-----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, QpAzoCvevIt8L70kJ89WVvJs8NhNATW6wygP+6lkRwjIxf0zjSe91DRiLRDOCsB1 VuDKQiBrTBZA9x41rWk0Iw== 0000950168-99-000966.txt : 19990331 0000950168-99-000966.hdr.sgml : 19990331 ACCESSION NUMBER: 0000950168-99-000966 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990330 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: 99578409 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from ___________to ________. Commission file number 0-10042 ONE VALLEY BANCORP, INC. (Exact name of registrant as specified in its charter) WEST VIRGINIA 55-0609408 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) ONE VALLEY SQUARE, SUMMERS AND LEE STREETS, P.O. BOX 1793 CHARLESTON, WEST VIRGINIA 25326 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (304) 348-7000 ---------- SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- COMMON STOCK ($10.00 PAR VALUE) NEW YORK STOCK EXCHANGE ---------- SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Title of class -------------- NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES [ X ] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] 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 ----------------------------------------- --------------------------- $1,012,591,701 MARCH 5, 1999 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, 1999 ----- ---------------------------- COMMON STOCK ($10.00 PAR VALUE) 34,401,692 DOCUMENTS INCORPORATED BY REFERENCE The following lists the documents which we incorporate by reference into the Form 10-K Annual Report, and the parts and items of the Form 10-K where we incorporate these documents.
Document Part of the Form 10-K Where We -------- Incorporate the Document ------------------------ Portions of One Valley Bancorp, Inc., 1998 Part I, Item 1; Part II, Items 5, 6, 7, Annual Report to Shareholders for the year 7A and 8; Part III, Item 13; and ended December 31, 1998 Part IV, Item 14 Portions of One Valley Bancorp, Inc., Proxy Part III, Items 10, 11, 12 and 13 Statement for the 1999 Annual Meeting of Shareholders
2 ONE VALLEY BANCORP, INC. FORM 10-K INDEX
Page ---- Part I Item 1. Business...................................................... 4 Item 2. Properties ................................................... 12 Item 3. Legal Proceedings............................................. 12 Item 4. Submission of Matters to a Vote of Security Holders........... 12 Item 4A. Executive Officers of the Registrant.......................... 13 Part II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters................................. 15 Item 6. Selected Financial Data....................................... 15 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......................... 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk ... 15 Item 8. Financial Statements and Supplementary Data................... 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................... 15 Part III Item 10. Directors and Executive Officers of the Registrant............ 16 Item 11. Executive Compensation........................................ 16 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................................. 16 Item 13. Certain Relationships and Related Transactions................ 16 Part IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K..................................... 17 Signatures .................................................................... 18 Index to Exhibits............................................................... 21
3 PART I ITEM 1. BUSINESS ONE VALLEY BANCORP, INC. AND ITS AFFILIATE BANKS One Valley Bancorp, Inc. is a $6.0 billion registered bank holding company headquartered in Charleston, West Virginia. On December 31, 1998, One Valley owned the following affiliate banks:
Percentage Year of Net When Currently Percentage Income Number of Name Organized Chartered As of Assets Contributed Branches - ---- --------- ------------ --------- ----------- -------- One Valley Bank, National Association 1867 National 35.60% 35.39% 22 One Valley Bank, Inc. 1911 State (WV) 14.75% 16.30% 19 One Valley Bank of Mercer County, Inc. 1906 State (WV) 4.46% 5.83% 5 One Valley Bank of Huntington, Inc. 1956 State (WV) 3.38% 3.84% 4 One Valley Bank-South, Inc. 1910 State (WV) 7.21% 9.90% 10 One Valley Bank-East, National Association 1865 National 6.87% 7.62% 13 One Valley Bank-North, Inc. 1903 State (WV) 4.21% 4.81% 6 One Valley Bank- Central Virginia, National Association 1914 National 19.91% 14.29% 35 One Valley Bank- Shenandoah 1933 State (VA) 3.61% 2.04% 11
Through these affiliate banks, One Valley has 125 offices in West Virginia and Virginia and over $4.0 billion in trust assets under administration. One Valley has a market capitalization of over $1.1 billion, and is the largest bank holding company based in West Virginia. One Valley's West Virginia affiliate banks are located in the most economically vibrant areas in West Virginia and have concentrated on growth in urban areas along major highways. Accordingly, these affiliate banks generally serve the stronger economic areas of West Virginia. In 1996, One Valley began an interstate expansion strategy into Virginia. The area through Central Virginia is a priority expansion market for One Valley with Charlottesville, Lynchburg and Lexington being the cornerstones of this expansion strategy. 4 One Valley Bank, National Association, One Valley's principal affiliate bank, was formed in 1867 as a state bank under the name "The Kanawha Valley Bank." In 1975, this bank converted from a state bank to a national banking association. In 1981, the bank's board of directors formed One Valley Bancorp, and through a corporate reorganization, One Valley Bancorp of West Virginia, Inc. was formed as a single bank holding company which owned all of the bank's common stock. In 1987, One Valley and its affiliates adopted the name "One Valley" primarily to promote a single corporate identity for One Valley's diverse banking operations. OPERATIONS OF THE AFFILIATE BANKS AND OTHER SUBSIDIARIES The affiliate banks offer all services that full-service commercial banks traditionally offer, including commercial and individual demand and time deposit accounts, commercial and individual loans, credit card (MasterCard and Visa) and drive-in banking services. Additionally, One Valley is active in correspondent banking services. It also offers trust services in West Virginia and Virginia. No material portion of any of the affiliate banks' deposits has been obtained from a single or small group of customers, and the loss of any one customer's deposits would not have a material adverse effect on the business of any of the affiliate banks. The affiliate banks also offer services to customers at various locations within their service areas through approximately 280 automated teller machines or ATMs. The ATMs allow customers to make deposits and withdrawals twenty-four hours a day at convenient locations. Customers may also borrow against their revolving lines of credit or transfer funds between deposit accounts at ATM locations. Affiliate bank customers 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 worldwide. One Valley Securities Corporation, a subsidiary of One Valley Bank, National Association, provides discount brokerage services and also sells, as agent, mutual funds and annuities. One Valley Insurance Corporation, a subsidiary of One Valley Bank, Inc., is a general agency and sells life and other insurance products. Valley Security Insurance Company, Inc., a subsidiary of One Valley Bank-Shenandoah, sells title insurance, as agent. Although the market areas of several of the affiliate banks 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 affiliate banks constitute less than 5% of One Valley's total loans outstanding. The affiliate banks generally serve the stronger economic areas of the State. 5 DELIVERY SYSTEMS The methods that the affiliate banks use to deliver bank products and services to customers consist of the following: o traditional branch offices; o electronic banking: o ATM network; o PC banking and bill payment; o telephone bill payment; o VISA check card; and o telebanking centers; o trust offices; and o investment centers. One Valley's strategy is to offer delivery systems that: o provide alternative channels for convenience; o give customers choices; o lower overall costs; and o introduce electronic banking at a cost which accommodates varying paces of customer acceptance. EMPLOYEES As of March 1, 1999, One Valley, its affiliate banks and other subsidiaries had approximately 2,300 full-time equivalent employees. COMPETITION Vigorous competition exists in all areas where One Valley and its affiliate banks conduct business. The affiliate banks primarily serve the following defined market areas: West Virginia, Central and Southern Virginia, and, to a limited extent, certain adjoining areas in Kentucky, Maryland, North Carolina, Ohio and Pennsylvania. 6 The affiliate banks compete with commercial banks and other financial institutions. 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. Additionally, insurance companies, investment counseling firms, other business firms and individuals offer personal, corporate trust and investment counseling services. The opening of branch banks within One Valley's market areas increased competition for the affiliate banks. Although federal and state banking legislation allows One Valley to acquire banking subsidiaries in other attractive banking areas, it increased competition for One Valley. With interstate banking, One Valley is in competition with others to acquire banking institutions in West Virginia and neighboring states. Until 1993, shareholders in West Virginia predominantly owned the various banks and bank-holding companies operating in West Virginia. Until that time, operations arising principally in West Virginia financed these banks and bank holding companies. Thereafter, other banking companies, including Banc One Corp. and Huntington Bankshares Incorporated have entered the West Virginia market. Other large out-of-state banks may, 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 that have access to greater capital resources and which have sophisticated marketing structures in place. During 1998, One Valley significantly expanded its presence in Virginia with the closing of the purchase of FFVA Financial Corporation, the purchase of 15 branches from Wachovia Corporation and the acquisition of Summit Bankshares, Inc. As a result, One Valley is the eighth largest banking institution in Virginia and competes with established Virginia and North Carolina banking companies. The markets served by One Valley in Virginia are growing more rapidly than the West Virginia markets and offer enhanced earnings opportunities. As of December 31, 1998, there were 56 bank holding companies in West Virginia registered with the Federal Reserve System and the West Virginia Board of Banking and Financial Institutions ("Board of Banking") and 58 bank holding companies in Virginia registered with the Federal Reserve System and the State Corporation Commission of Virginia. 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 affiliate banks. One Valley has actively competed with some of these bank holding companies to acquire its affiliate banks. SUPERVISION AND REGULATION The following outlines the regulatory framework for bank holding companies and their subsidiaries. We qualify this outline by reference to the particular statutory and regulatory provisions. A change in applicable statutes, regulations, regulatory or accounting policy could materially affect One Valley's and its subsidiaries' businesses. 7 ACQUISITIONS AND ACTIVITIES. The Board of Governors of the Federal Reserve System regulates bank holding companies like One Valley under the Bank Holding Company Act of 1956. This act imposes examination and reporting requirements on One Valley. Under this act, bank holding companies may not directly or indirectly own or control 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 Federal Reserve Board, subject to certain exceptions. In reviewing applications under this act, the Federal Reserve Board considers 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. Prior to acquiring more than 5% of the voting stock or substantially all of the assets of another institution in West Virginia, One Valley must obtain approval from the West Virginia Board of Banking. 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 West Virginia to exceed 25% of the total deposits of all depository institutions in the state. Based on June 30, 1998 data compiled by the FDIC, the total deposits of the affiliate banks were approximately 15.6% of the total deposits in West Virginia. Prior to acquiring more than 5% of the voting stock of a Virginia bank or 25% of the voting stock of a Virginia savings institution, or merging or consolidating with a Virginia bank or Virginia savings institution, One Valley must obtain the approval of the State Corporation Commission of Virginia. One Valley's West Virginia subsidiaries may expand into Virginia by merger with Virginia banking institutions or by de novo branching. There are no Virginia law limitations on the size of the deposit base in Virginia or an interstate acquiring bank in relation to the total deposits of all depository institutions in Virginia. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 permits bank holding companies to acquire banks located in states other than the bank holding company's home state. Riegle-Neal also 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. Additionally, the act allows branch banking 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 any legislation restricting interstate branch banking. Federal and state banking laws generally limit the activities of banks to the business of banking. Judicial decisions and regulatory rulings increased the range of services and products that bank holding companies and banks may offer. 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. 8 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. DIVIDEND PAYMENTS. One Valley is a legal entity separate and distinct from its affiliate banks. A major portion of One Valley's revenues comes from dividends its affiliate banks pay to it. Federal law restricts the amount of dividends affiliate banks may pay. In certain instances, a national bank must obtain approval of the Comptroller of the Currency before paying dividends. Federal law also prohibits national banks from paying dividends 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 apply to the state chartered affiliate banks. On December 31, 1998, the affiliate banks could have paid aggregate dividends of $17,248,000, plus retained net profits for the interim periods through the date of declaration, to One Valley during 1998 without obtaining prior regulatory approval. During 1998, the affiliate banks paid $86,750,000, including a one-time special dividend of $22 million from its operations in Virginia. It is One Valley's policy to maintain liquidity at the parent level. Therefore, each affiliate bank dividends nearly all of its earnings to the parent, retaining only an amount to keep it well capitalized. At year-end, the parent company held in excess of $100 million in liquid assets. Other regulatory policies and requirements impact the affiliate banks' ability to pay dividends, including the requirements that the institution maintain adequate capital above regulatory minimums. Banking regulatory authorities may restrict payments if the payment of dividends would be an unsafe or unsound banking practice. LOANS TO ONE VALLEY. One Valley and its non-bank subsidiaries may not borrow from the affiliate banks unless the borrowing is secured by designated amounts of specified collateral and are limited, as to One Valley or any one of its nonbank subsidiaries, to 10% of the lending bank's capital stock and surplus. One Valley and all its nonbank subsidiaries in the aggregate are limited to 20% of the lending bank's capital stock and surplus. These restrictions also apply to the bank affiliates' purchases of assets from and investments in One Valley and its nonbank subsidiaries. 9 CAPITAL REQUIREMENTS. Bank regulators adopted risk-based capital guidelines for bank holding companies and banks. Regulations divide capital ratios into Tier I capital and Tier II capital. At least half of a bank's total capital is required to be comprised of Tier I capital which consists 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 II capital consists of other preferred stock, certain other capital instruments and limited amounts of subordinated debt and allowance for loan losses. Additionally, bank regulators established minimum leverage ratio requirements for bank holding companies and banks. These requirements provide for a minimum leverage ratio of Tier I 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. At December 31, 1998, One Valley had a Tier I capital ratio of 15.6%, a total capital ratio of 14.3% and a leverage ratio of 9.0%. The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") requires federal banking agencies to take "prompt corrective action" about depository institutions that do not meet minimum capital requirements. This act establishes five capital categories which the chart below summarizes:
Capital Category Tier I Capital Ratio Total Capital Ratio Leverage Ratio - ---------------- -------------------- ------------------- -------------- Well Capitalized => 6% => 10% => 5% Adequately Capitalized => 4% => 8% => 4% Undercapitalized < 4% < 8% < 4% Significantly Undercapitalized < 3% < 6% < 3% Critically Undercapitalized(1) - - -
(1) Tangible equity is equal to or less than 2% of average quarterly tangible assets. As of December 31, 1998, One Valley and its affiliate banks had capital levels that qualify them as being "well capitalized." FDICIA generally prohibits a depository institution that is not "well capitalized" from accepting brokered deposits and offering interest rates on deposits higher than the prevailing rates 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 afterward be "undercapitalized." 10 "Undercapitalized" depository institutions are subject to growth limitations and must submit a capital restoration plan. The federal banking agencies may accept a capital plan only after determining that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution's capital. Additionally, the depository institution's parent holding company must guarantee that the institution will comply with the plan. If a depository institution fails to submit an acceptable plan, regulators treat the institution as if it is "significantly undercapitalized." "Significantly undercapitalized" depository institutions are 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 requirements to cease receiving deposits from correspondent banks. Regulators may appoint a receiver or conservator for "critically undercapitalized" institutions. OTHER OBLIGATIONS. The Financial Institutions Reform, Recovery and Enforcement Act of 1989 imposes liability on FDIC-insured depository institutions, like the affiliate banks, for losses the FDIC incurs when it assists an insured affiliated bank. Under the National Bank Act, if losses impair a national bank's capital stock, the Comptroller may assess the bank's shareholders, pro rata, for the amount of the deficiency. If the shareholder does not pay the deficiency after three months' notice, the Comptroller may sell the shareholder's stock to make good the deficiency. Under Federal Reserve Board policy, One Valley must act as a source of financial strength to each of its affiliate banks and commit resources to support each of them. STATE REGISTRATION. One Valley must register annually with the Commissioner of Banking of West Virginia and pay a registration fee based on the total amount of bank deposits of the affiliate banks. Although legislation allows the Commissioner to set the registration fee, it limits the fee to ten dollars per nearest million dollars of deposits. The Commissioner also regulates and supervises One Valley. The State Corporation Commission of Virginia has authority to examine One Valley as a bank holding company owning a Virginia bank or Virginia savings institution and to require reports from One Valley. Generally, this regulatory oversight is ceded through a cooperative agreement by the Virginia Commission to the Commissioner of Banking of West Virginia, who has primary examination responsibility for One Valley. EFFECT OF GOVERNMENTAL POLICIES ON OPERATIONS. The fiscal and monetary policies of the federal government and its agencies, particularly the Federal Reserve Board, affect both members and non-members of the Federal Reserve. The Federal Reserve Board regulates the national money supply to mitigate recessionary and inflationary pressures. The techniques the Federal Reserve Board uses 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. 11 The Federal Reserve Board's policies have a direct and indirect effect on the amount of bank loans and deposits, and the interest rates banks charge and pay. We cannot accurately predict the impact of current economic problems and the Federal Reserve Board's and other regulators' policies. These policies could materially affect the revenues and income of the affiliate banks. ONE VALLEY'S STATISTICAL DISCLOSURE. One Valley includes statistical disclosure in its "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of its Annual Report to Shareholders on pages 4 through 26 for the year ended December 31, 1998. We incorporate that report by reference. ITEM 2. PROPERTIES ONE VALLEY AND ONE VALLEY BANK One Valley Bank, National Association owns the site of its current banking quarters, One Valley Square in Charleston, West Virginia. One Valley Bank leases this land 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. One Valley Bank subleases the seventh floor to others. One Valley also operates from the space leased by One Valley Bank in One Valley Square. The remaining space is leased to non-affiliated tenants. One Valley Bank also conducts operations at its operations center located in Charleston, and at 20 branch locations throughout Kanawha, Mason, Putnam, Jackson, and Wood Counties. OTHER AFFILIATE BANKS On March 5, 1999, other affiliate banks own or lease eight main bank offices, related drive-in facilities, 95 branch offices and other properties that are necessary to house related support activities of those banks. All of the affiliate banks' properties are suitable and adequate for their current operations and are generally fully utilized. ITEM 3. LEGAL PROCEEDINGS Various legal proceedings are presently pending in which the affiliate banks are parties. These proceedings involve routine litigation incidental to the banks' businesses. 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 12 ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of One Valley are:
Name Age Banking Experience and Qualifications ---- --- ------------------------------------- Robert F. Baronner 72 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 58 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; Senior Vice President, 1998. Phyllis H. Arnold 50 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; Chief Operating Officer, 1998. Frederick H. Belden, Jr. 60 1968 to present, One Valley Bank. Senior Vice President and Senior Trust Officer, 1982; Executive Vice President, 1986. Executive Vice President, One Valley, 1994. 13 Name Age Banking Experience and Qualifications ---- --- ------------------------------------- Laurance G. Jones 52 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 46 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; Senior Vice President, One Valley, 1998. Robert E. Kamm, Jr. 47 1975 to 1978, One Valley Bank, Assistant Investment Officer; 1982 to present, President One Valley Bank-South, Inc.; Senior Vice President, One Valley, 1996. Kenneth R. Summers 53 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.
14 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS One Valley's Common Stock is registered on the New York Stock Exchange under the symbol "OV." On March 5, 1999, One Valley had approximately 18,400 shareholders, including shareholders of record and shares held in nominee name. One Valley incorporates by reference the information in paragraphs number 2 and 3 in the subsection captioned "Balance Sheet Analysis-Capital Resources" on page 19 of One Valley's 1998 Annual Report to Shareholders. One Valley incorporates by reference Notes A, C, E and S of Notes to the Consolidated Financial Statements appearing at pages 32, 35 and 45 of One Valley's 1998 Annual Report to Shareholders and Table 2 "Six-Year Selected Financial Summary" on page 5. ITEM 6. SELECTED FINANCIAL DATA One Valley incorporates by reference Table 2 "Six-Year Selected Financial Summary" on page 5 of One Valley's 1998 Annual Report to Shareholders. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS One Valley incorporates by reference the information contained on pages 4 through 26 of One Valley's 1998 Annual Report to Shareholders. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK One Valley incorporates by reference the information contained on pages 17 through 18 of One Valley's 1998 Annual Report to Shareholders. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA One Valley incorporates by reference the information contained on pages 28 through 49 of One Valley's 1998 Annual Report to Shareholders. See Item 14 for additional information regarding the financial statements. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 15 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT One Valley incorporates by reference the information in the sections "Election of Directors - Management Nominees to One Valley's Board" and "- Section 16(a) Beneficial Ownership Reporting Compliance" on pages 3 through 6 and page 8 of One Valley's definitive Proxy Statement dated March 26, 1999. One Valley also refers you to the information about One Valley's executive officers in Part I, Item 4A, of this report. ITEM 11. EXECUTIVE COMPENSATION One Valley incorporates by reference the information in the sections "Executive Compensation and Other Information", "Change in Control Arrangements," and "Board Compensation" on pages 13 through 17 and page 8 of One Valley's definitive Proxy Statement dated March 26, 1999. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT One Valley incorporates by reference the information in the sections "One Valley Share Ownership - Directors, Executive Officers and Nominees," and "- Certain Beneficial Owners" on pages 18 through 22 of One Valley's definitive Proxy Statement dated March 26, 1999. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS One Valley incorporates by reference the information in the sections captioned "Certain Transactions with Directors and Officers and Their Associates" and "Compensation Committee Interlocks and Insider Participation" on pages 8 and 9 of One Valley's definitive Proxy Statement dated March 26, 1999, and Notes G and I of the Notes to the Consolidated Financial Statements appearing at page 37 of One Valley's 1998 Annual Report to Shareholders. 16 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1998 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. Consolidated Balance Sheets at December 31, 1998, and 1997 28 Consolidated Statements of Income for the years ended December 31, 1998, 1997 and 1996 29 Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 30 Consolidated Statements of Cash Flows for the years ended December 31, 1998, 1997 and 1996 31 Notes to Consolidated Financial Statements 32-45 Report of Independent Auditors 46 (a) 2. Financial Statement Schedules One Valley omits all schedules, because the required information is inapplicable or the information is presented in the Consolidated Financial Statements or related Notes. (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. 21 (b) Reports on Form 8-K None. (c) Exhibits See Item 14(a)(3) above. (d) Financial Statement Schedules See Item 14(a)(2) above.
