SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended Commission file number 1-6580 December 31, 1995 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 offices) (Zip Code) Registrant's telephone number, including area code: 703/241-4000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ------------------- ------------------------ Common Stock, Par Value $1.00 New York Stock Exchange, Inc. and Philadelphia Stock Exchange, Inc. Securities registered pursuant to Section 12(g) of the Act: Convertible Preferred Stock, Par Value $10.00 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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ X ] The aggregate market value of the common stock of the registrant held by nonaffiliates as of February 29, 1996, was approximately $1,325,470,000. The registrant's voting preferred stock is not actively traded and the market value of such stock is not readily determinable. On February 29, 1996, there were 33,952,175 shares of common stock outstanding. INDEX Page ---- Part I Item 1. Business 3 Competitive Factors 4 Regulation 4 Employees 4 Lines of Business 4 Statistical Disclosure By Bank Holding Companies 5 Executive Officers of the Registrant 5/8 Item 2. Properties 8 Item 3. Legal Proceedings 8 Item 4. Submission of Matters to a Vote of Security Holders 8 Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 9 Item 6. Selected Financial Data 10/11 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 11/44 Item 8. Financial Statements and Supplementary Data 45/74 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 75 Part III Item 10. Directors and Executive Officers of the Registrant 75/80 Item 11. Executive Compensation 81/92 Item 12. Security Ownership of Certain Beneficial Owners and Management 92 Item 13. Certain Relationships and Related Transactions 93 Part IV Page ---- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 94/95 Signature 96/97 Financial Statements 45/72 Exhibits: Exhibit 3. Articles of Incorporation and Bylaws Exhibit 10. Amendments to: Supplemental Compensation Agreement, Key Employee Salary Reduction Deferred Compensation Plan, Collateral Assignment Split Dollar Life Insurance Agreement and Plan, and 1993 Stock Option Agreements Exhibit 11. Statement RE: Computation of per share earnings Exhibit 13. First Virginia Banks, Inc. 1995 Annual Report to Stockholders (Not included in Electronic Filing) Exhibit 21. Subsidiaries of Registrant Exhibit 23. Consent of Independent Auditors Exhibit 27. Financial Data Schedule PART I ------ ITEM 1. BUSINESS -------- First Virginia Banks, Inc. (the "corporation") is a registered bank holding company which was incorporated under the laws of the Commonwealth of Virginia in October, 1949. Since its formation in 1949, the corporation has acquired control of 59 operating commercial banks, with six acquisitions in the State of Maryland and four in the State of Tennessee, and has organized seven new banks located in the State of Virginia. Forty-four of the banks have been merged or consolidated with other banks controlled by the corporation and located in the same geographic area, so that, as of December 31, 1995, the corporation owned all of the outstanding stock of 22 commercial banks (the "banking companies") with combined assets of $7.987 billion. On that date, the banking companies operated 274 offices throughout the State of Virginia, 57 offices in Maryland and 23 offices in Tennessee. In addition to the 22 banks, the corporation owns, directly or through subsidiaries, several bank related member companies with offices in Virginia and seven other states, making the corporation the fourth largest bank holding company with headquarters in the state and the sixth largest banking organization in Virginia, based on total assets of $8.222 billion as of December 31, 1995. Competitive Factors - ------------------- Other banking organizations have been active in opening new banking offices through acquisition and control of existing banks, mergers, branching and formation of new banks and in acquiring or forming bank-related subsidiaries in areas where the corporation's banking companies compete. Accordingly, each banking company faces strong competition. Savings and loan associations and credit unions actively compete for deposits. Such institutions, as well as consumer finance companies, mortgage companies, loan production offices of out-of-state banks, factors, insurance companies and pension trusts are important competitors for various types of loans. The bank-related member companies also operate in highly competitive fields. At midyear 1995, the service area of the 13 banking companies in Virginia, with 274 offices, reached approximately 89% of Virginia's population. In Maryland, the service area of the 5 banking companies, with 57 offices, reached approximately 68% of Maryland's population, and in Tennessee, the service area of the 4 banking companies, with 23 offices, reached approximately 41% of East Tennessee's population. Regulation - ---------- The corporation and its subsidiaries are subject to the supervision and examination of the Federal Reserve Board, the Federal Deposit Insurance Corporation and the state regulators of Virginia, Maryland and Tennessee which have jurisdiction over financial institutions and have obtained regulatory approval for their various activities to the extent required. Employees - --------- As of December 31, 1995, the corporation and its subsidiaries employed 5,487 individuals. Lines of Business - ----------------- All of the corporation's income is derived from banking or bank-related activities. While each of the member companies is engaged in bank-related activities, several of them conduct lines of business not expressly permitted for banks under applicable regulations. During the last three years, the results of their operations have not been material in relation to the consolidated operating results of the corporation. Statistical Disclosure by Bank Holding Companies - ------------------------------------------------ The following statistical information appears in this Form 10-K on the page indicated: Page ---- Average balance sheets and interest rates on earning assets and interest-bearing liabilities 14/19 Average book value of investment securities 14/19 Average demand, savings and time deposits 14/19 Effect of rate-volume changes on net interest income 20/21 Type of loans 29 Maturity ranges of time certificates of deposit of $100,000 or more 31 Risk elements - loan portfolio 34 Summary of loan loss experience 37 Maturity ranges and average yields - investment securities 38 Loan maturities and sensitivity to changes in interest rates 39 Return on equity and assets, dividend payout ratio and equity to assets ratio 11 Executive Officers of the Registrant - ------------------------------------ There are no arrangements or understandings between the named executive officers and any other person pursuant to which they were selected as an officer. There are no family relationships among the executive officers. All positions and ages are through December 31, 1995. Messrs. Campbell, Cash, Hicks, and Lanzillotta have held their present positions with the corporation for more than five years. BARRY J. FITZPATRICK Chairman of the Board, President and Chief Executive Officer since July 1, 1995, and Chairman of the Board and Chief Executive Officer, January 1, 1995 through June 30,1995; 26 years of service; BBA, University of Notre Dame; MBA, American University, and graduate of The Stonier Graduate School of Banking. Has held several officer positions with First Virginia organizations, including Executive Vice President of the corporation, responsible for banking companies, from 1992 to December 31, 1994; Senior Vice President and Regional Executive Officer, Eastern Region, from 1982 to 1992; and President and CEO of member banks in the Roanoke Valley from 1972 to 1982. Mr. Fitzpatrick is 55. SHIRLEY C. BEAVERS, JR. Executive Vice President since April 1992; President and Chief Executive Officer of First Virginia Services, Inc. since May 1986; 26 years of service; BS and MBA, American University. Has held various officer positions with First Virginia organizations including that of Executive Vice President and Chief Operating Officer, First Virginia Bank, Falls Church. Mr. Beavers is 50. RAYMOND E. BRANN, JR. Executive Vice President of the corporation since January 1, 1995. Senior Vice President and Regional Executive Officer, Eastern Region, from April, 1992 to January, 1995; 31 years of service, BS, University of Virginia; MBA, Old Dominion University. Has held various officer positions with First Virginia organizations including that of Senior Vice President and Regional Executive Officer, Tennessee-Western Virginia Region from December 1986 to April 1992, and President and CEO of several member banks, including First Virginia Bank-Colonial and Tri-City Bank and Trust Company. Mr. Brann is 55. RICHARD F. BOWMAN Senior Vice President, Treasurer and Chief Financial Officer since 1994; 20 years of service; AB, College of William & Mary; Certified Public Accountant and Certified Bank Auditor. Employed as Staff Auditor; appointed Assistant General Auditor in 1978, Vice President and Controller in 1979, and Vice President and Treasurer in 1992. Mr. Bowman is 43. MICHAEL G. ANZILOTTI Senior Vice President and Regional Executive Officer, Northern Region, since April, 1995; President and Chief Executive Officer of First Virginia Bank since April, 1995; Executive Vice President and Chief Administrative Officer, First Virginia Bank from 1986 to April, 1995; 21 years of service; BS, Virginia Polytechnic Institute; MBA, George Mason University and graduate of The Stonier Graduate School of Banking. Mr. Anzilotti is 46. HUGH L.CAMPBELL Senior Vice President since 1978; 32 years of service; AB, Washington & Lee University; MBA, Colgate Darden Graduate School of Business Administration, University of Virginia; Advanced Management Program, Harvard University, 1979. Responsible for commercial lending, loan administration and financial planning. Mr. Campbell is 58. CHARLES R. CASH Senior Vice President and Regional Executive Officer, Shenandoah Valley Region, since 1982; Chairman, President and CEO of First Virginia Bank- Shenandoah Valley since 1970; 32 years of service; graduate certificate, American Institute of Banking. Has held several executive officer positions with banks in the Shenandoah Valley area which have, through merger, become First Virginia Bank-Shenandoah Valley. Mr. Cash is 66. DOUGLAS M. CHURCH, JR. Senior Vice President and Regional Executive Officer, Maryland Region, since December, 1994; Senior Vice President, Marketing from October 1990 to December 1994. 22 years of service; BS, University of Virginia and graduate of The Stonier Graduate School of Banking. Has held various officer positions with First Virginia organizations, including Executive Vice President of First Virginia Services, Inc., and Executive Vice President of First Virginia Bank. Mr. Church is 45. HENRY HOWARD HICKS, JR. Senior Vice President and Regional Executive Officer, Southwest Region, since 1982; 42 years of service; graduate certificate, American Institute of Banking. Has held various executive officer positions with First Virginia organizations including President and CEO of First Virginia Bank-Southwest from 1971 to 1982. Mr. Hicks is 60. THOMAS P. JENNINGS Senior Vice President, General Counsel and Secretary since December, 1995 and Vice President, General Counsel and Secretary from January 1993 to December 1995; 17 years of service; BA, Wake Forest University; JD, University of Virginia. Employed as Assistant Counsel; appointed Associate Counsel in 1979, General Counsel in 1980, and Vice President and General Counsel from March 1986 to January 1993. Mr. Jennings is 48. A. PAUL LANZILLOTTA Senior Vice President, Trust Services, since 1979; Executive Vice President, First Virginia Bank, Falls Church, since 1978; 33 years of service; BS, Boston College; JD and LLM, Georgetown University. Joined First Virginia Bank as Trust Officer; appointed Vice President and Trust Officer of the corporation in 1967 and Senior Vice President and Trust Officer in 1976. Mr. Lanzillotta is 64. WILLIAM H. McFADDIN Senior Vice President and Regional Executive Officer, Eastern Region, since December 1995. President and Chief Executive Officer, First Virginia Bank - Colonial from 1986 to December 1995. 23 years of service. BS, Presbyterian College and graduate of the Graduate School of Banking of the South. Mr. McFaddin is 49. CHARLES L. ROBBINS, III Senior Vice President and Regional Executive Officer, Tennessee-Western Virginia Region, since April 1992; President and CEO, Tri-City Bank and Trust Company, Tennessee, since April 1992; 22 years of service; BS, George Mason University, and graduate of The Stonier Graduate School of Banking. Has held various officer positions with First Virginia Bank, Falls Church, including Senior Vice President and Branch Administrator from August 1987 until April 1992. Mr. Robbins is 43. MELODYE MAYES TOMLIN Senior Vice President and General Auditor since December 1995; Vice President and General Auditor from 1986 to December 1995; 17 years of service; BS, Radford University, and graduate of The Stonier Graduate School of Banking; Certified Public Accountant and Certified Bank Auditor. Employed as Staff Auditor; appointed Regional Audit Manager in 1980 and Assistant General Auditor in 1983. Mrs. Tomlin is 38. ITEM 2. PROPERTIES ---------- The banking subsidiaries operated a total of 354 banking offices on December 31, 1995. Of these offices, 208 were owned by the banks, one is owned by the corporation and leased to the banks, two are owned by affiliated companies and leased to affiliated banks, and 143 were leased from others. The corporation owns other properties, including the two corporate headquarters buildings which house personnel of the corporation and its subsidiaries. On December 31, 1995, the net book value of all real estate and the unamortized cost of improvements to leased premises totaled $124,440,000. The corporation currently has no mortgage indebtedness. As of December 31, 1995, a total annual base rental of approximately $13,636,000 was being paid on leased premises, of which approximately $6,585,000 was being paid to affiliated companies and which was eliminated in consolidation. As of December 31, 1995, total lease commitments having a remaining term in excess of one year to persons other than affiliates were approximately $41,843,000. The majority of the properties are modern and well furnished and provide adequate parking. ITEM 3. LEGAL PROCEEDINGS ----------------- There are no legal proceedings, other than ordinary routine litigation incidental to the business, to which the corporation or any of its subsidiaries is a party or of which any of their property is subject. Management believes that the liability, if any, resulting from current litigation will not be material to the financial statements of the corporation. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- There was no submission of matters to a vote of security holders during the fourth quarter of 1995. PART II ------- ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED ----------------------------------------------------- STOCKHOLDER MATTERS ------------------- The common stock of the corporation is listed for trading on the New York Stock Exchange (Trading Symbol: FVB) and the Philadelphia Stock Exchange. The dividends paid per share and the high and low sales price for common shares traded on the New York Stock Exchange were: Sales Price ------------------------------ Dividends 1995 1994 Per Share -------------- -------------- ------------ High Low High Low 1995 1994 ------ ------ ------ ------ ----- ----- 1st Quarter...... $35.75 $32.00 $38.63 $32.25 $.33 $.31 2nd Quarter...... 38.50 33.00 40.38 34.88 .33 .31 3rd Quarter ..... 43.00 37.25 40.25 37.00 .34 .32 4th Quarter...... 44.00 39.88 38.63 31.63 .34 .32 The corporation's preferred stock is not actively traded. The 5% cumulative convertible preferred stock, Series A, pays a dividend of 12 1/2 cents per share in each quarter. The 7% cumulative convertible preferred stock, Series B and C, pays a dividend of 17 1/2 cents per share each quarter. The 8% cumulative convertible preferred stock, Series D, pays a dividend of 20 cents per share each quarter. As of December 31, 1995, there were 19,257 holders of record of the corporation's voting securities, of which 18,411 were holders of common stock. ITEM 6. SELECTED FINANCIAL DATA ----------------------- A five-year summary of selected financial data follows: 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- (Dollar amounts in thousands, except per-share data) Balance Sheet Data Cash.................. $ 397,858 $ 420,742 $ 326,136 $ 381,384 $ 361,027 Overnight investments. 235,000 30,000 235,000 235,000 205,000 Mortgage loans held for sale........ 19,216 13,291 69,173 60,105 25,841 Other earning assets.. 11,528 8,987 6,263 6,184 5,425 Investment securities: Available for sale... 64,546 - - - - Held to maturity..... 2,128,220 2,086,030 2,169,771 2,159,043 1,807,404 Loans, net............ 4,980,154 4,938,334 3,967,218 3,732,928 3,444,720 Other assets.......... 385,014 367,998 263,322 265,903 269,843 ---------- ---------- ---------- ---------- ---------- Total Assets......... $8,221,536 $7,865,382 $7,036,883 $6,840,547 $6,119,260 ========== ========== ========== ========== ========== Deposits ............. $7,056,107 $6,815,841 $6,136,389 $6,013,746 $5,349,971 Short-term borrowings. 209,719 179,409 151,859 150,681 144,816 Long-term indebtedness 2,710 3,814 1,008 5,227 11,467 Other liabilities .... 83,353 59,430 56,126 63,494 72,888 Shareholders' Equity.. 869,647 806,888 691,501 607,399 540,118 ---------- ---------- ---------- ---------- ---------- Total Liabilities and Shareholders' Equity $8,221,536 $7,865,382 $7,036,883 $6,840,547 $6,119,260 ========== ========== ========== ========== ========== Operating Results Interest income ...... $ 573,599 $ 503,642 $ 504,782 $ 525,270 $ 515,837 Interest expense ..... 215,502 161,639 164,959 204,826 260,286 ---------- ---------- ---------- ---------- ---------- Net interest income..... 358,097 342,003 339,823 320,444 255,551 Provision for loan loss. 8,341 6,463 6,450 17,355 14,024 Noninterest income...... 89,906 84,700 82,540 77,087 72,283 Noninterest expenses.... 271,384 252,459 245,767 238,891 218,243 ---------- ---------- ---------- ---------- ---------- Income before income tax 168,278 167,781 170,146 141,285 95,567 Provision for income tax 56,679 54,560 54,122 43,812 25,959 ---------- ---------- ---------- ---------- ---------- Net income ............$ 111,599 $ 113,221 $ 116,024 $ 97,473 $ 69,608 ========== ========== ========== ========== ========== Dividends declared: Preferred ............$ 47 $ 51 $ 54 $ 61 $ 71 Common................ 46,205 42,108 36,519 31,830 28,995 Per Share of Common Stock Net income ............ 3.28 3.51 3.57 3.02 2.17 Dividends declared..... 1.36 1.28 1.13 .99 .91 Shareholders' equity... 25.59 23.68 21.29 18.85 16.80 Market price at year-end 41.75 32.00 32.75 36.63 23.67 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- Ratios - ------ Earnings: Return on average assets 1.41% 1.58% 1.68% 1.50% 1.22% Return on average equity 13.34 15.76 17.81 17.03 13.44 Net interest margin..... 5.00 5.28 5.46 5.46 5.03 Risk-based capital: Tier 1.................. 15.42 14.76 16.84 15.52 14.74 Total capital........... 16.57 15.96 18.09 16.77 16.00 Tier 1 leverage......... 9.63 10.25 9.67 8.91 8.86 Capital strength: Ratio of average equity to average assets...... 10.53 10.04 9.45 8.80 9.08 Dividends declared as a percentage of net income (per share, not restated for poolings of interests).......... 41.46 36.47 31.65 32.78 41.94 Data for prior years have been restated for material acquisitions accounted for as poolings of interests. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND --------------------------------------------------------------- RESULTS OF OPERATIONS --------------------- Net income for the 1995 fiscal year declined 1% to $111.599 million compared to the $113.221 million earned in 1994. Net income for 1995 includes the earnings from Farmers National Bancorp, acquired at the end of 1994 and accounted for as a purchase. Accordingly, the 1994 results included only three days' earnings from Farmers, while the 1995 earnings contained the full year. Earnings per share equaled $3.28 per share, a 7% decline from the $3.51 earned in 1994. Earnings per share declined at a greater pace than net income because of the greater number of shares outstanding issued in connection with the acquisition of Farmers National Bancorp. The primary reason for the decline in earnings during 1995 was a decline in the net interest margin as the cost of funds increased at a faster pace than the yield on earning assets. In addition, goodwill and other intangibles created in connection with the Farmers acquisition caused an increase in amortization expense. First Virginia has historically been one of the highest performing banks in both its market area and the nation and, despite the decline in earnings, it once again achieved the highest return on average assets of all of the major Virginia-based bank holding companies. First Virginia's return on average assets declined from 1.58% in 1994 to 1.41% in 1995. However, this still exceeded by a significant margin the 1.24% return on average assets of the 32 banks in its regional peer group of southern banking companies and the 1.30% of its national peer group of $5- to $10-billion asset sized banks. Over the past 10 years, First Virginia has averaged a 1.39% return on average assets compared to a 1.04% return posted by its national peer group of similar-sized banks. Average shareholders' equity increased 16% and, at year-end, equaled $869.647 million, an 8% increase over the $806.888 million at the end of 1994. First Virginia remains one of the most highly capitalized of the 100 largest financial institutions in the country. Its average equity to average assets ratio of 10.53% during 1995 is significantly higher than the 8.62% of its national peer group of similar-sized banks. This high rate of capitalization provides the corporation with ample capital to weather periods of economic adversity and, at the same time, gives it the flexibility to take advantage of any opportunities that may arise. It also permitted the Board of Directors to increase the dividend twice during 1995 - the 19th consecutive year the dividend has been increased and the 14th consecutive year in which the dividend has been increased at least twice during the year. During 1995, the corporation, continuing its program to repurchase some of its shares, purchased 146,800 shares. Since the repurchase program was begun in 1994, the corporation has purchased and retired 1.8 million shares, or 5.6% of the shares outstanding at the beginning of the program. However, the increase in average shareholders' equity, coupled with the slight decline in earnings, meant that the return on average shareholders' equity declined from 15.76% in 1994 to 13.34% in 1995. This was less than the peer group average of 14.70% and marked the first time in over a decade that First Virginia's return on equity was below its peer group's average. Over the past 10 years, however, First Virginia's average return on equity of 15.44% has exceeded the peer group average of 14.27% despite First Virginia's much higher capitalization rate. Total assets at year-end increased 5% to $8.222 billion compared to $7.865 billion at the end of 1994. In September, the corporation purchased four offices with approximately $220 million in deposits in the Richmond, Virginia, area from Citizens Federal Savings Bank. These offices enhanced the corporation's exposure in the Richmond market and were a complementary fit with the existing offices of First Virginia Bank-Colonial, making it the second largest bank in the First Virginia system. Average assets increased at a greater pace of 11% due to the two 1994 acquisitions: the $700-million Farmers National Bancorp operating in the Annapolis and Eastern Shore areas of Maryland, and the $100-million FNB Financial Corporation with offices in the Knoxville, Tennessee, area. Loan demand slowed during 1995, and outstanding loans at year-end were up only 1% to $5.038 billion compared to the $4.997 billion at the end of 1994. Average loans increased at a faster rate of 13% as a result of strong loan volume throughout 1994 and the acquisition of loans from Farmers National Bancorp at the end of 1994. Declining automobile sales caused indirect automobile loan production to decline 8%. The corporation opened new indirect automobile loan production offices in North Carolina, Tennessee and South Carolina and plans to open additional offices in 1996. Direct installment loan production, primarily home equity loans made in the corporation's branches, which grew 22% in 1994, slowed considerably. We attribute this to a growing unease by consumers in the corporation's market area over the prospect of continued employment. Gross production in this area dropped 45%, although by year-end it had begun growing modestly as interest rates began to decline. Deposits increased 4% from the end of 1994 and reached $7.056 billion by the end of 1995. Almost all of this growth, however, came from the purchase of four Citizens Federal Savings Bank branches containing $220.5 million in deposits. Increased competition from other banks restricted deposit growth and did not permit interest rates on deposits to decline as rapidly as rates in general. In addition, an escalating stock market brought increased competition from mutual funds, resulting in some disintermediation of funds out of traditional bank deposits and into alternative investments. Year Ended December 31 95vs94 94vs93 93vs92 ----- ----- ----- Earnings per share - prior period................. $3.51 $3.57 $3.02 ----- ----- ----- Net change during the year: Taxable interest income......................... 1.34 .04 (.37) Tax-exempt interest income...................... .01 (.06) (.04) Interest expense ............................... (1.03) .07 .80 Provision for loan losses....................... (.04) .00 .22 Gain on sale of mortgage servicing rights....... .02 .03 .02 Noninterest income.............................. .08 .02 .08 FDIC expense.................................... .11 (.01) (.02) Noninterest expense, excluding FDIC expense..... (.47) (.13) (.12) Income taxes.................................... (.06) (.04) (.01) Decrease (increase) in common shares outstanding (.19) .02 (.01) ----- ----- ----- Net increase (decrease) during the period..... (.23) (.06) .55 ----- ----- ----- Earnings per share - current period............... $3.28 $3.51 $3.57 ===== ===== ===== AVERAGE BALANCE SHEETS AND INTEREST RATES ON EARNING ASSETS AND INTEREST-BEARING LIABILITIES 1995 ------------------------------ Interest Average Income/ Balance Expense Rate ---------- --------- ------- ASSETS (Dollars in thousands) Interest-earning assets: Investment securities-held to maturity: U.S. Government & its agencies $1,755,077 $105,580 6.02% State and municipal obligations(1) 233,267 16,269 6.97 Other(1) 6,565 387 5.89 ---------- -------- Total investment securities 1,994,909 122,236 6.13 ---------- -------- Loans, net of unearned income:(2) Installment 3,292,393 285,446 8.67 Real estate 924,763 82,337 8.90 Other(1) 738,337 69,814 9.46 ---------- -------- Total loans 4,955,493 437,597 8.83 ---------- -------- Mortgage loans held for sale 15,273 1,229 8.05 Federal funds sold and securities purchased under agreements to resell 316,601 18,994 6.00 Other earning assets 9,264 588 6.34 ---------- -------- Total earning assets and interest income 7,291,540 580,644 7.95 -------- Noninterest-earning assets: Cash and due from banks 344,540 Premises and equipment, net 154,047 Other assets 208,742 Less allowance for loan losses (57,645) ---------- Total Assets $7,941,224 ========== (1) Income from tax-exempt securities and loans is included in interest income on a taxable-equivalent basis. Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 35% and increased by 5% in recognition of the partial disallowance of interest costs incurred to carry the tax-exempt investments. (2) Nonaccruing loans are included in their respective categories. AVERAGE BALANCE SHEETS AND INTEREST RATES ON EARNING ASSETS AND INTEREST-BEARING LIABILITIES 1995 ------------------------------ Interest Average Income/ Balance Expense Rate ---------- --------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY (Dollars in thousands) Interest-bearing liabilities: Interest checking $1,312,782 $ 27,350 2.08% Money market accounts 716,903 22,005 3.07 Savings deposits 1,253,129 32,910 2.63 Certificates of deposit: Consumer 2,091,515 107,760 5.15 Large denomination 286,324 14,408 5.03 ---------- -------- Total interest-bearing deposits 5,660,653 204,433 3.61 Short-term borrowings 203,735 10,742 5.27 Long-term indebtedness 3,261 327 10.03 ---------- -------- Total interest-bearing liabilities and interest expense 5,867,649 215,502 3.67 -------- Noninterest-bearing liabilities: Demand deposits 1,168,574 Other 68,614 Shareholders' equity 836,387 ---------- Total liabilities and shareholders' equity $7,941,224 ========== Net interest income and net interest margin $365,142 5.00% ======== AVERAGE BALANCE SHEETS AND INTEREST RATES ON EARNING ASSETS AND INTEREST-BEARING LIABILITIES 1994 ------------------------------ Interest Average Income/ Balance Expense Rate ---------- --------- ------- ASSETS (Dollars in thousands) Interest-earning assets: Investment securities-held to maturity: U.S. Government & its agencies $1,777,875 $104,701 5.89% State and municipal obligations(1) 240,615 17,288 7.18 Other(1) 2,141 153 7.15 ---------- -------- Total investment securities 2,020,631 122,142 6.04 ---------- -------- Loans, net of unearned income:(2) Installment 3,089,033 264,795 8.57 Real estate 667,382 59,198 8.87 Other(1) 630,724 54,600 8.66 ---------- -------- Total loans 4,387,139 378,593 8.63 ---------- -------- Mortgage loans held for sale 26,602 1,893 7.12 Federal funds sold and securities purchased under agreements to resell 178,829 8,084 4.52 Other earning assets 6,584 396 6.00 ---------- -------- Total earning assets and interest income 6,619,785 511,108 7.72 -------- Noninterest-earning assets: Cash and due from banks 317,353 Premises and equipment, net 141,142 Other assets 132,019 Less allowance for loan losses (52,515) ---------- Total Assets $7,157,784 ========== (1) Income from tax-exempt securities and loans is included in interest income on a taxable-equivalent basis. Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 35% and increased by 5% in recognition of the partial disallowance of interest costs incurred to carry the tax-exempt investments. (2) Nonaccruing loans are included in their respective categories. AVERAGE BALANCE SHEETS AND INTEREST RATES ON EARNING ASSETS AND INTEREST-BEARING LIABILITIES 1994 ------------------------------ Interest Average Income/ Balance Expense Rate ---------- --------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY (Dollars in thousands) Interest-bearing liabilities: Interest checking $1,289,956 $ 28,315 2.20% Money market accounts 723,202 19,004 2.63 Savings deposits 1,327,002 36,247 2.73 Certificates of deposit: Consumer 1,614,572 63,339 3.92 Large denomination 180,140 7,192 3.99 ---------- -------- Total interest-bearing deposits 5,134,872 154,097 3.00 Short-term borrowings 178,333 7,101 3.98 Long-term indebtedness 4,173 441 10.57 ---------- -------- Total interest-bearing liabilities and interest expense 5,317,378 161,639 3.04 -------- Noninterest-bearing liabilities: Demand deposits 1,062,951 Other 59,013 Shareholders' equity 718,442 ---------- Total liabilities and shareholders' equity $7,157,784 ========== Net interest income and net interest margin $349,469 5.28% ======== AVERAGE BALANCE SHEETS AND INTEREST RATES ON EARNING ASSETS AND INTEREST-BEARING LIABILITIES 1993 ------------------------------ Interest Average Income/ Balance Expense Rate ---------- --------- ------- ASSETS (Dollars in thousands) Interest-earning assets: Investment securities-held to maturity: U.S. Government & its agencies $1,863,228 $117,634 6.31% State and municipal obligations(1) 268,288 21,206 7.90 Other(1) 2,866 215 7.50 ---------- -------- Total investment securities 2,134,382 139,055 6.51 ---------- -------- Loans, net of unearned income:(2) Installment 2,669,463 254,157 9.52 Real estate 652,118 60,845 9.33 Other(1) 597,811 47,549 7.95 ---------- -------- Total loans 3,919,392 362,551 9.25 ---------- -------- Mortgage loans held for sale 38,930 2,568 6.60 Federal funds sold and securities purchased under agreements to resell 270,392 8,359 3.09 Other earning assets 6,255 372 5.95 ---------- -------- Total earning assets and interest income 6,369,351 512,905 8.05 -------- Noninterest-earning assets: Cash and due from banks 305,900 Premises and equipment, net 137,124 Other assets 129,245 Less allowance for loan losses (50,882) ---------- Total Assets $6,890,738 ========== (1) Income from tax-exempt securities and loans is included in interest income on a taxable-equivalent basis. Interest income has been divided by a factor comprised of the complement of the incremental tax rate of 35% and increased by 5% in recognition of the partial disallowance of interest costs incurred to carry the tax-exempt investments. (2) Nonaccruing loans are included in their respective categories. AVERAGE BALANCE SHEETS AND INTEREST RATES ON EARNING ASSETS AND INTEREST-BEARING LIABILITIES 1993 ------------------------------ Interest Average Income/ Balance Expense Rate ---------- --------- ------- LIABILITIES AND SHAREHOLDERS' EQUITY (Dollars in thousands) Interest-bearing liabilities: Interest checking $1,218,697 $ 31,840 2.61% Money market accounts 746,703 20,090 2.69 Savings deposits 1,276,937 37,432 2.93 Certificates of deposit: Consumer 1,627,982 65,460 4.02 Large denomination 167,697 6,353 3.79 ---------- -------- Total interest-bearing deposits 5,038,016 161,175 3.20 Short-term borrowings 150,951 3,563 2.36 Long-term indebtedness 1,374 221 16.06 ---------- -------- Total interest-bearing liabilities and interest expense 5,190,341 164,959 3.18 -------- Noninterest-bearing liabilities: Demand deposits 990,007 Other 58,929 Shareholders' equity 651,461 ---------- Total liabilities and shareholders' equity $6,890,738 ========== Net interest income and net interest margin $347,946 5.46% ======== EFFECT OF RATE-VOLUME CHANGES ON NET INTEREST INCOME 1995 Compared to 1994 Increase (Decrease) Due to Change in ------------------------------ Total Average Average Increase Volume Rate (Decrease) -------- -------- -------- Interest income (In thousands) - --------------- Investment securities-held to maturity: U.S. Government and its agencies $ (1,343) $ 2,222 $ 879 State and municipal obligations* (528) (491) (1,019) Other* 316 (82) 234 -------- -------- -------- Total investment securities (1,555) 1,649 94 -------- -------- -------- Loans: Installment 17,432 3,219 20,651 Real estate 22,830 309 23,139 Other* 9,316 5,898 15,214 -------- -------- -------- Total loans 49,578 9,426 59,004 -------- -------- -------- Mortgage loans held for sale (806) 142 (664) Federal funds sold and securities purchased under agreements to resell 6,228 4,682 10,910 Other earning assets 161 31 192 -------- -------- -------- Total interest income 53,606 15,930 69,536 -------- -------- -------- Interest expense - ---------------- Interest checking 501 (1,466) (965) Money market accounts (166) 3,167 3,001 Savings deposits (2,018) (1,319) (3,337) Certificates of deposit: Consumer 18,710 25,711 44,421 Large denomination 4,239 2,977 7,216 -------- -------- -------- Total interest-bearing deposits 21,266 29,070 50,336 Short-term borrowings 1,011 2,630 3,641 Long-term indebtedness (96) (18) (114) -------- -------- -------- Total interest expense 22,181 31,682 53,863 -------- -------- -------- Net interest income $ 31,425 $(15,752) $ 15,673 ======== ======== ======== *Fully taxable-equivalent basis The increase or decrease due to a change in average volume has been determined by multiplying the change in average volume by the average rate during the preceding period, and the increase or decrease due to a change in average rate has been determined by multiplying the current average volume by the change in average rate. EFFECT OF RATE-VOLUME CHANGES ON NET INTEREST INCOME 1994 Compared to 1993 Increase (Decrease) Due to Change in ------------------------------ Total Average Average Increase Volume Rate (Decrease) -------- -------- -------- Interest income (In thousands) - --------------- Investment securities-held to maturity: U.S. Government and its agencies $ (5,389) $ (7,544) $(12,933) State and municipal obligations* (2,187) (1,731) (3,918) Other* (54) (8) (62) -------- -------- -------- Total investment securities (7,630) (9,283) (16,913) -------- -------- -------- Loans: Installment 39,947 (29,309) 10,638 Real estate 1,424 (3,071) (1,647) Other* 2,618 4,433 7,051 -------- -------- -------- Total loans 43,989 (27,947) 16,042 -------- -------- -------- Mortgage loans held for sale (813) 138 (675) Federal funds sold and securities purchased under agreements to resell (2,831) 2,556 (275) Other earning assets 20 4 24 -------- -------- -------- Total interest income 32,735 (34,532) (1,797) -------- -------- -------- Interest expense - ---------------- Interest checking 1,862 (5,387) (3,525) Money market accounts (632) (454) (1,086) Savings deposits 1,468 (2,653) (1,185) Certificates of deposit: Consumer (539) (1,582) (2,121) Large denomination 471 368 839 -------- -------- -------- Total interest-bearing deposits 2,630 (9,708) (7,078) Short-term borrowings 646 2,892 3,538 Long-term indebtedness 450 (230) 220 -------- -------- -------- Total interest expense 3,726 (7,046) (3,320) -------- -------- -------- Net interest income $ 29,009 $(27,486) $ 1,523 ======== ======== ======== *Fully taxable-equivalent basis The increase or decrease due to a change in average volume has been determined by multiplying the change in average volume by the average rate during the preceding period, and the increase or decrease due to a change in average rate has been determined by multiplying the current average volume by the change in average rate. STATEMENT OF INCOME - ------------------- NET INTEREST INCOME The tables on pages 14 through 19 detail the increase in earning assets, interest-bearing liabilities and demand deposits for the last three years, along with the related levels of fully taxable-equivalent interest income and expense. The variance in interest income and expense caused by differences in average balances and rates is shown on pages 20 and 21. As the Federal Reserve reacted to a slightly weaker economy and the lack of an inflation threat, interest rates declined steadily throughout 1995. They gave up almost all of the approximately 250 basis point increase they had achieved in 1994. In the beginning of the year, some banks experienced strong commercial loan demand and needed to attract deposits to fund these loans. Later in the year, the continued surge in the stock market attracted bank deposits as consumers pursued the higher returns available in the market. Consequently, as banks sought to maintain their deposit funding sources, deposit interest rates did not decline as rapidly as did the interest rates on loans and investments. At First Virginia, the net interest margin declined steadily during the year as interest rates on deposits did not drop as fast as the yield on consumer loans and investment securities. The margin for the full year declined 28 basis points to 5.00% from the 5.28% rate maintained in 1994. During the fourth quarter, the margin dropped below 5.00% for the first time since 1977. It is anticipated that the margin will stay below 5.00% for a portion of 1996 until interest rates on deposits catch up with the decline in rates on loans and investments. Further improvement in the margin is anticipated in 1996 if a modestly growing economy and the expansion of the corporation's indirect automobile loan production offices into additional market areas cause an increase in loan demand. Net Interest Margin Chart (the higher, the better) National First Southern Peer Virginia Regionals Group -------- --------- -------- 1995 5.00% 4.38% 4.58% 1994 5.28% 4.45% 4.50% 1993 5.46% 4.69% 4.62% 1992 5.46% 4.64% 4.69% 1991 5.03% 4.39% 4.42% Southern Regionals: Banking companies with assets over $2 billion (32 in 1995) National Peer Group: Banking companies with assets of between $5 and $10 billion (20 in 1995) Source: Keefe, Bruyette & Woods Despite the decline in the net interest margin, net interest income increased 4.5%. This was caused by an increase in average earning assets of 10.1% as a consequence of the acquisition in late 1994 of Farmers National Bancorp. Interest income from loans increased 15.6% due to an increase in yield of 20 basis points and a 13.0% increase in average outstanding balances. The corporation experienced very strong loan growth in early 1994 that helped to increase average loans for 1995. It also benefitted from the loans acquired from Farmers National Bancorp. Interest income from securities remained relatively unchanged despite a 1.3% decline in average outstanding balances. The combination of strong loan demand in 1994 and modest deposit growth caused the corporation to fund part of its 1994 loan growth from securities maturing in its investment portfolio. By the third quarter of 1995, however, a new combination of deposits purchased from Citizens Federal and a weaker loan demand meant additional funds were placed in the investment portfolio, causing it to grow again. Interest expense increased 33.3%, due in part to the acquisition of deposits from Farmers National and Citizens Federal, and increased the cost of funds 63 basis points to 3.67%. In mid-1994 a significant shift in the composition of deposits began to occur as consumers moved deposits out of lower-yielding savings accounts and into higher-cost certificates of deposit. This continued into 1995 as consumer savings accounts declined 5.6% and certificates of deposit increased 32.5%, including the $220.5 million purchased from Citizens Federal. It is anticipated that this trend will continue into 1996 as consumers react to declining interest rates by seeking alternative, higher-cost certificates of deposit to maximize their interest. Lower-cost transaction accounts grew during the year as demand accounts advanced 9.9% and interest checking accounts advanced 1.8%. The corporation's extensive branch structure and convenient locations create a strong sales base for these types of accounts. PROVISION FOR LOAN LOSSES The provision for loan losses increased $1.878 million to $8.341 million or 29% during 1995, after remaining unchanged in 1994. The corporation enjoyed exceptionally low net charge-offs of under 13 basis points in 1994 and 1993 because of a higher quality loan portfolio and the strong economic cycle. As a result, the allowance for loan losses was gradually reduced from 1993 to early 1995 to 1.15% of outstanding loans, which contributed to the reduction in the provision in 1994 and 1993. The allowance for loan losses covered net charge-offs 6.2 times at the end of 1995, compared to 11.9 times at the end of 1994, and covered nonperforming loans by 339.39%. Nonperforming assets represented .57% of outstanding loans at the end of 1995, compared to .52% at the end of 1994, and delinquencies remained essentially unchanged during both periods. During 1995, four factors combined to create a $4.3 million increase in net charge-offs to $9.3 million: 1. Recoveries declined slightly from their 1994 and 1993 highs as loans charged off in the last economic cycle were collected. 2. Farmers National and FNB Financial Corporation were included for the full year in 1995. 3. Outstanding loans that were booked over the past several years increased. 