES Executive Vice President and Chief Financial 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 Corporate Secretary TERRY T. PUSTER Senior Vice President KENNETH R. SUMMERS Senior Vice President 46 - ----------- SHAREHOLDER INFORMATION - ----------- MARKET REGISTRATION One Valley is registered on the New York Stock Exchange under the symbol "OV". 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: Allen E. Davis, Financial Accountant One Valley Bancorp P.O. Box 1793 Charleston, West Virginia 25326 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 should contact Laurance G. Jones, Executive Vice President and Chief Financial Officer, at (304) 348-7062. News media representatives and others seeking general information should contact Lloyd P. Calvert, Vice President - Corporate Affairs, at (304) 348-7207. 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 STOCK TRANSFER AGENT Harris Trust & Savings Bank 311 West Monroe Street Chicago, Illinois 60606 NUMBER OF SHAREHOLDERS There were approximately 8,225 share-holders of record of One Valley Common Stock at December 31, 1997. - --------- AFFILIATE MARKETS - --------- [MAP OF VIRGINIA AND WEST VIRGINIA APPEARS HERE] 47 - -------------------------------------------------------------------------------- AFFILIATE DIRECTORS - -------------------------------------------------------------------------------- ONE VALLEY BANK, NATIONAL ASSOCIATION ONE VALLEY SQUARE CHARLESTON, WV 25326 Phyllis H. Arnold* Charles M. Avampato Robert F. Baronner James K. Brown Nelle Ratrie Chilton Ray Marshall Evans, Jr. Robert F. Goldsmith Phillip H. Goodwin O. Nelson Jones Carl E. Little David E. Lowe Edward H. Maier J. Holmes Morrison Robert O. Orders, Sr. John L. D. Payne Angus E. Peyton William A. Rice, Jr. K. Richard C. Sinclair James C. Smith James R. Thomas, II Edwin H. Welch John Henry Wick, III Thomas D. Wilkerson James D. Williams HONORARY MEMBER John T. Chambers ONE VALLEY BANK OF SUMMERSVILLE 811 MAIN STREET SUMMERSVILLE, WV 26651 Roy V. Groves W. H. Henderson, Jr. Charles H. Hinkle Robert E. Kamm, Jr.* David Lackey Glenn H. McMillion Robert C. Rader ONE VALLEY BANK CENTRAL VIRGINIA, NA 2120 LANGHORNE ROAD LYNCHBURG, VA 24501 Donald W. Britton William J. Conner Bob M. Johnson Laurance G. Jones William M. Kidd Robert M. O'Brian William F. Overacre Edgar J.T. Perrow Jerry T. Price George P. Ramsey, III William D. Stegall* F. Rogers Vaden ONE VALLEY BANK, INC. 496 HIGH STREET MORGANTOWN, WV 26505 Iona L. Bucklew Jeffrey B. Carpenter Samuel Chico, Jr. Otis G. Cox, Jr. George R. Farmer, Jr. Arthur Gabriel Trevelyn F. Hall, II Wendell G. Hardway Benjamin H. Hayes Kenneth Juskowich James L. Laurita, Sr. John D. Lynch Paul F. Malone David Moffa D.J. Moore Thomas M. Prendergast Howard A. Shriver James M. Stevenson Paul T. Swanson Kenneth R. Summers* Robert H. Thompson Bernard G. Westfall Brian K. Wilson HONORARY MEMBER Laurence S. DeLynn ONE VALLEY BANK OF RONCEVERTE, N.A. 100 MAPLEWOOD AVENUE RONCEVERTE, WV 24970 Gary M. Ambler Thomas E. Goodwin Michael O'Brien Donald E. Parker, Jr. Henry E. Riffe John L. Robertson Paul G. Robinson* David Sebert Marion Shiflet HONORARY MEMBER Norman O. Nutter ONE VALLEY BANK OF OAK HILL 100 MAIN STREET OAK HILL, WV 25901 John M. Frazier* George W. Jones, III James E. Lively William E. Meador Marilyn T. Montgomery Donald C. Newell, Jr. Roy Shrewsbury, II N. M. Steen HONORARY MEMBER Elizabeth M. Lewis ONE VALLEY BANK EAST, N.A. 148 SOUTH QUEEN STREET MARTINSBURG, WV 25401 Walter L. Butler James W. Dailey, II Deborah J. Dhayer David L. Dunlop Conrad C. Hammann Charles A. Hensell James B. Hutzler Robert A. McMillan John M. Miller, III Ellen M. Parsons Bonn A. Poland, III Brent D. Robinson* Lacy I. Rice, Jr. Douglas M. Roach John L. Van Metre, Jr. HONORARY MEMBERS George E. Alter, Jr. Guy R. Avey, Jr. A. Elwood Butler Howard N. Carper, Jr. Robert G. Criswell Frank H. Fischer N. Blaine Groves T. Fred Hammond Otho S. Lewis Walter B. Ridenour Robert A. Sanders Philip T. Siebert Clyde E. Smith, Jr. Paul E. Tederick C. Vincent Townsend ONE VALLEY BANK OF MERCER COUNTY COURTHOUSE SQUARE PRINCETON, WV 24740 Jerry L. Beasley Fred A. Bolton A. Glendon Hill M. D. Kirk, Jr. James L. Miller* Charles W. Pace Dewey W. Russell James W. Thompson Ted L. White H. Elwood Winfrey HONORARY MEMBERS James W. Anderson W. R. Cooke Harry Finkelman H. Allen Griffith Richard V. Lilly Joseph F. Marsh Fred McKenzie Lawrence J. Pace Guy B. Scyphers Joseph C. Shaffer, Jr. ONE VALLEY BANK OF CLARKSBURG, N.A. 4TH AND MAIN STREETS CLARKSBURG, WV 26302 Ronald L. Adams Earl N. Flowers John C. Hart J. Cecil Jarvis Cecil B. Highland, Jr. C. William Johnson William M. Kidd Larry F. Mazza* Ronald E. Ohl Kenneth R. Summers Leonard J. Timms, Jr. ONE VALLEY BANK OF HUNTINGTON SIXTH AVE. & FIRST ST. HUNTINGTON, WV 25701 J. G. Call W. Dan Egnor Charlene Farrell Stephen G. Fox Henry M. Kayes Sara H. Lowe Charles R. Neighborgall, III Stephen G. Roberts David P. Reed* J. Roger Smith Kevin D. Thompson ONE VALLEY BANK NORTH 414 JEFFERSON AVENUE MOUNDSVILLE, WV 26041 C. Michael Blair* Earl G. Downs Robert L. Fisher Loren Gene Gray Sidney E. Grisell Carlos C. Jimenez Jeffrey V. Kessler Helen E. Levenson William Medovic Shelley R. Moore James P. Ovies Charles E. Rexroad Clinton Rogerson Nick A. Sparachane Bernard P. Twigg Glenn Reed Whipkey Bruce W. Wilson * PRESIDENT AND CEO EX-21 4 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT 1) One Valley Bank, National Association, a national banking association organized under the laws of the United States of America. 2) One Valley Bank of Huntington, Inc., a West Virginia banking corporation. 3) One Valley Bank of Mercer County, Inc., a West Virginia banking corporation. 4) One Valley Bank-East, National Association, a national banking association organized under the laws of the United States of America. 5) One Valley Bank of Oak Hill, Inc., a West Virginia banking corporation. 6) One Valley Bank of Ronceverte, National Association, a national banking association organized under the laws of the United States of America. 7) One Valley Bank, Inc., a West Virginia banking corporation. 8) One Valley Bank of Summersville, Inc., a West Virginia banking corporation. 9) One Valley Bank-North, Inc., a West Virginia banking corporation. 10) One Valley Bank of Clarksburg, National Association, a national banking association organized under the laws of the United States of America. 11) One Valley Bank-Central Virginia, National Association, a national banking association organized under the laws of the United States of America. 12) One Valley Square, Inc., a Texas corporation. 13) One Valley Thrift, Inc., a West Virginia corporation. 30 EX-23 5 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in this Annual Report (Form 10-K) of One Valley Bancorp, Inc., of our report dated January 21, 1998, included in the 1997 Annual Report to Shareholders of One Valley Bancorp, Inc. We also consent to the incorporation by reference in the Registration Statement, 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 21, 1998, 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 for the year ended December 31, 1997. /s/ Ernst & Young Charleston, West Virginia March 13, 1998 31 EX-27 6 EXHIBIT 27
