SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1998 Commission File No. 0-5929
F & M NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Commonwealth of Virginia 54-0857462
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
9 Court Square, Winchester, Virginia 22601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 540-665-4200
NO CHANGES
(Former name, former address and former fiscal year, if
changes since last report)
Indicate by check mark whether the registrant (l) has filed all
reports to be filed by Section 13 or 15(d) of the Securities and
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
As of November 12, 1998, there were 21,893,663 shares of the
Registrant's common stock outstanding.
<PAGE>
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (000 OMITTED)
<CAPTION>
(Unaudited)
Sept. 30, December 31,
1998 1997
<S> <C> <C>
Assets:
Cash and due from banks 115,445 132,138
Interest-bearing deposits in other banks 45,019 11,843
Securities-held to maturity(market value
September 30, 1998-$440,822;
December 31, 1997, $413,286) 426,515 406,707
Securities-available for sale
(market value) 279,755 254,466
Federal funds sold and securities
purchased under agreements to resell 100,018 113,077
Loans 1,680,876 1,652,415
Unearned income (3,069) (3,661)
Loans (net of unearned income) 1,677,807 1,648,754
Allowance for loan losses (22,099) (21,690)
Net loans 1,655,708 1,627,064
Bank premises and equipment, net 63,550 60,958
Other assets 73,046 71,683
Total assets 2,759,056 2,677,935
Liabilities and Shareholders' Equity:
Liabilities:
Deposits
Non-interest bearing 475,596 437,208
Interest bearing 1,843,534 1,838,173
Total deposits 2,319,130 2,275,381
Federal funds purchased and securities
sold under agreements to repurchase 94,521 81,336
Other short-term borrowings 15,940 14,508
Long-term debt 21,570 17,202
Other liabilities 26,530 24,657
Total liabilities 2,477,691 2,413,084
</TABLE>
<PAGE>
<TABLE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (000 OMITTED)
<CAPTION>
(Unaudited)
Sept. 30, December 31,
1998 1997
<S> <C> <C>
Stockholders' Equity
Preferred stock, no par value:
(Authorized 5,000,000 shares,
no shares outstanding) 0 0
Common stock par value $2.00 per
share, authorized 30,000,000 shares:
issued September 30, 1998-21,893,800
shares; issued December 31,
1997-21,889,413 shares 43,788 43,779
Capital surplus 77,146 77,827
Retained earnings 155,748 141,015
Accumulated other comprehensive income 4,683 2,230
Total shareholders' equity 281,365 264,851
Total liabilities and
shareholders' equity 2,759,056 2,677,935
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
F & M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (000 OMITTED)
<CAPTION>
(Unaudited) For (Unaudited) For
the Nine Months the Three Months
Ended Sept. 30, Ended Sept. 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans 111,231 109,336 37,411 37,246
Securities held to maturity:
Taxable interest income 18,386 15,020 6,319 5,277
Interest income exempt from
Federal income taxes 988 1,162 310 374
Securities available for sale:
Taxable interest income 12,043 12,330 4,180 3,921
Dividend income 648 573 207 193
Total security interest
income 32,065 29,085 11,016 9,765
Interest on federal funds sold
and securities purchased
under agreements to resell 4,680 2,802 1,318 944
Interest on deposits in banks 889 364 420 86
Total interest income 148,865 141,587 50,165 48,041
Interest Expense:
Interest on deposits 58,165 56,097 19,212 19,117
Interest on short-term
borrowings 2,932 2,313 987 918
Interest on long-term debt 766 634 276 218
Total interest expense 61,863 59,044 20,475 20,253
Net interest income 87,002 82,543 29,690 27,788
Provision for loan losses 2,790 2,768 1,410 799
Net interest income after
provision for loan losses 84,212 79,775 28,280 26,989
Other Income:
Commissions and fees from
fiduciary activities 1,969 1,757 659 570
Service charges on deposit
accounts 9,463 7,772 3,442 2,750
Credit card fees 2,996 2,691 1,089 982
Fees for other customer services 2,237 2,066 700 684
Insurance commission 6,568 2,352 2,291 816
Other operating income 2,246 1,921 201 669
Profits on securities available
for sale 732 1,822 540 1,393
Investment securities gains, net 1 1 -- 3
Total other income 26,212 20,382 8,922 7,867
</TABLE>
<PAGE>
<TABLE>
F & M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (000 OMITTED)
<CAPTION>
(Unaudited) For (Unaudited) For
