FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission file number 1-6580
June 30, 1999
FIRST VIRGINIA BANKS, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-0497561
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
6400 Arlington Boulevard
Falls Church, Virginia 22042-2336
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code
(703) 241-4000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities 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 __X__ No_____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
On July 31, 1999, there were 50,149,696 shares of common
stock outstanding.
This report contains a total of 28 pages.
1
INDEX
Page
---------
PART I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - June 30, 1999
and 1998, (Unaudited), and December 31, 1998 3/ 4
Condensed Consolidated Statements of Income - Three
months and Six months ended June 30, 1999
and 1998 (Unaudited) 5/ 6
Condensed Consolidated Statements of Shareholders'
Equity - Six months ended June 30, 1999
and 1998 (Unaudited) 7/ 8
Condensed Consolidated Statements of Cash Flows - Six
months ended June 30, 1999 and 1998 (Unaudited) 9
Notes to Condensed Consolidated Financial
Statements (Unaudited) 10/13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13/21
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 22
PART II - Other Information
Item 4. Submission of Matters to a Vote of
Security Holders 23/26
Item 6. Exhibits and Reports on Form 8-K
Signatures 27
Exhibit 27 - Financial Data Schedule 28
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
June 30 December 31 June 30
1999 1998 1998
---------- ---------- ----------
(In thousands)
ASSETS
Cash and due from banks $ 365,599 $ 377,374 $ 401,251
Money market investments 140,765 265,557 196,095
---------- ---------- ----------
Total cash and cash equivalents 506,364 642,931 597,346
---------- ---------- ----------
Loans held for sale 10,619 14,737 16,110
Investment securities - available for sale 115,578 20,580 23,333
Investment securities - held to maturity
(fair values of $2,114,206, $2,316,922
and $2,265,828) 2,139,209 2,302,472 2,260,462
Loans, net of unearned income 6,194,322 6,093,215 5,984,827
Allowance for loan losses (68,313) (70,312) (68,533)
---------- ---------- ----------
Net loans 6,126,009 6,022,903 5,916,294
---------- ---------- ----------
Other earning assets 23,098 22,427 21,981
Premises and equipment 157,336 160,781 163,722
Intangible assets 177,624 184,695 191,413
Accrued income and other assets 190,010 193,170 186,584
---------- ---------- ----------
Total Assets $9,445,847 $9,564,696 $9,377,245
========== ========== ==========
3
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (Continued)
June 30 December 31 June 30
1999 1998 1998
---------- ---------- ----------
(In thousands)
LIABILITIES
Deposits:
Noninterest-bearing $1,601,573 $1,601,041 $1,559,495
Interest-bearing:
Interest checking 1,448,258 1,508,511 1,385,978
Money market accounts 978,218 958,966 883,221
Savings deposits 1,145,711 1,134,108 1,159,151
Consumer certificates of deposit 2,324,304 2,414,366 2,472,052
Large denomination
certificates of deposit 423,477 438,086 436,240
---------- ---------- ----------
Total deposits 7,921,541 8,055,078 7,896,137
Short-term borrowings 367,318 385,996 311,241
Long-term debt 2,804 3,217 3,659
Accrued interest and other liabilities 116,998 130,077 123,695
---------- ---------- ----------
Total Liabilities 8,408,661 8,574,368 8,334,732
---------- ---------- ----------
SHAREHOLDERS' EQUITY
Preferred stock, $10 par value 496 534 542
Common stock, $1 par value 50,135 50,094 51,848
Capital surplus 6,130 4,004 88,424
Retained earnings 980,124 934,703 899,683
Accumulated other comprehensive income 301 993 2,016
---------- ---------- ----------
Total Shareholders' Equity 1,037,186 990,328 1,042,513
---------- ---------- ----------
Total Liabilities and Shareholders' Equity $9,445,847 $9,564,696 $9,377,245
========== ========== ==========
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands, except per-share data)
Interest income:
Loans $123,729 $128,951 $249,038 $256,300
Loans held for sale 179 330 410 598
Investment securities -
available for sale 1,035 232 1,259 373
Investment securities -
held to maturity 30,471 30,119 59,664 56,703
Money market investments 3,785 7,073 8,968 14,436
Other earning assets 384 368 777 735
-------- -------- -------- --------
Total interest income 159,583 167,073 320,116 329,145
-------- -------- -------- --------
Interest expense:
Deposits 47,525 55,143 97,627 109,295
Short-term borrowings 3,529 3,427 7,078 6,638
Long-term indebtedness 62 88 137 135
-------- -------- -------- --------
Total interest expense 51,116 58,658 104,842 116,068
-------- -------- -------- --------
Net interest income 108,467 108,415 215,274 213,077
Provision for loan losses 4,433 6,055 8,389 10,139
-------- -------- -------- --------
Net interest income after provision
for loan losses 104,034 102,360 206,885 202,938
-------- -------- -------- --------
5
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (Continued)
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
-------- -------- -------- --------
(In thousands, except per-share data)
Net interest income after provision
for loan losses 104,034 102,360 206,885 202,938
-------- -------- -------- --------
Noninterest income:
Service charges on deposit
accounts 13,909 10,926 27,550 21,799
Electronic banking service fees 3,011 3,079 5,685 5,813
Trust services 2,716 2,634 5,448 5,235
Credit card service charges
and fees 1,734 3,217 4,238 5,985
Insurance premiums and
commissions 1,797 1,575 3,761 3,345
Other customer services 3,590 3,642 7,048 7,106
Other 2,043 4,094 4,633 5,825
Gain on sale of credit card
portfolio 0 0 16,467 0
Investment securities gains 10 5 832 511
-------- -------- -------- --------
