FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended Commission file number 1-6580
March 31, 1999
FIRST VIRGINIA BANKS, INC.
(Exact name of registrant as specified in its charter)
Virginia 54-0497561
(State or other jurisdiction of (I.R.S. Employer Identification
incorporation or organization) Number)
6400 Arlington Boulevard
Falls Church, Virginia 22042-2336
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number, including area code
(703) 241-4000
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes __X__ No_____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
On April 30, 1999, there were 50,125,490 shares of common
stock outstanding.
This report contains a total of 22 pages.
1
INDEX
Page
---------
PART I - Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets - March 31, 1999
and 1998, (Unaudited), and December 31, 1998 3/ 4
Condensed Consolidated Statements of Income - Three
months ended March 31, 1999 and 1998 (Unaudited) 5/ 6
Condensed Consolidated Statements of Shareholders'
Equity - Three months ended March 31, 1999
and 1998 (Unaudited) 7/ 8
Condensed Consolidated Statements of Cash Flows - Three
months ended March 31, 1999 and 1998 (Unaudited) 9
Notes to Condensed Consolidated Financial
Statements (Unaudited) 10/13
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 13/20
Item 3. Quantitative and Qualitative Disclosures
About Market Risk 21
PART II - Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures 21
Exhibit 27 - Financial Data Schedule 22
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31 December 31 March 31
1999 1998 1998
---------- ---------- ----------
(Unaudited) (Unaudited)
(In thousands)
ASSETS
Cash and due from banks $ 359,388 $ 377,374 $ 398,354
Money market investments 245,067 265,557 340,263
---------- ---------- ----------
Total cash and cash equivalents 604,455 642,931 738,617
---------- ---------- ----------
Loans held for sale 10,580 14,737 21,084
Investment securities - available for sale 17,122 20,580 23,437
Investment securities - held to maturity
(fair values of $2,405,810, $2,316,922
and $2,146,904) 2,403,099 2,302,472 2,141,825
Loans, net of unearned income 6,004,017 6,093,215 5,858,520
Allowance for loan losses (66,200) (70,312) (67,117)
---------- ---------- ----------
Net loans 5,937,817 6,022,903 5,791,403
---------- ---------- ----------
Other earning assets 23,123 22,427 21,473
Premises and equipment 158,043 160,781 165,441
Intangible assets 181,354 184,695 186,257
Accrued income and other assets 205,321 193,170 180,209
---------- ---------- ----------
Total Assets $9,540,914 $9,564,696 $9,269,746
========== ========== ==========
3
CONDENSED CONSOLIDATED BALANCE SHEETS (Continued)
March 31 December 31 March 31
1999 1998 1998
---------- ---------- ----------
(Unaudited) (Unaudited)
(In thousands)
LIABILITIES
Deposits:
Noninterest-bearing $1,598,379 $1,601,041 $1,520,248
Interest-bearing:
Interest checking 1,477,151 1,508,511 1,406,234
Money market accounts 992,647 958,966 849,106
Savings deposits 1,148,087 1,134,108 1,160,411
Consumer certificates of deposit 2,373,928 2,414,366 2,461,759
Large denomination
certificates of deposit 432,387 438,086 423,693
---------- ---------- ----------
Total deposits 8,022,579 8,055,078 7,821,451
Short-term borrowings 349,093 385,996 274,476
Long-term debt 2,971 3,217 3,875
Accrued interest and other liabilities 146,933 130,077 139,315
---------- ---------- ----------
Total Liabilities 8,521,576 8,574,368 8,239,117
---------- ---------- ----------
SHAREHOLDERS' EQUITY
Preferred stock, $10 par value 502 534 551
Common stock, $1 par value 50,125 50,094 51,841
Capital surplus 5,074 4,004 93,359
