SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported) June 17, 1998
One Valley Bancorp, Inc.
(Exact name of registrant as specified in its charter)
West Virginia 0-10042 55-0609408
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation or organization) Identification No.)
One Valley Square, Charleston, West Virginia 25326
(Address of principal executive offices) (Zip Code)
(304) 348-7000
(Registrant's telephone number, including area code)
Not applicable
(Former name, address, and fiscal year, if changed since last report)
<PAGE>
One Valley Bancorp, Inc.
Item 5. Other Events
As required by the rules of the Securities and Exchange Commission for
pooling-of-interests accounting treatment, presented below is financial data for
One Valley Bancorp, Inc. and FFVA Financial Corporation reported in conjunction
with the consummation of the merger between those companies on March 30, 1998.
Following are the Consolidated Financial Statements of the Registrant as of
December 31, 1997 and 1996, and for the three year period ended December 31,
1997, and Management's Discussion and Analysis of Financial Condition and
Results of Operations restated to reflect that merger.
<PAGE>
One Valley Bancorp, Inc. and Subsidiaries
Audited Consolidated Financial Statements
December 31, 1997
Contents
Report of Independent Auditors.................................................1
Audited Consolidated Financial Statements
Consolidated Balance Sheets....................................................2
Consolidated Statements of Income..............................................3
Consolidated Statements of Shareholders' Equity................................4
Consolidated Statements of Cash Flows..........................................5
Notes to Consolidated Financial Statements.....................................6
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders
One Valley Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of One Valley
Bancorp, Inc. and subsidiaries (One Valley) as of December 31, 1997 and 1996,
and the related consolidated statements of income, shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of One Valley's management.
Our responsibility is to express an opinion on these financial statements based
on our audits. We did not audit the financial statements of FFVA Financial
Corporation and subsidiary, a wholly-owned subsidiary, which statements reflect
total assets constituting 11% in 1997 and 1996 and total income constituting 11%
in 1997, 1996, and 1995 of the related consolidated totals. 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 Financial Corporation
and subsidiary, 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, 1997 and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
January 21, 1998, except for
Notes A, D, and M, as to which
the date is June 15, 1998
1
<PAGE>
One Valley Bancorp, Inc. and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
December 31
1997 1996
----------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 127,012 $ 151,516
Interest-bearing deposits in other banks 2,162 9,897
Federal funds sold 20,310 6,095
----------------------------------
Cash and cash equivalents 149,484 167,508
Securities:
Available-for-sale, at fair value 1,216,749 1,059,459
Held-to-maturity (fair value approximated $359,369 and $306,345
at December 31, 1997 and 1996) 352,272 303,450
Loans, net 3,257,488 3,090,442
Premises and equipment 90,397 90,370
Accrued interest receivable 38,764 38,183
Other assets 56,332 51,701
==================================
Total assets $5,161,486 $4,801,113
==================================
Liabilities and shareholders' equity
Liabilities:
Deposits:
Non-interest bearing $ 465,227 $ 407,548
Interest bearing 3,468,947 3,396,821
----------------------------------
Total deposits 3,934,174 3,804,369
Short-term borrowings:
Federal funds purchased 22,581 17,278
Securities sold under agreements to repurchase and other 600,899 416,796
----------------------------------
Total short-term borrowings 623,480 434,074
Long-term borrowings 48,875 32,892
Other liabilities 51,307 46,720
----------------------------------
Total liabilities 4,657,836 4,318,055
Shareholders' equity:
Preferred stock--$10 par value; authorized 1,000,000 shares;
none issued - -
Common stock--$10 par value; authorized 40,000,000 shares;
36,330,605 and 29,849,306 shares issued at December 31, 1997 and 1996,
including 4,346,846 and 2,792,360 shares in treasury
at December 31, 1997 and 1996 363,306 298,493
Capital surplus 71,782 66,652
Retained earnings 157,730 183,226
2
<PAGE>
Unrealized gain on available-for-sale securities, net of deferred income
taxes 5,927 2,065
Treasury stock (95,095) (67,378)
----------------------------------
Total shareholders' equity 503,650 483,058
----------------------------------
Total liabilities and shareholders' equity $5,161,486 $4,801,113
==================================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
One Valley Bancorp, Inc. and Subsidiaries
Consolidated Statements of Income
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
---------------------------------------------------
<S> <C> <C> <C>
Interest income:
Interest and fees on loans:
Taxable $276,520 $262,354 $242,174
Tax-exempt 2,990 2,813 2,453
---------------------------------------------------
Total 279,510 265,167 244,627
Interest and dividends on securities:
Taxable 83,458 75,956 62,813
Tax-exempt 12,003 11,076 10,362
---------------------------------------------------
Total 95,461 87,032 73,175
Other 1,789 947 2,253
---------------------------------------------------
Total interest income 376,760 353,146 320,055
Interest expense:
Deposits 148,026 138,247 123,753
Short-term borrowings 25,466 21,076 15,851
Long-term borrowings 3,418 1,144 688
---------------------------------------------------
Total interest expense 176,910 160,467 140,292
---------------------------------------------------
Net interest income 199,850 192,679 179,763
Provision for loan losses 7,531 5,264 5,887
---------------------------------------------------
Net interest income after provision for loan losses 192,319 187,415 173,876
Other income:
Trust Department 10,228 9,322 8,203
Service charges on deposit accounts 15,511 14,934 14,109
Real estate loan processing and servicing fees 6,191 6,098 5,249
Other service charges and fees 10,947 8,177 7,097
Securities gains (losses) 1,018 (162) 144
Other 4,959 3,744 3,826
---------------------------------------------------
Total other income 48,854 42,113 38,628
Other expenses:
Salaries and employee benefits 74,234 70,408 67,022
Net occupancy 7,614 7,380 6,777
Equipment 9,377 9,683 9,233
Federal deposit insurance assessments 1,051 7,921 4,696
Outside data processing 9,115 6,632 6,073
Other 42,928 38,960 34,874
---------------------------------------------------
Total other expenses 144,319 140,984 128,675
---------------------------------------------------
Income before income taxes 96,854 88,544 83,829
Applicable income taxes 33,054 29,926 28,249
---------------------------------------------------
Net income $ 63,800 $ 58,618 $ 55,580
===================================================
Net income per common share:
Basic $2.00 $1.80 $1.69
Diluted $1.95 $1.76 $1.67
Average common shares outstanding:
4
<PAGE>
Basic 31,921,000 32,600,000 32,934,000
Diluted 32,686,000 33,221,000 33,203,000
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
One Valley Bancorp, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
Unrealized
Gain (Loss)
on
Available-
Common Capital Retained for-Sale Treasury
Stock Surplus Earnings Securities Stock
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balances at January 1, 1995 $208,478 $51,217 $171,259 $ (7,855) $(10,373)
Change in unrealized gains and losses, net of deferred income - - - 15,615 -
taxes of $8,735
Net income - - 55,580 - -
Issuance of common stock (411,602 shares) 4,116 8,130 - - -
Purchase of treasury stock (420,700 shares) - - - - (12,971)
Stock options exercised (66,614 shares) and adjustment for 666 519 - - -
fractional shares
Cash dividends on One Valley shares ($.66 per share) - - (17,918) - -
Cash dividends on FFVA shares - - (1,766) - -
FFVA repurchase of treasury stock (3,150) (2,664) (2,706) - -
Allocated/earned FFVA ESOP shares - 460 - - -
Purchase of unearned FFVA MSBP shares - (2,276) - - -
------------------------------------------------------------
Balances at December 31, 1995 210,110 55,386 204,449 7,760 (23,344)
Change in unrealized gains and losses, net of deferred income - - - (5,695) -
taxes of $(3,773)
Net income - - 58,618 - -
Issuance of common stock (1,789,000 shares) 17,890 37,817 - - -
Purchase of treasury stock (1,318,988 shares) - - - - (44,034)
Five-for-four stock split in the form of a 25% stock dividend 49,746 - (49,746) - -
Stock options exercised (144,958 shares) and adjustment for 1,430 1,414 - - -
fractional shares
Cash dividends on One Valley shares ($.74 per share) - - (20,028) - -
Cash dividends on FFVA shares - - (1,903) - -
FFVA repurchase of treasury stock, pre-split (1,460) (1,234) (1,564) - -
Two-for-one stock split on FFVA shares 28,484 (28,484) - - -
FFVA repurchase of treasury stock, post-split (7,725) 597 (6,600) - -
Allocated/earned FFVA ESOP and MSBP shares - 1,143 - - -
Exercise of FFVA stock options 18 13 - - -
------------------------------------------------------------
Balances at December 31, 1996 298,493 66,652 183,226 2,065 (67,378)
Change in unrealized gains and losses, net of deferred income - - - 3,862 -
taxes of $2,495
Net income - - 63,800 - -
Purchase of treasury stock (856,396 shares) - - - - (27,717)
Five-for-four stock split in the form of a 25% stock dividend 62,960 - (62,960) - -
Stock options exercised (303,698 shares) and adjustment for 3,015 1,783 - - -
fractional shares
Cash dividends on One Valley shares ($.80 per share) - - (22,009) - -
Cash dividends on FFVA shares - - (2,005) - -
FFVA repurchase of treasury stock (1,807) 140 (2,322) - -
Allocated/earned FFVA ESOP and MSBP shares - 3,810 - - -
Exercise of FFVA stock options 47 (5) - - -
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)
============================================================
</TABLE>
See notes to consolidated financial statements.
6
<PAGE>
One Valley Bancorp, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $ 63,800 $ 58,618 $ 55,580
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for loan losses 7,531 5,264 5,887
Depreciation 9,013 9,738 8,499
Amortization, net of accretion 3,371 2,391 3,570
Deferred income tax (benefit) expense (76) 165 133
Net (gains) losses from sales of assets (1,003) 112 (461)
Loans originated for sale (111,837) (67,105) (60,515)
Proceeds from loans sold 112,823 68,167 57,598
Net change in accrued interest receivable (581) 641 (4,290)
Net change in accrued interest payable 3,182 (382) 4,705
Net change in other assets and other liabilities (11,467) 2,137 1,502
--------------------------------------------
Net cash provided by operating activities 74,756 79,746 72,208
Investing activities:
Proceeds from sales of available-for-sale securities 92,165 151,749 128,729
Proceeds from maturities of available-for-sale securities 278,877 266,629 222,599
Purchases of available-for-sale securities (522,292) (366,559) (375,993)
Proceeds from maturities of held-to-maturity securities 37,740 21,934 53,027
Purchases of held-to-maturity securities (86,621) (47,968) (102,494)
Purchase of a subsidiary, net of cash received - 10,866 2,730
Net increase in loans (171,993) (169,662) (150,017)
Purchases of premises and equipment (8,781) (8,430) (6,416)
--------------------------------------------
Net cash used in investing activities (380,905) (141,441) (227,835)
Financing activities:
Net change in deposits 129,805 120,008 120,431
Net change in federal funds purchased 5,303 (36,727) 860
Net change in other short-term borrowings 184,103 48,265 33,581
Repayment of long-term borrowings (9,017) (10,776) (13,539)
Proceeds from long-term borrowings 25,000 15,007 5,000
Proceeds from issuance of common stock 4,840 2,875 1,185
Purchase of treasury stock (27,717) (44,034) (12,971)
Cash dividends (24,014) (21,931) (19,684)
Allocation of FFVA ESOP and MSBP shares 3,810 1,143 460
FFVA repurchase of treasury stock (3,988) (17,986) (8,520)
Purchase of FFVA MSBP shares - - (2,276)
--------------------------------------------
Net cash provided by financing activities 288,125 55,844 104,527
--------------------------------------------
Decrease in cash and cash equivalents (18,024) (5,851) (51,100)
Cash and cash equivalents at beginning of year 167,508 173,359 224,459
--------------------------------------------
Cash and cash equivalents at end of year $149,484 $167,508 $173,359
============================================
</TABLE>
See notes to consolidated financial statements.
7
<PAGE>
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.
Basis of Presentation
The consolidated financial statements have been restated to give retroactive
effect to the merger with FFVA Financial Corporation (FFVA) on March 30, 1998,
which was accounted for as a pooling of interests.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of One
Valley Bancorp, Inc. and its wholly-owned subsidiaries. All significant
intercompany balances and transactions have been eliminated.
Cash and Cash Equivalents
One Valley considers cash and due from banks, interest-bearing deposits in other
banks, and federal funds sold as cash and cash equivalents.
Securities
Management determines the appropriate classification of securities at the time
of purchase. Debt securities are classified as held-to-maturity when One Valley
has the positive intent and ability to hold the securities to maturity.
Held-to-maturity securities are stated at amortized cost.
Debt securities not classified as held-to-maturity are classified as
available-for-sale. Available-for-sale securities are stated at fair value with
the unrealized gains and losses, net of deferred income taxes, reported in a
separate component of shareholders' equity. Unrealized gains and losses
represent the difference between the estimated fair value and amortized cost of
available-for-sale securities.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts, which are recognized as adjustments to interest income. The specific
identification method is used to determine realized gains and losses on sales of
securities.
Loans Held for Sale
Mortgage loans originated and held for sale in the secondary market are carried
at the lower of cost or estimated fair value in the aggregate.
Allowance for Loan Losses
In determining the adequacy of the allowance for loan losses, as well as the
appropriate provision for loan losses, management takes into consideration the
results of internal review procedures, historical loan loss experience, an
assessment of the effect of current and anticipated future economic conditions
on the loan portfolio, the financial condition of the borrower and such other
factors which, in management's judgment,
<PAGE>
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.
Net Income per Common Share
In 1997, the Financial Accounting Standards Board (FASB) issued Statement No.
128, Earnings Per Share. Statement 128 requires the reporting of basic and
diluted net income per common share. Basic net income per common share excludes
any dilutive effects of stock options and is computed by dividing net income by
the average common shares outstanding adjusted for the ESOP shares which have
not been committed to release (which represent 209,000, 243,000 and 279,000 in
1997, 1996, and 1995.) 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
2
<PAGE>
765,000, 621,000, and 270,000 in 1997, 1996, and 1995. Net income per common
share amounts for all periods presented have been restated to conform to
Statement 128.
New Accounting Pronouncements
In June 1996, the FASB issued Statement No. 125, Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, which was
applicable to One Valley effective January 1, 1997. However, in late 1996, the
FASB agreed to defer the effective date for one year for the following
transactions: securities lending, repurchase agreements, dollar rolls and other
similar secured transactions. The adoption of the 1997 provisions did not have a
significant impact on the financial position or results of operations of One
Valley and management anticipates the same results for the provisions adopted on
January 1, 1998.
During 1997, the FASB issued several new statements which will also become
effective in 1998. These pronouncements include Statement No. 129, Disclosure of
Information about Capital Structure; Statement No. 130, Reporting Comprehensive
Income; and Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information. The Company is in the process of fully evaluating these new
pronouncements and will adopt them as required in 1998. The adoption of these
new statements is not expected to have a significant impact on the financial
position or results of operations of One Valley.
Reclassifications
Certain amounts in the 1996 and 1995 financial statements have been reclassified
to conform to the 1997 presentation. Such reclassifications had no impact on net
income or shareholders' equity.