9 This schedule contains summary financial information extracted from the consolidated balance sheets and statements of income of One Valley Bancorp as well as supplemental schedules of the analysis of loan losses and non-performing assets and the consolidated average balance sheets and is qualified in its entirety by reference ot such financial statements and supplemental schedules. 0000351616 ONE VALLEY BANCORP, INC. 1000 YEAR YEAR YEAR DEC-31-1997 DEC-31-1996 DEC-31-1995 DEC-31-1997 DEC-31-1996 DEC-31-1995 122615 146152 140617 2162 9897 8259 18900 4825 16800 0 0 0 1102014 952908 871699 237632 217322 205153 244062 219841 212040 2968678 2810212 2511962 41686 41745 39534 4582264 4267303 3858296 3517562 3406016 3048336 568480 378074 389780 50072 45744 40467 21875 28892 13411 0 0 0 0 0 0 315207 249232 180166 109068 159345 186136 4582264 4267303 3858296 250652 237966 219487 80801 73523 61055 1484 664 1830 332937 312153 282372 128910 119865 106493 153751 139285 121080 179186 172868 161292 7381 5204 5632 709 (413) (65) 132349 128415 119591 86618 80041 73643 86618 80041 73643 0 0 0 0 0 0 57364 53155 49106 2.10 1.94 1.83 2.07 1.91 1.82 4.56 4.72 4.91 7418 8528 7174 5641 4273 5582 0 0 0 0 0 0 41745 39534 37438 9737 7038 5611 2297 1819 1840 41686 41745 39534 41686 41745 39534 0 0 0 0 0 0
EX-99 7 EXHIBIT 99 ONE VALLEY BANCORP, INC. CHARLESTON, WEST VIRGINIA ------------------------- NOTICE OF REGULAR ANNUAL MEETING OF SHAREHOLDERS TO BE HELD APRIL 28, 1998 ------------------------- To the Shareholders: The Regular Annual Meeting of Shareholders of One Valley Bancorp, Inc. ("One Valley"), will be held at The Charleston Town Center Marriott, 200 Lee Street, East, in Charleston, West Virginia, at 10:00 a.m. on Tuesday, April 28, 1998, for the purpose of considering and voting upon proposals: 1. To elect seven directors - six to serve for a term of three years, and one to serve for a term of one year, and until their successors are chosen and qualify. 2. To ratify the selection of Ernst & Young LLP by the Board of Directors as Independent Auditors for the year 1998. 3. To transact such other business as may properly be brought before the meeting or any adjournment thereof. Only those shareholders of record at the close of business on March 10, 1998, are entitled to notice of the meeting and to vote at the meeting. We hope that you will attend this meeting. By Order of the Board of Directors J. Holmes Morrison PRESIDENT PLEASE SIGN AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS POSSIBLE, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING IN PERSON. YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED AT THE ANNUAL MEETING. MARCH 20, 1998 ONE VALLEY BANCORP, INC. ONE VALLEY SQUARE CHARLESTON, WEST VIRGINIA ------------------------- PROXY STATEMENT ANNUAL MEETING OF SHAREHOLDERS -- APRIL 28, 1998 ----------------------- This statement is furnished in connection with the solicitation of proxies for use at the Annual Meeting of Shareholders of One Valley Bancorp, Inc. ("One Valley"), to be held on Tuesday, April 28, 1998, at the time and for the purposes set forth in the accompanying Notice of Regular Annual Meeting of Shareholders. The approximate date on which this Proxy Statement and the form of proxy are to be first mailed to shareholders is March 20, 1998. The mailing address of the principal executive offices of One Valley is P. O. Box 1793, Charleston, West Virginia 25326. SOLICITATION OF PROXIES The solicitation of proxies is made by management at the direction of the Board of Directors of One Valley. These proxies enable shareholders to vote on all matters which are scheduled to come before the meeting. If the enclosed proxy is signed and returned, it will be voted as directed; or if not directed, the proxy will be voted "FOR" the election of the seven management nominees as directors for the terms specified and "FOR" the ratification of the selection of Ernst & Young LLP as Independent Auditors. A shareholder executing the proxy may revoke it at any time before it is voted by notifying One Valley in person, by giving written notice to One Valley of the revocation of the proxy, by submitting to One Valley a subsequently dated proxy or by attending the meeting and withdrawing the proxy before it is voted at the meeting. The expense for the solicitation of proxies will be paid by One Valley. In addition to this solicitation by mail, officers and regular employees of One Valley and its subsidiaries may, to a limited extent, solicit proxies personally or by telephone, telegraph or other form of communication. ELIGIBILITY OF STOCK FOR VOTING PURPOSES Pursuant to One Valley's Bylaws, the Board of Directors has fixed March 10, 1998, as the record date for the purpose of determining the shareholders entitled to notice of, and to vote at, the meeting or any adjournment thereof, and only shareholders of record at the close of business on that date are entitled to notice of and to vote at the Annual Meeting of Shareholders or any adjournment thereof. As of the record date for the Annual Meeting, 27,212,631 shares of the common stock with a par value of ten dollars ($10.00) per share ("One Valley Common Stock") of One Valley were issued and outstanding and entitled to vote. One Valley's subsidiary banks hold of record as trustee, co-trustee, executor or co-executor, but not beneficially, 4,970,823 shares of stock representing 18.27% of the shares of One Valley outstanding. Of these shares, the banks hold 4,210,550 shares as co-trustee or co-executor and 760,273 shares as sole trustee or sole executor (other principal holders of One Valley's stock are discussed under "Principal Holders of Securities"). The 4,210,550 shares held as co-trustee or co-executor are voted by the individual co-trustee(s) or co-executor(s) and not by the banks. Of the remaining 760,273 shares held by the banks as sole trustee or sole executor, 688,905 shares (or 2.53% of the total shares outstanding) will be voted by the banks, as trustee or executor, "FOR" the election of the seven management nominees as directors and "FOR" the ratification of the selection of Ernst & Young LLP as Independent Auditors. The remaining 71,368 shares are held by the banks as sole trustee or sole executor in personal trust and self-directed employee benefit accounts and will be voted by the banks at the direction of the grantor, settlor or beneficiary of those accounts. 1 PURPOSE OF MEETING 1. ELECTION OF DIRECTORS One Valley's Bylaws currently provide that the Board of Directors shall consist of not fewer than six nor more than 33 members. The Bylaws also provide that the exact number of directors within these minimum and maximum limits is to be fixed and determined by resolution of the Board of Directors. There are presently 29 directors on the Board, and at a meeting held February 17, 1998, the Board's Executive Committee fixed at 27 the number of directors to constitute the full Board of Directors of One Valley effective April 28, 1998. The term of Mr. Robert O. Orders, Sr., as a director of One Valley expires at the 1998 Annual Meeting, and in accordance with One Valley's Directors' Retirement Policy, he will not stand for re-election. Mr. C. Michael Blair has completed his term of service and will not stand for re-election. One Valley's Articles of Incorporation authorize classification of the Board of Directors into three classes, each of which serves for three years, with one class being elected each year. Pursuant to this arrangement six nominees have been nominated for three-year terms, and one nominee has been nominated for a one-year term, and until their successors are chosen and qualify. This will result in a Board composed of three classes with twelve directors in the class of 1999, nine directors in the class of 2000 and six directors in the class of 2001. MANAGEMENT NOMINEES TO THE BOARD OF ONE VALLEY Unless otherwise directed, the proxies will be voted "FOR" the election of the following seven directors to serve for terms expiring at the Annual Meeting of Shareholders for the years indicated below and until their successors are chosen and qualify.
