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