17 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, Senior Vice President and Chief Accounting Officer (Principal Accounting Officer) March 17, 1999 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 17, 1999 - ------------------------------- PHYLLIS H. ARNOLD /s/ Charles M. Avampato Director March 17, 1999 - ------------------------------- CHARLES M. AVAMPATO /s/ Robert F. Baronner Director March 17, 1999 - ------------------------------- ROBERT F. BARONNER 18 SIGNATURE TITLE DATE /s/ Dennis M. Bone Director March 17, 1999 - ------------------------------- DENNIS M. BONE /s/ James K. Brown Director March 17, 1999 - ------------------------------- JAMES K. BROWN /s/ James K. Candler Director March 17, 1999 - ------------------------------- JAMES K. CANDLER /s/ Nelle Ratrie Chilton Director March 17, 1999 - ------------------------------- NELLE RATRIE CHILTON /s/ H. Rodgin Cohen Director March 17, 1999 - ------------------------------- H. RODGIN COHEN /s/ James L. Davidson, Jr. Director March 17, 1999 - ------------------------------- JAMES L. DAVIDSON, JR. /s/ Ray Marshall Evans, Jr. Director March 17, 1999 - ------------------------------- RAY MARSHALL EVANS, JR. /s/ James Gabriel Director March 17, 1999 - ------------------------------- JAMES GABRIEL /s/ Thomas E. Goodwin Director March 17, 1999 - ------------------------------- THOMAS E. GOODWIN /s/ Bob M. Johnson Director March 17, 1999 - ------------------------------- BOB M. JOHNSON /s/ Robert E. Kamm, Jr. Director March 17, 1999 - -------------------------------- ROBERT E. KAMM, JR. /s/ John D. Lynch Director March 17, 1999 - -------------------------------- JOHN D. LYNCH /s/ Edward H. Maier Director March 17, 1999 - -------------------------------- EDWARD H. MAIER 19 SIGNATURE TITLE DATE /s/ J. Holmes Morrison President, Chief March 17, 1999 - ------------------------------- Executive Officer and J. HOLMES MORRISON Director /s/ Charles R. Neighborgall, III Director March 17, 1999 - -------------------------------- CHARLES R. NEIGHBORGALL, III /s/ John L. D. Payne Director March 17, 1999 - ------------------------------- JOHN L. D. PAYNE /s/ Angus E. Peyton Director March 17, 1999 - ------------------------------- ANGUS E. PEYTON /s/ Lacy I. Rice, Jr. Director March 17, 1999 - ------------------------------- LACY I. RICE, JR. /s/ Brent D. Robinson Director March 17, 1999 - ------------------------------- BRENT D. ROBINSON /s/ James W. Thompson Director March 17, 1999 - ------------------------------- JAMES W. THOMPSON /s/ W. Lowrie Tucker, III Director March 17, 1999 - ------------------------------- W. LOWRIE TUCKER, III /s/ J. Lee Van Metre, Jr. Director March 17, 1999 - ------------------------------- J. LEE VAN METRE, JR. /s/ Richard B. Walker Director March 17, 1999 - ------------------------------- RICHARD B. WALKER Director March 17, 1999 - ------------------------------- H. BERNARD WEHRLE, III /s/ John H. Wick, III Director March 17, 1999 - -------------------------------- JOHN H. WICK, III /s/ Thomas D. Wilkerson Director March 17, 1999 - ------------------------------- THOMAS D. WILKERSON
20 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, 1998, Quarterly Report on Form 10-Q and incorporated herein by reference. Exhibit 3.2 Amended and Restated Bylaws of One Valley filed as part of One Valley's June 30, 1998, Quarterly Report on Form 10-Q 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. Executive Compensation Plans and Arrangements. Exhibit 10.2 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 10.3 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. Exhibit 10.4 One Valley Bancorp, Inc., 1993 Amended and Restated Incentive Stock Option Plan found at page 23 herein. 21 Exhibit 10.5 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 10.6 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 10.7 One Valley Bancorp, Inc., Executive Incentive Compensation Plan, dated as of January 1, 1996. (12) Statement Re Computation of Ratios -- found at page 30 herein. (13) 1998 Annual Report to Security Holders -- found at page 31 herein. (21) Subsidiaries of Registrant -- found at page 83 herein. (23a) Consent of Ernst & Young LLP, Independent Auditors -- found at page 84 herein. (23b) Consent of Cherry, Bekaert & Holland, L.L.P., Independent Auditors -- found at page 85 herein. (27) Financial Data Statement -- Edgar filing only. (99a) Proxy Statement for the 1999 Annual Meeting of One Valley -- found at page 87 herein. (99b) Report of Cherry, Bekaert & Holland, L.L.P., Independent Auditors -- found at page 114 herein. 22 EX-10 2 EXHIBIT 10.4 EXHIBIT 10.4 ONE VALLEY BANCORP, INC. 1993 INCENTIVE STOCK OPTION PLAN (AMENDED AND RESTATED, EFFECTIVE APRIL 16, 1997) SECTION 1. PURPOSE OF THE PLAN The One Valley Bancorp, Inc. 1993 Incentive Stock Option Plan (the "Plan") is intended to provide a method whereby key employees of One Valley Bancorp, Inc. (the "Company") and its subsidiaries who are responsible for the management, growth, and protection of the business, and who are making and can continue to make substantial contributions to the success and profitability of the business, may be encouraged to acquire a stock ownership in the Company, thus creating a proprietary interest in the business and providing them with greater incentive to continue in the service of and to promote the interests of the Company and its stockholders. Accordingly, the Company will from time to time during the effective period of the Plan, grant to the employees selected in the manner provided below options to purchase shares of the $10.00 per value common stock of the Company ("Common Stock") subject to the conditions specified herein. It is further intended that options issued pursuant to the Plan will constitute incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as the same or any successor statute may now or hereafter be in effect (the "Code"). SECTION 2. ADMINISTRATION OF THE PLAN The Plan shall be administered by the Compensation Committee of the Board of Directors (the "Committee"). The Board of Directors may from time to time remove members from or add members to the Committee. Vacancies on the Committee, however caused, shall be filled by the Board of Directors. The Committee shall select one of its members as Chairman and shall hold meetings at such times and places as it may determine. The majority of the Committee shall constitute a quorum, and the acts of the majority of the members present at any meeting at which a quorum is present, or acts approved in writing by all of the members, shall be the acts of the Committee. 23 Subject to the provisions of the Plan, the Committee shall have full and final authority in its discretion, (a) to determine the employees to be granted stock options; (b) to determine the number of shares covered by each option; (c) to determine the time or times at which options will be granted; (d) to determine the option price of the shares subject to each option; (e) to prescribe the form or forms of the instruments evidencing any options granted (which forms shall be consistent with the Plan but need not be identical to one another); (f) to adopt, amend, and rescind such rules and regulations as, in its opinion, may be advisable in the administration of the Plan; and (g) to construe and interpret the Plan, the rules and regulations, and the instruments evidencing options granted under the Plan, and to make all of the determinations deemed necessary or advisable for the administration of the Plan. The Committee shall have authority in its discretion to determine the time or times when each option becomes exercisable and the duration of the exercise, subject to the provisions of Sections 5, 8 and 12 of the Plan. SECTION 3. SHARES AVAILABLE FOR OPTIONS Subject to the provisions of Section 11 hereof, there will be reserved for use upon the exercise of options to be granted from time to time under the Plan an aggregate of 960,000 shares of Common Stock, and the aggregate number of shares of Common Stock for which options may be granted under this Plan shall not exceed said 960,000 shares. Further, subject to the provisions of Section 11 hereof, the Committee may grant options in an amount not exceeding 96,000 shares of Common Stock in any calendar year plus the number of shares of common stock which were unissued, forfeited, or expired, in any previous calendar year within the time limitations of the Plan. The shares to be delivered upon exercise of options under this Plan shall be made available, at the discretion of the Board of Directors, either from the authorized but unissued shares of Common Stock of the Company or from shares of Common Stock held by the Company as treasury shares, including shares purchased on the open market. If an option granted under the Plan expires or terminates unexercised as to any shares covered thereby, such shares shall thereafter be available for the granting of other options under the Plan. The Company, during the term of the options granted pursuant to this Plan, will at all times reserve and keep available, and will seek to obtain from any regulatory body having jurisdiction, any requisite authority in order to issue and sell the number of shares of its Common Stock sufficient to satisfy the requirements of such options. If in the opinion of its counsel the issue or sale of any shares of its stock pursuant to this Plan will not be lawful for any reason, including the inability of the Company to obtain from any regulatory body having jurisdiction authority deemed by such counsel to be necessary to such issuance or sale, the Company shall not be obligated to issue or sell any such shares. SECTION 4. ELIGIBILITY Options will be granted only to persons who are key employees of the Company or of a subsidiary of the Company (as the term "subsidiary corporation" is defined by Section 424(f) of the Code). The term "key employee" may include officers as well as all other key employees of the Company and its subsidiaries, but shall include directors only if they are also employees. No member of the Board of Directors then serving on the Committee shall be eligible to receive an option under the Plan. In selecting the individuals to whom options shall be granted, as well as in determining the number of shares subject to and the type of terms and provisions of each option, the Committee shall weigh such factors as it shall deem relevant to accomplish the purpose of this Plan. 24 SECTION 5. TERM OF OPTIONS The full term of each option granted hereunder shall be for such period as the Committee shall determine, but in no case shall any option be exercisable after ten years from the date it is granted. In addition, no incentive stock option granted to a person then owning more than 10% of the voting power of all classes of stock of the Company or any of its subsidiaries, whether outright or by attribution under Section 424(d) of the Code, shall be exercisable after five years from the date it is granted. Each option shall be subject to earlier termination as provided by Paragraphs (a), (b), (c) and (d) of Section 10 hereof. SECTION 6. OPTION PRICE The option price shall be determined by the Committee for each option granted, and shall be not less than 100% of the fair market value of the shares covered thereby at the time the option is granted. Fair market value for purposes of this Plan as of any day shall be the average of the high and low reported sales price of the Common Stock on that day or, if no Common Stock was traded on that day, on the next preceding day on which there was such a trade. If an incentive stock option is granted to any person then owning more than 10% of the voting power of all classes of stock of the Company or any of its subsidiaries, whether outright or by attribution under Section 424(d) of the Code, the purchase price per share of the Common Stock subject to the option shall be not less than 110% of the fair market value of the stock on the date when the option is granted, determined in good faith, as aforesaid. SECTION 7. NONTRANSFERABILITY OF OPTIONS No option granted under this Plan shall be transferable by the grantee other than by will or the laws of descent and distribution, and such option may be exercised during the grantee's lifetime only by the grantee (or by grantee's legal representatives in the event of grantee's incapacity). More particularly (but without limiting the generality of the foregoing), no option may be assigned, transferred (except as aforesaid), pledged, or hypothecated in any way, whether by operation of law or otherwise, and no option shall be subject to execution, attachment, or similar process. Any attempted assignment, transfer, pledge, hypothecation, or other dispositions of an option contrary to the provisions hereof, or the levy of any attachment or similar process upon an option, shall be null and void and without effect. SECTION 8. EXERCISE OF OPTIONS (a) Each option granted under this Plan shall be exercisable on the date or dates and during the period and for the number of shares specified in the instrument evidencing such option; provided, however, that no option granted under this Plan shall be exercisable after the expiration of ten years from the date such option is granted. Options may be made exercisable in installments, and such options or installments thereof may be exercised in part from to time according to their terms. 25 (b) A person electing to exercise an option shall give written notice to the Company of such election and of the number of shares such person has elected to purchase, and shall at the time of exercise tender the full purchase price of such shares. Such person shall possess no rights of a record holder with respect to any of such shares until a certificate or certificates for the shares so purchased is issued. With respect to options granted on or after April 16, 1997, the payment of the purchase price shall be made (i) in cash, or by certified or bank check, (ii) by surrender of shares of Common Stock owned by the holder of the option for at least six months prior to exercise of the option, (iii) through simultaneous sale through a broker of shares acquired upon exercise, (iv) through additional methods prescribed by the Committee or (v) by a combination of any such methods. Any shares of Common Stock so delivered in payment shall be valued at their fair market value as determined on the exercise date, or on such other date as determined by the Committee for administrative convenience. With respect to options granted prior to April 16, 1997, the payment of the purchase price shall be made pursuant to (i), (iii) or (v). (c) The Company shall have the right to require Employee to pay to the Company in cash (including certified or bank check) any amount required to be withheld to satisfy federal, state and local tax withholding requirements prior to the issuance or delivery of any shares of Common Stock under the Plan. Employee may elect to satisfy such withholding obligation by (i) delivering previously owned shares of Common Stock, (ii) having the Company retain shares of Common Stock which would otherwise be delivered upon exercise of an option, or (iii) any combination of a cash payment or the methods set forth in (i) and (ii) above. For purposes of (i) and (ii) above, shares of Common Stock shall be valued at their fair market value as determined on the exercise date, or on such other date as determined by the Committee for administrative convenience. SECTION 9. CHANGE OF DUTIES & RIGHT TO CONTINUE EMPLOYMENT (a) No option shall be affected by any change of duties or position of the optionee (including transfer to or from a subsidiary) so long as the optionee continues to be an employee of the Company or of one of its subsidiaries. (b) Nothing in the Plan or in the options granted hereunder shall confer upon any optionee any right to continue in the employ of the Company or any of its subsidiaries, or to interfere in any way with the right of the Company or its subsidiaries to terminate such employment at any time. SECTION 10. TERMINATION OF OPTIONS (a) Any option granted pursuant to the Plan shall terminate, to the extent not theretofore exercised, ten (10) years from the date the Option is granted, except as provided below in this Section 10. 26 (b) Any option granted pursuant to the Plan shall terminate, to the extent not theretofore exercised, on the date on which the optionee ceases to be an employee of the Company or one of its subsidiaries for any reason other than death, retirement, or disability (with respect to options granted on or after April 16, 1997) or a voluntary or involuntary termination of employment due to, as a result of, or in connection with certain business combinations or a Change in Control of the Company as defined in Section 10(e) hereof. (c) If an optionee dies while employed by the Company or any of its subsidiaries, any person who acquires, by will or by the laws of descent and distribution, an option theretofore granted may exercise such option at any time prior to the expiration of its full term. The same rule shall apply if an optionee dies within 90 days of cessation of employment by the Company or any of its subsidiaries, (i) due to retirement in good standing; (ii) due to disability (with respect to options granted on or after April 16, 1997) or; (iii) due to, as a result of, or in connection with certain business combinations or a Change in Control of the Company as defined in Section 10(e) hereof. Such exercise shall be limited to the purchase rights which had accrued as of the date when the optionee ceased to be an employee of the Company or any of its subsidiaries. (d) With respect to options granted prior to April 16, 1997, (i) if an optionee retires in good standing from the employ of the Company or any of its subsidiaries, under rules and regulations adopted by the Committee, by reason of (A) age or (B) disability, or (ii) if an optionee's employment is voluntarily or involuntarily terminated due to, as a result of or in connection with certain business combinations or a Change in Control of the Company as defined in Section 10(e) hereof, the optionee shall have the right to exercise any option, to the extent not already exercised, at any time prior to the first to occur of the expiration of its full term or 90 days (one year in the event of disability retirement under clause (i) (B) above) from the date of such retirement or termination. With respect to options granted on or after April 16, 1997, if the optionee retires or terminates pursuant to (i) or (ii) above or if the optionee otherwise terminates employment as a result of disability, the optionee shall have the right to exercise any option, to the extent not already exercised, at any time prior to the first to occur of the expiration of its full term or three years from the date of such retirement or termination. (e) The provisions of Subsections 10(b), (c), and (d) relating to termination of employment due to, as a result of, or in connection with certain business combinations or a Change in Control of the Company as defined herein, and to Articles VI.1 through VI.6 of the Articles of the Company including, without limitation, the incorporation thereof into this Plan may be amended or suspended only with the affirmative vote of the holders of at least 80% of the outstanding stock of the Company entitled to vote thereon. 27 A Change in Control or certain business combination occurs as a result of or in connection with the following events: (i) any business combination which would require a higher than majority vote of the shareholders of the Company pursuant to the provisions of Articles VI.1 through VI.6 of the Articles of Incorporation of the Company ("Articles"), which are by this reference made a part of this Plan ("Unfriendly Business Combination"); (ii) a business combination (as defined in Article VI.1B of the Articles) which results in an Interested Shareholder (as defined in Article VI.3B of the Articles) or any affiliate or any associate (as defined in Article VI.3E of the articles) of an Interested Shareholder becoming the beneficial owner (as defined in Article VI.3C of the Articles) of more than 50% of the Voting Stock of the Company ("Friendly Business Combination"); or (iii) any person becomes the beneficial owner of over 50% of the Voting Stock of the Company and a majority of the Disinterested Directors (as defined in Article VI.3G of the Articles) finds and determines that such beneficial ownership constitutes a Change in Control of the Company ("Over 50% Acquisition"). SECTION 11. ADJUSTMENT UPON CHANGES IN CAPITALIZATION AND CERTAIN CORPORATE TRANSACTIONS In the event of any change in capitalization (such as a stock split or stock dividend or other similar corporate change) of the Company, the Committee shall make such equitable substitution or adjustment (in accordance with, to the extent applicable, Code Sections 422 and 424 and the Regulations promulgated thereunder), if any, as it deems to be appropriate, as to the number or kind of shares of Common Stock or other securities reserved for issuance pursuant to the Plan (including the annual limit on option grants) or subject to outstanding options, and to any other terms and conditions of outstanding options including the option purchase price. In the case of any Corporate Transaction (as hereinafter defined) involving the Company, the Committee shall make such equitable substitution or adjustment (in accordance with, to the extent applicable, Code Sections 422 and 424 and the Regulations promulgated thereunder), if any, as it deems to be appropriate, as to the number or kind of shares of Common Stock or other securities reserved for issuance pursuant to the Plan (including the annual limit on option grants) or subject to outstanding options, and to any other terms and conditions of outstanding options including the option purchase price, provided that: (1) the excess of the aggregate fair market value of the shares subject to the option over the aggregate option price of such shares, immediately after the substitution or assumption, is not more than the excess of the aggregate fair market value of the shares subject to the option over the aggregate option price of such shares immediately before such substitution or assumption, and (2) the new option or the assumption of the old option does not give the employee additional benefits which he did not have under the old option. 28 For purposes of this section the term "Corporate Transaction" means a corporate merger, consolidation, acquisition of property or stock, separation, reorganization or liquidation or similar corporate transaction. The Company shall give notice of such substitution or adjustment to each holder of an option under this Plan, and such substitution or adjustment shall be effective and binding on the optionee. SECTION 12. AMENDMENT, SUSPENSION, OR TERMINATION OF PLAN Subject to the provisions of Sections 10(e) and 14 of the Plan, the Board of Directors may at any time and from time to time amend or suspend this Plan, provided, however, that no such amendment shall, without approval of the shareholders of the Company, except as provided in Section 11 hereof, (a) increase the aggregate number of shares as to which options may be granted under the Plan; (b) change the minimum option exercise price; (c) increase the maximum period during which options may be exercised; (d) extend the effective period of the Plan; and (e) permit the granting of options to members of the Committee. No option may be granted during any suspension of the Plan or after the Plan has been terminated, and no amendment, suspension, or termination shall, except as provided in Section 11, without the optionee's consent, adversely alter or impair any of the rights or obligations under any option theretofore granted under this Plan. SECTION 13. SHAREHOLDER APPROVAL AND EFFECTIVE DATE This Plan became effective upon its approval by the affirmative vote of the holders of a majority of the outstanding shares entitled to vote at the annual meeting of the shareholders of the Company on April 27, 1993. No options may be granted under the Plan subsequent to April 26, 2003. SECTION 14. EXERCISE OF OPTIONS IN THE EVENT OF CHANGE IN CONTROL All unexpired options granted under the 1993 Incentive Stock Option Plan, as amended, which have not been previously exercised at that time, whether or not the optionee is an employee of the Company or any of its subsidiaries, will be immediately exercisable by the optionee, (i) at the time of a 50% Acquisition; or (ii) in the event of shareholder approval of an Unfriendly Business Combination or a Friendly Business Combination, provided that any such exercise of such unexpired options, at the election of the optionee, may be made contingent upon the consummation of an Unfriendly Business Combination or a Friendly Business Combination, whichever is applicable. This Section 14 of the Plan may be amended only upon the affirmative vote of the holders of at least 80% of the outstanding stock of the Company entitled to vote thereon. 29 EX-12 3 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. One Valley incorporates the definitions on page 27 of One Valley's 1998 Annual Report to Shareholders. 30 EX-13 4 EXHIBIT 13 - ------------- ONE VALLEY BANCORP, INC. ANNUAL REPORT 1998 - -------------
- -------------------------------------------------------------------------------- ================================================================================ Contents ================================================================================ Financial Highlights ...................................................... 1 Report to Customers, Employees, Owners .................................... 2 Management's Discussion and Analysis ...................................... 4 Glossary of Terms ......................................................... 27 Consolidated Financial Statements ......................................... 28 Six-Year Financial Summaries .............................................. 47 One Valley Bancorp Directors and Senior Management ........................ 50 Additional Shareholder Information ........................................ 52 - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------- ================================================================================ Financial Highlights ================================================================================ (Dollars in thousands, except per share data)
1998 1997 % CHANGE ---- ---- -------- For The Year Net interest income ........... $ 220,724 $ 199,850 10.44% Net income .................... 73,045 63,800 14.49 Average Balances Total loans - net ......... 3,641,069 3,135,152 16.14 Total assets .............. 5,648,166 4,945,505 14.21 Deposits .................. 4,283,567 3,846,583 11.36 Equity .................... 558,289 487,598 14.50 At Year-End Year-end Balances Total loans - net ......... $3,938,849 $3,257,488 20.92% Total assets .............. 5,963,580 5,161,486 15.54 Deposits .................. 4,552,888 3,934,174 15.73 Equity .................... 595,533 503,650 18.24 Per Share Net income: Basic ..................... $ 2.19 $ 2.00 9.50% Diluted ................... 2.15 1.95 10.26 Cash dividends ................ 0.90 0.80 12.50 Book value .................... 17.14 15.75 8.83
31 - ---------- REPORT TO CUSTOMERS, EMPLOYEES, OWNERS - ---------- [PHOTO] J. Holmes Morrison, President and CEO Net income increased for the 17th consecutive year - -------------------- One Valley Bancorp recorded its seventeenth consecutive year of increased net income and dividends in 1998. In addition, earnings per share increased to $2.15, which is the twelfth consecutive year of increased earnings per share on an as reported basis. Very few banking companies among the 100 largest in the country have matched this level of consistent profitability. The 1998 year also represented one of significant growth and expansion for One Valley. With the affiliation of FFVA Financial Corporation in Lynchburg, Virginia, the purchase of the fifteen Jefferson National and Central Fidelity branches from Wachovia, and the acquisition of Summit Bankshares Inc. located in Rockbridge County Virginia, One Valley increased its total assets by over $1.1 billion. One Valley now has 48 offices and $1.5 billion in assets in the growing markets of Lynchburg, Charlottesville and Lexington, Virginia making One Valley the eighth largest bank in Virginia. The significant growth experienced in 1998 enabled One Valley to once again reach record levels in assets, loans, deposits and shareholders' equity. At the same time One Valley has maintained its focus on the sound financial fundamentals of profitability, asset quality, operational efficiency, capital adequacy, liquidity and management of interest rate risk. For the year, One Valley earned a record $73.0 million, which is a 14.5% increase over the $63.8 million earned in 1997. Fully diluted net income per share increased 10.3% to $2.15 from the $1.95 earned on a restated basis in 1997. One-time charges connected with the acquisition of FFVA Financial Corporation were incurred during the first quarter of 1998 and decreased earnings by approximately $0.03 per share. Return on average assets at 1.29% and return on equity at 13.08% remained steady in 1998 compared to prior years. Average shareholders' equity grew 14.5% to $558.3 million resulting in a strong capital ratio, as equity to average assets was 9.88%. Cash dividends per share increased 12.5% to a record $0.90 in 1998. Growth in net income in 1998 was primarily a result of a 10.4% increase in net interest income and a 23.6% increase in non-interest income, both of which were positively impacted by One Valley's acquisition activity in 1998. However, due to the continued flattening of the yield curve throughout 1998, One Valley's net interest margin declined to 4.33% in 1998 versus the 4.48% recorded in 1997. The growth in non-interest income, led by trust income, real estate loan processing and servicing, and other fees, helped to offset the decline in the net interest margin. In the face of the significant growth in assets in 1998, One Valley maintained adequate control of operating expenses resulting in lower operational efficiency ratios, as the efficiency and net overhead ratios declined to 56.2% and 1.95%, respectively. One Valley's long history of sound asset quality continued in 1998 as net charge-offs declined to 0.18% of loans, non-performing assets declined to 0.24% of total loans, and loans delinquent for 30 days or more declined to 1.16% of total loans. The loan loss reserve at year-end of $52.3 million adequately covered the $9.6 million in non-performing assets by 546%. The forgoing asset quality ratios, which were achieved while growing the loan to deposit ratio to 86.5%, remain among the best in the industry. On page 27 of this report is a glossary of terms, which should assist 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 26 provides a comprehensive review of the financial condition and results of operations of One Valley for 1998 and prior years, and should be read in its entirety. Some of the financial highlights include: o Net income grew at an 11.0% compound annual growth rate over the last five years, while fully diluted earnings per share grew at a 6.1% rate during the same period. Return on average assets averaged 1.30% over the past five years, while return on equity averaged 13.08% over the same time frame. o Average loans grew 9.7% per year while deposits grew 5.8% per year during the last five years. o Equity has grown at an 11.7% compound annual rate over the last five years producing a strong average equity to assets ratio of 9.9% during this period. o One Valley's consistent profitability has benefited its owners as dividends per share grew at a 10.8% compound annual rate for the five-year period ending December 31, 1998. Other highlights during 1998 were as follows: o US Banker Magazine ranked One Valley as the 13th 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 third year in a row One Valley has been ranked in the top 15. 32 o For the second year in a row One Valley was named to Keefe Bruyette and Wood's "1998 Honor Roll" of banks for being one of 13 in their universe of 128 banks to report at least ten consecutive years of increased earnings per share. o As of December 31, 1998, One Valley was ranked as the 78th largest provider of bank managed mutual funds in the country. o With a market capitalization of over $1.1 billion One Valley ranked as the 73rd largest banking company in the country based upon market capitalization. o In March, the One Valley Board of Directors approved a revised strategic Long Range Plan to implement a proactive, consultative sales culture supported by a new organizational model, to propel One Valley to greater customer acquisition and penetration thereby creating more attractive earnings growth. As we look towards the future, 1999 will be focused on the strategic plan as well as Year 2000 readiness. One Valley's Year 2000 project began in 1996. We have worked diligently, internally and with our vendors, to assure that we are ready for the millennium date change. We are on or ahead of the schedule for remediation and testing of our computer systems set by the banking regulators. Our systems readiness effort, including all testing, will be complete by the end of June 1999. We have undertaken comprehensive contingency planning. In the event there should be service disruptions by others outside our control, we will be prepared and open for business. We will continue efforts begun during 1998 to educate our employees and customers on the issue. We are prepared to respond to the media and to speak to civic and professional groups. We encourage you to review One Valley's Year 2000 readiness disclosures included in later sections of this report. The 1990's has been a decade marked by growth, success and change for One Valley Bancorp. As we move forward toward the millennium, a clear vision of the future becomes even more imperative to our continued success. In examining our goals for the future, we acknowledge that the relationship between our customers and employees is intertwined in all that we do. To reach the objectives set forth in this plan, we will continue to position One Valley Bank as a "Super Community Bank". This positioning is our best strategy to take advantage of our Retail and Business market opportunities as we continue to compete with both large and smaller financial service providers. Being a "Super Community Bank" means that we continue our commitment to local decision making which facilitates effective service to our customers. Our greatest opportunities for the future lie in the acquisition of new customers in our Virginia markets and the expansion of household relationships in our West Virginia markets. Our goal is to implement a proactive sales culture by utilizing consultative selling methods which are best suited to providing financial solutions for our customers. In looking to the future, we realize that the only way to successfully prevail is to continually change and grow to meet the demands of our three constituencies: our Customers, Employees and Owners, and grow to exceed their expectations while giving back to the communities that we serve. The foundation for this change is the constant in our work together--our Vision Statement, Mission Statement and Core Values. These remain fundamental to not only our long-range goals, but our daily actions as well. In accordance with One Valley's Board Retirement policy, five directors (see picture on page 51) meet the mandatory retirement age and will become Honorary Directors in 1999. The tenure and service of these Directors has been remarkable and their wisdom and counsel will be sorely missed in future years. Robert F. Baronner, who has served as President & CEO of One Valley and its predecessor Kanawha Valley Bank from 1975 to 1991 and as Chairman since 1991, has had an unparalleled distinguished career in banking. He leaves a legacy of capital strength and sound asset quality that has stood the test of numerous economic cycles. Angus E. Peyton has served on One Valley Boards since 1958 and has been a member at one time or another of every Board Committee of One Valley and its predecessor Kanawha Valley Bank. He will always be remembered for his artistic influence on One Valley, most notably as a co-creator of the "Cabriole" statue in front of the headquarters building. James W. Thompson and Thomas E. Goodwin joined One Valley's Board as a result of their bank's affiliation with One Valley. James Gabriel was elected to the Board in 1993. Each of these individuals represented their affiliate bank and region with a thoughtful insight that enabled the bank and One Valley to grow and prosper during their tenure on the Board. By continuing an unwavering focus on our customers, employees, owners and communities we serve, One Valley should enjoy another successful year in 1999. Respectfully submitted, /s/ J. Holmes Morrison - ---------------------- J. Holmes Morrison President and CEO Net Income and Dividends Per Share [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Net Year Income Dividends --------------------------------------- 1993 $1.61 $.54 1994 $1.54 $.60 1995 $1.69 $.67 1996 $1.80 $.74 1997 $2.00 $.80 1998 $2.19 $.90 Ten-Year Total Return To Shareholders* [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] 1988 1990 1992 1994 1996 1998 ---- ---- ---- ---- ---- ---- 1,000 913 2,224 2,914 4,350 5,779 *Assumes initial investment of $1,000 and reinvestment of all dividends. Graph presents past performance and is not indicative of future results. 33 - ------------- 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 nine bank subsidiaries ranging in size from $203 million to $2.1 billion and includes three national banks. Through these banks, One Valley serves 81 cities and towns with a full range of banking services in 125 locations strategically located throughout West Virginia and central Virginia. At December 31, 1998, One Valley had approximately $6.0 billion in total assets, $4.0 billion in total loans, and $4.6 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. On March 30, 1998, One Valley merged with FFVA Financial Corporation (FFVA), a $604 million holding company in Lynchburg, Virginia. Since the transaction was accounted for as a pooling of interests, generally accepted accounting principles require that all historical financial information be restated to reflect the merger of the two companies from the earliest date presented in this annual report. Accordingly, all financial information in this discussion and throughout this annual report reflects the merger of One Valley and FFVA as if it occurred on January 1, 1993, (the earliest date presented in this annual report). Similarly, all prior period comparisons have been restated to present the significant changes in the financial condition and results of operations of the combined company.
- ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== Summary Statement of Net Income Table 1 ==================================================================================================================================== (Dollars in thousands) Increase (Decrease) From Prior Year 1998 1997 1996 1998 1997 --------- --------- --------- ----------------- ----------------- Amount Percent Amount Percent ------ ------- ------ ------- Interest income * ..................................... $ 420,019 $ 376,760 $ 353,146 $ 43,259 11.48 $ 23,614 6.69 Interest expense ...................................... 199,295 176,910 160,467 22,385 12.65 16,443 10.25 --------- --------- --------- --------- ----- --------- ----- Net interest income ................................... 220,724 199,850 192,679 20,874 10.44 7,171 3.72 Other operating income ................................ 59,108 47,836 42,275 11,272 23.56 5,561 13.15 Gross securities transactions ......................... 1,125 1,018 (162) 107 10.51 1,180 --------- --------- --------- --------- ----- --------- ----- Total operating income ................................ 280,957 248,704 234,792 32,253 12.97 13,912 5.93 Provision for loan losses ............................. 10,063 7,531 5,264 2,532 33.62 2,267 43.07 Other operating expenses .............................. 161,944 144,319 140,984 17,625 12.21 3,335 2.37 --------- --------- --------- --------- ----- --------- ----- Income before taxes ................................... 108,950 96,854 88,544 12,096 12.49 8,310 9.39 Income taxes .......................................... 35,905 33,054 29,926 2,851 8.63 3,128 10.45 --------- --------- --------- --------- ----- --------- ----- Net income ............................................ $ 73,045 $ 63,800 $ 58,618 $ 9,245 14.49 $ 5,182 8.84 ========= ========= ========= ========= ===== ========= ===== * Fully tax-equivalent interest income using the rate of 35% ....................................... $ 428,151 $ 384,833 $ 360,625 $ 43,318 11.26 $ 24,208 6.71
34 Summary Financial Results One Valley earned $73.0 million in 1998, a 14.5% increase over the $63.8 million earned in 1997. Table 1, Summary Statement of Net Income, presents three years of comparative income statement information. As shown in Table 1, 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 1997 of 8.8% over the $58.6 million earned in 1996. Earnings comparisons are impacted by the February 1998 purchase of fifteen branches from Wachovia Corporation, the August 1998 acquisition of Summit Bankshares, Inc. (Summit) and the April 1996 acquisition of CSB Financial Corporation (CSB) discussed below. Diluted earnings per share was $2.15 in 1998, an increase of 10.3% over the $1.95 earned in 1997, which compares to the 10.8% increase in 1997 over the $1.76 earned in 1996. As shown in Table 2, the five-year compound growth rate in earnings per share since 1993 has been 6.1%. Table 2, Six-Year Selected Financial Summary, presents summary financial data for the past six years, 1993 through 1998, along
- ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== Six-Year Selected Financial Summary Table 2 ==================================================================================================================================== (Dollars in thousands) 5-Year Compound Growth 1998 1997 1996 1995 1994 1993 Rate ----------- ----------- ----------- ----------- ----------- ----------- --------- Summary of Operations Interest income ............. $ 420,019 $ 376,760 $ 353,146 $ 320,055 $ 280,763 $ 276,129 8.75% Interest expense ............ 199,295 176,910 160,467 140,292 109,680 114,512 11.72 Net interest income ......... 220,724 199,850 192,679 179,763 171,083 161,617 6.43 Provision for loan losses ... 10,063 7,531 5,264 5,887 5,388 6,688 8.51 Non-interest income ......... 59,108 47,836 42,275 38,484 38,323 40,739 7.73 Gross securities transactions 1,125 1,018 (162) 144 (849) 266 Non-interest expense ........ 161,944 144,319 140,984 128,675 127,652 132,284 4.13 Net income .................. 73,045 63,800 58,618 55,580 50,914 43,301 11.02 Per Share Data Net income: Basic .................... $ 2.19 $ 2.00 $ 1.80 $ 1.69 $ 1.54 $ 1.61 6.35% Diluted .................. 2.15 1.95 1.76 1.67 1.53 1.60 6.09 Cash dividends .............. 0.90 0.80 0.74 0.66 0.60 0.54 10.76 Book value .................. 17.14 15.75 14.82 15.32 13.81 12.43 6.64 Selected Period-end Balances Net loans ................... $ 3,938,849 $ 3,257,488 $ 3,090,442 $ 2,763,643 $ 2,604,051 $ 2,394,357 10.47% Total assets ................ 5,963,580 5,161,486 4,801,113 4,355,586 4,113,844 3,892,461 8.91 Deposits .................... 4,552,888 3,934,174 3,804,369 3,426,311 3,263,735 3,272,711 6.83 Long-term borrowings ........ 35,480 48,875 32,892 22,661 28,700 35,288 0.11 Equity ...................... 595,533 503,650 356,587 454,361 412,726 334,937 12.20 Selected Average Balances Net loans ................... $ 3,641,069 $ 3,135,152 $ 2,958,161 $ 2,674,893 $ 2,462,509 $ 2,293,436 9.69% Investment securities ....... 1,163,607 1,467,907 1,345,501 1,174,001 1,164,445 1,162,499 6.78 Total assets ................ 5,648,166 4,945,505 4,625,907 4,168,873 3,942,948 3,840,341 8.02 Deposits .................... 4,283,567 3,846,583 3,656,587 3,361,721 3,272,721 3,228,528 5.82 Long-term borrowings ........ 42,814 52,315 21,951 19,026 22,931 36,088 3.48 Equity ...................... 558,289 487,598 471,443 438,814 359,966 321,403 11.68 Selected Ratios Average equity to assets .... 9.88% 9.86% 10.19% 10.53% 9.13% 8.37% Return on average assets .... 1.29 1.29 1.27 1.33 1.29 1.13 Return on average equity .... 13.08 13.08 12.43 12.67 14.14 13.47 Dividend payout ratio ....... 41.10 40.00 41.11 39.05 38.96 33.54
35 Net Income Dollars in millions [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Net Year Income --------------------------- 1993 43.301 1994 50.914 1995 55.580 1996 58.618 1997 63.800 1998 73.045 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 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 its assets to produce net income. One Valley's 1998 ROA of 1.29% matched the 1.29% ROA reported in 1997 and was up slightly from the 1.27% ROA in 1996. As shown in Table 3, while One Valley's ROA has not significantly changed over the past three years, the income components that make-up ROA have changed. One Valley's net credit income as a percentage of average earning assets has declined over the past three years. 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, One Valley has been able to offset this decline by increasing its non-interest income and reducing its operating costs (as a percentage of average earning assets). Non-interest expense as a percent of average earning assets has consistently declined in years 1994 through 1998 from the previous years' results. This is the result of increased operational efficiency and an increase in average earning assets. During 1997 and 1998, non-interest income as a percent of average earning assets increased rather significantly as a result of fee increases and fee income from new products and services. These two positive trends offset the decline in net credit income. As a result, One Valley's net overhead ratio (non-interest expense less non-interest income as a percent of average earning assets) has steadily declined to 1.95% in 1998, down from 2.08% in 1997 and 2.28% in 1996, while 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 1998 ROE was 13.08%, again matching the 13.08% earned in 1997 and up significantly from the 12.43% reported for 1996. ROE increased in 1997, primarily due to One Valley's strong earnings performance and the leveraging of equity through the CSB purchase in 1996.
- ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== Analysis of Return on Assets and Equity Table 3 ==================================================================================================================================== (Dollars in thousands) 1998 1997 1996 1995 1994 ----- ----- ----- ----- ----- As a percent of average earning assets: Fully taxable-equivalent net interest income * .................................. 4.33% 4.48% 4.63% 4.80% 4.85% Provision for loan losses ............................ (0.19) (0.16) (0.12) (0.15) (0.15) ----- ----- ----- ----- ----- Net credit income .................................. 4.14 4.32 4.51 4.65 4.70 Non-interest income .................................. 1.14 1.05 0.97 0.99 1.02 Non-interest expense ................................. (3.06) (3.11) (3.25) (3.31) (3.48) Tax equivalent adjustment ............................ (0.15) (0.17) (0.17) (0.18) (0.18) Applicable income taxes .............................. (0.69) (0.71) (0.70) (0.73) (0.67) ----- ----- ----- ----- ----- Return on average earning assets ........................ 1.38 1.38 1.36 1.42 1.39 Multiplied by average earning assets to average total assets ............................ 93.56 93.81 93.49 93.25 93.00 ----- ----- ----- ----- ----- Return on average assets ................................ 1.29% 1.29% 1.27% 1.33% 1.29% Multiplied by average assets to average equity .................................. 10.12X 10.14X 9.81X 9.51X 10.95X ----- ----- ----- ----- ----- Return on average equity ................................ 13.08% 13.08% 12.43% 12.67% 14.14% ===== ===== ===== ===== =====
*Fully tax-equivalent using the rate of 35% 36 Acquisition Activity At the close of business on March 30, 1998, One Valley merged with FFVA Financial Corporation, a $604 million Federal Savings Bank holding company headquartered in Lynchburg, Virginia. The acquisition of FFVA expanded One Valley's presence in Lynchburg and south central Virginia, a growing market for financial services providing additional geographical diversification for One Valley. Pursuant to the merger agreement, One Valley exchanged 1.05 shares of One Valley common stock for each share of FFVA common stock. At the date of acquisition, FFVA had total loans of $319 million, investment securities of $211 million, and total deposits of $418 million. The combination was accounted for as a pooling-of-interests. Accordingly, all prior period financial information has been restated to reflect the combined operations of One Valley and FFVA from the earliest period presented in this annual report. At the close of business on February 19, 1998, One Valley purchased fifteen branches from Wachovia Corporation, half of which were located in and around Charlottesville, Virginia. The purchase of these branches expanded One Valley's presence into central and north central Virginia, providing additional geographical diversification for One Valley. At the date of purchase, these fifteen branches had total loans of $125 million, total deposits of $283 million and cash equivalents of $112 million. Consolidated results for 1998 include the operations of the fifteen branches only from the date of purchase. Comparisons of average balances and income statement categories are all affected by the branch purchase. At the close of business on August 7, 1998, One Valley acquired Summit Bankshares, Inc., a $199 million bank holding company located in the Lexington, Virginia market with $149 million in loans and $181 million in deposits. Pursuant to the merger agreement, One Valley exchanged 1.36 shares of One Valley common stock for each share of Summit common stock. Operating now as One Valley Bank - Shenandoah, the consolidated results for 1998 include the operations of Summit only from the date of acquisition. Comparisons of average balances and income statement categories are all affected by the Summit acquisition. 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 was the first to expand One Valley's presence into central Virginia. 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. Return on Average Assets [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Return on Assets ------------- 1993 1.13% 1994 1.29% 1995 1.33% 1996 1.27% 1997 1.29% 1998 1.29% Return on Average Equity [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Return on Equity ------------- 1993 13.47% 1994 14.14% 1995 12.67% 1996 12.43% 1997 13.08% 1998 13.08% 37 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, 1998, is provided in Table 4, Average Balance Sheet/Net Interest Income Analysis. In 1998, average earning assets grew by 13.9% or $645.1 million over 1997, following a 7.3% or $314.6 million increase in 1997 over 1996. Average interest bearing liabilities, the primary source of funds supporting earning assets, increased 13.3% or $530.9 million over 1997, which follows a $275.3 million or 7.4% increase in 1997 over 1996. Approximately 45% of the asset increase and 75% of the liability increase in 1998 was due to the branch purchase and the acquisition of Summit, while approximately 40% of the increase in average earning assets and liabilities in 1997 was due to the purchase of CSB. The remaining 1998 and 1997 increases in interest bearing assets and
- -------------------------------------------------------------------------------------------------------------- ============================================================================================================== Average Balance Sheet/Net Interest Income Analysis Table 4 ============================================================================================================== (Dollars in thousands) 1998 1997 Average Yield/ Average Yield/ Balance Interest(1) Rate(1) Balance Interest(1) Rate(1) ---------- ---------- ------ ---------- ---------- ------ Assets Loans(2) Taxable ........................ $3,648,141 $ 315,172 8.64% $3,134,255 $ 276,520 8.82% Tax-exempt ..................... 42,563 4,162 9.78 46,208 4,600 9.95 ---------- ---------- ------ ---------- ---------- ------ Total loans .................. 3,690,704 319,334 8.65 3,180,463 281,120 8.84 Less: Allowance for losses ..... 49,635 45,311 ---------- ------ ---------- ------ Total loans-net .............. 3,641,069 8.77 3,135,152 8.97 Investment securities Taxable ........................ 1,374,913 88,136 6.41 1,241,684 83,458 6.72 Tax-exempt ..................... 238,694 19,071 7.99 226,223 18,466 8.16 ---------- ---------- ------ ---------- ---------- ------ Total securities ............. 1,613,607 107,207 6.64 1,467,907 101,924 6.94 Federal funds sold & other ........ 29,889 1,610 5.39 36,401 1,789 4.91 ---------- ---------- ------ ---------- ---------- ------ Total earning assets ......... 5,284,565 428,151 8.10 4,639,460 384,833 8.29 Other assets ...................... 363,601 306,045 ---------- ---------- Total assets ................. $5,648,166 $4,945,505 ========== ========== Liabilities and Equity Interest bearing liabilities: Interest bearing demand deposits ..................... $ 580,052 9,773 1.68 $ 561,331 10,894 1.94 Savings deposits ............... 1,003,638 34,511 3.44 746,879 23,164 3.10 Time deposits .................. 2,188,967 116,593 5.33 2,128,170 113,968 5.36 ---------- ---------- ------ ---------- ---------- ------ Total interest bearing deposits .................. 3,772,657 160,877 4.26 3,436,380 148,026 4.31 Short-term borrowings .......... 714,088 35,841 5.02 510,014 25,466 4.99 Long-term borrowings ........... 42,814 2,577 6.02 52,315 3,418 6.53 ---------- ---------- ------ ---------- ---------- ------ Total interest bearing liabilities ................ 4,529,559 199,295 4.40 3,998,709 176,910 4.42 Demand deposits ................... 510,910 410,203 Other liabilities ................. 49,408 48,995 Shareholders' equity .............. 558,289 487,598 ---------- ---------- Total liabilities and equity . $5,648,166 $4,945,505 ========== ========== Net interest earnings ............. $ 228,856 $ 207,923 ========== ========== Net yield on earning assets ....... 4.33% 4.48% ====== ====== 1996 Average Yield/ Balance Interest(1) Rate(1) -------- ---------- ------ Assets Loans(2) Taxable ........................ $2,959,033 $ 262,354 8.87% Tax-exempt ..................... 43,740 4,328 9.89 ---------- ---------- ----- Total loans .................. 3,002,773 266,682 8.88 Less: Allowance for losses ..... 44,612 ---------- ----- Total loans-net .............. 2,958,161 9.02 Investment securities Taxable ........................ 1,140,759 75,956 6.66 Tax-exempt ..................... 204,742 17,040 8.32 ---------- ---------- ----- Total securities ............. 1,345,501 92,996 6.91 Federal funds sold & other ........ 21,176 947 4.47 ---------- ---------- ----- Total earning assets ......... 4,324,838 360,625 8.34 Other assets ...................... 301,069 ---------- Total assets ................. $4,625,907 ========== Liabilities and Equity Interest bearing liabilities: Interest bearing demand deposits ..................... $ 570,783 12,036 2.11 Savings deposits ............... 700,919 20,107 2.87 Time deposits .................. 2,000,068 106,104 5.31 ---------- ---------- ----- Total interest bearing deposits .................. 3,271,770 138,247 4.23 Short-term borrowings .......... 429,708 21,076 4.90 Long-term borrowings ........... 21,951 1,144 5.21 ---------- ---------- ----- Total interest bearing liabilities ................ 3,723,429 160,467 4.31 Demand deposits ................... 384,817 Other liabilities ................. 46,218 Shareholders' equity .............. 471,443 ---------- Total liabilities and equity . $4,625,907 =========== Net interest earnings ............. $ 200,158 ========== Net yield on earning assets ....... 4.63% =====
(1) Fully tax-equivalent using the rate of 35%. (2) Non-accrual loans are included in average balances. 38 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. Loan Portfolio One Valley's loan portfolio is its largest and most profitable component of average earning assets, totaling 69.8% of average earning assets during 1998. One Valley continued to emphasize increasing its loan portfolio in 1998. Average net loans increased by $505.9 million or 16.1% in 1998. A total of $171.1 million of the increase in average loans was from the effect of the purchase activity in the Virginia market during 1998. The remaining increase in 1998 average loans was fueled primarily by increases in commercial lending and residential and commercial real estate loans. The 1998 increase follows a 6.0% or $177.0 million increase in 1997. Approximately one-third of the 1997 increase resulted from the CSB acquisition. The remaining increase in 1997 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 1998, ending the year at 86.5%. This ratio compares to 82.8% at December 31, 1997 and 81.2% at December 31, 1996. 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, 1998, increased by $688.6 million or 20.9% over the total at December 31, 1997. This increase compares to a $167.0 million or 5.3% increase in 1997 over total loans at December 31, 1996. Approximately $270.9 million in loans were obtained through acquisitions in 1998. Excluding the 1998 acquisitions, total loans increased by $417.7 million or 12.7% over December 31, 1997. The increase in 1998 lending was primarily from internal growth focused in commercial and residential real estate loans. Residential real estate loans including revolving home equity loans increased by $357.8 million or 20.8% during 1998, compared to a $96.4 million or 5.9% increase in 1997. Slightly more than one-third of the 1998 increase in residential real estate loans was the result of the branch purchase and the Summit acquisition. Commercial real estate loans increased by $141.9 million or 29.8% in 1998, following a $25.3 million or 5.6% increase in 1997 from year-end 1996. Approximately one-fourth of the 1998 increase in that category was obtained through acquisitions. 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 1998 by $71.8 million or 18.1%. This follows an increase during 1997 of $45.1 million or 12.8%. Approximately one-third of the increase was obtained through acquisitions, while the remaining increase in 1998 was primarily due to increases in the levels of credit line usage by large commercial customers and increases in automobile dealer floorplan loans. The 1997 increase in commercial loans was primarily due to increases in the levels of credit line usage by large commercial customers. Consumer installment loans increased by $52.8 million or 9.2% in 1998. Nearly all of the increase was the result of acquisitions. This increase follows a slight increase in 1997 over 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 $1.34 billion, 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 73% of One Valley's loan portfolio at December 31, 1998, 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. About 75% of these loans are secured by property located within West Virginia where real estate values have remained relatively stable over the past ten years. Most of the remaining 25% are secured by property located in central Virginia where real estate values are increasing and slightly more volatile. One Valley also originates residential real estate loans to be sold in the secondary market. In 1998, $263.6 million of loans were originated to be sold in the secondary market. This compares to $111.8 million of new loan volume originated for sale in the secondary market in Total Loans Dollars in millions [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.]
1993 1994 1995 1996 1997 1998 ------------------------------------------------------------------ Commercial, Financial & Other 370 448 405 418 457 565 Commercial Real Estate 362 392 458 523 552 722 Residental Real Estate 972 1,263 1,366 1,623 1,720 2,078 Consumer 465 544 581 572 573 626 2,169 2,648 2,810 3,135 3,303 3,991
- ------------ Total loans increased by $689 million in 1998 39
- ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== Loan Summary Table 5 ==================================================================================================================================== (Dollars in thousands) As of December 31 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- Summary of Loans by Type Commercial, financial, agricultural, and other loans ..................... $ 468,307 $ 396,503 $ 351,409 $ 348,761 $ 398,105 Real estate: Construction loans ................................. 97,175 60,975 66,369 56,420 49,453 Revolving home equity .............................. 226,216 192,252 152,006 128,754 113,142 Single family residentials ......................... 1,851,470 1,527,621 1,471,434 1,237,416 1,149,570 Apartment buildings and complexes .................. 103,349 75,314 70,990 60,191 49,101 Commercial ......................................... 618,958 477,025 451,756 397,821 343,298 Bankers' acceptances ................................. 0 0 0 0 849 Consumer installment loans ........................... 625,646 572,846 571,533 580,616 544,163 ---------- ---------- ---------- ---------- ---------- Subtotal ........................................... 3,991,121 3,302,536 3,135,497 2,809,979 2,647,681 Less: Allowance for loan losses ..................... 52,272 45,048 45,055 42,751 40,492 ---------- ---------- ---------- ---------- ---------- Net loans .......................................... $3,938,849 $3,257,488 $3,090,442 $2,767,228 $2,607,189 ========== ========== ========== ========== ========== Percent of Loans by Category Commercial, financial, agricultural, and other ............................ 11.73% 12.01% 11.21% 12.41% 15.04% Real estate: Construction loans ................................. 2.43 1.85 2.13 2.01 1.87 Revolving home equity .............................. 5.67 5.82 4.85 4.58 4.27 Single family residentials ......................... 46.39 46.26 46.91 44.04 43.42 Apartment buildings and complexes .................. 2.59 2.28 2.26 2.14 1.85 Commercial ......................................... 15.51 14.44 14.41 14.16 12.97 Bankers' acceptances ................................. 0.00 0.00 0.00 0.00 0.03 Consumer installment loans ........................... 15.68 17.34 18.23 20.66 20.55 ---------- ---------- ---------- ---------- ---------- Total .............................................. 100.00% 100.00% 100.00% 100.00% 100.00% ========== ========== ========== ========== ========== Non-Performing Assets Non-accrual loans .................................... $ 8,477 $ 8,052 $ 10,288 $ 9,627 $ 11,134 Other real estate owned .............................. 1,089 1,808 1,945 1,565 1,521 Restructured loans ................................... 0 0 0 0 552 ---------- ---------- ---------- ---------- ---------- Total non-performing assets ........................ $ 9,566 $ 9,860 $ 12,233 $ 11,192 $ 13,207 ========== ========== ========== ========== ========== Non-performing assets as a % of total loans .......... 0.24% 0.30% 0.39% 0.40% 0.50% Loans Past Due Over 90 Days ............................. $ 7,467 $ 6,275 $ 4,959 $ 8,180 $ 6,386 As a % of total loans ................................ 0.19% 0.19% 0.16% 0.29% 0.24% Allocation of Loan Loss Reserve by Loan Type Commercial, financial, agricultural, and other loans ...................... $ 19,830 $ 18,780 $ 18,585 $ 17,016 $ 16,036 Real estate construction loans ....................... 455 344 367 318 254 Real estate loans - other ............................ 12,158 9,216 9,753 9,809 9,556 Consumer installment loans ........................... 19,509 16,708 16,350 15,608 14,646 ---------- ---------- ---------- ---------- ---------- Total .............................................. $ 52,272 $ 45,048 $ 45,055 $ 42,751 $ 40,492 ========== ========== ========== ========== ==========
40 1997 and $67.1 million in 1996. 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 and 1998, a higher volume of mortgage activity was realized when compared to 1996. 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 used by the Federal Reserve to evaluate capital adequacy. Additional information on off-balance sheet commitments is contained in Note R to the consolidated financial statements. In spite of some increases in net charge-offs in recent years, overall asset quality for those years has remained 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 $9.6 million or 0.24% of total loans at year-end 1998, the lowest level over the past five year-ends. 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 1998 to $7.5 million. At year-end, these loans constituted 0.19% of total loans, unchanged from year-end 1997 but up slightly from the 0.16% at December 31, 1996. The consistently favorable ratio of problem loans to total loans has occurred while the loan portfolio has increased significantly over the 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 interest income from loans by $38.2 million or 13.6% in 1998 and $14.4 million or 5.4% in 1997. 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, 1998. During 1998, One Valley recognized less than $0.2 million of interest on non-accrual loans, while approximately $0.8 million would have been recognized on these loans had they been current throughout 1998 in accordance with their original terms. Similarly, during 1997, less than $0.1 million was recognized on non-accrual loans, while approximately $0.7 million would have been recognized in accordance with their original terms. A loan is categorized and reported as impaired when it is probable that the borrower will be unable to pay 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. Impaired loans are determined on a loan-by-loan basis and generally consist of large commercial loans. Impaired loans are measured at the present value of expected future Provision for Loan Losses and Net Charge-offs As a percent of average total loans [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Net Charge- Offs Provision ------------------------- 1993 0.24% 0.28% 1994 0.16% 0.22% 1995 0.14% 0.22% 1996 0.17% 0.18% 1997 0.24% 0.24% 1998 0.18% 0.27% Non-Performing Assets and Loans 90 Days Past Due As a percent of average total loans [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Non- Loans 90 Performing Days Assets Past Due ------------------------- 1993 0.58% 0.15% 1994 0.50% 0.24% 1995 0.40% 0.29% 1996 0.39% 0.16% 1997 0.30% 0.19% 1998 0.24% 0.19% 41 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 realizable 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. Commercial, consumer, and mortgage loan portfolios are segregated for purposes of analysis in determining the amount of One Valley's loan loss provision. Specific loss estimates are derived for individual credits where applicable, while historical loss percentages are applied to various homogeneous loan pools. Commercial loans are evaluated individually, while the consumer and mortgage portfolio loans are considered as homogenous pools, within each category. The general allowance on graded loans is determined via a combination of historical loss percentages, duration of the portfolio, and inherent risk by grade. Differences between actual losses and estimated losses are reduced by careful monitoring of the loan portfolios via a continuous internal risk review process.
- ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== Comparative Loan Loss Information Table 6 ==================================================================================================================================== (Dollars in thousands) For the Year Ended December 31 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- Allowance for Loan Losses, Beginning of Period .......... $ 45,048 $ 45,055 $ 42,751 $ 40,492 $ 39,060 Charge-offs Commercial, financial, and agricultural loans ........ 1,533 2,098 1,105 726 1,207 Real estate construction loans ....................... 0 34 0 0 0 Real estate loans - other ............................ 639 888 667 588 1,314 Consumer installment loans ........................... 6,523 6,817 5,293 4,451 3,662 ---------- ---------- ---------- ---------- ---------- Total charge-offs .................................. 8,695 9,837 7,065 5,765 6,183 ---------- ---------- ---------- ---------- ---------- Recoveries: Commercial, financial, and agricultural loans ........ 398 446 306 519 793 Real estate construction loans ....................... 0 0 0 0 0 Real estate loans - other ............................ 196 399 321 232 326 Consumer installment loans ........................... 1,433 1,454 1,252 1,151 1,108 ---------- ---------- ---------- ---------- ---------- Total recoveries ................................... 2,027 2,299 1,879 1,902 2,227 ---------- ---------- ---------- ---------- ---------- Net charge-offs ......................................... 6,668 7,538 5,186 3,863 3,956 Provision for loan losses ............................... 10,063 7,531 5,264 5,887 5,388 Balance of acquired subsidiaries ........................ 3,829 0 2,226 235 0 ---------- ---------- ---------- ---------- ---------- Allowance for Loan Losses, End of Period ................ $ 52,272 $ 45,048 $ 45,055 $ 42,751 $ 40,492 ========== ========== ========== ========== ========== Average total loans ..................................... $3,690,704 $3,180,463 $3,002,773 $2,716,839 $2,502,784 Total loans at year-end ................................. 3,991,121 3,302,536 3,135,497 2,809,979 2,647,681 As a Percent of Average Total Loans: Net charge-offs ...................................... 0.18% 0.24% 0.17% 0.14% 0.16% Provision for loan losses ............................ 0.27 0.24 0.18 0.22 0.22 Allowance for loan losses ............................ 1.42 1.42 1.50 1.57 1.62 As a Percent of Total Loans at Year-end: Allowance for loan losses ............................ 1.31% 1.36% 1.44% 1.52% 1.53% As a Multiple of Net Charge-offs: Allowance for loan losses ............................ 7.84X 5.98X 8.69X 11.07X 10.24X Income before tax and provision for loan losses ...... 17.85 13.85 18.09 13.22 20.45
42 As a part of the holding company structure, One Valley maintains credit analysis and review departments. Changes in loan concentrations and quality are monitored and could result in adjustments to the allowance during the period of review. One Valley also maintains a loan administration function to continually identify and monitor problem loans. Management is mindful of the imprecision inherent in any estimation of credit losses used in analyzing loan loss adequacy. Changes in general economic conditions, as well as specific economic factors in the individual markets in which One Valley operates presents an inherent risk factor, which involves a higher degree of uncertainty regarding the allowance. Accordingly, One Valley has assigned each major loan category an additional unallocated portion of the allowance to mitigate these unknown risk factors. Based on the analysis performed, 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. At December 31, 1998, the allowance for loan losses was $52.3 million or 1.31% of total year-end loans. This ratio is a decrease from the prior year's 1.36% and the 1.44% at the end of 1996. The provision for loan losses in 1998 was $10.1 million, up from the $7.5 million provision in 1997 and the $5.3 million provision in 1996. The increase in 1998 was to provide for the sharp growth in the loan portfolio, while 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 1998, 1997 and 1996, the overall credit quality of the portfolio has remained consistent over those years, as evidenced by the low level of non-performing assets and the low level of net charge-offs during those years. Net charge-offs in 1998 decreased by $0.9 million from 1997 net charge-offs, as loan loss experience improved in all categories of loans. This follows a $2.4 million increase in 1997 from 1996, 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 decreased to 0.18% in 1998, compared to 0.24% in 1997 and 0.17% in 1996. In all three years, these ratios compare favorably with peer group banks across the country. Although the dollar amount of net charge-offs has remained historically low, charge-offs could increase in the coming months due to the increase in the total dollar amount of loans, or adverse changes in economic conditions. These factors are considered in determining the adequacy of the allowance for loan losses, which at December 31, 1998, was sufficient to absorb over seven and one-half times the amount of net charge-offs experienced during 1998. - --------------- Loan loss experience improved in all categories of loans
- ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== Remaining Maturities of Loans Table 7 ==================================================================================================================================== Balance Projected Maturities* December 31 One Year One to Five Over Five 1998 or Less Years Years -------- -------- -------- -------- Commercial, financial, and agricultural loans .................. $433,935 $226,245 $153,152 $ 54,538 Real estate construction loans ................................. 97,175 60,056 14,163 22,956 Commercial real estate loans ................................... 722,307 116,294 300,808 305,205 Loans with: Floating rates .............................................. $575,685 $136,094 $290,946 $148,645 Predetermined rates ......................................... 677,732 266,501 177,177 234,054
*Based on scheduled or approximate repayments. 43 Investment securities averaged $1.6 billion in 1998 - --------------- Investment Portfolio and Other Earning Assets Investment securities averaged $1,613.6 million in 1998, a $145.7 million or 9.9% increase over the $1,467.9 million averaged in 1997. This increase follows a 9.1% increase over the $1,345.5 million averaged in 1996. Nearly 80% of the increase in 1998 was the result of investments and investable funds obtained through the Summit acquisition and the branch 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 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, 1998 was 8 years 1 month, lengthened primarily by the 16-year 9-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 65% of the securities available-for-sale are U.S. Government agency or Treasury securities that have an average maturity of 4 years 8 months. The average maturity period of securities held-to-maturity was 9 years 9 months at the end of 1998. The average maturity of the investment portfolio is managed at a level to maintain a proper matching with One Valley's interest rate risk guidelines. During 1998, 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. During 1998, One Valley increased its tax-exempt securities by $26.8 million, or 11.3%, over the level of tax-exempt securities held at December 31, 1997. Approximately one-half of this increase was the result of the Summit acquisition. During 1997, tax-exempt securities increased by $20.4 million, or 9.4%, over the level held at December 31, 1996. 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 decreased by 17.9% in 1998. This follows a 71.9% increase in 1997. Averaging $29.9 million in 1998, federal funds sold and other short-term investments decreased $6.5 million from the $36.4 million averaged in 1997, but was greater than the $21.2 million averaged during 1996. 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. 44
- ---------------------------------------------------------------------------------------------------------------------- ====================================================================================================================== Securities Maturity and Yield Analysis Table 8 ====================================================================================================================== As of December 31, 1998 Average Taxable Available-for-Sale Market Maturity Equivalent Value (Years/ Months) Yield* ---------- --------------- ---------- U. S. Treasury Securities Within one year......................................... $ 168,052 6.26% After one but within five years......................... 9,775 6.42 After five but within ten years......................... 21,239 7.01 ---------- Total U.S. Treasury Securities ........................ 199,066 1/3 6.35 U. S. Government Agencies Securities Within one year......................................... 41,189 4.93 After one but within five years......................... 269,711 5.78 After five but within ten years......................... 314,341 6.07 Over ten years.......................................... 25,702 7.17 ---------- Total U.S. Government Agencies Securities.............. 650,943 5/8 5.92 Mortgage-Backed Securities** Within one year ........................................ 4,034 6.88 After one but within five years......................... 13,763 6.89 After five but within ten years......................... 35,541 7.11 Over ten years.......................................... 276,130 7.03 ---------- Total Mortgage-Backed Securities....................... 329,468 16/9 7.03 Other Debt Securities Within one year ........................................ 25,281 5.85 After one but within five years......................... 37,465 6.33 After five but within ten years......................... 10,542 6.50 Over ten years.......................................... 7,927 7.38 ---------- Total Other Debt Securities............................ 81,215 8/5 6.31 Other Securities ......................................... 47,133 ---------- Total Securities Available-for-Sale ...................... $1,307,825 8/1 6.08% ==========
As of December 31, 1998 Average Taxable Held-to-Maturity Book Maturity Equivalent Value (Years/ Months) Yield* ---------- --------------- ---------- States and Political Subdivisions Securities Within one year......................................... $ 2,687 8.39% After one but within five years......................... 32,273 7.06 After five but within ten years......................... 117,587 7.62 Over ten years.......................................... 125,382 7.74 ---------- Total States and Political Subdivisions Securities .... 277,929 9/9 7.62 Other Securities ......................................... 338 ---------- Total Securities Held-to-Maturity ........................ $ 278,267 9/9 7.61% ==========
*Fully tax-equivalent using the rate of 35%. ** Maturities for Mortgage-Backed Securities are based on final maturity. 45 Average Deposits Dollars in millions [THE FOLLOWING TABLE WAS REPRESENTED BY A BAR CHART IN THE PRINTED MATERIAL.] Demand Time Savings Savings Total Deposits Deposits Regular Checking Deposits --------------------------------------------------------- 1993 397 1,247 800 451 2,895 1994 412 1,250 817 452 2,931 1995 381 1,450 696 481 3,007 1996 385 2,000 701 571 3,657 1997 410 2,128 747 561 3,847 1998 511 2,189 1004 580 4,284 Deposits increased by 15.7% in 1998 - ----------------- Funding Sources In 1998, rates paid on its interest bearing deposits declined slightly as market interest rates have remained low. The average rate paid on interest bearing liabilities decreased to 4.26% in 1998, down from the 4.31% average rate paid in 1997 but slightly higher than the 4.23% average rate paid in 1996. The decrease in 1998 is largely due to a $256.8 million or 34.4% increase in savings and money market deposits and a three basis point decrease in the average rate paid on time deposits. Due to alternative sources of investment and the increasing sophistication of customers in funds management techniques to maximize return on their money, competition for funds has become more intense. One Valley has offered new core deposit products as well as periodic special rate products to attract additional deposits. These core deposit products pay an indexed money market interest rate that adjusts monthly and account for a majority of the 1998 increase in savings deposits. One Valley's deposits, on average, increased by 11.4% or $437.0 million in 1998. Of this increase, $318.9 million resulted from the 1998 branch purchase and Summit acquisition. The 1998 increase compares to a 5.2% or $190.0 million increase in 1997. Approximately half of the 1997 increase was acquired through the CSB acquisition. Non-interest bearing deposits increased by 24.6% or $100.7 million on average when compared to 1997, primarily due to increases in predominantly consumer-based deposit accounts. Excluding the effect of the branch purchase and Summit acquisition, average non-interest bearing deposits increased by 14.8% or $60.6 million. Interest bearing deposits increased by 9.8% or $336.3 million over 1997, primarily in savings deposits. Excluding the effect of the 1998 acquisitions, interest bearing deposits increased by 1.8% or $61.8 million on average when compared to 1997. In 1997, non-interest bearing deposits increased by 6.6% or $25.4 million while interest bearing deposits increased by 5.0% or $164.6 million over 1996. In the past two years, One Valley has been able to attract non-interest bearing deposits by increasing customer service and convenience through increased electronic banking services and locations. To supplement its deposit growth, One Valley has increasingly turned to short-term borrowings to fund loan growth. Short-term borrowings increased, on average, by $208.0 million or 41.1% from 1997, following a $76.3 million or 17.8% increase in 1997 over 1996. Wholesale repurchase agreements increased, on average, by $146.3 million or 85.2% in 1998, primarily to fund loan growth, while repurchase agreements with commercial customers increased by $29.7 million or 12.9% in 1998. A repurchase agreement is a collateralized short-term debt instrument whereby One Valley agrees to repurchase the collateral at a specified price on a specified date. This 1998 increase in wholesale repurchase agreements follows a $49.1 million or 40.1% increase in 1997. 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, decreased by $13.5 million or 23.9% in 1998, following a $34.3 million increase in 1997. The decrease in 1998 was due to scheduled repayments that occurred during the year and late in 1997. The increase in 1997 was the result of the CSB acquisition in 1996 as well as a new $25.0 million long-term borrowing from the Federal Home Loan Bank (FHLB). As a result, One Valley now has $35.5 million of long-term debt, primarily FHLB borrowings, with repayment schedules from one to ten years. Other information regarding short- and long-term borrowings is contained in Note K to the consolidated financial statements.