(Photograph appears ROBERT F. BARONNER here of Robert F. Baronner) DIRECTOR SINCE 1981 TERM EXPIRES 1999 AGE 71 Chairman of the Board - One Valley Bancorp, Inc., Charleston, WV; formerly President and Chief Executive Officer - One Valley Bancorp, Inc., Charleston, WV (Photograph appears R. MARSHALL EVANS, JR. here of R. Marshall DIRECTOR SINCE 1984 Evans, Jr.) TERM EXPIRES 2001 AGE 56 President - Dickinson Co., Quincy Coal Co., and Chesapeake Mining Co., Charleston, WV; Vice President -Geary Securities, Charleston, WV; President - Hubbard Properties, Inc., Cheyenne, WY (2) (Photograph appears JAMES K. BROWN here of James K. Brown) DIRECTOR SINCE 1981 TERM EXPIRES 2001 AGE 68 Attorney - Jackson & Kelly, Charleston, WV (Photograph appears PHILLIP H. GOODWIN here of Phillip H. Goodwin DIRECTOR SINCE 1989 TERM EXPIRES 2001 AGE 57 President and Chief Executive Officer - CAMCARE; 1987 to 1997 President - Charleston Area Medical Center, Charleston, WV (Photograph appears NELLE RATRIE CHILTON here of Nelle Ratrie Chilton)DIRECTOR SINCE 1989 TERM EXPIRES 2001 AGE 58 Director and Vice President - Dickinson Fuel Co., Inc., Charleston, WV; TerraCo., Inc., Charleston, WV; TerraCare, Inc., TerraSalis, Inc., TerraSod, Inc., Malden, WV (Landscaping) (1) (Photograph appears JOHN L. D. PAYNE here of John L.D. Payne) DIRECTOR SINCE 1981 TERM EXPIRES 2001 AGE 59 President - Payne-Gallatin Mining Co., Charleston, WV (2)
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(Photograph appears BRENT D. ROBINSON here of Brent D. Robinson) DIRECTOR SINCE 1994 TERM EXPIRES 2001 AGE 50 1998 to present - President and Chief Executive Officer - One Valley Bank-East, Martinsburg, WV; 1995 to 1997 - President and Chief Executive Officer - One Valley Bank of Huntington, Huntington, WV; 1993 to 1996 - Executive Vice President, One Valley Bancorp, Inc.; formerly President, Chief Operating Officer and Chief Financial Officer Mountaineer Bankshares of W.Va., Inc. DIRECTORS CONTINUING TO SERVE UNEXPIRED TERMS (Photograph appears PHYLLIS H. ARNOLD here of Phyllis H. Arnold) DIRECTOR SINCE 1993 TERM EXPIRES 1999 AGE 49 President and Chief Executive Officer - One Valley Bank, National Association, Charleston, WV (Photograph appears H. RODGIN COHEN here of H. Rodgin Cohen) DIRECTOR SINCE 1997 TERM EXPIRES 2000 AGE 53 Attorney - Sullivan & Cromwell, New York, NY (Photograph appears CHARLES M. AVAMPATO here of Charles M. Avampato) DIRECTOR SINCE 1984 TERM EXPIRES 1999 AGE 59 President - Clay Foundation, Inc., Charleston, WV (Charitable Foundation) (Photograph appears JAMES GABRIEL here of James Gabriel) DIRECTOR SINCE 1993 TERM EXPIRES 1999 AGE 67 President and Chief Executive Officer - Gabriel Brothers, Inc., Morgantown, WV (Retail Sales) (Photograph appears DENNIS M. BONE here of Dennis M. Bone) DIRECTOR SINCE 1997 TERM EXPIRES 2000 AGE 46 1995 to present - President and Chief Executive Officer - Bell Atlantic - West Virginia, Inc.; formerly Director, Regulatory Planning - Bell Atlantic - New Jersey, Inc., Charleston, WV (Photograph appears THOMAS E. GOODWIN here of Thomas E. Goodwin) DIRECTOR SINCE 1985 TERM EXPIRES 1999 AGE 68 Chairman of the Board - One Valley Bank of Ronceverte, National Association, Ronceverte, WV
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(Photograph appears BOB M. JONNSON here of Bob M. Jonnson) DIRECTOR SINCE 1996 TERM EXPIRES 2000 AGE 62 1998 to present - Vice Chairman of the Board - One Valley Bank Central Virginia; 1996 to 1997 President and Chief Executive Officer - One Valley Bank - Central Virginia; formerly President and Chief Executive Officer - Co-operative Savings Bank, FSB, Lynchburg, VA (Photograph appears J. HOLMES MORRISON here of J. Holmes Morrison) DIRECTOR SINCE 1990 TERM EXPIRES 2000 AGE 57 President and Chief Executive Officer - One Valley Bancorp, Inc., and Chairman of the Board - One Valley Bank, National Association, Charleston, WV (Photograph appears ROBERT E. KAMM, JR. here of Robert E. Kamm, Jr.) DIRECTOR SINCE 1987 TERM EXPIRES 2000 AGE 46 President and Chief Executive Officer - One Valley Bank of Summersville, Inc., Summersville, WV (Photograph appears CHARLES R. NEIGHBORGALL, III here of Charles R. DIRECTOR SINCE 1987 Neighborgall, III) TERM EXPIRES 1999 AGE 56 President - The Neighborgall Construction Company, Huntington, WV (Photograph appears JOHN D. LYNCH here of John D. Lynch) DIRECTOR SINCE 1986 TERM EXPIRES 1999 AGE 57 Vice President - Davis Lynch Glass Company, Star City, WV (Photograph appears ANGUS E. PEYTON here of Angus E. Peyton DIRECTOR SINCE 1981 TERM EXPIRES 1999 AGE 71 Attorney - Brown and Peyton, Charleston, WV (3) (Photograph appears EDWARD H. MAIER here of Edward H. DIRECTOR SINCE 1983 Maier) TERM EXPIRES 2000 AGE 54 President - General Corporation, Charleston, WV (Real Estate Investment and Natural Gas Production) (Photograph appears LACY I. RICE, JR. here of Lacy I. Rice, Jr.) DIRECTOR SINCE 1994 TERM EXPIRES 2000 AGE 66 Attorney - Bowles, Rice, McDavid, Graff & Love; Vice Chairman of the Board - One Valley Bancorp, Inc., Charleston, WV; Chairman of the Board - One Valley Bank - East, Martinsburg, WV; formerly Chairman of the Board and Chief Executive Officer - Mountaineer Bankshares of W.Va., Inc.