Total noninterest income 28,810 29,172 75,662 55,619
-------- -------- -------- --------
Noninterest expense:
Salaries and employee benefits 44,829 44,568 89,241 88,200
Occupancy 6,117 6,171 12,424 12,524
Equipment 7,606 7,132 15,093 14,047
Credit card processing fees 1,520 2,374 3,363 4,310
Advertising 1,586 2,486 2,858 4,711
Amortization of intangibles 3,783 3,638 7,610 7,059
Other 15,197 14,564 31,980 28,842
-------- -------- -------- --------
Total noninterest expense 80,638 80,933 162,569 159,693
-------- -------- -------- --------
Income before income taxes 52,206 50,599 119,978 98,864
Provision for income taxes 17,966 18,155 41,454 34,878
-------- -------- -------- --------
Net income $ 34,240 $ 32,444 $ 78,524 $ 63,986
======== ======== ======== ========
Net income per share of common stock
Basic $ .68 $ .63 $ 1.57 $ 1.23
Diluted .68 .62 1.56 1.23
Average shares of common stock outstanding
Basic 50,129 51,843 50,116 51,835
Diluted 50,406 52,118 50,399 52,114
See notes to condensed consolidated financial statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
Accum-
ulated
Pre- Other Total
ferred Common Compre- Share-
Stock Stock Capital Retained hensive holders'
$10 Par $1 Par Surplus Earnings Income Equity
------- ------- -------- -------- ------ ----------
(Dollars in thousands)
Balance January 1, 1998 $ 583 $51,817 $ 92,971 $865,785 $ $1,011,156
Comprehensive income:
Net income 63,986 63,986
Unrealized gains on
investment securities
available for sale,
net of tax of $1,085 2,016 2,016
----------
Total comprehensive income 66,002
----------
Conversion of preferred
to common stock (41) 9 32 -
Issuance of shares for
stock options 22 354 376
Common stock repurchases
and related transactions (4,933) (4,933)
Dividends declared:
Preferred stock (18) (18)
Common stock
$0.58 per share (30,070) (30,070)
------- ------- -------- -------- ------ ----------
Balance June 30, 1998 $ 542 $51,848 $ 88,424 $899,683 $2,016 $1,042,513
======= ======= ======== ======== ====== ==========
See notes to condensed consolidated financial statements.
7
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY(Continued)(Unaudited)
Accum-
ulated
Pre- Other Total
ferred Common Compre- Share-
Stock Stock Capital Retained hensive holders'
$10 Par $1 Par Surplus Earnings Income Equity
------- ------- -------- -------- ------ ----------
(Dollars in thousands)
Balance January 1, 1999 $ 534 $50,094 $ 4,004 $934,703 $ 993 $ 990,328
Comprehensive income:
Net income 78,524 78,524
Unrealized gains on
investment securities
available for sale, net
of tax benefit of $373 (692) (692)
----------
Total comprehensive income 77,832
----------
Conversion of preferred
to common stock (24) 5 19 -
Preferred stock retired (14) (26) (40)
Issuance of shares for
stock options 39 2,286 2,325
Common stock repurchases
and related transactions (3) (153) (156)
Dividends declared:
Preferred stock (17) (17)
Common stock
$0.66 per share (33,086) (33,086)
------- ------- -------- -------- ------ ----------
Balance June 30, 1999 $ 496 $50,135 $ 6,130 $980,124 $ 301 $1,037,186
======= ======= ======== ======== ====== ==========
See notes to condensed consolidated financial statements.
8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Six Months Ended
June 30
1999 1998
-------- --------
(In thousands)
Net cash provided by operating activities $ 92,696 $ 82,167
-------- --------
Investing activities:
Proceeds from the maturity of
held to maturity investment securities 837,469 1,444,519
Proceeds from the maturity or sale of
available for sale investment securities 6,050 538
Purchases of held to maturity investment securities (677,107)(1,767,003)
Purchases of available for sale investment securities (101,482) (14,077)
Net increase in loans (111,494) (56,520)
Net increase in other earning assets (671) (537)
Purchases of premises and equipment (6,095) (9,247)
Proceeds from sale of premises and equipment 3,202 2,510
Increase in intangible assets (531) (22,877)
Other 3,986 4,796
-------- --------
Net cash used for investing activities (46,671) (417,898)
-------- --------
Financing activities:
Net increase (decrease) in deposits (133,537) 276,295
Net increase (decrease) in short-term borrowings (18,678) 59,554
Principal payments on long-term debt (413) (494)
Proceeds from long-term debt - 1,328
Cash dividends - common, $.64 and $.56 per share (32,076) (29,024)
Cash dividends - preferred (17) (19)
Stock repurchases and related transactions (196) (4,933)
Proceeds from issuance of common stock 2,325 376
-------- --------
Net cash provided by (used for)
financing activities (182,592) 303,083
-------- --------
Net decrease in cash and cash equivalents (136,567) (32,648)
Cash and cash equivalents at beginning of year 642,931 629,994
-------- --------
Cash and cash equivalents at end of period $506,364 $597,346
======== ========
Net cash provided by operating activities has been
reduced by the following cash payments:
Interest on deposits and borrowings $109,104 $118,741
Income taxes 47,525 34,816
See notes to condensed consolidated financial statements.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. GENERAL
The foregoing unaudited consolidated financial statements include the
accounts of the corporation and all of its subsidiaries. The corporation's
subsidiaries are predominantly engaged in banking. Operations other than
banking are not significant. All material intercompany transactions and
accounts have been eliminated. The unaudited consolidated financial statements
include all adjustments (consisting only of normal recurring accruals) which,
in the opinion of management, are necessary for a fair presentation of the
results of operations for each of the periods presented. Certain amounts
previously reported in 1998 have been reclassified for comparative purposes.