the Nine Months the Three Months
Ended Sept. 30, Ended Sept. 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Other Expenses:
Salaries and employees'
benefits 38,090 33,576 12,493 11,717
Net occupancy expense of
premises 6,110 5,599 2,080 2,082
Furniture and equipment expense 5,244 4,661 1,751 1,596
Deposit insurance 215 184 66 64
Credit card expense 2,269 1,860 892 676
Other operating expense 17,354 16,994 5,952 6,241
Total other expense 69,282 62,875 23,234 22,377
Income before income taxes 41,142 37,255 13,968 12,452
Income tax expense 14,313 12,716 4,820 4,260
Net income 26,829 24,539 9,148 8,192
Average shares:
Basic 21,887 21,710 21,889 21,624
Assuming dilution 22,096 21,922 22,074 21,844
Earnings per common share:
Basic $1.23 $1.13 $0.42 $0.38
Assuming dilution $1.22 $1.11 $0.41 $0.37
Dividends per share $0.565 $0.54 $0.195 $0.18
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
<TABLE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES-CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(000 OMITTED)
<CAPTION>
Accumulated
Other
Compre- Compre-
Common Capital Retained hensive hensive
Stock Surplus Earnings Income Income Total
<S> <C> <C> <C> <C> <C> <C>
Balances -
January 1, 1997 43,770 78,807 123,059 416 246,052
Comprehensive
Income:
Net income 24,539 24,539 24,539
Other comprehensive
income net of tax:
Unrealized gain on
available-for-sale
securities 3,451 3,451
Less: Reclassifi-
cation adjustment
for gains realized
in net income (1,822) (1,822)
Other comprehesive
income, net of tax 1,629 1,629
Total compre-
hensive income 26,168
Cash dividends (11,015) (11,015)
Cash for fractional
shares (7) (7)
Acquisition of
common stock (854) (9,382) (10,236)
Issuance of
authorized stock:
Stock options 123 405 528
Stock options
under nonvariable
compensatory plan 732 732
Employee stock
ownership plan 100 950 1,050
Balances -
September 30, 1997 43,139 71,512 136,576 2,045 253,272
</TABLE>
See Accompanying Notes to Consolidated Financial Statements<PAGE>
<TABLE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES-CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(000 OMITTED)
<CAPTION>
Accumulated
Other
Compre- Compre-
Common Capital Retained hensive hensive
Stock Surplus Earnings Income Income Total
<S> <C> <C> <C> <C> <C> <C>
Balances -
January 1, 1998 43,779 77,827 141,015 2,230 264,851
Comprehensive
Income:
Net income 26,829 26,829 26,829
Other comprehensive
income net of tax:
Unrealized gains
on available-
for-sale
securities 3,185 3,185
Less: Reclassi-
fication
adjustment for
gains realized
in net income (732) (732)
Other compre-
hensive income,
net of tax 2,453 2,453
Total compre-
hensive income 29,282
Cash dividends (12,096) (12,096)
Acquisition of
common stock (204) (3,118) (3,322)
Issuance of
authorized stock:
Stock options 143 668 811
Stock options
under nonvariable
compensatory plan 1,206 1,206
Employee stock
ownership plan 70 563 633
Balances -
September 30, 1998 43,788 77,146 155,748 4,683 281,365
</TABLE>
See Accompanying Notes to Consolidated Financial Statements<PAGE>
<TABLE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (000 Omitted)
<CAPTION>
(Unaudited)
For the Nine Months Ended
Sept. 30, Sept. 30,
1998 1997
<S> <C> <C>
Cash Flows From Operating Activities
Net income 26,829 24,539
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,815 4,171
Provision for loan losses 2,790 2,768
Profit on securities available for sale 732 1,822
Gain on securities held to maturity 1 1
Increase in other assets (1,599) (7,618)
Increase in other liabilities 1,872 2,531
Net cash provided by operating activities 35,440 28,214
Cash Flows From Investing Activities
(Increase) decrease in interest-bearing
deposits in other banks (33,176) 411
Proceeds from maturities, calls and sales
of available for sale securities 114,255 59,270
Purchase of securities available for sale (136,503) (32,412)
Proceeds from maturities of investment
securities 130,717 63,056
Purchase of investment securities (150,525) (102,372)
(Increase) decrease in federal funds sold
and securities purchased under agreements
to resell 13,059 (12,857)
Net (increase) in loans (34,535) (110,660)
Purchases of bank premises and equipment (6,535) (13,768)
Proceeds from sale of OREO 2,350 3,940
Net cash (used in) investing activities (100,893) (145,392)
Cash Flows From Financing Activities
Net increase in noninterest-bearing