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(Photograph appears JAMES W. THOMPSON here of James W. Thompson) DIRECTOR SINCE 1983 TERM EXPIRES 1999 AGE 70 Chairman of the Board - One Valley Bank of Mercer County, Inc., Princeton, WV (Photograph appears H. BERNARD WEHRLE, III here of H. Bernard DIRECTOR SINCE 1991 Wehrle, III) TERM EXPIRES 1999 AGE 46 President - McJunkin Corporation, Charleston, WV (Industrial Wholesaler) (Photograph appears J. LEE VAN METRE, JR. here of J. Lee Van Metre, DIRECTOR SINCE 1986 Jr.) TERM EXPIRES 1999 AGE 60 Attorney - Steptoe & Johnson; Secretary of the Board - One Valley Bank - East, National Association, Martinsburg, WV (Photograph appears JOHN H. WICK, III here of John H. Wick, III) DIRECTOR SINCE 1993 TERM EXPIRES 1999 AGE 52 1992 to present - Vice President - Dickinson Fuel Co., Inc., Charleston, WV (1) (Photograph appears RICHARD B. WALKER here of Richard B. Walker DIRECTOR SINCE 1991 TERM EXPIRES 2000 AGE 59 Chairman of the Board and Chief Executive Officer - Cecil I. Walker Machinery Co., Belle, WV (Photograph appears THOMAS D. WILKERSON here of Thomas D. DIRECTOR SINCE 1981 Wilkerson) TERM EXPIRES 2000 AGE 69 Senior Agent - Northwestern Mutual Life Insurance Company, Charleston, WV
(1) Nelle Ratrie Chilton is the sister-in-law of John H. Wick, III. (2) R. Marshall Evans, Jr. and John L. D. Payne are first cousins. (3) Angus E. Peyton is a member of the Board of Directors of American Electric Power Company, Inc. 5 GENERAL One Valley's Bylaws provide that in the election of directors, each shareholder will have the right to vote the number of shares owned by that shareholder for as many persons as there are directors to be elected, or to cumulate such shares and give one candidate as many votes as the number of such directors multiplied by the number of shares owned will equal, or to distribute them on the same principle among as many candidates as the shareholder sees fit. For all other purposes, each share is entitled to one vote. If any shares are voted cumulatively for the election of directors, the Proxies, unless otherwise directed, will have full discretion and authority to cumulate their votes and vote for less than all such nominees. Directors are elected by a plurality of votes cast, without regard to either broker non-votes or proxies as to which authority to vote for one or more of the nominees being proposed is withheld. One Valley's Bylaws provide that nominations for election to the Board of Directors, other than those made by or on behalf of the existing management of One Valley, must be made by a shareholder in writing delivered or mailed to the President not less than 14 days nor more than 50 days prior to the meeting called for the election of directors; provided, however, that if less than 21 days' notice of the meeting is given to shareholders, the nominations must be mailed or delivered to the President not later than the close of business on the 7th day following the day on which the notice of meeting was mailed. To the extent known, the notice of nomination must contain the following information: (a) name and address of proposed nominee(s); (b) principal occupation of proposed nominee(s); (c) total shares to be voted for each proposed nominee; (d) name and address of notifying shareholder; and (e) number of shares owned by notifying shareholder. Nominations not made in accordance with these requirements may be disregarded by the Chairman of the meeting, in which case the votes cast for the proposed nominee will likewise be disregarded. One Valley commenced business on September 4, 1981, as a bank holding company. The financial operations of One Valley in 1997 primarily related to the ownership and the establishment of policies for the management and direction of One Valley Bank, National Association; One Valley Bank of Huntington, Inc.; One Valley Bank of Mercer County, Inc.; One Valley Bank of Ronceverte, National Association; One Valley Bank, Inc.; One Valley Bank of Oak Hill, Inc.; One Valley Bank of Summersville, Inc.; One Valley Bank - East, National Association, One Valley Bank - North, Inc.; One Valley Bank of Clarksburg, National Association; and One Valley Bank - Central Virginia, N.A. COMMITTEES OF THE BOARD One Valley has a standing Audit Committee, Compensation Committee and Nominating Committee. The Audit Committee of One Valley consists of five members, Charles M. Avampato, Nelle Ratrie Chilton, Edward H. Maier, John L. D. Payne and Richard B. Walker and met four times in 1997. This Committee reviews and evaluates significant matters relating to audit and internal controls, reviews the scope and results of audits by independent auditors, reviews the activities of the internal audit staff, meets with the appropriate management personnel regarding internal and external audit results and reports its findings to the Board of Directors. The Compensation Committee of One Valley consists of six members, Charles M. Avampato, Dennis M. Bone, Nelle Ratrie Chilton, Phillip H. Goodwin, John L. D. Payne and H. Bernard Wehrle, III, and met once in 1997. The Compensation Committee administers the One Valley Bancorp, Inc., 1983 and 1993 Incentive Stock Option Plans. It also approves compensation levels for the executive management group of One Valley and its subsidiaries. The Nominating Committee of One Valley consists of six members, Robert F. Baronner, Nelle Ratrie Chilton, Phillip H. Goodwin, J. Holmes Morrison, John L. D. Payne and Angus E. Peyton and met two times in 1997. The Nominating Committee recommends nominees to fill vacancies on the Board of Directors, although the President of One Valley will also entertain nominations made in accordance with One Valley's Bylaws previously described. One Valley's Board met eight times in 1997, and there were numerous meetings of the Committees of the Board. During 1997, Directors Phillip H. Goodwin and Robert O. Orders, Sr., attended fewer than 75% of the aggregate of the total number of One Valley Board meetings and the total number of meetings held by all Committees on which they served. 6 PRINCIPAL HOLDERS OF VOTING SECURITIES John L. Dickinson and C. C. Dickinson, sons of John Q. Dickinson, one of the original incorporators of One Valley Bank, National Association, formerly Kanawha Valley Bank, National Association (hereinafter "One Valley Bank"), each owned more than 10% of the issued and outstanding stock of One Valley Bank. Both John L. and C. C. Dickinson are deceased, and much of the stock formerly held by them is now held by family trusts created by them or their spouses. At the time of One Valley's formation as a one-bank holding company holding 100% of the stock of One Valley Bank, the shares of One Valley Bank were exchanged on a one for one basis for shares of One Valley. The John L. Dickinson Family Trusts collectively hold 2,015,225 shares, representing 7.41% of the issued and outstanding stock of One Valley. The C. C. Dickinson Family Trusts collectively hold 1,354,653 shares, representing 4.98% of the issued and outstanding stock of One Valley. The following table sets forth the names and addresses of those shareholders who own beneficially more than 5% of the outstanding One Valley Common Stock as of March 10, 1998, the amount and nature of the beneficial ownership and the percentage of outstanding voting securities represented by the amount owned. The individuals named in the table are co-trustees of certain of the Dickinson Family Trusts and most of the shares owned by them are owned in their capacity as co-trustees.
TITLE OF NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF CLASS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP (1) CLASS ----- ------------------- ------------------------ ----- Common Stock Mary Price Ratrie 1,534,917(2) 5.64% Kanawha Salines Malden, WV 25306 Common Stock Charles C. Dickinson, III 1,405,705(3) 5.17% 1111 City National Building Wichita Falls, Texas 76301 Common Stock R. Marshall Evans, Jr. 2,242,704(4) 8.24% 3401 Northside Parkway Atlanta, GA 30327 - -------
(1) This table includes a duplication of beneficial ownership of securities in cases where the named individuals have overlapping co-trustee relationships. These three individuals hold, excluding duplication, a total of 3,828,698 shares, or 14.07% of the total 27,212,631 shares of One Valley Common Stock outstanding as of the record date. Although One Valley Bank, a subsidiary of One Valley, is a co-trustee of these various trusts, in all instances the named individual co-trustees vote the stock of One Valley held in the trusts. (2) Consists of 54,953 shares owned of record; 1,354,653 shares held as co-trustee with Charles C. Dickinson, III, and One Valley Bank (in which trusts Mary Price Ratrie has a one-third beneficial interest); 1,181 shares owned by J. Q. Dickinson & Co., a sole proprietorship owned by Mary Price Ratrie; and 124,130 shares owned by Dickinson Property Limited Partnership in which Mary Price Ratrie is a beneficial owner. (3) Consists of 51,052 shares owned of record and 1,354,653 shares held as co-trustee with Mary Price Ratrie and One Valley Bank (in which trusts Mr. Dickinson has a one-fifth beneficial interest). (4) Consists of 1,308,562 shares held as co-trustee with an individual co-trustee and One Valley Bank; 219,464 shares held as co-trustee with One Valley Bank and another individual co-trustee; 186,733 shares held with One Valley Bank as co-trustee; 36,132 shares held by his wife as trustee of trusts for the benefit of his children; 44,533 shares owned of record; 9,033 shares owned of record by his wife; and 438,247 shares owned by Dickinson Company, of which Mr. Evans is an executive officer. Not included in this total amount are 37,197 shares held in trusts from which Mr. Evans may, at the discretion of the co-trustees, receive distributions of income and, under certain circumstances, distributions of principal. 7 OWNERSHIP OF VOTING SECURITIES BY DIRECTORS, NOMINEES AND OFFICERS The following tabulation sets forth the number of shares of One Valley Common Stock beneficially owned by (i) each of the nominees and directors, (ii) each of the executive officers listed in the Summary Compensation Table, and (iii) the directors, nominees, and executive officers of One Valley as a group as of March 10, 1998, and indicates the percentages of One Valley Common Stock so owned. There is no other class of voting securities issued and outstanding.