2. INVESTMENT SECURITIES
The following reflects the amortized cost of securities and the related
approximate fair values (in thousands):
June 30, 1999 June 30, 1998
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
Securities available for sale:
U.S. Government and
its agencies $ 109,613 $ 108,511 $ 12,833 $ 12,829
Other 5,503 7,067 7,399 10,504
---------- ---------- ---------- ----------
$ 115,116 $ 115,578 $ 20,232 $ 23,333
========== ========== ========== ==========
Securities held to maturity:
U.S. Government and
its agencies $1,770,284 $1,747,662 $2,115,782 $2,118,885
State and municipal obligations 368,677 366,294 143,847 146,101
Other 248 250 833 842
---------- ---------- ---------- ----------
$2,139,209 $2,114,206 $2,260,462 $2,265,828
========== ========== ========== ==========
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
3. LOANS
Loans consisted of (in thousands):
June 30
1999 1998
---------- ----------
Consumer:
Automobile installment $2,962,126 $2,534,985
Home equity, fixed- and variable-rate 845,588 976,986
Revolving credit plans,
including credit cards 27,989 186,650
Other 318,390 355,961
Real estate:
Construction and land development 138,885 118,100
Commercial mortgage 565,122 578,336
Residential mortgage 632,807 572,743
Other, including Industrial
Development Authority loans 108,559 100,156
Commercial 594,856 560,910
---------- ----------
Loans, net of unearned income
of $142,764 and $161,225 $6,194,322 $5,984,827
========== ==========
4.ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was (dollars in thousands):
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
------- ------- ------- -------
Balance at beginning of period $66,200 $67,117 $70,312 $68,064
Increase attributable to
acquired loans - 679 - 679
Decrease attributable to
loans sold - - (4,323) -
Provision charged to expense 4,433 6,055 8,389 10,139
------- ------- ------- -------
70,633 73,851 74,378 78,882
Less:
Loans charged off, net of
recoveries of $1,173, $1,241,
$2,257 and $2,251 2,320 5,318 6,065 10,349
------- ------- ------- -------
Balance at June 30 $68,313 $68,533 $68,313 $68,533
======= ======= ======= =======
Percentage of annualized net
charge-offs to average loans .15% .36% .20% .35%
Percentage of allowance for loan
losses to period-end loans 1.10 1.15
Percentage of nonperforming assets
to period-end loans .37 .34
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
5.FEDERAL INCOME TAX
The reconcilement of income tax computed at the federal statutory tax
rates to the provision for income taxes was as follows (dollars in thousands):
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
------------- ------------- ------------- -------------
Amount Pct Amount Pct Amount Pct Amount Pct
------- ----- ------- ----- ------- ----- ------- -----
Statutory rate $18,272 35.0% $17,710 35.0% $41,992 35.0% $34,602 35.0%
Nontaxable interest on
municipal obligations(1,290)(2.5) (970)(1.9) (2,541)(2.1) (1,970)(2.0)
Other items 984 1.9 1,415 2.8 2,003 1.7 2,246 2.3
------- ----- ------- ----- ------- ----- ------- -----
Effective rate $17,966 34.4% $18,155 35.9% $41,454 34.6% $34,878 35.3%
======= ===== ======= ===== ======= ===== ======= =====
6. PREFERRED AND COMMON STOCK
There are 3,000,000 shares of preferred stock, par value $10.00 per
share, authorized. The following four series of cumulative convertible stock
were outstanding:
June 30 December 31 June 30
Series Dividends 1999 1998 1998
--------- --------- -------- ----------- --------
A 5% 17,242 18,615 18,942
B 7% 3,340 3,340 3,340
C 7% 8,108 9,788 9,788
D 8% 20,942 21,612 22,122
------- ------ ------
49,632 53,355 54,192
======= ====== ======
The Series A, Series B and Series D shares are convertible into two and
one fourth shares of common stock, and the Series C shares are convertible into
one and eight-tenths shares of common stock. All of the preferred stock may be
redeemed at the option of the corporation for $10.00 per share.