4. The current economic cycle, now fairly mature, increased the pace of charge-offs in all loan categories. Despite these factors, net charge-offs are still 29% below their peak in 1991 and amounted to just .19% of outstanding loans - well below peer group averages and below First Virginia's average of .26% over the past ten years. Because the corporation makes approximately 78% of its loans to consumers for small amounts with regular monthly repayment schedules, it has less risk exposure to loan charge-offs than many banks. Credit card loans are made primarily to bank customers located in the corporation's trade area and contain a lesser degree of risk and delinquency than many banks' nationally solicited accounts. The balance of the corporation's loans are made primarily to small- and medium-sized businesses in the corporation's trade area and are well-secured. Less than 2% of the corporation's loans are for land development and construction and are primarily for residential or owner- occupied facilities. The corporation does not have any international, national or highly leveraged credits, nor does it have any concentration of credit in any one industry that exposes the loan portfolio to adverse risk. NONINTEREST INCOME Noninterest income increased 6% in 1995 after rising by a more modest 3% in 1994. However, when the 1995 income from the newly acquired Farmers National is excluded, noninterest income rose by only 2% in 1995. First Virginia receives a greater proportion of its income from net interest income than other banking companies and has been aggressively seeking to develop more sources of noninterest fee income. For example, in 1995, the corporation successfully began two new programs it believes will produce fee income in the future and, in addition, is adding new products to further enhance fee income. Building on its expertise in the indirect automobile loan business, the corporation is making an automobile lease product available to its dealers. Since leasing is becoming a more popular form of financing automobile acquisitions - over 30% of new cars sold nationally are leased - this area has a great potential for future fee income. During 1995, the corporation earned $520,000 in leasing fees by originating leases for third parties, and it expects to more than double that in 1996 when the program is introduced to additional markets and automobile dealers. Another new product introduced in 1995 was real property title insurance, offered through the corporation's insurance agency. Despite a poor year for home equity loans, the corporation earned $218,000 in commissions with the introduction of this product. As it is offered through each of the member companies and as real estate lending increases, the volume of income from this source is expected to double in 1996. Despite the success of the newly introduced title insurance product, income from all types of insurance products was virtually unchanged in 1995 because of a 6% decline in premium income on credit life insurance. A lower level of consumer installment loan production and lower rates mandated by the state of Virginia combined to reduce income in this area. Service charges on deposits increased 8% in 1995, after a 5% increase in 1994, because of increased activity, higher fees and the addition of accounts from Farmers National. Most fee increases were at least equal with inflation since the corporation maintains a practice of continually reviewing fees to ensure that each line of business remains profitable. Returned check and overdraft fees, which make up slightly more than 50% of service charges on deposits, increased 11% in 1995 as a result of a modest fee increase, higher transaction volume and a weakening of the current economic cycle that caused some consumers to overdraw their accounts more frequently. Credit card fee income rose 2% despite an increase in average outstanding balances of 17%. In response to a more competitive market for new accounts and the retention of existing accounts, the corporation has been offering more customers a no annual fee credit card, which reduced fee income from this category by 25%. This has resulted in a greater retention of customers, however, and is more than offset through greater interest income and interchange income on the customers' charge activity. Trust services income rose 33% in 1995. The corporation has reorganized the trust and asset management area over the past several years, adding more sophisticated computer support and product enhancements and eliminating some lower-margin business. As a result, all categories of personal trust services enjoyed double-digit growth. Implementation of additional changes in marketing and managing these products should further enhance profitability in the future. Interchange income from automated teller machines (ATMs) slowed slightly in 1995 to a 3% growth after increasing in excess of 12% per year in the two previous years. Point-of-sale activity is growing rapidly as it becomes more widely accepted by consumers and offered by more merchants. This growth is expected to continue over the next several years. The corporation had a network of over 200 ATMs at the end of the year, including a number in high- traffic nonbranch locations, such as airports, shopping centers, and even temporary units used for local fairs and community events. Since it is the corporation's general policy to hold all of its fixed income securities to maturity, there were no security gains and losses in 1995. In 1994 and 1993, the corporation had gains of $976,000 and $711,000, respectively, from the sale of some equity securities acquired a number of years previously. Other noninterest income includes gains of $2.5 million in both 1995 and 1994 from the sale of mortgage servicing rights. The corporation normally sells a package of servicing rights each year rather than selling individual loans with servicing released. A higher total profit is made by packaging a group of servicing rights for sale. Excluding the sale of mortgage servicing rights, other income increased 6% in 1995, primarily because of the adoption of Statement of Financial Accounting Standards No. 122, "Accounting for Mortgage Servicing Rights," which required recognition of the value of originated mortgage servicing rights when the loan is made rather than when it is ultimately collected. In 1994, other income had declined 39% due to a 43% decline in mortgage origination income caused by reduced refinance activity. However, as mortgage loan interest rates declined at the end of 1995, refinance activity had begun to increase strongly again. Efficiency Ratio Chart (the lower, the better) National First Southern Peer Virginia Regionals Group -------- --------- -------- 1995 58.2% 60.7% 59.5% 1994 58.5% 63.2% 63.4% 1993 56.9% 62.6% 62.6% 1992 58.4% 61.8% 60.0% 1991 65.1% 64.7% 63.6% Southern Regionals: Banking companies with assets over $2 billion (32 in 1995) National Peer Group: Banking companies with assets of between $5 and $10 billion (20 in 1995) Source: Keefe, Bruyette & Woods NONINTEREST EXPENSE First Virginia continued to manage its noninterest expenses in a highly disciplined manner. Because First Virginia has always tightly controlled its expenses and searched for the most efficient means to operate in good and bad times, it has not had to resort to large layoffs or incur massive restructuring charges that seem so common today. First Virginia's efficiency ratio improved slightly in 1995 to 58.2% from 58.5% in 1994 and remains below industry averages, despite a very large branch structure. While First Virginia has a much larger branch network than other financial institutions of comparable size, it manages the network efficiently and gathers a larger proportion of its deposits from low-cost transaction-oriented accounts generated by its many convenient branch locations. In 1995, noninterest expenses increased 7%, caused entirely by the acquisition of Farmers National Bancorp at the end of 1994 and thus not included in 1994 expenses. Excluding Farmers from 1995 expenses would have resulted in a 1% decline in noninterest expense. Despite five additional branches in 1995 and a growth in assets of 5%, the corporation actually had 67 fewer employees at the end of 1995 compared to 1994. Salaries and employee benefits increased 10% primarily due to the inclusion of Farmers in 1995 results. A decline in net income meant incentive payments to employees declined by 12%. The increase in the price of the stock, however, resulted in an $801,000 increase in expense for stock-related compensation. Health care costs continued to increase and were up 15%. Although higher health care premiums caused part of the increase, most of it was the result of the Farmers acquisition. At the end of 1995, the corporation replaced its traditional health care plan for most employees with a point-of-service plan. This is expected to both control future expense increases and provide a greater choice of benefits to employees. Retirement benefits increased 30% because of higher pension costs and greater participation by employees in the corporation's 401(k) plan. New branches in growing areas and the inclusion of Farmers in 1995 expense created a 13% increase in occupancy expense in 1995, which was greater than the 6% increase in expense in 1994. Equipment expense increased 3% in 1995 and 1% in 1994 as the corporation was able to absorb most of the extra processing from the Farmers acquisition with existing equipment. In updating its branch automation system, the corporation is currently installing the next generation of computer equipment. This update will permit the corporation to continue offering customers sophisticated financial services at a low cost. FDIC insurance expense declined $5.7 million or 41% as the Bank Insurance Fund (BIF) became fully funded at mid-year and premiums for the second half of the year were curtailed drastically. This expense should decline an additional $7.5 million in 1996 since the premium has been virtually eliminated. Congress is currently debating proposed legislation to recapitalize the Savings Association Insurance Fund (SAIF) for savings and loan deposits. Since First Virginia purchased several branches from savings and loan institutions over the past 10 years, it may be subject to a special one-time assessment to recapitalize the SAIF fund in 1996 if the legislation passes. As currently proposed, this would be approximately $1.7 million, but it would potentially reduce First Virginia's annual assessment by an additional $500,000. Other operating expenses increased $5.1 million in 1995 after declining 3% in 1994. The primary cause was a $3.9 million increase in the amortization of goodwill and core deposit premiums paid in connection with the acquisition of Farmers, FNB Financial and Citizens Federal Savings Bank branches. Foreclosed property expense increased slightly in 1995 after declining in 1994, but it was under $728,000 in each year. Most other categories of expense increases reflected the general rate of inflation and the acquisition of Farmers National. PROVISION FOR INCOME TAXES Income tax expense increased $2.1 million in 1995, slightly greater than the increase in pretax income due to increases in state income taxes and nondeductible goodwill expense. Farmers National Bancorp operates in Maryland and is subject to a Maryland state income tax of 7%. The majority of the corporation's other banking activities are in Virginia, which does not have an income tax on banks. The corporation's effective tax rate increased 1.2% to 33.7% in 1995, primarily the result of the increases in state income taxes and nondeductible goodwill expense. The effective tax rate in 1994 increased .7% to 32.5% because of a decline in the proportion of nontaxable interest income received from municipal securities. Since 1982, various changes in tax laws have reduced the availability and attractiveness of tax-exempt securities for banks, and the corporation has not been able to replace maturing tax-exempt securities. BALANCE SHEET - ------------- The corporation's primary use of funds is to support the lending activities that generate the greatest amount of its income. The corporation's objective is to invest 70-80% of its total deposits in loans. Loan volume weakened in 1995 after strong activity in 1994. Outstanding loans at the end of 1995 were up only 1% compared to the end of 1994; however, average loans increased 13% in 1995 because 1994's strong growth carried forward into 1995. The 1994 acquisition of Farmers National also contributed to the 1995 increase in average loans. Average loans had been up 12% in 1994 compared to 1993 because of very strong loan demand in 1994. The weaker loan growth, coupled with the growth and acquisition of deposits from a thrift in the third quarter, resulted in a small expansion in the loan to deposit ratio from 70.8% in 1994 to 72.6% in 1995. The 1995 loan growth was funded primarily through growth in deposits, and in a lesser amount, from maturing investments, while most of 1994's loan growth was funded through maturing investments. Total assets increased to $8.222 billion, a growth of 5% over 1994's assets of $7.865 billion, due in large measure to the purchase of $220 million in deposits from Citizens Federal Savings Bank. In 1994, total assets grew 12% with the acquisition of Farmers National Bancorp and FNB Financial Corporation, which added approximately $800 million in assets. The table below shows the average balances of the various categories of earning assets as a percentage of total earning assets for the years indicated. 1995 1994 1993 1992 1991 ------ ------ ------ ------ ------ Loans .................. 67.96% 66.27% 61.53% 60.13% 65.31% Securities.............. 27.36 30.53 33.51 34.89 29.47 Mortgage loans held for sale .21 .40 .61 .56 .24 Other earning assets.... .13 .10 .10 .10 .10 Overnight investments... 4.34 2.70 4.25 4.32 4.88 ------ ------ ------ ------ ------ 100.00% 100.00% 100.00% 100.00% 100.00% ====== ====== ====== ====== ====== LOANS Loans increased at a modest 1% rate in 1995 after strong growth in 1994. The national decline in automobile sales affected First Virginia's production of indirect automobile loans, causing it to decline 8% in 1995 after advancing 20% or more for each of the three previous years. The corporation opened its first loan production office in 1993 with very successful results. It expanded its loan production into new areas in 1995, including additional offices in North Carolina, Tennessee and South Carolina, and it intends to continue expanding this activity in the future. First Virginia has approximately 39% of its loan portfolio in automobile- related loans and is a full-service provider of financial services to automobile dealerships. In fact, most of this portfolio consists of loans originated by automobile dealerships to consumers purchasing new and used vehicles. First Virginia concentrates on the highest quality of automobile loans, primarily "A" and "B" credits, for new cars with a maximum life of five years. There is an approximately equal distribution between domestic and foreign automobiles in the portfolio and there is no concentration in any particular make of car. The corporation also makes loans directly to dealers to finance their sales inventory (called floor plan loans), which are fully secured by specific automobiles. Average floor plan loans in 1995 increased 15% and totaled $151.1 million at the end of the year. In addition, loans are made to dealers to finance their show-rooms and real estate facilities. During 1995, a leasing product was introduced that is sold through the dealers. It provides a financing alternative for consumers and gives the dealers another opportunity to make a sale. First Virginia is committed to the automobile market, regardless of the economic cycle, and it devotes its primary lending resources to this area. Home equity lending is the second most important source of loans for First Virginia and comprises approximately 22% of the loan portfolio. These loans are originated through the banks' branches and through a home equity mortgage loan company in areas outside the corporation's banking markets. After advancing 12% in 1994, outstanding home equity loans declined 9% in 1995 as new loan production dropped over 40% from 1994's record production. The weakening in the economy and the concern over employment prospects, particularly in the corporation's primary markets in the Washington, D.C., metropolitan area, reduced consumers' willingness to use their home equity in making significant financial commitments. First Virginia also pursues the highest quality home equity loans with high underwriting standards. This has enabled the corporation to show minimal bad debt losses. For example, the corporation typically requires a maximum loan to equity ratio of no more than 80% and does not take a second mortgage behind a jumbo first mortgage in order to reduce its risk in foreclosure. Residential real estate loans declined 7% in 1995, after advancing 19% in 1994, as interest rates dropped to levels the corporation did not feel warranted the long-term interest rate risk. The corporation generally limits the term of loans it will accept for its own portfolio to 15-year, fixed-rate mortgage loans or longer-term loans with rates that adjust every three to five years. The corporation generally does not invest in adjustable-rate mortgages because of the substantial prepayment risk and low initial rates generally associated with such loans. Revolving credit loans, including credit cards, continued to grow rapidly. ln 1995, they increased 9% following a 17% rise in 1994. First Virginia has generally not aggressively promoted its cards through initial low "teaser" rates but has, instead, offered one of the best low fixed-rate, no-annual-fee card products in its market. This has resulted in a more stable cardholder base and an increased penetration rate in acquiring new accounts. The corporation limits its solicitation efforts primarily to the geographic area of its member banks. Commercial loans grew on average by 17% in 1995. The acquisition of Farmers, a more commercially oriented lender, was a primary cause for the increase. Total loans were up only 1% from the end of 1994 to the end of 1995. In 1994 average commercial loans grew 6%. Floor plan loans to automobile dealers comprise 32% of commercial loans at year-end. These loans are made to the highest quality automobile dealers and are subject to periodic inventory audits and at least an annual financial review. The corporation's other major commercial lending areas include loans to government contractors, secured by receivables from the U.S. Government, and church and country club loans. Other commercial loan activity was modest in both 1994 and 1995 because of increased competition for attractive commercial loans. Real estate development and construction loans declined 20% in 1995 after a 35% increase in 1994 because several projects were successfully completed. These loans comprise less than 25% of the total loan portfolio and are primarily made to established developers on residential properties with strong sales. Commercial mortgage loans increased 5% and are composed almost entirely of owner-use properties carrying floating or adjustable interest rates. In 1994, commercial real estate loans rose 55% with the acquisition of Farmers National Bancorp, an active lender in commercial properties. LOANS December 31 1995 1994 1993 1992 1991 ---------- ---------- ---------- ---------- ---------- (In thousands) Consumer: Automobile...........$1,836,603 $1,725,928 $1,429,750 $1,209,832 $1,073,325 Home equity, fixed- and variable-rate 1,091,858 1,198,087 1,072,379 999,877 928,657 Revolving credit loans, including credit cards 207,931 190,103 161,995 163,711 166,961 Other......... 300,157 260,989 152,793 164,208 166,686 Real estate: Construction and land development 97,974 122,737 90,823 109,378 109,809 Commercial mortgage. 489,225 465,943 301,315 284,579 257,944 Residential mortgage.. 470,994 504,823 424,580 468,909 379,750 Other, including Industrial Development Authority loans 68,431 61,876 63,082 69,898 70,204 Commercial 474,903 466,708 321,428 311,876 336,201 ---------- ---------- ---------- ---------- ---------- Loans, net of unearned income $5,038,076 $4,997,194 $4,018,145 $3,782,268 $3,489,537 ========== ========== ========== ========== ========== Loans and other assets which were not performing in accordance with their original terms are discussed on several of the following pages under the caption NONPERFORMING ASSETS. INVESTMENT SECURITIES The investment portfolio declined on average by 1% in 1995, despite the acquisition of Farmers National, because of the growth in the loan portfolio. By mid-year, however, deposit growth was sufficient and loan volume had moderated to allow a renewed expansion in the portfolio. In 1994, the investment portfolio declined 5% as it was permitted to mature without reinvestment to fund loan growth. The corporation places primary importance on safety and liquidity in the investment portfolio. Accordingly, most of the portfolio is invested in U.S. Government and agency securities with a maximum life of five years. At the end of 1995 and 1994, the average life of the portfolio was just under two years. At December 31, 1995, U.S. Government and agency securities comprised 91% of the securities portfolio. This percentage has been gradually increasing since 1982 when changes in federal income tax laws reduced the tax benefits derived by banks in investments in municipal securities. The limited availability of bank-qualified municipal securities and the reduction in yield caused by the loss of tax benefits has generally made municipal securities less attractive to the corporation. First Virginia has generally limited its investments in municipal securities to publicly issued municipal securities with a rating of A1 or better or to unrated, general-obligation municipal securities of municipalities in its market areas with which it is familiar. The corporation generally does not invest in mortgage-backed securities or collateralized mortgage obligations because of their unpredictable cash flows and maturities and the corporation's own emphasis on liquidity. It does not invest in structured notes or other types of derivative securities and has constructed its portfolio in a "laddered" approach so an approximately equal amount matures each month. During 1994, the corporation adopted Statement of Financial Accounting Standards No. 115 (SFAS No. 115) "Accounting for Certain Investments in Debt and Equity Securities." The corporation has classified virtually 100% of its investment portfolio as "held to maturity." It intends to hold its securities until their stated maturity and has the ability to do so. At the end of 1995, approximately $65 million in securities were reclassified out of the held to maturity portfolio and into the available for sale portfolio as permitted by a transition provision of SFAS No. 115. This was done to utilize some capital loss carry-forwards and some changes in Maryland state income tax laws. The reclassification is not a change in the corporation's policy to hold all of its securities to maturity; however, it is the intention of the corporation to sell these securities during 1996 to take full advantage of available tax incentives. With the reclassification of securities to the available for sale category, shareholders' equity has been increased by $1.634 million in recognition of the change in market value of this component of the portfolio. OVERNIGHT INVESTMENTS Overnight investments, consisting primarily of federal funds sold and securities repurchase agreements are generally governed by the size of normally anticipated deposit swings and loan demand. In addition, the amount of customer repurchase agreements is generally covered by investments in overnight securities. In 1994, overnight investments declined 34% as the corporation utilized some of the liquidity in this asset to temporarily fund loan growth. ln 1995, average overnight investments increased 77% to a more normal level of $317 million. DEPOSITS Deposit growth continued to be sluggish in 1995 as the competition for funds from other banks remained high. Higher commercial loan activity by other banks increased demand for funds and kept interest rates on most deposit products relatively high, particularly compared to the decline in rates on loans and investment securities. The stock market also experienced a big increase in 1995, creating strong consumer demand for mutual funds and placing further pressure on deposit growth. Overall, average deposits increased 10% in 1995 compared to a 3% growth in 1994; however, almost all of the 1995 growth was a result of the purchase of Farmers National and the deposits from Citizens Federal Savings Bank. The corporation's extensive branch system has enabled it to acquire low- cost consumer core deposits through its convenient neighborhood locations. In 1992 and 1993, there was a large shift by consumers out of higher-cost certificates of deposit and into lower-cost money market and savings accounts. From 1991 to its peak in 1993, savings accounts increased $688 million to $1.276 billion. They began falling in 1994 and 1995 as interest rates declined and certificates of deposit became relatively more attractive. In 1995 average savings accounts declined 6% to $1.253 billion. Similarly, insured money market accounts, which peaked in early 1993, declined 4% from 1993 to 1995. This shifting will probably continue into 1996 as some of this money migrates back to higher-yielding certificates of deposit. Average demand deposits grew 10%, after growing 7% in 1994. Most of this growth came from the acquisition of Farmers National as actual balances at the end of 1995 were virtually unchanged from the end of 1994. Interest checking accounts grew at a slower pace of 2% in 1995. The corporation obtains a higher proportion of its deposits from these sources than most other banks, with demand accounts equaling 17.1% of deposits and interest checking, an additional 19.2%. Average Deposits Pie Chart (Millions of Dollars) 1995 1994 1993 -------- -------- -------- Noninterest Bearing $1,168.6 $1,063.0 $ 990.0 Interest Checking 1,312.8 1,290.0 1,218.7 Savings 1,253.1 1,327.0 1,276.9 Money Market 716.9 723.2 746.7 Consumer CDs 2,091.5 1,614.5 1,628.0 Large Denomination CDs 286.3 180.1 167.7 -------- -------- -------- $6,829.2 $6,197.8 $6,028.0 ======== ======== ======== Consumer certificates of deposit increased 30% in 1995 after declining slightly in the two previous years as customers switched out of savings and money market accounts. The shorter-maturity certificates still remain the most popular, with those maturing between 9 to 24 months receiving the most growth. The yield curve was fairly flat throughout 1995, so shorter-term certificates were attractively priced compared to longer-term certificates. Large denomination certificates of deposit increased 59% to $286.3 million, following a 7% increase in 1994. These deposits are mostly from high net worth consumers and not from purchased sources as the corporation does not aggressively pursue deposits from jumbo sources. These deposits generally bear the same or lower rate than the corporation's smaller denomination consumer certificates. The corporation does not purchase brokered deposits nor does it solicit deposits outside of its primary market areas. Maturity ranges for certificates of deposit with balances of $100,000 or more on December 31, 1995, were (in thousands): One month or less.............................................. $ 27,905 After one month through three months........................... 72,742 After three through six months ................................ 67,337 After six through twelve months ............................... 93,294 Over twelve months............................................. 57,746 -------- $319,024 ======== OTHER INTEREST-BEARING LIABILITIES Short-term borrowings consist primarily of commercial paper issued by the parent company and securities sold by the member banks with an agreement to repurchase them on the following business day. These short-term obligations are issued principally as a convenience to customers in connection with their cash management activities. Average short-term borrowings from these sources increased 14% in 1995 and 18% in 1994, and reflect the increase in the number of commercial customers under cash management. Long-term debt is comprised of capitalized lease obligations on branch office facilities that are not subject to prepayment and on one equipment note for the purchase of the corporation's main-frame computer. A shelf registration for the issuance of $50 million of senior notes was filed with the Securities and Exchange Commission in 1989. Moody's has indicated that the notes, when and if issued, will have a rating of A-1. The corporation's commercial paper is rated P-1 by Moody's and A-1 by Standard & Poor's, and the lead bank's certificates of deposit are rated A+/A-1 by Standard & Poor's and Aa3 by Moody's, the highest rating of any bank's deposits in the corporation's market area. Return on Total Average Equity Chart (the higher, the better) National First Southern Peer Virginia Regionals Group -------- --------- -------- 1995 13.34% 15.21% 14.70% 1994 15.76% 15.28% 14.93% 1993 17.81% 15.66% 15.81% 1992 17.03% 14.27% 14.71% 1991 13.44% 11.53% 12.81% Southern Regionals: Banking companies with assets over $2 billion (32 in 1995) National Peer Group: Banking companies with assets of between $5 and $10 billion (20 in 1995) Source: Keefe, Bruyette & Woods SHAREHOLDERS' EQUITY First Virginia maintains its capital at one of the highest levels relative to other banks in the country. The ratio of shareholders' equity to assets averaged 10.53% during 1995, compared to an average of 8.625% for similar banks in its peer group of banks with assets between $5- to 10-billion according to Keefe, Bruyette & Woods. The corporation's Tier 1 leverage ratio declined slightly during 1995 to 9.63% from 10.25% in 1994 because of the acquisition of deposits from Citizens Federal Savings Bank at a premium. Intangible assets, such as this deposit premium, are deducted from capital in calculating the leverage ratio. Nevertheless, this level of capital exceeds the regulatory minimum of 3.0% by over three times and gives the corporation considerable capital for growth and safety. Each of the corporation's individual banks maintains capital ratios well in excess of regulatory minimums, and all qualify as "well capitalized" banks, allowing them the lowest FDIC premium rate and freedom to operate without restrictions from regulatory bodies. During 1994, the Board of Directors approved the repurchase of 2.7 million shares of the corporation's common stock and at December 31, 1995, approximately 1.8 million, or 5.6% of outstanding shares at the time the repurchase program was announced, had been repurchased. Purchases under this plan slowed considerably during 1995 to only 146,800 shares because of the 30% increase in the stock price. In 1994, the corporation issued 3.2 million shares in connection with the acquisition of two bank holding companies accounted for as purchases. First Virginia and its subsidiary banks are required to comply with capital adequacy standards established by the Federal Reserve and the FDIC. The corporation exceeded the additional regulatory risk-based capital requirements by wide margins, due in part to the high level of capital and in part to the conservative nature of the corporation's assets. The Tier 1 risk- based capital ratio increased 66 basis points to 15.42% during 1995, and the Tier 2 or total risk-based capital ratio advanced 61 basis points to 16.57%. Regulatory minimums of 4.0% and 8.0%, respectively, are exceeded by substantial margins. Asset Quality - ------------- The corporation has a number of policies to ensure that lending and investment activities expose the bank to a minimum of risk while producing a profit consistent with the exposure to risk. These policies are reviewed constantly by the corporation's senior management, and each member bank's internal loan monitoring system provides a detailed monthly report of production, delinquencies, and nonperforming and potential problem loans. This careful monitoring has resulted in a consistent record of low delinquencies and charge-offs as well as few non-performing loans in relation to the entire loan portfolio. The corporation has no foreign or highly leveraged transaction loans, and loans are only made within the trade areas of the member banks or in adjacent states where the corporation maintains loan production offices generating high-quality consumer installment loans. Loans are generally not participated with or purchased from banks outside of the First Virginia system. In addition, participations between banks within the First Virginia system must first be participated with the corporation's lead bank where a second comprehensive loan review process is performed. Approximately 78% of the corporation's loans are made to consumers and are normally secured by personal or real property. First Virginia has no significant concentrations of credit to a single industry or borrower and its loans are spread throughout its market area. The corporation's legal lending limit to any one borrower is approximately $130 million; however, it generally limits its loans to any one borrower and related interests to $15 million. In special cases, the corporation may exceed its internal guideline from time to time. One of the corporation's specialty loan areas is the automobile finance area, and loans are made to consumers both directly in the branches of the member banks and indirectly through automobile dealerships. Roughly 36% of the total loan portfolio is comprised of consumer automobile loans, but because the loan amounts are relatively small and spread across many individual borrowers, the risk of any major charge-offs is minimized. The automobile loans produced by the corporation consist primarily of the highest quality loans, commonly referred to in the industry as "A" and "B" quality loans. These loans contain substantially less risk characteristics than lower quality "C" and "D" subprime loans and have lower delinquency, charge-off and collection costs. During periods of economic weakness, the subprime loan categories generate very high delinquencies and charge-offs. However, the high quality loans the corporation specializes in experience only modestly higher delinquencies and charge-offs in recessions compared to periods of strong economic growth. The corporation also makes loans directly to high- quality automobile dealers to finance their inventories, and it has never experienced any losses in this area. NONPERFORMING ASSETS Nonperforming assets increased $2.8 million to $29.0 million after declining steadily in each of the preceding four years. Nonperforming assets were .57% as a percentage of total loans plus nonperforming assets, up slightly from the .52% at the end of 1994 but significantly below the .70% for comparably sized banks in the Southern region of the country. Foreclosed properties declined 9% in 1995 as a number of properties were sold. In 1994, foreclosed properties had increased 20% due entirely to the acquisition of Farmers National Bancorp and would have declined 12% excluding properties acquired from the merger with Farmers. The corporation had no foreclosed commercial real estate in the Washington, D.C., area market. The table below shows the total of nonperforming loans at the end of the past five years. Experience has shown that actual losses on nonperforming assets are only a small percentage of such assets. The corporation expects to recover virtually all of its nonperforming assets, many with full interest. Nonperforming Assets December 31 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- (In thousands) Nonaccruing loans ........ $17,066 $15,286 $18,387 $20,453 $17,425 Restructured loans........ 4,260 2,478 2,175 1,139 1,337 Properties acquired by foreclosure........... 7,680 8,478 7,086 11,099 16,160 ------- ------- ------- ------- ------- Total................... $29,006 $26,242 $27,648 $32,691 $34,922 ======= ======= ======= ======= ======= Percentage of total loans and foreclosed real estate .57% .52% .68% .85% .99% Loans 90 days past due.... $ 6,262 $ 4,881 $ 2,752 $ 4,595 $ 8,935 ======= ======= ======= ======= ======= Percentage of total loans. .12% .10% .07% .12% .25% Loans past due 90 days or more totaled $6.3 million at the end of 1995, an increase of 28% compared to 1994; however, this represented only .12% of outstanding loans, which was up slightly compared to the prior year's .10%, but was significantly below historic and national averages. No particular loan or category of loans accounted for the increase. Loans past due over 30 days increased 22 basis points over 1994 to .69% of outstanding loans and have been slowly increasing throughout 1995. All categories of loans have participated in this increase, and it reflects the gradual weakening of the economy. These levels are still significantly below industry averages and reflect the high overall quality of the corporation's loan portfolio. A loan generally is classified as nonaccrual when full collectibility of principal or interest is in doubt; when repossession, foreclosure or bankruptcy proceedings are initiated; or when other legal actions are taken. In the case of installment loans, a loan is placed in nonaccrual if payments are delinquent 120 days, and for other loans after payments are delinquent for 90 days. Credit card loans are charged off if they are 180 days past due. If collateral on a loan is sufficient to insure full collection of principal and interest, an exception to the general policy might be made. Loans may also be placed in a nonaccruing status at any time prior to that indicated above if the corporation anticipates that interest or principal will not be collected. Nonperforming Asset Ratios Chart (the lower, the better) National First Southern Peer Virginia Regionals Group -------- --------- -------- 1995 0.57% 0.70% 0.58% 1994 0.52 0.68 0.67 1993 0.68 1.19 0.96 1992 0.85 2.62 1.58 1991 0.99 2.49 2.22 Reserve Coverage Ratios Chart (the higher, the better) National First Southern Peer Virginia Regionals Group -------- --------- -------- 1995 272% 362% 334% 1994 331 336 321 1993 248 235 256 1992 229 161 204 1991 239 139 134 Net Charge-Offs Ratios Chart (the lower, the better) National First Southern Peer Virginia Regionals Group -------- --------- -------- 1995 0.19% 0.21% 0.19% 1994 0.11 0.17 0.20 1993 0.13 0.33 0.31 1992 0.35 0.78 0.66 1991 0.38 0.96 0.89 Southern Regionals: Banking companies with assets over $2 billion (32 in 1995) National Peer Group: Banking companies with assets of between $5 and $10 billion (20 in 1995) Source: Keefe, Bruyette & Woods ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level that management believes is adequate to absorb potential losses in the loan portfolio. Management's methodology in determining the adequacy of the allowance considers specific credit reviews, past loan loss experience, current economic conditions and trends, and the growth and composition of the loan portfolio. Every commercial loan is reviewed and rated at least annually, and trends in the total portfolio are examined for potential deterioration in overall quality. The corporation has reduced the allowance steadily over the past several years from a high of 1.30% in 1992 to 1.15% at the end of 1995 - a 3 basis point decline from the end of 1994. This reduction reflects the improvement in the corporation's net charge-off rate from .38% in 1991 to .19% in 1995 and declines in nonperforming assets and delinquencies. The quality of the corporation's loan portfolio has improved over the past ten years as it has stressed higher-quality automobile and home equity loans. The allowance covered net charge-offs 6.2 times at the end of 1995 and amounted to 272% of nonperforming loans. Most of the corporations loans are small, homogeneous loans to consumers with regular monthly repayment schedules, and accordingly, none of the allowance has been allocated to specific credits. The corporation constantly monitors the level of the allowance considering its long-term experience and short-term individual requirements. The allowance is charged when management determines that the prospect of recovery of the principal of a loan has significantly diminished. Subsequent recoveries, if any, are credited to the allowance. If asset quality and loan charge-offs remain at the current low levels, the corporation intends to maintain an allowance for loan losses in the 1.15 to 1.20% range. Management believes the allowance is adequate to absorb any potential unidentified losses. After improving in 1993 and 1994 to historic low amounts, net charge-offs increased 88% in 1995. However, the net charge-off rate was only .19% of loans, below the corporation's ten-year average of .26%, and lower than industry averages. All categories of gross charge-offs increased by double digits, with the largest component of charge-offs comprised of credit card loans. Net charge-offs of credit card loans increased 58 basis points to 3.19%, caused by a large increase in the number of bankruptcies, as the economy softens and bankruptcy becomes an easier option for many consumers. Nevertheless, the corporation's charge-off ratio for credit cards is significantly below those for most banks, as it generally pursues only customers within its banks' trade areas and does not solicit accounts on a nationwide basis. Net charge-offs in the corporation's two largest lending areas - indirect automobile and home equity loans - increased in 1995 to .10% and .02%, respectively, but are still extremely low by any standard. Delinquencies have increased slightly, but the overall credit quality of the portfolios is so high and the volume of problem credit so low that virtually any increase in net charge-offs or delinquencies would result in a large percentage increase in these ratios. An analysis of the activity in the allowance for loan losses for each of the last five years is presented in the following table. Allowance for Loan Losses December 31 1995 1994 1993 1992 1991 ------- ------- ------- ------- ------- (In thousands) Balance at beginning of year $58,860 $50,927 $49,340 $44,817 $43,917 Balances of acquired banks - 6,412 259 - - Provision charged to operating expense........ 8,341 6,463 6,450 17,355 14,024 ------- ------- ------- ------- ------- Total ................ 67,201 63,802 56,049 62,172 57,941 ------- ------- ------- ------- ------- Charge-offs: Consumer: Credit card............. 6,326 4,677 4,516 4,852 4,756 Indirect automobile..... 3,288 2,396 2,827 5,139 7,062 Other................... 1,551 1,222 1,464 2,758 3,291 Real estate.............. 155 98 39 473 201 Commercial............... 1,401 363 365 3,298 1,176 ------- ------- ------- ------- ------- Total ................ 12,721 8,756 9,211 16,520 16,486 ------- ------- ------- ------- ------- Recoveries: Consumer: Credit card............. 845 856 758 632 516 Indirect automobile..... 1,644 1,988 2,102 2,024 1,807 Other................... 696 730 765 813 681 Real estate.............. 6 3 17 18 53 Commercial............... 251 237 447 201 305 ------- ------- ------- ------- ------- Total ................ 3,442 3,814 4,089 3,688 3,362 ------- ------- ------- ------- ------- Net charge-offs deducted.. 9,279 4,942 5,122 12,832 13,124 ------- ------- ------- ------- ------- Balance at end of year ... $57,922 $58,860 $50,927 $49,340 $44,817 ======= ======= ======= ======= ======= Net Loan Losses (Recoveries) to Average Loans by Category: Credit card.............. 3.19% 2.61% 2.80% 3.11% 2.96% Indirect automobile...... .10 .03 .06 .29 .50 Other consumer........... .06 .03 .05 .16 .23 Real estate.............. .02 .01 - .07 .03 Commercial............... .16 .02 (.01) .50 .14 ------- ------- ------- ------- ------- Total Loans............... .19% .11% .13% .35% .38% ======= ======= ======= ======= ======= Percentage of allowance for loan losses to year-end loans. 