- --------------------------------------------------------------------------------------------------------------------- ===================================================================================================================== Maturity Distribution of Certificates of Deposit Table 9 ===================================================================================================================== As of December 31, 1998 As of December 31, 1997 Amount Percent Amount Percent ------ ------- ------ ------- Three months or less............................... $ 99,067 27.28% $ 99,980 30.47% Three through six months........................... 60,582 16.69 54,363 16.57 Six through twelve months.......................... 106,587 29.36 86,693 26.42 Over twelve months................................. 96,848 26.67 87,097 26.54 --------- ------ --------- ------ Total............................................ $ 363,084 100.00% $ 328,133 100.00% ========= ====== ========= ======
46 Interest Sensitivity and Liquidity Asset/liability management is a means of optimizing net interest income while minimizing interest rate risk by planning and controlling the mix and maturities of interest 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. 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 to thirty-six 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 potential 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 negative influence on net interest income whereas increasing rates would have little significant impact on net interest income. To hedge against potential rising interest rates on its indexed money market core deposit accounts, One Valley entered into an interest rate swap agreement during 1998. Under this agreement, One Valley agreed to pay a fixed rate of interest and receive a variable rate of interest. In addition, One Valley purchased an interest rate cap. The intent of these off-balance sheet instruments is to limit the impact of rising interest rates on the cost of its indexed core
- ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== Interest Rate Sensitivity Summary at December 31, 1998 Table 10 ==================================================================================================================================== 1999 2000 2001 2002 2003 Thereafter Total Fair Value ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Rate Sensitive Assets Fixed interest rate loans..... $ 692,131 $358,041 $281,049 $196,009 $174,148 $516,562 $2,217,940 $2,245,672 Average interest rate....... 8.94% 8.95% 8.57% 8.37% 8.12% 7.16% 8.37% Variable interest rate loans.. 545,446 190,937 133,057 113,397 99,877 690,467 1,773,181 1,775,098 Average interest rate....... 7.92% 7.86% 7.88% 7.88% 7.83% 8.22% 8.02% Fixed interest rate securities 580,012 150,519 168,043 83,020 98,398 506,100 1,586,092 1,595,260 Average interest rate....... 6.22% 6.34% 6.21% 6.27% 5.59% 5.67% 6.02% Rate Sensitive Liabilities Non interest-bearing deposits. $ 159,786 $ 91,306 $ 68,480 $ 63,344 $ 44,512 $143,236 $ 570,664 $ 570,434 Average interest rate....... - - - - - - - Savings and interest- bearing checking............ 237,997 251,057 198,234 163,416 141,760 825,164 1,817,628 1,817,628 Average interest rate....... 2.74% 2.87% 2.84% 2.79% 2.81% 2.76% 2.79% Fixed interest rate time deposits 1,241,338 470,345 85,881 36,931 34,148 2,140 1,870,783 1,883,894 Average interest rate....... 5.25% 5.49% 5.47% 5.79% 5.43% 4.07% 5.33% Variable interest rate time deposits............... 291,774 - - - - - 291,774 291,774 Average interest rate....... 4.19% - - - - - 4.19% Fixed interest rate borrowings 273,250 102,154 25,059 65 2,672 30,258 433,457 434,065 Average interest rate....... 5.01% 5.51% 4.40% 7.50% 5.96% 4.95% 4.97% Variable interest rate borrowings 331,782 331,782 331,782 Average interest rate....... 3.80% 3.80% Rate Sensitive Derivative Financial Instruments Interest rate swap purchased.. - - - - $150,000 - $ 150,000 $ (1,433) Average variable rate received... - - - - 5.29% - - Fixed rate paid............. - - - - 5.61% - - Interest rate cap purchased... - - $ 50,000 - - - 50,000 100 Average strike rate......... - - 6.00% - - - -
This table includes various assumptions and estimates by management of maturity and repayment patterns. 47 deposit accounts in a rising interest rate environment. One Valley continually evaluates all investment alternatives in its management of interest rate risk and asset/liability structure. Tables 10 and 11, 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 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. Those principal cash flows are based on historical experience, management's judgment, and statistical analysis, as applicable, concerning their most likely withdrawal behaviors. For derivative financial instruments, the table presents notional amounts and their contractual expiration dates. 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 available-for-sale 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 $67.6 million of cash from operations in 1998, which compares to $74.8 million in 1997 and $79.7 million in 1996. Additional cash of $244.6 million was generated through net financing activities in 1998, which compares to $288.1 million in 1997 and $55.8 million in 1996. 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 $253.3 million in 1998, which compares to $380.9 million in 1997 and $141.4 million in 1996. Details on the sources and uses of cash can be found in the Consolidated Statements of Cash Flows in the consolidated financial statements.
- ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== Interest Rate Sensitivity Summary at December 31, 1997 Table 11 ==================================================================================================================================== 1998 1999 2000 2001 2002 Thereafter Total Fair Value ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Rate Sensitive Assets Fixed interest rate loans..... $ 436,952 $309,777 $235,999 $194,432 $148,080 $422,679 $1,747,919 $1,759,314 Average interest rate....... 9.29% 9.19% 8.87% 8.57% 8.49% 7.80% 8.71% Variable interest rate loans.. 370,649 146,999 102,303 74,322 69,929 790,415 1,554,617 1,556,297 Average interest rate....... 8.62% 8.53% 8.61% 8.71% 8.95% 8.20% 8.39% Fixed interest rate securities 367,366 326,635 106,910 110,820 85,119 572,171 1,569,021 1,576,118 Average interest rate....... 6.40% 6.54% 6.61% 6.63% 6.70% 6.09% 6.36% Rate Sensitive Liabilities Non interest-bearing deposits. $ 130,873 $ 74,301 $ 55,726 $ 51,546 $ 36,222 $116,559 $ 465,227 $ 465,227 Average interest rate....... - - - - - - - Savings and interest- bearing checking............ 253,519 168,678 137,131 117,433 101,839 580,862 1,359,462 1,359,328 Average interest rate....... 2.79% 2.68% 2.68% 2.68% 2.68% 2.68% 2.70% Fixed interest rate time deposits............... 1,197,988 445,516 99,071 32,948 17,572 2,176 1,795,271 1,801,350 Average interest rate....... 5.45% 5.72% 5.95% 5.14% 5.89% 4.06% 5.33% Variable interest rate time deposits............... 314,214 - - - - - 314,214 314,214 Average interest rate....... 4.84% - - - - - 4.84% Fixed interest rate borrowings 171,474 167,321 29,006 6 6 2,837 370,650 371,164 Average interest rate....... 5.66% 5.49% 5.46% 8.76% 8.76% 5.84% 5.57% 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. 48 Capital Resources One Valley's average equity-to-asset ratio remained strong at 9.88% during 1998, relatively unchanged from 9.86% during 1997 but down from 10.19% in 1996. At year-end 1998, One Valley's primary capital ratio was 10.77% compared to 10.54% at year-end 1997. 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 1998, One Valley's risk adjusted capital-to-assets ratio was 15.6% compared to 16.4% at December 31, 1997. 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, 1998 was 9.0% compared to 9.2% at December 31, 1997. Both of these ratios are well above the minimum 3.0% and the 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 and 1,976,075 shares in 1996 were repurchased under this program. At December 31, 1998, One Valley held 4,392,546 shares in its treasury. Due to the accounting treatment of the FFVA merger 708,600 FFVA treasury shares were reissued which raised $26.3 million in equity. Subsequent to December 31, 1998, One Valley announced a plan authorizing management to repurchase up to an aggregate of 1,500,000 shares of common stock. Any shares purchased under the plan will be available for a variety of corporate purposes. Income Statement Analysis Net Interest Income Net interest income, the amount by which interest generated from earning assets exceeds the expense associated with funding those assets, is One Valley's most significant component of earnings. Net interest income on a fully tax-equivalent basis was $228.9 million in 1998, up 10.1% over the 1997 level, following a 3.9% increase in 1997 over 1996. 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 1998 is largely due to the increase in the volume of earning assets, primarily loans. As shown in Table 12, Rate Volume Analysis, increases in the volume of earning assets in both 1998 and 1997 have provided a significant increase in net interest income. In 1998, the increase in the volume of earning assets increased interest income by $53.5 million. This increase was dampened somewhat by decreases in interest yields on loans and investments due to the lower overall interest rate environment on average for the entire year. As a result, total interest income increased by $43.3 million in 1998 over 1997. Similarly in 1998, an increased volume of interest bearing liabilities boosted interest expense by $24.0 million. However a slightly lower cost of interest bearing liabilities reduced the overall increase in total interest expense to $22.4 million. The increase in total interest income exceeded the increase in overall interest expense by $20.9 million on a fully tax-equivalent basis in 1998 over 1997. In 1997, increases in volumes of interest sensitive assets and liabilities increased total interest income and total interest expense over the previous year. Yet, a decline in yields on loans partially reduced overall interest income while an 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 1997, net interest income still increased by $7.8 million in 1997 over 1996. During both - ----------------- Net interest income increased by $20.9 million in 1998 49 Net Interest Margin Fully taxable equivalent % of average earning assets [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Yield on Net Cost of Assets Margin Funds 1993 7.88 4.67 3.21 1994 7.84 4.85 2.99 1995 8.41 4.80 3.61 1996 8.34 4.63 3.71 1997 8.29 4.48 3.81 1998 8.10 4.33 3.77 years, the increase in loan volume was the most significant factor contributing to increased net interest income. In 1998, 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 1998, the decrease in the yield on loans was accompanied by a decrease in the yield on the investment portfolio. Thus the yield on all earning assets declined to 8.10% in 1998, down from the 8.29% realized during 1997 and the 8.34% 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 prevented the cost of all funds from declining as significantly as the yield on earning assets. In 1998, the average cost of funds was 4.40% down only slightly from the 4.42% in 1997, but up from the 4.31% average cost in 1996. As a result, the net interest margin in 1998 declined to 4.33%, down from the 4.48% earned in 1997 and the 4.63% earned in 1996. 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 13, non-interest income increased by $11.4 million or 23.3% in 1998 compared to 1997, which follows a 16.0% increase in 1997 over 1996. The increase in 1998 was primarily due to an increase in trust income, credit/debit card fees, service charges on deposit accounts and real estate fees. These areas increased, in part, due to the increased customer base in central Virginia resulting from the branch purchase and Summit acquisition. In 1998, trust income increased to $11.7 million, a 14.2% or $1.4 million increase over 1997. This increase follows a 9.7% increase in 1997 over 1996. Trust
- ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== Rate Volume Analysis of Changes in Interest Income and Expense Table 12 ==================================================================================================================================== 1998 vs 1997 1997 vs 1996 Increase (Decrease) Increase (Decrease) In Net Interest Income In Net Interest Income ---------------------------------- --------------------------------- Volume Rate Total Volume Rate Total -------- -------- -------- -------- -------- -------- Earning Assets Loans: Taxable ........................................... $ 44,502 $ (5,850) $ 38,652 $ 15,465 $ (1,299) $ 14,166 Tax-exempt ........................................ (358) (80) (438) 246 26 272 -------- -------- -------- -------- -------- -------- Total loans ..................................... 44,144 (5,930) 38,214 15,711 (1,273) 14,438 Investment Securities: Taxable ........................................... 8,665 (3,987) 4,678 6,777 725 7,502 Tax-exempt ........................................ 1,002 (397) 605 1,759 (333) 1,426 -------- -------- -------- -------- -------- -------- Total investment securities ..................... 9,667 (4,384) 5,283 8,536 392 8,928 Federal funds sold & other .......................... (340) 161 (179) 740 102 842 -------- -------- -------- -------- -------- -------- Total earning assets ............................ 53,471 (10,153) 43,318 24,987 (779) 24,208 -------- -------- -------- -------- -------- -------- Interest Bearing Liabilities Time and savings deposits ........................... 14,353 (1,502) 12,851 7,053 2,726 9,779 Short-term borrowings ............................... 10,442 (67) 10,375 4,004 386 4,390 Long-term borrowings ................................ (811) (30) (841) 1,922 352 2,274 -------- -------- -------- -------- -------- -------- Total interest bearing liabilities .............. 23,984 (1,599) 22,385 12,979 3,464 16,443 -------- -------- -------- -------- -------- -------- Net Interest Earnings .................................. $ 29,487 $ (8,554) $ 20,933 $ 12,008 $ (4,243) $ 7,765 ======== ======== ======== ======== ======== ========
* 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. 50 revenues are increasing primarily due to new business over the past several years and favorable results in the financial markets. Credit/debit card fees increased by $1.6 million or 43.5% in 1998, and by $1.2 million or 48.6% in 1997. One Valley introduced a new debit card product late in 1996 and usage has steadily increased. Likewise, commercial purchase card and credit card usage also increased in 1998. Deposit service charges increased by $3.9 million or 25.1% in 1998, and increased $577,000 or 3.9% in 1997. In 1997 and 1998, One Valley introduced new products and a new fee structure for deposit services. This new pricing structure, coupled with the increase in the customer base due to the 1998 acquisitions, led to the significant increase in service charge revenue. The 1997 increase was primarily due to an increase in customer activity. Electronic banking revenue increased by $494,000 or 21.0% in 1998 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. At December 31, 1998, One Valley had 287 ATM locations. Real estate servicing fees increased by $2.5 million or 40.3% in 1998, which compares to a $93,000 or 1.5% increase in 1997 from the level earned in 1996. As mortgage loan activity and sales in the secondary market increased in 1998 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 $305,000 or 27.9% in 1998. This compares to a $143,000 or 15.1% increase in 1997. One Valley began offering such products as part of its commitment to provide integrated financial services to its customers. In 1998, One Valley realized $1.1 million in gains on securities sales. This compares to $1.0 million in gains realized in 1997 and $162,000 in losses realized in 1996. These securities were sold as part of One Valley's management of its asset/liability position. Other operating income increased by $941,000 or 14.2% in 1998 partially due to the sale of a portion of One Valley's student loan portfolio. This compares to a $1.4 million increase in 1997 primarily due to the sale of One Valley's corporate trust business. 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 1998, however, operating costs increased by 12.2% due to the cost of operating the fifteen branches purchased in February and the nine branches obtained through the Summit acquisition. Yet, due to the increase in average earning assets from those acquisitions and the increases in non-interest income, One Valley's net overhead ratio declined in 1998. One Valley's 1998 net overhead ratio, or non-interest expense less non-interest income excluding securities transactions to average earning assets, was 1.95%, a decrease from the 2.08% realized in 1997, and down further still from the 2.28% ratio realized in 1996. For the year 1998, net overhead was $102.8 million, an increase of $6.4 million or 6.6% above the 1997 overhead of $96.5 million. The current year increase follows a decrease in 1997 of 2.3% or $2.2 million from the 1996 overhead of $98.7 million. In 1997, additional efficiencies were achieved in the operations of One Valley's affiliates by realigning processes and reallocating resources. This process continued throughout 1998 and was partially responsible for the limited 6.6% increase in net overhead costs. 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 2.4% whereas net interest income has grown by 6.4%. Total non-interest expense increased by $17.6 million or 12.2% from 1997. This year's increase compares to a $3.3 million or 2.4% increase in 1997 versus 1996. One Valley recognized acquisition related expenses of $3.6 million in the fourth quarter of 1997 and $1.5 million in the first quarter of 1998 due to the consolidation and growth of its expanding banking operations in Virginia and West Virginia. Total staff costs increased by 8.0% in 1998, a result of normal salary increases and the additional staff from the operations of the twenty-four new branches. Total staff costs increased by $3.8 million or 5.4% in 1997, compared to 1996, largely due to normal salary and benefit increases and additional pension costs. Additional information on employee benefits is discussed in Note M to the consolidated financial statements. Net Overhead Ratio Net overhead as a % of average earning assets [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Net Overhead ------------- 1993 2.57% 1994 2.44% 1995 2.32% 1996 2.28% 1997 2.08% 1998 1.95% Efficiency Ratio Non-interest expense as a % of total adjusted revenues* [THE FOLLOWING TABLE WAS REPRESENTED BY A LINE CHART IN THE PRINTED MATERIAL.] Efficiency Ratio ------------- 1993 63.91% 1994 59.07% 1995 57.15% 1996 58.15% 1997 56.43% 1998 56.24% *Tax-equivalent net interest income plus other income 51 Advertising expense remained virtually flat in 1998, increasing by only 2.2%. This follows a 1997 increase of $366,000 due to additional advertising related to the new debit card and electronic banking products. FDIC insurance decreased by $172,000 or 16.4% in 1998 as insurance rates were lowered. In 1997, FDIC insurance decreased by $6.9 million or 86.7%, largely due to a one-time special assessment on thrift-based deposits to replenish the Savings Association Insurance Fund in 1996. Net occupancy expense increased by $941,000 or 12.4% in 1997 compared to a 3.2% increase in 1997. Most of the increase in 1998 was the result of the new branch operations in 1998. The remaining portion of the 1998 increase was due to additional building depreciation expense resulting from improvements, higher utility costs, and increased real estate taxes. In 1998, equipment expense increased by $2.2 million or 23.8%, largely due to increased equipment depreciation and maintenance costs associated with the new branch operations, the imposition of personal property taxes on banks in West Virginia, and costs associated with technology improvements. Equipment expense decreased by 3.2% in 1997 primarily due to lower equipment depreciation costs. Outside data processing costs increased by $897,000 or 9.8% in 1998 due to processing costs related to the new branch operations as well as costs related to increased debit and credit card activity. This increase compares to a $2.5 million or 37.4% increase in 1997 due to conversion and data processing costs related to the expanded operations in Virginia, as well as the additional processing costs associated with the expansion of One Valley's ATM network.
- ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== Non-Interest Income and Expense Table 13 ==================================================================================================================================== Increase (Decrease) Over Prior Year 1998 1997 1996 1998 1997 --------- --------- --------- ------------------ ------------------- Amount Percent Amount Percent --------- ------ --------- ------ Service Charges and Other Operating Income Trust income ................................... $ 11,675 $ 10,228 $ 9,322 $ 1,447 14.15 $ 906 9.72 Credit/debit card income ....................... 5,286 3,684 2,479 1,602 43.49 1,205 48.61 Service charges on deposit accounts ............ 19,408 15,511 14,934 3,897 25.12 577 3.86 Electronic banking ............................. 2,844 2,350 1,206 494 21.02 1,144 94.86 Investment services ............................ 1,397 1,092 949 305 27.93 143 15.07 Real estate loan processing & servicing fees ... 8,686 6,191 6,098 2,495 40.30 93 1.53 Checkbook sales ................................ 2,259 2,168 2,095 91 4.20 73 3.48 Securities transactions ........................ 1,125 1,018 (162) 107 10.51 1,180 Miscellaneous .................................. 7,553 6,612 5,192 941 14.23 1,420 27.35 --------- --------- --------- --------- ------ --------- ------ Total Non-Interest Income .................... $ 60,233 $ 48,854 $ 42,113 $ 11,379 23.29 $ 6,741 16.01 ========= ========= ========= ========= ====== ========= ====== Staff and Other Operating Expenses Salaries & wages ............................... $ 62,978 $ 57,247 $ 54,262 $ 5,731 10.01 $ 2,985 5.50 Employee benefits .............................. 17,202 16,987 16,146 215 1.27 841 5.21 --------- --------- --------- --------- ------ --------- ------ Total staff expenses ......................... 80,180 74,234 70,408 5,946 8.01 3,826 5.43 Other Operating Expenses Advertising .................................. 4,175 4,083 3,717 92 2.25 366 9.85 FDIC insurance ............................... 879 1,051 7,921 (172) (16.37) (6,870) (86.73) Occupancy, net ............................... 8,555 7,614 7,380 941 12.36 234 3.17 Equipment .................................... 11,606 9,377 9,683 2,229 23.77 (306) (3.16) Outside data processing ...................... 10,012 9,115 6,632 897 9.84 2,483 37.44 Taxes not on income .......................... 4,151 3,382 3,400 769 22.74 (18) (0.53) Supplies and postage ......................... 8,842 7,404 7,013 1,438 19.42 391 5.58 All other .................................... 33,544 28,059 24,830 5,485 19.55 3,229 13.00 --------- --------- --------- --------- ------ --------- ------ Total other operating expenses ............... 81,764 70,085 70,576 11,679 16.66 (491) (0.70) --------- --------- --------- --------- ------ --------- ------ Total Non-Interest Expense ................. $ 161,944 $ 144,319 $ 140,984 $ 17,625 12.21 $ 3,335 2.37 ========= ========= ========= ========= ====== ========= ======
52 Taxes not on income increased by $769,000 or 22.7% in 1998, largely due to the Lynchburg affiliate's charter change to a national bank. In Virginia, banks are subject to an equity-based state franchise tax but are exempt from income tax. In 1997 and earlier years, the Lynchburg affiliate was a thrift institution and subject to state income tax. In 1997, taxes not on income were virtually unchanged from 1996. Supplies and postage expense increased by $1.4 million or 19.4% in 1998, primarily related to additional mailings, forms, supplies and courier services for the new branch operations. This increase compares to a 5.6% increase in 1997, primarily related to additional mailings, normal increases in supply costs, and courier service for One Valley's expanded Virginia operations. Other expenses increased by $5.5 million or 19.6% in 1998 compared to a $3.2 million or 13.0% increase in 1997. The increase in 1998 was primarily due to increased intangible amortization resulting from the Wachovia branch purchase, and a general increase in costs due to the expanding branch network. 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. 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 1998 was $35.9 million compared to $33.1 million in 1997 and $29.9 million in 1996. The increase in 1998 was primarily due to an increase in pretax earnings. One Valley's effective tax rate was 33.0% in 1998, down from the 34.1% in 1997, and the 33.8% in 1996, partially due to the elimination of state income taxes on the Lynchburg affiliate. Additional information regarding income taxes is contained in Note L to the consolidated financial statements. Effects of Changing Prices The results of operations and financial condition presented in this report are based on historical cost, unadjusted for the effects of inflation. Inflation affects One Valley in two ways. One is that inflation can result in 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 1998 Net income for the three months ended December 31, 1998 was $19.5 million, an increase of 39.3% from the $14.0 million earned during the fourth quarter of 1997. Earnings in 1997 were impacted by charges related to expanding One Valley's operations in Virginia. For the fourth quarter of 1998, diluted earnings per share rose to $0.55, a 27.9% increase from the $0.43 reported for the fourth quarter of 1997. Net interest income increased by 14.0% when compared to the same three months of 1997. Average earning assets increased by 15.9%, while average deposits increased by 15.4% versus the fourth quarter of 1997. The provision for loan losses increased by $342,000 when compared to the fourth quarter of 1997. Non-interest income excluding securities transactions increased by $3.3 million or 26.4% as all categories of non-interest income increased primarily due to the increased number of branches. One Valley also realized $136,000 in securities gains in the fourth quarter of 1998. Non-interest expense increased by 6.6% when compared to the same quarter last year. The increase is largely due to increased staff costs, occupancy and equipment costs, and other costs related to the increased number of branches. Additional quarterly financial data is provided in Note S to the consolidated financial statements. - ---------------- Net overhead decreased to 1.95% of average earning assets 53 Year 2000 Readiness Disclosure Introduction One Valley recognizes the significant potential risk associated with the Year 2000 or Y2K issue and the challenge its poses. The Y2K problem arose because many existing computer programs use only the last two digits to refer to a year. Consequently, these computer programs do not properly recognize a year that begins with 20XX instead of 19XX. Beginning January 1, 2000, computer applications that use dates for computations, comparisons and sorting may produce incorrect results or fail due to an invalid interpretation of the date. The potential risk is not limited to computers and related software applications, but extends to telephones, security systems, copiers, FAX machines or any apparatus that utilizes computer technology. The full extent of the potential impact of Y2K is not yet known, but it could adversely affect national or global economies. As a financial institution, the ability of One Valley to promptly and accurately capture, record, process and communicate its customers' financial transactions and related data is vital to its ongoing operations. The Y2K problem could impede One Valley's ability to do so in several significant respects. Recognizing this potential risk, One Valley has undertaken a comprehensive project to address the Year 2000 issues that may affect One Valley and its customers. One Valley's preparations began in late 1996 under the guidance of Management and with oversight by the Board of Directors. Project Overview One Valley's project includes five phases: Awareness, Assessment, Renovation (or remediation), Validation (or testing), and Implementation. Each phase is described below. The phases indicate the order and method of One Valley's approach to Year 2000 concerns. Elements of different phases overlap, and different systems are at varying levels of completion within each phase. Systems that are mission critical have been addressed first. The Awareness Phase consisted of formal updates to One Valley management, employees and the Board of Directors about the issues relating to Y2K. In this stage management gathered information and attended conferences, appointed a project steering team and coordinators, began preliminary discussions with third party vendors, and distributed preliminary information to its employees and customers. This phase was completed in October, 1997, however One Valley continues on-going efforts to keep its customers and employees up to date. In the Assessment Phase, One Valley identified its critical information technology (IT) systems and performed a company-wide inventory of all systems, software, hardware, equipment and components that potentially could be affected by Y2K. During this phase, One Valley established project time lines, allocated resources and established the methodology to monitor the Y2K readiness of the IT Systems provided by third parties, as well as its non-IT Systems. One Valley also determined the Y2K readiness of its in-house IT Systems and components, and reported progress to senior management and the Board of Directors on a regular basis. During this phase, One Valley identified four general areas of potential susceptibility to Y2K issues: Major IT Systems provided by third parties, Internal IT Systems, Non-IT Systems, including communications infrastructure and physical facilities, and interruption to customers' business. One Valley also identified which systems were "mission critical" in terms of its operations and customer service. The Assessment Phase was completed in the fourth quarter of 1997. In the Renovation Phase, One Valley's third-party IT providers implemented program changes to accommodate the Y2K issues and conducted internal testing, which was completed for all systems defined as mission critical in 1998. In addition, during this phase One Valley began reprogramming its internal IT and non-IT Systems to accommodate Y2K. Most internal IT Systems and non-IT Systems have not been designated as mission critical to One Valley. Those that were deemed mission critical were renovated or replaced during 1998. During this phase, One Valley is also focusing on its customers' readiness for and susceptibility to Y2K concerns. One Valley anticipates that the remaining renovation of systems that are not mission critical will be completed by the end of the second quarter of 1999. In the Validation Phase, One Valley and its third party IT providers test the renovated applications and components to make sure they are Y2K ready. This phase has been very active during late 1998 and early 1999. The Implementation Phase began during the fourth quarter of 1998. During the first part of this phase, vendors completed upgrading of the applications, systems and other components, and Y2K ready programs for mission critical functions were put into production at One Valley. The balance of this final phase will be completed by the end of the second quarter of 1999. 54 Project Status One Valley's major IT Systems are provided by the companies which are among the largest service providers in the world and are recognized as among the leading firms in their respective lines of business. The major IT Systems provided by these third parties consist of those which process mortgage loans, credit cards, commercial and installment loans, deposits, investments, and trust services. One Valley uses its Internal IT Systems to collect and format data that is then sent to and processed by these third parties. The resulting information is then available to One Valley. The third party service providers, in some cases, also generate statements for mailing directly to customers. One Valley has continually monitored the Y2K progress of these third parties and has determined that progress to date is acceptable. These systems have each been renovated, tested by the vendor, are in use by One Valley now, and are running on the remediated Y2K software. The Y2K upgrading of all mission critical IT Systems provided by third parties is complete. Because most of One Valley's mission critical systems are supplied by third party vendors, validation by the vendors occurred first. The upgraded system was then put into production at One Valley and further testing by One Valley will continue throughout 1999. One Valley is in the process of conducting time dimension testing of these third-party IT Systems, and in doing so utilizes its own testing, proxy testing, logical partition testing, or the most appropriate combination thereof. One Valley's Internal IT Systems are primarily used to capture and prepare data to be transmitted to its third party IT Systems providers. One Valley is in various stages of renovating, validating and implementing these systems, with completion anticipated by the second quarter of 1999. As part of a planned upgrade of its systems, by the end of the second quarter of 1999, One Valley will have replaced all of its personal computers with models that are Y2K ready. In addition, One Valley has over 280 ATMs in its network, all of which have been validated by the vendor and are using Y2K compliant software. It is anticipated that testing of these ATMs by One Valley will be completed by the end of the second quarter of 1999. One Valley's IT Systems also include network servers, routers and related software. The upgrading or replacement of One Valley's servers and routers and related software is approximately 85% to 93% complete and is expected to be finished by the end of the first quarter of 1999. Another important part of One Valley's operations includes its non-IT Systems, primarily facilities and equipment. Basic utilities, such as telephone, gas and electrical service, as well as heating and cooling systems, could be adversely affected by the Y2K. One Valley has performed an inventory of its facilities and has tested or developed plans to test, to the extent possible, applicable equipment for Year 2000 compliance. One Valley has determined that all of its vaults are Y2K ready. Outside companies, primarily utilities, which provide these non-IT services, have indicated to One Valley that they plan to be Y2K ready by the end of 1999, and to date One Valley is not aware of any non-IT system provider with a Y2K issue that would materially impact One Valley's operations. However, beyond these assurances, One Valley has no means of insuring or verifying that these non-IT Systems will be Y2K ready, and the impact of a failure in these systems is not determinable. Another area that could potentially impact One Valley is interruption of its customers' business, which among other things could potentially affect the ability of its commercial loan and other customers to repay loans from One Valley, thus increasing One Valley's delinquency ratios, non-performing assets and loans losses. To help minimize these problems and heighten customer awareness, One Valley has established a Y2K Corporate Customer Action Plan. As part of this plan, One Valley has mailed Year 2000 brochures to all commercial customers, hosted Y2K information seminars featuring a nationally known expert for its customers, made FDIC Year 2000 brochures available in the lobby of all its branches, and published a Year 2000 questions and answer sheet. One Valley has also incorporated a Y2K readiness assessment in its credit risk evaluations of corporate borrowers falling within certain parameters. As of June 30, 1998, corporate borrowers were preliminarily assessed as to their level of Year 2000 risk based upon their line of business, their degree of reliance on computer hardware and software, and their historic response to strategic challenges. A full assessment of medium and high-risk customers and industries was undertaken, including a questionnaire and a site visit in some instances. In addition, the results of One Valley's evaluations have been analyzed by industry segment to provide Y2K risk profiles by industry. Corporate borrowers in those industries with a significant inherent Y2K risk receive greater scrutiny. One Valley plans to monitor closely customers and industries judged to be high risk, and credit analyses on new and existing credits include evaluation of Year 2000 readiness. - ---------------- One Valley has undertaken a comprehensive project to address the Year 2000 issues 55 Although One Valley has implemented and made significant progress toward completing its Y2K project, there are uncertainties which, due to their unprecedented nature, simply cannot be fully evaluated. For example, the extent of interplay between payment systems is unclear, and it is not known how the potential failure of one aspect of that complex system might adversely impact other elements. In addition, although testing will be completed for each significant system, it is not possible to independently verify each vendor's vendors. It is unknown how a problem at one discrete point in the chain of service could impact an entire system. Management believes it has an effective project in place to resolve the Y2K issues within One Valley in a timely manner. In the event of a vendor, governmental, utility, customer or other Y2K failure, the Company may be unable to perform some or all of the functions related to its customers' financial transactions. The impact and duration of such inability would depend upon the extent of the Y2K-related failure or failures. While One Valley believes that it is taking the steps appropriate to prevent a Y2K failure on its part, because One Valley's ability to perform is linked to the performance of others, certainty is not possible. In addition, the potential for disruptions in the economy generally resulting from Y2K issues remains unknown and could also materially adversely affect One Valley and its customers. If system failures occur for any reason, One Valley and its customers could also be subject to litigation. The likelihood of such events and their impact on One Valley cannot be reasonably estimated at this time. One Valley is in the process of contingency planning for the possibility of business disruption due to Y2K issues. The Y2K contingency planning will expand existing business continuity plans, contemplating specific Y2K scenarios. As part of that process One Valley has assessed the potential business impact of a failure of each of its important systems and determined the need for contingency planning on a system by system basis. One Valley's contingency plans focus upon IT Systems failures by its vendors, as well as widespread disruptions of telecommunications and electrical power, all of varying duration. Contingency plans for Y2K have been developed for mission critical applications and, as part of an on-going process, One Valley will continue to develop these plans and similar plans as it finalizes evaluation of remaining systems. There can be no assurance, however, that contingency planning will be adequate for all possible events. Project Costs Expenses directly related to Y2K have been incurred, such as staff costs and informational conferences and seminars for employees and customers. These costs have been immaterial to date. Since third party vendors provide most of One Valley's IT Systems under the terms of fixed price contracts, One Valley has had to date, no material direct expense as a result of vendor's upgrades to those systems as a result of Y2K concerns. It is possible, however, that these vendors may attempt to recover some of their Y2K-related costs by way of future price increases upon renewal of their respective contracts. One Valley has been very aggressive in upgrading its internal IT Systems infrastructure, most of which are capital improvements attributed to planned upgrades in technology to modernize the way One Valley performs its day-to-day operations, and not solely the result of Y2K concerns. The total cost of the Y2K project, consisting primarily of computer upgrades for One Valley's IT Systems which were the result of or accelerated by Y2K concerns, is estimated to be approximately $5 million. To date, One Valley has incurred over $3.8 million of these total estimated expenditures. One Valley does not separately track the internal costs incurred for the Y2K project, which are principally payroll costs for its information technology employees and others involved in the Y2K project. Virtually all of the project costs are attributable to the purchase of new software and operations equipment, which will be capitalized. 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 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. 56 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 an 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. - ----------------- GLOSSARY OF TERMS - ----------------- 57
- ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== Consolidated Balance Sheets ==================================================================================================================================== One Valley Bancorp, Inc. and Subsidiaries (Dollars in thousands) December 31 1998 1997 ----------- ----------- Assets Cash and due from banks ............................................................... $ 155,226 $ 127,012 Interest-bearing deposits in other banks .............................................. 3,150 2,162 Federal funds sold .................................................................... 50,000 20,310 ----------- ----------- Cash and cash equivalents ........................................................... 208,376 149,484 Securities: Available-for-sale, at fair value ................................................... 1,307,825 1,216,749 Held-to-maturity (fair value approximated $287,441 and $359,369 at December 31, 1998 and 1997) .................................................... 278,267 352,272 Loans, net ............................................................................ 3,938,849 3,257,488 Premises and equipment ................................................................ 102,863 90,397 Accrued interest receivable ........................................................... 40,916 38,764 Other assets .......................................................................... 86,484 56,332 ----------- ----------- Total assets ........................................................................ $ 5,963,580 $ 5,161,486 =========== =========== Liabilities Deposits: Non-interest bearing ................................................................ $ 570,664 $ 465,227 Interest bearing .................................................................... 3,982,224 3,468,947 ----------- ----------- Total deposits .................................................................... 4,552,888 3,934,174 Short-term borrowings: Federal funds purchased ............................................................. 36,410 22,581 Securities sold under agreements to repurchase and other ............................ 693,349 600,899 ----------- ----------- Total short-term borrowings ....................................................... 729,759 623,480 Long-term borrowings .................................................................. 35,480 48,875 Other liabilities ..................................................................... 49,920 51,307 ----------- ----------- Total liabilities ................................................................... 5,368,047 4,657,836 Shareholders' Equity Preferred stock--$10 par value; authorized 1,000,000 shares; none issued Common stock--$10 par value; authorized 70,000,000 shares; 39,135,180 and 36,330,605 shares issued at December 31, 1998 and 1997, including 4,392,546 and 4,346,846 shares in treasury at December 31, 1998 and 1997 .......................................................... 391,352 363,306 Capital surplus ....................................................................... 94,157 71,782 Retained earnings ..................................................................... 200,174 157,730 Accumulated other comprehensive income ................................................ 6,450 5,927 Treasury stock ........................................................................ (96,600) (95,095) ----------- ----------- Total shareholders' equity .......................................................... 595,533 503,650 ----------- ----------- Total liabilities and shareholders' equity .......................................... $ 5,963,580 $ 5,161,486 =========== ===========
See notes to consolidated financial statements. 58
- ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== Consolidated Statements of Income ==================================================================================================================================== One Valley Bancorp, Inc. and Subsidiaries (Dollars in thousands, except per share data) Year Ended December 31 1998 1997 1996 --------- --------- --------- Interest Income Interest and fees on loans: Taxable .......................................................... $ 315,172 $ 276,520 $ 262,354 Tax-exempt ....................................................... 2,705 2,990 2,813 --------- --------- --------- Total .......................................................... 317,877 279,510 265,167 Interest and dividends on securities: Taxable .......................................................... 88,136 83,458 75,956 Tax-exempt ....................................................... 12,396 12,003 11,076 --------- --------- --------- Total .......................................................... 100,532 95,461 87,032 Other .............................................................. 1,610 1,789 947 --------- --------- --------- Total interest income .......................................... 420,019 376,760 353,146 Interest Expense Deposits ........................................................... 160,877 148,026 138,247 Short-term borrowings .............................................. 35,841 25,466 21,076 Long-term borrowings ............................................... 2,577 3,418 1,144 --------- --------- --------- Total interest expense ......................................... 199,295 176,910 160,467 --------- --------- --------- Net Interest Income ................................................... 220,724 199,850 192,679 Provision For Loan Losses ............................................. 10,063 7,531 5,264 --------- --------- --------- Net Interest Income After Provision For Loan Losses ................... 210,661 192,319 187,415 Other Income Trust Department ................................................... 11,675 10,228 9,322 Service charges on deposit accounts ................................ 19,408 15,511 14,934 Real estate loan processing and servicing fees ..................... 8,686 6,191 6,098 Other service charges and fees ..................................... 14,056 10,947 8,177 Securities gains (losses) .......................................... 1,125 1,018 (162) Other .............................................................. 5,283 4,959 3,744 --------- --------- --------- Total other income ............................................. 60,233 48,854 42,113 Other Expenses Salaries and employee benefits ..................................... 80,180 74,234 70,408 Net occupancy ...................................................... 8,555 7,614 7,380 Equipment .......................................................... 11,606 9,377 9,683 Federal deposit insurance assessments .............................. 878 1,051 7,921 Outside data processing ............................................ 10,012 9,115 6,632 Other .............................................................. 50,713 42,928 38,960 --------- --------- --------- Total other expenses ........................................... 161,944 144,319 140,984 --------- --------- --------- Income Before Income Taxes ............................................ 108,950 96,854 88,544 Applicable Income Taxes ............................................... 35,905 33,054 29,926 --------- --------- --------- Net Income ............................................................ $ 73,045 $ 63,800 $ 58,618 ========= ========= ========= Net income per common share: Basic .............................................................. $ 2.19 $ 2.00 $ 1.80 Diluted ............................................................ $ 2.15 $ 1.95 $ 1.76 Average common shares outstanding (in thousands): Basic .............................................................. 33,356 31,921 32,600 Diluted ............................................................ 33,940 32,686 33,221
See notes to consolidated financial statements. 59
- ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== Consolidated Statements of Shareholders' Equity ==================================================================================================================================== One Valley Bancorp, Inc. and Subsidiaries (Dollars in thousands, except per share data) Accumulated Other Common Capital Retained Comprehensive Treasury Stock Surplus Earnings Income Stock Total --------- ---------- --------- ---------- ---------- --------- Balances at January 1, 1996 .......................... $ 210,110 $ 55,386 $ 204,449 $ 7,760 $ (23,344) $ 454,361 Comprehensive income: Net income......................................... 58,618 58,618 Other comprehensive income, net of deferred income taxes of $(3,733): Unrealized gains on securities of $5,598, net of reclassification adjustment for losses included in net income of $97........................... (5,695) (5,695) --------- Total comprehensive income......................... 52,923 Issuance of common stock (1,789,000 shares)......... 17,890 37,817 55,707 Purchase of treasury stock (1,318,988 shares)....... (44,034) (44,034) Five-for-four stock split in the form of a 25% stock dividend .................................... 49,746 (49,746) Stock options exercised (144,958 shares) and adjustment for fractional shares................... 1,430 1,414 2,844 Cash dividends on One Valley shares ($.74 per share) (20,028) (20,028) Cash dividends on FFVA shares....................... (1,903) (1,903) FFVA repurchase of treasury stock................... (9,185) (637) (8,164) (17,986) Two-for-one stock split of FFVA shares.............. 28,484 (28,484) Allocated/earned FFVA ESOP and MSBP shares.......... 1,143 1,143 Exercise of FFVA stock options...................... 18 13 31 --------- ---------- --------- ---------- ---------- --------- Balances at December 31, 1996 ........................ 298,493 66,652 183,226 2,065 (67,378) 483,058 Comprehensive income: Net income......................................... 63,800 63,800 Other comprehensive income, net of deferred income taxes of $2,495: Unrealized gains on securities of $4,473, net of reclassification adjustment for gains included in net income of $611.......................... 3,862 3,862 --------- Total comprehensive income......................... 67,662 Purchase of treasury stock (856,396 shares)......... (27,717) (27,717) Five-for-four stock split in the form of a 25% stock dividend .................................... 62,960 (62,960) Stock options exercised (303,698 shares) and adjustment for fractional shares................... 3,015 1,783 4,798 Cash dividends on One Valley shares ($.80 per share) (22,009) (22,009) Cash dividends of FFVA shares....................... (2,005) (2,005) FFVA repurchase of treasury stock................... (1,807) 140 (2,322) (3,989) Allocated/earning FFVA ESOP and MSBP shares......... 3,810 3,810 Exercise of FFVA stock options...................... 47 (5) 42 Issuance of common stock to FFVA MSBP plan.......... 598 (598) --------- ---------- --------- ---------- ---------- --------- Balances at December 31, 1997 ........................ 363,306 71,782 157,730 5,927 (95,095) 503,650 Comprehensive income: Net income......................................... 73,045 73,045 Other comprehensive income, net of deferred income taxes of $225: Unrealized gains on securities of $1,198, net of reclassification adjustment for gains included in net income of $675.......................... 523 523 --------- Total comprehensive income......................... 73,568 Purchase of treasury stock (45,700 shares).......... (1,505) (1,505) Stock options exercised (269,519 shares) and adjustment for fractional shares................... 2,695 841 3,536 Cash dividends on One Valley shares ($.90 per share) (30,601) (30,601) Issuance of common stock (1,826,600 shares)......... 18,264 2,260 20,524 FFVA treasury shares reissued (708,600 shares)...... 7,087 19,274 26,361 --------- ---------- --------- ---------- ---------- --------- Balances at December 31, 1998 ........................ $ 391,352 $ 94,157 $ 200,174 $ 6,450 $ (96,600) $ 595,533 ========= ========= ========= ========== ========== =========
See notes to consolidated financial statements. 60
- ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== Consolidated Statements of Cash Flows ==================================================================================================================================== One Valley Bancorp, Inc. and Subsidiaries (Dollars in thousands) Year Ended December 31 1998 1997 1996 --------- --------- --------- Operating Activities Net income ............................................................. $ 73,045 $ 63,800 $ 58,618 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses .......................................... 10,063 7,531 5,264 Depreciation ....................................................... 10,365 9,013 9,738 Amortization, net of accretion ..................................... 3,530 3,371 2,391 Deferred income tax (benefit) expense .............................. (2,372) 842 165 Net (gains) losses from sales of assets ............................ (407) (1,003) 112 Loans originated for sale .......................................... (261,199) (111,837) (67,105) Proceeds from loans sold ........................................... 231,333 112,823 68,167 Net change in accrued interest receivable .......................... (377) (581) 641 Net change in accrued interest payable ............................. (3,112) 3,182 (382) Net change in other assets and other liabilities ................... 6,714 (12,385) 2,137 --------- --------- --------- Net cash provided by operating activities ........................ 67,583 74,756 79,746 Investing Activities Proceeds from sales of available-for-sale securities ................... 53,045 92,165 151,749 Proceeds from maturities of available-for-sale securities .............. 616,627 278,877 266,629 Purchases of available-for-sale securities ............................. (617,443) (522,292) (366,559) Proceeds from maturities of held-to-maturity securities ................ 42,916 37,740 21,934 Purchases of held-to-maturity securities ............................... (62,431) (86,621) (47,968) Purchase of subsidiary, net of cash received ........................... 118,371 10,866 Net increase in loans .................................................. (390,634) (171,993) (169,662) Purchases of premises and equipment .................................... (13,732) (8,781) (8,430) --------- --------- --------- Net cash used in investing activities ............................ (253,281) (380,905) (141,441) Financing Activities Net change in deposits ................................................. 154,144 129,805 120,008 Net change in federal funds purchased .................................. 13,829 5,303 (36,727) Net change in other short-term borrowings .............................. 92,450 184,103 48,265 Repayment of long-term borrowings ...................................... (13,622) (9,017) (10,776) Proceeds from long-term borrowings ..................................... 25,000 15,007 Proceeds from issuance of common stock ................................. 29,895 4,840 2,875 Purchase of treasury stock ............................................. (1,505) (27,717) (44,034) Cash dividends ......................................................... (30,601) (24,014) (21,931) Allocation of FFVA ESOP and MSBP shares ................................ 3,810 1,143 FFVA repurchase of treasury stock ...................................... (3,988) (17,986) --------- --------- --------- Net cash provided by financing activities ................................. 244,590 288,125 55,844 --------- --------- --------- Increase (decrease) in cash and cash equivalents .......................... 58,892 (18,024) (5,851) Cash and cash equivalents at beginning of year ............................ 149,484 167,508 173,359 --------- --------- --------- Cash and cash equivalents at end of year .................................. $ 208,376 $ 149,484 $ 167,508 ========= ========= =========