There are 175,000,000 shares of common stock, par value $1.00 per share,
authorized and 50,135,000, 50,094,000 and 51,848,000 shares were outstanding at
June 30, 1999, December 31, 1998, and June 30, 1998, respectively. Options to
purchase 738,818 shares of common stock were outstanding on June 30, 1999. A
total of 3,208,215 shares of common stock were reserved at June 30, 1999:
108,022 shares for the conversion of preferred stock and 3,100,193 shares for
stock options.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
7.EARNINGS PER SHARE
Earnings per share computations are as follows (in thousands, except per
share data):
Three Months Ended Six Months Ended
June 30 June 30
1999 1998 1999 1998
------- ------- ------- -------
Basic:
Average common shares outstanding 50,129 51,843 50,116 51,835
======= ======= ======= =======
Net income $34,240 $32,444 $78,524 $63,986
Preferred stock dividends 8 9 17 18
------- ------- ------- -------
Net income applicable to
common stock $34,232 $32,435 78,507 63,968
======= ======= ======= =======
Net income per share of common stock $ .68 $ .63 $ 1.57 $ 1.23
======= ======= ======= =======
Diluted:
Average common shares outstanding 50,129 51,843 50,116 51,835
Dilutive effect of stock options 168 157 171 157
Conversion of preferred stock 109 118 112 122
------- ------- ------- -------
Total average common shares 50,406 52,118 50,399 52,114
======= ======= ======= =======
Net income $34,240 $32,444 $78,524 $63,986
======= ======= ======= =======
Net income per share of common stock $ .68 $ .62 $ 1.56 $ 1.23
======= ======= ======= =======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
QUARTERLY RESULTS
Earnings per share in the second quarter of 1999 rose 10% to $.68 compared
to the $.62 earned in the prior year. Net income totaled $34.240 million
compared to the $32.444 million earned in the second quarter of 1998. The rise
in earnings for the quarter increased the return on average assets to 1.44%
compared to the prior year's 1.40%, and the return on average shareholders'
equity increased to 13.29% compared to 12.51% in the 1998 second quarter.
For the first six months of 1999, earnings per share rose 27% to $1.56
compared to the $1.23 earned in the comparable period in 1998. Net income for
the first six months of 1999 totaled $78.524 million compared to $63.986
13
million in 1998. The return on average assets and the return on average
shareholders' equity for the six-month periods were 1.66% and 15.45% in 1999,
respectively, and 1.40% and 12.44% in 1998. Excluding an after-tax gain
recognized in the first quarter of 1999 of $.21 per share on the sale of the
corporation's credit card loans, earnings per share increased 10% to $1.35 or
$67.820 million, the return on assets was 1.43% and the return on equity was
13.34%.
Loan growth was strong in the second quarter, and outstanding loans
increased at an annualized pace of 13% to $6.194 billion at June 30 compared to
$6.004 billion at March 31. The increase in loans was primarily fueled by a
28% advance in indirect automobile loans. New indirect loan production offices
were opened in Pittsburgh and Atlanta late in the first quarter and achieved
good volumes in the second quarter, and production from existing offices
remains very strong. In June, First Virginia's new monthly indirect loan
production exceeded $200 million for the first time. First Virginia is one of
the 20 largest automobile lenders in the United States and will continue to
evaluate new markets and expand its capabilities as part of a strategy to
gradually extend its geographic scope beyond the footprint of its banking
markets. The technological and organizational leadership that First Virginia
commands in this area has produced strong growth while simultaneously reducing
total expenses and improving credit quality. Commercial loans rose 7% during
the quarter, highlighting the increasing importance of this segment of the
corporation's business.
The Federal Reserve Board has been concerned over the growth of the
economy and its impact on inflation. As a consequence, interest rates began to
move up during the quarter in anticipation of a Federal Reserve move to
increase rates and slow down the economic growth rate. In late June, the
Federal Reserve increased interest rates by 1/4% and may increase rates further
as the year progresses. First Virginia's balance sheet has been constructed to
be relatively unaffected by changes in the absolute levels of interest rates
without the use of derivatives or other hedging devices. During the second
quarter, the net interest margin increased three basis points to 5.07% compared
to 5.04% in the first quarter. First Virginia has achieved a net interest
margin of at least 5.00% every year since 1978 despite wide movements in
interest rates.
Asset quality remains excellent. Net loan charge-offs declined
significantly during the 1999 second quarter to $2.320 million, representing an
annualized .15% of average loans compared to $5.318 million or .36% of loans in
the 1998 second quarter. Credit quality in the automobile portfolio improved
as the charge-off rate declined 10 basis points to .27% for the first six
months of the year despite a 16% increase in average outstanding loans. Over
the past two years, the corporation's automotive lending activities have been
consolidated into one unit and, when combined with improvements in
technological servicing, have resulted in a more consistent application of
credit standards and improved the overall quality of the loan portfolio. In
addition, the sale of the credit card loans at the end of the first quarter of
1999 removed the highest loss component of the portfolio and contributed to the
improvement in the charge-off rate. The provision for loan losses in the
second quarter of 1999 dropped 27% to $4.433 million compared to $6.055 million
in the prior year's second quarter. The allowance for loan losses equaled
1.10% of outstanding loans at June 30, 1999, unchanged from the first quarter.
Total nonperforming assets at June 30, 1999, increased to $23.078 million or
.37% of outstanding loans compared to $20.384 million or .34% of loans at June
30, 1998.