AMOUNT AND NATURE OF BENEFICIAL PERCENT OF NAME OF BENEFICIAL OWNER OWNERSHIP (1) CLASS Phyllis H. Arnold 79,391 Direct (2) * Charles M. Avampato 32,240 Direct * 5,006 Indirect Robert F. Baronner 15,692 Direct * 9,432 Indirect Frederick H. Belden, Jr. 37,969 Direct (3) * 3,228 Indirect C. Michael Blair 71,611 Direct * 16,480 Indirect Dennis M. Bone 502 Direct * James K. Brown 2,596 Direct * 3,913 Indirect Nelle Ratrie Chilton 68,093 Direct * H. Rodgin Cohen 1,250 Direct * R. Marshall Evans, Jr. 44,533 Direct 8.2% 2,198,171 Indirect (4) James Gabriel 23,751 Direct * 4,531 Indirect Phillip H. Goodwin 3,605 Direct * Thomas E. Goodwin 11,595 Direct * 11,683 Indirect Bob M. Johnson 46,245 Direct (5) * 31,892 Indirect Laurance G. Jones 28,155 Direct (6) * 5,750 Indirect Robert E. Kamm, Jr. 329,995 Direct (7) 1.3% 27,191 Indirect John D. Lynch 32,812 Direct * 4,687 Indirect Edward H. Maier 15,625 Direct J. Holmes Morrison 73,420 Direct (8) * 12,433 Indirect
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AMOUNT AND NATURE OF BENEFICIAL PERCENT OF NAME OF BENEFICIAL OWNER OWNERSHIP (1) CLASS Charles R. Neighborgall, III 2,696 Direct * 4,235 Indirect Robert O. Orders, Sr. 28,411 Direct * John L. D. Payne 1,115 Direct 2.6% 714,806 Indirect (9) Angus E. Peyton 51,503 Direct 1.1% 255,888 Indirect Lacy I. Rice, Jr. 182,770 Direct * 4,687 Indirect Brent D. Robinson 29,632 Direct (10) * 1,065 Indirect Kenneth R. Summers 47,734 Direct (11) * 100 Indirect James W. Thompson 24,175 Direct * 9,439 Indirect J. Lee Van Metre, Jr. 5,285 Direct * Richard B. Walker 3,060 Direct * H. Bernard Wehrle, III 1,843 Direct * John H. Wick, III 16,341 Direct * 43,450 Indirect Thomas D. Wilkerson 2,812 Direct * All Directors, Nominees and Executive 1,344,440 Direct Officers as a Group (33 individuals) 2,800,633 Indirect 15.2%
*Beneficial ownership does not exceed one percent of the class. (1) Share totals of directors include 100 directors' qualifying shares, which each director is required to own pursuant to One Valley's Bylaws. Shares held indirectly include shares held by family members and shares held through trusts or corporations which in turn hold shares of One Valley. (2) Includes options to purchase 12,269 shares pursuant to One Valley's 1983 Stock Option Plan. Includes options to purchase 32,501 shares pursuant to One Valley's 1993 Stock Option Plan. (3) Includes options to purchase 3,687 shares pursuant to One Valley's 1983 Stock Option Plan. Includes options to purchase 29,751 shares pursuant to One Valley's 1993 Stock Option Plan. (4) See Note (4) to Principal Holders of Voting Securities. (5) Includes options to purchase 11,468 shares pursuant to One Valley's 1993 Stock Option Plan. (6) Includes options to purchase 26,905 shares pursuant to One Valley's 1993 Stock Option Plan. 9 (7) Includes options to purchase 25,677 shares pursuant to One Valley's 1993 Stock Option Plan. (8) Includes options to purchase 17,613 shares pursuant to One Valley's 1983 Stock Option Plan. Includes options to purchase 39,626 shares pursuant to One Valley's 1993 Stock Option Plan. (9) Consists of 146,247 shares held in nine trusts of which John L. D. Payne is a co-trustee, 567,434 shares held by Dickinson Company, Payne-Gallatin Mining Company and Horse Creek Land and Mining Company (in which companies Mr. Payne is an executive officer), and 1,125 shares owned by his children; does not include 191,586 shares held in or through trusts in which John L. D. Payne, at the discretion of the trustees, is an income beneficiary. (10) Includes options to purchase 6,500 shares pursuant to One Valley's 1993 Stock Option Plan. (11) Includes options to purchase 10,405 shares pursuant to One Valley's 1983 Stock Option Plan. Includes options to purchase 30,139 shares pursuant to One Valley's 1993 Stock Option Plan. EXECUTIVE COMPENSATION The following table sets forth the annual and long-term compensation for services in all capacities to One Valley for the fiscal years ended December 31, 1997, 1996, and 1995, of those persons who were, as of December 31, 1997, (i) the chief executive officer and (ii) the four other most highly compensated executive officers of One Valley.
SUMMARY COMPENSATION TABLE Annual Compensation Long-Term Compensation Awards Payouts Other Securities All Name Annual Restricted Under- Other and Compen- Stock lying LTIP Compen- Principal Salary Bonus sation Award(s) Options Payouts sation (2) Position Year ($) ($) ($) ($) (#)(1) ($) ($) ------- --------- ------- ------ -------- ---------- ------- -------- ---------- J. Holmes Morrison 1997 377,000 180,960 0 0 18,000 0 4,000 President & CEO 1996 362,000 173,760 0 0 15,625 0 3,750 1995 340,000 140,080 0 0 14,843 0 3,750 Phyllis H. Arnold 1997 227,000 86,442 0 0 10,875 0 4,000 Exec. Vice President 1996 218,000 93,696 0 0 9,375 0 3,750 1995 205,000 78,925 0 0 8,593 0 3,750 Frederick H. Belden, Jr.1997 181,000 62,445 0 0 8,125 0 4,000 Exec. Vice President 1996 174,000 60,030 0 0 7,031 0 3,750 1995 164,000 54,858 0 0 6,562 0 3,750 Laurance G. Jones 1997 178,000 60,609 0 0 8,125 0 4,000 Exec. Vice President 1996 171,000 58,995 0 0 7,031 0 3,750 1995 160,000 49,440 0 0 6,562 0 3,750 Kenneth R. Summers 1997 158,000 47,795 0 0 7,125 0 4,000 Sr. Vice President 1996 152,000 46,740 0 0 6,250 0 3,750 1995 135,000 38,813 0 0 5,859 0 3,706
10 (1) The number of options has been adjusted to reflect 5 for 4 stock splits declared in 1996 and 1997. (2) The amounts included in "All Other Compensation" consist of One Valley's contributions on behalf of the listed officers to the 401(k) Plan, pursuant to which participating employees receive a matching contribution of 50% from One Valley for up to 5% of pay contributed to the 401(k) Plan by the employee, to a maximum of $4,000 in 1997; $3,750 in 1996 and 1995 which represents One Valley's matching share times $160,000 in 1997; $150,000 in 1996 and 1995, the maximum compensation allowed for benefit calculation in a qualified plan. The following table sets forth further information on grants of stock options during 1997 to (i) the listed officers and (ii) all optionees as a group pursuant to One Valley's 1993 Incentive Stock Option Plan. The number of shares and exercise price reflect a 5 for 4 stock split effected in the form of a 25% stock dividend declared on August 19, 1997. The table also provides information concerning the potential gain to all shareholders at the designated rate of appreciation. No stock appreciation rights ("SARs") were awarded by One Valley.