See notes to consolidated financial statements. 61 - -------------------------------------------------------------------------------- ================================================================================ Notes to Consolidated Financial Statements ================================================================================ One Valley Bancorp, Inc. and Subsidiaries December 31, 1998 (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. Mortgage Servicing Rights The value of mortgage servicing rights, regardless of how obtained, are capitalized and amortized in proportion to and over the period of estimated net servicing revenues. Impairment of mortgage servicing rights is assessed based on the fair value of those rights. To determine fair value, One Valley estimates the present value of future cash flows incorporating various assumptions including servicing income, cost of servicing, discount rates, prepayment speeds, and default rates. For purposes of determining impairment, the mortgage servicing rights are stratified based upon predominant risk characteristics of the underlying loans. Derivative Financial Instruments As part of managing its interest rate risk, One Valley periodically uses financial instruments such as interest rate swaps, cap and floor contracts, and other off-balance sheet financial agreements frequently referred to as derivative financial instruments. These derivative instruments provide an off-balance sheet method of managing earnings fluctuations due to changes in interest rates. During 1998, One Valley entered into an interest rate swap agreement with a notional amount of $150 million. Based on the terms of the interest rate swap agreement, One Valley pays fixed and receives variable during the term of the swap. The net amount payable or receivable from the interest rate swap agreement is accrued as an adjustment to interest expense. The amount accrued during 1998 was not material. In addition, One Valley purchased a $50 million interest rate cap during 1998 to help protect its interest rate margin in periods of extremely high interest rates. The amount paid for the interest rate cap was capitalized and is amortized over the term of the agreement. As with any financial instrument, derivatives have inherent risks, primarily market and credit risk. Market risk includes the risk of gains and losses that result from changes in interest rates. Credit risk is the risk that a counterparty to a derivative 62 - -------------------------------------------------------------------------------- Summary of Significant Accounting and Reporting Policies NOTE A - CONTINUED - --------- contract with an unrealized gain fails to perform according to the terms of the agreement. One Valley monitors these risks through its asset/liability committee policy whereby the outstanding amount of derivatives are limited and the counterparty is monitored. 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. Revenue Recognition Interest income on loans, amortization of unearned income, and accretion of discounts are computed by methods which generally result in level rates of return on principal amounts outstanding. The accrual of interest income generally is discontinued when the contractual payment of principal or interest has become 90 days past due. When interest accruals are discontinued, unpaid interest recognized in income in the current year is reversed and interest accrued in prior years is charged against the allowance for loan losses. Management may elect to continue the accrual of interest when the estimated net realizable value of collateral exceeds the principal balance and accrued interest, and the loan is in the process of collection. Interest received on nonaccrual loans is either applied against principal or reported as interest income, according to management's judgment as to the collectibility of the remaining unpaid principal. Generally, a loan is restored to accrual status when it is brought current, has performed in accordance with the contractual terms for a reasonable period of time, and the collectibility of the total contractual principal and interest is no longer in doubt. Stock-Based Compensation One Valley has nonqualified and incentive stock option plans for certain key employees and directors. One Valley has elected to follow Accounting Principles Board Opinion No. 25 (APB 25), "Accounting for Stock Issued to Employees," and related Interpretations in accounting for its employee stock options instead of applying Financial Accounting Standards Board (FASB) Statement No. 123 (FASB 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. 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 adjusted for the ESOP shares which were not committed to release in the previous years presented (which represent 209,000 and 243,000 in 1997 and 1996.) Diluted net income per common share is computed by dividing net income by the average common shares outstanding during the year, net of the ESOP shares, 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 584,000, 765,000, and 621,000 in 1998, 1997, and 1996. 63 - -------------------------------------------------------------------------------- Summary of Significant Accounting and Reporting Policies NOTE A - CONCLUDED - --------- Segment Reporting In June 1997, the FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information." The provisions of this statement require disclosure of financial and descriptive information about an enterprise's operating segments in annual and interim financial reports issued to shareholders. The statement defines an operating segment as a component of an enterprise that engages in business activities that generate revenue and incur expense, whose operating results are reviewed by the chief operating decision maker in the determination of resource allocation and performance, and for which discrete financial information is available. One Valley's only defined business segment is community banking as One Valley primarily evaluates its performance and allocates resources based on the financial information of its community banking operations. As a community bank, One Valley offers its customers a full range of products through traditional and in-store branches, offices, ATMs, telephones, personal computers, and other delivery channels throughout various geographic areas. The financial information presented in the financial statements represents the financial information of One Valley's community banking segment and no additional disclosure is necessary. New Accounting Pronouncements Certain provisions of FASB Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," relating to repurchase agreements, securities lending and other similar transactions, and pledged collateral, were deferred for one year by FASB No. 127, and were adopted prospectively as of January 1, 1998. FASB No. 125 established new criteria for determining whether a transfer of financial assets in exchange for cash or other consideration should be accounted for as a sale or as a pledge of collateral in a secured borrowing and also established new accounting requirements for pledged collateral. The adoption of these provisions did not have a material impact on financial position or results or operations. In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive Income." This statement establishes standards for reporting the components of comprehensive income and requires that all items that are required to be recognized under accounting standards as components of comprehensive income be included in a financial statement that is displayed with the same prominence as other financial statements. Comprehensive income includes net income as well as certain items that are reported directly within a separate component of stockholders' equity and bypass net income. One Valley adopted the provisions of this statement in 1998. These disclosure requirements had no impact on financial position or results of operations. In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." The provisions of this statement require that derivative instruments be carried at fair value on the balance sheet and allows hedge accounting when specific criteria are met. Any changes in fair value or cash flow that represent the ineffective portion of a hedge are required to be recognized in earnings and cannot be deferred. For derivative instruments not accounted for as hedges, changes in fair value are required to be recognized in earnings. The provisions of this statement become effective for quarterly and annual reporting beginning January 1, 2000. The impact of adopting the provisions of this statement on One Valley's financial position or results of operations subsequent to the effective date is not currently estimable and will depend on the financial position of One Valley and the nature and purpose of the derivative instruments in use by management at that time. - -------------------------------------------------------------------------------- NOTE B - ------ Restrictions on Cash and Due From Bank Accounts Bank subsidiaries are required to maintain average balances with the Federal Reserve Bank. The average amount of those balances for the year ended December 31, 1998, was approximately $16,764. 64 - -------------------------------------------------------------------------------- NOTE C - ------ Restrictions on Subsidiary Dividends The primary source of funds for the dividends paid by One Valley Bancorp, Inc. is dividends received from its subsidiary banks. Dividends paid by the subsidiary banks are subject to restrictions by banking regulations. The most restrictive provision requires regulatory approval if dividends declared in any year exceed the year's retained net profits, as defined, plus the retained net profits of the two preceding years. At December 31, 1998, the retained net profits available for distribution to One Valley Bancorp, Inc. as dividends without regulatory approval approximated $17,248. - -------------------------------------------------------------------------------- NOTE D - ------ Mergers and Acquisitions On August 7, 1998, One Valley acquired Summit Bankshares, Inc. (Summit), a bank holding company that operated nine branches in Virginia. Under terms of the agreement, One Valley exchanged 1.36 shares of its common stock for each share of Summit's common stock outstanding. This resulted in the issuance of approximately 1,827,000 shares valued at approximately $62 million. As of August 7, 1998, Summit had $199 million in total assets, $149 million in total loans, and $181 million in deposits. This transaction was accounted for as a pooling-of-interest. However, due to the immaterial impact on One Valley's financial statements, the balances and results of operations of Summit are included in One Valley's financial statements only from the date of acquisition. On March 30, 1998, One Valley acquired all stock of FFVA Financial Corporation (FFVA), headquartered in Lynchburg, Virginia. Under terms of the agreement, One Valley exchanged 1.05 shares of its common stock for each share of FFVA's common stock outstanding. This resulted in the issuance of approximately 5,519,000 shares valued at approximately $206 million. This combination was accounted for as a pooling of interests and, as a result, all prior financial results were restated and reported on a combined basis. Due to the immaterial impact on One Valley's financial statements, separate results of operations are not presented herein. On February 19, 1998, One Valley acquired 15 branches in Virginia from the Wachovia Corporation. Through this purchase, One Valley acquired $124.9 million in loans and $283.2 million in deposits. This transaction was accounted for as a purchase and, accordingly, the balances and results of the operations of the branches are included in the financial statements of One Valley only from the date of purchase. Prior to 1998 One Valley acquired other 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 $5,800 and $2,700 at December 31, 1998 and 1997. Deposit intangible amortization approximated $2,000 in 1998, $1,100 in 1997, and $900 in 1996. 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 $49,000 and $17,500 at December 31, 1998 and 1997. Goodwill amortization approximated $3,400 in 1998, $1,400 in 1997, and $1,200 in 1996. - -------------------------------------------------------------------------------- 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. 65 - -------------------------------------------------------------------------------- NOTE F - ------ Securities 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, 1998 U.S. Treasury securities and obligations of U.S. government agencies and corporations ....... $ 845,155 $ 6,541 $ (1,687) $ 850,009 $ 0 $ 0 $ 0 $ 0 Obligations of states and political subdivisions . 277,929 9,537 (363) 287,103 Mortgage-backed securities 324,538 5,103 (173) 329,468 Other securities .......... 127,694 807 (153) 128,348 338 338 -------------------------------------------------- -------------------------------------------------- Total securities ....... $1,297,387 $ 12,451 $ (2,013) $1,307,825 $ 278,267 $ 9,537 $ (363) $ 287,441 ================================================== ================================================== December 31, 1997 U.S. Treasury securities and obligations of U.S. government agencies and corporations ....... $ 857,928 $ 4,322 $ (793) $ 861,457 $ 46,443 $ 476 $ (28) $ 46,891 Obligations of states and political subdivisions . 237,290 6,557 (127) 243,720 Mortgage-backed securities 298,231 5,984 (295) 303,920 62,756 389 (192) 62,953 Other securities .......... 50,899 494 (21) 51,372 5,783 22 5,805 -------------------------------------------------- -------------------------------------------------- Total securities ....... $1,207,058 $ 10,800 $ (1,109) $1,216,749 $ 352,272 $ 7,444 $ (347) $ 359,369 ================================================== ================================================== December 31, 1996 U.S. Treasury securities and obligations of U.S. government agencies and corporations ....... $ 678,286 $ 4,258 $ (4,741) $ 677,803 $ 35,558 $ 315 $ (117) $ 35,756 Obligations of states and political subdivisions . 216,874 3,596 (1,073) 219,397 Mortgage-backed securities 328,958 4,873 (1,488) 332,343 46,570 484 (550) 46,504 Other securities .......... 48,881 508 (76) 49,313 4,448 10 (4) 4,454 -------------------------------------------------- -------------------------------------------------- Total securities ....... $1,056,125 $ 9,639 $ (6,305) $1,059,459 $ 303,450 $ 4,405 $ (1,744) $ 306,111 ================================================== ==================================================
Gross realized gains and losses on available-for-sale securities approximated $1,125 and $0 in 1998, $1,130 and $112 in 1997, and $359 and $521 in 1996. Upon consummation of the acquisitions of Summit and FFVA, One Valley chose to reclassify $1,700 and $110,400 of securities acquired from Summit and FFVA, respectively, from held-to-maturity to available-for-sale. The related unrealized gain on the securities acquired from Summit and FFVA was $20 and $1,500, respectively. This transfer was made by One Valley to conform the securities acquired to One Valley's investment policies and guidelines. The amortized cost and estimated fair value of debt securities at December 31, 1998, 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 ................................ $ 236,808 $ 238,556 $ 2,687 $ 3,491 Due after one year through five years .................. 328,613 330,714 32,273 33,152 Due after five years through ten years ................. 378,957 381,663 117,587 121,758 Due after ten years .................................... 305,876 309,759 125,382 128,702 ---------- ---------- ---------- ---------- 1,250,254 1,260,692 277,929 287,103 Other .................................................. 47,133 47,133 338 338 ---------- ---------- ---------- ---------- Total securities .................................... $1,297,387 $1,307,825 $ 278,267 $ 287,441 ========== ========== ========== ==========
At December 31, 1998 and 1997, securities carried at approximately $754,000 and $693,000 were pledged to secure public deposits, repurchase agreements, and for other purposes as required or permitted by law. 66 - -------------------------------------------------------------------------------- NOTE G - ------ Loans Loans are summarized as follows:
December 31 1998 1997 ---------- ---------- Commercial, financial and agricultural .......................... $ 433,935 $ 372,933 Real estate: Revolving home equity ..................... 226,216 192,252 Single family residential .................... 1,851,470 1,527,621 Apartment buildings and complexes ........................... 103,349 75,314 Commercial ................................ 618,958 477,025 Construction ................................. 97,175 60,975 Installment loans to individuals ............. 625,646 572,846 Other ........................................ 34,372 23,570 ---------- ---------- Total loans net of unearned income ......................... 3,991,121 3,302,536 Less allowance for loan losses ............... 52,272 45,048 ---------- ---------- Loans - net .................................. $3,938,849 $3,257,488 ========== ==========
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, 1998 and 1997, One Valley held loans for sale of approximately $39,077 and $11,500 and had commitments to originate and sell loans of approximately $36,771 and $11,000, respectively. The mortgage loan portfolio serviced by One Valley for the benefit of others approximated $863,457, $890,327, and $907,906 at December 31, 1998, 1997, and 1996. Custodial escrow balances maintained in connection with the foregoing loan servicing and One Valley's own mortgage loan portfolio were approximately $8,862 and $8,540 at December 31, 1998 and 1997, respectively. One Valley and its subsidiaries have granted loans to officers and directors of One Valley and its subsidiaries and to their associates. Related party loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and did not involve more than normal risk of collectibility. The following presents the activity with respect to related party loans aggregating $60 or more to any one related party:
1998 1997 --------- --------- Balance, January 1 ................. $ 86,140 $ 106,605 Additions .......................... 46,590 28,060 Amount collected ................... (47,448) (48,525) --------- --------- Balance, December 31 ............... $ 85,282 $ 86,140 ========= =========
- -------------------------------------------------------------------------------- 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, 1998, were as follows:
1998 1997 1996 -------- -------- -------- Balance, January 1 ............. $ 45,048 $ 45,055 $ 42,751 Charge-offs .................... (8,695) (9,837) (7,065) Recoveries ..................... 2,027 2,299 1,879 -------- -------- -------- Net charge-offs ............. (6,668) (7,538) (5,186) Provision for loan losses ...... 10,063 7,531 5,264 Balance of acquired subsidary ................... 3,829 2,226 -------- -------- -------- Balance, December 31 ........... $ 52,272 $ 45,048 $ 45,055 ======== ======== ========
Impaired loans approximated $3,700 and $6,600 (of which $2,100 and $3,400 were on a nonaccrual basis) at December 31, 1998 and 1997. 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, 1998, 1997 and 1996, was approximately $4,600, $8,500 and $9,000. For the years ended December 31, 1998, 1997 and 1996, One Valley recognized interest income on those impaired loans of $340, $560 and $880. The amount of interest income recognized in 1998, 1997 and 1996 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, 1998, have scheduled maturities of $1,533,000 in 1999, $470,000 in 2000, $86,000 in 2001, $37,000 in 2002, $34,000 in 2003 and $2,000 thereafter. The aggregate amount of time deposits exceeding $100 at December 31, 1998 approximated $363,000. As of December 31, 1998 and 1997, One Valley had deposits from related parties of approximately $77,200 and $76,000. Interest paid on deposits, short-term borrowings, and long-term borrowings approximated $200,012 in 1998, $172,511 in 1997, and $160,056 in 1996. 67 - -------------------------------------------------------------------------------- NOTE J - ------ Premises and Equipment The major categories of premises and equipment and accumulated depreciation are summarized as follows:
December 31 1998 1997 --------- --------- Land ................................... $ 22,559 $ 19,567 Buildings and improvements ............. 101,022 89,376 Equipment .............................. 64,939 56,300 --------- --------- Total ............................... 188,520 165,243 Less accumulated depreciation .......... (85,657) (74,846) --------- --------- Premises and equipment-net .......... $ 102,863 $ 90,397 ========= =========
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: 1999-$5,000; 2000-$4,500; 2001-$4,300; 2002-$2,700; and 2003-$600 with $3,200 of commitments extending beyond 2003. Total expense under these lease agreements, including cancelable and noncancelable leases, was $10,588 in 1998, $8,300 in 1997, and $7,100 in 1996. - -------------------------------------------------------------------------------- NOTE K - ------ Short-term and Long-term Borrowings Federal funds purchased and securities sold under agreements to repurchase represent borrowings with maturities primarily from overnight to 90 days. The securities underlying the repurchase agreements are under the control of One Valley. Additional details regarding short-term borrowings are set forth below:
Federal Repurchase Funds Agreements Purchased and Other --------- ---------- 1998 Average amount outstanding during year....................... $47,912 $666,894 Maximum amount outstanding at any month-end.................. 91,781 875,880 Weighted average interest rate: During year....................... 5.47% 4.99% End of year....................... 4.94% 4.45% 1997 Average amount outstanding during year....................... $33,806 $497,631 Maximum amount outstanding at any month-end................. 69,801 609,426 Weighted average interest rate: During year....................... 5.46% 4.97% End of year....................... 5.72% 5.06% 1996 Average amount outstanding during year....................... $26,612 $409,903 Maximum amount outstanding at any month-end.................. 71,563 528,966 Weighted average interest rate: During year....................... 5.38% 4.88% End of year....................... 5.40% 4.80%
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 $257,025 at December 31, 1998. The available lines of credit for short-term and long-term borrowings, at prevailing market interest rates, as of December 31, 1998, approximated $1.2 billion. Long-term borrowings of $35,480 and $48,875 at December 31, 1998 and 1997, primarily consist of FHLB advances. The advances mature as follows: 1999-$2,000; 2001-$5,000; 2002-$25,000; 2003-$2,600 and $880 thereafter. The weighted average interest rate of these advances at December 31, 1998, was 5.8%. 68 - -------------------------------------------------------------------------------- NOTE L - ------ Income Taxes The income tax provisions (benefits) included in the consolidated statements of income are summarized as follows:
1998 1997 1996 -------- -------- -------- Current: Federal ....................... $ 34,568 $ 28,282 $ 25,660 State ......................... 3,709 3,930 4,101 Deferred Federal and State ....... (2,372) 842 165 -------- -------- -------- Total ......................... $ 35,905 $ 33,054 $ 29,926 ======== ======== ========
Income taxes (benefit) related to securities gains (losses) approximated $450, $407, and $(65) in 1998, 1997, and 1996. One Valley made tax payments of approximately $32,874 in 1998, $34,193 in 1997, and $27,942 in 1996. Significant components of One Valley's deferred tax assets and liabilities are as follows:
December 31 1998 1997 ------- ------- Deferred tax assets: Allowance for loan losses ................. $20,078 $16,813 Accrued employee benefits ................. 2,224 1,480 Other ..................................... 4,472 4,697 ------- ------- Total deferred tax assets .............. 26,774 22,990 Deferred tax liabilities: Loans ..................................... 6,685 6,808 Available-for-sale securities ............. 3,988 3,763 Premises and equipment .................... 3,059 3,140 Other ..................................... 1,936 320 ------- ------- Total deferred tax liabilities .......... 15,668 14,031 ------- ------- Net deferred tax assets ................. $11,106 $ 8,959 ======= =======
- -------------------------------------------------------------------------------- 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:
1998 1997 1996 ---------------- ---------------- ---------------- Computed tax at statutory federal rate...................... $38,133 35.0% $33,796 35.0% $30,905 35.0% Plus: State income taxes, net of federal tax benefits....... 2,306 2.1 2,666 2.7 2,693 3.0 ------- ---- ------- ---- ------- ---- 40,439 37.1 36,462 37.7 33,598 38.0 Increase (decrease) in taxes resulting from: Tax-exempt interest...................................... (4,554) (4.2) (4,535) (4.7) (4,861) (5.5) Other--net................................................ 20 0.1 1,127 1.1 1,189 1.3 ------- ---- ------- ---- ------- ---- Actual tax expense.................................... $35,905 33.0% $33,054 34.1% $29,926 33.8% ======= ==== ======= ==== ======= ====
69 - -------------------------------------------------------------------------------- NOTE M - ------ Employee Benefit Plans One Valley and FFVA have defined benefit pension plans covering substantially all of its employees. During 1998, the FFVA defined benefit pension plan was merged into One Valley's plan. One Valley also has a defined benefit postretirement plan covering all employees who qualify for and elect to retire with a normal or early retirement benefit under the defined benefit pension plan. This plan provides medical and dental benefits. The following table summarizes the benefit obligation and plan asset activity for each of the plans.
Pension Benefits Other Benefits 1998 1997 1998 1997 -------- -------- -------- -------- Change in fair value of plan assets: Balance at beginning of measurement period ................... $ 54,090 $ 38,158 $ 0 $ 0 Actual return on plan assets ................................. 7,891 5,137 0 0 Employer contribution ........................................ 1,702 12,163 0 0 Benefits paid ................................................ (1,478) (1,368) 0 0 Settlement ................................................... (1,125) 0 0 -------- -------- -------- -------- Balance at end of measurement period ............................ 61,080 54,090 0 0 Change in benefit obligation: Balance at beginning of measurement period ................... 55,161 42,220 6,322 5,743 Service cost ................................................. 2,632 2,358 252 260 Interest cost ................................................ 3,904 3,543 342 440 Actuarial loss (gain) ........................................ 2,356 8,408 (1,492) 158 Benefits paid ................................................ (1,478) (1,368) (248) (279) Settlement ................................................... (1,115) Acquisition .................................................. 22 -------- -------- -------- -------- Balance at end of measurement period ............................ 61,460 55,161 5,198 6,322 -------- -------- -------- -------- Funded status ................................................... (380) (1,071) (5,198) (6,322) Unamortized prior service cost .................................. 2,320 2,636 185 197 Unrecognized net actuarial loss (gain) .......................... 6,184 7,576 (1,493) (84) Unrecognized net obligation ..................................... (1,453) (1,705) 3,059 3,277 -------- -------- -------- -------- Prepaid (accrued) benefit cost .................................. $ 6,671 $ 7,436 $ (3,447) $ (2,932) ======== ======== ======== ======== Weighted-average assumptions as of December 31: Discount rate ................................................ 6.75% 7.00%-7.25% 6.75% 7.00% Expected return on plan assets ............................... 8.50% 7.50%-8.50% Rate of compensation increase ................................ 4.75% 5.00%-6.00% 4.75% 5.00%
Plan assets of the defined benefit pension plan consist primarily of cash, listed stocks, and U.S. Government and agency obligations. The following table presents the components of net defined benefit pension and post-retirement benefit plans costs:
Pension Benefits Other Benefits 1998 1997 1996 1998 1997 1996 ------- ------- ------- ------- ------- ------- Components of net periodic benefit cost: Service cost ................................... $ 2,632 $ 2,358 $ 2,378 $ 252 $ 260 $ 230 Interest cost .................................. 3,904 3,543 2,836 342 440 421 Expected return on plan assets ................. (4,533) (3,275) (3,001) Net amortization and deferral .................. 425 95 443 147 231 231 ------- ------- ------- ------- ------- ------- Benefit cost ................................ $ 2,428 $ 2,721 $ 2,656 $ 741 $ 931 $ 882 ======= ======= ======= ======= ======= =======
For measurement purposes, a 6.75% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease gradually to 4.75% for 2001 and remain at that level thereafter. The health care trend rate assumption does not have a significant effect on the medical plan, therefore, a one percentage point change in the trend rate is not material in the determination of the accumulated postretirement benefit obligation or the ongoing expense. 70 - -------------------------------------------------------------------------------- NOTE M - Concluded - --------- Employee Benefit Plans FFVA had an ESOP covering all full-time employees, over the age of 21, with at least one year of service. The ESOP borrowed funds from FFVA to purchase 330,681 shares of common stock, the loan being collateralized by the common stock. Contributions by FFVA, along with dividends received on unallocated shares were used to repay the loan with shares being released from FFVA's lien proportional to the loan repayments. The plan was accounted for in accordance with Statement of Position 93-6 and the shares pledged as collateral are reported as a reduction of stockholder's equity in the consolidated statements of financial condition. The total amount charged to expense for the years ended December 31, 1997 and 1996, was $825 and $690, respectively. The ESOP was terminated on March 30, 1998. FFVA established a Management Stock Bonus Plan (MSBP) and Trust during 1995 to award directors, officers and employees in accordance with the provision of the plan. All shares which had been previously awarded became fully vested on December 16, 1997, the date of the signing of a definitive merger agreement with One Valley. For the years ended December 1997 and 1996, the amounts included in compensation expense were $2,077 and $628, respectively. The plan was terminated thereafter. - -------------------------------------------------------------------------------- NOTE N - ------ Stock Option Plans Pursuant to its nonqualified and incentive stock option plans, One Valley has an aggregate maximum of 1,500,000 shares of common stock reserved for issuance at December 31, 1998 and 1997, 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 FASB No. 123, and has been determined as if One Valley had accounted for its employee stock options under the fair value method of that statement. The fair value for the options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions:
1998 1997 1996 -------- -------- -------- Risk-free interest rate .............. 4.5% 5.7% 6.2% Dividend yields ...................... 2.5% 3.4% 3.4% Volatility factor .................... 0.193 0.187 0.186 Weighted-average life of options ..... 3 yrs 4 yrs 4 yrs
Pro forma information has not been presented herein because the effect of applying FASB No. 123's fair value method to One Valley's stock-based awards in 1998, 1997 and 1996 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:
1998 1997 1996 ------------------------- ------------------------- ------------------------- Weighted- Weighted- Weighted- Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price -------------------------- ------------------------- ------------------------- Outstanding at beginning of year .................. 1,290,056 $16.12 1,495,055 $13.73 1,306,156 $13.51 Balance of acquired subsidiary .................... 257,500 10.38 Granted ........................................... 157,900 38.22 167,500 30.60 152,500 19.85 Exercised ......................................... (269,282) 13.17 (372,499) 13.03 (216,699) 12.80 Forfeited ......................................... (4,402) 11.91 ---------- ---------- ---------- Outstanding at end of year ........................ 1,178,674 19.59 1,290,056 16.12 1,495,055 13.73 ========== ========== ========== Exercisable at end of year ........................ 1,178,674 19.59 1,290,056 16.12 980,533 14.49 Weighted-average fair value of options granted during the year ........................ $5.83 $4.96 $3.36
Exercise prices for options outstanding at December 31, 1998, ranged from $6.58 to $38.22. The weighted-average remaining contractual life of those options at December 31, 1998, was seven years. 71 - -------------------------------------------------------------------------------- NOTE O - ---------- Regulatory Matters One Valley and its banking subsidiaries are subject to various regulatory capital requirements administered by the banking regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on One Valley's consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, One Valley and each of its banking subsidiaries must meet specific capital guidelines that involve quantitative measures of One Valley and each of its banking subsidiaries' assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. One Valley and each of its banking subsidiaries' capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require One Valley and each of its banking subsidiaries to maintain minimum amounts and ratios of total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). One Valley and each of its banking subsidiaries met all capital adequacy requirements to which they were subject at December 31, 1998. As of December 31, 1998, the most recent notifications from the banking regulatory agencies categorized One Valley and each of its banking subsidiaries as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, One Valley and each of its banking subsidiaries must maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table below. There are no conditions or events since these notifications that management believes have changed the 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-Central Virginia, NA.
Well 1998 1997 Capitalized Minimum Amount Ratio Amount Ratio Ratio Ratio ------------------ ------------------ ---------------------- Total Capital (to Risk Weighted Assets) One Valley......................................... $580,900 16% $498,800 16% >=10% 8% One Valley Bank, National Association.............. 158,600 12 150,000 13 >=10 8 One Valley Bank-Central Virginia, NA............... 95,700 15 108,500 22 >=10 8 Tier I Capital (to Risk Weighted Assets) One Valley......................................... $534,200 14% $460,700 13% >=6% 4% One Valley Bank, National Association.............. 141,800 11 135,500 12 >=6 4 One Valley Bank-Central Virginia, NA............... 87,900 14 102,700 21 >=6 4 Tier I Capital (to Average Assets) One Valley......................................... $534,200 9% $460,700 9% >=5% 4% One Valley Bank, National Association.............. 141,800 7 135,500 7 >=5 4 One Valley Bank-Central Virginia, NA............... 87,900 7 102,700 11 >=5 4