Retained earnings 962,938 934,703 882,803
Accumulated other comprehensive income 699 993 2,075
---------- ---------- ----------
Total Shareholders' Equity 1,019,338 990,328 1,030,629
---------- ---------- ----------
Total Liabilities and Shareholders' Equity $9,540,914 $9,564,696 $9,269,746
========== ========== ==========
See notes to condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended
March 31
1999 1998
-------- --------
(In thousands, except per-share data)
Interest income:
Loans $125,309 $127,349
Loans held for sale 231 268
Investment securities -
available for sale 224 141
Investment securities -
held to maturity 29,193 26,584
Money market investments 5,183 7,363
Other earning assets 393 367
------- -------
Total interest income 160,533 162,072
------- -------
Interest expense:
Deposits 50,102 54,152
Short-term borrowings 3,549 3,211
Long-term debt 75 47
------- -------
Total interest expense 53,726 57,410
------- -------
Net interest income 106,807 104,662
Provision for loan losses 3,956 4,084
------- -------
Net interest income after provision
for loan losses 102,851 100,578
------- -------
5
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Continued) (Unaudited)
Three Months Ended
March 31
1999 1998
------- -------
(In thousands, except per-share data)
Net interest income after provision
for loan losses 102,851 100,578
------- -------
Noninterest income:
Service charges on deposit
accounts 13,641 10,873
Electronic banking service fees 2,674 2,734
Trust services 2,732 2,601
Credit card service charges
and fees 2,504 2,768
Insurance premiums and
commissions 1,964 1,770
Other customer services 3,458 3,464
Other 2,590 1,731
Gain on sale of credit card portfolio 16,467 -
Securities gains before income tax
provisions of $288 and $177 822 506
------- -------
Total noninterest income 46,852 26,447
------- -------
Noninterest expense:
Salaries and employee benefits 44,412 43,632
Occupancy 6,307 6,353
Equipment 7,487 6,915
Credit card processing fees 1,843 1,936
Advertising 1,272 2,225
Amortization of intangibles 3,827 3,421
Other 16,783 14,278
------- -------
Total noninterest expense 81,931 78,760
------- -------
Income before income taxes 67,772 48,265
Provision for income taxes 23,488 16,723
------- -------
Net income $44,284 $31,542
======= =======
Net income per share of common stock
Basic $.88 $.61
Diluted .88 .61
Average shares of common stock outstanding
Basic 50,103 51,828
Diluted 50,391 52,110
See notes to condensed consolidated financial statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Unaudited)
Accum-
ulated
Pre- Other Total
ferred Common Compre- Share-
Stock Stock Capital Retained hensive holders'
$10 Par $1 Par Surplus Earnings Income Equity
------- ------- -------- -------- ------ ----------
(Dollars in thousands)
Balance January 1, 1998... $ 583 $51,817 $ 92,971 $865,785 $ - $1,011,156
Comprehensive income:
Net income.............. - - - 31,542 - 31,542
Unrealized gains on
securities, net of
tax of $1,117 - - - - 2,075 2,075
----------
Total comprehensive income - - - - - 33,617
----------
Conversion of preferred
to common stock......... (32) 7 25 - - -
Issuance of shares for
stock options............ - 17 264 - - 281
Common stock repurchases
and related transactions - - 99 - - 99
Dividends declared:
Preferred stock......... - - - (9) - (9)
Common stock
$0.28 per share - - - (14,515) - (14,515)
------- ------- -------- -------- ------ ----------
Balance March 31, 1998.... $ 551 $51,841 $ 93,359 $882,803 $2,075 $1,030,629
======= ======= ======== ======== ====== ==========
See notes to condensed consolidated financial statements.