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, 1997, was approximately $11,000.
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, 1997, the retained net
profits available for distribution to One Valley Bancorp, Inc. as dividends
without regulatory approval approximated $13,400.
D. Mergers and Acquisitions
In May 1998, One Valley entered into an agreement to acquire Summit Bankshares,
Inc., headquartered in Raphine, Virginia. Under terms of the agreement, One
Valley will exchange 1.36 shares of its stock for each share of Summit
Bankshares' common stock outstanding which will result in the issuance of
approximately 1,823,000 shares valued at $68 million. It is anticipated that
this transaction will be consummated in the third quarter of 1998 and be
accounted for under the pooling of interests method. Summit Bankshares, Inc. had
$199 million in total assets, $176 million in deposits, and $140 million in
loans at March 31, 1998.
3
<PAGE>
On March 30, 1998, One Valley acquired all stock of 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 has been accounted for as a pooling
of interests and, as a result, all prior financial results have been 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 will be included in the financial statements of One Valley only from
the date of purchase.
On April 30, 1996, One Valley acquired all of the outstanding stock of CSB
Financial Corporation, also headquartered in Lynchburg, Virginia. Under terms of
the agreement, One Valley exchanged 0.6774 shares of its common stock for each
share of CSB Financial Corporation's common stock outstanding. This resulted in
the issuance of approximately 1,789,000 shares valued at approximately $55.7
million. This transaction was accounted for under the purchase method of
accounting. Accordingly, consolidated results include the operations of CSB
Financial Corporation only from the date of acquisition. CSB had $336 million in
total assets, $257 million in deposits, and $164 million in loans at April 30,
1996. Pro forma financial information is not presented because the above
transaction was immaterial to One Valley.
In years prior to 1995, One Valley acquired several financial institutions
accounted for using the purchase method of accounting. The purchase price of
these acquisitions and those previously noted was allocated to the identifiable
tangible and intangible assets acquired based upon their fair value at the
acquisition date. Intangible assets representing the present value of future net
income to be earned from deposits of acquired banks are being amortized on an
accelerated basis over a ten year period. Deposit intangibles, included in other
assets, approximated $2,700 and $3,800 at December 31, 1997 and 1996. Deposit
intangible amortization approximated $1,100 in 1997, $900 in 1996, and $600 in
1995. The excess of purchase price over the fair market value of assets of
subsidiary banks acquired (goodwill) is being amortized on a straight-line basis
over periods ranging from 15 to 25 years. Goodwill, included in other assets,
approximated $17,500 and $19,500 at December 31, 1997 and 1996. Goodwill
amortization approximated $1,400 in 1997, $1,200 in 1996, and $500 in 1995.
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.
4
<PAGE>
F. Securities
The following is a summary of available-for-sale and held-to-maturity
securities:
<TABLE>
<CAPTION>
Available-for-Sale Held-to-Maturity
------------------------------------------- ------------------------------------------
Gross Gross Estimated Gross Gross Estimated
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
December 31, 1997
U.S. Treasury securities
and obligations of U.S.
government agencies and $857,928 $ 4,322 $ (793) $ 861,457 $ 46,443 $ 476 $ (28) $ 46,891
corporations
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 $ 678,286 $ 4,258 $(4,741) $ 677,803 $ 35,558 $ 315 $ 117 $ 35,990
corporations
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 4448 10 (4) 4,454
------------------------------------------- ----------------------------------------
Total securities $1,056,125 $ 9,639 $(6,305) $1,059,459 $303,450 $4,405 $(1,510) $306,345
=========================================== ========================================
December 31, 1995
U.S. Treasury securities
and obligations of U.S.
government agencies and $ 659,085 $ 8,787 $ (639) $ 667,233 $ 31,482 $ 746 $ (19) $ 32,209
corporations
Obligations of states and
political subdivisions - - - - 204,694 7,334 (447) 211,581
Mortgage-backed securities 285,863 5,345 (942) 290,266 35,946 701 (176) 36,471
Other securities 27,517 251 - 27,768 5,366 14 (10) 5,370
=========================================== ========================================
Total securities $ 972,465 $14,383 $(1,581) $ 985,267 $277,488 $8,795 $ (652) $285,631
=========================================== ========================================
</TABLE>
Gross realized gains and losses on available-for-sale securities approximated
$1,130 and $112 in 1997, $359 and $521 in 1996, and $302 and $158 in 1995.
5
<PAGE>
The amortized cost and estimated fair value of debt securities at December 31,
1997, by contractual maturity, are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Estimated
Amortized Fair
Cost Value
-------------------------------
Available-for-sale
Due in one year or less $ 108,883 $ 109,252
Due after one year through five years 417,707 420,305
Due after five years through ten years 285,044 285,393
Due after ten years 46,294 46,507
-------------------------------
857,928 861,457
Mortgage-backed securities 298,231 303,920
Other 50,899 51,372
-------------------------------
Total securities $1,207,058 $1,216,749
===============================
Held-to-maturity
Due in one year or less $ 25,743 $ 25,858
Due after one year through five years 46,243 47,204
Due after five years through ten years 101,066 103,578
Due after ten years 112,571 115,884
-------------------------------
285,623 292,524
Mortgage-backed securities 62,756 62,953
-------------------------------
Other 3,893 3,892
-------------------------------
Total securities $352,272 $359,369
===============================
At December 31, 1997 and 1996, securities carried at approximately $693,000 and
$621,000 were pledged to secure public deposits, repurchase agreements, and for
other purposes as required or permitted by law.
6
<PAGE>
G. Loans
Loans are summarized as follows:
December 31
1997 1996
---------------------------------
Commercial, financial and agricultural $ 372,933 $ 323,146
Real estate:
Revolving home equity 192,252 152,006
Single family residential 1,527,621 1,471,434
Apartment buildings and complexes 75,314 70,990
Commercial 477,025 451,756
Construction 60,975 66,369
Installment loans to individuals 572,846 571,533
Other 23,570 28,263
---------------------------------
Total loans net of unearned income 3,302,536 3,135,497
Less allowance for loan losses 45,048 45,055
---------------------------------
Loans--net $3,257,488 $3,090,442
=================================
One Valley originates and sells fixed rate mortgage loans primarily to
governmental agencies on a servicing retained basis. Interest rates are
determined at the date of the commitment to sell the loans and the commitment
period generally ranges from 60 to 90 days. At December 31, 1997 and 1996, One
Valley held loans for sale of approximately $11,500 and $10,000 and had
commitments to originate and sell loans of approximately $11,000 and $10,500,
respectively.
The mortgage loan portfolio serviced by One Valley for the benefit of others
approximated $890,327, $907,906, and $975,047 at December 31, 1997, 1996, and
1995. Custodial escrow balances maintained in connection with the foregoing loan
servicing and One Valley's own mortgage loan portfolio were approximately $8,540
and $8,557 at December 31, 1997 and 1996, 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:
1997 1996
-----------------------------
Balance, January 1 $106,605 $ 72,199
Additions 28,060 61,639
Amount collected (48,525) (27,233)
-----------------------------
Balance, December 31 $ 86,140 $ 106,605
=============================
7
<PAGE>
H. Allowance for Loan Losses
Changes in the allowance for loan losses for each of the three years in the
period ended December 31, 1997, were as follows:
1997 1996 1995
----------------------------------------
Balance, January 1 $45,055 $42,751 $40,492
Charge-offs (9,837) (7,065) (5,765)
Recoveries 2,299 1,879 1,902
----------------------------------------
Net charge-offs (7,538) (5,186) (3,863)
Provision for loan losses 7,531 5,264 5,887
Balance of acquired subsidiaries - 2,226 235
----------------------------------------
Balance, December 31 $45,048 $45,055 $42,751
========================================
Impaired loans approximated $6,600 and $8,900 (of which $3,400 and $3,300 were
on a nonaccrual basis) at December 31, 1997 and 1996. Included in these amounts
are $4,900 and $5,900 of impaired loans for which the related allowance for loan
losses is $830 and $500, and $1,700 and $3,000 of impaired loans that as a
result of write-downs or being well secured do not have an allowance for loan
losses. The average recorded investment in impaired loans during the years ended
December 31, 1997, 1996 and 1995, was approximately $8,500, $9,000 and $9,500.
For the years ended December 31, 1997, 1996 and 1995, One Valley recognized
interest income on those impaired loans of $560, $880 and $780. The amount of
interest income recognized in 1997, 1996 and 1995 included less than $100 of
interest income recognized using the cash basis method of income recognition.
I. Deposits
Included in interest-bearing deposits are various time deposit products. Time
deposits outstanding at December 31, 1997, have scheduled maturities of
$1,203,616 in 1998, $445,035 in 1999, $91,000 in 2000, $41,117 in 2001, $18,000
in 2002 and $1,000 thereafter. The aggregate amount of time deposits exceeding
$100 at December 31, 1997 approximated $328,182.
As of December 31, 1997 and 1996, One Valley had deposits from related parties
of approximately $76,000 and $73,000. Interest paid on deposits, short-term
borrowings, and long-term borrowings approximated $172,511 in 1997, $160,056 in
1996, and $135,231 in 1995.
8
<PAGE>
J. Premises and Equipment
The major categories of premises and equipment and accumulated depreciation are
summarized as follows:
December 31
1997 1996
-----------------------------
Land $ 19,567 $ 19,719
Buildings and improvements 89,376 88,296
Equipment 56,300 62,517
-----------------------------
Total 165,243 170,532
Less accumulated depreciation (74,846) (80,162)
-----------------------------
Premises and equipment--net $ 90,397 $ 90,370
=============================
One Valley has entered into noncancelable lease agreements (operating leases)
for certain premises and equipment and outside data processing services. The
minimum annual rental commitment under these lease and service agreements,
exclusive of taxes and other charges payable by the lessees, is: 1998--$5,000;
1999--$4,400; 2000--$3,900; 2001--$3,800; and 2002--$2,300; with $2,600 of
commitments extending beyond 2002.
Total expense under these lease agreements, including cancelable and
noncancelable leases, was $8,300 in 1997, $7,100 in 1996, and $6,700 in 1995.
9
<PAGE>
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:
<TABLE>
<CAPTION>
Federal Repurchase
Funds Agreements
Purchased and Other
-----------------------------
<S> <C> <C>
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%
1995:
Average amount outstanding during year $24,642 $295,163
Maximum amount outstanding at any month end 54,005 400,751
Weighted average interest rate:
During year 5.89% 4.79%
End of year 5.76% 4.75%
</TABLE>
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 $222,300 at December 31, 1997. The available lines of credit for
short-term and long-term borrowings, at prevailing market interest rates, as of
December 31, 1997, approximated $1.1 billion.
Long-term borrowings of $48,875 and $32,892 at December 31, 1997 and 1996,
primarily consist of FHLB advances. The advances mature as follows:
1998--$14,000; 1999--$2,000; 2001--$5,000; and $27,900 thereafter. The weighted
average interest rate of these advances at December 31, 1997, was 6.06%.
10
<PAGE>
L. Income Taxes
The income tax provisions (benefits) included in the consolidated statements of
income are summarized as follows:
1997 1996 1995
----------------------------------------
Current:
Federal $28,282 $25,660 $24,115
State 3,930 4,101 4,001
Deferred Federal and State 842 165 133
----------------------------------------
Total $33,054 $29,926 $28,249
========================================
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:
<TABLE>
<CAPTION>
1997 1996 1995
Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Computed tax at statutory
federal rate $33,796 35.0% $30,905 35.0% $29,238 35.0%
Plus: State income taxes net of
federal tax benefits 2,666 2.7 2,693 3.0 2,633 3.1
-----------------------------------------------------------------------------
36,462 37.7 33,598 38.0 31,871 38.1
Increase (decrease) in taxes resulting from:
Tax-exempt interest (4,535) (4.7) (4,861) (5.5) (4,484) (5.4)
Other--net 1,127 1.1 1,189 1.3 862 1.0
-----------------------------------------------------------------------------
Actual tax expense $33,054 34.1% $29,926 33.8% $28,249 33.7%
=============================================================================
</TABLE>
11
<PAGE>
Significant components of One Valley's deferred tax assets and liabilities are
as follows:
December 31
1997 1996
---------------------------
Deferred tax assets:
Allowance for loan losses $16,813 $16,211
Accrued employee benefits 1,480 3,840
Other 4,697 1,993
---------------------------
Total deferred tax assets 22,990 22,044
Deferred tax liabilities:
Loans 6,808 6,028
Available-for-sale securities 3,763 1,268
Premises and equipment 3,140 3,313
Other 320 51
---------------------------
Total deferred tax liabilities 14,031 10,660
---------------------------
Net deferred tax assets $ 8,959 $11,384
===========================
Income taxes (benefit) related to securities gains (losses) approximated $407,
$(65), and $58 in 1997, 1996, and 1995.
One Valley made tax payments of approximately $34,193 in 1997, $27,942 in 1996,
and $29,514 in 1995.
M. Employee Benefit Plans
One Valley and FFVA have defined benefit pension plans covering substantially
all of its employees. The benefits are based on years of service and the
employee's compensation during the last five years of employment. The funding
policy of One Valley and FFVA is to contribute annually the maximum amount that
can be deducted for income tax purposes.
12
<PAGE>
The following table presents the funded status of the plan and amounts
recognized in the consolidated balance sheets at December 31:
<TABLE>
<CAPTION>
1997 1996
-----------------------------
<S> <C> <C>
Actuarial present value of accumulated benefit obligation, including
vested benefits of $32,820 in 1997 and $24,454
in 1996 $42,663 $ 30,592
=============================
Actuarial present value of projected benefit obligation for services
rendered to date $(55,134) $(42,135)
Plan assets at fair value, consisting primarily of cash, listed
stocks, and U.S. Gov't and agency obligations 54,090 38,158
-----------------------------
Projected benefit obligation in excess of plan assets (1,044) (3,977)
Unrecognized transition asset, net of amortization (1,705) (1,957)
Unrecognized net loss from past experience different from
that assumed and effects of changes in assumptions 7,549 2,877
Unrecognized prior service cost 2,636 1,300
-----------------------------
Prepaid (accrued) pension cost included in other assets (other
liabilities) $ 7,436 $ (1,757)
=============================
</TABLE>
Following is a summary of the components of net periodic pension cost:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned during the period $2,358 $2,378 $1,732
Interest cost on projected benefit obligation 3,543 2,836 2,412
Actual return on plan assets (5,136) (3,001) (4,589)
Net amortization and deferral 2,206 443 2,267
-------------------------------------
Net periodic pension cost $2,971 $2,656 $1,822
=====================================
</TABLE>
The weighted-average discount rate used in determining the actuarial present
value of projected benefit obligations ranged from 7.0 to 7.25% and 7.5% at
December 31, 1997 and 1996. The rate of increase in future compensation levels
used in determining the actuarial present value of projected benefit obligations
ranged from 5.0 to 6.0% and 5.5 to 6.0% in 1997 and 1996. The expected long-term
rate of return on plan
13
<PAGE>
assets ranged from 7.5 to 8.5% in 1997, 1996, and 1995. The unrecognized net
loss increased in 1997 due to actual experience different from that assumed and
the change in the weighted-average discount rate.