72 - -------------------------------------------------------------------------------- NOTE P - ---------- Parent Company Condensed Financial Information Condensed Balance Sheets
December 31 Assets: 1998 1997 -------- -------- Cash ......................................... $ 269 $ 964 Repurchase agreement with a subsidiary bank ........................... 38,912 26,696 Securities: Available-for-sale ........................ 83,990 15,329 Held-to-maturity .......................... 6,754 Premises and equipment ....................... 1,279 967 Investment in subsidiaries: Commercial and federal savings banks .......................... 479,768 452,297 Non-banks ................................. 7,243 6,925 Other assets ................................. 6,155 22,112 -------- -------- Total assets .............................. $624,370 $525,290 ======== ======== Liabilities and Shareholders' Equity: Liabilities: Short-term borrowings ........................ $ 10,968 $ 6,105 Other liabilities ............................ 17,869 15,535 -------- -------- Total liabilities ......................... 28,837 21,640 Shareholders' equity ......................... 595,533 503,650 -------- -------- Total liabilities and shareholders' equity ................... $624,370 $525,290 ======== ========
Condensed Statements of Income
Year Ended December 31 1998 1997 1996 -------- -------- -------- Income: Dividends from subsidiaries ................... $ 86,750 $ 58,130 $ 71,258 Other income ...................... 7,856 6,134 5,031 -------- -------- -------- Total income ................... 94,606 64,264 76,289 Expenses: Salaries and employee benefits .............. 9,387 7,727 8,108 Other expenses .................... 8,741 8,487 4,967 Interest expense .................. 501 479 280 -------- -------- -------- Total expenses ................. 18,629 16,693 13,355 -------- -------- -------- Income before income taxes and equity in undistributed earnings of subsidiaries ................ 75,977 47,571 62,934 Applicable income tax (benefit) .................. (5,016) (3,716) (3,157) -------- -------- -------- Income before equity in undistributed earnings of subsidiaries ................ 80,993 51,287 66,091 (Excess dividends) equity in undistributed earnings of subsidiaries ....... (7,948) 12,513 12,527 Distribution of subsidiary retained earnings .............. (20,000) -------- -------- -------- Net income .................. $ 73,045 $ 63,800 $ 58,618 ======== ======== ========
Condensed Statements of Cash Flows
Year Ended December 31 1998 1997 1996 -------- -------- -------- Operating Activities: Net income ........................ $ 73,045 $ 63,800 $ 58,618 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................ 458 324 245 Dividend from subsidiary .................. 20,000 Excess dividends (equity in undistributed earnings) of subsidiaries ................ 7,948 (12,513) (12,527) Net change in other assets and other liabilities ................. 1,424 1,471 1,344 -------- -------- -------- Net cash provided by operating activities ........ 82,875 53,082 67,680 Investing Activities: Net decrease (increase) in loans receivable ............ 14,750 6,250 (661) Purchase of securities: Available-for-sale ............. (75,759) (8,715) (8,453) Held-to-maturity ............... (6,756) Proceeds from maturities and sales of securities: Available-for-sale ............. 3,370 4,083 10,982 Held-to-maturity ............... 3,779 860 Investment in subsidiaries ........ (12,668) Purchase of equipment ............. (722) (387) (427) -------- -------- -------- Net cash (used in) provided by investing activities ........ (74,006) 1,231 2,301 Financing Activities: Net change in short-term borrowings ..................... 4,863 312 5,793 Proceeds from issuance of common stock ................... 29,895 4,840 2,875 Purchase of treasury stock ........ (1,505) (27,717) (44,034) Issuances of MSBP shares .......... 2,002 FFVA repurchase of treasury stock ................. (3,988) (17,986) Cash dividends paid ............... (30,601) (24,014) (21,931) -------- -------- -------- Net cash provided by (used in) financing activities .................. 2,652 (48,565) (75,283) -------- -------- -------- Increase (decrease) in cash ........................ 11,521 5,748 (5,302) Cash and cash equivalents at beginning of year ........... 27,660 21,912 27,214 -------- -------- -------- Cash and cash equivalents at end of year ................. $ 39,181 $ 27,660 $ 21,912 ======== ======== ========
73 - -------------------------------------------------------------------------------- NOTE Q - ---------- Fair Value of Financial Instruments The following methods and assumptions were used by One Valley in estimating its fair value disclosures for financial instruments: Cash and Cash Equivalents The carrying values of cash and cash equivalents approximate their fair values. Securities Fair values of securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. Loans The fair values of fixed rate commercial, mortgage, and consumer loans are estimated using discounted cash flow analyses at interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. Accrued Interest The carrying value of accrued interest approximates its fair value. Deposits The fair values of demand deposits (i.e. interest and non-interest bearing checking, regular savings, and other types of money market demand accounts) are, by definition, equal to their carrying values. Fair values of certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregate expected monthly maturities of time deposits. FASB 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, 1998 and 1997. Short-Term Borrowings The carrying values of federal funds purchased and securities sold under agreements to repurchase approximate their fair values. Long-Term Borrowings The fair values of long-term borrowings are estimated using discounted cash flow analyses based on One Valley's current incremental borrowing rates for similar types of borrowing arrangements. Off-Balance Sheet Derivative Financial Instruments The fair values for the derivative financial instruments were computed using discounted cash flows at current interest rates. 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, 1998 and 1997, approximate their carrying value. - -------------------------------------------------------------------------------- The fair values of One Valley's financial instruments are summarized below:
December 31, 1998 December 31, 1997 -------------------------------- -------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ----------- ----------- ----------- ----------- Cash and cash equivalents ..................... $ 208,376 $ 208,376 $ 149,484 $ 149,484 Securities .................................... 1,586,092 1,595,266 1,569,021 1,576,118 Loans ......................................... 3,938,849 3,969,731 3,257,488 3,271,796 Accrued interest receivable ................... 40,916 40,916 38,764 38,764 Deposits ...................................... 4,552,888 4,563,730 3,934,174 3,940,099 Short-term borrowings ......................... 729,759 730,041 623,480 625,858 Long-term borrowings .......................... 35,480 35,806 48,875 47,011 Accrued interest payable ...................... 18,561 18,561 19,277 19,277 Off-balance sheet derivatives ................. 178 (1,333)
74 - -------------------------------------------------------------------------------- NOTE R - --------- Commitments and Contingent Liabilities 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 $22,850 as of December 31, 1998. 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, 1998, the Bank had commitments outstanding to extend credit at prevailing market rates approximating $675,150. 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, 1998, there was approximately $18,249 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. - -------------------------------------------------------------------------------- NOTE S - ---------- Quarterly Financial Data (Unaudited) Quarterly financial data for 1998 and 1997 is summarized below:
1998 1997 Three Months Ended Three Months Ended March 31 June 30 Sept 30 Dec 31 March 31 June 30 Sept 30 Dec 31 -------- -------- -------- -------- -------- -------- -------- -------- Interest income ........................... $100,086 $104,290 $108,237 $107,406 $ 91,611 $ 93,381 $ 95,299 $ 96,469 Interest expense .......................... 48,113 49,372 51,669 50,141 42,177 43,399 45,349 45,985 -------- -------- -------- -------- -------- -------- -------- -------- Net interest income .................... 51,973 54,918 56,568 57,265 49,434 49,982 49,950 50,484 Provision for loan losses ................. 2,594 2,294 2,593 2,582 1,458 1,834 1,999 2,240 -------- -------- -------- -------- -------- -------- -------- -------- Net interest income after provision for loan losses .............. 49,379 52,624 53,975 54,683 47,976 48,148 47,951 48,244 Other income, excluding securities gains ....................... 13,807 14,417 15,061 15,823 11,318 11,685 12,581 12,252 Securities transactions ................... 537 186 266 136 (45) 192 230 641 Other expenses ............................ 38,267 40,161 40,908 42,608 34,389 34,673 35,314 39,943 -------- -------- -------- -------- -------- -------- -------- -------- Income before income taxes ................ 25,456 27,066 28,394 28,034 24,860 25,352 25,448 21,194 Applicable income taxes ................... 8,945 9,047 9,409 8,504 8,495 8,672 8,709 7,178 -------- -------- -------- -------- -------- -------- -------- -------- Net income ............................. $ 16,511 $ 18,019 $ 18,985 $ 19,530 $ 16,365 $ 16,680 $ 16,739 $ 14,016 ======== ======== ======== ======== ======== ======== ======== ======== Average shares outstanding: Basic .................................. 31,836 32,754 34,058 34,736 32,202 31,921 31,799 31,762 Diluted ................................ 32,553 33,434 34,635 35,252 32,895 32,609 32,504 32,738 Per Share Data: Net income: Basic ............................... $ .52 $ .55 $ .56 $ .56 $ .51 $ .52 $ .53 $ .44 Diluted ............................. .51 .54 .55 .55 .50 .51 .51 .43 Dividends .............................. .21 .21 .24 .24 .19 .19 .21 .21 High ................................... 38.81 40.13 36.31 34.00 32.20 33.60 37.00 40.94 Low .................................... 33.75 33.25 29.50 28.75 28.60 28.60 32.50 36.31
75 - ----------- 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, 1998 and 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of One Valley's management. Our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the consolidated financial statements of FFVA Financial Corporation and subsidiary (FFVA) which statements reflect total assets of $579 million as of December 31, 1997 and total interest income of $44 million and $41 million for the years ended December 31, 1997 and 1996. Those statements were audited by other auditors whose report has been furnished to us and our opinion, insofar as it relates to data included for FFVA, is based solely on the report of the other auditors. We conducted our audits in accordance with 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 and the report of other auditors provide a reasonable basis for our opinion. In our opinion, based on our audits and the report of other auditors, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of One Valley Bancorp, Inc. and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Charleston, West Virginia January 19, 1999 76
- ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== Six-Year Average Balance Sheet Summary ==================================================================================================================================== One Valley Bancorp, Inc. and Subsidiaries (Dollars in thousands) 1998 1997 1996 1995 1994 % of % of % of % of % of $ Total $ Total $ Total $ Total $ Total ---------------- ---------------- ---------------- ---------------- ---------------- Assets Loans: Taxable .................... 3,648,141 65 3,134,255 63 2,959,033 64 2,682,862 64 2,468,354 63 Tax-exempt ................. 42,563 1 46,208 1 43,740 1 33,977 1 34,430 1 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Total loans ............. 3,690,704 66 3,180,463 64 3,002,773 65 2,716,839 65 2,502,784 64 Less: Allowance for losses . 49,635 1 45,311 1 44,612 1 41,946 1 40,275 1 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Total loans-net ......... 3,641,069 65 3,135,152 63 2,958,161 64 2,674,893 64 2,462,509 63 Investment Securities: Taxable .................... 1,374,913 24 1,241,684 25 1,140,759 25 986,821 24 988,366 25 Tax-exempt ................. 238,694 4 226,223 5 204,742 4 187,180 4 176,079 4 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Total securities ........ 1,613,607 28 1,467,907 30 1,345,501 29 1,174,001 28 1,164,445 29 Federal funds sold & other .... 29,889 1 36,401 1 21,176 0 38,540 1 39,833 1 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Total earning assets .... 5,284,565 94 4,639,460 94 4,324,838 93 3,887,434 93 3,666,787 93 Other assets .................. 363,601 6 306,045 6 301,069 7 281,439 7 276,161 7 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Total assets ........ 5,648,166 100 4,945,505 100 4,625,907 100 4,168,873 100 3,942,948 100 ========= ===== ========= ===== ========= ===== ========= ===== ========= ===== Liabilities & Shareholders' Equity Interest Bearing Liabilities: Time & savings deposits .... 3,772,657 67 3,436,380 70 3,271,770 71 2,980,725 71 2,860,705 73 Short-term borrowings ...... 714,088 12 506,046 10 429,708 9 312,195 8 255,503 6 Long-term borrowings ....... 42,814 1 56,283 1 21,951 0 19,026 0 22,931 1 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Total interest bearing liabilities ......... 4,529,559 80 3,998,709 81 3,723,429 80 3,311,946 79 3,139,139 80 Demand deposits ............... 510,910 9 410,203 8 384,817 8 380,996 9 412,016 10 Other liabilities ............. 49,408 1 48,995 1 46,218 1 37,117 1 31,827 1 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Total Liabilities ....... 5,089,877 90 4,457,907 90 4,154,464 89 3,730,059 89 3,582,982 91 Shareholders' equity .......... 558,289 10 487,598 10 471,443 11 438,814 11 359,966 9 --------- ----- --------- ----- --------- ----- --------- ----- --------- ----- Total liabilities & shareholders' equity 5,648,166 100 4,945,505 100 4,625,907 100 4,168,873 100 3,942,948 100 ========= ===== ========= ===== ========= ===== ========= ===== ========= ===== 1993 % of $ Total ----------------- Assets Loans: Taxable .................... 2,301,683 59 Tax-exempt ................. 31,153 1 --------- ----- Total loans ............. 2,332,836 60 Less: Allowance for losses . 39,400 1 --------- ----- Total loans-net ......... 2,293,436 59 Investment Securities: Taxable .................... 1,061,922 28 Tax-exempt ................. 100,577 3 --------- ----- Total securities ........ 1,162,499 31 Federal funds sold & other .... 105,049 3 --------- ----- Total earning assets .... 3,560,984 93 Other assets .................. 279,357 7 --------- ----- Total assets ........ 3,840,341 100 ========= ===== Liabilities & Shareholders' Equity Interest Bearing Liabilities: Time & savings deposits .... 2,831,817 74 Short-term borrowings ...... 224,369 6 Long-term borrowings ....... 36,088 1 --------- ----- Total interest bearing liabilities ......... 3,092,274 81 Demand deposits ............... 396,711 10 Other liabilities ............. 29,953 1 --------- ----- Total Liabilities ....... 3,518,938 92 Shareholders' equity .......... 321,403 8 --------- ----- Total liabilities & shareholders' equity 3,840,341 100 ========= =====
77
- ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== Six-Year Net Interest Income Summary ==================================================================================================================================== One Valley Bancorp, Inc. and Subsidiaries (Dollars in thousands) 1998 1997 1996 1995 1994 1993 % 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 ...................... 315,172 73.6 276,520 71.8 262,354 72.7 242,174 74.1 210,775 73.3 202,478 72.1 Tax-exempt ................... 4,162 1.0 4,600 1.2 4,328 1.2 3,774 1.1 3,618 1.3 3,255 1.2 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total loans ............... 319,334 74.6 281,120 73.0 266,682 73.9 245,948 75.2 214,393 74.6 205,733 73.3 Securities Taxable ...................... 88,136 20.6 83,458 21.7 75,956 21.1 62,813 19.2 56,526 19.6 61,791 22.0 Tax-exempt ................... 19,071 4.4 18,466 4.8 17,040 4.7 15,941 4.9 15,497 5.4 10,146 3.6 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total securities .......... 107,207 25.0 101,924 26.5 92,996 25.8 78,754 24.1 72,023 25.0 71,937 25.6 Funds sold & other .............. 1,610 0.4 1,789 0.5 947 0.3 2,253 0.7 1,037 0.4 3,104 1.1 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total interest income ..... 428,151 100.0 384,833 100.0 360,625 100.0 326,955 100.0 287,453 100.0 280,774 100.0 Interest Expense: Deposits ........................ 160,877 37.5 148,026 38.5 138,247 38.3 123,753 37.9 99,115 34.5 104,785 37.3 Short-term borrowings ........... 35,841 8.4 25,466 6.6 21,076 5.9 15,851 4.8 9,380 3.3 7,018 2.5 Long-term borrowings ............... 2,577 0.6 3,418 0.9 1,144 0.3 688 0.2 1,185 0.4 2,709 1.0 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Total interest expense ............. 199,295 46.5 176,910 46.0 160,467 44.5 140,292 42.9 109,680 38.2 114,512 40.8 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Tax equivalent net interest income ............. 228,856 53.5 207,923 54.0 200,158 55.5 186,663 57.1 177,773 61.8 166,262 59.2 Tax equivalent adjustment .......... 8,132 1.9 8,073 2.1 7,479 2.1 6,900 2.1 6,690 2.3 4,645 1.6 ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- ------- ----- Net interest income ................ 220,724 51.6 199,850 51.9 192,679 53.4 179,763 55.0 171,083 59.5 161,617 57.6 ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== ======= ===== Summary of Average Rates Earned & Paid* Taxable loans ...................... 8.64% 8.82% 8.87% 9.03% 8.54% 8.80% Tax-exempt loans ................... 9.78 9.95 9.89 11.11 10.51 10.45 Net loans ....................... 8.77 8.97 9.02 9.19 8.71 8.97 Taxable securities ................. 6.41 6.72 6.66 6.37 5.72 5.82 Tax-exempt securities .............. 7.99 8.16 8.32 8.52 8.80 10.09 Total securities ................ 6.64 6.94 6.91 6.71 6.19 6.19 Funds sold & deposits .............. 5.39 4.91 4.47 5.85 2.60 2.95 Total earning assets ............ 8.10% 8.29% 8.34% 8.41% 7.84% 7.88% Time & savings deposits ............ 4.26 4.31 4.23 4.15 3.46 3.70 Short-term borrowings .............. 5.02 5.03 4.90 5.08 3.67 3.13 Long-term borrowings ............... 6.02 6.07 5.21 3.62 5.17 7.51 Total interest cost ............. 4.40 4.42 4.31 4.24 3.49 3.70 Total cost of all funds ......... 3.77 3.81 3.71 3.61 2.99 3.21 Net interest margin .......... 4.33% 4.48% 4.63% 4.80% 4.85% 4.67%
* Interest income and yields are computed on a fully taxable equivalent basis using the rate of 35%. 78
- ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== Six-Year Operating Income Summary ==================================================================================================================================== One Valley Bancorp, Inc. and Subsidiaries (Dollars in thousands, except per share data) 1998 1997 1996 1995 1994 1993 % 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 ................ 420,019 87.5 376,760 88.5 353,146 89.3 320,055 89.2 280,763 88.2 276,129 87.1 Interest expense ............... 199,295 41.5 176,910 41.6 160,467 40.5 140,292 39.1 109,680 34.5 114,512 36.1 -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- Net interest income ............ 220,724 46.0 199,850 46.9 192,679 48.8 179,763 50.1 171,083 53.7 161,617 51.0 Provision for loan losses ...... 10,063 2.1 7,531 1.8 5,264 1.3 5,887 1.6 5,388 1.7 6,688 2.1 -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- Net interest income after provision for loan losses ... 210,661 43.9 192,319 45.1 187,415 47.5 173,876 48.5 165,695 52.0 154,929 48.9 Other Income: Trust Department income ..... 11,675 2.4 10,228 2.4 9,322 2.4 8,203 2.3 7,892 2.5 7,272 2.3 Service charges on deposit accounts ......... 19,408 4.0 15,511 3.7 14,934 3.8 14,109 3.9 11,441 3.6 11,963 3.7 Other service charges and fees ......... 22,742 4.8 17,138 4.0 14,275 3.6 12,346 3.5 13,671 4.3 16,079 5.1 Other operating income ...... 5,283 1.1 4,959 1.2 3,744 0.9 3,826 1.1 5,319 1.7 5,425 1.7 Securities transactions ..... 1,125 0.2 1,018 0.2 (162) (0.0) 144 0.0 (849) (0.3) 266 0.1 -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- Total other income ....... 60,233 12.5 48,854 11.5 42,113 10.7 38,628 10.8 37,474 11.8 41,005 12.9 Operating Expenses: Salaries & benefits ......... 80,180 16.7 74,234 17.4 70,408 17.8 67,022 18.7 67,079 21.0 65,225 20.6 Occupancy expense ........... 8,555 1.8 7,614 1.8 7,380 1.9 6,777 1.9 6,937 2.2 7,083 2.2 Equipment expense ........... 11,606 2.4 9,377 2.2 9,683 2.4 9,233 2.6 8,468 2.7 10,604 3.3 External computer costs ..... 10,012 2.1 9,115 2.1 6,632 1.7 6,073 1.6 5,981 1.9 5,721 1.8 Other expense ............... 51,591 10.7 43,979 10.3 46,881 11.9 39,570 11.0 39,187 12.4 43,651 13.7 -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- Total operating expenses . 161,944 33.7 144,319 33.8 140,984 35.7 128,675 35.8 127,652 40.2 132,284 41.6 -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- Income before tax .............. 108,950 22.7 96,854 22.8 88,544 22.5 83,829 23.5 75,517 23.6 63,650 20.2 Applicable income taxes ........ 35,905 7.5 33,054 7.8 29,926 7.6 28,249 7.9 24,603 7.7 20,349 6.4 -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- -------- ---- Net income ..................... 73,045 15.2 63,800 15.0 58,618 14.9 55,580 15.6 50,914 15.9 43,301 13.8 ======== ==== ======== ==== ======== ==== ======== ==== ======== ==== ======== ====
* Adjusted operating income equals interest income plus other income.
Per Share Summary 1998 1997 1996 1995 1994 1993 ------------- ------------- ------------- ------------- ------------- ------------- Net income: Basic ......................... 2.19 2.00 1.80 1.69 1.54 1.61 Diluted ....................... 2.15 1.95 1.76 1.67 1.53 1.60 Cash dividends ................... 0.90 0.80 0.74 0.66 0.60 0.54 Stock dividends .................. 0 25% 25% 0 0 50%/20% Basic average shares ............. 33,356,000 31,921,000 32,600,000 32,934,000 33,059,000 26,933,000 Diluted average shares ........... 33,940,000 32,686,000 33,221,000 33,203,000 33,219,000 27,106,000
79 - --------- 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. Dennis M. Bone President & Chief Executive Officer Bell Atlantic - West Virginia, Inc. James K. Brown Attorney, Jackson & Kelly James K. Candler President, Candler Oil Company Nelle Ratrie Chilton Vice President and Director Dickinson Fuel Company, Inc. and Terra Co., Inc. H. Rodgin Cohen Attorney, Sullivan & Cromwell James L. Davidson, Jr. Chairman of the Board One Valley Bank-Central Virginia, NA 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. Thomas E. Goodwin Retired 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-South, Inc. 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 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 W. Lowrie Tucker, III President & Chief Executive Officer One Valley Bank-Shenandoah 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. Highland, Jr. Robert O. Orders, Sr. - ---------- 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 John F. Sapp Senior Vice President Kenneth R. Summers Senior Vice President 80 [PHOTO] Directors of One Valley Bancorp - Standing Left to Right - John L. D. Payne, Robert E. Kamm, Jr., Ray Marshall Evans, Jr., John L. Van Metre, Jr., John D. Lynch, Edward H. Maier, James K. Brown, Richard B. Walker, Bob M. Johnson, Brent D. Robinson, John H. Wick, III, W. Lowrie Tucker, III, James L. Davidson, Jr., James K. Candler, H. Bernard Wehrle, III, Dennis M. Bone, Charles R. Neighborgall, III Seated Left to Right - James Gabriel, James W. Thompson, Angus E. Peyton, Lacy I Rice, Jr., J. Holmes Morrison, Robert F. Baronner, Phyllis H. Arnold, Thomas E. Goodwin, Nelle Ratrie Chilton, Thomas D. Wilkerson, Charles M. Avampato [PHOTO] Left to Right - Robert F. Baronner, James Gabriel, Thomas E. Goodwin, Angus E. Peyton, James F. Thompson - ----------- ONE VALLEY BANCORP RETIRING DIRECTORS - ----------- 81 - ---------------- 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 Terry T. Puster, Senior Vice President, at (304) 348-1442. Shareholders seeking assistance should contact Linda S. Dugan, Shareholder Relations Representative, at (304) 348-7023. Independent Auditors Ernst & Young LLP 900 United Center Charleston, West Virginia 25301 Stock Transfer Agent Harris Trust & Savings Bank 311 West Monroe Street Chicago, Illinois 60606 Number of Shareholders There were approximately 8,300 shareholders of record of One Valley Common Stock at December 31, 1998. - -------------- AFFILIATE MARKETS - -------------- [GRAPHIC] 82 EX-21 5 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, Inc., a West Virginia banking corporation. 6) One Valley Bank-South, Inc., a West Virginia banking corporation. 7) One Valley Bank-North, Inc., a West Virginia banking corporation. 8) One Valley Bank-Central Virginia, National Association, a national banking association organized under the laws of the United States of America. 9) One Valley Bank-Shenandoah, a Virginia banking corporation. 10) One Valley Square, Inc., a Texas corporation. 83 EX-23 6 EXHIBIT 23A EXHIBIT 23A 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 19, 1999, included in the 1998 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 19, 1999, 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, 1998. /s/ Ernst & Young LLP Charleston, West Virginia March 25, 1999 84 EX-23 7 EXHIBIT 23B EXHIBIT 23B CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statements (Form S-8, Nos. 2-90738 and 33-66700) of One Valley Bancorp, Inc. of our report dated January 30, 1998, relating to the consolidated statement of financial condition of FFVA Financial Corporation and subsidiary as of December 31, 1997, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the two years in the period ended December 31, 1997, which report appears in this December 31, 1998 annual report on Form 10-K of One Valley Bancorp, Inc. /s/ Cherry, Bekaert & Holland, L.L.P. Lynchburg, Virginia March 24, 1999 85 EX-27 8 FDS
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 of such financial statements and supplemental schedules. 0000351616 ONE VALLEY BANCORP, INC 1000 YEAR YEAR YEAR DEC-31-1998 DEC-31-1997 DEC-31-1996 DEC-31-1998 DEC-31-1997 DEC-31-1996 155226 127012 151516 3150 2162 9897 50000 20310 6095 0 0 0 1307825 1216749 1059459 278267 352272 303450 287441 359369 306345 3991121 3302536 3135497 52272 45048 45055 5963580 5161486 4801113 4552888 3934174 3804369 729759 623480 434074 49920 51307 46720 35480 48875 32892 0 0 0 0 0 0 391352 363306 298493 204181 140344 184565 5963580 5161486 4801113 317877 279510 265167 100532 95461 87032 1610 1789 947 420019 376760 353146 160877 148026 138247 199295 176910 160467 220724 199850 192679 10063 7531 5264 1125 1018 (162) 161944 144319 140984 108950 96854 88544 108950 96854 88544 0 0 0 0 0 0 73045 63800 58618 2.19 2.00 1.80 2.15 1.95 1.76 4.33 4.48 4.63 9566 9860 12233 7467 6275 4959 0 0 0 0 0 0 45048 45055 42751 8695 9837 7065 2027 2299 1879 52272 45048 45055 52272 45048 45055 0 0 0 0 0 0
EX-99 9 EXHIBIT 99A EXHIBIT 99a ONE VALLEY BANCORP, INC. NOTICE OF ANNUAL MEETING OF SHAREHOLDERS DATE: April 27, 1999 TIME: 10:00 A.M., local time PLACE: Charleston Town Center Marriott 200 Lee Street East Charleston, West Virginia MATTERS TO BE VOTED UPON: 1. Election of 12 directors - nine directors to serve three-year terms and three directors to serve two-year terms; 2. Ratification of the Board of Directors' selection of Ernst & Young LLP as One Valley's independent auditors for 1999; and 3. Any other matters that properly come before the meeting. Shareholders who are holders of record on March 9, 1999, may vote at the meeting. By Order of the Board of Directors J. Holmes Morrison President Charleston, West Virginia March 26, 1999 Please sign and return the enclosed proxy card as soon as possible, even if you plan to attend the meeting. You may revoke your proxy before it is voted at the meeting. TABLE OF CONTENTS
_________________________________________________________________ PAGE NO. VOTING PROCEDURES AND REVOKING YOUR PROXY............................... 1 VOTING FOR DIRECTORS................................................. 2 VOTING FOR RATIFICATION OF AUDITORS.................................. 2 REVOKING YOUR PROXY.................................................. 2 * ELECTION OF DIRECTORS (ITEM 1 ON PROXY CARD)............................. 3 MANAGEMENT NOMINEES TO ONE VALLEY'S BOARD............................ 3 OTHER NOMINEES....................................................... 7 BOARD INFORMATION.................................................... 7 Number of Meetings............................................ 7 Board Committees.............................................. 7 Board Compensation............................................ 8 Section 16(a) Beneficial Ownership Reporting Compliance....... 8 Certain Transactions with Directors and Officers and Their Associates ................................................... 8 Compensation Committee Interlocks and Insider Participation... 9 Board Compensation Committee Report on Executive Compensation. 9 Performance Graph............................................. 12 Five-Year Cumulative Total Return Comparison.................. 12 EXECUTIVE COMPENSATION AND OTHER INFORMATION......................... 13 Summary of Compensation....................................... 13 Summary of Stock Options...................................... 14 Summary of Option Exercises................................... 15 Retirement Benefits........................................... 15 Change in Control Arrangements................................ 17 ONE VALLEY SHARE OWNERSHIP......................................... 18 Directors, Executive Officers and Nominees....................... 18 Certain Beneficial Owners - One Valley Common Stock Ownership................................ 21 * RATIFICATION OF AUDITORS (ITEM 2 ON PROXY CARD)..................... ...... 22 FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION................................................... 23 OTHER INFORMATION..................................................... 23 SHAREHOLDER PROPOSALS FOR 1999........................................ 23
* Matters to be voted upon. ONE VALLEY BANCORP, INC. ONE VALLEY SQUARE SUMMERS AND LEE STREETS P. O. BOX 1793 CHARLESTON, WEST VIRGINIA 25326 PROXY STATEMENT One Valley's Board of Directors is soliciting proxies to vote One Valley shares at the 1999 Annual Meeting of Shareholders. Shareholders will meet at 10:00 a.m. on Tuesday, April 27, 1999, for the purposes stated in the accompanying Notice of Annual Meeting. On or about March 26, 1999, One Valley began mailing this proxy statement to shareholders of record as of March 9, 1999. Shareholders as of March 9, 1999, may vote at the meeting. Please read this proxy statement carefully. You will find more information about One Valley in our enclosed 1998 Annual Report to Shareholders and in the public documents we file with the Securities and Exchange Commission. One Valley will pay for the Board of Directors' solicitation of proxies, and employees of One Valley and its subsidiaries may follow up on this written solicitation by telephone or other methods of communication. As of March 5, 1999, One Valley had 70,000,000 authorized shares of common stock with 34,401,692 shares issued and outstanding. VOTING PROCEDURES AND REVOKING YOUR PROXY If you complete, sign and return the enclosed proxy card, the persons named in the proxy card will vote your shares as you direct. If you sign and return the proxy card without indicating how you want to vote, the proxies will vote your shares "FOR" the election of the 12 nominees as directors and "FOR" the ratification of the selection of Ernst & Young LLP as independent auditors. A quorum for the meeting is present if at least a majority of the outstanding shares is present in person or by proxy. Those who fail to return a proxy or attend the meeting will not count towards determining a quorum. 1 VOTING FOR DIRECTORS Directors are elected by a plurality of the shares voted. This means that the 12 nominees receiving the most votes will be elected. You may vote each share you own for each nominee. Alternatively, you may choose to vote cumulatively, a process explained below. Cumulative voting is applicable only to the election of directors. To vote cumulatively, you multiply the number of shares you own times the number of nominees, resulting in a cumulative total. You may vote your cumulative total for one nominee or divide it among nominees in any proportion you choose. The following is an example of how cumulative voting works. If you own five shares and there are 12 nominees for director, you have a cumulative total of 60 votes. You may choose to vote all 60 votes for one nominee and not vote for the other nominees. Or, you may allocate 30 votes for one nominee, 30 votes for another nominee and not vote for the others. Or, you may choose any other allocation of your cumulative total over all or part of the 12 nominees. If you vote your shares cumulatively by proxy, you must indicate how you wish to divide your cumulative total. Otherwise, the proxies will vote the cumulative total evenly or in a manner to elect as many of One Valley's nominees as possible. VOTING FOR RATIFICATION OF AUDITORS A favorable vote by a majority of shareholders of One Valley common stock represented at the Annual Meeting is required to ratify the selection of Ernst & Young LLP as independent auditors for 1999. REVOKING YOUR PROXY You may revoke your proxy before it is voted at the Annual Meeting by: o notifying One Valley in person; o giving written notice to One Valley; o submitting to One Valley a subsequently dated proxy; or o attending the meeting and withdrawing the proxy before it is voted. 