OPTION GRANTS IN LAST FISCAL YEAR Individual Grants Number of % of Total Potential Realizable Value Securities Options at Assumed Annual Rates Underlying Granted to Exercise of Stock Appreciation for Options Employees or Base Expira- Ten-Year Option Term (1) Granted in Fiscal Price (2) tion 5% 10% Name (#) Year ($/Sh) (3) Date ($) ($) ------- -------- --------- ---------- -------- ----- ---- J. Holmes Morrison 18,000 10.7% 30.60 04/29/07 346,320 877,860 Phyllis H. Arnold 10,875 6.5% 30.60 04/29/07 209,235 530,374 Frederick H. Belden, Jr. 8,125 4.9% 30.60 04/29/07 156,325 396,256 Laurance G. Jones 8,125 4.9% 30.60 04/29/07 156,325 396,256 Kenneth R. Summers 7,125 4.3% 30.60 04/29/07 137,085 347,486 26 Optionees (including the five listed above) 167,500 100.0% 30.60 04/29/07 3,222,700 8,168,975 All Shareholders - - - - 533,118,986 1,351,362,419 Optionee Gain as % of All Shareholders' Gain - - - - .60% .60%
(1) The actual value, if any, an officer may realize depends on the excess of the stock price over the exercise price on the date the option is exercised. (2) The exercise price is the fair market value of One Valley Common Stock on the date the options were granted. Options are exercisable immediately and terminate upon termination of employment for reasons other than death or retirement, upon the expiration of three months after the date of retirement, upon the expiration of one year from the date of death or ten years from the option date. 11 (3) The ISOP was amended in 1997 for options granted on or after April 16, 1997 to allow participants to use previously owned shares to cover an option exercise price and to provide for the withholding of shares otherwise due upon exercise to satisfy required tax withholding obligations. In addition, the option expiration period was extended to the earlier of three years or the full option term in the event of retirement, disability or termination due to a change in control. The following table sets forth information concerning (i) the value realized upon the exercise of stock options during 1997 by the listed officers, and (ii) the number of unexercised options held by each listed officer as of December 31, 1997, and iii) the market value of the underlying shares if the options had been exercised on that date. The number of shares reflect a 5 for 4 stock split effected in the form of a 25% stock dividend declared on August 19, 1997. No SARs have been awarded by One Valley.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Options at Options at Shares Acquired Value FY-End (#) FY-End ($) Name On Exercise (#) Realized ($) (1) Exercisable Exercisable ---- --------------- ---------------- ----------- ----------- J. Holmes Morrison 45,792 877,839 57,239 1,073,576 Phyllis H. Arnold 17,322 410,834 44,770 855,583 Frederick H. Belden, Jr. 5,524 99,018 33,438 595,863 Laurance G. Jones 7,125 130,665 26,905 433,791 Kenneth R. Summers 3,825 112,538 40,544 803,963
(1) Market value of underlying securities at exercise, minus the exercise or base price. RETIREMENT BENEFITS Compensation covered by a qualified pension plan is based on total pay, including all Incentive Compensation Plan payments, received during the sixty consecutive months of employment which results in the highest total divided by five. Total pay does not include amounts realized from the sale, exchange or other disposition of stock acquired under a qualified or non-qualified stock option, or which were paid to a participant in lieu of benefits under the Employer's flexible benefits program. Such compensation is directly related to the total annual salary and bonus set forth in the Summary Compensation Table except that compensation relative to the benefit calculation cannot exceed $160,000. As of November 1, 1997, the credited years of service under the retirement plan for the individuals named in the table shown under Executive Compensation were: Phyllis H. Arnold, 21.667 years; J. Holmes Morrison, 30.170 years; Frederick H. Belden, Jr., 30.000 years; Laurance G. Jones, 28.417 years; and Kenneth R. Summers, 34.417 years. In 1990, a Supplemental Employee Retirement Plan (SERP) was established for certain members of senior management, including the individuals named in the Summary Compensation Table, which provides for a benefit at normal retirement of 65% of final average compensation, less (i) the retirement benefit under the Defined Benefit Pension Plan, (ii) any retirement benefits from a previous employer, and (iii) the employee's Social Security benefit. The plan further provides reduced early retirement benefit target objectives and a disability retirement benefit target of 60% of final average compensation at the time of disability, minus the benefits paid under the employer Long-Term Disability Plan and the employee's Social Security benefit. In 1997, the SERP was amended to specifically exclude from compensation as a basis for the calculation of benefits any amounts realized from the sale, exchange or other disposition of stock acquired under a qualified or non-qualified stock option, or which were paid to a participant in lieu of benefits under the flexible benefits program. During 1997, $251,150 was accrued for the SERP Trust, and $260,662 was paid into the Trust. 12 The following table indicates, for purposes of illustration, the approximate annual retirement benefits (Qualified Plan and Supplemental Plan) that would be payable to an employee retiring on November 1, 1997, at age 65 on the full life annuity form under various assumptions as to salary and years of service. Benefits are not subject to deduction for Social Security or other offset amounts.
PENSION PLAN TABLE HIGHEST CONSECUTIVE ESTIMATED ANNUAL PENSION FOR FIVE-YEAR REPRESENTATIVE YEARS OF CREDITED SERVICE AVERAGE COMPENSATION* 15 20 25 30 35 $125,000 $27,802 $37,070 $65,338 $65,338 $65,338 150,000 33,802 45,070 81,588 81,588 81,588 175,000 36,202 48,270 97,838 97,838 97,838 200,000 36,202 48,270 114,088 114,088 114,088 225,000 36,202 48,270 130,338 130,338 130,338 250,000 36,202 48,270 146,588 146,588 146,588 300,000 36,202 48,270 179,088 179,088 179,088 400,000 36,202 48,270 244,088 244,088 244,088 450,000 36,202 48,270 276,588 276,588 276,588 500,000 36,202 48,270 309,088 309,088 309,088 550,000 36,202 48,270 341,588 341,588 341,588 600,000 36,202 48,270 374,088 374,088 374,088
*IRS Maximum for Qualified Plan is $160,000. CHANGE IN CONTROL ARRANGEMENTS In October 1996, One Valley entered into agreements with the officers listed in the Summary Compensation Table and with certain other officers to encourage those key officers not to seek other employment because of the possibility that One Valley might be acquired by another entity, and to secure the executives' continued service and dedication in the event of an actual or threatened change in control. The Board of Directors determined that such an arrangement was appropriate, especially in view of the volatile banking market and the advent of full-scale interstate branching in June 1997; however, the agreements were not undertaken in the belief that a change in control of One Valley was imminent. The 1996 agreements supersede previous change in control agreements. In general, the agreements provide that, in the event there is a change in control of One Valley (as described below), and during the two-year period immediately following the change in control the executive is (i) terminated by One Valley without cause, or (ii) terminates employment for good reason (as defined in the agreements), or (iii) in the case of executives at the level of Executive Vice President or above, voluntarily terminates employment during the thirteenth month after a change in control, the executive shall receive a lump-sum cash amount equal to either three (at the level of Executive Vice President or above) or two times the sum of (i) the executive's base salary and average bonus for the three years preceding the change in control, (ii) a pro rata portion of the executive's target bonus for the year in which the change in control occurs, (iii) the continuation of welfare benefits for a 36-month period, and (iv) retiree medical benefits following such 36-month period if the executive has attained age 50 with ten years of service as of the date of termination. In the event change in control related payments are subject to a 20% excise tax under Section 4999 of the Internal Revenue Code, One Valley will reimburse executives at the level of Executive Vice President or above in an amount sufficient to enable the executive to retain his or her change in control benefits as if the excise tax had not applied; provided, however, that the reimbursement will not be made and severance payments will be capped so no excise tax would be due if a reduction of the severance payments by an amount equal to less than 10% of the change in control benefits would result in no excise tax being due. If necessary, payments for other executives under the severance agreements will be reduced so no excise tax would be due. Pursuant to the severance agreements, the executives agree not to voluntarily terminate employment during the 180-day period following the commencement of a tender or exchange offer or proxy contest or execution of an agreement which would result in a change in control, unless and until such offer, contest or agreement is terminated or abandoned or a change in control occurs. 