and interest-bearing demand deposits
and savings accounts 77,184 70,680
Net increase (decrease) in certificates
of deposit (33,435) 42,330
Dividends paid (12,096) (11,015)
Increase in other short-term borrowings 14,617 13,643
Increase in long-term debt 4,368 4,854
Acquisition of common stock (3,322) (11,573)
Net proceeds from issuance of common stock 1,444 2,908
</TABLE>
<PAGE>
<TABLE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (000 Omitted)
<CAPTION>
(Unaudited)
For the Nine Months Ended
Sept. 30, Sept. 30,
1998 1997
<S> <C> <C>
Net cash provided by financing activities 48,760 111,827
Increase in cash and
cash equivalents (16,693) (5,351)
Cash and Cash Equivalents
Beginning 132,138 131,943
Ending 115,445 126,592
Supplemental Disclosures of Cash Flows
Information
Cash payments for:
Interest paid to depositors 54,742 56,097
Interest paid on other short-term
borrowings 3,698 2,313
58,440 58,410
Income taxes 13,762 12,252
Supplemental Schedule of Noncash Investing
and Financing Activities
Issuance of stock options under
nonvariable compensatory plan:
1998 - 84,680 shares;
1997 - 68,500 shares 1,206 732
Loan balances transferred to foreclosed
properties 3,101 2,358
Market value adjustment available for
sale securities 3,774 2,506
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
1. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the
financial position as of September 30, 1998, and December 31, 1997,
and the results of operations and changes in cash flows for the nine
months ended September 30, 1998 and 1997. The statements should be
read in conjunction with the Consolidated Notes to Financial
Statements included in F&M's Annual Report for the year ended
December 31, 1997.
The amounts previously reported for the periods presented have been
retroactively restated to reflect the acquisitions of Peoples Bank of
Virginia on April 1, 1998, The Bank of Alexandria on June 1, 1998,
and J. V. Arthur, Inc., on April 22, 1998.
2. The results of operations for the nine-month periods ended
September 30, 1998 and 1997, are not necessarily indicative of the
results to be expected for the full year.
3. F&M National Corporation's ("F&M" or the "Corporation") amortized
cost and market value of securities being held to maturity as of
September 30, 1998, are as follows:
<TABLE>
<CAPTION>
September 30, 1998 (000 omitted)
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies 399,219 13,559 (163) 412,615
Corporate securities 1,284 73 - 1,357
Obligations of states and
political subdivisions 26,012 838 - 26,850
426,515 14,470 (163) 440,822
</TABLE>
F&M's amortized cost and market value of the available for sale
securities as of September 30, 1998, are as follows:
<PAGE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
<TABLE>
<CAPTION>
September 30, 1998 (000 omitted)
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies 256,707 12,909 (89) 269,527
Corporate securities 620 4 -- 624
Other 9,604 -- -- 9,604
266,931 12,913 (89) 279,755
</TABLE>
4. F&M's loan portfolio is composed of the following:
<TABLE>
<CAPTION>
Sept. 30, December 31,
1998 1997
(000 Omitted)
<S> <C> <C>
Commercial, financial and agricultural 283,578 275,600
Real estate-construction 102,138 95,310
Real estate-mortgage 1,100,526 1,100,923
Installment loans to individuals 194,634 180,582
Total loans 1,680,876 1,652,415
Less: Unearned income (3,069) (3,661)
Allowance for loan losses (22,099) (21,690)
Loans, net 1,655,708 1,627,064
</TABLE>
F&M had $14,451,000 in non-accrual loans at September 30, 1998.
5. Reserve for Loan Losses:
<TABLE>
<CAPTION>
Sept. 30, December 31,
1998 1997
(000 Omitted)
<C> <S> <S>
Balance at January 1 21,690 19,077
Provision charged to operating expense 2,790 5,802
Recoveries added to the reserve 468 1,126
Loan losses charged to the reserve (2,849) (4,315)
Balance at end of period 22,099 21,690
</TABLE>
<PAGE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
6. Earnings and dividends paid per share:
<TABLE>
<CAPTION>
September 30, 1998 September 30, 1997
Per Per
Share Share
Shares Amount Shares Amount
<C> <S> <S> <S> <S>
Basic EPS 21,886,947 1.23 21,710,145 1.13
Effective of
dilutive securities:
Stock options 209,505 211,865
Diluted EPS 22,096,452 1.22 21,922,010 1.11
</TABLE>
The weighted average number of shares outstanding for the nine
months ended September 30, 1998, and September 30, 1997, were
21,886,947 and 21,710,145 shares, respectively.