7
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY(Cont.)(Unaudited)
Accum-
ulated
Pre- Other Total
ferred Common Compre- Share-
Stock Stock Capital Retained hensive holders'
$10 Par $1 Par Surplus Earnings Income Equity
------- ------- -------- -------- ------ ----------
(Dollars in thousands)
Balance January 1, 1999... $ 534 $50,094 $ 4,004 $934,703 $ 993 $ 990,328
Comprehensive income:
Net income.............. - - - 44,284 - 44,284
Unrealized gains on
securities, net of
tax of $(158) - - - - (294) (294)
----------
Total comprehensive income - - - - - 43,990
----------
Conversion of preferred
to common stock......... (18) 4 14 - - -
Preferred stock retired... (14) - (26) - - (40)
Issuance of shares for
stock options............ - 29 1,206 - - 1,235
Common stock repurchases
and related transactions - (2) (124) - - (126)
Dividends declared:
Preferred stock......... - - - (9) - (9)
Common stock
$0.32 per share - - - (16,040) - (16,040)
------- ------- -------- -------- ------ ----------
Balance March 31, 1999.... $ 502 $50,125 $ 5,074 $962,938 $ 699 $1,019,338
======= ======= ======== ======== ====== ==========
See notes to condensed consolidated financial statements
8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
March 31
1999 1998
-------- --------
(In thousands)
Net cash provided by operating activities $ 62,604 $ 54,124
-------- --------
Investing activities:
Proceeds from the maturity of
held to maturity securities 512,263 604,304
Proceeds from the maturity or sale of
available for sale securities 3,800 538
Purchases of held to maturity securities (614,059) (806,080)
Purchases of available for sale securities - (14,077)
Net decrease in loans 81,130 74,426
Net increase in other earning assets (696) (29)
Purchases of premises and equipment (3,448) (4,862)
Proceeds from sale of premises and equipment 2,580 351
Increase in intangible assets (482) (14,698)
Other 2,455 3,323
-------- --------
Net cash provided by (used for)
investing activities (16,457) (156,804)
-------- --------
Financing activities:
Net increase (decrease) in deposits (32,499) 201,609
Net increase (decrease) in short-term borrowings (36,903) 22,789
Principal payments on long-term debt (246) (279)
Proceeds from long-term debt - 1,328
Cash dividends - common, $.32 and $.28 per share (16,035) (14,515)
Cash dividends - preferred (9) (9)
Stock repurchases and related transactions (166) 99
Proceeds from issuance of common stock 1,235 281
-------- --------
Net cash provided by (used for)
financing activities (84,623) 211,303
-------- --------
Net increase (decrease) in cash and
cash equivalents (38,476) 108,623
Cash and cash equivalents at beginning of year 642,931 629,994
-------- --------
Cash and cash equivalents at end of period $604,455 $738,617
======== ========
Net cash provided by operating activities has been
reduced by the following cash payments:
Interest on deposits and borrowings $ 54,891 $ 59,615
Income Taxes 625 1,390
See notes to condensed consolidated financial statements.
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
1. GENERAL
The foregoing unaudited consolidated financial statements include the
accounts of the corporation and all of its subsidiaries. The corporation's
subsidiaries are predominantly engaged in banking. Operations other than
banking are not significant. All material intercompany transactions and
accounts have been eliminated. The unaudited consolidated financial statements
include all adjustments (consisting only of normal recurring accruals) which,
in the opinion of management, are necessary for a fair presentation of the
results of operations for each of the periods presented. Certain amounts
previously reported in 1998 have been reclassified for comparative purposes.