14
A summary of nonperforming assets and delinquent loans is as follows:
June 30
1999 1998
------- -------
(Dollars in thousands)
Nonaccruing loans $17,572 $13,476
Restructured loans 1,898 2,262
Foreclosed real estate 3,608 4,646
------- -------
Total nonperforming assets $23,078 $20,384
======= =======
Percentage of total loans .37% .34%
======= =======
Loans past due 90 days or more $13,986 $14,398
======= =======
Percentage of total loans .23% .24%
======= =======
Noninterest income declined 1% in the second quarter of 1999 compared to
1998. However, the second quarter of 1998 included a gain of $2.081 million on
the sale of seven branches in Maryland, while the second quarter of 1999
reflected a decline in fee income from credit cards as a result of the sale of
the credit card loan portfolio on March 31, 1999. Excluding these two items,
noninterest income increased 13%, with service charges on deposits increasing
27% as the corporation implemented a value-based approach to service charges in
late 1998. Income from insurance activities increased 14% in the second
quarter compared to 1998 as a consequence of increased sales of commercial
insurance lines, investment products and a higher volume of title insurance
sales on real estate loans.
Noninterest expense in the second quarter of 1999 declined slightly
compared to the prior year's second quarter and was down 6% on an annualized
basis compared to the first quarter of 1999. Salaries and employee benefits
rose less than 1% compared to the 1998 second quarter, a result of efficiencies
achieved with the merger of several of the First Virginia member banks,
organizational changes and consolidation of operational areas. Equipment
expense increased 7% in the second quarter and in the first six months as a
result of preparations in connection with Year 2000 readiness.
Total shareholders' equity was $1.037 billion at June 30, 1999, compared
to $1.043 billion at June 30, 1998. First Virginia continues to be one of the
best capitalized among the 100 largest banks in the country. At June 30, 1999,
the corporation's leverage ratio was 9.23% compared to 8.73% at the end of
1998, significantly higher than regulatory requirements or peer group averages.
No shares were repurchased during the first half of 1999, and there are 1.487
million shares remaining in the corporation's currently authorized share
repurchase plan. As a result of shares repurchased in the third and fourth
quarters of 1998, average diluted shares outstanding in the second quarter of
1999 declined 3.3% to 50.406 million compared to 52.118 million in the 1998
first quarter.
15
YEAR 2000:
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Any of the corporation's
computer programs that have time-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including among
other things, a temporary inability to process transactions, send invoices or
engage in similar normal business activities.
First Virginia began preparing its computer systems and applications for
the Year 2000 in 1993. This process involves modifying or replacing the
corporation's affected hardware and software, as well as ensuring that external
service providers, significant vendors and large customers are taking the
appropriate actions to remedy their own Year 2000 issues. First Virginia
developed a five-phase approach to resolve its Year 2000 issues. This approach
involves the following phases: awareness, assessment, renovation, validation
and implementation. The awareness and assessment phases involve identifying the
systems affected, analyzing the scope and magnitude of the problem, and
developing an action plan to address each area affected. Management has
identified 64 systems as "mission-critical," which are defined as those systems
that would severely impair operations or cause a significant loss of revenue if
not remediated. The renovation phase involves modifying or replacing the
corporation's affected systems. The final two phases, validation and
implementation, involve testing and certification that the mission-critical
systems are compliant with all Year 2000 issues. As of June 30, 1999, the
corporation has completed all phases for these 64 mission-critical systems.
First Virginia has contacted non-mission-critical external service
providers, significant suppliers and large customers to determine the extent to
which they may be affected by Year 2000 issues and to determine whether they
are taking the appropriate steps to remedy their own Year 2000 issues. To
date, First Virginia is not aware of any external service providers, vendors or
large customers whose failure to resolve their own Year 2000 issues would have
a material adverse effect on First Virginia's results of operations. However,
the corporation has no means of ensuring that external agents or large
customers will be ready and the effect of their noncompliance is not
determinable. The corporation will continue to monitor the progress of non-
mission- critical external service providers, significant suppliers and large
customers throughout 1999 and will determine if a contingency plan is necessary
for those external parties by September 30, 1999.
Management of the corporation believes it has an effective program in
place to resolve the Year 2000 issue in a timely manner. An independent third
party has been engaged to review the corporation's plan and readiness for Year
2000 mission-critical issues. In addition, the corporation's primary
regulator, the Federal Reserve, conducts quarterly examinations and evaluations
of the corporation's progress.
In the event that First Virginia is unable to complete all necessary
phases of the plan, First Virginia may be unable to process transactions,
invoice customers or collect payments and perform other operations. In
addition, disruptions in the economy generally resulting from Year 2000 issues
could also materially adversely affect the corporation. The corporation has
developed contingency plans for all of its mission-critical systems. These
plans involve, among other actions, manual work-arounds, temporary postponement
16
of certain functions and alternative computer systems. Some of these plans
incorporate parts of the corporation's existing disaster recovery programs
involving offsite data processing and detailed plans for each function within
the corporation.
First Virginia estimates that the total cumulative cost of the project
will be approximately $22 million, of which $20 million has already been
expended. This includes both internal and external personnel costs related to
modifying the systems and the cost of purchasing or leasing hardware or
software. Purchased hardware and software will be capitalized in accordance
with normal policy. Personnel and all other costs related to the project are
being expensed as incurred. These costs are not expected to have a material
effect on the corporation's results of operations.
The cost of the project and the expected completion dates are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources and
other factors. However, there can be no guarantee that these estimates will be
achieved, and actual results could differ materially from those anticipated.