7. On September 11, 1997, the Corporation and Shomo & Lineweaver
Insurance Agency, Inc., announced that their respective Board of
Directors have approved an agreement for the affiliation of Shomo &
Lineweaver Insurance Agency, Inc., with F&M Bank-Winchester. The
transaction was completed in the fourth quarter 1997.
8. Peoples Bank of Virginia ("PBVA") and the Corporation entered
into a Definitive Agreement and Plan of Reorganization, dated as of
December 21, 1997, and a related Plan of Merger (collectively, the
"Merger Agreement"). This transaction was consummated and the merger
became effective on April 1, 1998. Under the terms of the Merger
Agreement, PBVA was merged with F&M Bank-Richmond and each share of
common stock of PBVA outstanding immediately prior to consummation of
the Merger will be exchanged, in a tax-free exchange, for 2.58 shares
of common stock of F&M, with cash being paid in lieu of issuing
fractional shares. As of December 31, 1997, PBVA had total assets of
$80.4 million, total loans of $47.0 million, total deposits of $70.4
million and total shareholders' equity of $8.2 million.
9. The Bank of Alexandria ("BOA") and the Corporation entered into a
Definitive Agreement and Plan of Reorganization, dated as of December
12, 1997, and related Plan of Merger (collectively, the "Merger
Agreement"). This transaction was consummated and became effective on
June 1, 1998. Under the terms of the Merger Agreement, BOA was merged
with F&M Bank-Northern Virginia and each share of common stock of BOA
outstanding immediately prior to consummation of the Merger was
exchanged, in a tax-free exchange, for 0.942 shares of common stock
of F&M, with cash being paid in lieu of issuing fractional shares. As
of December 31, 1997, BOA had total assets of $75.9 million, total
loans of $58.2 million, total deposits of $67.6 million, and total
shareholders' equity of $7.9 million.<PAGE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
10. On April 22, 1998, the Corporation and J.V. Arthur, Inc., ("JVA")
announced an agreement of affiliation of J.V. Arthur, Inc. with F&M
Bank-Winchester, F&M's lead bank. JVA is an insurance agency located
in Winchester, Virginia, which offers a full line of insurance
products. The affiliation was effective on April 30, 1998.
11. F&M, in the normal course of business, continually replaces and
upgrades computer software and equipment in order to provide services
demanded by our customers. Normal replacement and upgrade of computer
software and equipment is not considered an expenditure for Year
2000, but the normal conduct of business. Any expenditure that must
be made to eliminate Year 2000 problems are addressed as unusual.
Year 2000 will not be a material event or uncertainty that would
cause previously reported financial information to no longer be
accurate. Also, F&M is of the opinion that the cost or consequences
of Year 2000 will not represent a known material event or uncertainty
that will reasonably be expected to adversely affect future financial
results.
12. Security Bank ("Security") and the Corporation have entered into
an agreement, dated as of November 10, 1998, for the affiliation of
Security Bank Corporation, Manassas, Virginia, with the Corporation.
This transaction is subject to the approval of regulatory authorities
and shareholders of Security. Under the terms of the agreement,
Security would exchange the number of its shares of common stock
whose aggregate market value determined as of the date of the closing
equals $17.25, giving the transaction an indicated value of
approximately $16.5 million. The transaction is intended to qualify
as a tax-free exchange and be accounted for as a pooling of
interests. Security also granted F&M an option, exercisable under
certain circumstances, to acquire 191,300 shares of Security's common
stock (subject to adjustment). It is anticipated that the merger will
be effective in the first quarter 1999. At September 30, 1998,
Security had total assets of approximately $61 million.
<PAGE>
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
F & M National Corporation
Winchester, Virginia
We have reviewed the accompanying consolidated balance sheet of F&M
National Corporation and Subsidiaries as of September 30, 1998, and
the related consolidated statements of income, changes in
shareholders' equity and cash flows for the nine-month periods ended
September 30, 1998 and 1997. These financial statements are the
responsibility of the Corporation's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying condensed consolidated
financial statements referred to above for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of F&M National Corporation and
Subsidiaries as of December 31, 1997, and the related statements of
income, changes in shareholders' equity and cash flows for the year
then ended (not presented herein); and in our report dated January
28, 1998, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the
accompanying condensed balance sheet as of December 31, 1997 is
fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
/s/
YOUNT, HYDE & BARBOUR, P.C.