2 ELECTION OF DIRECTORS (ITEM 1 ON PROXY CARD) One Valley's Bylaws provide that the Board of Directors can set the number of directors but also provide that the Board of Directors must have no less than six nor more that 33 directors. The Board of Directors has set the number of directors to serve in 1999 at 26, which means that 12 directors will be elected at the 1999 annual meeting. One Valley's Articles of Incorporation divide the Board of Directors into three classes, each of which serves for three years. The classes are to be approximately equal. Because of this arrangement, One Valley has nominated nine nominees for three-year terms and three nominees for two-year terms. Following the election, the three classes would be; nine directors in the class of 2000, eight directors in the class of 2001 and nine directors in the class of 2002. MANAGEMENT NOMINEES TO ONE VALLEY'S BOARD [PHOTO HERE] PHYLLIS H. ARNOLD Director since 1993 Term expires 2002 Age 50 President and Chief Executive Officer - One Valley Bank, National Association, Charleston, WV [PHOTO HERE] CHARLES M. AVAMPATO Director since 1984 Term expires 2002 Age 60 President-Clay Foundation, Inc., Charleston, WV (Charitable Foundation) [PHOTO HERE] JAMES K. CANDLER Director since 1998 Term expires 2002 Age 63 President-Candler Oil Company, Inc., Lynchburg, VA [PHOTO HERE] JAMES L. DAVIDSON, JR. Director since 1998 Term expires 2002 Age 65 Chairman of the Board - One Valley Bank-Central, VA. Lynchburg, VA [PHOTO HERE] JOHN D. LYNCH Director since 1986 Term expires 2002 Age 58 Vice President-Davis Lynch Glass Company. Star City, WV [PHOTO HERE] JOHN MORK Nominee Term expires 2001 Age 51 President and Chief Executive Officer and Director - Energy Corporation of America. Denver, CO 3 [PHOTO HERE] CHARLES R. NEIGHBORGALL, III Director since 1987 Term expires 2002 Age 57 President - The Neighborgall Construction Company, Huntington, WV [PHOTO HERE] WILLIAM A. RICE, JR. Nominee Term expires 2001 Age 52 1999 to present - President - AIRGAS, INC. (ARG, NYSE) (distributor of welding equipment and gases) Radnor, PA; 1995 to 1998 - Group President Airgas Direct Industrial, Charleston, WV; 1993 to 1995 - Vice President Purchasing. [PHOTO HERE] W. LOWRIE TUCKER, III Director since 1998 Term expires 2002 Age 46 President - One Valley Bank - Shenandoah, Raphine, VA [PHOTO HERE] J. LEE VAN METRE, JR. Director since 1986 Term expires 2002 Age 61 Attorney - Steptoe & Johnson; Secretary of the Board - One Valley Bank - East, National Association, Martinsburg, WV [PHOTO HERE] EDWIN H. WELCH Nominee Term expires 2001 Age 54 1989 to present - President - University of Charleston, Charleston, WV [PHOTO HERE] JOHN H. WICK, III Director since 1993 Term expires 2002 Age 53 1992 to present - Vice President - Dickinson Fuel Co., Inc., Charleston WV(1) 4 DIRECTORS CONTINUING TO SERVE UNEXPIRED TERMS [PHOTO HERE] DENNIS M. BONE Director since 1997 Term expires 2000 Age 47 1995 to present - President and Chief Executive Officer - Bell Atlantic - West Virginia, Inc.; formerly Vice President External Affairs - Bell Atlantic - New Jersey, Inc., Charleston, WV [PHOTO HERE] JAMES K. BROWN Director since 1981 Term expires 2001 Age 69 Attorney - Jackson & Kelly PLLC Charleston, WV [PHOTO HERE] NELLE RATRIE CHILTON Director since 1989 Term expires 2001 Age 59 Director and Vice President - Dickinson Fuel Co., Inc., Charleston, WV; TerraCo., Inc., Charleston, WV; TerraCare, Inc., TerraSalis, Inc., TerraSod, Inc., Malden. WV (Landscaping) (1) [PHOTO HERE] H. RODGIN COHEN Director since 1997 Term expires 2000 Age 54 Attorney - Sullivan & Cromwell, New York, NY [PHOTO HERE] R. MARSHALL EVANS, JR. Director since 1984 Term expires 2001 Age 57 President - Dickinson Co., LLC, Quincy Coal Co., and Chesapeake Mining Co., Charleston, WV; Vice President - Geary Securities, Charleston, WV; President - Hubbard Properties, Inc., Cheyenne, WY (2) [PHOTO HERE] BOB M. JOHNSON Director since 1996 Term expires 2000 Age 63 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 [PHOTO HERE] ROBERT E. KAMM, JR. Director since 1987 Term expires 2000 Age 47 President and Chief Executive Officer - One Valley Bank - South, Inc., Summersville, WV [PHOTO HERE] EDWARD H. MAIER Director since 1983 Term expires 2000 Age 55 President - General Corporation, Charleston, WV (Real Estate Investment and Natural Gas Production) 5 [PHOTO HERE] J. HOLMES MORRISON Director since 1990 Term expires 2000 Age 58 President and Chief Executive Officer - One Valley Bancorp, Inc., and Chairman of the Board - One Valley Bank, National Association, Charleston, WV [PHOTO HERE] JOHN L. D. PAYNE Director since 1981 Term expires 2001 Age 60 President - Payne-Gallatin Mining Co., Charleston, WV (2) [PHOTO HERE] LACY I. RICE, JR. Director since 1994 Term expires 2000 Age 67 Attorney - Bowles, Rice, McDavid, Graff & Love PLLC; Vice Chairman of the Board - One Valley Bancorp, Inc., Charleston, WV; Chairman of the Board - One Valley Bank - East, Martinsburg, WV [PHOTO HERE] BRENT D. ROBINSON Director since 1994 Term expires 2001 Age 51 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. [PHOTO HERE] RICHARD B. WALKER Director since 1991 Term expires 2000 Age 60 Chairman of the Board and Chief Executive Officer - Cecil I. Walker Machinery Co., Belle, WV [PHOTO HERE] THOMAS D. WILKERSON Director since 1981 Term expires 2000 Age 70 Senior Agent - Northwestern Mutual Life Insurance Company, Charleston, WV _________________ (1) John H. Wick, III is the brother-in-law of Nelle Ratrie Chilton. (2) R. Marshall Evans, Jr. and John L. D. Payne are first cousins. 6 OTHER NOMINEES One Valley's Bylaws require that any nominations for election to the Board of Directors, other than those made by One Valley, must be made by a shareholder. The nomination must be in writing and delivered or mailed to the President not less than 14 days nor more than 50 days prior to the meeting. However, if One Valley gives less than 21 days' notice of the meeting, the nominations must be mailed or delivered to the President not later than the 7th day after the notice of meeting was mailed. A shareholder nomination must include the: o name and address of the proposed nominee(s); o principal occupation of proposed nominee(s); o total shares to be voted for each proposed nominee; o name and address of the shareholder making the nomination; and o number of shares owned by the shareholder making the nomination. If a shareholder does not follow these nomination requirements, the Chairman of the meeting does not have to accept the nomination. This means that unless these requirements are met, the shareholder's nominee(s) will not be included among the nominees for election and any votes for those nominees will not be counted. BOARD INFORMATION NUMBER OF MEETINGS The Board of Directors met six times in 1998. All of One Valley's directors attended 75% or more of all Board and Committee meetings during 1998, with the exception of Messrs. Cohen, Kamm and Wehrle. BOARD COMMITTEES The AUDIT COMMITTEE has seven members, Charles M. Avampato, James K. Brown, Nelle Ratrie Chilton, Edward H. Maier, John L. D. Payne, Richard B. Walker and Thomas D. Wilkerson, and met four times in 1998. This committee monitors audit and internal controls, the scope and results of audits by independent auditors, the activities of the internal audit staff and internal audit results. 7 The COMPENSATION COMMITTEE has five members, Charles M. Avampato, Dennis M. Bone, Nelle Ratrie Chilton, John L. D. Payne and H. Bernard Wehrle, III, and met twice in 1998. This committee administers the One Valley Bancorp, Inc., 1983 and 1993 Incentive Stock Option Plans and approves compensation levels for the executive management group of One Valley and its subsidiaries. The BOARD GOVERNANCE COMMITTEE has six members, Robert F. Baronner, Dennis M. Bone, Nelle Ratrie Chilton, J. Holmes Morrison, John L. D. Payne and Angus E. Peyton and met once in 1998. Among other things, this committee recommends nominees to fill vacancies on the Board of Directors. BOARD COMPENSATION During 1998, each director who was not an employee of One Valley received $650 for each meeting of the Board of Directors he or she attended. Additionally, non-employee directors who were members of the Audit Committee received $350 per meeting attended and $300 for other committee meetings attended. In addition, Mr. Baronner received $18,000 for serving as Chairman of the Board. Each director not employed by One Valley also receives an annual grant of 100 shares of One Valley common stock. During 1998, there were no other compensation arrangements for One Valley directors. Under the One Valley Deferred Compensation Plan, One Valley directors may defer fees they receive for serving as directors. 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 to make stock ownership and transaction filings with the Securities and Exchange Commission and to provide copies to One Valley. Based on a review of the reports furnished to One Valley and written statements that no other reports were required, all Section 16(a) filing requirements applicable to its officers and directors were met except for Mr. Edward H. Maier, who filed one report late. One Valley is required to report late filings. CERTAIN TRANSACTIONS WITH DIRECTORS AND OFFICERS AND THEIR ASSOCIATES One Valley and its banking subsidiaries have and expect to have business transactions with directors, officers, principal shareholders and their associates. During 1998, all of these transactions were made on substantially the same terms (including interest rates, collateral and repayment terms on loans) as comparable transactions with affiliated persons. One Valley's management believes that these transactions, which at December 31, 1998, were, in the aggregate, 14.32% of total shareholders' equity, did not involve more than the normal business risk of collection or include other unfavorable features. Jackson & Kelly PLLC, a law firm in which Director James K. Brown is a member, Steptoe & Johnson, a law firm in which Director J. Lee Van Metre, Jr., is a partner, Bowles, Rice, McDavid, Graff 8 & Love PLLC, a law firm in which Director Lacy I. Rice, Jr., is of counsel, and Sullivan & Cromwell, a law firm in which Director H. Rodgin Cohen is a partner, performed legal services for One Valley and its subsidiaries in 1998. Based on information provided by Messrs. Brown, Van Metre, Rice and Cohen, the payments made to these law firms were less than five percent of the gross revenues of each of those firms in 1998. In One Valley's opinion, these transactions were on terms as favorable to One Valley as they would have been with unaffiliated third parties. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION During 1998, One Valley's affiliate banks and One Valley Square, Inc., paid $114,910 to TerraCare, Inc., for landscaping services. TerraCare, Inc., is a wholly owned subsidiary of TerraCo, Inc. 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 during 1998 were Phillip H. Goodwin, Charles M. Avampato, Dennis M. Bone, Nelle Ratrie Chilton, John L. D. Payne and H. Bernard Wehrle, III. BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee ("Committee") of the Board of Directors establishes compensation policies, plans and programs to accomplish three objectives: o to attract and retain highly capable and well-qualified executives; o to focus executives' efforts on increasing long-term shareholder value; and o to reward executives at levels which are competitive with the marketplace for similar positions and consistent 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 totals of the annual cash compensation and average long-term incentives. The Committee meets at least annually and otherwise when necessary with the Chief Executive Officer and the senior human resources executive to review and approve the compensation programs for executives. Outside compensation consultants are retained when the Committee deems it appropriate. In determining the salary budget for 1998 and in fixing levels of executive compensation, the Committee considered: o the review of compensation by Price Waterhouse LLP, o One Valley's performance relative to its long-range goals and its peers, o the relative individual performances of each executive. 9 In its evaluation of One Valley's corporate performance when fixing base salary levels, the Committee does not assign weights to the individual factors which, taken together, constitute "corporate performance." The Compensation Committee has determined that One Valley's 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 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. In 1998, the Committee retained Towers Perrin to study the cash and non-cash compensation of the most senior executives of One Valley. This new study will assist the Committee in its continuing evaluation of the external competitiveness of compensation and executive benefits available to One Valley executives. The information will be used for establishing compensation practices for 1999. One Valley pays short-term incentive compensation 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 (EPS) 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. In establishing the short-term payouts for 1998, the Committee considered One Valley's performance relative to peers which placed results in the top quintile of the peer group of fifteen (15) banks. EICP awards were influenced by the impact of acquisition costs on certain goals. However, the Committee considers the impact of these acquisition costs to be short-term in nature and a transition to greater long-term value. The Committee believes that shareholder value can be further increased by 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. The executive may exercise the option any time within a ten-year period. The options gain value over that time only if the market price of One Valley stock increases. The Committee believes the ISOP focuses the attention and efforts of executive management upon increasing long-term shareholder value. The Committee awards options 10 once each year 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 usually allocated to executives based upon the recommendation of the Chief Executive Officer. The Compensation Committee determines total compensation for the CEO in basically 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. One Valley's earnings per share determines the amount of base compensation increase and significantly affects the EICP award. In addition, the market price of One Valley Common Stock determines the value of options previously awarded to the CEO. The base compensation of the CEO in 1998 was based primarily on the corporate results in 1997 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 weights to the components of corporate performance in fixing the CEO's base compensation. This report shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, unless One Valley specifically incorporates this report by reference. It will not otherwise be filed under such Acts. The report is submitted by the Compensation Committee, which consists of Dennis M. Bone, Chairman Charles M. Avampato Nelle Ratrie Chilton John L. D. Payne H. Bernard Wehrle, III. 11 PERFORMANCE GRAPH The following five-year performance graph compares the yearly change in cumulative total shareholder return on One Valley common stock, with the cumulative total return of the Standard & Poor's 500 Stock Index and the Media General Industry Group Index - 04. Industry Group Index - 04 consists of all banks and bank holding companies within the United States whose stock has been publicly traded for at least six years. This graph assumes the reinvestment of all dividends and an initial investment of $100. There is no assurance that One Valley's stock performance will continue in the future with the same or similar trends as the graph depicts. FIVE-YEAR CUMULATIVE TOTAL RETURN COMPARISON*
One Valley S&P 500 Publicly Traded Banks Bancorp 1993 100 100 100 1994 101 97 104 1995 139 135 119 1996 171 177 183 1997 229 255 244 1998 294 268 213
*The graph shall not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, unless One Valley specifically incorporates this graph by reference. It will not otherwise be filed under such Acts. 12 EXECUTIVE COMPENSATION AND OTHER INFORMATION SUMMARY OF COMPENSATION The following table summarizes the compensation One Valley paid its chief executive officer and the four other most highly compensated executive officers as of the end of 1998. SUMMARY COMPENSATION TABLE
Annual Compensation Long-Term Compensation ------------------- ------------------------ Awards Payouts ------- --------- All Other Other Compensation Incentive Annual Restricted Securities (Including Compen- Compen- Stock Underlying LTIP 401(k) Name and Salary sation sation Award(s) Options Payouts Matching Principal Position Year ($) ($) ($) ($) (#) ($) Contributions) - ------------------ ---- --- --- --- --- --- --- -------------- J. Holmes Morrison 1998 400,000 160,000 0 0 18,000 0 4,000 President and CEO 1997 377,000 180,960 0 0 18,000 0 4,000 1996 362,000 173,760 0 0 15,625 0 3,750 Phyllis H. Arnold 1998 245,083 93,744 0 0 11,000 0 4,000 Exec. Vice President 1997 227,000 86,442 0 0 10,875 0 4,000 & Chief Operating 1996 218,000 93,696 0 0 9,375 0 3,750 Officer Frederick H. Belden, 1998 192,000 61,920 0 0 8,200 0 4,000 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 Laurance G. Jones 1998 190,000 59,850 0 0 8,200 0 4,000 Exec. Vice President 1997 178,000 60,609 0 0 8,125 0 4,000 1996 171,000 58,995 0 0 7,031 0 3,750 Kenneth R. Summers 1998 167,917 48,663 0 0 7,200 0 4,000 Sr. Vice President 1997 158,000 47,795 0 0 7,125 0 4,000 1996 152,000 46,740 0 0 6,250 0 3,750
13 SUMMARY OF STOCK OPTIONS The following table lists One Valley's grants during 1998 of stock options to the listed officers and all recipients of options under One Valley's 1993 Incentive Stock Option Plan. The table also provides information about the potential gain to all shareholders at the designated rate of appreciation. The actual value, if any, an officer may realize depends on the amount by which the stock market price is greater than the exercise price. The exercise price is the price the employee must pay to buy the shares. It is set at the fair market value of One Valley common stock on the date One Valley granted the options. Recipients may exercise options at any time. The table reflects the impact of a 25% stock dividend declared on August 19, 1997. One Valley did not award any stock appreciation rights. OPTION GRANTS IN LAST FISCAL YEAR
Individual Grants -------------------------------------------------------- Number of Potential Realizable Value Securities % of Total At Assumed Annual Rates Underlying Options Of Stock Appreciation for Options Granted to Exercise or Ten-Year Option Term Granted Employees in Base Price Expiration 5% 10% Name (#) Fiscal Year ($/Sh) (1) Date ($) ($) - ---- --- ----------- ---------- ---- ----- ----- J. Holmes Morrison 18,000 11.1% 38.22 04/29/08 432,540 1,096,380 Phyllis H. Arnold 11,000 6.8% 38.22 04/29/08 264,330 670,010 Frederick H. Belden, Jr. 8,200 5.1% 38.22 04/29/08 197,046 499,462 Laurance G. Jones 8,200 5.1% 38.22 04/29/08 197,046 499,462 Kenneth R. Summers 7,200 4.4% 38.22 04/29/08 173,016 438,552 26 Optionees (including the five 157,900 100.0% 38.22 04/29/08 3,794,337 9,617,689 listed above) One Optionee 4,000 - 36.63 05/18/08 92,160 233,520 All Shareholders - - - - 825,984,625 2,092,998,941 Optionee Gain as % of All Shareholders' Gain - - - - .49% .49%
- ----------------------- (1) Plan participants may use previously owned shares to pay for an option's exercise price. Additionally, plan participants may have One Valley withhold their shares due upon exercise of an option to satisfy their required tax withholding obligations. In 1997, One Valley amended the plan to extend the expiration period of the options to the earlier of three years or the full option term if a participant retires, is disabled or is terminated because of a change in control. The number of shares has been adjusted for the 25% stock dividend declared on August 19, 1997. 14 SUMMARY OF OPTION EXERCISES The following table lists the number of shares acquired and the value realized as a result of the exercise of options during 1998 for the listed officers. The value realized is the difference between the market price of the shares acquired and the exercise price of the options. The table also lists the number of shares underlying unexercised options as well as values for "in-the-money" options. Options are "in-the-money" if the 1998 year-end share price is higher than the exercise price. OPTION EXERCISES IN LAST FISCAL YEAR
Number of Securities Value of Underlying Unexercised Unexercised In-the-Money Shares Options at Options at Acquired On FY-End (#) FY-End ($) Name Exercise (#) Value Realized ($) Exercisable Exercisable - ---- ------------- ----------------- -------------- ------------ J. Holmes Morrison 4,600 112,600 52,639 626,422 Phyllis H. Arnold 7,680 170,261 37,090 422,778 Frederick H. Belden, Jr. 1,000 18,528 32,438 380,450 Laurance G. Jones 1,087 15,090 25,818 260,007 Kenneth R. Summers 0 0 40,544 565,767
RETIREMENT BENEFITS One Valley maintains a qualified pension plan. Compensation covered by a qualified pension plan is based on total pay received during a period of 60 consecutive months of employment which results in the highest total pay. "Total pay" does not include stock options or payments in lieu of benefits under One Valley's flexible benefits program. "Total pay" is the total annual salary and bonus listed in the Summary Compensation Table. For purposes of calculating retirement, the benefits compensation is capped at $160,000. As of November 1, 1998, the credited years of service under the retirement plan for the following individuals were: Phyllis H. Arnold, 22.667 years; J. Holmes Morrison, 31.167 years; Frederick H. Belden, Jr., 31.000 years; Laurance G. Jones, 29.417 years; and Kenneth R. Summers, 35.417 years. 15 In 1990, One Valley established a Supplemental Employee Retirement Plan for members of senior management, including the individuals named in the Summary Compensation Table. This plan provides for a benefit at normal retirement of 65% of final average compensation, less the retirement benefit under the Defined Benefit Pension Plan, any retirement benefits from a previous employer and the employee's Social Security benefit. The plan also provides a reduced early retirement benefit and a disability retirement benefit. Both of these benefits are reduced by benefits paid under One Valley's Long Term Disability Plan and Social Security benefits an employee receives. In 1997, One Valley amended the Supplemental Employee Retirement Plan to exclude stock options and payments in lieu of benefits under One Valley's flexible benefits program from the calculation of Supplemental Employee Retirement Plan benefits. During 1998, $371,794 was accrued for the Supplemental Employee Retirement Plan Trust, and $178,449 was paid into the Trust. For illustrative purposes, the following table lists the approximate annual retirement benefits (Qualified Plan and Supplemental Plan) an employee would receive if he or she retired on November 1, 1998, at age 65. Amounts are based 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 or More $125,000 $ 27,665 $ 36,887 $ 65,146 150,000 33,665 44,887 81,396 175,000 39,665 52,887 97,646 200,000 45,665 60,887 113,896 225,000 51,665 68,887 130,146 250,000 57,665 76,887 146,396 300,000 69,665 92,887 178,896 400,000 93,665 124,887 243,896 450,000 105,665 140,887 276,396 500,000 117,665 156,887 308,896 550,000 129,665 172,887 341,396 600,000 141,665 188,887 373,896 650,000 153,665 204,887 406,396 700,000 165,665 220,887 438,896
* IRS Maximum for Qualified Plan is $160,000. 16 CHANGE IN CONTROL ARRANGEMENTS In October 1996, One Valley entered into agreements with all officers listed in the Summary Compensation Table and with other officers to encourage those key officers not to seek other employment because of the possibility of another entity's acquiring One Valley. One Valley designed these agreements to secure the executives' continued service and dedication in the face of the perception a change in control could occur, or an actual or threatened change in control. Because of the amount of acquisition activity in the banking industry, the Board of Directors believed entering into these agreements was in One Valley's best interest. The 1996 agreements replaced existing change in control agreements and were not entered into because a change in control was imminent. Generally, the agreements apply if there is a change in control of One Valley and for two years following the change in control. During this period, if the executive (a) is terminated by One Valley without cause, (b) resigns for "good reason," or (c) if an executive at the level of executive vice president or above voluntarily terminates employment during the thirteenth month after a change in control, then the executive will receive cash equal to either three (at the level of executive vice president or above) or two times the sum of (a) the executive's base salary and average bonus for the three years prior to the change in control, and (b) a pro rata portion of the executive's target bonus for the year when the change in control occurs. Health benefits will continue for 36 months following that period, and the executive will receive retiree medical benefits if the executive has 10 years of service and is at least 50 years old. If an excise tax under Section 4999 of the Internal Revenue Code applies to these agreements, One Valley will pay executives (at the level of executive vice president or above) an additional amount so that after payment of the tax, the executive has received the full change in control benefits. However, the extra payment will not be made and payments will be capped if One Valley reduces the change in control payments so that no excise tax is due. If necessary, One Valley will reduce payments for other executives under the change in control agreements so no excise tax would be due. Under the agreements, executives will not resign for 180 days after change in control activities have begun, unless the activities terminate or a change in control occurs. Under the change in control agreements, a "change in control" means (a) a person becomes the beneficial owner of 50% or more of the voting power of One Valley, (b) a change in a majority of the Board, (c) the completion of a reorganization, merger, consolidation or sale of substantially all of One Valley's assets (unless One Valley's shareholders receive more than 60% of the voting stock of the acquiring company, no person acquires more than 50% of the voting stock, and One Valley's Board of Directors constitutes a majority of the continuing board of directors of the acquiring company), or (d) a liquidation, dissolution or sale or disposition of all or substantially all of One Valley's assets. 17 ONE VALLEY SHARE OWNERSHIP The following table lists One Valley's share ownership for the persons or groups specified. Ownership includes direct and indirect (beneficial) ownership as defined by SEC rules. Information in the table is as of March 5, 1999. Share totals include 100 directors' qualifying shares which One Valley's Bylaws require each director to own. The Bylaws further require that to be eligible for re-election, a director must own at least 500 shares by the end of the first three years of service. DIRECTORS, EXECUTIVE OFFICERS AND NOMINEES
SHARES NAME POSITIONS WITH COMPANY BENEFICIALLY OWNED ---- ---------------------- ------------------ NOMINEES FOR THREE-YEAR TERM: - ----------------------------- Phyllis H. Arnold Chief Operating Officer, 90,391 Direct (1) (2) Executive Vice President, Director Charles M. Avampato Director 32,894 Direct 5,138 Indirect James K. Candler Director 24,573 Direct (3) James L. Davidson, Jr. Director 181,631 Direct (3) 12,806 Indirect John D. Lynch Director 32,912 Direct 4,687 Indirect Charles R. Neighborgall, III Director 2,857 Direct 3,656 Indirect W. Lowrie Tucker, III Director 32,939 Direct 7,599 Indirect J. Lee Van Metre, Jr. Director 2,822 Direct 2,612 Indirect John H. Wick, III Director 17,098 Direct 43,730 Indirect NOMINEES FOR TWO-YEAR TERM: - --------------------------- John Mork Nominee 900 Direct William A. Rice, Jr. Nominee 5,825 Direct Edwin H. Welch Nominee 2,517 Direct 18 SHARES NAME POSITIONS WITH COMPANY BENEFICIALLY OWNED ---- ---------------------- ------------------ CONTINUING DIRECTORS: - --------------------- Dennis M. Bone Director 1,040 Direct James K. Brown Director 2,767 Direct 4,018 Indirect Nelle Ratrie Chilton Director 68,178 Direct H. Rodgin Cohen Director 3,446 Direct R. Marshall Evans, Jr. Director 44,633 Direct 2,208,169 Indirect(4) Bob M. Johnson Director 46,345 Direct(2) 31,892 Indirect Robert E. Kamm, Jr. Director 330,495 Direct 27,191 Indirect Edward H. Maier Director 26,000 Direct J. Holmes Morrison President, Chief Executive Officer, 86,020 Direct (1) (2) Director 15,583 Indirect John L. D. Payne Director 1,215 Direct 724,806 Indirect (5) Lacy I. Rice, Jr. Director 179,964 Direct 4,687 Indirect Brent D. Robinson Senior Vice President, 36,132 Direct (2) Director 1,065 Indirect Richard B. Walker Director 4,544 Direct Thomas D. Wilkerson Director 3,112 Direct 19 SHARES NAME POSITIONS WITH COMPANY BENEFICIALLY OWNED ---- ---------------------- ------------------ EXPIRED TERMS: Robert F. Baronner Chairman of the Board, 15,792 Direct Director 9,432 Indirect James Gabriel Director 28,351 Direct 4,531 Indirect Thomas E. Goodwin Director 11,695 Direct 11,683 Indirect Angus E. Peyton Director 51,668 Direct 255,888 Indirect James W. Thompson Director 24,929 Direct 10,195 Indirect H. Bernard Wehrle, III Director 3,943 Direct OTHER EXECUTIVE OFFICERS: - ------------------------- Frederick H. Belden, Jr. Executive Vice President 45,965 Direct (1) (2) 3,125 Indirect Laurance G. Jones Executive Vice President, 35,318 Direct (2) Chief Financial Officer 6,537 Indirect Kenneth R. Summers Senior Vice President 54,953 Direct (1) (2) 276 Indirect All Directors, Nominees and 1,566,952 Direct Executive Officers as a Group 2,821,872 Indirect (36 Individuals)
All Directors, Nominees and Executive Officers as a Group - 12.76%. Three of the above individuals beneficially own more than one percent of One Valley common stock: R. Marshall Evans, Jr. - 6.55%, Robert E. Kamm, Jr. - 1.04%, and John L. D. Payne - 2.11%. (1) Includes shares the individual has the right to acquire within 60 days through the exercise of options under One Valley's 1983 Stock Option Plan: Phyllis H. Arnold - 4,589, J. Holmes Morrison - 13,013, Kenneth R. Summers - 10,405, and Frederick H. Belden, Jr. - 1,687. 20 (2) Includes shares the individual has the right to acquire within 60 days through the exercise of options under One Valley's 1993 Stock Option Plan: Phyllis H. Arnold - 43,501, Bob M. Johnson - 6,000, Robert E. Kamm, Jr. - 27,801, J. Holmes Morrison - 57,626, Brent D. Robinson - 13,000, Kenneth R. Summers - 37,339, Frederick H. Belden, Jr. - 37,951, and Laurance G. Jones - 34,018. (3) Includes shares the individual has the right to acquire within 60 days through the exercise of options under the FFVA Financial Corporation 1994 Stock Option Plan: James K. Candler - 13,238, and James L. Davidson, Jr. - 83,713. (4) See Note (1) under Certain Beneficial Owners. (5) Consists of 146,247 shares held in nine trusts of which John L. D. Payne is a co-trustee, 567,434 shares held by Hubbard Properties, Inc., formerly Dickinson Company, LLC, Payne-Gallatin Mining Company and Horse Creek Land and Mining Company and 10,000 shares held by Southern Land Limited Partnership (in which companies Mr. Payne is an executive officer and director), 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 trustees, is an income beneficiary. CERTAIN BENEFICIAL OWNERS ONE VALLEY COMMON STOCK OWNERSHIP Mr. R. Marshall Evans, Jr. is the only shareholder known to One Valley to beneficially own five percent or more of One Valley's common stock. "Beneficially own" means to own the shares directly, or to have the right to vote the shares, or to have the right to dispose of the shares. More than one person may "beneficially own" the same shares. For example, co-trustees of a trust may each be "beneficial owners" of the shares in the trust. Name and Address of Amount and Nature of Percent Beneficial Owner Beneficial Ownership (1) of Class ---------------- ------------------------ -------- R. Marshall Evans, Jr. 2,252,802 (1) 6.55% 3401 Northside Parkway Atlanta, GA 30327 - ---------------- (1) Consists of (a) 1,308,562 shares held as co-trustee with an individual co-trustee and One Valley Bank; (b) 219,464 shares held as co-trustee with One Valley Bank and another individual co-trustee; (c) 186,731 shares held with One Valley Bank as co-trustee; (d) 36,132 shares held by his wife as trustee of trusts for the benefit of his children; (e) 44,633 shares owned of record; (f) 9,033 shares owned of record by his wife; and (g) 438,247 shares owned by Hubbard 21 Properties, Inc., formerly Dickinson Company, LLC, and 10,000 shares owned by Southern Land Limited Partnership (in which Mr. Evans is an executive officer and director). This does not include 35,654 shares held in trusts from which Mr. Evans may, at the discretion of the co-trusees, receive distributions of income and, under certain circumstances, distributions of principal. One Valley's subsidiary banks hold of record as trustee, co-trustee, executor or co-executor, 4,848,642 shares of stock representing 14.09% of the outstanding One Valley shares. One Valley does not vote all of these shares. The information below indicates when One Valley's subsidiary banks have voting control: o The banks do not vote the 4,095,763 shares held as co-trustee or co-executor. o The banks hold 752,879 shares as sole trustee or sole executor, of which 707,666 shares (or 2.06% of the total shares outstanding) will be voted by the banks, as trustee or executor. These shares will be voted "FOR" the election of the 12 nominees as directors and "FOR" the ratification of the selection of Ernst & Young LLP as independent auditors. o The banks hold 45,213 shares as sole trustee or sole executor in personal trust and self-directed employee benefit accounts. These shares will be voted at the direction of the grantor, settlor or beneficiary of those accounts. RATIFICATION OF AUDITORS (ITEM 2 ON PROXY CARD) The Board of Directors has selected the firm of Ernst & Young LLP to serve as independent auditors for One Valley for 1999. Although the selection of auditors does not require shareholder ratification, the Board of Directors has submitted the appointment of Ernst & Young LLP to the 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. Ernst & Young LLP advised One Valley that no member of that 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, will have the opportunity to make a statement and will respond to appropriate questions. The proxies will vote your proxy "FOR" the ratification of the selection of Ernst & Young LLP unless otherwise directed. 22 FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION ONE VALLEY WILL PROVIDE A COPY OF ONE VALLEY'S 1998 ANNUAL REPORT ON FORM 10-K, WITHOUT CHARGE, TO ANY SHAREHOLDER, UPON WRITTEN REQUEST MAILED TO LAURANCE G. JONES, EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER, ONE VALLEY BANCORP, INC., P. O. BOX 1793, CHARLESTON, WEST VIRGINIA 25326. OTHER INFORMATION If any of the nominees for election as directors is unable to serve due to death or other unexpected occurrence, your proxies will be voted for a substitute nominee or nominees designated by the Board of One Valley, or the Board of Directors may adopt a resolution to reduce the number of directors to be elected. The Board of Directors is unaware of any other matters to be considered at the annual meeting. If any other matters properly come before the meeting, persons named in the accompanying proxy will vote your shares in accordance with the direction 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 29, 1999, to have it considered for inclusion in the proxy statement of the Annual Meeting in 2000. J. Holmes Morrison President Charleston, West Virginia March 26, 1999 23 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 27, 1999 Charles D. Dunbar, Elizabeth Lord and Louis S. Southworth II, or any one of them with full power to act alone and with full power of substitution, 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 27, 1999, 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.) 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.
FOR WITHHOLD FOR ALL ALL ALL EXCEPT * Except Nominee(s) Written Below 1. Election of Directors for the terms specified in the Proxy Statement: [ ] [ ] [ ] Phyllis H. Arnold, Charles M. Avampato, James K. Candler, James L. Davidson, Jr., John D. Lynch, John Mork, Charles R. Neighborgall, III, William A. Rice, Jr., W. Lowrie Tucker, III, J. Lee Van Metre, Jr., Edwin H. Welch and John H. Wick, III - ----------------------------------- * (Except Nominee(s) written above.) 2. Ratify the selection of Ernst & Young LLP as FOR AGAINST ABSTAIN Independent Auditors for 1999. [ ] [ ] [ ] 3. Transact such other business as may properly come before the meeting and any adjournment thereof. Dated: _________________, 1999 _______________________________________ Signature(s) When signing as attorney, executor, administrator, trustee or guardian, please give full title. If more than one trustee, all should sign.
EX-99 10 EXHIBIT 99B EXHIBIT 99B REPORT OF INDEPENDENT AUDITORS The Board of Directors and Stockholders FFVA Financial Corporation Lynchburg, Virginia We have audited the consolidated statements of financial condition of FFVA Financial Corporation and Subsidiary as of December 31, 1997, and the related consolidated statements of changes in stockholders' equity, income, and cash flows for each of the two years in the period ended December 31, 1997 (not presented separately herein). These financial statements are the responsibility of the Company'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 financial position of FFVA Financial Corporation and Subsidiary as of December 31, 1997, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Cherry, Bekaert & Holland, L.L.P. Lynchburg, Virginia January 30, 1998 114 -----END PRIVACY-ENHANCED MESSAGE-----