One Valley has a defined benefit postretirement plan covering all employees who
qualify for and elect to retire with a normal or early retirement benefit under
the defined benefit pension plan. The plan provides medical and dental benefits.
This plan is contributory and contains cost sharing features such as deductibles
and co-insurance. One Valley's policy is to fund the cost of the plan in amounts
determined at the discretion of management.
The following table presents the plan's funded status and amounts recognized in
the consolidated balance sheets at December 31:
<TABLE>
<CAPTION>
1997 1996
-------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Active plan participants fully eligible for benefits $ - $ -
Other active participants (3,463) (3,147)
Current retirees (2,859) (2,598)
-------------------------
(6,322) (5,745)
Plan assets - -
-------------------------
Accumulated postretirement benefit obligation in excess
of plan assets (6,322) (5,745)
Unrecognized transition obligation 3,277 3,496
Unrecognized prior service cost 197 208
Unrecognized net gain from past experience different
from that assumed and effects of changes in assumptions (84) (239)
-------------------------
Accrued postretirement benefit cost included in other liabilities $(2,932) $(2,280)
=========================
</TABLE>
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------
<S> <C> <C> <C>
Service cost $260 $230 $188
Interest cost 440 421 403
Amortization of transition obligation over 20 years 231 231 230
-------------------------------
Net periodic postretirement benefit cost $931 $882 $821
===============================
</TABLE>
14
<PAGE>
The weighted-average annual assumed rate of increase in the per capita cost of
covered benefits (i.e. health care cost trend rate) is 8% for 1998 and is
assumed to decrease gradually to 5% in 2001 and remain at that level thereafter.
The health care cost trend rate assumption has a significant effect on the
amounts reported. For example, increasing the assumed health care cost trend
rates by one percentage point in each year would increase the accumulated
postretirement benefit obligation for the plan as of December 31, 1997 by $386
and the aggregate of the service and interest cost components of net periodic
postretirement benefit cost for 1997 by $60.
The weighted-average discount rate used in determining the accumulated
postretirement benefit obligation was 7.0% and 7.5% at December 31, 1997 and
1996.
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, 1996, and 1995 was $825, $690, and $460 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, 1996, and 1995, the amounts
included in compensation expense was $2,077, $628, and $453, respectively.
N. Other Expenses
Included in other expenses is supplies expense which approximated $3,768 in
1997, $3,711 in 1996, and $3,791in 1995.
O. Stock Option Plans
One Valley has nonqualified and incentive stock option plans for certain key
employees and directors. One Valley has elected to follow Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, (APB 25) and
related Interpretations in accounting for its employee stock options instead of
applying FASB Statement No. 123, Accounting for Stock-Based Compensation. Under
APB 25, because the exercise price of One Valley's employee stock options equals
the market price of the underlying stock on the date of grant, no compensation
expense is recognized.
Pursuant to these plans, at December 31, 1997 and 1996, an aggregate maximum of
1,500,000 shares of common stock were reserved for issuance, although no more
than 150,000 shares, plus any shares carried over from the prior year, may be
issued in any calendar year. All options granted have 10 year terms and vest
immediately.
Pro forma information regarding net income and earnings per share is required by
Statement 123, and has been determined as if One Valley had accounted for its
employee stock options under the fair value method of that Statement. However,
pro forma information has not been presented herein because the effect of
applying Statement 123's fair value method to One Valley's stock-based awards in
1997, 1996 and 1995
15
<PAGE>
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:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------ -------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
------------------------------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 980,600 $14.84 657,500 $15.09 611,250 $13.41
Balance of acquired subsidiary - - 257,500 10.38 - -
Granted 681,900 16.50 282,000 16.21 155,000 19.39
Exercised (372,300) 13.04 (216,400) 12.80 (103,750) 11.38
Forfeited - - - - (5,000) 19.36
------------- -------------- -------------
Outstanding at end of year 1,290,200 16.24 980,600 14.84 657,500 15.09
============= ============== =============
Exercisable at end of year 1,290,200 16.24 980,600 $14.84 657,500 $15.09
Weighted-average fair value of options
granted during the year $17.89 $4.84 $3.00
</TABLE>
Exercise prices for options outstanding at December 31, 1997, ranged from $6.58
to $30.60. The weighted-average remaining contractual life of those options at
December 31, 1997, was 7.5 years.
P. Stock Split
On August 19, 1997, One Valley's Board of Directors authorized a five-for-four
stock split of common shares effected in the form of a 25% stock dividend to
shareholders of record on August 29, 1997. Average shares outstanding and per
share amounts included in the consolidated financial statements have been
restated to give effect to the stock split.
Q. 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
16
<PAGE>
defined). One Valley and each of its banking subsidiaries met all capital
adequacy requirements to which they were subject at December 31, 1997.
As of December 31, 1997, the most recent notifications from the banking
regulatory agencies categorized One Valley and each of its banking subsidiaries
as well capitalized under the regulatory framework for prompt corrective action.
To be categorized as well capitalized, One Valley and each of its banking
subsidiaries must maintain minimum total risk-based, Tier I risk-based, and Tier
I leverage ratios as set forth in the table below. There are no conditions or
events since these notifications that management believes have changed the
institutions' category.
17
<PAGE>
The following table sets forth regulatory capital ratios for One Valley and its
significant banking subsidiaries, One Valley Bank, National Association and One
Valley Bank, Inc.
<TABLE>
<CAPTION>
Well
1997 1996 Capitalized Minimum
Amount Ratio Amount Ratio Ratio Ratio
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total Capital (to Risk Weighted Assets)
One Valley $498,800 16% $475,700 16% >=10% 8%
One Valley Bank, National Association 150,000 13 150,100 14 >=10 8
One Valley Bank, Inc. 48,600 13 47,100 14 >=10 8
Tier I Capital (to Risk Weighted Assets)
One Valley $460,700 13% $439,000 17% >=6% 4%
One Valley Bank, National Association 135,500 12 136,900 13 >=6 4
One Valley Bank, Inc. 43,800 12 42,800 13 >=6 4
Tier I Capital (to Average Assets)
One Valley $460,700 9% $439,000 9% >=5% 4%
One Valley Bank, National Association 135,500 7 136,900 8 >=5 4
One Valley Bank, Inc. 43,800 7 42,800 8 >=5 4
</TABLE>
R. Parent Company Condensed Financial Information
CONDENSED BALANCE SHEETS
December 31
1997 1996
------------------------------
Assets
Cash $ 964 $ 443
Repurchase agreement with a subsidiary bank $ 26,696 $ 21,469
Available-for-sale securities 15,329 10,468
Premises and equipment 967 893
Investment in subsidiaries:
Commercial and federal savings banks 452,297 434,715
Nonbanks 6,925 6,391
Other assets 22,112 26,433
------------------------------
Total assets $525,290 $500,812
==============================
Liabilities and shareholders' equity
Liabilities:
Short-term borrowings $ 6,105 $ 5,793
Other liabilities 15,535 11,961
------------------------------
Total liabilities 21,640 17,754
Shareholders' equity 503,650 483,058
------------------------------
Total liabilities and shareholders' equity $525,290 $500,812
==============================
18
<PAGE>
CONDENSED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Income:
Dividends from bank subsidiaries $58,130 $71,258 $47,290
Other income 6,134 5,031 5,538
-----------------------------------------
Total income 64,264 76,289 52,828
Expenses:
Salaries and employee benefits 7,727 8,108 6,749
Other expenses 8,487 4,967 5,169
Interest expense 479 280 18
-----------------------------------------
Total expenses 16,693 13,355 11,936
-----------------------------------------
Income before income taxes and equity in undistributed
earnings of subsidiaries 47,571 62,934 40,892
Applicable income tax (benefit) (3,716) (3,157) (2,422)
-----------------------------------------
Income before equity in undistributed earnings of subsidiaries 51,287 66,091 43,314
Equity in undistributed earnings of subsidiaries 12,513 12,527 12,266
Distribution of subsidiary retained earnings (20,000)
-----------------------------------------
Net income $63,800 $58,618 $55,580
=========================================
</TABLE>
19
<PAGE>
CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Operating activities:
Net income $63,800 $58,618 $55,580
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 324 245 238
Dividend from subsidiary 20,000
Equity in undistributed earnings of subsidiaries (12,513) (12,527) (12,266)
Net change in other assets and other liabilities 1,471 1,344 3,290
-----------------------------------------
Net cash provided by operating activities 53,082 67,680 46,842
Investing activities:
Net decrease (increase) in loans receivable 6,250 (661) 9,333
Purchase of available-for-sale securities (8,715) (8,453) (6,275)
Proceeds from maturities and sale of securities:
Available-for-sale 4,083 10,982 196
Held-to-maturity - 860 -
Investment in subsidiaries - - (5,139)
Purchase of equipment (387) (427) (292)
-----------------------------------------
Net cash provided by (used in) investing activities 1,231 2,301 (2,177)
Financing activities:
Net change in short-term borrowings 312 5,793 -
Proceeds from issuance of common stock 4,840 2,875 1,185
Purchase of treasury stock (27,717) (44,034) (12,971)
Issuance of MSBP shares 2,002 - -
FFVA repurchase of treasury stock (3,988) (17,986) (8,520)
20
<PAGE>
Cash dividends (24,014) (21,931) (19,684)
-----------------------------------------
Net cash used in financing activities (48,565) (75,283) (39,990)
-----------------------------------------
Increase (decrease) in cash and cash equivalents 5,748 (5,302) 4,675
Cash and cash equivalents at beginning of year 21,912 27,214 22,539
-----------------------------------------
Cash and cash equivalents at end of year $27,660 $21,912 $27,214
=========================================
</TABLE>
S. Fair Value of Financial Instruments
The following methods and assumptions were used by One Valley in estimating its
fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying values of cash and cash equivalents
approximate their fair values.
Securities: Fair values of securities are based on quoted market prices, where
available. If quoted market prices are not available, fair values are based on
quoted market prices of comparable instruments.
Loans: The fair values of fixed rate commercial, mortgage, and consumer loans
are estimated using discounted cash flow analyses at interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality. For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying values.
Accrued Interest: The carrying value of accrued interest approximates its fair
value.
Deposits: The fair values of demand deposits (i.e. interest and non-interest
bearing checking, regular savings, and other types of money market demand
accounts) are, by definition, equal to their carrying values. Fair values of
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregate expected monthly maturities of time deposits. FASB
Statement No. 107 defines the fair value of demand deposits as the amount
payable on demand, and prohibits adjusting fair value for any value derived from
retaining those deposits for an unexpected future period of time (commonly
referred to as a deposit base intangible). Accordingly, the deposit base
intangible is not considered in the estimated fair value of total deposits at
December 31, 1997 and 1996.
Short-Term Borrowings: The carrying values of federal funds purchased and
securities sold under agreements to repurchase approximate their fair values.
Long-Term Borrowings: The fair values of long-term borrowings are estimated
using discounted cash flow analyses based on One Valley's current incremental
borrowing rates for similar types of borrowing arrangements.
Commitments: The fair values of commitments (standby letters of credit and loan
commitments) are estimated based on fees currently charged to enter into similar
agreements, taking into consideration the remaining terms of the agreements and
the counterparties' credit standing. The estimated fair value of these
commitments at December 31, 1997 and 1996, approximate their carrying value.
21
<PAGE>
The fair values of One Valley's financial instruments are summarized below:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
---------------------------------- ---------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 149,484 $ 149,484 $ 167,508 $ 167,508
Securities 1,569,021 1,576,118 1,362,909 1,365,804
Loans 3,257,488 3,271,796 3,090,442 3,107,830
Accrued interest receivable 38,764 38,764 38,183 38,183
Deposits 3,934,174 3,940,099 3,804,369 3,824,518
Short-term borrowings 623,480 625,858 434,074 434,091
Long-term borrowings 48,875 47,011 32,892 32,802
Accrued interest payable 19,277 19,277 16,095 16,095
</TABLE>
T. 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 $29,853 as of December 31,
1997. Management conducts regular reviews of these commitments on an individual
customer basis, and the results are considered in assessing the adequacy of One
Valley's allowance for loan losses.
Loan Commitments: As of December 31, 1997, the Bank had commitments outstanding
to extend credit at prevailing market rates approximating $538,319. These
commitments generally require the customers to maintain certain credit
standards. The amount of collateral obtained, if deemed necessary by One Valley
upon extension of credit, is based on management's credit evaluation of the
customer. Collateral held varies but may include accounts receivable, inventory,
property, plant and equipment, and income producing commercial properties.
Loans Sold with Recourse: One Valley is contingently liable on certain loans
previously sold by an acquired company. At December 31, 1997, there was
approximately $24,200 in outstanding loans sold with recourse. Pursuant to the
terms of an Indemnity Agreement with the Federal Deposit Insurance Corporation
(FDIC), successor to the obligations of the Resolution Trust Corporation, the
FDIC is
22
<PAGE>
obligated to indemnify any and all costs, losses, liabilities and expenses,
including legal fees, resulting from certain third-party claims.
U. Quarterly Financial Data (Unaudited)
Quarterly financial data for 1997 and 1996 is summarized below:
<TABLE>
<CAPTION>
1997 1996
Three Months Ended Three Months Ended
March 31 June 30 Sept 30 Dec 31 March 31 June 30 Sept 30 Dec 31
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income $91,611 $93,381 $95,299 $96,469 $82,846 $88,029 $90,870 $91,401
Interest expense 42,177 43,399 45,349 45,985 37,221 39,576 41,667 42,003
-------------------------------------------------------------------------------------
Net interest income 49,434 49,982 49,950 50,484 45,625 48,453 49,203 49,398
Provision for loan losses 1,458 1,834 1,999 2,240 1,209 1,334 1,353 1,368
-------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 47,976 48,148 47,951 48,244 44,416 47,119 47,850 48,030
Other income, excluding
securities gains 11,318 11,685 12,581 12,252 10,020 10,671 10,670 10,914
Securities transactions (45) 192 230 641 (203) 28 (138) 151
Other expenses 34,389 34,673 35,314 39,943 32,786 34,009 39,896 34,293
-------------------------------------------------------------------------------------
Income before income taxes 24,860 25,352 25,448 21,194 21,447 23,809 18,486 24,802
Applicable income taxes 8,495 8,672 8,709 7,178 7,190 8,059 6,108 8,569
-------------------------------------------------------------------------------------
Net income $16,365 $16,680 $16,739 $14,016 $14,257 $15,750 $12,378 $16,233
=====================================================================================
Average shares outstanding:
Basic 32,202 31,921 31,799 31,762 31,803 32,731 33,184 32,682
Diluted 32,895 32,609 32,504 32,738 32,072 33,668 33,645 33,282
Per share data:
Net income:
Basic $ .51 $ .52 $ .53 $ .44 $ .45 $ .48 $ .37 $ .50
Diluted .50 .51 .51 .43 .44 .47 .37 .49
Dividends .19 .19 .21 .21 .18 .18 .19 .19
High 32.20 33.60 37.00 40.94 20.96 22.24 25.28 30.20
Low 28.60 28.60 32.50 36.31 19.76 19.60 21.60 25.00
</TABLE>
One Valley Bancorp, Inc.