2. INVESTMENT SECURITIES
The following reflects the amortized cost of securities and the related
approximate fair values (in thousands):
March 31, 1999 March 31, 1998
Amortized Fair Amortized Fair
Cost Value Cost Value
---------- ---------- ---------- ----------
Securities available for sale:
U.S. Government and
its agencies $ 10,539 $ 10,607 $ 12,847 $ 12,809
Other 5,503 6,515 7,399 10,628
---------- ---------- ---------- ----------
$ 16,042 $ 17,122 $ 20,246 $ 23,437
========== ========== ========== ==========
Securities held to maturity:
U.S. Government and
its agencies $2,087,003 $2,087,520 $1,991,437 $1,994,046
State and municipal obligations 315,848 318,039 148,914 151,376
Other 248 251 1,474 1,482
---------- ---------- ---------- ----------
$2,403,099 $2,405,810 $2,141,825 $2,146,904
========== ========== ========== ==========
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
3. LOANS
Loans consisted of (in thousands):
March 31
1999 1998
---------- ----------
Consumer:
Automobile installment $2,778,587 $2,464,160
Home equity, fixed- and variable-rate 855,532 1,005,351
Revolving credit plans,
including credit cards 26,845 184,674
Other 317,497 351,559
Real estate:
Construction and land development 129,060 112,513
Commercial mortgage 570,323 567,498
Residential mortgage 639,490 518,048
Other, including Industrial
Development Authority loans 109,854 94,142
Commercial 576,829 560,575
---------- ----------
Loans, net of unearned income
of $142,764 and $174,774 $6,004,017 $5,858,520
========== ==========
4. ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses was (dollars in thousands):
Three Months Ended
March 31
1999 1998
------- -------
Balance at beginning of period $70,312 $68,064
Provision charged to expense 3,956 4,084
Decrease attributable to loans sold (4,323) -
------- -------
69,945 72,148
Less:
Loans charged off, net of
recoveries of $1,084 and $1,010 3,745 5,031
------- -------
Balance at March 31 $66,200 $67,117
======= =======
Percentage of annualized net
charge-offs to average loans .25% .34%
Percentage of allowance for loan
losses to period-end loans 1.10 1.15
Percentage of nonperforming assets
to period-end loans .34 .41
11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
5. FEDERAL INCOME TAX
The reconcilement of income tax computed at the federal statutory tax
rates to the provision for income taxes was as follows (dollars in thousands):
Three Months Ended
March 31
1999 1998
------------- -------------
Amount Percent Amount Percent
------- ----- ------- -----
Statutory rate $23,720 35.0% $16,893 35.0%
Nontaxable interest on
municipal obligations (1,251)(1.8) (1,000)(2.1)
Other items 1,019 1.5 830 1.8
------- ---- ------- ----
Effective rate $23,488 34.7% $16,723 34.7%
======= ==== ======= ====
6. PREFERRED AND COMMON STOCK
There are 3,000,000 shares of preferred stock, par value $10.00 per
share, authorized. The following four series of cumulative convertible stock
were outstanding:
March 31 December 31 March 31
Series Dividends 1999 1998 1998
--------- --------- -------- ----------- --------
A 5% 17,429 18,615 19,704
B 7% 3,340 3,340 3,340
C 7% 8,212 9,788 9,788
D 8% 21,172 21,612 22,276
------- ------ ------
50,153 53,355 55,108
======= ====== ======
The Series A, Series B and Series D shares are convertible into two and
one fourth shares of common stock, and the Series C shares are convertible
into one and eight-tenths shares of common stock. All of the preferred stock
may be redeemed at the option of the corporation for $10.00 per share.
There are 175,000,000 shares of common stock, par value $1.00 per share,
authorized and 50,125,000, 50,094,000 and 51,841,000 shares were outstanding
at March 31, 1999, December 31, 1998, and March 31, 1998, respectively.
Options to purchase 756,868 shares of common stock were outstanding on March
31, 1999. A total of 3,222,391 shares of common stock were reserved at March
31, 1999: 109,148 shares for the conversion of preferred stock and 3,113,243
shares for stock options.
12
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) (Unaudited)
7. EARNINGS PER SHARE
Earnings per share computations are as follows (in thousands, except per
share data):
Three Months Ended
March 31
1999 1998
-------- --------
Basic:
Average common shares outstanding 50,103 51,828
======== ========
Net income $ 44,284 $ 31,542
Preferred stock dividends 9 9
-------- --------
Net income applicable to
common stock $ 44,275 $ 31,533
======== ========
Net income per share of common stock $ .88 $ .61
======== ========
Diluted:
Average common shares outstanding 50,103 51,828
Dilutive effect of stock options 175 157
Conversion of preferred stock 113 125
-------- --------
Total average common shares 50,391 52,110
======== ========
Net income $ 44,284 $ 31,542
======== ========
Net income per share of common stock $ .88 $ .61
======== ========
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
QUARTERLY RESULTS
Net income in the first quarter was $44.284 million, an increase of 40%
compared to the $31.452 million earned in the prior year's first quarter.
Earnings per share increased 44% to $.88 compared to $.61 in the prior year's
first quarter. Included in income was an after-tax gain of $10.7 million or
$.21 per share on the sale of the corporation's credit card loan portfolio.