1.15% 1.18% 1.27% 1.30% 1.28% LIQUIDITY AND SENSITIVITY TO INTEREST RATES - ------------------------------------------- The primary functions of asset/liability management are to ensure adequate liquidity and maintain an appropriate balance between interest-sensitive assets and interest-sensitive liabilities. Liquidity management involves the ability to meet the cash flow requirements of the corporation's loan and deposit customers. Interest-rate-sensitivity management seeks to avoid fluctuating net interest margins and to enhance consistent growth of net interest income through periods of changing interest rates. The corporation does not hedge its position with swaps, options or futures but instead maintains a highly liquid and short-term position in all of its earning assets and interest-bearing liabilities. In order to meet its liquidity needs, the corporation schedules the maturity of its investment securities so that approximately an equal amount will mature each month. The weighted- average life of the securities portfolio at the end of 1995 and 1994 was just under 24 months. Because the corporation views its securities portfolio primarily as a source of liquidity and safety, it does not necessarily react to changes in the yield curve in an attempt to enhance its yield. Accordingly, the average life of the portfolio does not change much as the corporation maintains a constant approach to its portfolio and invests primarily in U.S. Government and agency securities with a life no greater than five years. Municipal securities are also generally limited to lives of no more than five years but due to availability and other factors are occasionally purchased in serial issues with longer lives. The maturity ranges of the securities and the average taxable-equivalent yields as of December 31, 1995, are shown in the following table. U.S. Government State and and its Agencies Municipal Other --------------- ------------- ------------ Amount Yield Amount Yield Amount Yield ---------- ---- -------- ---- ------- ---- (Dollars in thousands) One year or less.............. $ 594,867 5.9% $ 58,387 4.6% $ 7,437 5.1% After one year through five years 1,323,475 6.0 120,546 4.5 951 5.5 After five through ten years.. 314 8.8 16,477 4.6 21 10.0 After ten years............... 2,021 8.3 3,670 6.1 54 9.2 ---------- -------- ------- Total ........................ $1,920,677 6.0% $199,080 4.5% $ 8,463 5.5% ========== ======== ======= Weighted-average maturity..... 23 months 28 months A cash reserve consisting primarily of overnight investments is also maintained by the parent company to meet any contingencies and to provide additional capital, if needed, to the member banks. Most of the corporation's loans are fixed-rate installment loans to consumers and mortgage loans with maturities longer than the deposits by which they are funded. A degree of interest rate risk is incurred if the interest rate on deposits should rise before the loans mature. However, the substantial liquidity provided by the monthly repayments on these loans can be reinvested at higher rates that largely reduce the interest rate risk. Home equity lines of credit have adjustable rates that are tied to the prime rate. Many of the loans not in the installment or mortgage categories have maturities of less than one year or have floating rates that may be adjusted periodically to reflect current market rates. These loans are summarized in the following table. Between 1 year 1 and 5 After or less years 5 years Total -------- -------- ------- -------- (In thousands) Maturity ranges: Commercial, financial and other... $383,883 $148,912 $67,567 $600,362 Construction and land development. 28,743 60,405 8,826 97,974 -------- -------- ------- -------- Total ............................. $412,626 $209,317 $76,393 $698,336 ======== ======== ======= ======== Floating-rate loans: Commercial, financial and other... $ 77,485 $26,771 $104,256 Construction and land development. 59,547 5,941 65,488 -------- ------- -------- Total ............................. $137,032 $32,712 $169,744 ======== ======= ======== First Virginia's Asset/Liability Committee is responsible for reviewing the corporation's liquidity requirements and maximizing the corporation's net interest income consistent with capital requirements, liquidity, interest rate and economic outlooks, competitive factors and customer needs. Liquidity requirements are reviewed in detail for each of the corporation's individual banks, however, overall asset/liability management is performed on a consolidated basis in order to achieve a consistent and coordinated approach. One of the tools the corporation uses to determine its interest rate risk is gap analysis. Gap analysis attempts to examine the volume of interest-rate sensitive assets minus interest-rate sensitive liabilities. The difference between the two is the interest-sensitivity gap, and it indicates how future changes in interest rates may affect net interest income. Regardless of whether interest rates are expected to increase or fall, the objective is to maintain a gap position that will minimize any changes in net interest income. A negative gap exists when the corporation has more interest- sensitive liabilities maturing within a certain time period than interest- sensitive assets. Under this scenario, if interest rates were to increase it would tend to reduce net interest income. At December 31, the corporation had a negative interest rate gap in the short term (under six months) of approximately 35% of earning assets, which reduced to 29% in 12 months. Technically, the corporation may reprice interest checking, savings and insured money markets at any time and, accordingly, they have been classified in the 1-30 day sensitivity category in the accompanying table. While these accounts have in the last two years been somewhat more subject to repricing than in prior years, the degree and frequency of movement is limited, and they are much less sensitive than contractually possible. The table on the following pages shows the corporation's interest-sensitivity position at December 31, 1995. INTEREST-SENSITIVITY ANALYSIS 1 to 30-Day 1 to 90-Day 1 to 180-Day Sensitivity Sensitivity Sensitivity ------------ ------------ ------------ (Dollars in thousands) Earning assets: Loans, net of unearned income.... $ 831,050 $ 1,132,784 $ 1,501,664 Investment securities............ 17,085 116,966 285,087 Federal funds purchased and securities purchased under agreements to resell........... 235,000 235,000 235,000 Other earning assets............. - - - ------------ ------------ ------------ Total earning assets......... 1,083,135 1,484,750 2,021,751 ------------ ------------ ------------ Funding sources: (1) Non-interest bearing demand deposits................ - - - Interest checking accounts....... 1,342,482 1,342,482 1,342,482 Money market accounts............ 710,114 710,114 710,114 Savings deposits................. 1,184,298 1,184,298 1,184,298 Consumer certificates of deposit. 213,001 567,433 976,736 Large denomination certificates of deposit..................... 27,905 100,647 167,984 Short-term borrowings............ 209,719 209,719 209,719 Long-term borrowings............. - - - ------------ ------------ ------------ Total funding sources........ 3,687,519 4,114,693 4,591,333 ------------ ------------ ------------ Interest-sensitivity gap........... $(2,604,384) $(2,629,943) $(2,569,582) ============ ============ ============ Interest-sensitivity gap as a percentage of earning assets..... (34.74)% (35.08)% (34.28)% Ratio of interest-sensitive assets to interest-sensitive liabilities .29x .36x .44x (1) Technically, interest checking, money market, and savings accounts can be repriced at any time; accordingly, all balances have been classified in the 1-30 day sensitivity category although their actual repricing and maturity experience are much less sensitive. INTEREST-SENSITIVITY ANALYSIS (Continued) Beyond One 1 to 365-Day Year or Sensitivity Nonsensitive Total ------------ ----------- ----------- (Dollars in thousands) Earning assets: Loans, net of unearned income.... $2,174,908 $2,882,384 $5,057,292 Investment securities............ 598,730 1,594,036 2,192,766 Federal funds purchased and securities purchased under agreements to resell........... 235,000 - 235,000 Other earning assets............. - 11,528 11,528 ------------ ----------- ----------- Total earning assets......... 3,008,638 4,487,948 7,496,586 ------------ ----------- ----------- Funding sources: (1) Noninterest-bearing demand deposits................ 1,235,396 1,235,396 Interest checking accounts....... 1,342,482 - 1,342,482 Money market accounts............ 710,114 - 710,114 Savings deposits................. 1,184,298 - 1,184,298 Consumer certificates of deposit. 1,496,372 768,421 2,264,793 Large denomination certificates of deposit..................... 261,278 57,746 319,024 Short-term borrowings............ 209,719 - 209,719 Long-term borrowings............. 2,710 2,710 ------------ ----------- ----------- Total funding sources........ 5,204,263 2,064,273 7,268,536 ------------ ----------- ----------- Interest-sensitivity gap........... $(2,195,625) $2,423,675 $ 228,050 ============ =========== =========== Interest-sensitivity gap as a percentage of earning assets..... (29.29)% 32.33% 3.04% Ratio of interest-sensitive assets to interest-sensitive liabilities .58x 2.17x 1.03x (1) Technically, interest checking, money market, and savings accounts can be repriced at any time; accordingly, all balances have been classified in the 1-30 day sensitivity category although their actual repricing and maturity experience are much less sensitive. First Virginia does not simply manage its interest rate risk with static maturity and repricing reports. It also uses a dynamic modeling process that projects the impact of different interest rate, loan and deposit growth scenarios over a 12-month period. A large part of First Virginia's loans and deposits comes from its retail base, and they do not automatically reprice on a contractual basis in reaction to changes in interest rate levels. Accordingly First Virginia has not experienced the earnings volatility its interest- sensitive gap position indicates it might. Due to the relatively larger proportion of lower-cost core deposits, such as demand, interest checking, savings, and insured money market accounts, the corporation will tend to do better in a higher interest rate environment than a low one since these deposits can be invested in higher-yielding loans and investments. However, the corporation historically has been able to maintain a net interest margin in excess of 5.00% every year since 1978, regardless of whether rates were high or low, and has been able to maintain adequate liquidity to provide for changes in interest rates and in loan and deposit demands. Quarterly Results - ----------------- The results of operations for the first three quarters of 1995 have been analyzed in quarterly reports to shareholders. The results of operations for each of the quarters during the two years ended December 31, 1995, are summarized in the table on pages 43 and 44. The results of operations for the fourth quarter are highlighted below. Net income during the fourth quarter of 1995 was $27.6 million, a 1% decline compared to the $27.8 million earned in the fourth quarter of 1994 and down 6% compared to the $29.3 million earned in the third quarter of 1995. Earnings per share of $.81 per share declined at a greater rate of 8%, compared to the $.88 earned in the fourth quarter of 1994, because of the higher number of shares outstanding in 1995, a result of the Farmers National Bancorp acquisition at the end of 1994. In connection with the acquisition of this $700-million asset bank holding company, 2.892 million shares of stock were issued and cash of $45.1 million was paid. The acquisition was accounted for as a purchase and, accordingly, did not have a material effect on 1994 income. The rate of growth in loans increased at the end of the fourth quarter compared to the third quarter with loans growing at an annualized rate of 5% to $5.038 billion. Average loans increased 8% compared to the prior year's fourth quarter with the inclusion of Farmers National loans in 1995. The net interest margin declined 40 basis points to 4.85% compared to the fourth quarter of 1994, which included the recovery of interest on a loan that had been in a nonaccruing status. The margin was down 15 basis points compared to the third quarter as the yield on earning assets increased at a slower pace than the cost of funds. Competition for deposits was strong throughout 1995 in the corporation's market area. While deposit rates began to drop more rapidly in the fourth quarter, they were still declining at a slower pace than the yields on new loans and investments. Noninterest income increased 12% compared to the prior year's fourth quarter due, in part, to an increase in service charge income from the increased level of deposits from the acquisition of Farmers National and from normal deposit growth. Fee income from mortgage origination activities increased 20% compared to the third quarter as lower interest rates prompted consumers to refinance real estate loans. Trust income increased 29% compared to the fourth quarter of 1994 because of increased personal trust business. Other income also benefitted in 1995 from the introduction of an automobile leasing program and a real property title insurance agency business. Noninterest expense increased 3% compared to the third quarter, which had been low due to a rebate of FDIC premiums of $4.1 million. Noninterest expense in the fourth quarter increased 7% compared to the prior year's fourth quarter, primarily due to the acquisition of Farmers National. Excluding Farmers National-related expenses, which were not included in 1994 fourth quarter expenses, a reduction in FDIC insurance and nominal growth in other noninterest expenses caused an actual 1% decline in noninterest expense. Nonperforming assets increased $2.8 million to $29.0 million compared to the prior year's fourth quarter. This represented .57% of outstanding loans compared to .52% at the end of 1994 and was relatively unchanged from the .56% at the end of the third quarter. Net charge-offs increased slightly compared to the third quarter and represented .24% of outstanding loans. The provision for loan losses during the fourth quarter was $3.463 million compared to $2.462 million in the third quarter and $1.362 million in the fourth quarter of 1994. It was up primarily because of the increase in outstanding loans. QUARTERLY RESULTS 1995 -------------------------------------- Quarter Ended -------------------------------------- Dec. 31 Sept. 30 June 30 Mar. 31 -------- -------- -------- -------- Condensed Statements of Income (Dollar amounts in thousands, except per-share data) Interest and fees on loans $109,705 $110,001 $108,535 $107,025 Interest on mortgage loans held for sale 393 314 266 256 Income from securities 31,759 29,219 28,209 28,337 Other interest income 5,321 5,851 5,631 2,777 -------- -------- -------- -------- Total interest income 147,178 145,385 142,641 138,395 -------- -------- -------- -------- Interest on deposits 54,875 52,168 50,816 46,574 Interest on borrowed funds 2,668 3,062 2,911 2,428 -------- -------- -------- -------- Total interest expense 57,543 55,230 53,727 49,002 -------- -------- -------- -------- Net interest income 89,635 90,155 88,914 89,393 Provision for loan losses 3,463 2,462 2,084 332 Noninterest income 22,641 22,242 24,585 20,438 Noninterest expense 67,431 65,662 69,513 68,778 Provision for income taxes 13,822 15,004 14,330 13,523 -------- -------- -------- -------- Net income $ 27,560 $ 29,269 $ 27,572 $ 27,198 ======== ======== ======== ======== Net income per share $ .81 $ .86 $ .81 $ .80 Average Quarterly Balances Average balances (in millions): Securities $ 2,125 $ 1,970 $ 1,919 $ 1,959 Loans 4,995 4,966 4,922 4,936 Total earning assets 7,502 7,330 7,227 7,097 Total assets 8,164 7,976 7,873 7,743 Demand deposits 1,198 1,190 1,160 1,126 Interest-bearing deposits 5,817 5,657 5,607 5,555 Total deposits 7,015 6,847 6,767 6,681 Interest-bearing liabilities 6,022 5,868 5,826 5,747 Total shareholders' equity 861 843 828 815 Key Ratios Rates earned on assets 7.89% 7.99% 7.99% 7.93% Rates paid on liabilities 3.79 3.73 3.70 3.47 Net interest margin 4.85 5.00 5.01 5.12 Return on average assets 1.35 1.47 1.40 1.41 Return on average equity 12.81 13.89 13.33 13.35 QUARTERLY RESULTS 1994 -------------------------------------- Quarter Ended -------------------------------------- Dec. 31 Sept. 30 June 30 Mar. 31 -------- -------- -------- -------- Condensed Statements of Income (Dollar amounts in thousands, except per-share data) Interest and fees on loans $ 98,799 $ 96,315 $ 93,481 $ 87,765 Interest on mortgage loans held for sale 233 300 478 834 Income from securities 26,308 28,395 30,293 32,469 Other interest income 2,603 1,937 1,674 1,870 -------- -------- -------- -------- Total interest income 127,943 126,947 125,926 122,938 -------- -------- -------- -------- Interest on deposits 40,334 39,043 37,435 37,286 Interest on borrowed funds 2,570 2,080 1,731 1,160 -------- -------- -------- -------- Total interest expense 42,904 41,123 39,166 38,446 -------- -------- -------- -------- Net interest income 85,039 85,824 86,760 84,492 Provision for loan losses 1,362 938 3,702 461 Noninterest income 20,277 20,693 22,603 21,015 Noninterest expense 63,090 64,630 62,436 62,303 Provision for income taxes 13,074 13,363 14,196 13,927 -------- -------- -------- -------- Net income $ 27,790 $ 27,586 $ 29,029 $ 28,816 ======== ======== ======== ======== Net income per share $ .88 $ .85 $ .89 $ .89 Average Quarterly Balances Average balances (in millions): Securities $ 1,838 $ 1,974 $ 2,108, $ 2,168 Loans 4,613 4,546 4,331 4,053 Total earning assets 6,604 6,702 6,648 6,513 Total assets 7,160 7,245 7,180 7,041 Demand deposits 1,087 1,078 1,067 1,019 Interest-bearing deposits 5,134 5,179 5,132 5,093 Total deposits 6,221 6,257 6,199 6,112 Interest-bearing liabilities 5,293 5,378 5,336 5,260 Total shareholders' equity 727 734 721 700 Key Ratios Rates earned on assets 7.82% 7.66% 7.68% 7.67% Rates paid on liabilities 3.22 3.03 2.94 2.96 Net interest margin 5.25 5.22 5.32 5.28 Return on average assets 1.55 1.52 1.62 1.64 Return on average equity 15.29 15.03 16.11 16.47 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ------------------------------------------- CONSOLIDATED BALANCE SHEETS December 31 1995 1994 ---------- ---------- (In thousands) ASSETS Cash and due from banks - Note 4.............. $ 397,858 $ 420,742 Federal funds sold and securities purchased under agreements to resell................. 235,000 30,000 ---------- ---------- Total cash and cash equivalents....... 632,858 450,742 ---------- ---------- Mortgage loans held for sale.................. 19,216 13,291 Investment securities-available for sale-Note 5 64,546 - Investment securities-held to maturity (market value-$2,146,792-1995 and $2,032,148-1994)- Note 5................... 2,128,220 2,086,030 Loans, net of unearned income - Note 6........ 5,038,076 4,997,194 Allowance for loan losses - Note 7......... (57,922) (58,860) ---------- ---------- Net loans............................. 4,980,154 4,938,334 ---------- ---------- Other earning assets.......................... 11,528 8,987 Premises and equipment - Note 8............... 150,168 156,051 Intangible assets - Note 3.................... 95,271 85,322 Other assets.................................. 139,575 126,625 ---------- ---------- Total Assets............................... $8,221,536 $7,865,382 ========== ========== CONSOLIDATED BALANCE SHEETS (Continued) December 31 1995 1994 ---------- ---------- (In thousands) LIABILITIES Deposits: Noninterest-bearing........................ $1,235,396 $1,234,060 Interest-bearing: Interest checking..................... 1,342,482 1,391,978 Money market accounts................. 710,114 761,160 Savings deposits...................... 1,184,298 1,402,889 Certificates of deposit: Consumer........................... 2,264,793 1,820,274 Large denomination................. 319,024 205,480 ---------- ---------- Total deposits..................... 7,056,107 6,815,841 Interest, taxes and other liabilities......... 83,353 59,430 Short-term borrowings - Note 9................ 209,719 179,409 Long-term indebtedness - Note 9............... 2,710 3,814 ---------- ---------- Total Liabilities.......................... 7,351,889 7,058,494 ---------- ---------- SHAREHOLDERS' EQUITY Preferred stock - Note 10..................... 695 746 Common stock - Note 11........................ 33,951 34,050 Capital surplus............................... 107,112 111,184 Retained earnings............................. 726,255 660,908 Net unrealized gain on securities available for sale.............. 1,634 - ---------- ---------- Total Shareholders' Equity................. 869,647 806,888 ---------- ---------- Total Liabilities and Shareholders' Equity. $8,221,536 $7,865,382 ========== ========== See notes to consolidated financial statements CONSOLIDATED STATEMENTS OF INCOME Year Ended December 31 1995 1994 1993 -------- -------- -------- (In thousands, except per share data) Interest income: Interest and fees on loans.......... $435,266 $376,312 $360,551 Interest on mortgage loans held for sale...................... 1,229 1,893 2,568 Interest on investment securities-held to maturity........ 117,524 116,957 132,932 Income from federal funds sold and securities purchased under agreements to resell......... 18,994 8,084 8,359 Income on other earning assets...... 586 396 372 -------- -------- -------- Total interest income............ 573,599 503,642 504,782 -------- -------- -------- Interest expense: Deposits............................ 204,433 154,097 161,175 Short-term borrowings............... 10,742 7,101 3,563 Long-term indebtedness.............. 327 441 221 -------- -------- -------- Total interest expense........... 215,502 161,639 164,959 -------- -------- -------- Net interest income...................... 358,097 342,003 339,823 Provision for loan losses................ 8,341 6,463 6,450 -------- -------- -------- Net interest income after provision for loan losses......................... 349,756 335,540 333,373 -------- -------- -------- CONSOLIDATED STATEMENTS OF INCOME (Continued) Year Ended December 31 1995 1994 1993 -------- -------- -------- (In thousands, except per share data) Net interest income after provision for loan losses......................... 349,756 335,540 333,373 -------- -------- -------- Noninterest income: Service charges on deposit accounts.. 38,823 36,063 34,448 Insurance premiums and commissions... 6,717 6,713 6,555 Credit card service charges and fees. 11,626 11,407 11,070 Trust services....................... 6,908 5,203 5,001 Income from other customer services.. 18,573 17,513 16,533 Securities gains before income tax provisions of $0-1995, $343-1994, and $246-1993...................... - 976 711 Other................................ 7,259 6,825 8,222 -------- -------- -------- Total noninterest income......... 89,906 84,700 82,540 -------- -------- -------- Noninterest expense: Salaries and employee benefits...... 153,843 139,780 134,296 Occupancy........................... 21,738 19,263 18,207 Equipment........................... 20,429 19,919 19,634 Telephone........................... 5,718 5,270 5,508 Printing and supplies............... 6,398 5,550 5,485 Postage............................. 5,273 4,534 4,600 Credit card processing fees......... 7,715 7,292 6,431 FDIC assessment..................... 8,087 13,771 13,412 Other............................... 42,183 37,080 38,194 -------- -------- -------- Total noninterest expense........ 271,384 252,459 245,767 -------- -------- -------- Income before income taxes............... 168,278 167,781 170,146 Provision for income taxes - Note 14..... 56,679 54,560 54,122 -------- -------- -------- NET INCOME............................... $111,599 $113,221 $116,024 ======== ======== ======== Net income per share of common stock..... $ 3.28 $ 3.51 $ 3.57 Average primary shares of common stock outstanding......... 34,056 32,281 32,512 See notes to consolidated financial statements CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Unreal- ized Gain on Securi- ties Pre- Avail- Total ferred Common able Share- Stock Stock Capital Retained for holders' $10 Par $1 Par Surplus Earnings Sale Equity ------- ------- -------- -------- ------- -------- Balance January 1, 1993... $ 825 $32,185 $ 64,930 $509,459 $ - $607,399 Increase attributable to acquired banks....... - 197 2,117 1,139 - 3,453 Net income................ - - - 116,024 - 116,024 Conversion of preferred to common stock......... (20) 3 17 - - - Issuance of shares for stock options and stock appreciation rights..... - 59 1,342 - - 1,401 Dividends declared: Preferred stock......... - - - (54) - (54) Common stock $1.13 per share - - - (36,519) - (36,519) Dividends paid by a bank prior to its acquisition - - - (203) - (203) ------- ------- -------- -------- ------- -------- Balance December 31, 1993. 805 32,444 68,406 589,846 - 691,501 Increase attributable to acquired banks....... - 3,234 102,202 - - 105,436 Net income................ - - - 113,221 - 113,221 Conversion of preferred to common stock......... (59) 8 51 - - - Issuance of shares for stock options and stock appreciation rights..... - 32 713 - - 745 Common stock purchased and retired............. - (1,668) (60,188) - - (61,856) Dividends declared: Preferred stock......... - - - (51) - (51) Common stock $1.28 per share - - - (42,108) - (42,108) ------- ------- -------- -------- ------- -------- Balance December 31, 1994. 746 34,050 111,184 660,908 - 806,888 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Continued) Unreal- ized Gain on Securi- ties Pre- Avail- Total ferred Common able Share- Stock Stock Capital Retained for holders' $10 Par $1 Par Surplus Earnings Sale Equity ------- ------- -------- -------- ------- -------- Balance December 31, 1994. 746 34,050 111,184 660,908 - 806,888 Net income................ - - - 111,599 - 111,599 Conversion of preferred to common stock......... (51) 7 44 - - - Issuance of shares for stock options and stock appreciation rights..... - 59 1,414 - - 1,473 Common stock purchased and retired............. - (165) (5,530) - - (5,695) Dividends declared: Preferred stock......... - - - (47) - (47) Common stock $1.36 per share - - - (46,205) - (46,205) Unrealized gains on securities available for sale, net of tax........ - - - - 1,634 1,634 ------- ------- -------- -------- ------- -------- Balance December 31, 1995. $ 695 $33,951 $107,112 $726,255 $ 1,634 $869,647 ======= ======= ======== ======== ======= ======== See notes to consolidated financial staements CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 1995 1994 1993 -------- -------- -------- (In thousands) Operating activities - -------------------- Net income.................................... $111,599 $113,221 $116,024 Adjustments to reconcile net income to net cash provided by operating activities: Provision for depreciation and amortization 13,462 12,644 12,487 Gain on sale of fixed assets............... (1,050) (596) (208) Provision for loan losses.................. 8,341 6,463 6,450 Amortization of investment securities premiums..................... 12,275 16,265 20,936 Accretion of investment securities discounts.................... (6,112) (661) (775) Net decrease (increase) in mortgage loans held for sale...................... (5,925) 55,882 (9,068) Gain on sale of securities................. - (976) (711) Amortization of intangible assets.......... 7,709 2,843 3,963 Deferred income taxes...................... (58) (1,976) (1,943) Increase in prepaid expenses............... (6,126) (2,963) (2,708) Decrease (increase) in interest receivable. (3,243) (643) 6,489 Increase (decrease) in interest payable.... 19,554 2,793 (1,940) Increase in other accrued expenses......... 4,945 3,421 2,720 -------- -------- -------- Net cash provided by operating activities 155,371 205,717 151,716 -------- -------- -------- Investing activities - -------------------- Proceeds from maturity and sale of investment securities....................... - - 631,475 Proceeds from the sale of available for sale securities......................... - 2,183 - Proceeds from the maturity of held to maturity securities...................... 669,373 645,092 - Purchase of investment securities............. - - (662,409) Purchase of held to maturity securities....... (780,448) (255,750) - Net increase in loans......................... (50,122) (581,584) (240,530) Purchases of premises and equipment........... (13,691) (14,339) (12,996) Sales of premises and equipment............... 7,162 1,245 362 Mortgage servicing rights acquired............ (1,190) (495) (747) Other intangible assets acquired.............. (16,469) - (625) Acquisition of banks, net of cash acquired.... - (1,785) - Other......................................... (7,513) (1,339) (7,409) -------- -------- -------- Net cash used for investing activities... (192,898) (206,772) (292,879) -------- -------- -------- CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) Year Ended December 31 1995 1994 1993 -------- -------- -------- (In thousands) Financing activities - -------------------- Net (decrease) increase in deposits........... 240,266 (12,234) 122,643 Net increase in short-term borrowings......... 30,310 2,181 1,178 Principal payments on long-term borrowings.... (1,104) (994) (4,219) Proceeds from long-term borrowings............ - 3,799 - Common stock purchased and retired............ (5,695) (61,856) - Cash dividends paid: Common $1.34 per share-1995, $1.26 per share-1994 and $1.08 per share-1993........ (45,559) (40,928) (34,830) Preferred................................... (48) (52) (54) Cash dividends paid by a bank prior to its acquisition............................. - - (204) Proceeds from issuance of common stock........ 1,473 745 1,401 -------- -------- -------- Net cash (used for) provided by financing activities................ 219,643 (109,339) 85,915 -------- -------- -------- Net increase (decrease) in cash and cash equivalents..................... 182,116 (110,394) (55,248) Cash and cash equivalents at beginning of year...................... 450,742 561,136 616,384 -------- -------- -------- Cash and cash equivalents at end of year. $632,858 $450,742 $561,136 ======== ======== ======== See notes to consolidated financial statements NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - ------------------------------------------ 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the corporation and all of its subsidiaries. Foreign banking activities and operations other than banking are not significant. All material intercompany transactions and accounts have been eliminated. Certain amounts for years prior to 1995 have been reclassified for comparative purposes. SECURITIES AVAILABLE FOR SALE Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. Securities available for sale are stated at the estimated fair value, with the unrealized gains and losses, net of tax, reported in a separate component of shareholders' equity. Quoted market prices are used to determine the estimated fair value. The adjusted cost basis of a specific security sold is used to compute gains or losses on the sale of investment securities. SECURITIES HELD TO MATURITY Debt securities are classified as held to maturity when the corporation has the positive intent and ability to hold the securities to maturity. Securities held to maturity are carried at amortized cost. The adjusted carrying value of a specific security sold is used to compute gains or losses on the sale of investment securities. MORTGAGE LOANS HELD FOR SALE Mortgage loans held for sale to investors are carried at the lower of cost (net of discounts) or market. Market is determined by investor commitment prices or current auction rates at the date of the financial statements. LOANS Interest on installment loans is recorded as income in amounts that will provide an approximate level yield over the terms of the loans. Accrual of interest on other loans is based generally on the daily amount of principal outstanding. Interest is not accrued on loans if the collection of such interest is doubtful. ALLOWANCE FOR LOAN LOSSES The allowance for loan losses is maintained at a level considered adequate to provide for potential losses in the loan portfolio. Management's evaluation of the adequacy of the allowance is based on a review of individual loans, past loss experience, current and anticipated economic conditions, the value of underlying collateral and other factors. PREMISES AND EQUIPMENT Premises and equipment are carried at cost, less accumulated depreciation and amortization computed principally on the straight-line method over lives not exceeding 50 and 20 years for buildings and equipment, respectively. Gains and losses on disposition are reflected in current operations. Maintenance and repairs are charged to operating expenses, and major alterations and renovations are capitalized. INCOME TAXES The corporation uses the liability method of accounting for income taxes as required by Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under the liability method, deferred-tax assets and liabilities are determined based on differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities (i.e., temporary differences) and are measured at the enacted rates that will be in effect when these differences reverse. OTHER REAL ESTATE OWNED Other real estate owned primarily represents properties acquired by the corporation's affiliates through customer loan defaults. The real estate is stated at an amount equal to the lesser of the loan balance prior to foreclosure, plus the costs incurred for improvements to the property, or fair value, less the estimated selling costs of the property. At the time of foreclosure, any excess of cost over the estimated fair value is charged to the allowance for loan losses. After foreclosure, the estimated fair value is reviewed periodically by management. Any further declines in fair value are charged against current earnings or any applicable foreclosed property valuation allowance. USE OF ESTIMATES The preparation of 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. NATURE OF OPERATIONS All of the corporation's income is derived from banking operations or bank-related activities located primarily in Virginia, Maryland and Tennessee. While each of the member companies is engaged in bank-related activities, several conduct lines of business not expressly permitted for banks under applicable regulations, and the results of their operations have not been material in relation to the operating results of the corporation. 2. ACQUISITIONS On September 25, 1995, First Virginia Bank-Colonial purchased, from a savings and loan, $220 million in deposits of four of its Virginia-based branches. Core deposit premiums of $17.105 million were recorded and are being amortized over ten years. On June 17, 1994, the merger of FNB Financial Corporation into the corporation was consummated. FNB Financial Corporation was the bank holding company of First Knoxville Bank, located in Knoxville, Tennessee, and that bank became a wholly owned subsidiary bank of the corporation as a result of the merger. Cash of $2.275 million and 342,295 shares of the corporation's common stock were issued and were valued at $36.63 per share. The trans- action was accounted for as a purchase, and goodwill of $7.399 million was recorded and is being amortized over ten years. On December 28, 1994, the merger of Farmers National Bancorp into the corporation was consummated. Farmers National Bancorp operated three banks in Maryland: Farmers Bank of Maryland, Annapolis, Maryland; Atlantic Bank, Ocean City, Maryland; and The Caroline County Bank, Greensboro, Maryland. Cash of $45.138 million and 2,891,786 shares of the corporation's common stock were issued and were valued at $32.13 per share. The acquisition was accounted for as a purchase, and goodwill and other intangible assets of $62.790 million were recorded and are being amortized over 10 to 25 years. The results of operations of the two acquisitions in 1994 are included in the consolidated statements of income from the date of acquisition through December 31, 1995. Periods prior to the date of acquisition are not included in the consolidated statements of income. The unaudited pro forma information presented in the following table has been prepared based on the historical results of the corporation combined with FNB Financial Corporation and Farmers National Bancorp. The information has been combined to present the results of operations as if the acquisitions had occurred at the beginning of 1993. The pro forma results are not necessarily indicative of the results that would have actually been obtained if the acquisitions had been consummated in the past nor are they indicative of future results. Year Ended December 31 1994 1993 -------- -------- Total interest income...............................$555,725 $560,448 Total interest expense.............................. 179,597 184,504 Provision for loan losses........................... 7,427 8,422 Total other income.................................. 84,206 89,476 Total other expenses................................ 276,825 272,080 Provision for income taxes ......................... 57,767 57,942 -------- -------- Net income..........................................$118,315 $126,976 ======== ======== Earnings per share..................................$ 3.36 $ 3.55 On August 27, 1993, the corporation acquired United Southern Bank of Morristown, Tennessee, in exchange for 196,679 shares of common stock. As of January 1, 1993, United Southern Bank had total assets of $43.2 million and shareholders' equity of $3.4 million. Because the restatement would not have had a material effect upon the corporation's financial statements, the accounts of United Southern Bank have not been retroactively reflected in periods prior to 1993. 3. INTANGIBLE ASSETS Total intangible assets represent core deposit premiums, mortgage servicing rights and the excess of the purchase price of subsidiaries over net assets acquired. The carrying amounts of these intangibles were (in thousands): December 31 1995 1994 -------- -------- Goodwill ...........................................$ 62,716 $ 67,325 Core deposit premiums............................... 29,225 14,134 Mortgage servicing rights .......................... 2,048 2,437 Lease rights........................................ 986 1,047 Covenant not to compete and customer lists ......... 296 379 -------- -------- Total intangible assets.............................$ 95,271 $ 85,322 ======== ======== The increase in core deposit premiums is related to the $220 million in deposits acquired by First Virginia Bank-Colonial ($17.105 million). Goodwill related to acquisitions prior to 1976 is being amortized on a straight-line basis over 40 years, and goodwill related to acquisitions after 1975 is being amortized over 10 to 25 years. Unamortized core deposit premiums, mortgage servicing rights and covenants not to compete, along with the customer lists, are being amortized over 5 to 10 years. Lease rights are being amortized over 15 to 99 years. 4. RESTRICTIONS ON CASH BALANCES The corporation's banking affiliates are required by Federal Reserve regulations or by state banking laws to maintain certain minimum cash balances consisting of vault cash and deposits in the Federal Reserve Bank or in other commercial banks. Such restricted balances totaled $178.594 million and $176.179 million as of December 31, 1995 and 1994, respectively. 5. INVESTMENT SECURITIES On January 1, 1994, Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," was implemented by the corporation. In accordance with the statement, prior period financial statements have not been restated to reflect the change in accounting principles. Management determines the appropriate classification of debt securities and reevaluates such designation as of each balance sheet date. Debt securities are classified as held to maturity when the company has the positive intent and ability to hold the securities to maturity. Held to maturity securities are stated at amortized cost, and debt securities not classified as held to maturity are classified as available for sale securities and are stated at fair value, with the unrealized gains and losses, net of tax, reported in a separate component of shareholders' equity. On December 31, 1995 (pursuant to the transition provisions of the Financial Accounting Standards Board staff's Special Report on Statement No. 115), the corporation transferred securities with an amortized cost of $62,032,000 from the held to maturity category to the available for sale category. The unrealized gains associated with securities transferred were $1,634,000 (net of $880,000 of deferred taxes). Securities available for sale consist entirely of U.S. Government obligations that mature after one year through five years at an average yield of 7.7%. The following reflects the carrying amounts of available for sale securities and held to maturity securities and the related approximate market values (in thousands). Amortized Unrealized Unrealized Market Cost Gains Losses Value ---------- ------- ------ ---------- Investment securities available for sale: December 31, 1995: U.S. Government....................$ 62,032 $ 2,514 $ - $ 64,546 ========== ======= ======== ========== Investment securities held to maturity: December 31,1995: U.S. Government and its agencies...$1,920,677 $18,608 $ 3,195 $1,936,090 State and municipal obligations.... 199,080 3,434 330 202,184 Other ............................. 8,463 59 4 8,518 ---------- ------- ------- ---------- Total............................$2,128,220 $22,101 $ 3,529 $2,146,792 ========== ======= ======= ========== December 31,1994: U.S. Government and its agencies...$1,785,837 $ 367 $51,314 $1,734,890 State and municipal obligations.... 280,817 809 3,742 277,884 Other ............................. 19,376 - 2 19,374 ---------- ------- ------- ---------- Total............................$2,086,030 $ 1,176 $55,058 $2,032,148 ========== ======= ======= ========== Proceeds from the maturity and call of held to maturity securities, during 1995, were $669.373 million. Securities having a carrying value of $465.908 million and $479.512 million at December 31, 1995 and 1994, respectively, were pledged to secure public deposits and for other purposes required by law. The maturity ranges of securities, the average taxable-equivalent yield and fair value by maturity range as of December 31, 1995, are shown below: U.S. Government and its Agencies ----------------------------- Book Value Fair Value Yield ---------- ---------- ----- One year or less........................$ 594,867 $ 596,918 5.9% After one year through five years....... 1,323,475 1,336,736 6.0 After five through ten years............ 314 330 8.8 After ten years......................... 2,021 2,106 8.3 ---------- ---------- ---- Total................................$1,920,677 $1,936,090 6.0% ========== ========== ==== Weighted average maturity...............23 months State and Municipal ----------------------------- Book Value Fair Value Yield ---------- ---------- ----- One year or less........................$ 58,387 $ 58,614 4.6% After one year through five years....... 120,546 123,289 4.5 After five through ten years............ 16,477 16,533 4.6 After ten years......................... 3,670 3,748 6.1 ---------- ---------- ---- Total................................$ 199,080 $ 202,184 4.5% ========== ========== ==== Weighted average maturity...............28 months Other ----------------------------- Book Value Fair Value Yield ---------- ---------- ----- One year or less........................$ 7,437 $ 7,435 5.1% After one year through five years....... 951 1,007 5.5 After five through ten years............ 21 21 10.0 After ten years......................... 54 55 9.2 ---------- ---------- ---- Total................................$ 8,463 $ 8,518 5.5% ========== ========== ==== 6. LOANS Loans consisted of (in thousands): December 31 1995 1994 ---------- ---------- Consumer: Automobile installment ............................$1,836,603 $1,725,928 Home equity, fixed and variable rate............... 1,091,858 1,198,087 Revolving credit loans, including credit cards..... 207,931 190,103 Other.............................................. 300,157 260,989 Real estate: Construction and land development.................. 97,974 122,737 Commercial mortgage................................ 489,225 465,943 Residential mortgage............................... 470,994 504,823 Other, including Industrial Development Authority.. 68,431 61,876 Commercial........................................... 474,903 466,708 ---------- ---------- Loans, net of unearned income of $332,181 and $355,310 5,038,076 4,997,194 Less allowance for loan losses....................... 