Specific factors that could influence the results may include, but are not
limited to, the availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer codes, the availability of
alternative systems in the event of failure of mission-critical systems, the
ability of third-party intermediaries to be Year 2000 ready, and similar
uncertainties.
FORWARD-LOOKING STATEMENTS:
Certain statements in this discussion may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks
including, but not limited to, changes in general economic and business
conditions, interest-rate fluctuations, competition within and without the
banking industry, new products and services in the banking industry, risks
inherent in making loans, including repayment risks and fluctuating collateral
values, changing trends in customer profiles, and changes in laws and
regulations applicable to the corporation. Although the corporation believes
that its expectations with respect to the forward-looking statements are based
upon reasonable assumptions within the bounds of its knowledge of its business
and operations, there can be no assurance that actual results, performance or
achievements of the corporation will not differ materially from any future
results, performance or achievements expressed or implied by such forward-
looking statements.
17
AVERAGE BALANCES AND INTEREST RATES (Unaudited)
(Dollars in thousands)
Three Months Ended June 30
1999
------------------------------
Interest
Average Income/
Balance Expense Rate
---------- --------- -------
Interest-earning assets:
Investment securities-available for sale:
U.S. Government and its agencies $ 76,607 $ 980 5.14%
Other 6,521 55 3.34
Investment securities-held to maturity:
U.S. Government and its agencies 1,843,252 26,506 5.76
State, municipal and other
(Fully taxable-equivalent basis) 344,063 5,078 5.90
---------- --------
Total investment securities 2,270,443 32,619 5.75
---------- --------
Loans, net of unearned income:
Installment 4,007,295 82,011 8.21
Real estate 1,117,892 23,047 8.25
Other (Fully taxable-equivalent basis) 965,749 19,377 8.11
---------- --------
Total loans 6,090,936 124,435 8.19
---------- --------
Loans held for sale 8,815 179 8.09
Money market investments 318,107 3,785 4.77
Other earning assets 23,114 385 6.65
---------- --------
Total earning assets and income $8,711,415 161,403 7.42
========== --------
Interest-bearing liabilities:
Interest checking/savings plan $1,480,770 3,112 0.84
Money market accounts 985,781 7,424 3.02
Savings deposits 1,147,974 4,670 1.63
Consumer certificates of deposit 2,348,415 27,334 4.67
Large denomination
certificates of deposit 424,393 4,985 4.71
---------- --------
Total interest-bearing deposits 6,387,333 47,525 2.98
Short-term borrowings 361,894 3,529 3.91
Long-term indebtedness 2,883 62 8.53
---------- --------
Total interest-bearing liabilities
and interest expense $6,752,110 51,116 3.04
========== --------
Net interest income and net interest margin $110,287 5.07%
========
Other average balances:
Demand deposits $1,598,557
Common shareholders' equity 1,029,993
Total shareholders' equity 1,030,493
Total assets 9,504,937
18
AVERAGE BALANCES AND INTEREST RATES (Continued) (Unaudited)
(Dollars in thousands)
Three Months Ended June 30
1998
------------------------------
Interest
Average Income/
Balance Expense Rate
---------- --------- -------
Interest-earning assets:
Investment securities-available for sale:
U.S. Government and its agencies $ 12,805 $ 178 5.54%
Other 10,626 54 2.05
Investment securities-held to maturity:
U.S. Government and its agencies 1,859,369 28,162 6.07
State, municipal and other
(Fully taxable-equivalent basis) 148,159 2,658 7.18
---------- --------
Total investment securities 2,030,959 31,052 6.12
---------- --------
Loans, net of unearned income:
Installment 3,960,195 86,463 8.78
Real estate 1,028,486 23,038 8.96
Other (Fully taxable-equivalent basis) 901,647 20,106 9.02
---------- --------
Total loans 5,890,328 129,607 8.81
---------- --------
Mortgage loans held for sale 16,595 330 7.96
Money market investments 508,896 7,073 5.58
Other earning assets 21,882 368 6.74
---------- --------
Total earning assets and income $8,468,660 168,430 7.97
========== --------
Interest-bearing liabilities:
Interest checking/savings plan $1,407,157 5,019 1.43
Money market accounts 865,344 7,428 3.44
Savings deposits 1,155,942 6,609 2.29
Consumer certificates of deposit 2,458,894 30,408 4.97
Large denomination
certificates of deposit 421,341 5,679 5.41
---------- --------
Total interest-bearing deposits 6,308,678 55,143 3.51
Short-term borrowings 287,503 3,427 4.78