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 twelve bank subsidiaries
ranging in size from $120 million to $1.9 billion and includes five national
banks. Through these banks, One Valley serves 71 cities and towns with a full
range of banking services in 115 locations strategically located throughout West
Virginia and central Virginia. One Valley is also the parent of a real estate
management
23
<PAGE>
corporation that owns and operates a fifteen-floor office building in
Charleston, West Virginia. This office building is the headquarters for One
Valley Bancorp and the main office location of its lead bank. At December 31,
1997, One Valley had approximately $5.2 billion in total assets, $3.3 billion in
total loans, and $3.9 billion in total deposits.
The accompanying consolidated financial statements have been prepared by the
management of One Valley in conformity with generally accepted accounting
principles. The audit committee of the Board of Directors engaged Ernst & Young
LLP, independent auditors, to audit the consolidated financial statements, and
their report is included herein. Financial information appearing throughout this
annual report is consistent with that reported in the consolidated financial
statements. The following discussion is designed to assist readers of the
consolidated financial statements in understanding significant changes in One
Valley's financial condition and results of operations.
Management's objective of a fair presentation of financial information is
achieved through a system of strong internal accounting controls. The financial
control system of One Valley is designed to provide reasonable assurance that
assets are safeguarded from loss and that transactions are properly authorized
and recorded in the financial records. As an integral part of that financial
control system, One Valley maintains an internal audit staff at the parent
company with audit responsibility for all of its subsidiaries. The activities of
both the internal and external audit functions are reviewed by the audit
committee of the Board of Directors.
One Valley's Board of Directors declared a five-for-four stock split in the form
of a 25% stock dividend in August 1997. Since stock dividends increase the
number of shares outstanding while leaving the total dollar amount of equity
invested in the company unchanged, generally accepted accounting principles
require that all historical per share information be restated to reflect the
increase in the number of shares of common stock outstanding. This restatement
enables the reader to compare all historical per share information with current
operations and market price quotations. Accordingly, all per share information
in this discussion and throughout this annual report reflects the increase in
the number of shares outstanding as a result of the 25% stock dividend.
Summary Financial Results
On March 31, 1998, One Valley consummated the acquisition of FFVA Financial
Corporation, a unitary thrift holding company, also headquartered in Lynchburg,
Virginia. One Valley exchanged 1.05 shares of One Valley common stock for each
share of FFVA Financial Corporation common stock in a transaction accounted for
as a pooling of interests. Accordingly, the consolidated financial information
has been restated to include FFVA as if the acquisition had been consummated as
of the beginning of the earliest period presented. At December 31, 1997, FFVA
Financial Corporation reported that assets of $580 million, loans of
approximately $327 million, and deposits of approximately $416 million.
24
<PAGE>
One Valley earned $63.8 million in 1997, an 8.8% increase over the $58.6 million
earned in 1996. The increase is primarily due to increased net interest income
and non-interest income which more than offset increased operating costs. This
increase in earnings follows an increase in 1996 of 5.5% over the $55.6 million
earned in 1995. Earnings comparisons are impacted by the April 1996 acquisition
of CSB Financial Corporation (CSB) discussed below. Basic earnings per share was
$2.00 in 1997, an increase of 11.1% over the $1.80 earned in 1996, which
compares to the 6.5% increase in 1996 over the $1.69 earned in 1995. As shown in
Table 2, the five-year compound growth rate in earnings per share since 1992 has
been 5.8%.
Table 2, Six-Year Selected Financial Summary, presents summary financial data
for the past six years, 1992 through 1997, along with a five-year compound
growth rate. This table shows the expansion of One Valley due to its growth in
banking operations and its acquisition activity. Particular attention should be
paid to the growth rates in equity, net loans, net income and cash dividends.
The management of One Valley believes balanced sustainable growth in its
financial position enhances shareholder value. A solid capital base is a key
strength of One Valley. As shown in Table 2, the average equity-to-assets ratio
has remained consistently strong over the past six years. This is a result of
record earnings performances and a judicious acquisition strategy. Table 1,
Summary Statement of Net Income, presents three years of comparative income
statement information.
Table 3 comparatively illustrates the components of ROA and ROE over the
previous five years. Return on average assets (ROA) measures how effectively One
Valley utilizes its assets to produce net income. One Valley's 1997 ROA of 1.29%
was a slight increase from the 1.27% ROA reported in 1996, down slightly from
the 1.33% ROA in 1995. As shown in Table 3, the increase in ROA is attributed
primarily to an increase in non-interest income and a decrease in non-interest
expense. Non-interest expense as a percent of average earning assets has
consistently declined in years 1993 through 1997 from their previous years'
results. This is the result of increased operational efficiency and an increase
in average earning assets. During 1997, non-interest income as a percent of
average earning assets increased rather significantly as a result of fee income
from new products and services. These two positive trends offset the decline in
net credit income. The decline in net credit income (net interest income less
the provision for loan losses) as a percent of average earning assets is due to
two factors. The current low interest rate environment tends to decrease the
yield on earning assets, while the increase in the competition for funds tends
to increase the cost of funding earning assets. However, as One Valley's net
overhead ratio (non-interest expense less non-interest income as a percent of
average earning assets) has steadily declined to 2.08% in 1997, down from 2.28%
in 1996 and 2.32% in 1995, ROA has remained consistent.
Return on average equity (ROE), another measure of earnings performance,
indicates the amount of net income earned in relation to the total equity
capital invested. One Valley's 1997 ROE was 13.08%, compared to the 12.43%
earned in 1996 and 12.67% reported in 1995. ROE increased in 1997, primarily due
to One Valley's strong earnings performance and a more efficient use of the
equity generated from the CSB acquisition in 1996.
25
<PAGE>
Acquisition Activity
At the close of business on April 30, 1996, One Valley acquired CSB Financial
Corporation, a $336 million Federal Savings Bank holding company headquartered
in Lynchburg, Virginia. The acquisition of CSB expanded One Valley's presence
into central Virginia, a growing market for financial services which provides
additional geographical diversification for One Valley. Pursuant to the merger
agreement, One Valley exchanged 0.6774 shares of One Valley common stock for
each share of CSB common stock. At the date of acquisition, CSB had total loans
of $164 million, investment securities of $136 million, and total deposits of
$257 million. The combination was accounted for under the purchase method of
accounting. Accordingly, consolidated results for 1996 include the operations of
CSB only from the date of acquisition. Comparisons of average balances and
income statement categories are all affected by the CSB acquisition.
On March 31, 1998, One Valley consummated the acquisition of FFVA Financial
Corporation, a unitary thrift holding company, also headquartered in Lynchburg,
Virginia. One Valley exchanged 1.05 shares of One Valley common stock for each
share of FFVA Financial Corporation common stock in a transaction accounted for
as a pooling of interests. Accordingly, the consolidated financial information
has been restated to include FFVA as if the acquisition had been consummated as
of the beginning of the earliest period presented. At December 31, 1997, FFVA
Financial Corporation reported that assets of $580 million, loans of
approximately $327 million, and deposits of approximately $416 million.
In October 1997, One Valley entered into an agreement with Wachovia Corporation
to purchase fifteen branches located in Virginia and their corresponding loans,
assets and deposits. The transaction was completed on February 20, 1998. These
branches included approximately $127 million in loans and $290 million in
deposits.
Balance Sheet Analysis
Summary
A financial institution's primary sources of revenue are generated by its
earning assets, while its major expenses are produced by the funding of these
assets with interest bearing liabilities. Effective management of these sources
and uses of funds is essential in attaining a financial institution's optimal
profitability while maintaining a minimum amount of interest rate and credit
risk. Information on rate-related sources and uses of funds for each of the
three years in the period ended December 31, 1997, is provided in Table 4,
Average Balance Sheet/Net Interest Income Analysis.
In 1997, average earning assets grew by 7.3% or $314.6 million over 1996,
following an 11.3% or $437.4 million increase in 1996 over 1995. Average
interest bearing liabilities, the primary source of funds supporting earning
assets, increased 7.4% or $275.3 million over 1996, which follows a $411.5
million or 12.4% increase in 1996 over 1995. Approximately one-third of the
increase in 1997 and one-half of the increase in 1996 was due to the purchase of
CSB. The
26
<PAGE>
remaining 1997 and 1996 increases in interest bearing assets and liabilities
were the result of increases in banking operations as more fully explained
below.
Additional information on each of the components of earning assets and interest
bearing liabilities is contained in the following sections of this report.
Loan Portfolio
One Valley's loan portfolio is its largest and most profitable component of
average earning assets, totaling 67.6% of average earning assets during 1997.
One Valley continued to emphasize increasing its loan portfolio in 1997. Average
net loans increased by $177 million or 6.0% in 1997. $59.0 million of the
increase was from the effect of the CSB acquisition and subsequent loan growth
in the Virginia market. The remaining increase in 1997 average loans was fueled
primarily by increases in residential and commercial real estate loans. The 1997
increase follows a 10.6% or $283.2 million increase in 1996. Approximately 40%
of the 1996 increase resulted from the CSB acquisition. The remaining increase
in 1996 average loans was also primarily in residential and commercial real
estate loans. As a result of these increases in loan activity, One Valley's
loan-to-deposit ratio maintained its upward trend in 1997, ending the year at
82.8%. This ratio compares to 81.2% at December 31, 1996 and 79.8% at December
31, 1995. Internal growth, as well as One Valley's carefully planned acquisition
activity, has resulted in the increase in the loan portfolio.
Total loans at December 31, 1997, increased by $167.0 million or 5.4% over the
total at December 31, 1996. This increase compares to a $325.5 million or 11.6%
increase in 1996 over total loans at December 31, 1995. As mentioned above,
$164.4 million in loans was acquired in 1996 through the CSB acquisition. The
increase in 1997 lending was primarily from internal growth focused in real
estate loans. Residential real estate loans including revolving home equity
loans increased by $96.4 million or 5.9% during 1997, compared to a $257.3
million or 18.8% increase in 1996. Approximately one-half of the 1996 increase
in residential real estate loans was acquired through the CSB purchase.
Commercial real estate loans increased by $25.3 million or 5.6% in 1997,
following a $53.9 million or 13.6% increase in 1996 from year-end 1995.
Approximately 25% of the 1996 increase in that category was acquired through the
CSB acquisition. Commercial real estate loans have historically averaged about
one-sixth of the total loan portfolio. This low concentration of such loans has
limited One Valley's exposure to swings in commercial real estate values and the
potential for related credit losses. Loans for commercial purposes not secured
by real estate increased in 1997 by $45.1 million or 12.8%. This follows a
slight increase during 1996 of $2.6 million or 0.8%. The increase in 1997 was
primarily due to increases in the levels of credit line usage by large
commercial customers. Consumer installment loans slightly increased by $1.3
million or 0.2% in 1997. This increase follows a $9.1 million or 1.6% decrease
during 1996.
Table 5, Loan Summary, presents a five-year comparison of loans by type. With
the exception of those categories included in the comparison, there are no loan
concentrations which exceed 10% of total loans. Additionally, One Valley's loan
portfolio contains no loans to foreign borrowers nor
27
<PAGE>
does it have a material volume of highly leveraged transaction lending. Over the
past four years, total loans have increased $863.2 million, a result of
acquisitions and internal growth. While loan growth has been substantial, One
Valley imposes underwriting and credit standards which are designed to maintain
a quality loan portfolio.
Loans secured by real estate, which in total constituted approximately 71% of
One Valley's loan portfolio at December 31, 1997, consist of a diverse portfolio
of predominantly single family residential loans and loans for commercial
purposes where real estate is merely collateral, not the primary source of
repayment. The majority of these loans is secured by property located within
West Virginia, where real estate values have remained relatively stable over the
past ten years. One Valley also originates residential real estate loans to be
sold in the secondary market. In 1997, $95.4 million of loans were originated to
be sold in the secondary market. This compares to $62.9 million of new loan
volume originated for sale in the secondary market in 1996 and $52.4 million in
1995. This activity generates considerable processing and servicing fee income
for One Valley, as discussed further in the "Income Statement Analysis" section
of this report. Volumes of loans originated for sale fluctuate inversely with
mortgage interest rates. Due to a lower interest rate environment in 1997, a
higher volume of mortgage activity was realized when compared to 1996 and 1995.
In addition to the loans reported in Table 5, One Valley also offers certain
off-balance sheet products such as letters of credit, revolving credit
agreements, and other loan commitments. These products are offered under the
same credit standards as the loan portfolio and are included in the risk-based
capital ratios used by the Federal Reserve to evaluate capital adequacy.
Additional information on off-balance sheet commitments is contained in Note T
to the consolidated financial statements.
In spite of some increases in net charge-offs over the last two years, overall
asset quality for the year was sound. Reported in Table 5 is a five-year
comparison of the level of non-performing assets and loans contractually past
due over 90 days. Total non-performing assets, which consist of past-due loans
on which interest is not being accrued, foreclosed properties in the process of
liquidation, and loans with restructured terms to enable a delinquent borrower
to repay, were $9.9 million or 0.30% of total loans at year-end 1997, a decrease
from the percentage at December 31, 1996. While levels of non-performing assets
are susceptible to increases resulting from fluctuations in the economy, One
Valley diligently works to keep its level of non-performing assets at a
relatively low level as demonstrated in Table 5. The amount of loans
contractually past due over 90 days, but which continue to accrue interest,
increased in 1997. At year-end, these loans constituted 0.19% of total year-end
loans, a slight increase from the 0.16% at December 31, 1996, but lower than the
0.29% at December 31, 1995.
The consistently favorable ratio of problem loans to total loans has occurred
while the loan portfolio has increased significantly over the last five years,
and thus the favorable ratio is indicative of One Valley's commitment to a
quality loan portfolio. Both the increase in the size and the credit quality of
the loan portfolio have enabled One Valley to increase its net credit income by
$5.5 million or 2.8% in 1997 and $14.1 million or 7.8% in 1996.
28
<PAGE>
It is One Valley's policy to place loans that are past due over 90 days on
non-accrual status, unless the loans are adequately secured and in the process
of collection. For real estate loans, upon repossession, the balance of the loan
is transferred to "Other Real Estate Owned" (OREO) and carried at the lower of
the outstanding loan balance or the fair market value of the property less costs
to dispose based on current appraisals and other current market trends. If a
writedown of the OREO property is necessary at the time of foreclosure, the
amount is charged off against the allowance for loan losses. A quarterly review
of the recorded property value is performed in conjunction with normal loan
reviews, and if market conditions indicate that the recorded value exceeds the
fair market value less costs to dispose, additional writedowns of the property
value are charged directly to operations. One Valley had no commitments to
provide additional funds on non-accrual loans at December 31, 1997. During 1997,
One Valley recognized less than $0.1 million of interest on non-accrual loans,
while approximately $0.8 million would have been recognized on these loans had
they been current throughout 1997 in accordance with their original terms.
Similarly, during 1996, less than $0.1 million was recognized on non-accrual
loans, while approximately $0.8 million would have been recognized in accordance
with their original terms.