57,922 58,860 ---------- ---------- Net loans .........................................$4,980,154 $4,938,334 ========== ========== Because the majority of the corporation's loans are homogeneous loans with small balances, adoption of Statement of Financial Accounting Standards No. 114 had no material impact on the corporation. Loans on which interest is not being accrued or whose terms have been modified to provide for a reduced rate of interest because of financial difficulties of borrowers, and interest income earned with respect to such loans were (in thousands): December 31 1995 1994 1993 ------- ------- ------- Nonaccruing loans........................ $17,066 $15,286 $18,387 Restructured loans ...................... 4,260 2,478 2,175 ------- ------- ------- $21,326 $17,764 $20,562 ======= ======= ======= Allocation of the allowance for loan losses for nonaccruing loans........... $ - $ - $ - Average balance of nonaccruing loans..... 16,379 16,502 20,088 Income recorded.......................... 218 109 107 Income anticipated under original loan agreements..... 1,639 1,481 1,639 There were no formal commitments of a material amount to lend additional funds under these agreements, but additional advances may be made in the future if it is in the interest of the corporation to do so. Loans modified for reasons other than a reduction in the interest rate were not material in amount. The corporation's loans are widely dispersed among individuals and industries. On December 31, 1995, there was no concentration of loans in any single industry that exceeded 5% of total loans. The corporation, in the normal course of business, has made commitments to extend loans and has written standby letters of credit that are not recognized in the financial statements. On December 31, 1995 and 1994, standby letters of credit totaled $20.889 and $23.780 million, respectively, and the unfunded amounts of loan commitments were (in thousands): 1995 1994 ---------- ---------- Fixed-rate revolving credit lines ...................$ 874,459 $ 731,054 Adjustable-rate loans: Home equity lines ................................. 388,266 346,336 Commercial loans................................... 465,415 392,858 Construction and land development loans............ 98,054 75,361 Other ............................................. 46,567 42,533 ---------- ---------- Total ...........................................$1,872,761 $1,588,142 ========== ========== As of December 31, 1995, the corporation had mortgage loans held for sale of $19.216 million and additional commitments to fund mortgage loans totaling $10.560 million, with a corresponding commitment to sell $11.900 million of mortgage loans to outside investors. The commitments to sell mortgage loans to outside investors are intended to reduce the corporation's interest rate exposure. A majority of the commercial, construction and land development commitments and letters of credit will expire within one year, and all loan commitments can be terminated by the corporation if the borrower violates any condition of the commitment agreement. The credit risk associated with loan commitments and letters of credit is essentially the same as that involved with loans that are funded and outstanding. The corporation uses the same credit standards on a case-by-case basis in evaluating loan commitments and lines of credit as it does when funding loans, including the determination of the type and amount of collateral, if required. 7. ALLOWANCE FOR LOAN LOSSES Activity in the allowance for loan losses was (in thousands): Year ended December 31 1995 1994 1993 ------- ------- ------- Balance January 1...............................$58,860 $50,927 $49,340 Increase attributable to acquired banks ........ - 6,412 259 Provision charged to operating expense ......... 8,341 6,463 6,450 ------- ------- ------- 67,201 63,802 56,049 ------- ------- ------- Deduct: Loans charged off............................. 12,721 8,756 9,211 Less recoveries............................... 3,442 3,814 4,089 ------- ------- ------- Net charge-offs............................... 9,279 4,942 5,122 ------- ------- ------- Balance December 31.............................$57,922 $58,860 $50,927 ======= ======= ======= 8. PREMISES, EQUIPMENT AND LEASES Premises and equipment consisted of (in thousands): December 31 1995 1994 -------- -------- Land .................................................$ 33,489 $ 31,675 Premises and improvements............................. 148,471 155,837 Furniture and equipment............................... 100,482 96,752 -------- -------- 282,442 284,264 Accumulated depreciation and amortization............. 132,274 128,213 -------- -------- Carrying value .....................................$150,168 $156,051 ======== ======== The corporation's subsidiaries have entered into lease agreements with unaffiliated persons for premises, principally banking offices. Many of the leases have one or more renewal options, generally for five or ten years, and some contain a provision for increased rent during the renewal period. Leases containing a provision for contingent payments are immaterial in number or amount. Portions of a few premises are subleased, and the amount of rent received is not material. There are no significant restrictions imposed on the corporation or its subsidiaries by the lease agreements. The subsidiaries also lease a portion of their computer systems and other equipment. Leases on seven banking offices have been recorded as capital leases. The effect of capitalizing such leases on net income has not been material. Minimum rental payments over the noncancelable term of operating and capital leases having a remaining term in excess of one year are (in thousands): 1996..............................................$ 6,495 1997.............................................. 5,997 1998.............................................. 5,314 1999.............................................. 4,440 2000.............................................. 3,406 Thereafter........................................ 16,191 ------- Total minimum lease payments......................$41,843 ======= During 1995, 1994 and 1993, occupancy and equipment expense included the rent paid on operating leases of $15.460 million, $14.724 million and $13.668 million, respectively, and was reduced by rental income of $2.312 million, $2.162 million and $2.024 million, respectively, applicable to leases to unaffiliated persons, generally for a five-to-ten-year duration. 9. INDEBTEDNESS Short-term borrowings consisted of (in thousands): December 31 1995 1994 -------- -------- Securities sold under agreements to repurchase .......$177,789 $159,041 Commercial paper (Parent company only) ............... 31,930 20,368 -------- -------- $209,719 $179,409 ======== ======== Securities sold under agreements to repurchase generally mature within three days from the transaction date. Commercial paper maturities range from 1 to 270 days. Bank lines of credit available to the corporation amounted to $50 million at December 31, 1995 and 1994. Such lines were not being used on either of those dates. Long-term indebtedness and mortgage indebtedness, including capital lease obligations, of the corporation and its subsidiaries were (in thousands): December 31 1995 1994 ------ ------ 8% - 9 1/2% mortgages payable........................ $ - $ 77 Capital leases ...................................... 755 886 7.9% note due December 1997.......................... 1,955 2,851 ------ ------ $2,710 $3,814 ====== ====== The capital leases are on properties that had a carrying value of $809 thousand and $944 thousand on December 31, 1995 and 1994, respectively. The principal maturities of debt, other than short-term borrowings, in each of the five years after December 31, 1995, will be $1.110 million, $1.016 million, $16 thousand, $10 thousand and $12 thousand, respectively. Interest paid on deposits and indebtedness during the years 1995, 1994 and 1993 totaled $195.948 million, $140.194 million and $166.892 million, respectively. 10. PREFERRED STOCK There are three million shares of preferred stock, par value of $10 per share, authorized. The following four series of cumulative convertible pre- ferred stock were outstanding as of December 31: Number of Shares Series Dividends 1995 1994 ------ ------ A 5% 23,040 23,721 B 7% 6,000 9,300 C 7% 10,484 10,484 D 8% 29,996 31,083 ------ ------ 69,520 74,588 ====== ====== The Series A, Series B and Series D shares are convertible into one and one-half shares of common stock, and the Series C shares are convertible into one and two-tenths shares of common stock. All of the preferred stock may be redeemed at the option of the corporation for $10.00 per share. 11. COMMON STOCK There are 60 million shares of common stock, par value $1 per share, authorized, and 33.951 million shares and 34.050 million shares were outstanding on December 31, 1995 and 1994, respectively. On December 31, 1995, options to purchase 320,290 shares of common stock were outstanding under employee stock option and stock appreciation rights plans. An additional 202,100 shares are authorized for further granting of options and rights. Options for 162,640 shares were exercisable on December 31, 1995, at a weighted-average price of $21.29. Additional options becoming exercisable in subsequent years total 19,350 in 1996 at an average price of $32.45; 36,108 in 1997 at an average price of $37.09; 35,108 in 1998 at an average price of $36.96; 34,859 in 1999 at an average price of $36.99; 16,425 in 2000 at an average price of $41.88; and 15,800 in 2001 at an average price of $41.88. Options ----------------------------------------------- Options Unexercised Option Average Available Or Price Option To Outstanding Per Price Per Grant Options Share Share -------- -------- -------------- -------- Balance, January 31, 1993.... 391,500 304,613 $12.25 - 23.08 $19.58 Granted......................(110,000) 110,000 32.13 - 32.75 32.47 Exercised ................... - (69,350) 12.25 - 23.08 20.04 -------- -------- -------------- -------- Balance, December 31,1993.... 281,500 345,263 12.25 - 32.75 23.59 Exercised ................... - (42,963) 12.25 - 23.08 18.00 -------- -------- -------------- -------- Balance, December 31, 1994... 281,500 302,300 14.83 - 32.75 24.39 Forfeited.................... 4,100 (4,100) 32.13 32.13 Granted...................... (83,500) 83,500 41.88 41.88 Exercised ................... - (61,410) 14.83 - 32.75 22.95 -------- -------- -------------- -------- Balance, December 31,1995.... 202,100 320,290 $15.25 - 41.88 $29.24 ======== ======== ============== ======== A stock appreciation right entitles the holder to the difference between the value of a share of common stock on the exercise date and the value on the date the right was granted. Payment will be made with common stock based on its value on the exercise date. In 1993, 11,084 shares were issued for 22,800 rights. In 1994, 9,014 shares were issued for 31,963 rights. In 1995, 9,155 shares were issued for 20,432 rights. Holders of 100,215 options outstanding on December 31, ]995, with an average price of $21.55, may elect on the exercise date to receive the benefits of a stock appreciation right rather than an option. Compensation expense is recognized in connection with stock appreciation rights based on the current market value of the common stock. No compensation expense is recognized in connection with stock options, unless an election can be made by the holder to treat the option as a stock appreciation right. A stock option is accounted for at the difference between the market price of the option on the measurement date or date granted and the amount the employee is required to pay. All options are granted at full market price on the date of the grant and, therefore, no compensation expense is recognized. In certain cases, a holder may exercise an option as a stock appreciation right. Stock appreciation rights are measured in the same way as an option, except that in subsequent periods if a change in the market value of the shares occurs, then adjustments between the current market price and previously accrued amounts are recorded as compensation expense. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation", provides companies with an alternative to APB Opinion No.25, "Accounting for Stock Issued to Employees," in accounting for stock-based compensation plans. This standard is effective in 1996. The corporation does not intend to adopt this alternative. Therefore there is no effect on the 1995 financial statements. In 1996 the corporation will be required to make pro forma disclosures for awards granted in 1995 and 1996. At December 31,1995, 623,524 shares of common stock were reserved: 101,134 for the conversion of preferred stock and 522,390 for stock options and stock appreciation rights. The corporation has adopted a shareholder rights plan, which under certain circumstances will give the holders of the corporation's common stock the right to purchase shares of its preferred stock or other securities. The rights will become exercisable if a person or entity should acquire 20% or more of the corporation's voting stock, unless it is acquired pursuant to an offer for all outstanding shares of common stock at a price and on terms determined by the Board of Directors to be adequate and in the best interests of the corporation and its shareholders. If the rights become exercisable, the holder of each share of common stock, except the person or entity acquiring 20% or more of the voting stock, will have the right to purchase for $90 the number of one one-hundredths of a share of preferred stock or equivalent security equal to $180, divided by the then market value of one share of common stock. In the event of a merger involving an exchange of common stock, the holder of each right, except the acquiring person or entity, will also have the right to purchase for $90 the number of shares of common stock of the acquiring company having a then market value of $180. The corporation may redeem the rights for $.01 per right, at its option, at any time prior to the date they become exercisable. The rights expire on August 8, 1998. 12. FAIR VALUE OF FINANCIAL INSTRUMENTS Statement of Financial Accounting Standards No. 107 (SFAS No. 107), "Disclosures about Fair Value of Financial instruments," requires disclosure of fair value information about financial instruments, whether or not recognized in the balance sheet. In cases where quoted market prices are not available, fair values are based on estimates using discounted cash flow analyses or other valuation techniques. Those techniques involve subjective judgment and are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. As a result, the derived fair value estimates cannot be substantiated by comparison to independent markets, and in many cases, could not be realized in immediate settlement of the instrument. The following methods and assumptions were used by the corporation in estimating the fair value of its financial instruments. All of the corporation's financial instruments were held or issued for purposes other than trading. Cash and Cash Equivalents: The carrying amounts reported in the balance sheet for cash and short-term instruments approximate those assets' fair value. Investment Securities: Fair values for investment securities are based on quoted market prices. Loans: For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for certain mortgage loans, e.g., one-to-four family residential, and credit cards are based on quoted market prices of similar loans sold in conjunction with securitization transactions and adjusted for differences in loan characteristics. The fair values for other loans were estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Other Earning Assets: The carrying amount of other earning assets as reported on the balance sheet approximates fair value. Deposits: For deposits with no defined maturity, SFAS No. 107 defines the fair value as the amount payable on demand and prohibits adjusting fair value for any value derived from retaining those deposits for an expected future period of time. Accordingly, the fair value of demand, interest checking, regular savings and money market deposits is equivalent to their carrying value as of the reporting date. Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities. Short-Term Borrowings: The carrying amounts of federal funds purchased, borrowings under repurchase agreements and other short-term borrowings approximate their fair values. Long-Term Debt: The corporation's long-term debt consists partially of capital leases that are exempt from the disclosure requirements of SFAS No. 107. The fair value of the remaining long-term debt is estimated based on interest rates currently available for debt with similar terms and remaining maturities. Off-Balance Sheet Instruments: The estimated fair value of off-balance sheet items was not material at December 31, 1995. The corporation does not engage in hedging or swap transactions, nor does it employ any derivative securities. The estimated fair values of the Corporation's financial instruments as of December 31 are summarized below (in thousands): 1995 1994 Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- ---------- ---------- Financial assets: Cash and cash equivalents $ 632,858 $ 632,858 $ 450,752 $ 450,752 Investment securities.... 2,192,766 2,211,338 2,086,030 2,032,148 Loans, net............... 5,057,292 5,061,305 5,010,485 4,951,032 Other earning assets..... 11,528 11,528 8,987 8,987 Financial liabilities: Deposits................. 7,056,107 7,073,767 6,815,841 6,801,951 Short-term borrowings.... 209,719 209,719 179,409 179,409 Long-term indebtedness... 1,955 1,952 2,928 2,926 SFAS No. 107 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. The disclosures also do not include certain intangible assets such as deposit base intangible, mortgage servicing rights and goodwill. Accordingly, the aggregate fair value amount presented should not be interpreted as representing the underlying value of the corporation. 13. RETIREMENT AND OTHER POSTRETIREMENT BENEFITS The corporation and its subsidiaries have a noncontributory, defined- benefit pension plan covering substantially all of their qualified employees. The benefits are based on years of service and the employee's compensation during the last ten years of employment. The corporation's funding policy is to make annual contributions in amounts necessary to satisfy the Internal Revenue Service's funding standards to the extent they are deductible against taxable income. Contributions are intended to provide not only for benefits attributed to service to date, but also for those expected to be earned in the future. Contributions to the plan totaled $4.851 million, $3.665 million and $3.385 million in 1995, 1994 and 1993, respectively. Contributions include normal costs of the plan and amortization for periods of up to 40 years of unfunded past service cost. Pension expense included the following components (in thousands): Year ended December 31 1995 1994 1993 ------ ------ ------ Service cost - benefits earned during the period. $2,737 $2,739 $2,541 Interest cost on projected benefit obligation.... 6,167 4,844 4,615 Actual return on plan assets.....................(15,094) 192 (3,267) Net amortization and deferral ................... 8,821 (5,972) (2,336) ------ ------ ------ Net periodic pension cost...................... $2,631 $1,803 $1,553 ====== ====== ====== The following table sets forth the plan's funded status and amounts recognized in the consolidated balance sheets (in thousands): December 31 1995 1994 1993 ------- ------- ------- Actuarial present value of benefit obligations: Accumulated benefit obligation, including vested benefits of $72,950, $52,302 and $46,693......... $78,078 $57,643 $51,485 ======= ======= ======= Plan assets at fair value ........................ $91,275 $74,476 $67,126 Projected benefit obligation for service rendered to date............................. 96,666 73,109 66,242 ------- ------- ------- Plan assets in excess of projected benefit obligation (5,391) 1,367 884 Unrecognized net loss from past experience different from that assumed and effects of change in assumptions............................. 19,611 11,139 7,988 Unamortized prior service cost....................... (1,839) (2,359) (2,611) Unrecognized net obligation at January 1, 1990 being recognized over 15 years ................... 58 72 86 ------- ------- ------- Prepaid pension cost included in other assets........$12,439 $10,219 $ 6,347 ======= ======= ======= The assets of the plan consist of U.S. Treasury securities - 41%, other debt obligations - 13%, stocks - 39%, and cash and equivalents - 7%. The weighted-average discount rate and rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation were 7.25% and 4.75%, respectively. The expected long-term rate of return on plan assets was 9%. The corporation and its subsidiaries have a thrift plan to which employees with one year of service may elect to contribute up to 6% of their salary. The corporation contributes to the plan to the extent of 50% of the employees' contributions, and an additional 25% contribution is made if a specified profit objective is met. A 75% employer match was made in each of the years 1995, 1994 and 1993 when the corporation's contributions to the plan totaled $3.582 million, $3.212 million and $3.055 million, respectively. The plan is administered under the provisions of Section 401(k) of the Internal Revenue Code. Certain individuals who were participating in any of the corporation's medical plans at retirement may elect to receive medical benefits similar to those provided for active employees if they make their elections within 30 days of retirement. Terminated employees may elect to receive such benefits for a limited period. The corporation sponsors a defined benefit health care plan that provides postretirement medical benefits to full-time employees who have worked at least 10 years and have attained age 55 while in service with the corporation. The benefits are based on years of service and are contributory, with retiree contributions adjusted annually, and contain other cost-sharing features such as deductibles and coinsurance. Employees hired after December 31, 1993, may participate in the plan but must pay 100% of the cost. The accounting for the plan anticipates future cost-sharing changes to the written plan that are consistent with the corporation's expressed intent to increase the retiree contribution rate annually for the expected increase in medical costs for that year. The corporation has set a maximum amount that it will contribute per year of approximately three times the 1993 contribution level. The plan is not funded. In 1993, the corporation adopted Statement of Financial Accounting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than Pensions." The effect of adopting the new rules increased 1993 net periodic postretirement benefit cost by $1.977 million and decreased 1993 net income by $1.285 million. The liability for postretirement benefits is unfunded. The following table presents the status of the plan, reconciled with amounts recognized in the corporation's statement of financial position (in thousands). December 31 1995 1994 ------- ------- Accumulated postretirement benefit obligation: Retirees ........................................... $ 5,218 $ 5,631 Fully eligible, active plan participants ........... 3,238 2,179 Other active plan participants ..................... 9,131 5,635 ------- ------- 17,587 13,445 Plan assets at fair value ............................. - - ------- ------- Accumulated postretirement benefit obligation in excess of plan assets ........................... 17,587 13,445 Unrecognized net gain or (loss) ....................... 1,465 (2,068) Unrecognized transition obligation .................... 10,378 10,989 ------- ------- Accrued postretirement benefit cost ................... $ 5,744 $ 4,524 ======= ======= Net periodic postretirement benefit cost includes the following components: 1995 1994 1993 ------ ------ ------ Service cost ......................................$ 638 $ 971 $ 691 Interest cost ..................................... 1,046 1,223 977 Amortization of transition obligation over 20 years 611 611 610 Net amortization and deferral...................... (127) 102 - ------ ------ ------ Net periodic postretirement benefit cost...........$2,168 $2,907 $2,278 ====== ====== ====== The weighted-average annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost-trend rate) is 11.3% for 1995 and is assumed to decrease gradually to 5.0% for 2004 and to remain at that level thereafter. The health care cost-trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost-trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation as of December 31, 1995, by $1,163,000, and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1995 by $102,000. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.25% at December 31,1995. The corporation has limited its exposure to increases in health care cost- trend rates by setting a cap on the maximum amount it will ever pay on any one retiree and by passing through 100% of the cost of retiree health care to new employees hired after December 31, 1993. 14. INCOME TAXES Significant components of the corporation's deferred-tax liabilities and assets are as follows (in thousands): December 31 1995 1994 ------- ------- Deferred-tax liabilities: Life insurance reserves................................$ 2,683 $ 3,013 Depreciation........................................... 6,406 6,298 Other.................................................. 6,299 5,087 Acquisition of banks................................... - 337 ------- ------- Total deferred-tax liabilities ........................ 15,388 14,735 ------- ------- Deferred-tax assets: Installment loan interest and fees..................... 2,807 2,845 Deferred compensation.................................. 5,952 4,845 Allowance for loan losses.............................. 19,963 18,230 Other.................................................. 9,609 6,918 Acquisition of banks................................... - 4,782 ------- ------- Total deferred-tax assets.............................. 38,331 37,620 ------- ------- Net deferred-tax assets .................................$22,943 $22,885 ======= ======= The provision for income taxes includes amounts currently payable and amounts deferred to or from other years as a result of differences in timing of income or expenses for reporting and tax purposes. The income tax provision includes the following amounts (in thousands): Year Ended December 31 ------------------------- 1995 1994 1993 ------- ------- ------- Current: Federal income taxes ..............................$54,572 $55,570 $54,590 State income taxes................................. 2,165 966 1,475 ------- ------- ------- Total current...................................... 56,737 56,536 56,065 ------- ------- ------- Deferred (benefit): Federal income taxes .............................. 160 (1,910) (1,858) State income taxes................................. (218) (66) (85) ------- ------- ------- Total deferred .................................... (58) (1,976) (1,943) ------- ------- ------- Provision for income taxes...........................$56,679 $54,560 $54,122 ======= ======= ======= Income taxes paid during the year..................$54,612 $56,260 $60,207 ======= ======= ======= The exclusion of certain categories of income and expense from taxable net income results in an effective tax rate that is lower than the statutory federal rate. The differences in the rates are as follows (dollars in thousands): Year Ended December 31 1995 1994 1993 --------------- --------------- --------------- Amount Percent Amount Percent Amount Percent ------- ------- ------- ------- ------- ------- Statutory rate................$58,897 35.0% $58,723 35.0% $59,551 35.0% Nontaxable interest on municipal obligations....... (4,606) (2.7) (4,874) (2.9) (5,847) (3.4) Other items .................. 2,388 1.4 711 .4 418 .2 ------- ------- ------- ------- ------- ------- Effective rate................$56,679 33.7% $54,560 32.5% $54,122 31.8% ======= ======= ======= ======= ======= ======= The Internal Revenue Service has examined the corporation's federal income tax returns through December 31, 1990, and all years are closed through December 31, 1991. 15. EARNINGS PER SHARE Earnings per share of common stock, after giving effect to dividends on preferred stock of $47 thousand in 1995, $51 thousand in 1994 and $54 thousand in 1993, are based on 34.056 million, 32.281 million and 32.512 million average shares outstanding, respectively. The dilutive effect upon earnings per share of the conversion of the outstanding convertible preferred stock and other items was not material for any of the three years. 16. COMMITMENTS AND CONTINGENCIES The corporation, in the normal course of its business, is the subject of legal proceedings instituted by customers and others. In the opinion of the corporation's management, there were no legal matters pending as of December 31, 1995, that would have a material effect on its financial statements. 17. RESTRICTIONS ON LOANS AND DIVIDENDS FROM SUBSIDIARIES The corporation's banking affiliates and its life insurance subsidiary are subject to federal and/or state statutes that prohibit or restrict certain of their activities, including the transfer of funds to the corporation. There are restrictions on loans from banks to their parent company, and banks and life insurance companies are limited as to the amount of cash dividends that they can pay. As of December 31,1995, the corporation's equity in the net assets of its subsidiaries, after elimination of intercompany deposits and loans, totaled $666.965 million. Of that amount, $661.047 million was restricted as to the payment of dividends. Consolidated retained earnings in the amount of $297.307 million were free of limitations on the payment of dividends to the corporation's shareholders as of December 31,1995. 18. RELATED-PARTY TRANSACTIONS Directors and officers of the corporation and their affiliates were customers of, and had other transactions with, the corporation in the ordinary course of business. The corporation has made residential mortgage loans at favorable rates to officers of the corporation and its subsidiaries who have been relocated for the convenience of the corporation. Other loan transactions with directors and officers were made on substantially the same terms as those prevailing for comparable loans to other persons and did not involve more than normal risk of collectibility or present other unfavorable features. As of December 31, 1995 and 1994, loans to directors and executive officers of the corporation and its largest subsidiary bank, where the aggregate of such loans exceeded $60 thousand, totaled $74.622 million and $60.147 million, respectively. During 1995, $213.801 million of new loans were made and repayments totaled $199.326 million. These totals include loans to certain business interests and family members of the directors and executive officers, and no losses are anticipated in connection with any of the loans. 19. FIRST VIRGINIA BANKS, INC. (PARENT COMPANY ONLY) CONDENSED FINANCIAL INFORMATION (IN THOUSANDS) BALANCE SHEETS December 31 1995 1994 -------- -------- Assets Cash and noninterest-bearing deposits principally in affiliated banks.......................$ 4,350 $ 3,546 Securities purchased under agreements to resell......... 99,080 56,902 Investment in affiliates based on the Corporation's equity in their net assets: Banking companies.................................... 634,573 606,092 Bank-related companies............................... 14,601 12,729 Investment securities, (market value $10,794-1995 and $9,682-1994)................................... 10,586 10,048 Loans (including $16,627-1995 and $14,425-1994 to affiliated companies) .......................... 25,263 15,121 Premises and equipment.................................. 33,378 39,550 Goodwill and core deposit premium....................... 71,773 78,705 Other assets ........................................... 40,193 35,828 -------- -------- Total Assets .........................................$933,797 $858,521 ======== ======== Liabilities Interest, taxes and other liabilities ..................$ 32,220 $ 31,265 Commercial paper ....................................... 31,930 20,368 -------- -------- Total Liabilities .................................... 64,150 51,633 -------- -------- Shareholders' Equity Preferred stock......................................... 695 746 Common stock............................................ 33,951 34,050 Capital surplus......................................... 107,112 111,184 Retained earnings....................................... 727,889 660,908 -------- -------- Total Shareholders' Equity............................ 869,647 806,888 -------- -------- Total Liabilities and Shareholders' Equity............$933,797 $858,521 ======== ======== STATEMENTS OF INCOME Year Ended December 31 1995 1994 1993 -------- -------- -------- Income Dividends from affiliates: Banking companies...............................$109,682 $123,024 $ 68,674 Bank-related companies ......................... 325 - 25 Service fees from affiliates...................... 13,864 9,017 10,529 Rental income: Affiliates .................................... 5,937 6,692 5,185 Other ......................................... 1,882 1,975 1,782 Interest and dividends on investment securities... 5,006 3,706 1,901 Other income: Affiliates ..................................... 1,915 2,339 2,390 Other .......................................... 387 1,187 751 -------- -------- -------- Total income.................................. 138,998 147,940 91,237 -------- -------- -------- Expenses Salaries and employee benefits.................... 15,406 14,092 12,685 Interest ......................................... 1,383 829 517 Other expenses: Paid to affiliates.............................. 1,714 1,694 806 Other .......................................... 12,904 9,715 9,673 -------- -------- -------- Total expense................................. 31,407 26,330 23,681 -------- -------- -------- Income before income taxes and equity in undistributed income of affiliates .......... 107,591 121,610 67,556 Federal income tax (credits)...................... 124 (706) (1,054) -------- -------- -------- Income before equity in undistributed income of affiliates........... 107,467 122,316 68,610 Equity in undistributed income of affiliates ..... 4,132 (9,095) 47,414 -------- -------- -------- Net income........................................$111,599 $113,221 $116,024 ======== ======== ======== STATEMENTS OF CASH FLOWS Year Ended December 31 1995 1994 1993 -------- -------- ------- Net cash provided by operating activities..........$111,810 $125,485 $69,025 -------- -------- ------- Investing activities: Proceeds from maturity and sale of investment securities...................... - - 28,167 Proceeds from the sale of available for sale securities................. - 1,195 - Proceeds from maturity of held to maturity securities................... 1,400 20,699 - Purchase of investment securities ............... (1,977) (4,263) (48,931) Net (increase) decrease in loans................. (10,142) 38,308 (4,862) Purchases of premises and equipment ............. (844) (1,749) (1,891) Sales of premises and equipment ................. 4,985 28 3 Investment in affiliates......................... (25,585) (43,651) (3,453) Other............................................ 1,601 (6,523) 2,260 -------- -------- ------- Net cash (used for) provided by investing activities........... (30,562) 4,044 (28,707) -------- -------- ------- Financing activities: Net increase (decrease) in short-term borrowings 11,563 3,146 (4,114) Principal payments on long-term borrowings....... - - (4,095) Common stock purchased and retired............... (5,695) (61,856) - Cash dividends - common.......................... (45,559) (40,928) (34,830) Cash dividends - preferred ...................... (48) (52) (54) Proceeds from issuance of common stock........... 1,473 745 1,401 -------- -------- ------- Net cash used for financing activities ....... (38,266) (98,945) (41,692) -------- -------- ------- Net increase (decrease) in cash and cash equivalents................... 42,982 30,584 (1,374) Cash and cash equivalents at beginning of year 60,448 29,864 31,238 -------- -------- ------- Cash and cash equivalents at end of year......$103,430 $ 60,448 $29,864 ======== ======== ======= Net cash provided by operating activities has been reduced (increased) by the following cash payments (receipts): Interest on indebtedness...........................$ 1,371 $ 823 $ 518 Income taxes....................................... (990) (467) (954) MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING - --------------------------------------------------- The management of First Virginia Banks, Inc., has prepared and is responsible for the accompanying financial statements, together with the financial data and other information presented in this annual report. Management believes that the financial statements have been prepared in conformity with generally accepted accounting principles appropriate under the circumstances. The financial statements include amounts that are based on management's best estimates and judgments. Management maintains and depends upon an internal accounting control system designed to provide reasonable assurance that transactions are executed in accordance with management's authorization, that financial records are reliable as the basis for the preparation of all financial statements, and that the corporation's assets are safeguarded. The design and implementation of all systems of internal control are based on judgments required to evaluate the costs of control in relation to the expected benefits and to determine the appropriate balance between these costs and benefits. The corporation maintains a professional internal audit staff to monitor compliance with the system of internal accounting control. Operational and special audits are conducted, and internal audit reports are submitted to appropriate management. The Audit Committee of the Board of Directors, comprised solely of outside directors, meets periodically with the independent public accountants, management and internal auditors to review accounting, auditing and financial reporting matters. The independent public accountants and internal auditors have free access to the committee, without management present, to discuss the results of their audit work and their evaluations of the adequacy of internal controls and the quality of financial reporting. The financial statements in this annual report have been audited by the corporation's independent auditors, Ernst & Young LLP, for the purpose of determining that the financial statements are presented fairly. Their independent professional opinion on the corporation's financial statements is presented on the following page. /s/ Barry J. Fitzpatrick ________________________ Barry J. Fitzpatrick Chairman, President and Chief Executive Officer /s/ Richard F. Bowman ________________________ Richard F. Bowman Senior Vice President, Treasurer and Chief Financial Officer REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS - ------------------------------------------------- To the Shareholders and Board of Directors First Virginia Banks. Inc. We have audited the accompanying consolidated balance sheets of First Virginia Banks, Inc., and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of the corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of First Virginia Banks, Inc., and subsidiaries at December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Washington, D.C. January 17, 1996 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ----------------------------------------------------------- AND FINANCIAL DISCLOSURE ------------------------ Not applicable. PART III -------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT -------------------------------------------------- The Board of Directors is divided into three classes (A, B and C). The term of office for Class C directors will expire at this Annual Meeting. Four persons, all of whom are presently on the Board, have been nominated to serve as Class C directors. If elected, the four nominees for Class C directors will serve for a term of three years. It is the intention of the persons named in the accompanying form of proxy, unless stockholders specify otherwise by their proxies, to vote for the election of the four nominees named below and on the next page. Although the Board of Directors does not expect that any of the persons named will be unable to serve as a director, should any of them be unable to accept nomination or election, it is intended that shares represented by the accompanying form of proxy will be voted by the proxy holders for such other person or persons as may be designated by the present Board of Directors. Certain information concerning the nominees for election at this meeting and the Class A and Class B directors who will continue in office after the meeting is set forth below and on the following pages, as furnished by them. NOMINEES FOR CLASS C DIRECTORS Paul H. Geithner, Jr., 65, is the retired President and Chief Administrative Officer of First Virginia (1985-1995) and has been a director of First Virginia since 1984. He also is a director of First Virginia Life Insurance Company, a nonbank affiliate. He is a member of the Public Policy Committee and the executive Committee. He beneficially owns 40,687 shares of Common Stock. (1) L. H. Ginn, III, 62, has been President since 1975 of Lighting Affiliates, Inc., a distributor of electrical fixtures located in Richmond, Virginia, and has been a director of First Virginia since 1978. Mr. Ginn is a retired U. S. Army Reserve Major General. He is Chairman of the Board of First Virginia Bank- Colonial, Richmond, Virginia. He is a member of the Executive Committee and the Director Nominating Committee and beneficially owns 12,281 shares of Common Stock. (2) T. Keister Greer, 74, has been principal of T. Keister Greer, P.C., in Rocky Mount, Virginia, since 1995 and has been a director of First Virginia since 1976. Prior to that, he was Counsel to Greer & Melesco (1972-1994) and Counsel to Greer & Greer (1990-1991). He is Chairman of the Board of First Virginia Bank-Franklin County, Rocky Mount, Virginia. Mr. Greer is a member of the Public Policy Committee and the Director Nominating Committee and beneficially owns 17,400 shares of Common Stock. (3) Edward M. Holland, 56, has been an attorney in Arlington, Virginia since 1966 and is a former member of the Virginia General Assembly (Senate) (1972-January, 1996). He has been a director of First Virginia since 1974. He also is a director of First Virginia Bank, Falls Church, Virginia. He serves on the Executive Committee and the Management Compensation and Benefits Committee and beneficially owns 59,479 shares of Common Stock. (4) CLASS A DIRECTORS (Serving until the 1997 Annual Meeting) E. Cabell Brand, 72, has been President since 1987 of Recovery Systems, Inc., a company in Salem, Virginia that engages in business and environmental consulting and international development projects. He is a director and Vice Chairman of the Board of First Virginia Bank-Southwest, Roanoke, Virginia and has been a director of First Virginia since 1976. He serves on the Management Compensation and Benefits Committee and the Director Nominating Committee and beneficially owns 5,538 shares of Common Stock. (5) Barry J. Fitzpatrick, 56, is Chairman, President and Chief Executive Officer of First Virginia. He is Chairman of First Virginia Bank in Falls Church and a director of a number of nonbank affiliated companies including First Virginia Services, Inc. and First Virginia Credit Services, Inc. He was appointed Chairman and Chief Executive Officer of First Virginia effective January 1, 1995, and President effective July 1, 1995. He was Executive Vice President of First Virginia from May 1992, until January 1, 1995, and was Senior Vice President and Regional Executive Officer from June 1982, to May 1992. He serves on the Executive Committee, the Public Policy Committee and the Director