13 Under the severance agreements, a "change in control" is defined generally to mean: (i) a person becomes the beneficial owner of 50% or more of the voting power of One Valley; (ii) a change in a majority of the Board (or their approved successors); (iii) the consummation of a reorganization, merger, consolidation or sale of substantially all of the assets of One Valley (unless One Valley's stockholders receive more than 60% of the voting stock of the surviving or purchasing company, no person acquires more than 50% of such voting stock, and One Valley's Board of Directors remains a majority of the continuing board of directors of the surviving or purchasing company); or (iv) a liquidation, dissolution or sale or disposition of all or substantially all the assets of One Valley. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee ("Committee") of the Board of Directors establishes compensation policies, plans and programs which are intended to accomplish three objectives: to attract and retain highly capable and well-qualified executives; to focus executives' efforts on increasing long-term shareholder value; and to reward executives at levels which are competitive with the marketplace for similar positions and commensurate with the performance of each executive and of One Valley. The Committee has determined that to accomplish these objectives, total compensation should be composed of base salary, short-term incentive compensation and long-term incentive compensation. Total compensation refers to the aggregation of the annual cash compensation and average long-term incentives. The Committee meets annually and when necessary with the Chief Executive Officer and the senior human resources executive to review, modify as appropriate, and approve the compensation programs for executives. Outside compensation consultants are retained when appropriate. In determining the salary budget for 1997 and in fixing levels of executive compensation, the Committee considered internal equity and external competitiveness of base compensation and total compensation and One Valley's performance relative to its long-range goals and its peers. In its evaluation of One Valley's corporate performance for the purpose of fixing base salary levels, the Committee does not attempt to assign specific weights to the various individual factors which, taken together, constitute "corporate performance." The aspects of corporate performance include but are not limited to long-range plan goals for earnings, asset quality, capital, liquidity, resource utilization, and the annual increase in One Valley's earnings per share as well as the performance of One Valley versus its peers. The annual performance of One Valley, determined in a manner which emphasizes factors which should have a positive impact upon total return to shareholders, has a significant impact upon total executive compensation. In 1997 the Committee retained Price Waterhouse LLP to follow up their 1995-1996 study of compensation and benefits of the most senior executives of the corporation. This new study assisted the Committee in its continuing evaluation of the external competitiveness of compensation and executive benefits available to One Valley executives. The Compensation Committee has determined that the level of One Valley's total compensation is generally competitive with peer banks; however, One Valley places slightly more emphasis on the incentive components of the compensation package than the banks included in the peer group. Base compensation for One Valley's executives is targeted somewhat below the average for similar positions within comparable financial institutions. The Committee believes, philosophically, that total compensation should trend toward having a relatively higher percentage of compensation at risk. To this end, the Committee has set a base salary range target for executives at the 37.5 percentile of the marketplace average, while the incentive based component is such that total compensation is more toward the 50th percentile/median level. Short-term incentive compensation is provided to key executives, as determined by the Compensation Committee pursuant to One Valley's Executive Incentive Compensation Plan ("EICP"). Awards under EICP are based upon individual and corporate performance. Corporate performance is measured by One Valley's earnings per share growth relative to a target level set by the Board of Directors, and One Valley's performance on six financial measures as compared to a selected peer group. The comparative measures are: net operating expenses / average assets; non-performing assets / (loans and OREO); net loan charge-offs / average loans; efficiency ratio; return on assets; and return on equity. The individual portion is based upon performance of the executive and the unit he or she manages in meeting established objectives, and upon the executive's relative position within One Valley. The Committee believes that shareholder value can be further enhanced by closely aligning the financial interests of One Valley's key executives with those of its shareholders. Awards of stock options pursuant to One Valley's Incentive Stock Option Plan ("ISOP") are intended to meet this objective and constitute the long-term incentive portion of executive compensation. Participation in the ISOP is specifically approved by the Committee and consists of approximately twenty-five to thirty senior management employees of One Valley and its affiliate banks who are deemed to have the opportunity to most significantly affect corporate results. Under the ISOP, the option price paid by the executive to exercise the option is the fair market value of One Valley Common Stock on the day the option is granted, and the option is freely exercisable within a ten-year period. The options attain value over that time only if the market price of the underlying stock increases, and the increase in value of the option is 14 directly tied to the increase in the value of the One Valley Common Stock. The Committee believes the ISOP focuses the attention and efforts of executive management upon increasing long-term shareholder value, and the Committee annually awards options to key executives in amounts it believes are adequate to achieve the desired objective. The total number of shares available for award in each plan year is specified in the ISOP. These shares are generally allocated based upon the recommendation of the Chief Executive Officer to the Committee, taking into account the historical levels of awards and the relative positions with One Valley of the participants in the ISOP. Price Waterhouse LLP reviewed long-term incentives as a part of total compensation benchmarking and found the ISOP and the awards to be competitive. The ISOP was amended in 1997 for options granted on or after April 16, 1997 to allow participants to use previously owned shares to cover an option exercise price and to provide for the withholding of shares otherwise due upon exercise to satisfy required tax withholding obligations. In addition, in the event of retirement, disability or termination due to a change in control, the option expiration period was extended to the earlier of three years or the full option term. Total compensation for the CEO is determined in essentially the same way as for other executives, recognizing that the CEO has overall responsibility for the performance of One Valley. Therefore, One Valley's performance has a direct impact upon the CEO's compensation in that its earnings per share determines the amount of base compensation increase and significantly impacts the EICP award; and, in addition, the market price of One Valley Common Stock determines the value of options awarded during prior periods. The base compensation of the CEO in 1997 was based in large measure on the corporate results in 1996 relative to long-range plan goals for earnings, asset quality, capital, liquidity and resource utilization. As discussed above, no attempt is made by the Committee to assign relative weights to the various components of corporate performance in fixing the CEO's base compensation. Recent revisions to the Internal Revenue Code disallow deductions in excess of $1,000,000 for certain designated executive compensation. The Committee has not adopted a policy in this regard because none of One Valley's executives receives such designated compensation approaching the $1,000,000 level. This report shall not be deemed incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that One Valley specifically incorporates this report by reference, and shall not otherwise be filed under such Acts. The report is submitted by the Compensation Committee, which consists of Phillip H. Goodwin, Chairman Charles M. Avampato Dennis M. Bone Nelle Ratrie Chilton John L. D. Payne H. Bernard Wehrle, III. 15 PERFORMANCE GRAPH The following graph compares the yearly percentage change in cumulative total shareholder return on One Valley Common Stock for the five-year period ending December 31, 1997, with the cumulative total return of the Standard & Poor's 500 Stock Index and the Media General Industry Group Index - 04, which consists of all banks and bank holding companies within the United States whose stock has been publicly traded for at least six years. The graph assumes (i) the reinvestment of all dividends and (ii) an initial investment of $100. There is no assurance that One Valley's stock performance will continue in the future with the same or similar trends as depicted in the graph. The graph shall not be deemed incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that One Valley specifically incorporates this graph by reference, and shall not otherwise be filed under such Acts. FIVE-YEAR CUMULATIVE TOTAL RETURN COMPARISON (Performance Graph appears here with the following plot points) Proxy Performance Graph All Publicly S&P 500 Traded Banks One Valley 1992 100 100 100 1993 110 118 96 1994 112 112 100 1995 153 159 114 1996 189 219 175 1997 252 313 234 16 COMPENSATION OF DIRECTORS During 1997, each director who was not also an officer and full-time employee of One Valley received $650 for each meeting of the Board of Directors of One Valley attended. Non-employee directors who were members of the Board's Audit Committee received $350 per meeting attended and $300 for other committee meetings attended. In addition, Mr. Baronner received compensation in the amount of $18,000 for serving as Chairman of the Board of Directors. During 1997, there were no other arrangements pursuant to which any director of One Valley was compensated for services as a director. Directors of One Valley are eligible to defer fees pursuant to the One Valley Deferred Compensation Plan, which was adopted in 1984, with respect to fees received in 1984 and thereafter for services rendered as a director of One Valley. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires One Valley's directors and executive officers and persons who beneficially own more than ten percent of a registered class of One Valley's equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of One Valley. Officers, directors and greater than ten percent shareholders are required by SEC regulation to furnish One Valley with copies of all Section 16(a) forms they file. To One Valley's knowledge, based solely upon review of the copies of such reports furnished to One Valley and written representations that no other reports were required, all Section 16(a) filing requirements applicable to its officers, directors and greater than ten percent beneficial owners were fulfilled, except those of Mr. C. Michael Blair, Mr. Charles R. Neighborgall, III and Mr. Kenneth R. Summers who each filed late one report related to one transaction, and Ms. Phyllis H. Arnold and Mr. Angus E. Peyton who each filed late one report related to two transactions. CERTAIN TRANSACTIONS WITH DIRECTORS AND OFFICERS AND THEIR ASSOCIATES One Valley and its various banking subsidiaries have had and expect to have in the future transactions in the ordinary course of business with directors, officers, principal shareholders and their associates. During 1997, all of these transactions were made on substantially the same terms, including interest rates, collateral and repayment terms on extensions of credit, as those prevailing at the same time for comparable transactions with other unaffiliated persons. One Valley's management believes that these transactions, which at December 31, 1997, were, in the aggregate, 20.2% of total shareholders' equity, did not involve more than the normal risk of collectibility or present other unfavorable features. Jackson & Kelly, a law firm in which Director James K. Brown is a partner, Steptoe & Johnson, a law firm in which Director J. Lee Van Metre, Jr., is a partner, Bowles, Rice, McDavid, Graff & Love, a law firm in which Director Lacy I. Rice, Jr., is a partner, and Sullivan & Cromwell, a law firm in which H. Rodgin Cohen is a partner, performed legal services for One Valley and its subsidiaries in 1997. Based on information provided by Messrs. Brown, Van Metre, Rice, and Cohen, One Valley believes that payments it made to these law firms were less than five percent of each of those law firms' gross revenues in 1997. In One Valley's opinion, these transactions were on terms as favorable to One Valley as they would have been with third parties not otherwise affiliated with One Valley. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1997, One Valley's affiliate banks and One Valley Square, Inc., paid $108,366 to TerraCare, Inc., for landscaping services. TerraCare, Inc., is a wholly owned subsidiary of TerraCo, Inc. Mary Price Ratrie, a principal shareholder of One Valley, is the principal shareholder and President of TerraCo, Inc., and Director Nelle Ratrie Chilton is Vice President and director of TerraCo, Inc. In the opinion of One Valley, these transactions were on terms as favorable to One Valley as they would have been with third parties not otherwise affiliated with One Valley. The members of One Valley's Compensation Committee are Phillip H. Goodwin, Charles M. Avampato, Dennis M. Bone, Nelle Ratrie Chilton, John L. D. Payne and H. Bernard Wehrle, III. 17 2. RATIFICATION OF SELECTION OF AUDITORS The Board of Directors has selected the firm of Ernst & Young LLP to serve as independent auditors for One Valley for 1998. Although the selection of auditors does not require shareholder ratification, the Board of Directors has directed that the appointment of Ernst & Young LLP be submitted to shareholders for ratification. If the shareholders do not ratify the appointment of Ernst & Young LLP, the Board of Directors will consider the appointment of other independent auditors. One Valley is advised that no member of this accounting firm has any direct or indirect material interest in One Valley, or any of its subsidiaries. A representative of Ernst & Young LLP will be present at the Annual Meeting to respond to appropriate questions and to make a statement if desired. The enclosed proxy will be voted "FOR" the ratification of the selection of Ernst & Young LLP unless otherwise directed. The affirmative vote of a majority of the shares of One Valley Common Stock represented at the Annual Meeting of Shareholders is required to ratify the appointment of Ernst & Young LLP. FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION Upon written request by any shareholder to Laurance G. Jones, Executive Vice President and Chief Financial Officer, One Valley, P. O. Box 1793, Charleston, West Virginia 25326, a copy of One Valley's 1997 Annual Report on Form 10-K will be provided without charge. OTHER INFORMATION If any of the nominees for election as directors is unable to serve as a director by reason of death or other unexpected occurrence, proxies will be voted for a substitute nominee or nominees designated by the Board of One Valley unless the Board of Directors adopts a resolution pursuant to the Bylaws reducing the number of directors. The Board of Directors is unaware of any other matters to be considered at the meeting, but if any other matters properly come before the meeting, persons named in the proxy will vote such proxy in accordance with the recommendation of the Board of Directors. SHAREHOLDER PROPOSALS FOR 1999 Any shareholder who wishes to have a proposal placed before the next Annual Meeting of Shareholders must submit the proposal to Merrell S. McIlwain II, Secretary of One Valley, at its executive offices, no later than November 20, 1998, to have it considered for inclusion in the proxy statement of the Annual Meeting in 1999. J. Holmes Morrison PRESIDENT Charleston, West Virginia March 20, 1998 18 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - PROXY ONE VALLEY BANCORP, INC. PROXY CHARLESTON, WEST VIRGINIA THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL MEETING OF SHAREHOLDERS, APRIL 28, 1998 Michael A. Albert, John R. Lukens and Louis S. Southworth, II, or any one of them, are hereby authorized to represent and to vote stock of the undersigned in One Valley Bancorp, Inc. at the Annual Meeting of Shareholders to be held April 28, 1998, and any adjournment thereof. Unless otherwise specified on this Proxy, the shares represented by this Proxy will be voted "FOR" the propositions listed on the reverse side and described more fully in the Proxy Statement of One Valley Bancorp, Inc., distributed in connection with this Annual Meeting. If any shares are voted cumulatively for the election of Directors, the Proxies, unless otherwise directed, shall have full discretion and authority to cumulate their votes and vote for less than all such nominees. If any other business is presented at said meeting, this Proxy shall be voted in accordance with recommendations of the Board of Directors. PLEASE MARK, SIGN, DATE AND MAIL THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. (Continued and to be signed on reverse side.) - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - 19 - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
ONE VALLEY BANCORP, INC. PLEASE MARK VOTE IN OVAL IN THE FOLLOWING MANNER USING DARK INK ONLY The Board of Directors recommends a vote "FOR" the listed propositions. 1. Election of Directors for the terms specified in the FOR WITHHELD FOR ALL Proxy Statement. Except Nominees(s)written Below Nominees: Robert F. Baronner, James K. Brown, Nelle [ ] [ ] [ ] Ratrie Chilton, R. Marshall Evans, Jr., Phillip H. Goodwin, John L. D. Payne and Brent D. Robinson. 2. Ratify the selection of Ernst & Young LLP as Independent FOR AGAINST ABSTAIN Auditors for 1998. [ ] [ ] [ ] 3. Transact such other business as may properly come before the meeting and any adjournment thereof. Dated:__________________, 1998 Signature(s)___________________________________ ----------------------------------------- When signing as attorney, executor, administrator, trustee or guardian, please give full title. If more than one trustee, all should sign. - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
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