A loan is categorized and reported as impaired when it is probable that the
creditor will be unable to pay all of the principal and interest amounts
according to the contractual terms of the loan agreement. In determining whether
a loan is impaired, management considers such factors as past payment history,
recent economic events, current and projected financial condition and other
relevant information that is available. Impairment is determined on a
loan-by-loan basis and generally consists of large commercial loans. Impaired
loans are measured at the present value of expected future cash flows discounted
at the loan's original effective interest rate or, as a practical expedient, at
the loan's observable market price or the fair value of the collateral if the
loan is collateral dependent. Additional information on impaired loans is
contained in Note H to the consolidated financial statements.
The allowance for loan losses is maintained to absorb probable losses associated
with lending activities. Factors considered in determining the adequacy of the
allowance include an individual assessment of risk on large commercial credits,
historical charge-off experience, levels of non-performing and impaired loans,
and an evaluation of current economic conditions. As a part of the holding
company structure, One Valley maintains a credit analysis and review department
to evaluate large commercial credit requests and to complete loan follow-up
procedures. One Valley also maintains a loan administration function to
continually identify and monitor problem loans.
At December 31, 1997, the allowance for loan losses was $45.0 million or 1.36%
of total year-end loans. This ratio is a decrease from the prior year's 1.44%
and the 1.52% at the end of 1995. In management's opinion, the allowance for
loan losses is adequate to absorb the current estimated risk of loss in the
existing loan portfolio. A summary of the allowance for loan losses allocated by
loan type is also included in Table 5. Table 6, Comparative Loan Loss
Information, provides a detailed history of the allowance for loan losses,
illustrating charge-offs and recoveries by loan type, and the annual provision
for loan losses over the past five years.
29
<PAGE>
The provision for loan losses in 1997 was $7.5 million, up from the $5.2 million
provision in 1996 and the $5.9 million provision in 1995. The increase in 1997
was in response to a change in the risk profile of the consumer loan portfolio
early in 1997 and to provide for the continued growth of the loan portfolio. One
Valley continually evaluates the adequacy of its allowance for loan losses, and
changes in the provision are based on the estimated inherent risk of the loan
portfolio. While One Valley experienced considerable loan growth during 1997,
1996 and 1995, the overall credit quality of the portfolio has remained
consistent over those years, as evidenced by the low level of non-performing
assets and the low level of net charge-offs during those years.
While net charge-offs in 1997 increased by $2.3 million from 1996 net
charge-offs, largely due to a $1.3 million increase in consumer loan net
charge-offs and a $0.9 million increase in commercial net charge-offs, net
charge-offs as a percentage of average total loans increased only slightly to
0.23%, compared to 0.17% in 1996 and 0.14% in 1995. In all three years, these
ratios compare consistently with peer group banks across the country. The
increase in 1997 charge-offs follows a minimal decrease of $23,000 in 1996 from
the level of 1995 net charge-offs. Although the dollar amount of net charge-offs
has remained historically low, charge-offs could increase in the coming months
due to the increase in the total dollar amount of loans or adverse changes in
economic conditions. These factors are considered in determining the adequacy of
the allowance for loan losses, which at December 31, 1997, was sufficient to
absorb over five and one-half times the amount of net charge-offs experienced
during 1997.
Investment Portfolio and Other Earning Assets
Investment securities averaged $1,467.9 million in 1997, a $122.4 million or
9.1% increase over the $1,345.5 million averaged in 1996. This increase follows
a 14.6% increase over the $1,174.0 million averaged in 1995. Just over one-half
of the increase in 1996 was a result of the CSB purchase. The increase in the
average balance during 1997 was primarily the result of One Valley's
asset/liability strategy to use borrowed funds to purchase higher yielding
investments to mitigate the risk of a decline in interest rates.
As sources of funds (deposits, federal funds purchased, and repurchase
agreements with corporate customers) fluctuate, excess funds are initially
invested in federal funds sold and other short-term investments. Based upon
continual analyses of asset/liability repricing, interest rate forecasts, and
liquidity requirements, funds are periodically reinvested in high-quality debt
securities, which typically mature over a longer period of time (Table 8). At
the time of purchase, management determines whether securities will be
classified as available-for-sale or held-to-maturity. If classified as
held-to-maturity, securities are 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.
30
<PAGE>
As shown in Table 8, Securities Maturity and Yield Analysis, the average
maturity period of securities available-for-sale at December 31, 1997 was 6
years 5 months, lengthened primarily by the 14-year 2-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 71%
of the securities available-for-sale are U.S. Government agency or Treasury
securities that have an average maturity of 4 years 1 month. The average
maturity period of securities held-to-maturity was 9 years, 1 month at the end
of 1997. The average maturity of the investment portfolio is managed at a level
to maintain a proper matching with interest rate risk guidelines. During 1997,
One Valley sold a portion of the securities classified as available-for-sale as
part of its management of interest rate risk, as shown in the Statements of Cash
Flows. One Valley does not have any securities classified as trading and it has
no plans to establish such classification at the present time. Other information
regarding investment securities may be found in Table 8, and in Note F to the
consolidated financial statements.
Due to unfavorable laws relating to investments in tax-exempt assets and
corporate minimum tax regulations, levels of tax-exempt securities held by One
Valley, as well as their average maturity period, declined in the years from
1986 to 1993. However, due to the lower interest rate environment, overall
yields on tax-exempt securities have become attractive once again. During 1997,
One Valley increased its tax-exempt securities by $20.4 million, or 9.4%, over
the level of tax-exempt securities held at December 31, 1996. This increase
followed an increase in 1996 of $12.2 million, or 6.0%, over the level held at
December 31, 1995. Future investments in tax-exempt securities will generally
depend upon comparisons to taxable yields and the liquidity needs of One Valley.
One Valley's average investment in federal funds sold and other short-term
investments increased 71.2% in 1997. This follows a 45.1% decrease in 1996.
Averaging $36.4 million in 1997, federal funds sold and other short-term
investments increased $15.2 million from the $21.2 million averaged in 1996, but
was less than the $38.5 million averaged during 1995. Fluctuations in federal
funds sold and other short-term investments reflect management's goal to
maximize asset yields while maintaining proper asset/liability structure, as
discussed in greater detail above and in other sections of this report.
Funding Sources
In 1997, One Valley once again increased the rates paid on its interest bearing
deposits. The average rate paid on interest bearing liabilities increased to
4.42% in 1997, up from the 4.31% average rate paid in 1996 and the 4.24% average
rate paid in 1995. The increase in 1997 is largely due to a $128.1 million or
6.4% increase in longer term but more costly time deposits and a seven basis
point increase in the average rate paid on those deposits. Due to alternative
sources of investment and an increasing sophistication of customers in funds
management techniques to maximize return on their money, competition for funds
has become more intense. One Valley has offered new core deposit products as
well as periodic special rate products to attract additional deposits.
31
<PAGE>
One Valley's deposits, on average, increased by 5.2% or $190.0 million in 1997.
$93.0 million of this increase was the effect of the CSB acquisition and
subsequent deposit growth in the Virginia market. The 1997 increase compares to
an 8.8% or $294.9 million increase in 1996. Approximately $173.4 million of the
1996 increase was acquired through the CSB acquisition. The remaining 4.7%
increase in 1996 compares to a 2.7% or $89.0 million increase in 1995.
Non-interest bearing deposits increased by 6.6% or $25.4 million on average when
compared to 1996, primarily due to increases in predominantly consumer based
deposit accounts. Interest bearing deposits increased by 5.0% or $164.6 million
over 1996, primarily in longer-term time deposits. Excluding the effect of the
CSB acquisition, during 1996 non-interest bearing deposits remained relatively
flat on average when compared to 1995, while interest bearing deposits increased
by 4.1% or $122.2 million over 1995. These trends are reflective of customer
trends to keep more funds in interest bearing accounts, thus reducing their
balances in checking and other non-interest bearing deposit products, and the
stiff competition for interest bearing investments in a lower interest rate
environment. One Valley anticipates that similar trends will continue into the
foreseeable future.
To supplement modest deposit growth, One Valley has increasingly turned to
short-term borrowings. Short-term borrowings increased, on average, by $80.3
million or 18.7% from 1996, following a 36.2% or $114.1 million increase in 1996
over 1995. Only $3.4 million of the increase in 1996 was the result of the CSB
purchase. Repurchase agreements and other short-term borrowings increased, on
average, by $87.7 million or 21.4% in 1997, primarily to fund loan and
investment growth. This increase follows a $114.7 million or 38.9% increase in
1996. One Valley continues to evaluate the use of short-term borrowings in local
and national markets as a resource to fund loan growth and investment
strategies, as deposit growth has not kept pace with the growth in loans.
Long-term borrowings, on average, increased by $30.4 million, or 138.33%, in
1997, following a $6.3 million or 40.6% increase in 1996. The increases in 1996
and 1997 were partly a result of the CSB acquisition on April 30, 1996 and
additional borrowings at that affiliate during the year, as One Valley
integrated the acquisition into its existing asset/liability management
strategy. As a result, One Valley now has $48.9 million of long-term debt,
primarily Federal Home Loan Bank (FHLB) borrowings, with repayment schedules
from one to six years. Other information regarding short- and long-term
borrowings is contained in Note K to the consolidated financial statements.
Interest Sensitivity and Liquidity
Asset/liability management is a means of maximizing net interest income while
minimizing interest rate risk by planning and controlling the mix and maturities
of interest related assets and liabilities. One Valley has established an
Asset/Liability Management Committee for the purpose of monitoring and managing
interest rate risk. Interest rate risk is the earnings variation that could
occur due to changes in market interest rates.
32
<PAGE>
A commonly used measure of interest rate risk is a gap report. A gap report
identifies the ratio of earning assets to interest bearing liabilities that will
mature or reprice within a given time period. In addition to the gap report, One
Valley uses computer simulations of the next twelve months as a primary tool for
analyzing interest rate risk and modeling business strategies in a dynamic
framework. The simulations begin with the gap report information and use various
assumptions, such as expected changes in the interest rate environment; the
shape of the yield curve; pricing strategies for loans and deposits; the growth,
volume and mix of interest sensitive assets and liabilities; and potential
hedging strategies. These simulations assist management in minimizing risk and
maintaining a conservative sensitivity position. Based on current simulations,
One Valley anticipates that over the next twelve months a declining interest
rate scenario would have a slight positive influence on net interest income
whereas increasing rates would have a slight negative influence on net interest
income.
One Valley's investments have been limited to traditional investment securities
and it does not currently have any investments in derivative instruments.
However, One Valley continually evaluates all investment alternatives in its
management of interest rate risk and asset/liability structure.
Table 10, Interest Rate Sensitivity Summary, provides information about One
Valley's financial instruments that are sensitive to changes in interest rates.
For loans, securities and liabilities with contractual maturities, the table
presents principal cash flows and related weighted-average interest rates by
contractual maturity as well as One Valley's estimate of the impact of interest
rate fluctuations on the prepayment of residential real estate loans, home
equity loans and mortgage backed securities. For core deposits that have no
contractual maturity, the table presents principal cash flows and, as
applicable, related weighted-average interest rates based on historical
experience, management's judgment, and statistical analysis, as applicable,
concerning their most likely withdrawal behaviors.
Liquidity is the ability to satisfy demands for deposit withdrawals, lending
commitments, and other corporate needs. One Valley's liquidity is based on the
stable nature of consumer core deposits held by the banking subsidiaries.
Likewise, additional liquidity is available from holdings of investment
securities and short-term investments which can be readily converted to cash.
Furthermore, One Valley continues to have the ability to attract short-term
sources of funds such as federal funds and repurchase agreements, and to arrange
credit lines to meet its cash needs.
One Valley generated $74.8 million of cash from operations in 1997, which
compares to $79.7 million in 1996 and $72.2 million in 1995. Additional cash of
$288.1 million was generated through net financing activities in 1997, which
compares to $55.8 million in 1996 and $104.5 million in 1995. These proceeds
along with proceeds from the sale and maturity of securities were used to fund
loans and purchase securities during the year. Net cash used in investing
activities totaled $380.9 million in 1997, which compares to $141.4 million in
1996 and $227.8 million in 1995. Details on the sources and uses of cash can be
found in the Consolidated Statements of Cash Flows in the consolidated financial
statements.
33
<PAGE>
Capital Resources
One Valley's average equity-to-asset ratio remained strong at 9.86% during 1997,
down slightly from 10.19% during 1996 and 10.53% in 1995. The decrease in 1997
primarily resulted from a slight leveraging of the balance sheet to purchase
investments prior to the anticipated decline in interest rates. At year-end
1997, One Valley's primary capital ratio was 10.53% compared to 10.89% at
year-end 1996. The Federal Reserve's risk-based capital guidelines and leverage
ratio measure the capital adequacy of banking institutions. The risk-based
capital guidelines weight balance sheet assets and off-balance sheet commitments
by prescribed factors relative to credit risk, thus eliminating disincentives
for holding low risk assets and requiring more capital for holding higher risk
assets. At December 31, 1997 and 1996, One Valley's risk adjusted
capital-to-assets ratio was 16.4%, which is well above the minimum level of 8.0%
prescribed for bank-holding companies of One Valley's size. The leverage ratio
is a measure of total tangible equity to total tangible assets. One Valley's
leverage ratio at December 31, 1997 was 9.2% compared to 9.1% at December 31,
1996. Both of these ratios are well above the minimum 3.0% and the recommended
4.0 to 5.0% prescribed by the Federal Reserve. These healthy ratios are the
direct result of management's desire to maintain a strong capital position.
The primary source of funds for dividends paid by One Valley to its shareholders
is the dividends received from its subsidiary banks. Federal regulatory agencies
impose certain restrictions on the payment of dividends and the transfer of
assets from the banking subsidiaries to the holding company. Historically, these
restrictions have not had an adverse impact on One Valley's dividend policy, and
it is not anticipated that they will in the future. Additional information
concerning dividend restrictions is discussed in Note C to the consolidated
financial statements.
Simultaneous with the January 1996 announced merger agreement between One Valley
and CSB, the Board of Directors authorized management to purchase up to 2.8
million shares of One Valley Bancorp common stock in the open market. During
1997, 820,403 shares (post 25% stock dividend) and 1,976,075 shares in 1996
(post two 25% stock dividends) were repurchased under this program. At December
31, 1997, One Valley held 4,346,846 shares in its treasury. Due to the merger
with FFVA Financial Corp. in 1998, all remaining unfulfilled treasury stock
authorizations have been canceled.
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 $207.9 million in 1997, up 3.9% over the 1996 level, following a 7.2%
increase in 1996 over 1995. When net interest income is presented on a fully
tax-equivalent basis, interest income from tax-exempt earning assets is
increased by the amount equivalent to the federal income taxes which would have
been paid if this income were taxable at the statutory federal tax rate of 35%.