Long-term indebtedness 3,799 88 9.31
---------- --------
Total interest-bearing liabilities
and interest expense $6,599,980 58,658 3.56
========== --------
Net interest income and net interest margin $109,772 5.19%
========
Other average balances:
Demand deposits $1,514,818
Common shareholders' equity 1,036,666
Total shareholders' equity 1,037,212
Total assets 9,274,741
19
AVERAGE BALANCES AND INTEREST RATES (Continued) (Unaudited)
(Dollars in thousands)
Six Months Ended June 30
1999
------------------------------
Interest
Average Income/
Balance Expense Rate
---------- --------- -------
Interest-earning assets:
Investment Securities-available for sale:
U.S. Government and its agencies $ 44,436 $ 1,141 5.18%
Other 7,173 118 3.28
Investment Securities-held to maturity:
U.S. Government and its agencies 1,802,019 52,000 5.80
State, municipal and other
(Fully taxable-equivalent basis) 329,642 9,853 5.98
---------- --------
Total investment securities 2,183,270 63,112 5.80
---------- --------
Loans, net of unearned income:
Installment 4,010,760 165,689 8.31
Real estate 1,119,945 46,331 8.27
Other (Fully taxable-equivalent basis) 954,145 38,410 8.16
---------- --------
Total loans 6,084,850 250,430 8.27
---------- --------
Mortgage loans held for sale 10,494 410 7.81
Money market investments 380,462 8,968 4.75
Other earning assets 22,805 778 6.82
---------- --------
Total earning assets and income $8,681,881 323,698 7.49
========== --------
Interest-bearing liabilities:
Interest checking/savings plans $1,479,764 6,670 0.91
Money market accounts 983,661 14,876 3.05
Savings deposits 1,141,779 10,093 1.78
Consumer certificates of deposit 2,378,018 55,777 4.74
Large denomination
certificates of deposit 423,477 10,211 4.80
---------- --------
Total interest-bearing deposits 6,406,699 97,627 3.07
Short-term borrowings 364,139 7,078 3.92
Long-term indebtedness 3,005 137 9.07
---------- --------
Total interest-bearing liabilities
and interest expense $6,773,843 104,842 3.12
========== --------
Net interest income and net interest margin $218,856 5.06%
========
Other average balances:
Demand deposits $1,568,331
Common shareholders' equity 1,015,917
Total shareholders' equity 1,016,428
Total assets 9,478,732
20
AVERAGE BALANCES AND INTEREST RATES (Continued) (Unaudited)
(Dollars in thousands)
Six Months Ended June 30
1998
------------------------------
Interest
Average Income/
Balance Expense Rate
---------- --------- -------
Interest-earning assets:
Investment Securities-available for sale:
U.S. Government and its agencies $ 8,915 $ 245 5.55%
Other 10,423 128 2.45
Investment Securities-held to maturity:
U.S. Government and its agencies 1,744,632 52,722 6.07
State, municipal and other
(Fully taxable-equivalent basis) 152,164 5,446 7.17
---------- --------
Total investment securities 1,916,134 58,541 6.14
---------- --------
Loans, net of unearned income:
Installment 3,972,889 172,993 8.78
Real estate 1,027,211 45,192 8.80
Other (Fully taxable-equivalent basis) 895,708 39,405 8.92
---------- --------
Total loans 5,895,808 257,590 8.78
---------- --------
Mortgage loans held for sale 15,884 598 7.53
Money market investments 529,837 14,436 5.49
Other earning assets 21,670 735 6.79
---------- --------
Total earning assets and income $8,379,333 331,900 7.96
========== --------
Interest-bearing liabilities:
Interest checking/savings plans $1,391,989 10,266 1.49
Money market accounts 839,815 14,185 3.41
Savings deposits 1,147,106 13,059 2.30
Consumer certificates of deposit 2,455,039 60,500 4.97
Large denomination
certificates of deposit 426,439 11,285 5.34
---------- --------
Total interest-bearing deposits 6,260,388 109,295 3.52
Short-term borrowings 280,421 6,638 4.77
Long-term indebtedness 3,264 135 8.29
---------- --------
Total interest-bearing liabilities
and interest expense $6,544,073 116,068 3.58
========== --------
Net interest income and net interest margin $215,832 5.16%
========
Other average balances:
Demand deposits $1,471,576
Common shareholders' equity 1,027,915
Total shareholders' equity 1,028,475
Total assets 9,169,537
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
As of June 30, 1999, there have been no material changes
in information regarding quantitative and qualitative
disclosures about market risk from the information presented
as of December 31, 1998 in the corporation's annual report
on Form 10-K.
22
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
a) An Annual Meeting of the Shareholders was held on Friday,
April 30, 1999. Proxies for the meeting were solicited pursuant to
Regulation 14 under the Act.