Nominating Committee. He beneficially owns 49,772 shares of First Virginia Common Stock. (6) Elsie C. Gruver, 69, is a community and civic leader in Arlington, Virginia and has been a director of First Virginia since 1973. She is Chairman of the Public Policy Committee and a member of the Audit Committee and beneficially owns 5,936 shares of Common Stock. (7) W. Lee Phillips, Jr., 60, has been a professional engineer involved in real estate management and home building in Falls Church, Virginia and southern Maryland since 1991. Prior to that, he was a Professional Engineer and Land Surveyor (1959-1991) and Chairman of the Board, Walter L. Phillips, Inc. (1976-1991). He has been a director of First Virginia since 1985 and is a director of First Virginia Bank, Falls Church, Virginia. He serves on the Audit Committee, as well as the Management Compensation and Benefits Committee, and beneficially owns 8,254 shares of Common Stock. (8) Josiah P. Rowe, III, 68, has been Co-Publisher and General Manager of The Free Lance-Star Publishing Co. of Fredericksburg, Va. since 1949 and has been a director of First Virginia since 1991. He is a director of First Virginia Bank, Falls Church, Virginia. He serves on the Public Policy Committee and the Director Nominating Committee and beneficially owns 1,500 shares of Common Stock and 100 shares of Preferred Stock. Albert F. Zettlemoyer, 61, retired in 1995 as President of the Government Systems Group of UNISYS Corporation in McLean, Virginia and as Executive Vice President of UNISYS Corporation. He has been a director of First Virginia since 1978. Prior to being President of the Government Systems Group, he was Vice President of UNISYS (1991-1993) and President of Paramax Corporation, a subsidiary of UNISYS (1992). He serves on the Audit Committee and chairs the Management Compensation and Benefits Committee. He beneficially owns 6,000 shares of Common Stock. (9) CLASS B DIRECTORS (Serving until the 1998 Annual Meeting) Edward L. Breeden, III, 61, has been a partner in the law firm of Breeden, MacMillan & Green in Norfolk, Virginia since 1959 and has been a director of First Virginia since 1982. He is a director of First Virginia Bank of Tidewater, Norfolk, Virginia and of First Virginia Life Insurance Company. He serves on both the Executive Committee and the Public Policy Committee and chairs the Audit Committee. He beneficially owns 66,053 shares of Common Stock. (10) Gilbert R. Giordano, 67, has been an attorney since 1956 and senior partner in the law firm of Giordano, Villareale & Vaughan, P.A., in Upper Marlboro, Maryland since 1972. He has been a director of First Virginia since 1989. He is Chairman of the Board of First Virginia Bank-Maryland, Upper Marlboro, Maryland. He serves on the Audit Committee and the Director Nominating Committee and beneficially owns 220,666 shares of Common Stock. (11) Eric C. Kendrick, 49, has been President of Mereck Associates, Inc., a real estate management and development firm in Arlington, Virginia since 1989 and has been a director of First Virginia since 1986. He serves on the Management Compensation and Benefits Committee and the Public Policy Committee. He beneficially owns 49,734 shares of Common Stock. (12) John B. Melvin, 71, is Trustee of the Stanley Family Bottling Company Trust. In 1991, he retired as Chairman of the Board, Coca-Cola Bottling Co. of Annapolis, Maryland. He is a director of Farmers Bank of Maryland, a subsidiary bank of First Virginia located in Annapolis, Maryland. He beneficially owns 19,620 shares of Common Stock. (13) Robert H. Zalokar, 68, is the retired Chairman of the Board and Chief Executive Officer of First Virginia (1984-1994). He has been a director of First Virginia since 1959. He is also a director of First Virginia Bank in Falls Church and a director of First Virginia Life Insurance Company and First Virginia Mortgage Company. He serves as Chairman of the Executive Committee and is a member of the Public Policy Committee and the Director Nominating Committee. He beneficially owns 124,301 shares of Common Stock. (1) Includes 31,600 shares held in a revocable trust and 4,114 shares held indirectly through his spouse. (2) Includes 235 shares held indirectly through his spouse and 1,366 shares held by a trust of which Mr. Ginn is trustee. (3) Includes 5,400 shares of Common Stock held by a trust in which Mr. Greer has a beneficial interest. During 1995, Mr. Greer's law firm, T. Keister Greer, P.C. was retained by First Virginia Bank-Franklin County to perform certain legal services. During 1995, he was paid $37,416 for these services. (4) Includes 34,479 shares held by a corporation of which Mr. Holland is an officer, director, and owner. (5) Includes 264 shares of Common Stock held indirectly through his spouse. (6) Includes options to purchase 27,250 shares of Common Stock which are currently exercisable but does not include options to purchase 26,000 shares of Common Stock which are not currently exercisable. (7) Includes 1,782 shares of Common Stock held in a Keogh Plan, 900 shares held in an Individual Retirement Account and 900 shares held in her spouse's Individual Retirement Account. (8) Includes 3,000 shares held by a trust of which Mr. Phillips is a trustee. (9) All of the shares are held jointly with spouse. (10) Includes 7,500 shares held by a corporation of which Mr. Breeden is President, 16,325 shares held by two foundations of which Mr. Breeden is Chairman, and 38,175 shares held by two trusts of which Mr. Breeden is trustee. (11) Includes 264 shares held in a trust for his son, 87 shares held by his spouse and daughter, 550 shares held by his spouse and son, 10,547 shares held by the Giordano Family Foundation and, 4,330 shares held by his spouse as custodian for his son. (12) Includes 6,489 shares held by his spouse and 1,729 shares held by a corporation of which Mr. Kendrick is a director and president. (13) All of the shares are held in a trust. As of February 28, 1996, executive officers and directors as a group beneficially owned 967,272 shares of Common Stock representing approximately 2.8% of those shares outstanding, of which 151,715 shares represent shares covered by current]y exercisable options (or options exercisable within 60 days) and 225 shares of Preferred Stock representing approximately .33 % of those shares outstanding. No officer or director owned as much as 1.0% of First Virginia Common Stock. Messrs. Breeden, Greer and Giordano are members of or are associated with law firms which have been in the last two years, and are proposed in the future to be, retained by First Virginia and its subsidiaries. Messrs. Brand, Breeden, Fitzpatrick, Geithner, Ginn, Giordano, Greer, Holland, Melvin, Phillips, Rowe and Zalokar have been directors of various subsidiaries of First Virginia during the past five years. Ages of the directors are stated as of February 28, 1996. BENEFICIAL OWNERSHIP OF NAMED EXECUTIVE OFFICERS The following table sets forth certain information regarding the named executives' beneficial ownership of First Virginia Common Stock as of February 28, 1996. Shares of Common Stock of First Virginia Beneficially Owned Name of Officer Number * Percent of Class Barry J. Fitzpatrick 49,772 .1458 Shirley C. Beavers, Jr. 37,072 .1086 Raymond E. Brann, Jr. 31,590 .0925 Michael G. Anzilotti 8,664 .0254 H. Howard Hicks, Jr. 33,821 .0991 * The amounts shown represent the total shares owned outright by such individuals together with shares which are issuable upon the exercise of all stock options that are currently exercisable. Specifically, the following individuals have the right to acquire the shares indicated after their names, upon the exercise of stock options: Mr. Fitzpatrick, 27,250; Mr. Beavers, 26,250; Mr. Brann, 21,050; Mr. Anzilotti, 7,500 and Mr. Hicks, 5,300. COMMITTEES AND MEETINGS OF THE BOARD OF DIRECTORS First Virginia's Board of Directors has a standing Audit Committee, Director Nominating Committee, Management Compensation and Benefits Committee, Public Policy Committee, and Executive Committee. The Audit Committee, comprised of Directors Breeden, Giordano, Gruver, Melvin, Phillips, and Zettlemoyer, held five meetings during 1995. Functions of the Committee include (1) reviewing with the independent public accountants and management such matters as: the financial statements and the scope of First Virginia's audit, compliance with laws and regulations, and the adequacy of First Virginia's system of internal procedures and controls and resolution of material weaknesses; (2) reviewing with First Virginia's internal auditors the activities and performance of the internal auditors; (3) reviewing with management the selection and termination of the independent public accountants and any significant disagreements between the independent public accountants and management; and (4) reviewing the nonaudit services of the independent public accountant. Under Section 36 of the Federal Deposit Insurance Act, the Audit Committee also performs similar functions for some of the First Virginia member banks. The Director Nominating Committee, comprised of Directors Malone, Brand, Fitzpatrick, Ginn, Giordano, Greer, Rowe, and Zalokar, held one meeting in 1995. The functions of the Committee include annually recommending to the Board the names of persons to be considered for nomination and election by First Virginia's stockholders and, as necessary, recommending to the Board the names of persons to be elected to the Board between annual meetings. The Management Compensation and Benefits Committee, comprised of Directors Zettlemoyer, Brand, Holland, Kendrick, and Phillips, held two meetings in 1995. The Committee has the authority to establish the level of compensation (including bonuses) and benefits of management of First Virginia. In addition, the Committee has authority to award long-term incentive compensation, e.g., stock options and stock appreciation rights, to First Virginia's management based on such factors as individual and corporate performance. The Public Policy Committee, comprised of Directors Gruver, Breeden, Fitzpatrick, Geithner, Greer, Kendrick, Malone, Rowe, and Zalokar, met four times during 1995. This Committee supervises First Virginia's contribution and matching gifts programs. The Committee also monitors the programs developed for affirmative action and compliance with the Community Reinvestment Act and Title VII of the Civil Rights Act of 1964. The Executive Committee, comprised of Directors Zalokar, Breeden, Fitzpatrick, Geithner, Ginn, Holland, and Malone, held 11 meetings in 1995. The Committee exercises all of the powers of the Board of Directors when the Board is not in session, except for those powers reserved for the Board under state law and by First Virginia's Articles of Incorporation and Bylaws. During 1995, there were 12 meetings of the Board of Directors. All directors attended more than 75% of the aggregate total number of meetings of the Board and committees of the Board on which they served. SECTION 16 TRANSACTIONS Section 16(a) of the Securities Exchange Act of 1934 requires First Virginia's executive officers and directors to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the New York Stock Exchange. Executive officers and directors are required by SEC regulation to furnish First Virginia with copies of all Section 16(a) forms they file. Based on a review of the forms that were filed and written representations from the executive officers and directors, First Virginia believes that during the year 1995 all filing requirements applicable to its officers and directors were met. ITEM 11. EXECUTIVE COMPENSATION ---------------------- The Summary Compensation Table shows the annual compensation for the last three fiscal years for First Virginia's Chief Executive Officer and for the four most highly compensated executive officers other than First Virginia's Chief Executive Officer: SUMMARY COMPENSATION TABLE Long-Term Annual Compensation Compensation (a) (b) (c) (d) (e) (f) (g) Other All Annual Options/ Other Name And Compen- SARs Compen- Principal Salary Bonus sation Awarded sation Position Year ($) (1) ($) (2) ($) (3) (#) ($) (4) - -------- ---- ------- ------- ------- ------- ------- Barry J. Fitzpatrick 1995 350,000 156,275 3,636 20,000 45,804 Chairman, President and 1994 209,000 125,144 6,135 0 24,691 Chief Executive Officer of 1993 189,000 90,406 69,099 10,000 25,203 First Virginia Shirley C.Beavers, Jr. 1995 230,000 93,362 3,868 5,000 30,818 Executive Vice President of 1994 209,000 94,952 6,919 0 25,963 First Virginia and President, 1993 189,000 90,406 6,045 10,000 31,385 First Virginia Services, Inc. Raymond E. Brann, Jr. 1995 183,821 61,735 66,360 5,000 57,270 Executive Vice President 1994 154,348 34,179 2,394 0 55,700 of First Virginia 1993 147,000 35,185 16,600 2,000 54,881 Michael G. Anzilotti 1995 173,798 46,524 2,250 5,000 15,034 Senior Vice President and 1994 149,741 41,588 4,007 0 13,904 Regional Executive Officer 1993 140,846 42,219 3,290 7,500 13,130 of First Virginia and President and Chief Executive Officer of First Virginia Bank Henry Howard Hicks, Jr. 1995 178,980 34,975 0 1,500 32,098 Senior Vice President and 1994 171,288 45,244 0 0 29,402 Regional Executive Officer 1993 162,830 46,013 0 2,000 31,614 of First Virginia (1) The Salary Column (Column (c)) includes the base salary earned by the executive officer, which includes amounts that are deferred under the First Virginia Banks, Inc. Employees Thrift Plan and the First Virginia Pre-Tax Health Benefit Plan. (2) The Bonus Column (Column (d)) includes the amount earned as a bonus for that year even if paid in the following year. It also includes amounts earned for that year under the First Virginia Banks, Inc. Profit Sharing Plan. (3) The Other Annual Compensation Column (Column (e)) includes the amount of taxes paid by First Virginia for certain benefits. In Mr. Brann's case, it also includes perquisites or personal benefits whose value amounted to $56,900. Of that amount, $32,459 was for country club dues and a country club initiation fee and $17,287 was for moving expenses. During 1995, First Virginia made a below market rate residential mortgage loan to Mr. Brann as an inducement for him to relocate to Northern Virginia. The Other Annual Compensation Column includes the interest benefit to Mr. Brann for 1995 for that loan. (4) The All Other Compensation Column (Column (g)) includes the amount paid by the employer under the First Virginia Banks, Inc. Employees Thrift Plan which, for each of the named officers, was $6,750. It also includes the amounts paid by the employer under the First Virginia Supplemental Benefits Plan. This plan provides supplemental retirement benefits for those key officers who are restricted from receiving further benefits under the Thrift Plan as a result of the limitation on pretax contributions imposed by the Internal Revenue Code. For 1995, these amounts were: for Mr. Fitzpatrick, $15,981; Mr. Beavers, $7,884; Mr. Brann, $3,071; Mr. Anzilotti, $2,953 and Mr. Hicks, $3,351. It also includes the premium amounts paid by the employer under the First Virginia Split Dollar life Insurance Plan. For 1995, these amounts were: for Mr. Fitzpatrick, $22,541; Mr. Beavers, $14,635; Mr. Brann, $44,149; Mr. Anzilotti, $4,331 and Mr. Hicks, $15,999. It also includes the "above-market" earnings on deferred compensation earned during 1995. These amounts were: for Mr. Fitzpatrick, $532; Mr. Beavers, $1,549; Mr. Brann, $3,300; Mr. Anzilotti, $1,000 and Mr. Hicks, $5,998. STOCK OPTIONS AND STOCK APPRECIATION RIGHTS The table on the following page shows for each of the named executive officers (1) the number of options that were granted during 1995, (2) out of the total number of options granted to all employees, the percent granted to the named executive officer, (3) the exercise price, (4) the expiration date and (5) the potential realizable value of the options, assuming that the market price of the underlying securities appreciates in value from the date of grant to the end of the option term, at a 5% and 10% annualized rate. No freestanding SARs were granted in 1995. Stock Option Grants In 1995 Potential Percent of Realizable Number of Total Value at Securities Options Assumed Annual Underlying Granted to Exercise Rates of Stock Options Employees or Base Expir- Price Appreciation Granted in Fiscal Price ation for Option Term Name (# Shs.)(1) Year (2) ($/Sh.) Date 5%($) 10%($) ---- ---------- --------- ------- ----- ------- ------- Barry J. Fitzpatrick 20,000 23.95% 41.875 12/19/2005 526,699 1,334,759 Shirley C. Beavers, Jr. 5,000 5.99% 41.875 12/19/2005 131,674 333,689 Raymond E. Brann, Jr. 5,000 5.99% 41.875 12/19/2005 131,674 333,689 Michael G. Anzilotti 5,000 5.99% 41.875 12/19/2005 131,674 333,689 H.Howard Hicks, Jr. 1,500 1.80% 41.875 12/19/2005 39,502 100,107 (1) Options granted to the named executive officers in 1995 are exercisable over a five year period provided certain performance goals are achieved by First Virginia. All of the options that were granted in 1995 include a provision that would accelerate the vesting of the options upon a "change in control" of First Virginia. For an explanation of the "change in control" provision, see "Directors' Compensation, Consulting Arrangements and Plans Which Include Change in Control Arrangements." (2) Options to purchase 83,500 shares of First Virginia Common Stock were granted to employees during 1995. No freestanding SARs were granted in 1995 to employees and none of the options that were granted had any tandem SARs. The table on the following page shows for each of the named executive officers the number of shares of First Virginia Common Stock acquired upon the exercise of stock options and stock appreciation rights during 1995, the value realized upon their exercise, the number of unexercised stock options and SARs at the end of 1995 and the value of unexercised "in-the-money" stock options and SARs at the end of 1995. Stock options or freestanding SARs are considered "in-the- money" if the fair market value of the underlying securities exceeds the exercise price of the option or SAR. Some of the stock options which were granted to First Virginia's executive officers include a provision that would accelerate the vesting of the options upon a "change in control" of First Virginia. There were no unexercisable or exercisable freestanding SARs owned by any of the named executive officers at yearend. Aggregated Options/SAR Exercises in 1995 and Yearend Options/SAR Values Value of Number of Unexercised Unexercised In-the-Money Shares Options Options Acquired at Yearend at on Value (#) Yearend ($) Exercise Realized Exercisable/ Exercisable/ Name (#) ($) Unexercisable Unexercisable ---- -------- -------- ------------- ------------- Barry J. Fitzpatrick 3,000 67,375 25,250/28,000 525,750/72,000 Shirley C. Beavers, Jr. 4,000 92,334 24,250/13,000 505,792/72,000 Raymond E. Brann, Jr. 0 0 20,650/6,600 471,976/15,400 Michael G. Anzilotti 1,522 53,080 6,000/11,000 132,750/54,000 H. Howard Hicks, Jr. 6,268 138,494 4,900/3,100 87,850/15,400 PENSION AND THRIFT PLANS AND SUPPLEMENTAL COMPENSATION ARRANGEMENTS The following table shows the estimated annual benefit payable upon retirement (life only) under the First Virginia Pension Trust Plan based on specified remuneration and years of credited service classifications, assuming a participant retired on December 31, 1995, at age 65. The table ends at an average annual pay of $150,000 since compensation in excess of that amount is not taken into account under the Plan because of IRS regulations. Credited service in excess of thirty years is also not taken into account in determining benefits under the Plan. Annual Benefits Under First Virginia's Pension Trust Plan Average Annual Pay for 10 Years 15 Years 20 Years 25 Years 30 Years Highest of of of of of Five Years Service Service Service Service Service - ----------- ------- ------- ------- ------- ------- $125,000 18,704 28,056 37,408 46,760 56,112 150,000 22,704 34,056 45,408 56,760 68,112 Under the First Virginia Pension Trust Plan, a participant retiring at age 65 with 30 years of credited service under the Plan will receive a maximum annual pension benefit equal to 1.1 % of his average annual pay multiplied by 30 years of credited service plus 0.5% of his average annual pay in excess of his covered compensation multiplied by 30 years of credited service. The calculation of "average annual pay" is based on annual compensation for the highest five consecutive years out of the participant's final 10 years of service. "Covered compensation" is calculated by multiplying the annual average of Social Security taxable wage bases in effect for the 35 years ending with the last day of the year in which the participant attains Social Security retirement age. Remuneration on earnings determining pension benefits under the Plan includes salaries and bonuses (which are listed in the Summary Compensation Table) but it also includes any other taxable compensation including compensation resulting from the exercise of nonqualified options and SARs. Credited service as of December 31, 1995, for each of the named executives was as follows: Mr. Fitzpatrick, 26.4 years; Mr. Beavers, 26.3 years; Mr. Brann, 30 years, Mr. Anzilotti, 17.2 years and Mr. Hicks, 30 years. If a participant retired on December 31, 1995 at age 65 under the Plan, the participant would receive the greater of (1) that participant's accrued benefits as determined by using the Summary Compensation Table and the pension table in conjunction with the formula described above or (2) that participant's accrued benefits as of December 31, 1993, which for the named executive officers, was as follows: Mr. Fitzpatrick $69,985, Mr. Beavers $75,605, Mr. Brann, $68,520, Mr. Anzilotti, $39,693 and Mr. Hicks, $86,719. Mr. Fitzpatrick has a supplemental compensation agreement which will provide him with supplemental retirement benefits in addition to those pension benefits described above. Under Mr. Fitzpatrick's agreement, if he resigns, retires or leaves First Virginia for any reason after reaching the age of 62, he is entitled to receive for the rest of his life supplemental compensation equal to sixty percent of the average of his highest five years of annual salary and bonus. Highest annual salary includes salary and bonus and any profit sharing payments received under the First Virginia Profit Sharing Plan but does not include any other form of compensation that is not salary or bonuses, such as compensation arising from the exercise of SARs and nonqualified options. Mr. Fitzpatrick can also receive his benefits under his agreement prior to age 62 if there is a "change in control," if he becomes totally and permanently disabled, or if he is dismissed or requested to leave his employment without "just cause." The amount of benefit Mr. Fitzpatrick would receive under his agreement would be reduced by the amount he would receive under the First Virginia Pension Trust Plan. After receiving benefits, should Mr. Fitzpatrick die, his wife would be entitled to one-half of his total annual benefit for the rest of her life. Under his agreement, once benefits begin to be paid, Mr. Fitzpatrick is to remain available to provide consulting and advisory services if he is physically and mentally capable of doing so. Furthermore, his benefits are forfeitable under certain circumstances. Executive officers, like other employees of First Virginia, are eligible to participate in the First Virginia Banks, Inc. Employees' Thrift Plan ("Thrift Plan"). Under the Thrift Plan, employees of First Virginia and its subsidiaries who have completed one year of service can contribute up to six percent of their compensation and receive matching employer contributions equal to 50% of their employee contributions. For the years when First Virginia meets an earnings test under the Thrift Plan, First Virginia contributes 75% of employee contributions. The Thrift Plan complies with Section 401(k) of the Internal Revenue Code so that employee contributions can be made on a pretax basis. Employees can direct the investment of their contributions and the matching employer contributions into one or more of three funds that are administered by the Trust Department of First Virginia Bank. Reference is made to Footnote 4 of the Summary Compensation Table for the amount of contributions made on behalf of the named executive officers under the Thrift Plan. First Virginia also maintains a First Virginia Supplemental Benefits Plan which provides supplemental retirement benefits for those key officers who are restricted from receiving further benefits under the Thrift Plan as a result of the limitation on pretax contributions imposed by the Internal Revenue Code for 1995. Under the First Virginia Supplemental Benefits Plan, executive officers can continue to make pretax contributions in excess of the IRS limits imposed on the Thrift Plan and receive matching contributions from First Virginia identical to what they would have received if they were in the Thrift Plan and there were no limitations on contributions. Reference is made to Footnote 4 of the Summary Compensation Table for the amount of the employer and employee contributions made on behalf of the named executive officers under the First Virginia Supplemental Benefits Plan. DIRECTORS' COMPENSATION, CONSULTING ARRANGEMENTS AND PLANS WHICH INCLUDE CHANGE IN CONTROL ARRANGEMENTS For 1996, directors of First Virginia who are not salaried officers will be paid an annual retainer of $14,000 per year, a fee of $900 for each meeting of the Board of Directors attended, and a fee of $700 for each meeting of a Committee of the Board of Directors attended. Committee chairmen will receive $850 for each committee meeting they chair. Directors are reimbursed for out- of-town expenses incurred in connection with Board and Committee meetings. Directors can participate in First Virginia's deferred compensation plans which allow them to defer their retainers and fees. During 1995, Edwin T. Holland, the founder and former Chairman and Chief Executive Officer of First Virginia, and Thomas K. Malone, Jr., former Chairman and Chief Executive Officer of First Virginia, were paid $148,463 and $114,852, respectively, under their supplemental compensation agreements, in addition to the amounts they received from the First Virginia Pension Trust Plan and, in the case of Mr. Malone, in addition to his director fees. When requested, both Holland and Malone are required to provide consulting services under their supplemental compensation agreements. During 1995, Robert H. Zalokar, former Chairman and Chief Executive Officer of First Virginia, and Paul H. Geithner, Jr., former President and Chief Administrative Officer of First Virginia, were paid $521,316 and $141,264, respectively, under their supplemental compensation agreements, in addition to the amounts they received from the First Virginia Pension Trust Plan and in addition to their director fees. When requested, both Zalokar and Geithner are required to provide consulting services under their supplemental compensation agreements. First Virginia paid Mr. Zalokar's and Mr. Malone's country club membership fees during 1995 which amounted to $2,996 and $1,742 respectively. During 1995, Virginia H. Brown, formerly Virginia H. Beeton, received $71,000 pursuant to her former husband's Supplemental Retirement Agreement with First Virginia in addition to what she received from the First Virginia Pension Trust Plan. Her former husband, Ralph A. Beeton, was Chairman and Chief Executive Officer of First Virginia. First Virginia also has two key employee salary reduction deferred compensation plans, one of which began in 1983 and the other in 1986, and two directors' deferred compensation plans, one of which also began in 1983 and the other in 1986, ("Deferred Compensation Plans") for key employees of First Virginia and its subsidiaries and for directors of First Virginia. Under the Deferred Compensation Plans, participants elect to defer some or all of their compensation from First Virginia, and First Virginia agrees to pay at normal retirement age or earlier (or to participant's beneficiary or estate on participant's death) a sum substantially in excess of what each participant has deferred. To fund the benefits under the Deferred Compensation Plans, First Virginia has purchased life insurance contracts on the lives of the participants, with First Virginia as the beneficiary. For the period ending December 31, 1995, none of the named executive officers of First Virginia deferred any compensation under the Deferred Compensation Plans. The 1983 deferred compensation plans include a provision regarding "change in control." Generally, the 1983 Key Employee Salary Reduction Deferred Compensation Plan requires that an employee continue his/her position with First Virginia and/or its subsidiaries until retirement in order to receive his/her benefits. If there is a "change in control" of First Virginia, and a director is terminated under the directors' plan, or in the case of the employee plan, an employee is terminated "without cause" or the employee terminates his/her employment for "good reason," as those terms are defined under the employee plan, then the director or employee, as the case may be, becomes entitled to his/her benefits under the 1983 Deferred Compensation Plans at retirement, notwithstanding the fact that his/her affiliation with First Virginia has terminated. First Virginia has a Collateral Assignment Split Dollar Life Insurance Agreement and Plan ("Split Dollar Plan") which currently includes all executive employees of First Virginia including those named in the Summary Compensation Table. Under the Split Dollar Plan, an executive can purchase ordinary life insurance policies with coverage of at least two times what is projected to be the executive's base salary at retirement, up to a limit of $1,000,000. A portion of the premiums will be loaned to the executives by First Virginia up to the later of ten years or the executive's retirement date. At the end of this period, if assumptions about mortality, dividends and other factors are realized, First Virginia will recover all of its loans for premiums from the cash value of the policy. The policy will then be transferred to the executive, who will pay all further premiums if any, under the policy. Executives who participate in the Split Dollar Plan forego any insurance coverage over $50,000 under the First Virginia Group Life Insurance Plan. During 1989, the Split Dollar Plan was amended so that in the event of a "change in control," only the executive would have the right to terminate the policy. First Virginia's Board of Directors approved in 1992 the establishment of a trust with Chemical Bank as the trustee to partially secure the benefits of some of First Virginia's nonqualified compensation plans, including the Deferred Compensation Plans and the First Virginia Supplemental Benefits Plan, in case of a "change in control." Under the trust agreement establishing the trust, if a "change in control" takes place, the trustee would pay the benefits under the covered compensation plans out of the trust assets that have been contributed to the trust by First Virginia, if First Virginia refused to pay the benefits. The trust is considered a "grantor trust" subject to the claims of First Virginia's general creditors. For accounting purposes, the trust assets are considered corporate assets and, therefore, no balance sheet impact to First Virginia will result from the establishment of the trust. The trust agreement does not include a provision which would accelerate the vesting or payment of any of the benefits under the covered compensation plans in case of a change in control. During 1995, First Virginia did not make a contribution to the Trust. During 1995, First Virginia amended the 1983 deferred compensation plans, the Split Dollar Plan, and the above-described trust agreement with Chemical Bank to provide for a standard "change in control" definition. Some of the stock option agreements and Mr. Fitzpatrick's supplemental compensation agreement were also amended to include this definition. Under this definition, a change in control means: (a) an acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person")) of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of First Virginia Common Stock or (ii) the combined voting power of the then outstanding voting securities of First Virginia entitled to vote generally in the election of directors (the "Outstanding First Virginia Voting Securities"); provided, however, that any acquisition directly from or by First Virginia or any acquisition by any employee benefit plan (or related trust) sponsored or maintained by First Virginia or an affiliated company or any acquisition by a company pursuant to a transaction which complies with clauses (i), (ii) and (iii) of (c) below would be excluded; or (b) individuals who, as of the date when the change in control provisions were adopted, constitute the Board (the "Incumbent Board") of First Virginia, cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director whose election, or nomination for election by First Virginia's shareholders, was approved by vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual was a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of First Virginia (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the outstanding First Virginia Common Stock and Outstanding First Virginia Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns First Virginia or all or substantially all of First Virginia's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the outstanding First Virginia Common Stock and the outstanding First Virginia Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan nor related trust) of First Virginia or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or the action of the Board, providing for such Business Combination, or (d) approval by the shareholders of First Virginia of a complete liquidation or dissolution of First Virginia. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION The current members of First Virginia's Management Compensation and Benefits Committee are E. Cabell Brand, Edward M. Holland, Eric C. Kendrick, W. Lee Phillips, Jr. and Albert F. Zettlemoyer. Edward M. Holland is the son of Edwin T. Holland, the founder and former Chairman and Chief Executive Officer of First Virginia. As noted above, Edwin T. Holland receives a fee from First Virginia pursuant to a Supplemental Compensation Agreement. Also, as noted above, Edward M. Holland's sister, Virginia H. Brown, receives a benefit pursuant to her former husband's Supplemental Retirement Agreement with First Virginia. Albert F. Zettlemoyer's daughter is an officer of First Virginia Bank. None of the members of the Management Compensation and Benefits Committee served as members of the compensation committees of another entity. No executive officer of First Virginia served as a director of another entity that had an executive officer serving on First Virginia's compensation committee. No executive officer of First Virginia served as a member of the compensation committee of another entity which had an executive officer who served as a director of First Virginia. MANAGEMENT COMPENSATION AND BENEFITS COMMITTEE REPORT CONCERNING FIRST VIRGINIA'S EXECUTIVE COMPENSATION POLICY The Management Compensation and Benefits Committee (the "Committee") of the Board of Directors establishes the policy for the compensation of the executive officers of First Virginia. It is also responsible for administering most of First Virginia's executive compensation programs. The Committee is composed entirely of outside directors who are not eligible, with the exception of the directors' deferred compensation plans, to participate in the plans over which it has authority. The overall goal of First Virginia's compensation policy is to motivate, reward and retain its key executive officers. The Committee believes this should be accomplished through an appropriate combination of competitive base salaries and, at times, both short term and long term incentives. The primary components of First Virginia's executive compensation program are base salaries, bonuses, (e.g. short term compensation), and equity compensation (e.g. long term compensation). Executive officers also participate in other broad based employee compensation and benefit programs. Since no First Virginia executive had compensation in 1995 which in total exceeded one million dollars and since no executive is expected to be compensated in excess of that amount in 1996, the Committee did not consider the effect of the one million dollar deduction limitation under Section 162(m) of the Internal Revenue Code in determining executive compensation nor did they establish any specific policy regarding the deductibility of executive compensation. Base Salary The Compensation Committee's policy for determining base salaries is that two primary factors should be considered: (1) the degree of responsibility the executive officer has, his experience, and the number of years he has been in office, and (2) the compensation levels of corresponding positions at other banking companies of comparable size that compete with and serve the same markets as First Virginia. This "Local Peer Group" of companies consists of Central Fidelity Banks, Inc., Crestar Financial Corporation and Signet Banking Corporation based in Virginia, First Maryland Bancorp and Mercantile Bankshares Corporation based in Maryland, and First Tennessee National Corporation and First American Corporation of Tennessee. Base salaries are targeted to be the median salaries of corresponding positions in the "Local Peer Group." For 1995, Mr. Fitzpatrick's base salary was $350,000 which was in the lower quartile for salaries paid to his counterparts in the "Local Peer Group." Short Term Incentives/Bonuses The Committee grants bonuses to the executive officers including the Chief Executive Officer ("CEO") based on the extent to which First Virginia achieves or exceeds annual performance objectives. The Compensation Committee may award bonuses to the CEO and to the executive officers if First Virginia achieves a return on total average assets (ROA) of at least 1% (the same basis for determining payments of profit sharing to all employees). ROA generally is considered by the Committee to be an important factor in measuring the performance of a banking company, and achievement of a 1% ROA generally is considered by the Committee to be the mark of a good performing banking company. Bonus awards are based on the following: (a) The Committee establishes target amounts each year for return on average assets ("ROA"), return on total stockholders' equity ("ROE"), asset quality and capital strength consistent with First Virginia's Profit Plan target amounts. Up to 50% of an executive's salary may be awarded if the corporation achieves an ROA equivalent to 80% or more of ROA target amount for the year. For the chief executive officer, First Virginia would also have to achieve 80% of targeted amounts for ROE, asset quality (as determined by the ratio of nonperforming assets to total loans (NPA ratio) and net loan charge-offs (CO ratio)) and capital strength (based on the average equity to asset ratio (Equity/asset ratio) and the Tier 1 risk based capital ratio); or (b) Up to 30% of an executive's salary may be awarded based on the degree to which First Virginia's earnings, asset quality and capital ratios exceed the average for the other major banking companies based in the Southeast, the "Southeastern Regional Peer Group," as compiled by Keefe, Bruyette and Woods, the New York securities firm which specializes exclusively in the banking and thrift industry; or (c) Up to 20% of an executive's salary may be awarded at the discretion of the Committee based on an individual executive's performance. Within the above parameters, prior to the beginning of any year, the Committee establishes for the CEO a target bonus which is based on a projected return on assets for First Virginia. At the end of the year, the Committee considers a preliminary bonus after taking into account the target bonus, First Virginia's actual return on assets for the year and a formula which is based on a set relationship between the actual versus the projected return on assets. The Committee then exercises its judgment in light of the foregoing parameters and other considerations, including the Committee's view of individual performance and potential and the recommendations of the CEO for the executive officers (other than himself), to reach a bonus decision for each executive officer and for the CEO. The Committee does not use a formula to determine a final bonus decision. In 1995, the final bonus decision for the CEO was at variance to the preliminary bonus amount. Among other things, Mr. Fitzpatrick's bonus reflected First Virginia's success in achieving a 1.42% return on assets for the first nine months (1.41% for the year) and the other above described results. Consistent with the Committee's avoidance of a strict formula approach, no specific weighting among the above 50%, 30% and 20% factors was specified. The Committee believes that the use of the above approach provides a flexible yet effective method of motivating First Virginia's management. Listed below are the annualized ratios for First Virginia and the Southeastern Regional Peer Group based on results for the first nine months of 1995, the latest data available to the Committee at the time the incentive awards were considered. First Virginia Profit Plan or Target KBW Southeastern Amount Actual Regional Peer Group Earnings (Higher is better) ROA 1.54% 1.42% 1.30% ROE 14.24% 13.53% 15.82% Asset Quality (Lower is better) NPA .60% .56% .66% CO .15% .17% .20% Capital (Higher is better) Equity/Asset 8.50% 10.42% 8.26% Tier I Risk Based Capital 10.00% 15.05% 11.10% Even though First Virginia's ROA and ROE did not exceed the profit plan or target amounts, they did substantially exceed the Regional Peer Group results except for ROE which would have also exceeded the goal if adjusted for relative capital outstanding. For that reason, the Committee awarded Mr. Fitzpatrick a bonus of $140,000. Long Term Compensation/Stock Options The Committee believes that the granting of stock options is the most appropriate form of long term compensation for executives and that such awards of equity encourage the executive to achieve a significant ownership stake in the success of First Virginia. Equity compensation awards may be made only if First Virginia exceeds the weighted average of the returns reported by the major competitors in its banking markets (Central Fidelity, Signet, Crestar, Mercantile Bankshares, First Tennessee and First American of Tennessee). The performance ratios are weighted as follows: ROA 35%, ROE 25%, five year cumulative total return to shareholders ("Five Year Return") 15%, Nonperforming Asset Ratio 15% and Charge-off Ratio 10% . The following table shows the performance ratios of First Virginia and the average for its major market area competitors of comparable size for the first nine months of 1995: Market Area First Virginia Major Competitors ROA 1.42% 1.33% ROE 13.53% 15.14% Five Year Return 410.24% 634.63% NPA .56% .66% CO .17% .40% As of September 30, 1995 (the latest date information is available for the peer group), the weighted average of the performance factors for First Virginia was 110.61% of the peer group. The Committee granted, at the end of 1995, options covering a total of 50,500 shares of First Virginia Common Stock at an exercise price of $41.875 per share to the CEO and to all other First Virginia executive officers. The size of each option award was not based on a formula and did not necessarily correlate to the degree by which First Virginia's results exceed those of its Market Area Major Competitors or the amount of each executive's current stock- based holdings. Instead, the size of each award was based on a number of factors, some of which were subjective, including the performances of the CEO and each executive officer and the degree of responsibility each executive officer has with First Virginia. Mr. Fitzpatrick received options covering 20,000 shares. The size of his grant was primarily based on the performance of First Virginia as described above. Each option that was awarded will vest over a five-year or less period in equal annual installments beginning one year from the date of grant. However, each installment can only be exercised if the performance goals for that year are met; otherwise, that portion of the option lapses. E. Cabell Brand Edward M. Holland Eric C. Kendrick W. Lee Phillips Albert F. Zettlemoyer ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND --------------------------------------------------- MANAGEMENT ---------- No person is known by management of the corporation to own beneficially, directly or indirectly, more than five percent of any class of the corporation's voting securities. The number of shares of the corporation's voting securities beneficially owned by each of the corporation's directors and by all of its directors and officers as a group is shown in Part III, item 10, on pages 75 through 82 of this report. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- During the past year, certain of the directors and officers of the corporation and their associates had loans outstanding from the corporation's banking subsidiaries. Each of these loans was made in the ordinary course of the lending bank's business. In some cases, where officers of the corporation or its subsidiaries had to be relocated, residential mortgage loans were made by the corporation at favorable interest rates. During 1995, the corporation made a below market rate residential mortgage loan in the amount of $400,000 at 7 5/8% to Raymond E. Brann, Jr., Executive Vice President of the corporation, as an inducement for him to relocate to Northern Virginia. The interest benefit to him of that loan is included in the Summary Compensation Table. However, none of the other named executive officers had any other below market rate loans from the corporation and none of them had any loans from any of the corporation's banking subsidiaries at favorable interest rates. All other loans have been made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other persons and did not involve more than the normal risk of collectibility or present other unfavorable features. As of December 31, 1995, the aggregate amount of loans outstanding to all directors and executive officers of First Virginia and associates and members of their immediate families was approximately $6,594,310. Reference is made to Footnote 3 on page 77 of this report concerning certain legal services performed by T. Keister Greer for First Virginia Bank - Franklin County. PART IV ------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K --------------------------------------------------------------- FINANCIAL STATEMENTS: The following consolidated financial statements and report of independent auditors of the Corporation and its subsidiaries are in Part II, item 8 on the following pages: Page Consolidated Balance Sheets - December 31, 1995 and 1994 45/46 Consolidated Statements of Income - Three Years Ended December 31, 1995 47/48 Consolidated Statements of Stockholders' Equity - Three Years Ended December 31, 1995 49/50 Consolidated Statements of Cash Flows - Three Years Ended December 31, 1995 51/52 Notes to Consolidated Financial Statements 53/72 Report of Independent Auditors 74 EXHIBITS: The following exhibits are filed as a part of this report: (3) Restated Articles of Incorporation and Bylaws. (4) Instruments defining the rights of holders of the Corporation's long-term debt are not filed herein because the total amount of securities authorized thereunder does not exceed 10% of consolidated total assets. The Corporation hereby agrees to furnish a copy of such instruments to the Commission upon its request. (10) Management contract for Mr. Barry J. Fitzpatrick is incorporated by reference to Exhibit 10 of the 1994 Annual Report on Form 10-K. Management contracts for Messrs. Ralph A. Beeton, Paul H. Geithner, Jr., Edwin T. Holland, Thomas K. Malone, Jr., and Robert H. Zalokar are incorporated by reference to Exhibit 10 of the 1992 Annual Report on Form 10-K. Also incorporated from that exhibit are: (1) Key Employee Salary Reduction Deferred Compensation Plans and Directors' Deferred Compensation Plans for 1983 and 1986 and (2) A compensatory plan known as the Collateral Assignment Split Dollar Life Insurance Agreement and Plan. (3) There are also four plans relating to options and rights. The 1982 Incentive Stock Option Plan is incorporated by reference to Post-effective Amendment Number 2 to Registration Statement Number 2-77151 on Form S-8 dated October 30, 1987. The 1986 Incentive Stock Option Plan, Nonqualified Stock Option Plan and Stock Appreciation Rights Plan is incorporated by reference to Registration Statement Number 33-17358 on Form S-8 dated September 28, 1987. The 1991 Incentive Stock Option Plan, Nonqualified Stock Option Plan and Stock Appreciation Rights Plan is incorporated by reference to Registration Statement Number 33-54802 on Form S-8 dated November 20, 1992. Included as Exhibit 10 are Amendments to (1) Paragraph 1(a) of Barry J. Fitzpatrick's Supplemental Compensation Agreement, which was included in Exhibit 10 of the 1994 Annual Report on Form 10-K, (2) Article VI, Section 6.03 of the Key Employee Salary Reduction Deferred Compensation Plan, which was included in Exhibit 10 of the 1992 Annual Report on Form 10-K, (3) the third paragraph of Section 9 of the Collateral Assignment Split Dollar Life Insurance Agreement and Plan, which was included in Exhibit 10 of the 1992 Annual Report on Form 10-K, and (4) amendment to Section 2 (e) of the 1993 Stock Option Agreement. These amendments were amended to include a uniform "change in control" definition. (11) Statement RE: Computation of Per Share Earnings. (13) First Virginia Banks, Inc. 1995 Annual Report to its Stockholders. (Not included in the electronic filing) (21) Subsidiaries of the Registrant. (23) Consent of Independent Auditors. (27) Financial Data Schedule FINANCIAL STATEMENT SCHEDULES: Schedules to the consolidated financial statements required by Article 9 of Regulation S-X are not required under the related instructions or are inapplicable, and therefore have been omitted. REPORTS ON FORM 8-K: No reports on Form 8-K were required to be filed during the last quarter of 1995. SIGNATURES - ---------- Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed as of March 27, 1996 on its behalf by the undersigned, thereunto duly authorized. FIRST VIRGINIA BANKS, INC. /s/ Barry J. Fitzpatrick ___________________________________ Barry J. Fitzpatrick, Chairman, President and Chief Executive Officer /s/ Richard F. Bowman ___________________________________ Richard F. Bowman, Senior Vice President, Treasurer and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons as of March 27, 1996 on behalf of the registrant and in the capacities indicated. SIGNATURE TITLE --------- ----- /s/ Barry J. Fitzpatrick ____________________________ Chairman, President, Barry J. Fitzpatrick Chief Executive Officer and Director /s/ Richard F. Bowman ____________________________ Principal Financial Richard F. Bowman and Accounting Officer /s/ E. Cabell Brand ____________________________ Director E. Cabell Brand /s/ Edward L. Breeden ____________________________ Director Edward L. Breeden, III /s/ Paul H. Geithner, Jr. ____________________________ Director Paul H. Geithner, Jr. /s/ L. H. Ginn ____________________________ Director L. H. Ginn, III SIGNATURE TITLE --------- ----- /s/ Gilbert R. Giordano ____________________________ Director Gilbert R. Giordano /s/ T. Keister Greer ____________________________ Director T. Keister Greer /s/ Elsie C. Gruver ____________________________ Director Elsie C. Gruver /s/ Edward M. Holland ____________________________ Director Edward M. Holland /s/ Eric C. Kendrick ____________________________ Director Eric C. Kendrick /s/ Thomas K. Malone, Jr. ____________________________ Director Thomas K. Malone, Jr. /s/ John B. Melvin ____________________________ Director John B. Melvin /s/ W. Lee Phillips, Jr. ____________________________ Director W. Lee Phillips, Jr. /s/ Josiah P. Rowe ____________________________ Director Josiah P. Rowe, III /s/ Robert H. Zalokar ____________________________ Director Robert H. Zalokar /s/ Albert F. Zettlemoyer ____________________________ Director Albert F. Zettlemoyer ANNUAL REPORT ON FORM 10-K For the Year Ended December 31, 1995 ITEM 14 EXHIBITS The Exhibits filed with this annual report are included herein. FIRST VIRGINIA BANKS, INC. 6400 Arlington Boulevard Falls Church, Virginia 22042-2336 Exhibit 3 FIRST VIRGINIA BANKS, INC. ARTICLES OF INCORPORATION (With Amendments through April 24, 1992) ARTICLE I. The name of the Corporation is First Virginia Banks, Inc. ARTICLE II. The purpose of the Corporation is to acquire, own, manage and dispose of the capital stock and other securities of banks and other corporations and to render to such banks and corporations, and to others, such advice and services as may be permitted by law. In addition, the Corporation shall have the power to transact any business not prohibited by law or required to be stated in these Articles of Incorporation. ARTICLE III. The Corporation shall have the authority to issue 60,000,000 shares of Common Stock, $1.00 par value, and 3,000,000 shares of Preferred Stock, $10.00 par value. A. Voting of Shares. Except as otherwise made mandatory by law, there shall be no class voting, and each outstanding share regardless of class (whether Common or Preferred), shall entitle the holder thereof to one vote on each matter submitted to a vote at any meeting of stockholders. B. Preemptive Rights. No holders of any class of stock of this Corporation shall have any preemptive or other preferential right to purchase or subscribe to (i) any shares of any class of stock of the Corporation, whether now or hereafter authorized, (ii) any warrants, rights or options to purchase any such stock, or (iii) any obligations convertible into any such stock or into warrants, rights or options to purchase any such stock. C. Preferred Shares Issuable in Series. Authority is expressly vested in the Board of Directors to divide the Preferred Stock into series and, within the following limitations, to fix and determine the relative rights and preferences of the shares of any series so established, and to provide for the issuance thereof. Each series shall be so designated as to distinguish the shares thereof from the shares of all other series and classes. All shares of the Preferred Stock shall be identical except as to the following relative rights and preferences, as to which there may be variations between different series: 1. The rate of dividend, the time of payment, and the dates from which they shall be cumulative, and the extent of participation rights, if any; 2. The price at and the terms and conditions on which shares may be redeemed; 3. The amount payable upon shares in event of involuntary liquidation; 4. The amount payable upon shares in event of voluntary liquidation; 5. Sinking fund provisions for the redemption or purchase of shares; and 6. The terms and conditions on which shares may be converted, if the shares of any series are issued with the privilege of conversion. Prior to the issuance of any shares of a series of Preferred Stock, the Board of Directors shall establish such series by adopting a resolution setting forth the designation and number of shares of the series and the relative rights and preferences thereof, to the extent permitted by the provisions hereof, and the Corporation shall file in the office of the State Corporation Commission of Virginia articles of serial designation as required by law, and the Commission shall have issued a certificate of serial designation. D. Common Characteristics of All Series of Preferred Stock. Each and every series of Preferred Stock, now existing or hereafter issued, shall have the following common characteristics: 1. It shall rank on a parity and be of equal dignity as to dividends and assets with all other series according to the respective dividend rates and amounts distributable upon any voluntary or involuntary liquidation of the Corporation fixed for each such series and without preference or priority of any series over any other series. 2. It shall have no other dividend rights than those set forth in the provisions pertaining to dividends for such series contained herein or in any articles of serial designation. 3. If at any time less than all of a series then outstanding shall be called for redemption, the shares to be redeemed shall be selected by lot in such manner as may be determined by the Board of Directors. 4. All shares of a series redeemed or repurchased by the Corporation shall be canceled in the manner provided by law and shall become authorized and unissued shares undesignated as to series. 5. On or at any time before the date fixed for redemption of any Preferred Stock which has been issued, the Corporation shall deposit in trust, for the account of the holders of the shares to be redeemed, funds necessary for such redemption with a bank or trust company in good standing doing business in the State of Virginia, and having capital, surplus and undivided profits aggregating at least $5,000,000, designated or to be designated in such notice of redemption. Upon the making of such deposit, then all shares with respect to the redemption shall, whether or not the certificates therefor shall have been surrendered for cancellation, be deemed no longer to be outstanding for any purpose, and all rights with respect to such shares shall thereupon cease and terminate, except the right of the holders of the certificates for such shares to receive, out of the funds so deposited in trust, from and after the date of such deposit, the amount payable upon the redemption thereof, and except for such right, if any, to convert such shares in the manner prescribed for the series of which it is a part. At the expiration of three years after the redemption date, any such moneys then remaining on deposit with such bank or trust company shall be paid over to the Corporation, free of trust, and thereafter the holders of the certificates for such shares shall have no claims against such bank or trust company, but only claims as unsecured creditors against the Corporation, or against the Commonwealth of Virginia in the event of escheat by law, for amounts equal to their pro rata shares of the money so paid over. ARTICLE IV. The Corporation may, with the approval of a majority of the entire Board of Directors, establish, adopt, alter, amend or repeal pension plans, pension trust, profit-sharing plans, stock-option plans, stock- purchase plans and other incentive, bonus or deferred compensation plans, for the officers or employees of the Corporation or its subsidiaries, including employees who are directors of the Corporation or any subsidiary. ARTICLE V. A. The number of directors of the Corporation, not less than 3 and not more than 30, shall be fixed by the Bylaws and in the absence of a Bylaw fixing the number, shall be sixteen. Upon the adoption of this Paragraph A, of Article V, the directors shall be divided into three classes (A, B and C), as nearly equal in number as possible. The initial term of office for members of Class A shall expire at the annual meeting of stockholders in 1985; the initial term of office for members of Class B shall expire at the annual meeting of stockholders in 1986; and the initial term of office for members of Class C shall expire at the annual meeting of stockholders in 1987. At each annual meeting of stockholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election, and shall continue to hold office until their respective successors are elected and qualified. In the event of any increase in the number of directors fixed in the Bylaws, the additional directors shall be so classified that all classes of directors have as nearly equal numbers of directors as may be possible. In the event of any decrease in the number of directors of the Corporation, all classes of directors shall be decreased equally as nearly as may be possible. B. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from an increase by not more than two in the authorized number of directors or any vacancies in the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause shall be filled by the affirmative vote of a majority of the directors then in office, whether or not a quorum. Each director so chosen shall hold office until the expiration of the term of the director, if any, whom he has been chosen to succeed, or if none, until the expiration of the term of the class assigned to the additional directorship to which he has been elected, or until his earlier death, resignation or removal. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. Subject to the rights of the holders of any series of Preferred Stock then outstanding, any director or the entire Board of Directors may be removed from office at any time, but only the affirmative vote of the holders of at least four-fifths (80%) of the stock entitled to vote generally in the election of directors at a meeting called for that purpose. C. The affirmative vote of the holders of not less than four-fifths (80%) of the stock entitled to vote generally in the election of directors shall be required to amend, or repeal this Article V or adopt any provision inconsistent with this Article V, or to adopt a Bylaw to fix the number of directors. ARTICLE VI. INDEMNIFICATION AND ELIMINATION OF LIABILITY OF DIRECTORS, ADVISORY DIRECTORS AND OFFICERS A. The Corporation shall indemnify a person who is or was made a party to any proceeding, or is threatened to be made a party to any proceeding, including a proceeding by or in the right of the Corporation, because the person is or was a director, advisory director, or officer of the Corporation or because, while a director, advisory director, or officer of the Corporation, the person is or was serving any other legal entity in any capacity at the request of the Corporation against all liabilities, fines, penalties, and claims imposed upon or asserted against the person(including amounts paid in settlement) and reasonable expenses incurred in the proceeding (including counsel fees), except such liabilities and expenses as are incurred because of the person's willful misconduct or knowing violation of the criminal law. The right to indemnify under this paragraph shall inure to the benefit of heirs, executors and administrators of such a person. The Corporation may, upon majority vote of a quorum of disinterested directors, contract in advance to indemnify and advance the expenses of any director, advisory director, or officer. B. Unless a determination has been made that indemnification is not permissible, the Corporation shall make advances and reimbursements for expenses incurred by a director, advisory director, or officer in a proceeding upon receipt of an undertaking from the director, advisory director, or officer to repay the same if it is ultimately determined that the director, advisory director, or officer is not entitled to indemnification. Such undertaking shall be an unlimited unsecured general obligation of the director, advisory director, or officer and shall be accepted without reference to his ability to make repayment. C. The Corporation may, to a lesser extent or to the same extent that the Corporation is required to provide indemnification and make advances and reimbursements for expenses to its present or former directors, advisory directors, and officers, provide indemnification and make advances and reimbursements for expenses to its present or former employees and agents, the directors, advisory directors, officers, employees and agents of its affiliates, subsidiaries and predecessor entities, and any person serving in any other legal entity in any capacity at the request of the Corporation, and may contract in advance to do so. The determination that indemnification under this paragraph is permissible, the authorization of such indemnification and the evaluation as to the reasonableness of expenses in a specific case shall be made as authorized from time to time by general or specific action of the Board of Directors, which action may be taken before or after a claim for indemnification is made, or as otherwise provided by law. D. In any proceeding brought by a shareholder in the right of the Corporation or brought by or on behalf of shareholders of the Corporation, no damages may be assessed against a director, advisory director or officer of the Corporation arising out of a single transaction, occurrence or course of conduct, provided that this elimination of liability shall not be applicableif the director, advisory director or officer engaged in willful misconduct or knowing violation of the criminal law or of any federal or state securities law. E. The provisions of this Article shall be applicable from and after its adoption, even though some or all of the underlying conduct or events relating to the proceeding with respect to which indemnity is claimed may have occurred before such adoption. No amendment, modification or repeal of this Article shall diminish the rights provided hereunder to any person arising from conduct or events occurring before the adoption of such amendment, modification or repeal. F. The Corporation may purchase and maintain insurance to indemnify it against the whole or any portion of the liability assumed by it in accordance with this Article and may also procure insurance on behalf of any person who is or was a director, advisory director, officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee or agent of another Corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, against any liability or expenses incurred by such person in any such capacity or arising from the person's status as such, whether or not the Corporation would have the power to indemnify the person against such liability under the provisions of this Article. ARTICLE VII. SERIAL DESIGNATIONS The first series of Preferred Stock, consisting of 522,500 shares, is designated as "Series A Preferred Stock." Said series, in addition to the common characteristics described in section D of ARTICLE III, is issued subject to the following terms and conditions: DIVIDENDS: The holders of the Series A Preferred Stock shall be entitled to receive, when and as declared by the Board of Directors, yearly dividends at the rate of 5% per annum, payable quarterly on such dates as the Board of Directors shall determine, together with proper adjustment for any dividend period which is less than a full quarter. Such dividends shall be paid before any dividends are paid upon, or set apart for, the Common Stock of the Corporation and shall be cumulative from the date of issuance so that if for any quarterly dividend period dividends at the rate of 5% per annum shall not have been paid upon or set apart for the Series A Preferred Stock, the deficiency, with interest thereon at the rate of six percent (6%) per annum on such dividends as are in arrears, shall be fully paid or set apart for payment before any dividends shall be paid upon, or set apart for, the Common Stock. REDEMPTION: The Corporation shall have no right to redeem the Series A Preferred Stock until five years after the date on which it is issued. Thereafter, all or any part thereof may be redeemed at any time at the option of the Board of Directors upon not less than forty-five nor more than ninety days written notice of the date fixed for redemption given to the holders thereof in the manner in which notices of stockholders' meetings are required to be given by law. The redemption price at any time during the sixth year after such stock is issued shall be $10.50 per share. Thereafter during the seventh and each subsequent full year after such stock is issued the redemption price shall be reduced by 5 cents per share per year until the beginning of the sixteenth full year after it is issued, after which time it may be redeemed for $10 per share. In addition the redemption price shall include all unpaid accrued dividends, with interest thereon at the rate of six percent (6%) per annum on such dividends as are in arrears, to the date fixed for redemption. LIQUIDATION: 1. In the event of the voluntary dissolution of the Corporation and the distribution of its assets to its stockholders, if there is no other series of Preferred Stock issued or outstanding, then the holders of the Series A Preferred Stock shall be entitled to receive the then redemption price for their shares plus all unpaid accrued dividends, with interest thereon at the rate of six percent (6%) per annum on such dividends as are in arrears, to the date of payment before any amount shall be paid to the holders of the Common Stock. 2. In the event of the voluntary dissolution of the Corporation and the distribution of its assets to its stockholders, if there are other series of Preferred Stock issued and outstanding, then the holders of the Preferred Stock of all series shall be preferred as to both dividends and assets over the holders of the Common Stock. In such event the holders of the Series A Preferred Stock shall be entitled to receive the then redemption price for their shares plus all unpaid accrued dividends, with interest thereon at the rate of six percent (6%) per annum on such dividends as are in arrears, to the date of payment before any amount shall be paid to the holders of the Common Stock. If, for any reason, there are insufficient assets to pay these amounts to the holders of the Series A Preferred Stock and to pay the holders of other series of preferred stock the amounts to which they are also entitled, then the holders of the Series A Preferred Stock and of such other preferred stock, as stated aforesaid, shall be paid ratably in proportion to the amounts to which they are respectively entitled. 3. The provisions hereinabove set forth with regard to a voluntary dissolution of the Corporation shall also be applicable to an involuntary dissolution except that the holders of Preferred Stock shall only be entitled to receive, in addition to dividends and interest, if any, the par value of their shares in lieu of the then redemption price. CONVERSION: 1. At the election of the holder, shares of Series A Preferred Stock may be converted into shares of the Common Stock ($1 par value) of the Corporation at any time at the following listed Basic Conversion Rates, or at such Adjusted Conversion Rates as may hereafter be determined by application of the formulae set forth in paragraph 8, subject to the following listed terms and conditions: a. Until and including March 31, 1977 (herein called the first conversion period) the Basic Conversion Rate shall be 1.40 shares of Common Stock for one share of Series A Preferred Stock; b. Thereafter, until and including March 31, 1982 (herein called the second conversion period) the Basic Conversion Rate shall be 1.20 shares of Common Stock for one share of Series A Preferred Stock; c. Thereafter for as long as any Series A Preferred Stock shall remain outstanding (herein called the third conversion period) the Basic Conversion Rate shall be one share of Common Stock for one share of Series A Preferred Stock. 2. Any holder of shares of Series A Preferred Stock desiring to convert the same shall, during regular business hours, deliver the certificate(s) therefor, properly endorsed, to any transfer agent therefor or to any transfer agent for the Common Stock of the Corporation, or to the Corporation, if there be no such transfer agent, together with a notice in writing of his election to convert the same, and shall receive, in exchange therefor a certificate or certificates for shares of Common Stock in accordance with the conversion rate prevailing with respect to shares of Series A Preferred Stock upon the day of delivery of such notice accompanied by such certificate(s) for the shares of Series A Preferred Stock to be converted. All shares of Series A Preferred Stock surrendered for conversion during any day shall be deemed to have been surrendered together as of the close of business on such day in order that a single conversion rate as to all of such shares shall be determined after giving effect to any transactions affecting the conversion rate during or prior to such day. 3. The right of conversion shall expire as to any shares of Series A Preferred Stock which shall be called for redemption unless, on or before the day and hour for the expiration of the right of conversion specified in the notice of redemption, the certificate(s) representing such shares together with the notice hereinabove provided for shall have been delivered as provided in the foregoing paragraph 2. In case of voluntary or involuntary dissolution of the Corporation all conversion rights applicable to shares of Series A Preferred Stock shall terminate at 2 P.M. Eastern Standard Time, on the sixtieth day next following the date on which such dissolution shall have been authorized by the stockholders of the Corporation, or otherwise ordered, and in case of such dissolution, the Corporation shall notify the holders of the Series A Preferred Stock in the same manner that it is required to give notice of a redemption of such stock that the conversion rights of the shares of Series A Preferred Stock will terminate, which notice shall specify the date of such termination and the conversion rate then in effect applicable to the shares of Series A Preferred Stock. 4. As to any shares of Series A Preferred Stock converted or any shares of Common Stock issuable on conversion no dividends shall be deemed to have accrued at the time of conversion and the holders thereof shall only receive such dividends as they are entitled to receive as holders of record on the dates dividends are declared. 5. The Corporation shall not be required to issue any fraction of a share upon conversion of any share or shares of Series A Preferred Stock. If more than one share of Series A Preferred Stock shall be surrendered for conversion at one time by the same holder, the number of full shares of Common Stock issuable upon conversion thereof shall be computed on the basis of the total number of shares of Series A Preferred Stock so surrendered. If any fractional interest in a share of Common Stock would be deliverable upon conversion, the Corporation shall make an adjustment therefor in cash unless its Board of Directors shall have determined to adjust fractional interests by issuance of scrip certificates or in some other manner. Adjustment in cash shall be made on the basis of the Current Market Value of one share of Common Stock as that term is defined in paragraph 8C below. 6. If the holder of any shares of Series A Preferred Stock so surrendered for conversion shall request that the stock certificate(s) representing the Common Stock issuable upon such conversion be issued in the name of a person or names of persons other than the holder of record thereof, such holder shall pay all stock transfer taxes that may be payable in respect thereof. The Corporation shall pay all original issue taxes imposed, if any, in respect of the issuance of Common Stock upon conversion of shares of Series A Preferred Stock in order that such shares may be issued in the name or names of the respective holder or holders of record of the shares of Series A Preferred Stock so surrendered for conversion. 7. No adjustment shall be made in the Basic Conversion Rates, hereinabove specified, or in any Adjusted Conversion rate which may be in effect at any time if the Corporation shall (i) issue or sell any shares of its Common Stock or securities convertible into Common Stock to the public for cash or to the public or others in consideration for the acquisition by the Corporation or any of its subsidiaries of all or a portion of the stock or assets of any corporation, partnership, or proprietorship, for the business purposes of the Corporation, or (ii) issue or sell any rights to purchase shares of its Common Stock to the then holders of its Common Stock if, at the same time, similar rights are offered to the then holders of the Series A Preferred Stock in such a manner that each of them receives the same rights to purchase shares of Common Stock that he would have received if he had converted his shares of Series A Preferred Stock into Common Stock immediately prior to the time such rights were issued, or (iii) issue or sell any shares of its Common Stock to the holders of the warrants outstanding on March 24, 1967, which warrants provided for the sale and purchase of 350,000 shares of Common Stock, or (iv) issue any shares of its Common Stock to the holders of the options outstanding on March 24, 1967, which options provided for the sale and purchase of 46,500 shares of Common Stock, or (v) issue any shares of its Common Stock pursuant to its Incentive Bonus Plan initially approved by the stockholders on April 28, 1966, or (vi) issue any shares of its Common Stock upon the exercise of rights, warrants or options, the execution of stock purchase contracts, or the conversion of convertible securities if, at the time such rights, warrants or options were issued, such stock purchase contracts entered into, or such convertible securities were issued the conversion rates then in effect were adjusted, in the manner hereinafter described in paragraph 8 or if, at that time, no adjustments in conversion rates were required by the provisions of paragraph 8. 8. Except as is provided in paragraph 7 above the conversion rates in effect from time to time shall be subject to adjustments, made to the nearest one-hundredth share of Common Stock, as follows: A. If the Corporation shall pay any dividend or make any other distribution in shares of Common Stock or in securities convertible into Common Stock the conversion rate for each conversion period in effect immediately prior to such action shall be proportionately increased so that the holders of the Series A Preferred Stock shall be able to convert their shares of Series A Preferred Stock into a number of shares of Common Stock equal to the same percentage of the shares of Common Stock outstanding immediately after the payment of such dividend or the making of such distribution into which they could have converted their shares of Series A Preferred Stock immediately prior to the payment of such dividend or the making of such distribution. For purpose of determining the number of shares of Common Stock outstanding both before and after the payment of such dividend or the making of such distribution all rights (which term as hereinafter used in the description of the Series A Preferred Stock shall be deemed to mean rights, warrants or options) and contracts (which term as hereinafter used in the description of the Series A Preferred Stock shall be deemed to mean contracts or agreements of any kind) then outstanding for the purchase of shares of Common Stock and all of the then outstanding securities issued by the Corporation which are convertible into shares of Common Stock shall be deemed to have been exercised or converted in the manner which they could have been exercised or converted immediately prior to the paying of such dividend or the making of such distribution or, if any of them could not have been exercised or converted on that date in accordance with their terms, then such rights, contracts and convertible securities shall be deemed to have been exercised or converted in the manner which they could be exercised or converted on the date upon which they first become exercisable or convertible. B. If the Corporation shall split the outstanding shares of its Common Stock into a greater number of shares or combine its outstanding shares of Common Stock into a smaller number of shares the conversion rates for each conversion period in effect immediately prior to such action shall be proportionately increased, in the case of a split, or decreased, in case of a combination, so that the holders of the Series A Preferred Stock shall be able to convert their shares of Series A Preferred Stock into a number of shares of Common Stock equal to the same percentage of the shares of Common Stock outstanding immediately after the completion of such action into which they could have converted their shares of Series A Preferred Stock immediately prior to the taking of such action. For the purpose of determining the number of the shares of Common Stock outstanding both before and after the taking of such action all rights, contracts, and convertible securities then outstanding for the purchase of shares of Common Stock shall be deemed to have been exercised or converted in the manner which they could have been exercised or converted immediately prior to such split or combination or, if any of them could not have been exercised or converted on that date in accordance with their terms, then such rights, contracts and convertible securities shall be deemed to have been exercised or converted in the manner which they could be exercised or converted on the date upon which they first become exercisable or convertible. C. If the Corporation shall issue any rights or enter into any contracts for the purchase of shares of its Common Stock, whether or not said rights or contracts can be exercised or executed immediately, at a price (including the consideration received for such rights or contracts) which is less than ninety-five percent of the Current Market Value (as defined below in this paragraph) of the Common Stock of the Corporation on the date such rights are issued or such contracts are entered into, the conversion rates for each conversion period in effect immediately prior to such date shall be increased to an amount determined by multiplying such conversion rates by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to the date such rights are issued or such contracts entered into plus the number of additional shares of Common Stock offered for sale pursuant to such rights or contracts and the denominator of which shall be the number of shares of Common Stock of the Corporation outstanding immediately prior to such date plus the number of shares of Common Stock of the Corporation which the aggregate subscription or purchase price (including the consideration received for such rights or contracts) of the total number of shares offered pursuant to said rights or contracts would purchase at the Current Market Value of the Common Stock of the Corporation at such date. For the purpose of determining the number of shares of Common Stock of the Corporation outstanding immediately prior to the issue of such rights or the making of such contracts all outstanding rights and contracts for the purchase of shares of Common Stock and all securities issued by the Corporation which are convertible into shares of Common Stock shall be deemed to have been exercised or converted in the manner which they could have been exercised or converted immediately prior to the issuing of such rights or the making of such contracts or, if any then outstanding rights or contracts or any then outstanding convertible securities could not have been exercised or converted on that date in accordance with their terms, then such outstanding rights, contracts and convertible securities shall be deemed to have been exercised or converted in the manner which they could be exercised or converted on the date upon which they first become exercisable or convertible. As used in this paragraph the term Current Market Value at the date of issue of such rights or making of such contracts shall mean the last reported sales price per share of the Common Stock of the Corporation on the American Stock Exchange or the New York Stock Exchange on such date, if the shares are listed on either of said exchanges, or the mean of the low bid and high asked price in the over-the-counter market on such day if such shares are not listed on either of said exchanges. D. If the Corporation shall issue any rights or enter into any contracts for the purchase of any security convertible into shares of its Common Stock, whether or not said rights or contracts can be exercised or executed immediately, and, on the date such rights are issued or such contracts are made the price per share of each share of Common Stock of the Corporation into which such security is initially convertible (including the consideration received for such rights or contracts) is less than ninety- five per cent of the Current Market Value of the Common Stock of the Corporation, as defined in paragraph C above, then the conversion rates for each conversion period in effect immediately prior to the issue of such rights or the making of such contracts shall be increased in the manner hereinabove described in paragraph C in the same manner as if such rights or contracts were rights or contracts to purchase the number of shares of Common Stock represented by such convertible securities on the date they are issued, if they are convertible on the date on which they are issued and, if not, the number of shares of Common Stock represented by such convertible securities on the date when they first become convertible. E. If any rights or contracts to purchase any shares of Common Stock or convertible securities of the Corporation shall be issued in connection with the issue or sale of other securities of the Corporation, such rights or contracts shall be deemed to have been issued or sold without consideration. F. If the Corporation shall consolidate or merge with another corporation, or reclassify its Common Stock (other than by way of subdivision or contraction of outstanding shares of Common Stock) each share of Series A Preferred Stock shall thereafter be convertible into the number of shares of stock or other securities or property of the Corporation or of the corporation resulting from such consolidation, merger, or reclassification, to which the Common Stock of the Corporation, deliverable upon conversion of shares of Series A Preferred Stock, would have been entitled, upon such consolidation, merger or reclassification had the holder of such share of Series A Preferred Stock exercised his right of conversion in the manner in which it could have been exercised on the date of such consolidation, merger or reclassification or, if it could not have been converted on that date, then in the manner in which it could have first been exercised thereafter, and such shares of Common Stock been issued and outstanding, and had suchholder been the holder of record of such Common Stock at the time thereof, and lawful provision therefor shall be made as part of any such consolidation, merger or reclassification. G. If (i) The Corporation shall declare any dividend payable otherwise than in cash upon its Common Stock to the holders of its Common Stock, or (ii) The Corporation shall offer only to the holders of its Common Stock any additional shares of stock of any class of the Corporation or any right to subscribe thereto, or (iii) Any capital reorganization, or reclassification of the capital stock of the Corporation, or consolidation or merger of the Corporation with another corporation, or sale of all or substantially all of the assets of the Corporation shall be proposed, then, in any one or more of said events, the Corporation shall notify the holders of the Series A Preferred Stock in the same manner that it is required to give notice of the redemption of said stock prior to the date on which (a) the books of the Corporation shall close, or a record be taken for such stock dividend or subscription rights, or (b) such reclassification, reorganization, consolidation, merger or sale, shall take place, as the case may be. Such notice shall also state the conversion rate at the time in effect applicable to the shares of Series A Preferred Stock. H. The Corporation shall at all times reserve and keep available out of its authorized and unissued Common Stock, solely for the purpose of effecting the conversion of shares of Series A Preferred Stock, such number of shares of Common Stock as, from time to time, shall be sufficient to effect the conversion of all shares of Series A Preferred Stock from time to time outstanding. The Corporation, from time to time, shall in accordance with the laws of the Commonwealth of Virginia, increase the authorized amount of its Common Stock if at any time the number of shares of Common Stock remaining unissued shall not be sufficient to permit the conversion of all shares of Series A Preferred Stock then outstanding. I. The exercise of the conversion privilege shall be subject to such regulations not inconsistent with the provisions of this paragraph 8 as may at any time or from time to time be adopted by resolution of the Board of Directors, and any resolution so adopted may, at any time or from time to time, be amended or repealed. MISCELLANEOUS: 1. There shall be no sinking fund provided for the redemption of shares of Series A Preferred Stock. 