The increase in net interest income
34
<PAGE>
in 1997 is largely due to the increase in the volume of earning assets,
primarily loans. As shown in Table 11, Rate Volume Analysis, increases in the
volume of earning assets in both 1997 and 1996 have provided a significant
increase in net interest income. In 1997, the increase in the volume of earning
assets increased interest income by $25.0 million. This increase was dampened
somewhat by decreases in interest yields on loans due to the lower overall
interest rate environment on average for the entire year. As a result, total
interest income increased by $24.2 million in 1997 over 1996. Similarly in 1997,
an increased volume of interest bearing liabilities boosted interest expense by
$13.0 million, and the higher cost of interest bearing liabilities resulted in
an overall increase in total interest expense of $16.4 million. However, the
increase in total interest income exceeded the increase in overall interest
expense by $7.8 million on a fully tax-equivalent basis in 1997 over 1996. In
1996, increases in volumes of interest sensitive assets and liabilities
increased total interest income and total interest expense over the previous
year. Yet, as in 1997, the decline in yields on loans partially reduced overall
interest income while the increase in rates paid on deposits increased interest
expense. As the increase in the volume of earning assets outpaced the increase
in interest bearing liabilities in 1996, net interest income increased by $13.5
million in 1996 over 1995. During both years, the increase in loan volume was
the most significant factor contributing to increased net interest income.
In 1997, even though net interest income increased due to higher volumes of
earning assets, the lower overall interest rate environment and increased
competition for deposits and other funds had a dampening effect on the net
interest margin percentage on a fully tax-equivalent basis. In 1997, a decrease
in the yield on loans was only partially offset by an increase in the yield on
the investment portfolio; thus the yield on all earning assets declined to 8.29%
in 1997, down from 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 pushed the cost of all funds up to 4.42% in 1997, from the
4.31% average cost in 1996. As a result, the net interest margin in 1997
declined to 4.48%, down from the 4.63% earned in 1996 and the 4.80% earned in
1995. The Net Interest Margin graph shows One Valley's yield on earning assets,
cost of all funds and net interest margin over the past six years. Further
discussion of net interest income is included in the section of this report
entitled "Balance Sheet Analysis."
Non-interest Income and Expense
Non-interest income has been and will continue to be an important factor for
improving profitability. Recognizing this importance, management continues to
evaluate areas where non-interest income can be enhanced. As shown in Table 12,
non-interest income increased by $6.7 million or 16.0% in 1997 compared to 1996,
which follows a 9.0% increase in 1996 over 1995. The increase in 1997 was
primarily due to an increase in trust income, credit/debit card fees and
electronic banking. In 1997, trust income increased to $10.2 million, a 9.7% or
$906,000 increase over 1996. This increase follows a 13.6% increase in 1996 over
1995. Trust revenues are increasing primarily due to new business over the past
several years and favorable results in the bond and equity markets. Credit/debit
card fees increased by $1.2 million or 48.6% in 1997, and by $468,000 or 23.3%
in 1996, as One Valley introduced a new debit card product late in 1996.
Electronic banking revenue increased by $1.1 million or 94.9% in 1997 largely
due to increased
35
<PAGE>
ATM usage. In 1997, One Valley increased its number of ATM locations from 104 at
the end of 1996 to 244 at the end of 1997 through arrangements reached with
several retail convenience store chains. Deposit service charges increased by
$577,000 or 3.9% in 1997, and increased $615,000 (excluding the CSB acquisition)
or 5.9% in 1996, primarily due to an increase in customer activity.
Real estate servicing fees slightly increased in 1997 by $93 or 1.5%, which
compares to an $849,000 or 16.2% increase in 1996 from the level earned in 1995.
As mortgage loan activity and sales in the secondary market improved in 1996 due
to lower mortgage interest rates, One Valley's processing and servicing fees
also increased. In 1997, mortgage loan activity increased again over the prior
year. However, the increased revenue generated from the originations was offset
by lower servicing revenue on loans serviced for others. Revenue from the sale
of investment products, such as discount brokerage, mutual funds and annuities,
increased by $143,000 or 15.1% in 1997. This compares to a $189,000 or 24.9%
increase in 1996. One Valley began offering such products as part of its
committment to provide integrated financial services to its customers.
In 1997, One Valley realized $1,018,000 in gains on securities sales. This
compares to $162,000 in losses realized in 1996 and $144,000 in gains realized
in 1995. These securities were sold as part of One Valley's management of its
asset/liability position. Other operating income increased by $1.4 million or
27.3% in 1997 partially due to the sale of One Valley's corporate trust
business. This compares to a $333,000 or 6.9% increase in 1996 primarily due to
increases in several miscellaneous banking services.
Just as management continues to evaluate areas where non-interest income can be
enhanced, it strives to find ways to improve the efficiency of its operations
and thus reduce operating costs. In 1997, additional efficiencies were achieved
in the operations of One Valley's affiliates by realigning processes and
reallocating resources. One Valley's 1997 net overhead ratio, or non-interest
expense less non-interest income excluding securities transactions to average
earning assets, was 2.08%, a decrease from the 2.28% realized in 1996, and down
further still from the 2.32% ratio realized in 1995. For the year 1997, net
overhead was $96.5 million, a decrease of $2.2 million or 2.3% below the 1996
overhead of $98.7 million. The current year decrease follows an increase in 1996
of 9.4% or $8.5 million from the 1995 overhead of $90.2 million. A large portion
of the increase in 1996 was due to a $6.0 million one-time assessment on certain
financial institutions to recapitalize the Savings Association Insurance Fund
(SAIF). Also included in the 1996 increase was the cost of operations associated
with the CSB purchase, which is included in the consolidated financial
statements only from the date of acquisition. A lower net overhead ratio means
more of the net interest margin flows through as net income. Over the past five
years, net overhead has grown by a compound rate of only 2.7% whereas net
interest income has grown by 5.1%.
Total non-interest expense increased by $3.3 million, or 2.4% from 1996. During
the fourth quarter of 1997, One Valley recognized non-recurring expenses of $1.8
million related to the consolidation and growth of its expanding banking
operations in Virginia and West Virginia. This
36
<PAGE>
year's increase compares to a $12.3 million or 9.6% increase in 1996 versus
1995. Approximately 50% of the 1996 increase was due to the operational costs of
CSB and the remainder of the increase related to the aforementioned one-time
SAIF assessment. Total staff costs increased by 5.4% in 1997, a result of normal
salary increases and increased pension costs. Total staff costs increased by
$3.4 million or 5.1% in 1996, compared to 1995. Staff costs increased in 1996
primarily due to the additional staff costs from the CSB acquisition. Additional
information on employee benefits is discussed in Note M to the consolidated
financial statements.
Advertising expense increased by $366,000 in 1997 due to additional advertising
related to the new debit card and electronic banking products. Advertising
expense increased by $1.2 million or 49.6% in 1996 due to a new image campaign
resulting from One Valley's expansion into Virginia. FDIC insurance decreased by
$6.9 million or 86.7% in 1997 following a $3.2 million or 68.7% increase in
1996. Both changes are largely due to the $6.0 million one-time special
assessment on thrift based deposits to replenish the Savings Association
Insurance Fund in 1996. FDIC insurance also decreased in 1997 as the rate
assessed on banking deposits was decreased.
Net occupancy expense increased by $234,000 or 3.2% in 1997 compared to an 8.9%
increase in 1996. Most of the increase in 1997 and approximately one-half of the
increase in 1996 was the result of the CSB purchase. The remaining portion of
the 1996 increase was due to additional building depreciation expense resulting
from improvements completed in 1996 and 1995. In 1997, equipment expense
decreased by $306,000 or 3.2%, largely due to lower equipment depreciation
costs. Equipment expense increased by 4.9% in 1996 primarily due to the CSB
acquisition and increased equipment depreciation due to technology improvements.
Outside data processing costs increased by $2.5 million or 37.4% in 1997 due to
conversion and data processing costs related to the Lynchburg affiliate and the
upcoming Wachovia branch purchase, as well as the additional processing costs
associated with the expansion of One Valley's ATM network. Outside data
processing costs increased by 9.2% in 1996 largely due to the CSB acquisition
and the cost associated with the increased electronic banking activity in 1996.
Taxes not on income remained relatively unchanged in 1997 following a $539,000
or 18.8% increase in 1996. The increase in 1996 was primarily due to increases
in local taxes on gross receipts and equity. Supplies and postage expense
increased by $391,000 or 5.6% in 1997, primarily related to additional mailings,
normal increases in supply costs, and courier service for One Valley's expanded
Virginia operations. This increase compares to a 2.1% increase in 1996. Other
expenses increased by $3.2 million or 13.0% in 1997 compared to a $2.2 million
or 9.6% increase in 1996. The increase in 1997 was largely due to increased
professional service costs, increased employee travel, intangible amortization
resulting from the CSB acquisition, and a planned increase in employee training
and development. The increase in 1996 was primarily due to the CSB acquisition,
increased collection costs associated with the higher level of consumer
charge-offs, and increased amortization of mortgage servicing rights.
An analysis of the allowance for loan losses and related provision for loan
losses is included in the Loan Portfolio section of the Balance Sheet Analysis
of this report.
37
<PAGE>
Applicable Income Taxes
Income tax expense in 1997 was $33.1 million compared to $29.9 million in 1996
and $28.2 million in 1995. The increase in 1997 was primarily due to an increase
in pretax earnings, which was compounded by an increase in nondeductible
goodwill amortization. One Valley's effective tax rate was 34.1% in 1997, up
from the 33.8% in 1996, and the 33.7% in 1995. 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 1997
Net income for the three months ended December 31, 1997 was $14.0 million, a
decrease of 13.7% from the $16.2 million earned during the fourth quarter of
1996. On a per share basis, 1997 fourth quarter earnings were $0.44 compared to
$0.50 in 1996, a decrease of 12.0%.
Net interest income increased by 2.2% when compared to the same three months of
1996. The provision for loan losses increased by $872,000 when compared to the
fourth quarter of 1996. Non-interest income excluding securities transactions
increased by $1.3 million or 12.3% as all categories of non-interest income
increased. One Valley also realized $644,000 in securities gains in the fourth
quarter of 1997. Non-interest expense increased by 16.5% when compared to the
same quarter last year. The increase is largely due to increased staff costs,
costs related to One Valley's expanded ATM network, acquisition expenses, and
other non-recurring expenses related to the consolidation of its banking
operations.
Additional quarterly financial data is provided in Note U to the consolidated
financial statements.
38
<PAGE>
Year 2000 Compliance
One Valley continually monitors the Year 2000 activity of its service
organizations, significant suppliers, large customers and other financial
institutions to ensure that those parties have appropriate plans to remediate
Year 2000 issues where their systems interface with One Valley's systems or
otherwise impact its operations. One Valley's primary service organizations are
among the nationally recognized leaders in the products and services they
provide and have indicated their intention to fully remediate the Year 2000
issues.
One Valley's comprehensive Year 2000 initiative is managed by a team of internal
staff members and outside consultants, as needed. The team's activities are
designed to ensure that there is no adverse effect on One Valley's core business
operations and that transactions with customers, suppliers, and other financial
institutions are fully supported. One Valley has assessed the extent to which
its operations would be impacted should it and these organizations fail to
remediate properly their computer systems. One Valley is well under way with
these efforts and has established December 31, 1998, as the date to have all
Year 2000 changes in place with extensive testing to take place in 1999.
While One Valley believes its planning efforts are adequate to address its Year
2000 concerns, there can be no guarantee that the systems of other companies on
which One Valley's systems and operations rely will be converted on a timely
basis and will not have a material effect. However, at this stage of the
process, there are no indications that those companies will not meet their Year
2000 goals and objectives to be compliant when the new millennium arrives. The
cost of the Year 2000 initiatives is not expected to be material to One Valley's
results of operations or financial position.
Forward-looking Statements
The Private Securities Litigation Act of 1995 indicates that the disclosure of
forward-looking information is desirable for investors and encourages such
disclosure by providing a safe harbor for forward-looking statements by
corporate management. This Annual Report, including the Letter to Shareholders
and the Management's Discussion and Analysis of Financial Condition and Results
of Operations, contains forward-looking statements that involve risk and
uncertainty. In order to comply with the terms of the safe harbor, the
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.
Long-range Plan
As part of achieving One Valley's mission "to establish mutually beneficial
relationships with its customers by offering a complete range of services and
products that meet or exceed their expectations; to share responsibility as
employees for the success of our company and ourselves by committing to
continuous improvement and self-development; and, to deliver long-term value
39
<PAGE>
on the investment made by our owners," One Valley has developed a long-range
plan that outlines specific goals for the three years ending December 31, 1998.
The long-range plan outlines goals for each of the constituencies outlined in
One Valley's mission statement, namely its customers, employees and owners.
Table 13 below lists the plan's owner objectives and how the 1997 and 1996
financial results of One Valley compare to those objectives. The goals and owner
objectives under the plan are forward-looking statements and are strategic goals
One Valley hopes to achieve. They are not historical facts and involve risks and
uncertainties, including, but not limited to, the demand for One Valley's
products and services, the effect of economic conditions on borrowers' ability
to repay loans, changes in the general level of interest rates, and the impact
of continued competitive pressure from bank and non-bank providers of
traditional banking services.