Excluding the gain on the sale of the credit card portfolio in March,
earnings per share increased 10% to $.67 or $33,581,000. The return on
average assets was 1.87% in the first quarter of 1999 including the gain on
the sale of the credit card portfolio, and 1.42% excluding the gain on sale
compared to 1.39% in the prior year's first quarter. The return on average
shareholders' equity was 17.67% including the gain on the sale of the credit
card portfolio and 13.40% excluding the sale, a 103 basis point improvement
compared to the 12.37% earned in 1998.
13
The credit card industry has been consolidating rapidly over the last
several years, and the large companies specializing in credit cards have been
able to offer a superior level of product features and service. Credit cards
made up less than 2% of First Virginia's loans and the lack of growth and
increasing costs of fraud and bankruptcy had diminished the potential for
this part of First Virginia's business, leading to the decision to sell the
remaining $101.8 million of the corporation's credit card portfolio. First
Virginia will continue to offer credit cards to its customers in partnership
with MBNA, a company specializing in credit card lending.
The first quarter witnessed a continuation of the strength in the U.S.
economy. Automobile sales were particularly strong, which helped First
Virginia post a 26% increase in the production of automobile loans compared
to the prior year's first quarter, and achieving a record volume in March.
During the first quarter, First Virginia opened new automobile loan
production offices in Pittsburgh, Pennsylvania and Atlanta, Georgia, and it
is anticipated that they will contribute to growth in future quarters.
Average loans increased 3.0% to $6.079 billion compared to $5.901
billion in the prior year's first quarter. Average indirect automobile loans
increased 14.1% compared to the first quarter of 1998, while average real
estate loans increased 9.4% and average commercial loans increased 5.9%. In
addition to the decline in credit card loans as a result of the sale, overall
loan growth was constrained by a 19.9% decline in average home equity loans
as low interest rates continued to fuel home mortgage refinancing activity.
Average deposits increased 4.2% in the 1999 first quarter to $7.964 billion
including a 7.6% increase in low-cost transaction accounts and a 20.6%
increase in money market accounts. At the end of the quarter, total assets
were $9.541 billion, a 2.9% increase compared to $9.270 billion at the end of
the 1998 first quarter, but down slightly compared to the $9.565 billion at
the end of 1998. The net interest margin in the first quarter was 5.04%,
virtually unchanged from the fourth quarter margin of 5.05%. First Virginia
has achieved a net interest margin of 5.00% or better every year since 1978.
Asset quality remains at an excellent level. Nonperforming assets
declined to $20.232 million at March 31, representing a record low .34% of
outstanding loans. This compares to $23.998 million or .41% of loans at
March 31, 1998, and $21.790 million or .36% of loans at December 31, 1998.
Potential problem loans, those loans which are currently performing in
accordance with contractual terms but where management has concerns over the
ability of the borrower to continue to comply with those terms, totaled
$31.885 million at March 31, 1999, compared to $33.201 million at March 31,
1998. Loans past due 90 days or more of $18.250 million represented .30% of
loans, up slightly compared to the $17.162 million or .29% of loans at the
end of 1998.
14
A summary of nonperforming assets and delinquent loans is as follows:
March 31
1999 1998
------- -------
(Dollars in thousands)
Nonaccruing loans $14,018 $17,284
Restructured loans 2,386 1,978
Foreclosed real estate 3,828 4,736
------- -------
Total nonperforming assets $20,232 $23,998
======= =======
Percentage of total loans .34% .41%
======= =======
Loans past due 90 days or more $18,250 $14,451
======= =======
Percentage of total loans .30% .25%
======= =======
Net charge-offs in the first quarter declined to $3.744 million or an
annualized .25% of average loans compared to $5.032 million or .34% in the
prior year's first quarter. The provision for loan losses in the first
quarter of $3.956 million covered net charge-offs and provided for new loan
growth. This compares to the $4.084 million provision for loan loss expense
in the first quarter of 1998. The allowance for loan losses was $66.200
million at March 31, 1999, and represented 1.10% of outstanding loans
compared to $67.117 million and 1.15% of loans at March 31, 1998. The
allowance was reduced as a consequence of the sale of the corporation's
credit card loans during the quarter. Credit card loans had a significantly
higher net charge-off rate than other loans in the corporation's loan
portfolio and it is anticipated that net charge-offs will decline in future
quarters.