Winchester, Virginia
November 10, 1998
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial information is
presented to aid the reader in understanding and evaluating the
financial condition and results of operations of F&M National
Corporation ("F&M" or the "Corporation").
FINANCIAL CONDITION
Total assets on September 30, 1998, amounted to $2.759 billion, up
$159.4 million or 6.1% from $2.600 billion at September 30, 1997.
Total assets at December 31, 1997, were $2.678 billion. For the first
nine months of 1998, total assets averaged $2.726 billion, 8.1% above
the first nine months of 1997 average of $2.521 billion.
Total loans, net of unearned income, amounted to $1.678 billion at
September 30, 1998, an increase of $44.1 million or 2.7% from $1.634
billion at September 30, 1997. At December 31, 1997, total loans,
net, were $1.649 billion. Total loans (net) as a percent of total
assets were 60.8% at September 30, 1998, as compared to 62.8% at
September 30, 1997, and 61.6% at December 31, 1997. Net loan volume
for the first nine months 1998 increased $29.1 million as compared to
an increase of $105.9 million for the first nine months 1997. Loan
volume decreased as a result of increased competition for loans.
On September 30, 1998, the securities portfolio totalled $706.3
million, which was $63.6 million or 9.9% higher than the year before
and $45.1 million or 6.8% higher than at December 31, 1997. In the
first nine months 1998, as funds became available, they were
primarily utilized for investing in the securities portfolio. Funds
were invested in the securities portfolio by acquiring U.S.
government and U.S. agency securities in an effort to balance the
asset risk portfolio. Federal funds sold and securities purchased
under agreements to resell were $100.0 million on September 30, 1998,
$13.1 million or 11.6% lower than $113.1 million outstanding at
December 31, 1997. Federal funds sold are one day sales of funds to
large regional correspondent banks. It is anticipated that as
interest rates improve, these funds will be invested in higher
yielding financial instruments.
FASB Pronouncement #115 requires the Corporation to show the effect
of market changes in the value of securities available for sale
(AFS). The market value of AFS securities at September 30, 1998, was
$279.8 million as compared to $254.5 million at year end 1997. The
Corporation increased the investment in AFS securities as a result of
attractive rates and the high quality of U.S. government securities.
The effect of the market value of AFS securities less the book value
of AFS securities, net of income taxes, is reflected in Stockholders'
Equity which was $4.7 million at September 30, 1998, an increase from
year end 1997 of $2.5 million.
Total deposits increased $103.2 million or 4.7% to $2.319 billion at
September 30, 1998, compared to one year earlier. At December 31,
1997, total deposits were $2.275 billion. F&M offers attractive, yet
competitive, rates that have contributed to the increase in deposits.<PAGE>
Long-term debt was $21.6 million at September 30, 1998, as compared
to $16.4 million at September 30, 1997, and $17.2 million at year end
1997. Long-term debt consists of borrowed funds from Federal Home
Loan Banks that are lent to eligible bank customers for a period of
10 to 15 years for low income housing.
RESULTS OF OPERATIONS
Net income for the first nine months of 1998 amounted to $26.8
million, increasing $2.3 million or 9.4% from $24.5 million for the
first nine months of 1997. The yield on interest-earning assets was
8.07% for the first nine months 1998 as compared to 7.97% for the
first nine months 1997, and the yield on interest-bearing deposits
was 4.21% for the first nine months 1998 as compared to 4.07% for the
first nine months 1997.
Return on average assets was 1.32% for the first nine months 1998,
compared with 1.31% for the same period in 1997 and 1.29% for the
year 1997. F&M's return on average equity was 13.03% for the first
nine months 1998, as well as 1997, and 12.95% for the year ended
1997.
Net interest income totaled $87.0 million for the first nine months
1998, a $4.5 million or 5.4% increase over F&M's performance for the
first nine months 1997. The net interest margin for the first nine
months 1998 was 4.69%, up 4 basis points from 4.65% for the first
nine months 1997. The increase in net interest margin is the effect
of lower interest costs related to deposits.
Total nonperforming assets, which consist of nonaccrual loans,
restructured loans, and foreclosed properties were $31.8 million at
September 30, 1998, a decrease of $3.4 million or 9.66% from $35.2
million at December 31, 1997. Nonperforming assets are composed
largely of 1-4 family residential loans and commercial loans secured
by real property.