40
<PAGE>
- - --------------------------------------------------------------------------------
TABLE 1
Summary Statement of Net Income
(Dollars in Thousands)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1997
------------------ ------------------ ------------------ --------------------
<S> <C> <C> <C> <C>
AMOUNT
------------------
Interest Income * $ 376,760 $ 353,146 $ 320,055 $ 23,614
Interest Expense 176,910 160,467 140,292 16,443
------------------ ------------------ ------------------ ------------------
Net Interest Income 199,850 192,679 179,763 7,171
Other Operating Income 47,836 42,275 38,484 5,561
Gross Securities Transactions 1,018 (162) 144 1,180
------------------ ------------------ ------------------ ------------------
Adjusted Operating Income 248,704 234,792 218,391 13,912
Provision for Losses 7,531 5,264 5,887 2,267
Other Operating Expenses 144,319 140,984 128,675 3,335
------------------ ------------------ ------------------ ------------------
Income Before Taxes 96,854 88,544 83,829 8,310
Income Taxes 33,054 29,926 28,249 3,128
------------------ ------------------ ------------------ ------------------
Net Income $ 63,800 $ 58,618 $ 55,580 $ 5,182
================== ================== ================== ==================
* Fully tax-equivalent interest income
using the rate of 35% $ 384,833 $ 360,625 $ 326,955 $ 24,208
</TABLE>
<TABLE>
<CAPTION>
1996
------------- ----------- ------------
<S> <C> <C> <C>
PERCENT AMOUNT PERCENT
------------- ----------- ------------
Interest Income * 6.69 $ 33,091 10.34
Interest Expense 10.25 20,175 14.38
------------- ----------- ------------
Net Interest Income 3.72 12,916 7.19
Other Operating Income 13.15 3,791 9.85
Gross Securities Transactions (728.40) (306) (212.50)
------------- ----------- ------------
Adjusted Operating Income 5.93 16,401 7.51
Provision for Losses 43.07 (623) (10.58)
Other Operating Expenses 2.37 12,309 9.57
------------- ----------- ------------
Income Before Taxes 9.39 4,715 5.62
Income Taxes 10.45 1,677 5.94
------------- ----------- ------------
Net Income 8.84 $ 3,038 5.47
============= =========== ============
* Fully tax-equivalent interest income
using the rate of 35% 6.71 $ 33,670 10.30
</TABLE>
<PAGE>
<TABLE>
<S> <C>
- - --------------------------------------------------------------------------------
TABLE 2
Six Year Selected Financial Summary
(Dollars in thousands except per share data)
- - --------------------------------------------------------------------------------
1997 1996 1995 1994
- - ---------------------------------------------------------------------------------------------------------------------------------
Summary of Operations
Interest Income $ 376,760 $ 353,146 $ 320,055 $ 280,763
Interest Expense 176,910 160,467 140,292 109,680
Net Interest Income 199,850 192,679 179,763 171,083
Provision for Loan Losses 7,531 5,264 5,887 5,388
Non-Interest Income 47,836 42,275 38,484 38,323
Gross Securities
Transactions 1,018 (162) 144 (849)
Non-Interest Expense 144,319 140,984 128,675 127,652
Net Income 63,800 58,618 55,580 50,914
Per Share Data
Net Income $ 2.00 $ 1.80 $ 1.69 $ 1.54
Cash Dividends 0.80 0.74 0.66 0.60
Book Value 15.75 14.82 15.32 13.81
Average Balance Sheet
Summary
Net Loans $ 3,135,152 $ 2,958,161 $ 2,674,893 $ 2,462,509
Investment Securities 1,467,907 1,345,501 1,174,001 1,164,445
Total Assets 4,945,505 4,625,907 4,168,873 3,942,948
Deposits 3,846,583 3,656,587 3,361,721 3,272,721
Long-Term Borrowings 52,315 21,951 19,026 22,931
Equity 487,598 471,443 438,814 359,966
Selected Ratios
Equity to Average Assets 9.86% 10.19% 10.53% 9.13%
Return on Average Assets 1.29 1.27 1.33 1.29
Return on Average Equity 13.08 12.43 12.67 14.14
Dividend Payout Ratio 40.00 41.11 39.05 38.96
<CAPTION>
5-YEAR
COMPOUND
GROWTH
1993 1992 RATE
----------------------------------------------------------------------------
Summary of Operations
Interest Income $ 276,129 $ 293,446 5.13
Interest Expense 114,512 137,780 5.13
Net Interest Income 161,617 155,666 5.12
Provision for Loan Losses 6,688 12,115 (9.07)
Non-Interest Income 40,739 38,029 4.70
Gross Securities
Transactions 266 436
Non-Interest Expense 132,284 122,513 3.33
Net Income 43,301 40,554 9.49
Per Share Data
Net Income $ 1.61 $ 1.51 5.78
Cash Dividends 0.54 0.45 12.20
Book Value 12.43 11.31 6.85
Average Balance Sheet
Summary
Net Loans $ 2,293,436 $ 2,187,688 7.46
Investment Securities 1,162,499 1,132,868 5.32
Total Assets 3,840,341 3,733,988 5.78
Deposits 3,228,528 3,158,145 4.02
Long-Term Borrowings 36,088 25,703 15.27
Equity 321,403 290,727 10.90
Selected Ratios
Equity to Average Assets 8.37% 7.79%
Return on Average Assets 1.13 1.09
Return on Average Equity 13.47 13.95
Dividend Payout Ratio 33.54 29.80
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Analysis of Return on Assets and Equity
- - -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- -------- ------- -------------
As a percent of average earning assets:
Fully taxable-equivalent net
interest income * 4.48% 4.63% 4.80% 4.85% 4.67%
Provision for loan losses (0.16) (0.12) (0.15) (0.15) (0.19)
---------- --------- -------- ----- ----
Net credit income 4.32 4.51 4.65 4.70 4.48
Non-interest income 1.05 0.97 0.99 1.02 1.15
Non-interest expense (3.11) (3.25) (3.31) (3.48) (3.71)
Tax equivalent adjustment (0.17) (0.17) (0.18) (0.18) (0.13)
Applicable income taxes (0.71) (0.70) (0.73) (0.67) (0.57)
---------- --------- -------- ----- ----
Return on average earning assets 1.38 1.36 1.42 1.39 1.22
Multiplied by average earning assets
to average total assets 93.81 93.49 93.25 93.00 92.73
--------- --------- -------- ----- -----
Return on average assets 1.29% 1.27% 1.33% 1.29% 1.13%
Multiplied by average assets
to average equity 10.14 X 9.81 X 9.51 X 10.95 X 11.95 X
--------- --------- -------- ------ -------
Return on average equity 13.08% 12.43% 12.67% 14.14% 13.47%
========= ========== ========= ====== ======
* Fully tax-equivalent using the rate of 35%.
<CAPTION>
3yr Avg 5yr Avg
-------- ---------
As a percent of average earning assets:
Fully taxable-equivalent net
interest income * 4.637 4.686
Provision for loan losses (0.143) (0.154)
Net credit income 4.493 4.532
Non-interest income 1.003 1.036
Non-interest expense (3.223) (3.372)
Tax equivalent adjustment (0.173) (0.166)
Applicable income taxes (0.712) (0.675)
Return on average earning assets 1.388 1.354
Multiplied by average earning assets
to average total assets 93.517 93.255
Return on average assets 1.298 1.264
Multiplied by average assets
to average equity 9.820 10.470
Return on average equity 12.729 13.161
</TABLE>
* Fully tax-equivalent using the rate of 35%.
<PAGE>
<TABLE>
<S> <C>
- - -------------------------------------------------------------------------------------------------------------
TABLE 4
- - -------------------------------------------------------------------------------------------------------------
1997
AVERAGE YIELD/
BALANCE INTEREST (1) RATE (1)
------------------------------------------------------------
Assets
Loans (2)
Taxable $ 3,134,255 $ 276,520 8.82%
Tax-Exempt 46,208 4,600 9.95
------------------ ----------------- -------------
Total Loans 3,180,463 281,120 8.84
Less: Allowance for Losses 45,311
------------------
Total Loans-Net 3,135,152 8.97
Investment Securities
Taxable 1,241,684 83,458 6.72
Tax-Exempt 226,223 18,466 8.16
------------------ ----------------- -------------
Total Securities 1,467,907 101,924 6.94
Federal Funds Sold & Other 36,401 1,789 4.91
------------------ ----------------- -------------
Total Earning Assets 4,639,460 384,833 8.29
Other Assets 306,045
------------------
Total Assets 4,945,505
==================
Liabilities and Equity
Interest Bearing Liabilities
Int Bearing Demand Deposits 561,331 10,894 1.94
Savings Deposits 746,879 23,164 3.10
Time Deposits 2,128,170 113,968 5.36
------------------- ----------------- -------------
Total Interest
Bearing Deposits 3,436,380 148,026 4.31
Short-Term Borrowings 510,014 25,466 4.99
Long-Term Borrowings 52,315 3,418 6.53
------------------ ----------------- -------------
Total Interest Bearing
Liabilities 3,998,709 176,910 4.42
Demand Deposits 410,203
Other Liabilities 48,995
Shareholders' Equity 487,598
------------------
Total Liabilities &
Equity $ 4,945,505
==================
Net Interest Earnings $ 207,923
================
Net Yield on Earning Assets 4.48%
========
<CAPTION>
-----------------------------------------------------------------------
Average Balance Sheet/Net Interest Income Analysis
(Dollars in Thousands)
-----------------------------------------------------------------------
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
Int 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 &
Equity $ 4,625,907
===================
Net Interest Earnings $ 200,158
=================
Net Yield on Earning Assets 4.63%
<CAPTION>
-----------------------------------------------------------------
-----------------------------------------------------------------
1995
AVERAGE YIELD/
BALANCE INTEREST (1) RATE (1)
----------------------------------------------------------
Assets
Loans (2)
Taxable $ 2,682,862 $ 242,174 9.03%
Tax-Exempt 33,977 3,774 11.11
------------------- ---------------- ----------
Total Loans 2,716,839 245,948 9.05
Less: Allowance for Losses 41,946
-------------------
Total Loans-Net 2,674,893 9.19
Investment Securities
Taxable 986,821 62,813 6.37
Tax-Exempt 187,180 15,941 8.52
------------------- ---------------- ----------
Total Securities 1,174,001 78,754 6.71
Federal Funds Sold & Other 38,540 2,253 5.85
------------------- ---------------- ----------
Total Earning Assets 3,887,434 326,955 8.41
Other Assets 281,439
-------------------
Total Assets 4,168,873
===================
Liabilities and Equity
Interest Bearing Liabilities
Int Bearing Demand Deposits 560,668 13,573 2.42
Savings Deposits 732,548 20,880 2.85
Time Deposits 1,687,509 89,300 5.29
----------------- ------------- ----------
Total Interest
Bearing Deposits 2,980,725 123,753 4.15
Short-Term Borrowings 312,195 15,851 5.08
Long-Term Borrowings 19,026 688 3.62
---------------- ------------- ---------
Total Interest Bearing
Liabilities 3,311,946 140,292 4.24
Demand Deposits 380,996
Other Liabilities 37,117
Shareholders' Equity 438,814
--------------------
Total Liabilities &
Equity $ 4,168,873
====================
Net Interest Earnings $ 186,663
================
Net Yield on Earning Assets 4.80%
====
(1) Fully taxable equivalent using the rate of 35%.
(2) Non-accrual loans are included in average balances.
</TABLE>
<PAGE>
- - -------------------------------------------------------------------------------
TABLE 5
Loan Summary
(Dollars in Thousands)
- - -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF DECEMBER 31
1997 1996 1995 1994 1993
----------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Summary of Loans by Type
Commercial, Financial,
Agricultural, and Other Loans $ 396,503 $ 351,409 $ 348,761 $ 398,105 $ 334,068
Real Estate:
Construction Loans 60,975 66,369 56,420 49,453 44,927
Revolving Home Equity 192,252 152,006 128,754 113,142 102,648
Single Family Residentials 1,527,621 1,471,434 ,237,416 1,149,570 1,077,151
Apartment Buildings 75,314 70,990 60,191 49,101 53,588
Commercial 477,025 451,756 397,821 343,298 350,369
Bankers' Acceptances 0 0 0 849 2,123
Installment Loans 572,846 571,533 580,616 544,163 474,507
----------- ----------- --------- ---------- ----------
Subtotal 3,302,536 3,135,497 ,809,979 2,647,681 2,439,381
Less: Allowance for Loan Losses 45,048 45,055 42,751 40,492 39,060
----------- ----------- --------- ---------- ----------
Net Loans $ 3,257,488 $ 3,090,442 $ ,767,228 $2,607,189 $ 2,400,321
=========== =========== ========= ========== ==========
Percent of Loans by Category
Commercial, Financial,
Agricultural, and Other Loans 12.01% 11.21% 12.41% 15.04% 13.69%
Real Estate:
Construction Loans 1.85 2.13 2.01 1.87 1.84
Revolving Home Equity 5.82 4.85 4.58 4.27 4.21
Single Family Residentials 46.26 46.91 44.04 43.42 44.16
Apartment Buildings 2.28 2.26 2.14 1.85 2.20
Commercial 14.44 14.41 14.16 12.97 14.36
Bankers' Acceptances 0.00 0.00 0.00 0.03 0.09
Installment Loans 17.34 18.23 20.66 20.55 19.45
----------- ----------- --------- ---------- ----------
Total 100.00% 100.00% 100.00% 100.00% 100.00%
=========== =========== ========= ========== ==========
Non-Performing Assets
Non-Accrual Loans $ 8,052 $ 10,288 $ 9,627 $ 11,134 $ 13,354
Other Real Estate Owned 1,808 1,945 1,565 1,521 3,524
Restructured Loans 0 0 0 552 969
----------- ----------- --------- ---------- ----------
Total Non-Performing Assets $ 9,860 $ 12,233 $ 11,192 $ 13,207 $ 17,847
=========== =========== ========= ========== ==========
Non-performing Asset As a
% of Total Loans 0.30% 0.39% 0.40% 0.50% 0.73%
Loans Past Due Over 90 Days $ 6,275 $ 4,959 $ 8,180 $ 6,386 $ 7,748
=========== =========== ========= ========== ==========
Loans Past Due Over 90 Days
As a % of Total Loans 0.19% 0.16% 0.29% 0.24% 0.32
Allocation of Loan Loss Reserve
by Loan Type
Commercial, Financial, and
Unallocated Portion $ 18,780 $ 18,585 $ 17,016 $ 16,036 $ 17,569
Real Estate Construction Loans 344 367 318 254 332
Real Estate Mortgage Loans 9,216 9,753 9,809 9,556 9,625
Installment Loans 16,708 16,350 15,608 14,646 11,534
----------- ----------- --------- ---------- ----------
Total $ 45,048 $ 45,055 $ 42,751 $ 40,492 $ 39,060
=========== =========== ========= ========== ==========
</TABLE>
<PAGE>
- - --------------------------------------------------------------------------------
TABLE 6
Comparative Loan Loss Summary
(Dollars in Thousands)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993
----------- ------------ ---------- ---------- -----------
<S> <C> <C> <C> <C> <C>
Allowance for Loan Losses,
Beginning of Period $ 45,055 $ 42,751 $ 40,492 $ 39,060 $ 38,038
Charge-offs:
Commercial, Financial, and
Agricultural Loans 2,098 1,105 726 1,207 2,644
Real Estate Construction Loans 34 0 0 0 0
Real Estate Mortgage Loans 888 667 588 1,314 2,018
Installment Loans 6,817 5,293 4,451 3,662 3,429
---------- ---------- ---------- ---------- ----------
Totals 9,837 7,065 5,765 6,183 8,091
---------- ---------- ---------- ---------- ----------
Recoveries:
Commercial, Financial, and
Agricultural Loans 446 306 519 793 930
Real Estate Construction Loans 0 0 0 0 0
Real Estate Mortgage Loans 399 321 232 326 378
Installment Loans 1,454 1,252 1,151 1,108 1,117
---------- ---------- ---------- ---------- ----------
Totals 2,299 1,879 1,902 2,227 2,425
---------- ---------- ---------- ---------- ----------
Net Charge-offs 7,538 5,186 3,863 3,956 5,666
Provision for Loan Losses 7,531 5,264 5,887 5,388 6,688
Balance of Acquired Subsidiaries 0 2,226 235 0 0
---------- ---------- ---------- ---------- ----------
Allowance for Loan Losses,
End of Period $ 45,048 $ 45,055 $ 42,751 $ 40,492 $ 39,060
========== ========== ========== ========== =========
Average Total Loans $ 3,180,463 $ 3,002,773 $2,716,839 $2,502,784 $2,332,836
Total Loans at Year-end 3,302,536 3,135,497 2,809,979 2,647,681 2,439,381
As a Percent of Average
Total Loans:
Net Charge-offs 0.24% 0.17% 0.14% 0.16% 0.24%
Provision for Loan Losses 0.24 0.18 0.22 0.22 0.29
Allowance for Loan Losses 1.42 1.50 1.57 1.62 1.67
As a Percent of Total Loans
at Year-end:
Allowance for Loan Losses 1.36% 1.44% 1.52% 1.53% 1.60%
As a Multiple of Net Charge-offs:
Allowance for Loan Losses 5.98 X 8.69 X 11.07 X 10.24 X 6.89 X
Income Before Tax and
Provision for Loan Losses 13.85 18.09 23.22 20.45 12.41
</TABLE>
<PAGE>
TABLE 7
REMAINING MATURITIES OF LOANS
(Dollars In Thousands)
<TABLE>
<CAPTION>
PROJECTED MATURITIES *
BALANCE ONE YEAR ONE TO FIVE OVER FIVE
DECEMBER 31, 1997 OR LESS YEARS YEARS
------------------- ----------- ------------ ----------
<S> <C> <C> <C> <C>
Commercial, Financial, and Agricultural Loans $ 372,933 $ 190,851 $ 135,657 $ 46,425
Real Estate Construction Loans 60,975 38,283 10,689 12,003
Commercial Real Estate Loans 552,339 99,420 257,406 195,513
Loans With:
Floating Rates $ 450,079 $ 98,439 $ 249,205 $ 102,304
Predetermined Rates $ 536,168 $ 230,115 $ 154,547 $ 151,637
</TABLE>
*Based on scheduled or approximate repayments.