Noninterest income increased 77% to $46.852 million compared to $26.447
million in the first quarter of 1998. Excluding the pre-tax gain of $16.467
million on the sale of the corporation's remaining credit card loan portfolio
in the 1999 first quarter, noninterest income increased 15%. The corporation
is continuing to increase the proportion of the income it receives from
noninterest sources. In the first quarter of 1999, noninterest income
comprised 22% of revenue compared to 20% in the 1998 first quarter. Service
charges on deposit accounts increased 25% compared to the prior year's first
quarter, attributable to the late-1998 implementation of a customer value-
based approach to service charges. Income from insurance activities
increased 11% with continued strong growth expected as the corporation's
insurance agency added new agents to its commercial sales force. The
corporation recognized a gain on the sale of some equity securities which
contributed to a net gain on securities transactions of $.822 million in the
first quarter of 1999 compared to $.506 million in 1998.
Noninterest expense declined compared to the third and fourth quarters
of 1998 and was up only 4.0% compared to the prior year's first quarter. The
corporation's practice of continually examining and evaluating its operating
systems and processes controls increases in operating expenses. As part of
this ongoing review, the corporation recently eliminated a level of
15
management within the corporation, giving the chief executive officers of the
corporation's community banks direct lines of communication with senior
management and empowering them to make even more decisions at the local
level. In addition, several smaller banks with overlapping markets were
consolidated, forming larger and more market-dominant banks in their
communities. The back office operations continue to be concentrated for
efficiency, and the corporation recently combined all the service operations
into one organization to achieve even higher cost savings as new technology
and changes in procedures permit. These moves combined to improve the
efficiency ratio further to 56.6% in the first quarter compared to the 57.0%
achieved in the prior year's first quarter and full year of 1998.
Total shareholders' equity was $1.019 billion at March 31, 1999,
compared to $1.031 billion at March 31, 1998. First Virginia continues to be
one of the best capitalized among the 100 largest banks in the country. At
March 31, 1999, the corporation's leverage ratio was 9.05% compared to 8.73%
at the end of 1998, significantly higher than regulatory requirements or peer
group averages. No shares were repurchased during the 1999 first quarter
under the corporation's share repurchase plan. There are 1.487 million
shares remaining under the currently authorized plan. As a result of shares
repurchased in the third and fourth quarters of 1998, average diluted shares
outstanding in the first quarter of 1999 declined 3.3% to 50.391 million
compared to 52.110 million in the 1998 first quarter.
YEAR 2000
The Year 2000 issue is the result of computer programs using two digits
rather than four to define the applicable year. Any of the corporation's
computer programs that have time-sensitive software may recognize a date
using "00" as the year 1900 rather than the year 2000. This could result in
a system failure or miscalculations causing disruptions of operations,
including among other things, a temporary inability to process transactions,
send invoices, or engage in similar normal business activities.
First Virginia began preparing its computer systems and applications for
the Year 2000 in 1993. This process involves modifying or replacing the
corporation's affected hardware and software as well as ensuring that
external service providers, significant vendors and large customers are
taking the appropriate action to remedy their own Year 2000 issues. First
Virginia developed a five-phase approach to resolve its Year 2000 issues.
This approach involves the following phases: awareness, assessment,
renovation, validation and implementation. The awareness and assessment
phases involve identifying the systems affected, analyzing the scope and
magnitude of the problem, and developing an action plan to address each area
affected. Management has identified 64 systems as "mission-critical," which
are defined as those systems that would severely impair operations or cause a
significant loss of revenue if not remediated. The renovation phase involves
modifying or replacing the corporation's affected systems. The final two
phases, validation and implementation, involve testing and certification that
the mission-critical systems are compliant with all Year 2000 issues. As of
March 31, 1999, the corporation has completed all phases for these 64
mission-critical systems.