Nonperforming loans (nonaccrual loans and restructured loans) at
September 30, 1998, were $15.0 million, or 0.9% of total loans,
compared to $20.0 million, or 1.21% of total loans at December 31,
1997. Also included in nonperforming loans are loans considered
impaired where management is concerned about the ability of the
customer to repay the loan and related interest at the original
contractual terms. At September 30, 1998, impaired loans totaled
$10.5 million upon which an allowance of $4.1 million has been
provided, which is included in the total loan portfolio allowance for
loan losses. Interest income recognized on impaired loans as of
September 30, 1998, was $419 thousand. The average balance of
impaired loans for the first nine months 1998 was $11.1 million.
Loans past due 90 days or more and still accruing interest because
they were well secured and in the process of collection were $2.9
million at December 31, 1997, and $2.1 million at September 30, 1998.
Foreclosed properties consists of 38 parcels of real estate acquired
through debt previously contracted. These properties consist
primarily of commercial and residential real estate whose value is
determined through sale at public auction or fair market value,
whichever is less. At September 30, 1998, foreclosed properties were
$16.8 million as compared to $15.2 million at December 31, 1997.
The allowance for loan losses has increased to $22.1 million at
September 30, 1998, as compared to $21.7 million at year end 1997.
The allowance for loan losses increased $409 thousand in the first
nine months 1998 as compared to $370 thousand for the first nine
months 1997. The amount provided for loan losses in 1997 and 1998 is,
in management's judgment, an amount sufficient for the risk
associated with the loan portfolio. The ratio of allowance for loan
losses to total loans was 1.32% at September 30, 1998, as compared to
1.19% at September 30, 1997, and 1.32% at year end 1997.
Total noninterest income increased $5.8 million or 28.6% from $20.4
million for the first nine months 1997 to $26.2 million for the first
nine months 1998. For the first nine months 1998, gains realized on
securities available for sale were $733 thousand or 2.8% of total
noninterest income, whereas, for the first nine months of 1997
securities gains were $1.8 million or 8.9% of total noninterest
income. Security gains are realized when market conditions exist that
are favorable to the Corporation and/or conditions dictate additional
liquidity is desirable. It is the intent of the Corporation not to
sell any security that is held in its "held to maturity" portfolio
and any gain or loss in this category is the result of securities
being called prior to maturity by the issuer. Credit card fees were
$3.0 million for the first nine months 1998, up $305 thousand or
11.3% over the first nine months 1997 as a result of marketing
efforts to attract new credit card customers. Insurance commission
income for the first nine months 1998 was $6.6 million, up $4.2
million from the first nine months 1997 primarily as a result of the
purchase of Shomo & Lineweaver Insurance Agency ("Shomo") and J.V.
Arthur, Inc. ("JVA"), whose source of income is derived from selling
insurance policies to customers. Other operating income increased
$325 thousand, up from $1.9 million for the first nine months 1997 to
$2.2 million for the first nine months of 1998. Other operating
income consists of other fees and charges that have increased as a
result of providing additional banking services to customers.
Total noninterest expenses increased $6.4 million or 10.2% from $62.9
million for the first nine months 1997 to $69.3 million for the first
nine months 1998. Salary expense increased $4.5 million or 13.6% from
$33.6 million for the first nine months 1997 to $38.1 million for the
first nine months 1998 as a result of increases in salaries and
benefits and the purchase of Shomo and JVA. The cost of net occupancy
expense has increased $511 thousand or 9.1% from $5.6 million for the
first nine months 1997 to $6.1 million for the first nine months
1998, as a result of acquisition of new branches, remodeling of older
branches, and completion of F&M headquarters renovated office
complex. Furniture and equipment expense has increased $583 thousand
or 12.5% from $4.7 million for the first nine months 1997 to $5.2
million for the first nine months 1998, which reflects an increase in
the acquisition of new furniture, equipment, and computer software.
Inherent in furniture and equipment expenses, F&M is testing,
replacing, and upgrading computer equipment and software in order to
be ready for Year 2000. Deposit insurance was $215 thousand for the
first nine months 1998, an increase of $31 thousand from $184
thousand for the same period 1997 which is attributable to growth in
deposits. Credit card expense was up $409 thousand or 22.0% from $1.9
million for the first nine months 1997 to $2.3 million for the first
nine months 1998 as a result of direct marketing and offering new
products. Other operating expense increased $360 thousand from $17.0
million for the first nine months of 1997 to $17.4 million for the
first nine months 1998.