2. The Corporation may not redeem any shares of its Common Stock so long as any dividends on its Series A Preferred Stock are in arrears. ARTICLE VIII. The second series of Preferred Stock, consisting of 84,000 shares, is designated as "Second Series A Preferred Stock." Said series, in addition to the common characteristics described in Section D of ARTICLE III, is issued subject to the following terms and conditions (whenever the words "Identical to ARTICLE VII" appear next to a subject heading or paragraph(s) thereof, they shall be taken to mean (i) that the entire contents of the particular heading or paragraph(s) thereof, as the case may be, are identical to the corresponding provisions pertaining to "Series A Preferred Stock" set forth in ARTICLE VII hereof, except that each reference therein to "Series A Preferred Stock" is changed to "Second Series A Preferred Stock," and (ii) that such corresponding provisions of ARTICLE VII, with each reference therein to "Series A Preferred Stock" changed to "Second Series A Preferred Stock," are incorporated herein verbatim by reference): DIVIDENDS: All provisions are Identical to ARTICLE VII. REDEMPTION: All provisions are Identical to ARTICLE VII. LIQUIDATION: All provisions are Identical to ARTICLE VII. CONVERSION: Paragraphs 1, 2, 3, 4, 5 and 6 pertaining to CONVERSION are Identical to ARTICLE VII. 7. No adjustment shall be made in the Basic Conversion Rates, hereinabove specified, or in any Adjusted Conversion Rate which may be in effect at any time if the Corporation shall (i) issue or sell any shares of its Common Stock or securities convertible into Common Stock to the public for cash or to the public or others in consideration for the acquisition by the Corporation or any of its subsidiaries of all or a portion of the stock or assets of any corporation, partnership, or proprietorship, for the business purposes of the Corporation, or (ii) issue or sell any rights to purchase shares of its Common Stock to the then holders of its Common Stock if, at the same time, similar rights are offered to the then holders of the Second Series A Preferred Stock in such a manner that each of them receives the same rights to purchase shares of Common Stock that he would have received if he had converted his shares of Second Series A Preferred Stock into Common Stock immediately prior to the time such rights were issued, or (iii) issue or sell any shares of its Common Stock to the holders of the warrants outstanding on February 16, 1968, which warrants provided for the sale and purchase of 350,000 shares of Common Stock, or (iv) issue any shares of its Common Stock to the holders of the options outstanding on February 16, 1968, which options provided for the sale and purchase of 42,500 shares of Common Stock, or (v) issue any shares of its Common Stock pursuant to its Incentive Bonus Plan initially approved by the stockholders on April 28, 1966, or (vi) issue any shares of its Common Stock upon the exercise of rights, warrants or options, the execution of stock purchase contracts, or the conversion of convertible securities if, at the time such rights, warrants or options were issued, such stock purchase contracts entered into, or such convertible securities were issued the conversion rates then in effect were adjusted, in the manner hereinafter described in paragraph 8 or if, at that time, no adjustments in conversion rates were required by the provisions of paragraph 8. Paragraph 8 and subparagraphs A through I thereunder, inclusive, pertaining to CONVERSION are Identical to ARTICLE VII. MISCELLANEOUS: All provisions are Identical to ARTICLE VII. ARTICLE IX. The third series of Preferred Stock, consisting of 80,000 shares, is designated as "Third Series A Preferred Stock." Said series, in addition to the common characteristics described in section D of ARTICLE III, is issued subject to the following terms and conditions (whenever the words "Identical to ARTICLE VII" appear next to a subject heading or paragraph(s) thereof, they shall be taken to mean (i) that the entire contents of the particular heading or paragraph(s) thereof, as the case may be, are identical to the corresponding provisions pertaining to "Series A Preferred Stock" set forth in ARTICLE VII hereof, except that each reference therein to "Series A Preferred Stock" is changed to "Third Series A Preferred Stock," and (ii) that such corresponding provisions of ARTICLE VII, with each reference therein to "Series A Preferred Stock" changed to "Third Series A Preferred Stock," are incorporated herein verbatim by reference): DIVIDENDS: All provisions are Identical to ARTICLE VII. REDEMPTION: All provisions are Identical to ARTICLE VII. LIQUIDATION: All provisions are Identical to ARTICLE VII. CONVERSION: Paragraphs 1, 2, 3, 4, 5 and 6 pertaining to CONVERSION are identical to ARTICLE VII. 7. No adjustment shall be made in the Basic Conversion Rates, hereinabove specified, or in any Adjusted Conversion Rate which may be in effect at any time if the Corporation shall (i) issue or sell any shares of its Common Stock or securities convertible into Common Stock to the public for cash or to the public or others in consideration for the acquisition by the Corporation or any of its subsidiaries of all or a portion of the stock or assets of any corporation, partnership, or proprietorship, for the business purposes of the Corporation, or (ii) issue or sell any rights to purchase shares of its Common Stock to the then holders of its Common Stock if, at the same time, similar rights are offered to the then holders of the Third Series A Preferred Stock in such a manner that each of them receives the same rights to purchase shares of Common Stock that he would have received if he had converted his shares of Third Series A Preferred Stock into Common Stock immediately prior to the time such rights were issued, or (iii) issue or sell any shares of its Common Stock to the holders of the warrants outstanding on October 2, 1968, which warrants provided for the sale and purchase of 350,000 shares of Common Stock, or (iv) issue any shares of its Common Stock to the holders of the options outstanding on October 2, 1968, which options provided for the sale and purchase of 38,875 shares of Common Stock, or (v) issue any shares of its Common Stock pursuant to its Incentive Bonus Plan initially approved by; the stockholders on April 28, 1966, or (vi) issue any shares of its Common Stock upon the exercise of rights, warrants or options, the execution of stock purchase contracts, or the conversion of convertible securities if, at the time such rights, warrants or options were issued, such stock purchase contracts entered into, or such convertible securities were issued the conversion rates then in effect were adjusted, in the manner hereinafter described in paragraph 8 or if, at that time, no adjustments in conversion rates were required by the provisions of paragraph 8. Paragraph 8 and subparagraphs A through I thereunder, inclusive, pertaining to CONVERSION are identical to ARTICLE VII. MISCELLANEOUS: All provisions are Identical to ARTICLE VII. ARTICLE X. A. Higher Vote for Certain Business Combinations. In addition to any affirmative vote of holders of a class or series of capital stock of the Corporation required by law or these Articles, and except as otherwise expressly provided in Section B of this Article X, a Business Combination (as hereinafter defined) with or upon a proposal by a Related Person (as hereinafter defined) shall require the affirmative vote of the holders of at least eighty percent (80%) of the voting power of the voting stock of the Corporation, voting together as a single class. B. When Higher Vote Is Not Required. The provisions of Section A of this Article X shall not be applicable to a particular Business Combination and such Business Combination shall require only such affirmative vote as is required by law and other provisions of the Articles or the Bylaws of the Corporation, if all of the conditions specified in any one of the following Paragraphs (1), (2) or (3) are met: 1. Approval by Directors. The Business Combination has been approved by a vote of a majority of directors, which includes a majority of all the Continuing Directors (as hereinafter defined); or 2. Combination with Subsidiary. The Business Combination is solely between the Corporation and a subsidiary of the Corporation; or 3. Price Conditions and Procedures. All of the following conditions have been met: a. Such holders shall receive the aggregate amount of (i) cash and (ii) fair market value (as of the date of the consummation of the Business Combination) of consideration other than cash, per share of Common or Preferred in such Business Combination by holders thereof at least equal to the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Related Person for any shares of such class or series of stock acquired by it; provided, that if the highest preferential amount per share of a series of Preferred Stock to which the holders thereof would be entitled in the event of any voluntary or involuntary liquidation, dissolution or winding-up of the affairs of the Corporation (regardless of whether the Business Combination to be consummated constitutes such an event) is greater than such aggregate amount, holders of such series of Preferred Stock shall receive an amount for each such share at least equal to the highest preferential amount applicable to such series of Preferred Stock. b. The consideration to be received by holders of a particular class or series of outstanding Common or Preferred Stock shall be in cash or in the same form as the Related Person has previously paid for shares of such class or series of stock. If the Related Person has paid for shares of any class or series of stock with varying forms of consideration, the form of consideration given for such class or series of stock in the Business Combination shall be either cash or the form used to acquire the largest number of shares of such class or series of stock previously acquired by it. c. No Extraordinary Event (as hereinafter defined) occurs after the Related Person has become a Related Person and prior to the consummation of the Business Combination. d. A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) is mailed to public stockholders of the Corporation at least 30 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required pursuant to such Act or subsequent provisions). C. Certain Definitions. For purposes of this Article X: 1. A "person" shall mean any individual, firm, corporation or other entity, or a group of "persons" acting or agreeing to act in the manner set forth in Rule 13d-5 under the Securities Exchange Act of 1934, as in effect on January 1, 1984. 2. The term "Business Combination" shall mean any of the following transactions, when entered into by the Corporation, or a subsidiary of the Corporation, with, or upon a proposal by, a Related Person: a. the merger or consolidation of the Corporation, or any subsidiary of the Corporation; or b. the sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one or a series of transactions) of any assets of the Corporation or any subsidiary of the Corporation having an aggregate fair market value of $5,000,000 or more; or c. the issuance or transfer by the Corporation or any subsidiary of the Corporation (in one or a series of transactions) of securities of the Corporation or that subsidiary having an aggregate fair market value of $5,000,000 or more; or d. the adoption of a plan or proposal for the liquidation or dissolution of the Corporation; or e. the reclassification of securities (including a reverse stock split), recapitalization, consolidation or any other transaction (whether or not involving a Related Person) which has the direct or indirect effect of increasing the voting power, whether or not then exercisable, of a Related Person in any class or series of capital stock of the Corporation or any subsidiary of the Corporation; or f. any agreement, contract or other arrangement providing directly or indirectly for any of the foregoing. 3. The term "Related Person" shall mean any person (other than the Corporation, a subsidiary of the Corporation or any profit sharing, employee stock ownership or other employee benefit plan of the Corporation or a subsidiary of the Corporation or any trustee of or fiduciary with respect to any such plan acting in such capacity) that is the direct or indirect beneficial owner (as defined in Rule 13d-3 and Rule 13d- 5 under the Securities Exchange Act of 1934, as in effect on January 1, 1984) of five percent (5%) or more than five percent (5%) of the outstanding capital stock of the Corporation entitled to vote for the election of directors, and any Affiliate or Associate of any such person. 4. The term "Continuing Director" shall mean any member of the Board of Directors who is not affiliated with a Related Person and who was a member of the Board of Directors immediately prior to the time that the Related Person became a Related Person, and any person who is not affiliated with the Related Person and is recommended to be a Continuing Director by a majority of Continuing Directors who are then members of the Board of Directors. 5. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 under the Securities Exchange Act of 1934, as in effect on January 1, 1984. 6. The term "Extraordinary Event" shall mean, as to any Business Combination and Related Person, any of the following events that is not approved by a majority of all Continuing Directors: a. any failure to declare and pay at the regular date therefor any full quarterly dividend (whether or not cumulative) on outstanding Preferred Stock; or b. any reduction in the annual rate of dividends paid on the Common Stock (except as necessary to reflect any subdivision of the Common Stock); or c. any failure to increase the annual rate of dividends paid on the Common Stock as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction that has the effect of reducing the number of outstanding shares of the Common Stock; or d. the receipt by the Related Person, after such Related Person has become a Related Person, of a direct or indirect benefit (except proportionately as a shareholder) from any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation or any subsidiary of the Corporation, whether in anticipation of or in connection with the Business Combination or otherwise. 7. A majority of the Continuing Directors shall have the power to make all determinations with respect to this Article X, including, without limitation, determining the transactions that are Business Combinations, the persons who are Related Persons, the time at which a Related Person became a Related Person, and the fair market value of any assets, securities or other property, and any such determinations of such Continuing Directors shall be conclusive and binding. D. No Effect on Fiduciary Obligations of Related Persons. Nothing contained in this Article X shall be construed to relieve any Related Person from any fiduciary obligation imposed by law. E. Amendment or Repeal. The affirmative vote of the holders of not less than eighty percent (80%) of the total voting power of the voting stock of the Corporation, voting together as a single class, shall be required in order to amend or repeal this Article X or adopt any provision inconsistent with this Article X. ARTICLE XI. A. The power to adopt, alter, amend or repeal Bylaws shall be vested in the Board of Directors, which may take such action by the vote of a majority of the directors present and voting at a meeting where a quorum is present, provided that if, as of the date such action shall occur, there is a Related Person as defined in this Article XI of the Articles of Incorporation, such majority shall include a majority of the Continuing Directors as defined in this Article XI of the Articles of Incorporation; the stockholders, by the affirmative vote of the holders of not less than four-fifths (80%) of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors, may adopt new Bylaws, or alter, amend or repeal Bylaws adopted by either the stockholders or the Board of Directors. In addition, the stockholders may prescribe by the affirmative vote of the holders of not less than four-fifths (80%) of the voting power of all of the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors that any Bylaw made by them shall not be altered, amended or repealed by the Board of Directors. B. This Article shall not be amended, modified or repealed except by the affirmative vote of the holders of not less than four-fifths (80%) of the voting power of all of the then outstanding shares of capital stock of the Corporation then entitled to vote generally in the election of directors. C. Certain Definitions. For purposes of this Article XI: 1. A "person" shall mean any individual, firm, corporation or other entity, or a group of "persons" acting or agreeing to get together in the manner set forth in Rule 13d-5 under the Securities Exchange Act of 1934, as in effect on January 1, 1984. 2. The term "Related Person" shall mean any person (other than the Corporation, a subsidiary of the Corporation or any profit sharing, employee stock ownership or other employee benefit plan of the Corporation or a subsidiary of the Corporation or any trustee of or fiduciary with respect to any such plan acting in such capacity) that is the direct or indirect beneficial owner (as defined in Rule 13d-3 and Rule 13d-5 under the Securities Exchange Act of 1934, as in effect on January 1, 1984) of five percent (5%) or more than five percent (5%) of the outstanding capital stock of the Corporation entitled to vote for the election of directors, and any Affiliate or Associate of any such person. 3. The term "Continuing Director" shall mean any member of the Board of Directors who is not affiliated with a Related Person and who was a member of the Board of Directors immediately prior to the time that the Related Person became a Related Person, and any successor to a Continuing Director who is not affiliated with the Related Persons and is recommended to succeed a Continuing Director by a majority of Continuing Directors who are then members of the Board of Directors. 4. "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 under the Securities Exchange Act of 1934, as in effect on January 1, 1984. ARTICLE XII. A. A seventh series of Preferred Stock, par value $10.00 per share, is created as follows: Section 1. Designation and Amount. The shares of such series shall be designated as "Series E Participating Preferred Stock," and the number of shares constituting such series shall be 300,000. Such number of shares may be increased or decreased by resolution of the Board of Directors; provided, that no decrease shall reduce the number of shares of Series E Participating Preferred Stock to a number less than that of the shares then outstanding plus the number of shares issuable upon exercise of outstanding rights, options or warrants or upon conversion of outstanding securities issued by the Corporation. Section 2. Dividends and Distributions. (A) The holders of shares of Series E Participating Preferred Stock in preference to the holders of shares of Common Stock, par value $1.00 per share (the "Common Stock"), of the Corporation and any other junior stock, shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable in cash on the first day of January, April, July and October in each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series E Participating Preferred Stock in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00, or (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends, and 100 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock, since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series E Participating Preferred Stock. In the event the Corporation shall at any time after August 8, 1988 (the "Rights Declaration Date") (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount to which holders of shares of Series E Participating Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series E Participating Preferred Stock as provided in paragraph (A) above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that, in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series E Participating Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series E Participating Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series E Participating Preferred Stock unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series E Participating Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series E Participating Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by- share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series E Participating Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be no more than 30 days prior to the date fixed for the payment thereof. Section 3. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series E Participating Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series E Participating Preferred Stock outstanding shall have been paid in full, the Corporation shall not (i) declare or pay dividends on, make any other distributions on, or redeem or purchase or otherwise acquire for consideration any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series E Participating Preferred Stock; (ii) declare or pay dividends on or make any other distributions on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series E Participating Preferred Stock except dividends paid ratably on the Series E Participating Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem or purchase or otherwise acquire for consideration shares of any stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series E Participating Preferred Stock provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such parity stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series E Participating Preferred Stock; or (iv) purchase or otherwise acquire for consideration any shares of Series E Participating Preferred Stock or any shares of stock ranking on a parity with the Series E Participating Preferred Stock except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under paragraph (A) of this Section 3, purchase or otherwise acquire such shares at such time and in such manner. Section 4. Liquidation, Dissolution or Winding Up. (A) Upon any liquidation (voluntary or otherwise), dissolution or winding up of the Corporation, no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series E Participating Preferred Stock unless, prior thereto, the holders of shares of Series E Participating Preferred Stock shall have received per 1/100 share thereof, the greater of the issuance price thereof or the payment made per share of Common Stock, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the "Series E Liquidation Preference"). Following the payment of the full amount of the Series E Liquidation Preference, no additional distributions shall be made to the holders of shares of Series E Participating Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the "Common Adjustment") equal to the quotient obtained by dividing (i) the Series E Liquidation Preference by (ii) 100 (as appropriately adjusted as set forth in subparagraph C below to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii), the "Adjustment Number"). Following the payment of the full amount of the Series E Liquidation Preference and the Common Adjustment in respect to all outstanding shares of Series E Participating Preferred Stock and Common Stock, respectively, holders of Series E Participating Preferred Stock and holders of shares of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively. (B) In the event there are not sufficient assets available to permit payment in full of the Series E Liquidation Preference and the liquidation preferences of all other series of Preferred Stock, if any, which rank on a parity with the Series E Participating Preferred Stock then such remaining assets shall be distributed ratably to the holders of such parity shares in proportion to their respective liquidation preferences. In the event there are not sufficient assets available to permit payment in full of the Common Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock. (C) In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 5. Consolidation, Merger, etc. In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series E Participating Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share (subject to the provision for adjustment hereinafter set forth) equal to 100 times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged. In the event the Corporation shall at any time after the Rights Declaration Date (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series E Participating Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that are outstanding immediately prior to such event. Section 6. Redemption. The shares of Series E Participating Preferred Stock shall not be redeemable. Section 7. Ranking. The Series E Participating Preferred Stock shall rank on a parity with all other series of the Corporation's Preferred Stock as to the payment of dividends and the distribution of assets. Section 8. Amendment. The Articles of Incorporation of the Corporation shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Series E Participating Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series E Participating Preferred Stock voting separately as a class. Section 9. Fractional Shares. Series E Participating Preferred Stock may be issued in fractions of a share which shall entitle the holder in proportion to such holders' fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series E Participating Preferred Stock. ARTICLE XIII. Except as otherwise provided under Article V, Article X and Article XI, these Articles of Incorporation may be amended by the affirmative vote of a majority of all votes entitled to be cast by each voting group of the Corporation entitled to vote on the amendment at a meeting at which a quorum of each voting group exists. Exhibit 3 BYLAWS OF FIRST VIRGINIA BANKS, INC. (With Amendments through April 28, 1995) ARTICLE I MEETING OF STOCKHOLDERS Section 1. Annual Meetings. The annual meeting of the stockholders for the election of directors and for the transaction of such other business as may properly come before the meeting shall be held on such date each year that shall be established by the board of directors; however, if no such date is established, then the annual meeting shall be on the fourth Wednesday in April each year, if not a legal holiday, and if so, then on the next succeeding business day. Section 2. Special Meetings. Except as provided in Article II, Section 4 of these bylaws, special meetings of the stockholders shall be called by the president or secretary only at the written request of a majority of the directors, provided that, if as of the date of the request for such special meeting there is a Related Person as defined in Article X of the Articles of Incorporation, such majority shall include a majority of the Continuing Directors, as defined in Article X of the Articles of Incorporation or by the holders of four-fifths (80%) of the voting power of all of the then outstanding shares of capital stock of the corporation entitled to vote generally in the election of directors. The request shall state the purpose or purposes for which the meeting is to be called. The notice of every special meeting of stockholders shall state the purpose for which it is called. Section 3. Hour and Place of Meeting. All meetings of the stockholders may be held at such hour and place within or without the State of Virginia as may be provided in the notice of meeting. Section 4. Notice of Meetings. Written notice of the annual and of any special meeting of the stockholders shall be given not less than ten days nor more than sixty days before the meeting (except as a different time is specified by law), by or at the direction of the board of directors or the person calling the meeting, to each holder of record of shares of the corporation entitled to vote at the meeting, in person or by mail sent to the address recorded on the stock transfer books of the corporation on the date mailed, unless otherwise required by law. If any stockholder shall fail or decline to furnish mailing address, then such notice need not be sent to him unless required by law. All such notices should state the day, hour, place and purpose(s) of the meeting, and the matters to be considered. Section 5. Voting List. A complete list of the stockholders entitled to vote at any meeting or any adjournment thereof, with the address of and number of shares held by each on the record date, shall, for a period of ten days prior to such meeting, be kept on file at the registered office or principal place of business of the corporation or at the office of the transfer agent or registrar and shall be subject to inspection by any stockholder at any time during usual business hours except as such right of inspection may be subject to limitations prescribed by law. Such list shall also be produced and kept open at the time and place of the meeting and shall be open to inspection by any stockholder during the whole time of the meeting. Whenever the production or exhibition of any voting list, or of the stock transfer books of the corporation, shall be required by law, the production of a copy thereof certified correct by the transfer agent shall be deemed to be substantial compliance with such requirement. Section 6. Quorum. A majority of the shares entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders. Once a quorum has been duly convened, the quorum shall not be deemed broken by the departure of any stockholder or holder of a proxy. In the absence of a quorum, the stockholders present in person or by proxy, by majority vote and without notice other than by announcement at the meeting, may adjourn the meeting from time to time until a quorum shall be present. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which could have been transacted at the meeting as originally called. Section 7. Organization. At all meetings of the stockholders, the chairman of the board, or in his absence the vice chairmen, in the order of their appointment, or in their absence the president, or in the absence of all of them a person chosen by a majority of the stockholders represented in person or by proxy and entitled to vote at the meeting shall preside as chairman of the meeting. The secretary of the corporation, or in his absence or if he be appointed chairman of the meeting, an assistant secretary shall act as secretary at all meetings of the stockholders; but if neither the secretary nor any assistant secretary be present and able to act as such, the chairman may appoint any person to act as secretary of the meeting. Section 8. Conduct of Meetings. Parliamentary rules as formulated by Cushman, Robert's or Sturgis' Manual shall govern the conduct of all meetings of the stockholders upon verbal announcement thereof by the chairman, except that where such rules conflict with the provisions of these bylaws, the statutes of Virginia, or the Articles of Incorporation, the provisions of the said bylaws, statutes or Articles shall prevail. The chairman of all meetings of the stockholders may announce from time to time such rules and guidelines for the conduct of business as he may determine in his discretion. Section 9. Voting. Except as otherwise provided by law or by Articles of Serial Designation with respect to any class or classes of preferred stock outstanding, each stockholder shall be entitled to one vote for each share of stock held by him and registered in his name on the books of the corporation on the date fixed by the resolution of the board of directors as the record date for the determination of the stockholders entitled to notice of and to vote at such meeting as more fully set forth elsewhere in these bylaws. Such vote may be given in person or by proxy appointed by an instrument in writing executed by a stockholder or his duly authorized attorney, and delivered to the secretary of the meeting. No proxy shall be valid after eleven months from its date, unless otherwise provided therein. If a quorum is present, the affirmative vote of a majority of the shares represented at the meeting and entitled to vote on the subject matter shall be the act of the stockholders, except when a larger vote or a vote by class is required by the Articles of Incorporation, any other provision of these bylaws or the laws of the state of Virginia and except that in elections of directors those receiving the greatest number of votes shall be deemed elected even though not receiving a majority. Section 10. Counting of Votes. The chairman shall appoint three tellers to count the vote respecting the election of directors and any other questions put to vote, whether such vote is by written ballot or by a show of hands or by viva voce', and at least two out of three tellers shall certify in writing the results of any such voting. Written ballots shall not be required unless first decided upon by the chairman on matters to be brought before the stockholders and a teller may but need not be, a stockholder of the corporation. Section 11. Stockholder Nominations. (a) Nominations of candidates for election as directors at any annual meeting of stockholders may be made (i) by, or at the direction of, a majority of the directors (provided that, if as of the date of the nomination there is a Related Person as defined in Article XI of the Articles of Incorporation, such majority shall include a majority of the Continuing Directors, as defined in Article XI of the Articles of Incorporation (such directors, whether or not they include the Continuing Directors shall be referred to as the "directors" for the purposes of this Section 11)) or (ii) by any stockholder of record entitled to vote at such annual meeting. Only persons nominated in accordance with procedures set forth in Section 11(b) shall be eligible for election as directors at an annual meeting. (b) Nominations, other than those made by, or at the direction of, a majority of the directors, shall be made pursuant to timely notice in writing to the secretary of the Corporation as set forth in this Section 11(b). To be timely, a stockholder's notice shall be delivered to, or mailed and received at, the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the date of the scheduled annual meeting, regardless of postponements, deferrals, or adjournments of that meeting to a later date; provided, however, that if less than seventy (70) days' notice or prior public disclosure of the date of the scheduled annual meeting is given or made, notice by the stockholder to be timely must be so delivered or received not later than the close of business on the tenth (10th) day following the earlier of the day on which such notice of the date of the scheduled annual meeting was mailed or the day on which such public disclosure was made. Such stockholder's notice shall set forth (i) as to each person whom the stockholder proposes to nominate for election as a director (a) the name, age, business address and residence address of such person, (b) the principal occupation or employment of such person, (c) the class and number of shares of the Corporation's equity securities which are beneficially owned (as such term is defined in Rule 13d-3 or 13d-5 under the Securities Exchange Act of 1934 (the "Exchange Act")) by such person on the date of such stockholder notice and (d) any other information relating to such person that would be required to be disclosed pursuant to Schedule 13D under the Exchange Act in connection with the acquisition of shares, and pursuant to Regulation 14A under the Exchange Act, in connection with the solicitation of proxies with respect to nominees for election as directors, regardless of whether such person is subject to the provisions of such regulations, including, but not limited to, information required to be disclosed by Items 4(b) and 6 of Schedule 14A under the Exchange Act and information which would be required to be filed on Schedule 14B under the Exchange Act with the Securities and Exchange Commission and (ii) as to the stockholder giving the notice (a) the name and address, as they appear on the Corporation's books, of such stockholder and any other stockholder who is a record or beneficial owner of any equity securities of the Corporation and who is known by such stockholder to be supporting such nominee(s) and (b) the class and number of shares of the Corporation's equity securities which are beneficially owned, as defined above, and owned of record by such stockholder on the date of such stockholder notice and the number of shares of the Corporation's equity securities beneficially owned and owned of record by any person known by such stockholder to be supporting such nominee(s) on the date of such stockholder notice. At the request of a majority of the directors, any person nominated by, or at the direction of, the Board of Directors for election as a director at an annual meeting shall furnish to the secretary of the Corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. (c) No person shall be elected as a director of the Corporation unless such person is nominated in accordance with the procedures set forth in Section 11 and is eligible to serve as a director under Article II of these bylaws. Ballots bearing the names of all the persons who have been nominated for election as directors at an annual meeting in accordance with the procedures set forth in Section 11 and are eligible to serve as a director under Article II of these bylaws shall be provided for use at the annual meeting. (d) A majority of the directors may reject any nomination by a stockholder not timely made in accordance with the requirements of Section 11(b). If a majority of the directors determines that the information provided in a stockholder's notice does not satisfy the informational requirements of Section 11(b) in any material respect, the secretary of the Corporation shall promptly notify such stockholder of the deficiency in the notice. The stockholder shall have an opportunity to cure the deficiency by providing additional information to the secretary within five (5) days from the date such deficiency notice is given to the stockholder, or such shorter time as may be reasonably deemed appropriate by a majority of the directors. If the deficiency is not cured within such period, or if a majority of the directors reasonably determines that the additional information provided by the stockholder, together with the information previously provided, does not satisfy the requirements of Section 11(b) in any material respect, then the board of directors may reject such stockholder's nomination. The secretary of the Corporation shall notify a stockholder in writing whether his or her nomination has been made in accordance with the time and informational requirements of Section 11(b). Notwithstanding the procedure set forth in this paragraph, if the majority of the directors does not make a determination as to the validity of any nominations by a stockholder, the chairman of the annual meeting shall determine and declare at the annual meeting whether a nomination was not made in accordance with the terms of Section 11(b). If the chairman of such meeting determines that a nomination was not made in accordance with the terms of Section 11(b), he or she shall so declare at the annual meeting and the defective nomination shall be disregarded. Section 12. Business to be Brought Before the Meeting. (a) At an annual meeting of stockholders, only such business shall be conducted, and only such proposals shall be acted upon as shall have been brought before the annual meeting (i) by, or at the direction of, the majority of the directors (provided that, if as of the date of the nomination there is a Related Person as defined in Article XI of the Articles of Incorporation, such majority shall include a majority of the Continuing Directors, as defined in Article XI of the Articles of Incorporation (such directors, whether or not they include the Continuing Directors shall be referred to as the "directors" for the purposes of this Section 12)); or (ii) by any stockholder of the Corporation who complies with the notice procedures set forth in Section 12(b). (b) For a proposal to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the secretary of the Corporation. To be timely, a stockholder's notice must be delivered to, or mailed and received at, the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the scheduled annual meeting, regardless of any postponements, deferrals or adjournments of that meeting to a later date; provided, however, that if less than seventy (70) days' notice or prior public disclosure of the date of the scheduled annual meeting is given or made, notice by the stockholder, to be timely, must be so delivered or received not later than the close of business on the tenth (10th) day following the earlier of the day on which such notice of the date of the scheduled annual meeting was mailed or the day on which such public disclosure was made. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the proposal desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and address, as they appear on the Corporation's books, of the stockholder proposing such business and any other stockholder who is the record or beneficial owner (as defined in Section 11(a) of these bylaws) of any equity security of the Corporation known by such stockholder to be supporting such proposal, (iii) the class and number of shares of the Corporation's equity securities which are beneficially owned (as defined in Section 11(a) of these bylaws) and owned of record by the stockholder giving the notice on the date of such stockholder notice and by any other record or beneficial owners of the Corporation's equity securities known by such stockholder to be supporting such proposal on the date of such stockholder notice, and (iv) any financial or other interest of the stockholder in such proposal. (c) A majority of the directors may reject any stockholder proposal not timely made in accordance with the terms of Section 12(b). If a majority of the directors determines that the information provided in a stockholder's notice does not satisfy the informational requirements of Section 12(b) in any material respect, the secretary of the Corporation shall promptly notify such stockholder of the deficiency in the notice. The stockholder shall have the opportunity to cure the deficiency by providing additional information to the secretary within such period of time, not to exceed five (5) days from the date such deficiency notice is given to the stockholder, as the majority of the directors shall reasonably determine. If the deficiency is not cured within such period, or if the majority of the directors determines that the additional information provided by the stockholder, together with information previously provided, does not satisfy the requirements of this Section 12(b) in any material respect, then a majority of the directors may reject such stockholder's proposal. The secretary of the Corporation shall notify a stockholder in writing whether such person's proposal has been made in accordance with the time and information requirements of Section 12(b). Notwithstanding the procedures set forth in this paragraph, if the majority of the directors does not make a determination as to the validity of any stockholder proposal, the chairman of the annual meeting shall determine and declare at the annual meeting whether the stockholder proposal was made in accordance with the terms of Section 12(b). If the chairman of such meeting determines that a stockholder proposal was not made in accordance with the terms of Section 12(b), he or she shall so declare at the annual meeting and any such proposal shall not be acted upon at the annual meeting. (d) This provision shall not prevent the consideration and approval or disapproval at the annual meeting of reports of officers, directors and committees of the Board of Directors, but, in connection with such reports, no new business shall be acted upon at such annual meeting unless stated, filed and received as herein provided. ARTICLE II BOARD OF DIRECTORS Section 1. General Powers. The business and affairs of the corporation shall be managed by the board of directors subject to any requirement of stockholder action. Section 2. Number. The number of directors shall be sixteen (16). Section 3. Terms of Directors. A person up for election shall be elected to serve a term of three years and shall not be eligible to stand for election or re-election if on the date of the stockholders' meeting at which he is to be elected or re-elected, he has then reached the age of 72 years, except that if any such person shall have been duly appointed as chairman of the corporation or of a member bank at any time prior to the date that he reaches the age of 72 years, he shall be eligible to continue to stand for election as a director thereafter; provided, however, that he shall not in any case be eligible to stand for such election beyond the date that he reaches the age of 75. Further, except as provided above, when a director shall reach the age of 72 during such term, he shall resign from the board of directors effective on the day preceding the next succeeding annual meeting of the stockholders at which such director's term expires. If any such director shall become ill and unable to perform his duties as a director, he shall resign from the board of directors effective on the day of the next succeeding meeting of the board of directors or the date set forth in the notice of resignation, whichever is earlier. Section 4. Vacancies. Any vacancy on the board of directors for any cause, except a vacancy created by an increase by more than two in the number of directors, may be filled for the unexpired portion of the term by a majority vote of all of the remaining directors, though less than a quorum, given at a regular meeting or at a special meeting called for that purpose. In case the entire board shall die or resign, any stockholder may call a special meeting of the stockholders upon notice as hereinbefore provided for meetings of the stockholders, at which special meeting the directors for the unexpired portion of the term may be elected. Section 5. Fees. Directors, as such, shall not receive any stated salary for their services, but, by resolution of the board of directors, a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of the board or any meeting of any committee. Nothing herein contained shall be construed to preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Section 6. Senior Advisory Board. There shall be a senior advisory board which shall consist of such directors of the corporation as shall resign from the board of directors hereafter at or after reaching the age of 72 or as shall resign because of poor health and who request to transfer to it. The members of such board shall serve at the pleasure of the corporation's board of directors and shall be subject to reappointment from year to year by said board of directors, but not more than three years from the date first elected to such senior advisory board. Members of the senior advisory board shall receive notice of and be entitled to attend all meetings of the corporation's regular board of directors and shall receive the same fees and expenses as are paid to members of the board of directors, but will not be entitled to vote at such meetings. Section 7. Stock Ownership of Directors. Every director shall be the owner of stock of the corporation having a book value of not less than Five Thousand Dollars ($5,000). Such stock must be unpledged and unencumbered at the time such director becomes a director and during the whole of his term as such. Any director violating the provisions of this section shall immediately vacate his office. ARTICLE III DIRECTORS' MEETINGS Section 1. Regular Meetings. Regular meetings of the board of directors shall be held without other notice than this bylaw immediately after, and at the same place as, the annual meeting of stockholders. Additional regular meetings shall be held at least monthly. The board of directors may provide by resolution the time and place, either within or without this state, for the holding of additional regular meetings without other notice than such resolution. Section 2. Special Meetings. Special meetings of the board of directors shall be held whenever called by the chairman of the board, by the president, or by any two of the directors. Notice of each such meeting shall be mailed to each director, addressed to his residence or usual place of business, at least three days before the day on which the meeting is to be held, or shall be sent to such place by telegraph or mailgram, or be delivered personally or by telephone, not later than the day before the day on which the meeting is to be held. Neither the business to be transacted at, nor the purpose of, any special meeting need be specified in the notice or waiver of notice of such meeting. Section 3. Organization. At all meetings of the board of directors, the chairman, or in his absence the vice chairmen in the order of their appointment, or in their absence, the president (or in his absence the executive vice president if a member of the board), or, in the absence of all of them, any director selected by the board of directors shall act as chairman; and the secretary of the corporation, or, in his absence or if he be elected chairman of the meeting, an assistant secretary, shall act as secretary; but if neither the secretary nor any assistant secretary be present and able to act as such, the chairman may appoint any person present to act as secretary of the meeting. Section 4. Quorum and Manner of Acting. Unless otherwise provided by law or the Articles of Incorporation, a majority of the number of directors fixed by the bylaws at the time of any regular or special meeting shall constitute a quorum for the transaction of business at such meeting, and the act of a majority of the directors present at any such meeting at which a quorum is present shall be the act of the board of directors. In the absence of a quorum, a majority of those present may adjourn the meeting from time to time until a quorum be had. Notice of any such adjourned meeting need not be given. Section 5. Order of Business. At all meetings of the board of directors business may be transacted in such order as from time to time the board may determine. Section 6. Action Without a Meeting. Any action which is required to be taken at a meeting of the directors or of a director's committee may be taken without a meeting if a consent in writing, setting forth the action so to be taken, shall be signed either before or after such action by all of the directors or by all of the members of the committee, as the case may be, and such consent is filed in the minute book of the proceedings of the board or committee. Such consent shall have the same force and effect as a unanimous vote. Section 7. Telephone Meetings. Members of the board of directors or any committee designated thereby may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment whereby all persons participating in the meeting can hear each other, and a written record can be made of the action taken at the meeting. ARTICLE IV COMMITTEES OF THE BOARD Section 1. Executive Committee. The board of directors, by a resolution adopted by a majority of the number of directors, may designate three or more directors, to include the chairman, the vice chairmen, if one or more be appointed, and the president, to constitute an executive committee. Members of the executive committee shall serve until removed, until their successors are designated or until the executive committee is dissolved by the board of directors. All vacancies which may occur in the executive committee shall be filled by the board of directors. The executive committee, when the board of directors is not in session, may exercise all of the powers of the board of directors except to approve an amendment to the Articles of Incorporation, these bylaws, a plan of merger or consolidation, a plan of exchange under which the corporation would be acquired, the sale, lease or exchange, or the mortgage or pledge for a consideration other than money, of all, or substantially all, the property and assets of the corporation otherwise than in the usual and regular course of its business, the voluntary dissolution of the corporation, or revocation of voluntary dissolution proceedings, and may authorize the seal of the corporation to be affixed as required. The executive committee may make its own rules for the holding and conduct of its meetings (except that at least two members of the committee shall be necessary to constitute a quorum), the notice thereof required and the keeping of its records, and shall report all of its actions to the board of directors. Section 2. Management Compensation and Benefits Committee. The board of directors shall, by resolution, appoint a Management Compensation and Benefits Committee that shall be comprised entirely of "outside directors" as that term is defined under proposed Item 402(j)(2) of Regulation S-K of the Securities and Exchange Commission; that is, "directors who do not have employment or consulting arrangements with the corporation or its affiliates and who are not employed by an entity that has an employee of the corporation serving as a member of a committee which establishes that entity's compensation policy." (If, in the final SEC rules, Item 402(j)(2) of the SEC's Regulation S-K includes a different definition of "outside directors" than that described above, then these Bylaws will follow the definition as stated in the final rules, as amended from time to time.) Such committee shall fix its own rules and procedures and shall meet at least once each year. The committee shall have the authority to establish the level of compensation (including bonuses) and benefits of management of the corporation. Such committee shall also have all of the authority vested under any stock option or other equity-based compensation plan of the corporation including but not limited to the authority to grant stock options, stock appreciation rights, restricted or phantom stock, etc. to the corporation's management. Section 3. Public Policy Committee. The board of directors shall, by resolution, appoint not less than three nor more than six of its members to constitute a public policy committee. The board shall likewise designate the chairman of the committee. In addition, the chairman of the board shall be an ex-officio member of the public policy committee and shall be entitled to vote on all matters coming before the committee. The committee shall recommend to the board of directors the total amount of funds to be allocated each calendar year for charitable contributions to be made by the corporation. The committee shall have authority to approve contributions by the corporation within the dollar limits set by the approved annual budget and may delegate some or all of its authority for final approval to the chief executive officer provided that all contributions approved by the chief executive officer are subsequently reported to the committee for review. The committee shall exercise general supervision over the corporation's matching gifts program and shall have authority to add and/or delete those colleges and universities eligible for inclusion in the program. The committee shall monitor on an ongoing basis the programs developed for compliance with the Community Reinvestment Act as well as Title VII of the Civil Rights Act of 1964 (Equal Employment Opportunity) and as a result may make recommendations to the chief executive officer in respect thereto. The committee shall perform such other duties and functions as shall be assigned to said committee from time to time by the board of directors. The chairman of the committee shall report regularly to the board of directors on the results of its meetings. The committee shall meet quarterly except that it may additionally meet on call of its chairman as may be necessary. Section 4. Audit Committee. The Board of Directors shall appoint an Audit Committee that shall be comprised entirely of directors who meet the standard of independence set forth by the New York Stock Exchange for audit committees of listed companies. Such committee shall be comprised of a minimum of three members and shall fix its own rules and procedures. The committee shall meet at least quarterly. The committee shall review the following: (1) with the independent public accountant and management, the financial statements and the scope of the corporation's audit; (2) with the independent public accountant and management, the adequacy of the corporation's system of internal procedures and controls, including the resolution of material weaknesses; (3) with the corporation's internal auditors, the activities and performance of the internal auditors; (4) with management and the independent accountant, compliance with laws and regulations; (5) with management, the selection and termination of the independent public accountant and any significant disagreements between the independent public accountant and management; and (6) the nonaudit services of the corporation's independent public accountant. The committee, when so delegated by a member bank, shall perform such audit committee functions for such bank as are requested by the bank to fulfill its requirements under Section 36 of the Federal Deposit Insurance Act and under the regulations and guidelines adopted by the FDIC to implement Section 36. The committee shall also review any other matters concerning auditing and accounting as it deems necessary and appropriate. The committee, at its discretion, may retain counsel without prior permission of the Board or management. Section 5. Other Committees. Other committees with limited authority may be designated by a resolution adopted by a majority of the directors present at a meeting at which a quorum is present. ARTICLE V OFFICERS Section 1. Number. The officers of the corporation may be a chairman of the board, a president, one or more vice chairmen (who also may serve as a consultant and advisor to the board but not as a full-time employee of the corporation or any of its affiliates), one or more executive vice presidents, one or more vice presidents (any one or more of whom may be designated as senior vice presidents), a secretary, and a treasurer. At the discretion of the board of directors, there may be one or more assistant vice presidents, assistant secretaries, and assistant treasurers; a general counsel and one or more assistant general counsel and assistant counsel; a general auditor, one or more assistant general auditors and audit managers, an electronic data processing auditor, and a trust auditor; a communications officer; one or more marketing officers, and such other officer titles designated by the board from time to time. The chairman of the board, the vice chairmen, and the president shall be chosen from members of the board of directors. The same person may hold any two of such offices, except the office of secretary may not be held by any person holding the office of president. Section 2. Election, Term of Office and Qualifications. Officers of the corporation shall be chosen annually by the board of directors at its regular meeting immediately following the annual meeting of stockholders, and each officer shall hold office until the next annual meeting of stockholders and until his successor shall have been chosen and qualified or until he shall resign or shall have been removed in the manner hereinafter provided. Section 3. Other Officers, Agents and Employees. The board of directors may from time to time appoint such other officers as it may deem necessary, to hold office for such time as may be designated by it or during its pleasure, and may also appoint, from time to time, such agents and employees of the corporation as may be deemed proper, or may authorize any officer to appoint and remove such agents and employees, and may from time to time prescribe the powers and duties of such officers, agents and employees of the corporation in the management of its property and affairs, and may authorize any officer to prescribe the powers and duties of agents and employees. Section 4. Vacancies. If any vacancy shall occur among the officers of the corporation, such vacancy shall be filled by the board of directors. Section 5. Removal of Officers. Any officer or agent of the corporation may be removed with or without cause at any time by the board of directors or such officer as may be provided in the bylaws. Any person or agent appointed or employed by the corporation otherwise than by the board of directors may be removed with or without cause at any time by any officer having authority to appoint whenever such officer in his absolute discretion shall consider that the best interests of the corporation will be served thereby. Section 6. Chairman of the Board. The chairman of the board shall be the chief executive officer of the corporation and subject to the control of the board of directors, shall have general direction of the business affairs and property of the corporation and shall do and perform such other duties as may be prescribed in these bylaws or which may be assigned to him from time to time by the board of directors. The chairman of the board shall preside at all meetings of the board of directors and at all meetings of the stockholders. He shall prescribe the duties and have general supervision over all other officers, employees and agents of the corporation enumerated in these bylaws or established by resolution of the board of directors or otherwise, and shall have the power to appoint, employ, suspend or remove with or without the advice of the board of directors any such officer, employee or agent unless otherwise specifically provided in these bylaws, and shall fix the salaries of all such officers, employees and agents of the corporation and its subsidiaries within the limits established from time to time by the board of directors. He shall have power to sign all stock certificates, deeds, contracts and other instruments authorized by the board of directors or its executive committee unless other direction is given therefor, and he shall be a member of all standing committees of the board except the accounting and auditing committee and the management compensation and benefits committee. Honorary Chairman of the Board. The board of directors may appoint a former full-time officer who has held the office of chairman of the board of the corporation to the position of honorary chairman of the board and provide such person with a reasonable amount of office space as long as desired by him. If appointed, such person shall act as chairman of the senior advisory board as such body exists from time to time. Section 7. Vice Chairmen of the Board. The board of directors may appoint one or more vice chairmen of the board and, if any such officers are appointed, may assign such specific duties to any one of them as it deems necessary and advisable. Such officers may, but need not, be full-time salaried employees of the corporation. Any such full-time vice chairmen shall report to the corporation's chief executive officer and shall perform such duties as such officers may prescribe and assign from time to time. Section 8. Succession of Duties. The bylaw duties of the chairman of the board may be exercised and carried out by any vice chairmen when such have been appointed by the board of directors in the absence or disability of the chairman of the board in order of their appointment; if no vice chairmen are so appointed, then the president shall carry out such duties in the absence of the chairman of the board; and in the absence of the president, the executive vice president or any vice president in the order of their election shall carry out all such duties in the absence or disability of the chairman of the board. Section 9. President. The president shall be the chief administrative officer of the corporation and as such shall perform such duties as the chairman of the board or the board of directors may prescribe from time to time by resolution or as may be prescribed by these bylaws. He shall exercise all the powers and discharge all the duties of the chairman of the board during the latter's absence or inability to act. He shall have concurrent power with the chairman of the board to sign all deeds, contracts and instruments authorized by the board of directors or its executive committee unless the board otherwise directs, and he may be a member of the standing committees of the board except the accounting and auditing committee when appointed by the board. He shall report to the chairman of the board in carrying out his assignments and in conducting the affairs of his office. Section 10. Executive Vice President. The board of directors may elect one or more executive vice presidents and any such person so elected to such office shall perform such duties as the board of directors or the chairman of the board may assign and prescribe from time to time. Section 11. Vice Presidents. Each vice president shall have such powers and perform such duties as the board of directors or the chairman may from time to time prescribe, and shall perform such other duties as may be prescribed in these bylaws. Each vice president shall have power to sign all deeds, contracts and instruments authorized by the board of directors or its executive committee unless they otherwise direct. In case of the absence or inability to act of the president, and the executive vice presidents in the order of their appointments, then such vice president as the board of directors may designate for the purpose (but in the absence of such designation then the vice presidents in order of appointment) shall have the powers and discharge the duties of the president. Section 12. Secretary. The secretary shall keep the minutes of all meetings of the stockholders, the board of directors and meetings of committees of the board as they are held, in a book or books kept for that purpose. He shall keep in safe custody the seal of the corporation and he may affix such seal to any instrument duly executed on behalf of the corporation. The secretary shall have charge of the certificate books and such other books and papers as the board of directors may direct. He shall attend to the giving and serving of all notices of the corporation, and shall also have such other powers and perform such other duties as pertain to his office, or as from time to time may be assigned to him by the board of directors or the corporation's chief executive officer. Section 13. Treasurer. The treasurer shall be the principal financial and accounting officer of the corporation. He shall have charge of the funds, securities, receipts and disbursements of the corporation, and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such banks or other depositaries as the board of directors may from time to time designate. He shall render to the chairman of the board, or to the board of directors, or to the president, whenever any of them shall require him so to do, an account of the financial condition of the corporation and its affiliates and all of his transactions as treasurer. He shall keep correct books of account of all its business and transactions. If required by the board of directors, he shall give a bond in such sum and on such conditions and with such surety as the board of directors may designate, for the faithful performance of the duties of his office and the restoration to the corporation, at the expiration of his term of office, or, in case of his death, resignation or removal from office, of all books, papers, vouchers, money or other property of whatever kind in his possession belonging to the corporation. He shall also have such other powers and perform such other duties as pertain to his office or as from time to time may be assigned to him by the board of directors or the president. Section 14. General Counsel. The general counsel, if one be appointed, shall have charge of all litigation of the corporation, and shall keep himself advised of the character and progress of all legal proceedings and claims by and against the corporation or in which it is interested by reason of its ownership and control of other corporations. He shall give to the board of directors reports from time to time on all legal matters affecting the corporation and, when requested, his opinion upon any question affecting the interests of the corporation. He may, with the consent of the chief executive officer, employ on behalf of the corporation special counsel for the handling of any legal matter pertaining to the business of the corporation which he deems necessary and advisable. The general counsel may, but need not be, a full-time salaried officer of the corporation. He shall from time to time consult with the corporation's legal advisory committee on legal matters affecting the corporation and its affiliates. Section 15. General Auditor. The general auditor, if one be appointed, shall perform such internal auditing and accounting functions with regard to the member banks and companies as the board of directors or any appropriate committee thereof may from time to time determine, and shall have such additional powers and duties as may be prescribed by these bylaws and as the board of directors or any appropriate committee thereof may from time to time determine, and shall have additional responsibilities and duties in connection therewith as may be prescribed by these bylaws, applicable laws and regulations or the board of directors or any appropriate committee thereof. Except as stated, the general auditor and other auditing staff shall be subject to day-to-day administrative direction of the chief executive officer of the corporation and any such officer or employee may be dismissed by the chief executive officer for reasons as may be applied in dismissing any other personnel of the corporation, provided that a report of any such dismissal of internal auditing personnel with the reasons therefor shall be made to the board of directors or its executive committee at the next succeeding meeting thereof. All other officers and personnel appointed or assigned to assist in the internal audit function of the corporation, its member banks and companies, may be assigned such day-to-day duties and responsibilities as may be necessary by the general auditor to carry out the responsibilities of the internal audit function. The office of general auditor may not be held by any person holding other offices in the corporation or its affiliates except with the specific approval of the board of directors. Section 16. Assistant Secretary. In the absence or disability of the secretary, the assistant secretary (or if more than one, then the assistant secretary designated by the board of directors or the president for such purpose) shall perform all the duties of the secretary and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the secretary. Each assistant secretary shall also perform such other duties as from time to time may be assigned to him by the board of directors, the chief executive officer or the secretary. Section 17. Assistant Treasurer. In the absence or disability of the treasurer, the assistant treasurer (or if more than one, then the assistant treasurer designated by the board of directors or the chief executive officer for such purpose) shall perform all the duties of the treasurer and, when so acting, shall have all the powers of, and be subject to all restrictions upon, the treasurer. Each assistant treasurer shall also perform such other duties as from time to time may be assigned to him by the board of directors, the chief executive officer or the treasurer. ARTICLE VI CAPITAL STOCK Section 1. Certificates. Certificates representing shares of the capital stock of the corporation shall be in such form as is permitted by law and prescribed by the board of directors or the chief executive officer and shall be signed by the persons authorized to sign the same by the bylaws or specific resolution of the board of directors. Certificates may, but need not be, sealed with the seal of the corporation or a facsimile thereof. The signature of the officers upon such certificates may be facsimiles if the certificate is countersigned by a transfer agent or registered by registrar other than the corporation itself or an employee of the corporation. In case any officer who has signed or whose facsimile signature has been placed upon a stock certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer at the date of its issue. Section 2. Issue and Registration of Certificates: Transfer Agents and Registrars. Transfer agents and/or registrars for the stock of the corporation may be appointed by the board of directors and may be required to countersign stock certificates. Certificates of stock shall be issued in consecutive order and the certificate books shall be kept at an office of the corporation or at the office of the transfer agent. Certificates shall be numbered and registered in the order in which they are issued. New certificates and, in the case of cancellation, old certificates, shall, before they are delivered, be passed to a registrar if one is appointed by the board of directors, and such registrar shall register the issue or transfer of such certificates. Upon the return of the certificates by the registrar, the new certificates shall be delivered to the person entitled thereto. Section 3. Transfer of Stock. The stock of the corporation shall be transferable or assignable on the books of the corporation by the holders in person or by attorney on surrender of the certificates for such shares duly endorsed and, if sought to be transferred by attorney, accompanied by a written power of attorney to have the same transferred on the books of the corporation. Section 4. Lost, Destroyed and Mutilated Certificates. Holders of the stock of the corporation shall immediately notify the corporation of any loss, destruction or mutilation of the certificate therefor, and the board of directors may in its discretion, or any officer of the corporation appointed by the board of directors for that purpose may in his discretion, cause one or more new certificates for the same number of shares in the aggregate to be issued to such stockholder upon the surrender of the mutilated certificate or upon satisfactory proof of such loss or destruction and the deposit of a bond in such form and amount and with such surety as the board of directors may require. Section 5. Record Date. For the purposes of determining stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend, or in order to make a determination of stockholders for any other proper purpose, the board of directors may fix in advance a date as the record date for any such determination of stockholders, such date in any case to be not more than fifty days prior to the date on which the particular action requiring such determination of stockholders is to be taken. If no record date is fixed for the determination of stockholders entitled to notice of or to vote at a meeting of stockholders, or stockholders entitled to receive payment of a dividend, the date on which notice of the meeting is mailed or the date on which the resolution of the board of directors declaring such dividend is adopted, as the case may be, shall be the record date for such determination of stockholders. When a determination of stockholders entitled to vote at any meeting of stockholders has been made as provided in this section, such determination shall apply to any adjournment thereof. ARTICLE VII CONTRACTS, LOANS, BANK ACCOUNTS, CHECKS, SECURITIES, ETC.: AUTHORITY OF OFFICERS Section 1. Contracts. The board of directors may authorize any officer or officers, agent or agents to enter any contract or to execute and deliver any instrument on behalf of the corporation, and such order may be general or confined to specific instances. Section 2. Loans. The board of directors may authorize any officer or officers, agent or agents to effect loans and advances at any time for the corporation from any bank, trust company, insurance company, or other institution, or from any person, firm, association, or corporation, and in connection with such loans and advances to make, execute and deliver promissory notes or other evidences of indebtedness of the corporation, and, as security for the payment of any and all loans, advances, indebtedness and liabilities of the corporation, to pledge, hypothecate or transfer any and all stocks, securities and other personal property at any time held by the corporation, and to that end to transfer, endorse, assign and deliver the same in the name of the corporation. Such authority may be general or confined to specific instances, except that any pledge, hypothecation or transfer of the capital stock or assets of any subsidiary corporation shall be authorized only by a specific resolution of the board of directors. Section 3. Bank Accounts. All funds of the corporation, not otherwise employed, shall be deposited from time to time to the credit of the corporation in such banks or trust companies or other depositaries as the board of directors may select. Section 4. Checks, Securities, Etc. All checks, drafts or orders for the payment of money, notes or other evidences of indebtedness issued in the name of the corporation, all stock powers, endorsements, assignments, or other instruments for the transfer of securities held by the corporation shall be executed and delivered by, and all such securities shall be voted and proxies for the voting thereof shall be executed and delivered by such officer or officers, agent or agents to whom the board of directors shall delegate the power, and under such conditions and restrictions as they may impose. ARTICLE VIII MISCELLANEOUS Section 1. Fiscal Year. The fiscal year of the corporation shall begin on the first day of January and end on the thirty-first day of December in each year. Section 2. Dividends. The board of directors may from time to time declare, and the corporation may pay, dividends on its outstanding shares in the manner and upon the terms and conditions provided by law and its Articles of Incorporation. Section 3. Corporate Seal. The board of directors shall provide a corporate seal which shall be circular in form and shall have inscribed thereon the name of the corporation, the state of Virginia, and year of incorporation and the words, Corporate Seal". ARTICLE IX EMERGENCIES Section 1. Emergency Bylaws. During any emergency resulting from an attack on the United States or any nuclear or atomic disaster, which is declared to be such by an appropriate agency of the state or federal government, these bylaws shall be modified (but only to the extent required by such emergency) as follows: a. A meeting of the board of directors may be called by any officer or director by giving at least one hour's notice to such of the directors as it may be feasible to reach at the time and by such means as may be feasible at the time, including publication or radio. b. The directors in attendance at the meeting, if not less than three, shall constitute a quorum. To the extent required to constitute a quorum at any meeting of the board of directors, the officers of the corporation who are present shall be deemed, in order of rank and within the same rank in order of seniority, directors for such meeting. For purposes of this bylaw, officers shall rank as follows: chairman of the board, vice chairmen, president, executive vice president, senior vice president, vice president, secretary, treasurer, assistant vice president, assistant secretary, and assistant treasurer. Officers holding similar titles shall rank in the order of their appointment. Section 2. Termination of Emergency. Except as provided in this article, the regular bylaws of the corporation shall remain in full force and effect during any emergency, and upon its termination, these emergency bylaws shall cease to be operative. ARTICLE X AMENDMENTS The board of directors shall have the power to alter, amend or repeal any bylaws of the corporation and to adopt new bylaws; but any bylaws made by the board of directors may be repealed or changed, and new bylaws made, by the stockholders, who may prescribe that any bylaw made by them shall not be altered, amended or repealed by the board of directors. EXHIBIT 10 On September 27, 1995, the First Virginia Banks, Inc. Board of Directors amended (1) Paragraph 1(a) of Barry J. Fitzpatrick's Supplemental Compensation Agreement, (2) Article VI, Section 6.03 of the 1983 Key Employee Salary Reduction Deferred Compensation Plan, (3) the third paragraph of Section 9 of the Collateral Assignment Split Dollar Life Insurance Agreement and Plan, and (4) Section 2 (e) of the 1993 Stock Option Agreement to include a uniform "change in control" definition. The new definition of "change in control" is as follows: A change in control shall mean: (a) The acquisition by any individual, entity or group (within the meaning of Section 13 (d) (3) or 14 (d) (2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of either (i) the then outstanding shares of common stock of the Corporation (the "Outstanding Corporation Common Stock") or (ii) the combined voting power of the then outstanding voting securities of the Corporation entitled to vote generally in the election of directors (the "Outstanding Corporation Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not constitute a Change of Control: (i) any acquisition directly from the Corporation, (ii) any acquisition by the Corporation, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Corporation or any company controlled by the Corporation or (iv) any acquisition by any company pursuant to a transaction which complies with clauses (i), (ii) and (iii) of subsection (c) of this Section ___; or (b) Individuals who, as of the date hereof, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to the date hereof whose election, or nomination for election by the Corporation's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (c) Consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Corporation (a "Business Combination"), in each case, unless, following such Business Combination, (i) all or substantially all of the individuals and entities who were the beneficial owners, respectively, of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 50% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation which as a result of such transaction owns the Corporation or all or substantially all of the Corporation's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Corporation Common Stock and Outstanding Corporation Voting Securities, as the case may be, (ii) no Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Corporation or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (d) Approval by the shareholders of the Corporation of a complete liquidation or dissolution of the Corporation. EXHIBIT 11 FIRST VIRGINIA BANKS, INC. STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS Year Ended December 31 1995 1994 1993 -------- ------- ------- (In thousands, except per share data) PRIMARY: Average common shares outstanding 33,976 32,190 32,408 Dilutive effect of stock options 80 91 104 -------- -------- -------- Total average common shares 34,056 32,281 32,512 ======== ======== ======== Net income $111,599 $113,221 $116,024 Provision for preferred dividends (47) (51) (53) -------- -------- -------- Net income applicable to common stock $111,552 $113,170 $115,971 ======== ======== ======== Net income per share of common stock $3.28 $3.51 $3.57 ======== ======== ======== FULLY DILUTED: Average common shares outstanding 33,976 32,190 32,408 Dilutive effect of stock options 83 91 107 Conversion of preferred stock 104 112 117 -------- -------- -------- Total average common shares 34,163 32,393 32,632 ======== ======== ======== Net income $111,599 $113,221 $116,024 ======== ======== ======== Net income per share of common stock $3.27 $3.50 $3.56 ======== ======== ======== SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 December 31, 1995 State of Incorporation ------------- First Virginia Banks, Inc. Virginia Banking Subsidiaries: Northern Region: First Virginia Bank Virginia First General Mortgage Company Virginia First Virginia Mortgage Company Virginia First Virginia Commercial Corporation Virginia First Virginia Card Services, Inc. Virginia First Virginia Credit Services, Inc. Virginia Maryland Region: First Virginia Bank-Central Maryland Maryland C.B. Properties, Inc. Maryland C.B. Properties II, Inc. Maryland First Virginia Bank-Maryland Maryland Farmers Bank of Maryland Maryland Colonial Securities Corporation Delaware Atlantic Bank Maryland The Caroline County Bank Maryland Eastern Region: First Virginia Bank of Tidewater Virginia First Virginia Bank-Colonial Virginia First Virginia Bank-Commonwealth Virginia First Virginia Bank-Central Virginia First Virginia Bank-South Hill Virginia Southwest Region: First Virginia Bank-Southwest Virginia First Virginia Bank-Franklin County Virginia First Virginia Bank-Highlands Virginia First Virginia Bank-Piedmont Virginia First Virginia Bank-Clinch Valley Virginia Shenandoah Valley Region: First Virginia Bank-Shenandoah Valley Virginia Tennessee-Western Virginia Region: First Virginia Bank-Mountain Empire Virginia Tri-City Bank and Trust Company Tennessee Bank of Madisonville Tennessee United Southern Bank Tennessee First Knoxville Bank Tennessee Nonbanking Subsidiaries First Virginia Insurance Services, Inc. Virginia First Virginia Services, Inc. Virginia First Virginia Life Insurance Company Virginia Springdale Advertising Agency, Inc. Virginia Northern Operations Center, Inc. Virginia Southwest Operations Center, Inc. Virginia Eastern Operations Center, Inc. Virginia United Land Corporation Maryland Springdale Temporary Services, Inc. Virginia First General Leasing Company Virginia Farmers National Land Corporation Maryland Maryland Operations, Center, Inc. Maryland All of the organizations listed above are 100% owned by First Virginia Banks, Inc. or one of its subsidiary banks. Exhibit 23 Consent of Independent Auditors Board of Directors First Virginia Banks, Inc. We consent to the incorporation by reference into Post-effective Amendment No. 1 to Registration Statement Number 33-38024 on Form S-8 dated January 10, 1994, Registration Statement Number 33-51587 on Form S-3 dated December 20, 1993, Registration Statement Number 33-54802 on Form S-8 dated November 20, 1992, Registration Statement Number 33-31890 on form S-3 dated November 1, 1989, Post-effective Amendment Number 2 to Registration Statement Number 2-77151 on Form S-8 dated October 30, 1987, Registration Statement Number 33-17358 on Form S-8 dated September 28, 1987, and Registration Statement Number 33-15360 on Form S-3 dated June 26, 1987, of our report dated January 17, 1996, with respect to the consolidated financial statements of First Virginia Banks, Inc. included in this Annual Report on Form 10-K for the year ended December 31, 1995. /s/ Ernst & Young LLP Washington, D.C. March 27, 1996 Exhibit 27 [ARTICLE] 9 [CIK] 0000037032 [NAME] FIRST VIRGINIA BANKS, INC. [MULTIPLIER] 1000 [PERIOD-TYPE] 12-MOS [FISCAL-YEAR-END] DEC-31-1995 [PERIOD-END] DEC-31-1995 [CASH] 397,858 [INT-BEARING-DEPOSITS] 0 [FED-FUNDS-SOLD] 235,000 [TRADING-ASSETS] 0 [INVESTMENTS-HELD-FOR-SALE] 64,546 [INVESTMENTS-CARRYING] 2,128,220 [INVESTMENTS-MARKET] 2,146,792 [LOANS] 5,038,076 [ALLOWANCE] 57,922 [TOTAL-ASSETS] 8,221,536 [DEPOSITS] 7,056,107 [SHORT-TERM] 209,719 [LIABILITIES-OTHER] 83,353 [LONG-TERM] 2,710 [COMMON] 33,951 [PREFERRED-MANDATORY] 0 [PREFERRED] 695 [OTHER-SE] 835,001 [TOTAL-LIABILITIES-AND-EQUITY] 8,221,536 [INTEREST-LOAN] 436,495 [INTEREST-INVEST] 117,524 [INTEREST-OTHER] 19,580 [INTEREST-TOTAL] 573,599 [INTEREST-DEPOSIT] 204,433 [INTEREST-EXPENSE] 11,069 [INTEREST-INCOME-NET] 358,097 [LOAN-LOSSES] 8,341 [SECURITIES-GAINS] 0 [EXPENSE-OTHER] 271,384 [INCOME-PRETAX] 168,278 [INCOME-PRE-EXTRAORDINARY] 168,278 [EXTRAORDINARY] 0 [CHANGES] 0 [NET-INCOME] 111,599 [EPS-PRIMARY] 3.28 [EPS-DILUTED] 3.27 [YIELD-ACTUAL] 7.95 [LOANS-NON] 17,066 [LOANS-PAST] 6,262 [LOANS-TROUBLED] 4,260 [LOANS-PROBLEM] 7,680 [ALLOWANCE-OPEN] 58,860 [CHARGE-OFFS] 12,721 [RECOVERIES] 3,442 [ALLOWANCE-CLOSE] 57,922 [ALLOWANCE-DOMESTIC] 57,922 [ALLOWANCE-FOREIGN] 0 [ALLOWANCE-UNALLOCATED] 0