First Virginia has contacted non-mission-critical external service
providers, significant suppliers and large customers to determine the extent
to which they may be affected by Year 2000 issues and to determine whether
16
they are taking appropriate steps to remedy their own Year 2000 issues. To
date, First Virginia is not aware of any external service providers, vendors
or large customers whose failure to resolve their own Year 2000 issues would
have a material adverse effect on First Virginia's results of operations.
However, the corporation has no means of ensuring that external agents or
large customers will be ready and the effect of their noncompliance is not
determinable. The corporation will continue to monitor the progress of non-
mission-critical external service providers, significant suppliers and large
customers throughout 1999 and will determine if a contingency plan is
necessary for those external parties by September 30, 1999.
Management of the corporation believes it has an effective program in
place to resolve the Year 2000 issue in a timely manner. An independent
third party has been engaged to review the corporation's plan and readiness
for Year 2000 mission-critical issues. In addition, the corporation's
primary regulator, the Federal Reserve, conducts quarterly examinations and
evaluations of the corporation's progress.
In the event that First Virginia is unable to complete all necessary
phases of the plan, First Virginia may be unable to process transactions,
invoice customers or collect payments and perform other operations. In
addition, disruptions in the economy generally resulting from Year 2000
issues could also materially adversely affect the corporation. The
corporation has developed contingency plans for 80% of its mission-critical
systems and is developing plans for the remaining systems that will be
completed by June 30, 1999. These plans involve, among other actions, manual
work-arounds, temporary postponement of certain functions and alternative
computer systems. Some of these plans incorporate parts of the corporation's
existing disaster recovery programs involving offsite data processing and
detailed plans for each function within the corporation.
First Virginia estimates that the total cumulative cost of the project
will be approximately $22 million of which $19 million has already been
expended. This includes both internal and external personnel costs related
to modifying the systems and the cost of purchasing or leasing hardware or
software. Purchased hardware and software is being capitalized in accordance
with normal policy. Personnel and all other costs related to the project are
being expensed as incurred. These costs are not expected to have a material
effect on the corporation's results of operations.
The cost of the project and the expected completion dates are based on
management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources and other factors. However, there can be no guarantee that these
estimates will be achieved, and actual results could differ materially from
those anticipated. Specific factors that could influence the results may
include, but are not limited to, the availability and cost of personnel
trained in this area, the ability to locate and correct all relevant computer
codes, the availability of alternative systems in the event of failure of
mission-critical systems, the ability of third-party intermediaries to be
Year 2000 ready, and similar uncertainties.
17
FORWARD-LOOKING STATEMENTS
Certain statements in this discussion may constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform
Act of 1995. Such forward-looking statements involve known and unknown risks
including, but not limited to, changes in general economic and business
conditions, interest-rate fluctuations, competition within and without the
banking industry, new products and services in the banking industry, risks
inherent in making loans, including repayment risks and fluctuating
collateral values, changing trends in customer profiles and changes in laws
and regulations applicable to the corporation. Although the corporation
believes that its expectations with respect to the forward-looking statements
are based upon reasonable assumptions within the bounds of its knowledge of
its business and operations, there can be no assurance that actual results,
performance or achievements of the corporation will not differ materially
from any future results, performance or achievements expressed or implied by
such forward-looking statements.