Income taxes increased $1.6 million or 12.5% from $12.7 million for
the first nine months 1997 to $14.3 million for the first nine months
1998. The increase in income taxes is the result of greater amounts
of income subject to income taxes.
YEAR 2000 ISSUE
As discussed above, F&M is implementing changes to its information
systems so that they will be fully operable for date recognition and
data processing before the year 2000 begins. The Corporation's Year
2000 plans are subject to guidelines promulgated by the Federal
Financial Institutions Examination Council ("FFIEC"). The Federal
Reserve Bank of Richmond periodically measures the status of F&M's
plans and progress, as outlined in the FFIEC guidelines.
The Board of Directors and Senior Management of F&M have made a
commitment that the organization will be Year 2000 ready by December
31, 1998. The Year 2000 Task Force team has been meeting no less than
quarterly since February 1996. The task force and the organization
have made great progress in achieving the Year 2000 goals.
In April of 1998, the Kirchman Corporation certified F&M's D3000
software Year 2000 ready. On May 21, 1998, the Kirchman Corporation
received certification from the Information Technology Association of
America ("ITAA") on the Year 2000. ITAA 2000 certification means that
the process and methods used by the Kirchman Corporation meets the
information technology industry's best software development practices
for addressing the Year 2000 issue.
The ITAA, in conjunction with the Software Productivity Consortium,
performs a thorough and complete review of design methods and
controls used to provide Year 2000 compliant software. This
independent examination is viewed as a vital piece of the Year 2000
due diligence practices for software providers.
F&M has also dedicated technical and managerial support from all
levels of the organization to ensure that it has the necessary
resources to complete the Year 2000 compliance plans in accordance
with the recommended time frames and, therefore, expects no
interruptions in service. It has been estimated that the cost of
addressing Year 2000 will be 1.6% of 1998 earnings (or 0.006% of
assets), which is immaterial when considering the size of the
Corporation.
The projections of total costs of F&M's year 2000 project and the
expected completion dates are based on F&M's best estimates, which
are necessarily based in part on assumptions of future events
including the continued availability of adequate resources and
completion of third party modification plans. There can be no
guarantee that these estimates will be achieved; actual results could
differ from the Corporation's current estimates. Specific risk
factors that might cause material differences include, but are not
limited to, the availability and cost of personnel with adequate
programming skills and the ability to locate and correct all relevant
computer codes. The inability to control the actions and plans of
vendors and suppliers, customers, government entities, and other
third parties with respect to Year 2000 issues are associated risks.
ASSET QUALITY
Loan quality continues to be good based on reviews by management.
Loan quality is the result of management employing conservative
principles of lending while meeting the needs of customers. Good loan
quality results in reduced need for additional provision for loan
losses and efforts to collect past due loans which has a positive
impact on net income.
Total loan charge-offs less recoveries, amounted to $2.4 million for
the first nine months of 1998, representing a ratio of net
charge-offs to total average loans, net of unearned income, of 0.19%,
annualized. This compares to 1997 twelve-month net charge-offs of
$3.2 million, or 0.20% of average loans.
As of September 30, 1998, loans on a non-accrual basis amounted to
$14.5 million, or 0.9% of total loans, net of unearned discount, up
from $11.2 million for the same period 1997. Loans 90 days or more
past due and still accruing totaled $2.1 million, or 0.12% of total
loans, net of unearned discount. The increase in non-accrual loans is
primarily due to the inclusion of loans made to one commercial
customer for $3.7 million. F&M has provided $2.0 million in the
allowance for loan losses to adequately provide for any possible
losses attributable to this customer. In management's judgment, the
balance in the reserve for loan losses is adequate to cover future
losses in the existing loan portfolio.
F&M closely monitors those loans that are deemed to be potential
problem loans. Loans are viewed as potential problem loans when
possible credit problems of the borrowers cause management to have
doubts as to the ability of such borrowers to comply with current
repayment terms. Those loans are subject to constant management
attention, and their classification is reviewed on a regular basis.
At September 30, 1998, the potential problem loans were $17.4 million
and included two lending relationships with principal balances in
excess of $500,000. Those two lending relationships had an aggregate
principal balance outstanding of $3.2 million.