<PAGE>
- - --------------------------------------------------------------------------------
TABLE 8
Investment Securities Analysis
(Dollars in Thousands)
- - --------------------------------------------------------------------------------
Held-to-Maturity
<TABLE>
<CAPTION>
As of December 31, 1997
------------------------------------------------------
AVERAGE TAXABLE
BOOK MATURITY EQUIVALENT
VALUE (Yrs./Mos.) YIELD *
------------- ------------ -------------
<S> <C> <C> <C>
States and Political Subdivisions Securities
Within one year 6,299 11.44%
After one but within five years 21,062 8.61
After five but within ten years 101,066 7.72
After ten years 108,863 7.97
-------------
Total State and Political Subdivision 237,290 9/7 8.01
U.S. Government Agencies
Within one year 19,444 6.77
After one but within five years 25,181 6.92
After ten years 3,708 7.28
-------------
Total State and Political Subdivision 48,333 2/10 6.89
Mortgage-Backed Securities
After one but within five years 4,556 6.40
After five but within ten years 1,958 6.40
After ten years 56,242 6.40
-------------
Total Mortgage-Backed Securities 62,756 14/2 6.40
Other Securities 3,893
-------------
Total Securities Held-to-Maturity $ 352,272 9/2 7.56%
=============
</TABLE>
Available-for-Sale
<TABLE>
<CAPTION>
AVERAGE TAXABLE
MARKET MATURITY EQUIVALENT
VALUE (Yrs./Mos.) YIELD *
-------------- ------------ -------------
<S> <C> <C> <C>
U.S. Treasury Securities
Within one year $ 69,047 6.11%
After one but within five years 180,182 6.40
After five but within ten years 21,223 7.06
After ten years
------------
Total U.S. Treasury Securities 270,452 1/10 6.38
U.S. Government Agencies Securities
Within one year 40,205 6.55
After one but within five years 240,122 6.36
After five but within ten years 264,170 6.67
After ten years 46,508 7.09
------------
Total Government Agencies 591,005 5/1 6.57
Mortgage-Backed Securities
Within one year 1,656 6.81
After one but within five years 14,957 6.80
After five but within ten years 24,857 6.82
After ten years 262,450 7.10
------------
Total Mortgage-Backed Securities 303,920 14/2 7.02
Other Securities 51,372
------------
Total Securities Available-for-Sale $ 1,216,749 6/5 6.36%
============
</TABLE>
*Fully taxable equivalent using the rate of 35%.
** Maturities for mortgage-backed securities are based on final maturity.
<PAGE>
- - --------------------------------------------------------------------------------
TABLE 9
Maturity Distribution of Certificates of Deposit
In Amounts of $100,000 or More
(Dollars In Thousands)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1997 AS OF DECEMBER 31, 1996
AMOUNT PERCENT AMOUNT PERCENT
------------ ---------- ------------ ---------
<S> <C> <C> <C> <C>
Three Months or Less $ 99,980 30.47% $ 127,759 39.97%
Three through Six Months 54,363 16.57 50,236 15.71
Six through Twelve Months 86,693 26.42 58,458 18.29
Over Twelve Months 87,097 26.54 83,216 26.03
------------ ---------- ------------- ----------
Total $ 328,133 100.00% $ 319,669 100.00%
============ ========== ============= ==========
</TABLE>
<PAGE>
TABLE 10
INTEREST RATE SENSITIVITY SUMMARY
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 Thereafter Total Fair Value
--------- --------------------- ---------- ---------- ------------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Rate Sensitive Assets
Fixed interest rate loans $ 436,952 $ 309,777 $ 235,999 $ 194,432 $ 148,080 $ 422,679 $ 1,747,919 $ 1,696,723
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 1,612,334
Average interest rate 8.62% 8.53% 8.61% 8.71% 8.95% 8.20% 8.39%
Fixed interest rate securities 358,127 317,396 97,671 101,581 75,880 561,155 1,511,810 1,516,144
Average interest rate 6.39% 6.53% 6.59% 6.61% 6.69% 6.08% 6.34%
Variable interest rate
securities 9239 9239 9239 9239 9239 11016 57,211 59974
Average interest rate 6.81% 6.81% 6.81% 6.81% 6.81% 6.81% 6.81%
Rate Sensitive Liabilities
Non interest bearing deposits 130,873 74,301 55,726 51,546 36,222 116,559 465,227 465,226
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%
Variable interest rate time
deposits 314,214 314,214 314,195
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%
</TABLE>
<PAGE>
- - --------------------------------------------------------------------------------
TABLE 11
Rate Volume Analysis of Changes
In Interest Income and Expense
(Dollars in Thousands)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 vs 1996 1996 vs 1995
INCREASE (DECREASE) INCREASE (DECREASE)
IN NET INTEREST INCOME * IN NET INTEREST INCOME *
----------------------------------------------- ------------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
----------------------------------------------- ------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earning Assets
Loans
Taxable $ 15,465 $ (1,299) $ 14,166 $ 24,551 $ (4,371) $20,180
Tax-Exempt 246 26 272 999 (445) 554
------------ ---------- ---------- ---------- ---------- -------
Total Loans 15,711 (1,273) 14,438 25,550 (4,816) 20,734
Investment Securities
Taxable 6,777 725 7,502 10,147 2,996 13,143
Tax-Exempt 1,759 (333) 1,426 1,468 (369) 1,099
------------ ---------- ---------- ---------- ---------- -------
Total Securities 8,536 392 8,928 11,615 2,627 14,242
Federal Funds Sold & Other 740 102 842 (858) (448) (1,306)
------------ ---------- ---------- ---------- ---------- -------
Total Earning Assets 24,987 (779) 24,208 36,307 (2,637) 33,670
------------ ---------- ---------- ---------- ---------- -------
Interest Bearing Liabilities
Time & Savings Deposits 7,053 2,726 9,779 12,265 2,229 14,494
Short-Term Borrowings 4,004 386 4,390 5,780 (555) 5,225
Long-Term Borrowings 1,922 352 2,274 118 338 456
------------ ---------- ---------- ---------- ---------- -------
Total Interest Bearing
Liabilities 12,979 3,464 16,443 18,163 2,012 20,175
------------ ---------- ---------- ---------- ---------- -------
Net Interest Earnings $ 12,008 $ (4,243) $ 7,765 $ 18,144 $ (4,649) $13,495
============ ========== ========== ========== ========== =======
</TABLE>
* 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.
<PAGE>
- - --------------------------------------------------------------------------------
TABLE 12
Non-Interest Income and Expense
(Dollars in Thousands)
- - --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
INCREASE (DECREASE) OVER PRIOR YEAR
----------------------------------------------
1997 1996 1995 1997 1996
---------- ----------- ---------- ---------------------- -----------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Service Charges and Other
Operating Income
Trust Income $ 10,228 $ 9,322 $ 8,203 $ 906 9.72 $ 1,119 13.64
Credit/Debit Card Fees 3,684 2,479 2,011 1,205 48.61 468 23.27
Service Charges on
Deposit Accounts 15,511 14,934 14,109 577 3.86 825 5.85
Electronic Banking 2,350 1,206 1,065 1,144 94.86 141 13.24
Investment Services 1,092 949 760 143 15.07 189 24.87
Real Estate Fees 6,191 6,098 5,249 93 1.53 849 16.17
Checkbook Sales 2,168 2,095 2,228 73 3.48 (133) (5.97)
Securities Transactions 1,018 (162) 144 1,180 (728.40) (306) (212.50)
Miscellaneous 6,612 5,192 4,859 1,420 27.35 333 6.85
--------- -------- --------- ------- ------- -------- --------
Total Non-Interest
Income $ 48,854 $ 42,113 $ 38,628 $ 6,741 16.01 $ 3,485 9.02
========= ======== ========= ======= ======= ======== ========
Other Operating Expenses
Salaries & Wages $ 55,175 $ 53,634 $ 51,973 $ 1,541 2.87 $ 1,661 3.20
Employee Benefits 19,059 16,774 15,049 2,285 13.62 1,725 11.46
--------- -------- --------- ------- ------- -------- --------
Total Staff Expenses 74,234 70,408 67,022 3,826 5.43 3,386 5.05
Other Operating Expenses
Advertising 4,083 3,717 2,484 366 9.85 1,233 49.64
FDIC Insurance 1,051 7,921 4,696 (6,870) (86.73) 3,225 68.68
Occupancy, Net 7,614 7,380 6,777 234 3.17 603 8.90
Equipment 9,377 9,683 9,233 (306) (3.16) 450 4.87
Outside Data Processing 9,115 6,632 6,073 2,483 37.44 559 9.20
Taxes Not on Income 3,382 3,400 2,861 (18) (0.53) 539 18.84
Supplies & Postage 7,404 7,013 6,868 391 5.58 145 2.11
All Other 28,059 24,830 22,661 3,229 13.00 2,169 9.57
--------- -------- --------- ------- ------- -------- --------
Total Other Operating
Expenses 70,085 70,576 61,653 (491) (0.70) 8,923 14.47
--------- -------- --------- ------- ------- -------- --------
Total Non-Interest
Expense $ 144,319 $140,984 $ 128,675 $ 3,335 2.37 $ 12,309 9.57
========= ======== ========= ======= ======= ======== ========
</TABLE>
<PAGE>
EXHIBITS
(27) Financial Data Schedules
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
One Valley Bancorp, Inc.
DATE: June 17, 1998
BY /s/ Laurance G. Jones
-------------------------------
Laurance G. Jones
(Chief Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
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 AS FILED WITH THIS EXHIBIT.
</LEGEND>
<RESTATED>
<CIK> 0000351616
<NAME> ONE VALLEY BANCORP, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 148300
<INT-BEARING-DEPOSITS> 8259
<FED-FUNDS-SOLD> 16800
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 985267
<INVESTMENTS-CARRYING> 277488
<INVESTMENTS-MARKET> 285631
<LOANS> 2809979
<ALLOWANCE> 42751
<TOTAL-ASSETS> 4355586
<DEPOSITS> 3426311
<SHORT-TERM> 419030
<LIABILITIES-OTHER> 42473
<LONG-TERM> 13411
0
0
<COMMON> 210110
<OTHER-SE> 244251
<TOTAL-LIABILITIES-AND-EQUITY> 4355586
<INTEREST-LOAN> 244627
<INTEREST-INVEST> 83175
<INTEREST-OTHER> 2253
<INTEREST-TOTAL> 320055
<INTEREST-DEPOSIT> 123753
<INTEREST-EXPENSE> 16539
<INTEREST-INCOME-NET> 179763
<LOAN-LOSSES> 5887
<SECURITIES-GAINS> 144
<EXPENSE-OTHER> 128675
<INCOME-PRETAX> 83829
<INCOME-PRE-EXTRAORDINARY> 83829
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 55580
<EPS-PRIMARY> 1.69
<EPS-DILUTED> 1.67
<YIELD-ACTUAL> 4.80
<LOANS-NON> 9627
<LOANS-PAST> 8180
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 40492
<CHARGE-OFFS> 5765
<RECOVERIES> 1902
<ALLOWANCE-CLOSE> 42751
<ALLOWANCE-DOMESTIC> 42751
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
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 AS FILED WITH THIS EXHIBIT.
</LEGEND>
<RESTATED>
<CIK> 0000351616
<NAME> ONE VALLEY BANCORP, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<CASH> 151516
<INT-BEARING-DEPOSITS> 9897
<FED-FUNDS-SOLD> 6095
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1059459
<INVESTMENTS-CARRYING> 303450
<INVESTMENTS-MARKET> 306345
<LOANS> 3135497
<ALLOWANCE> 45055
<TOTAL-ASSETS> 4801113
<DEPOSITS> 3804369
<SHORT-TERM> 434074
<LIABILITIES-OTHER> 46720
<LONG-TERM> 32892
0
0
<COMMON> 298493
<OTHER-SE> 184565
<TOTAL-LIABILITIES-AND-EQUITY> 4801113
<INTEREST-LOAN> 265167
<INTEREST-INVEST> 87032
<INTEREST-OTHER> 947
<INTEREST-TOTAL> 353146
<INTEREST-DEPOSIT> 138247
<INTEREST-EXPENSE> 22220
<INTEREST-INCOME-NET> 192679
<LOAN-LOSSES> 5264
<SECURITIES-GAINS> (162)
<EXPENSE-OTHER> 140984
<INCOME-PRETAX> 88544
<INCOME-PRE-EXTRAORDINARY> 88544
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58618
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.76
<YIELD-ACTUAL> 4.63
<LOANS-NON> 10288
<LOANS-PAST> 4959
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 42751
<CHARGE-OFFS> 7065
<RECOVERIES> 1879
<ALLOWANCE-CLOSE> 45055
<ALLOWANCE-DOMESTIC> 45055
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
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 AS FILED WITH THIS EXHIBIT.
</LEGEND>
<RESTATED>
<CIK> 0000351616
<NAME> ONE VALLEY BANCORP, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 127012
<INT-BEARING-DEPOSITS> 2162
<FED-FUNDS-SOLD> 20310
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1216749
<INVESTMENTS-CARRYING> 352272
<INVESTMENTS-MARKET> 359369
<LOANS> 3302536
<ALLOWANCE> 45048
<TOTAL-ASSETS> 5161486
<DEPOSITS> 3934174
<SHORT-TERM> 623480
<LIABILITIES-OTHER> 51307
<LONG-TERM> 48875
0
0
<COMMON> 363306
<OTHER-SE> 140344
<TOTAL-LIABILITIES-AND-EQUITY> 5161486
<INTEREST-LOAN> 279510
<INTEREST-INVEST> 95461
<INTEREST-OTHER> 1789
<INTEREST-TOTAL> 376760
<INTEREST-DEPOSIT> 148026
<INTEREST-EXPENSE> 28884
<INTEREST-INCOME-NET> 199850
<LOAN-LOSSES> 7531
<SECURITIES-GAINS> 1018
<EXPENSE-OTHER> 144319
<INCOME-PRETAX> 96854
<INCOME-PRE-EXTRAORDINARY> 96854
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 63800
<EPS-PRIMARY> 2.00
<EPS-DILUTED> 1.95
<YIELD-ACTUAL> 4.48
<LOANS-NON> 8052
<LOANS-PAST> 6275
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 45055
<CHARGE-OFFS> 9837
<RECOVERIES> 2299
<ALLOWANCE-CLOSE> 45048
<ALLOWANCE-DOMESTIC> 45048
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