18
AVERAGE BALANCES AND INTEREST RATES (Unaudited)
(Dollars in thousands)
Three Months Ended March 31
1999
------------------------------
Interest
Average Income/
Balance Expense Rate
---------- --------- -------
Interest-earning assets:
Investment securities-available for sale:
U.S. Government and its agencies $ 11,911 $ 161 5.46%
Other 7,831 63 3.22
Investment securities-held to maturity:
U.S. Government and its agencies 1,760,329 25,494 5.84
State and municipal obligations
(Fully taxable-equivalent basis) 314,812 4,771 6.06
Other (Fully taxable-equivalent basis) 247 4 6.58
---------- --------
Total investment securities 2,095,130 30,493 5.86
---------- --------
Loans, net of unearned income:
Installment 4,014,264 83,678 8.45
Real estate 1,122,020 23,284 8.30
Other (Fully taxable-equivalent basis) 942,412 19,033 8.25
---------- --------
Total loans 6,078,696 125,995 8.36
---------- --------
Loans held for sale 12,191 231 7.59
Money market investments 443,510 5,183 4.74
Other earning assets 22,491 393 7.00
---------- --------
Total earning assets and income $8,652,018 162,295 7.56
========== --------
Interest-bearing liabilities:
Interest checking/savings plan $1,478,747 3,558 0.98
Money market accounts 981,518 7,452 3.08
Savings deposits 1,135,516 5,423 1.94
Consumer certificates of deposit 2,396,125 28,443 4.81
Large denomination
certificates of deposit 434,375 5,226 4.88
---------- --------
Total interest-bearing deposits 6,426,281 50,102 3.16
Short-term borrowings 366,410 3,549 3.93
Long-term indebtedness 3,129 75 9.57
---------- --------
Total interest-bearing liabilities
and interest expense $6,795,820 53,726 3.21
========== --------
Net interest income and net interest margin $108,569 5.04%
========
Other average balances:
Demand deposits $1,537,769
Common shareholders' equity 1,001,683
Total shareholders' equity 1,002,207
Total assets 9,452,236
19
AVERAGE BALANCES AND INTEREST RATES (Unaudited)
(Dollars in thousands)
Three Months Ended March 31
1998
------------------------------
Interest
Average Income/
Balance Expense Rate
---------- --------- -------
Interest-earning assets:
Investment securities-available for sale:
U.S. Government and its agencies $ 4,982 $ 68 5.57%
Other 10,217 73 2.86
Investment securities-held to maturity:
U.S. Government and its agencies 1,628,619 24,561 6.08
State and municipal obligations
(Fully taxable-equivalent basis) 154,664 2,763 7.14
Other (Fully taxable-equivalent basis) 1,550 24 6.24
---------- --------
Total investment securities 1,800,032 27,489 6.16
---------- --------
Loans, net of unearned income:
Installment 3,985,723 86,530 8.80
Real estate 1,025,922 22,154 8.64
Other (Fully taxable-equivalent basis) 889,704 19,299 8.86
---------- --------
Total loans 5,901,349 127,983 8.74
---------- --------
Loans held for sale 15,164 268 7.06
Money market investments 551,011 7,363 5.42
Other earning assets 21,456 367 6.85
---------- --------
Total earning assets and income $8,289,012 163,470 7.95
========== --------
Interest-bearing liabilities:
Interest checking/savings plan $1,376,652 5,247 1.55
Money market accounts 814,002 6,757 3.37
Savings deposits 1,138,173 6,451 2.30
Consumer certificates of deposit 2,455,885 30,091 4.97
Large denomination
certificates of deposit 426,850 5,606 5.33
---------- --------
Total interest-bearing deposits 6,211,562 54,152 3.54
Short-term borrowings 273,260 3,211 4.77
Long-term indebtedness 2,723 47 6.89
---------- --------
Total interest-bearing liabilities
and interest expense $6,487,545 57,410 3.59
========== --------
Net interest income and net interest margin $106,060 5.14%
========
Other average balances:
Demand deposits $1,427,853
Common shareholders' equity 1,019,704
Total shareholders' equity 1,020,276
Total assets 9,063,163
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
There have been no material changes in information
regarding quantitative and qualitative disclosures about
market risk from the information presented as of
December 31, 1998 in the corporation's anual report on
Form 10-K to March 31, 1999.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8 - K
----------------------------------
a) Exhibit 27 - Financial Data Schedule (Page 22)
b) Incorporated by reference from the corporation's Form 8-K/A
dated February 24, 1999.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by its
principal financial officer thereunto duly authorized.
FIRST VIRGINIA BANKS, INC.
/s/ Richard F. Bowman
May 13, 1999 __________________________
Richard F. Bowman,
Senior Vice President,
Treasurer and
Chief Financial Officer
21