LIQUIDITY
Liquidity requirements are measured by the need to meet deposit
withdrawals, fund loans, maintain reserve requirements and operate
the organization. To meet its liquidity needs, F&M maintains cash
reserves and has an adequate flow of funds from maturing loans,
investment securities, and short-term investments. In addition, F&M's
affiliate banks have the ability to borrow from correspondent banks,
the Federal Reserve Bank, and the Federal Home Loan Bank. F&M
considers its sources of liquidity to be ample to meet its estimated
needs.
CAPITAL RESOURCES
F&M's strong capital position provides the resources and flexibility
for anticipated growth.
F&M's risk-based capital position at September 30, 1998 was $266.3
million, or 15.6% of risk-weighted assets, for Tier I capital and
$287.7 million, or 16.8% for total risk based capital.
Tier I capital consists primarily of common shareholders' equity,
while total risk-based capital adds the allowance for loan losses to
Tier I. Risk-weighted assets are determined by assigning various
levels of risk to different categories of assets and off-balance
sheet activities. Under current risk-based capital standards, all
banks are required to have Tier I capital of at least 4% and total
capital of 8%.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Post Retirement Benefits." This
statement revises employers' disclosures about pension and other post
retirement benefits plans. It does not change the measurement or
recognition of those plans. This Statement standardizes the
disclosure requirements for pensions and other post retirement
benefits to the extent practicable, requires additional information
on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain
disclosures. Restatement of disclosures for earlier periods is
required. This Statement is effective for the Corporation's financial
statements for the year ended December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement
requires companies to record derivatives on the balance sheet as
assets and liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. This Statement is not expected to
have a material impact on the Corporation's financial statements.
This Statement is effective for fiscal years beginning after June 15,
1999, with earlier adoption encouraged. The Corporation will adopt
this accounting standard as required by January 1, 2000.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position ("SOP") 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal
Use." This SOP provides guidance on accounting for the costs of
computer software developed or obtained for internal use. This SOP
requires that entities capitalize certain internal-use software costs
once certain criteria are met. This Statement is not expected to have
a material impact on the Corporation's financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities", which requires the costs of start-up activities
and organization costs to be expensed as incurred. This Statement is
effective for the fiscal year 1998 financial statements. This
Statement is not expected to have a material impact on the
Corporation's financial statements.
Effective January 1, 1998, the Corporation adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and
display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose
financial statements. Financial statements for prior periods have
been restated as required.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in information reported as of
December 31, 1997, in Form 10-K.
<PAGE>
FORM 10-Q PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Registrant or
any of its subsidiaries, directors or officers is a party or by which
they, or any of them, are threatened. All legal proceedings presently
pending or threatened against F & M and its subsidiaries involve
routine litigation incidental to the business of F&M or the
subsidiary involved and are either not material in respect to the
amount in controversy or fully covered by insurance.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
(2) Plan of Acquisition, Reorganization, Arrangement,
Liquidation, or Succession - not applicable.
(3) (i) Articles of Incorporation - not applicable.
(ii) By-laws - not applicable.
(4) Instruments Defining the Rights of Security Holders
Including Indentures - not applicable.
(10) Material Contracts.
Incorporated herein by reference to Registrant's Form 10-K
Annual Report for the year ended December 31, 1997, filed
with the Commission on March 19, 1998, under Exhibit 10.
(11) Statement re Computation of Per Share Earnings.
Incorporated herein by reference to Registrant's Form 10-K
Annual Report for the year ended December 31, 1997, filed
with the Commission on March 19, 1998 under Exhibit 11.
(15) Letter re Unaudited Interim Financial Information - not
applicable.
(18) Letter re change in accounting principles - not applicable.
(19) Reports furnished to security holders.
Incorporated herein by reference to Registrant's 1998 Notice
of Annual Meeting and Proxy Statement dated March 30, 1998,
filed with the Commission on March 26, 1998.
(22) Published Report Regarding Matters Submitted to Vote of
Security Holders - not applicable.
(23) Consent of Experts and Counsel - not applicable.
(24) Power of Attorney - not applicable.
(27) Financial Data Schedules - Included herein as Exhibit 27.
(99) Additional Exhibits - None.
(b) Reports on Form 8-K.
(1) November 9, 1998, for event of November 5, 1998, under ITEM
5. to report authorization by the Registrant's Board of
Directors for management to purchase 200,000 additional
shares of the Registrant's common stock on the open market.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
F & M NATIONAL CORPORATION
/s/ Alfred B. Whitt
Alfred B. Whitt
President, Vice Chairman, and Chief Financial Officer
/s/ Charles E. Curtis
Vice Chairman and Chief Administrative Officer
Date: November 13, 1998
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