b) There was no solicitation in opposition to the management nominees as
listed in the proxy statement and all such nominees were elected. The
following directors were elected at the meeting:
Management nominee: Common Preferred Total
Paul H. Geithner, Jr. Stock Stock Stock
===================== ----------- ------- -----------
Votes for:
Individual votes 18,492,584 21,263 18,513,847
Broker/nominee votes 23,252,063 5,227 23,257,290
----------- ------- -----------
Total management proxy votes for 41,744,647 26,490 41,771,137
Floor vote for - individual/in person 1,372 0 1,372
----------- ------- -----------
Total votes for 41,746,019 26,490 41,772,509
Votes withheld:
Individual votes 251,140 50 251,190
Broker/nominee votes 173,766 0 173,766
----------- ------- -----------
Total votes 42,170,925 26,540 42,197,465
Shares not present nor voted:
Individual 5,255,905 25,330 5,281,235
Broker/nominee 2,674,249 117 2,674,366
----------- ------- -----------
Total shares outstanding 50,101,079 51,987 50,153,066
=========== ======= ===========
23
Management nominee: Common Preferred Total
L.H. Ginn, III Stock Stock Stock
============== ----------- ------- -----------
Votes for:
Individual votes 18,423,869 21,233 18,445,102
Broker/nominee votes 23,244,927 5,227 23,250,154
----------- ------- -----------
Total management proxy votes for 41,668,796 26,460 41,695,256
Floor vote for - individual/in person 1,372 0 1,372
----------- ------- -----------
Total votes for 41,670,168 26,460 41,696,628
Votes withheld:
Individual votes 319,855 80 319,935
Broker/nominee votes 180,902 0 180,902
----------- ------- -----------
Total votes 42,170,925 26,540 42,197,465
Shares not present nor voted:
Individual 5,255,905 25,330 5,281,235
Broker/nominee 2,674,249 117 2,674,366
----------- ------- -----------
Total shares outstanding 50,101,079 51,987 50,153,066
=========== ======= ===========
Management nominee: Common Preferred Total
Edward M. Holland Stock Stock Stock
================= ----------- ------- -----------
Votes for:
Individual votes 18,497,964 21,261 18,519,225
Broker/nominee votes 23,252,642 5,227 23,257,869
----------- ------- -----------
Total management proxy votes for 41,750,606 26,488 41,777,094
Floor vote for - individual/in person 1,372 0 1,372
----------- ------- -----------
Total votes for 41,751,978 26,488 41,778,466
Votes withheld:
Individual votes 245,760 52 245,812
Broker/nominee votes 173,187 0 173,187
----------- ------- -----------
Total votes 42,170,925 26,540 42,197,465
Shares not present nor voted:
Individual 5,255,905 25,330 5,281,235
Broker/nominee 2,674,245 117 2,674,366
----------- ------- -----------
Total shares outstanding 50,101,079 51,987 50,153,066
=========== ======= ===========
24
Management nominee: Common Preferred Total
Lynda S. Vickers-Smith Stock Stock Stock
====================== ----------- ------- -----------
Votes for:
Individual votes 18,449,045 21,233 18,470,278
Broker/nominee votes 23,231,732 5,227 23,236,959
----------- ------- -----------
Total management proxy votes for 41,680,777 26,460 41,707,237
Floor vote for - individual/in person 1,372 0 1,372
----------- ------- -----------
Total votes for 41,682,149 26,460 41,708,609
Votes withheld:
Individual votes 294 679 80 294,759
Broker/nominee votes 194,097 0 194,097
----------- ------- -----------
Total votes 42,170,925 26,540 42,197,465
Shares not present nor voted:
Individual 5,255,905 25,330 5,281,235
Broker/nominee 2,674,249 117 2,674,366
----------- ------- -----------
Total shares outstanding 50,101,079 51,987 50,153,066
=========== ======= ===========
25
c) Among other matters voted on at the meeting was the following:
i) The appointment of the independent auditors.
Common Preferred Total
Stock Stock Stock
----------- ------- -----------
Votes for:
Individual votes 18,358,513 20,059 18,378,572
Broker/nominee votes 23,272,793 5,127 23,277,920
----------- ------- -----------
Total management proxy votes for 41,631,306 25,186 41,656,492
Floor vote for - individual/in person 1,372 0 1,372
----------- ------- -----------
Total votes for 41,632,678 25,186 41,657,864
Votes against:
Individual votes 83,308 80 83,388
Broker/nominee votes 93,551 100 93,651
----------- ------- -----------
Total shares voted 41,809,537 25,366 41,834,903
Votes abstain:
Individual votes 301,903 1,174 303,077
Broker/nominee votes 59,485 0 59,485
----------- ------- -----------
Total votes received 42,170,925 26,540 42,197,465
Shares not present nor voted:
Individual 5,255,905 25,330 5,281,235
Broker/nominee 2,674,249 117 2,674,366
----------- ------- -----------
Total shares outstanding 50,101,079 51,987 50,153,066
=========== ======= ===========
26
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K
----------------------------------
a) Exhibit 27 - Financial Data Schedule (Page 28)
b) A Form 8-K was not required to be filed during the quarter
ended June 30, 1999.
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 its
principal financial officer thereunto duly authorized.
FIRST VIRGINIA BANKS, INC.
/s/ Richard F. Bowman
August 12, 1999 ________________________
Richard F. Bowman,
Senior Vice President,
Treasurer and
Chief Financial Officer
27
<TABLE> <S> <C>
<ARTICLE> 9
<CIK> 0000037032
<NAME> FIRST VIRGINIA BANKS, INC.
<MULTIPLIER> 1000
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> Jun-30-1999
<CASH> 365,574
<INT-BEARING-DEPOSITS> 25
<FED-FUNDS-SOLD> 140,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 115,578
<INVESTMENTS-CARRYING> 2,139,209
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<ALLOWANCE> 68,313
<TOTAL-ASSETS> 9,445,847
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0
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<INCOME-PRETAX> 119,978
<INCOME-PRE-EXTRAORDINARY> 119,978
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 78,524
<EPS-BASIC> 1.57
<EPS-DILUTED> 1.56
<YIELD-ACTUAL> 5.06
<LOANS-NON> 17,572
<LOANS-PAST> 13,986
<LOANS-TROUBLED> 1,898
<LOANS-PROBLEM> 27,876
<ALLOWANCE-OPEN> 70,312
<CHARGE-OFFS> 8,322
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<ALLOWANCE-CLOSE> 68,313
<ALLOWANCE-DOMESTIC> 68,313
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<ALLOWANCE-UNALLOCATED> 65,325
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