SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 0-5929
F&M NATIONAL CORPORATION
(Exact Name of Registrant as specified in its charter)
VIRGINIA 54-0857462
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
9 COURT SQUARE, WINCHESTER, VIRGINIA 22601
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code:
(540) 665-4200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, $2.00 par value
(Title of Class)
New York Stock Exchange
(Name of each exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
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 (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the 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. [ ]
State the aggregate market value of the voting stock held by the non-affiliates
of the Registrant. The aggregate market value is computed by reference to the
closing price of such stock as reported by the New York Stock Exchange on
February 28, 1998: $ 679,360,242.75
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT FEBRUARY 28, 1998: 20,389,759
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Shareholders for the
fiscal year ended December 31, 1997, are incorporated by reference in
Parts II and IV hereof; and
(2) Portions of Registrant's 1998 Proxy Statement dated March 30, 1998,
are incorporated by reference in Part III hereof.
<PAGE>
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Since January 1, 1997, there have been no developments in the
Registrant's (hereinafter called "F&M" or the "Company") business other than the
following:
On February 12, 1997, F&M Bank-Allegiance opened a new branch bank
located at 99 South Washington Street, Rockville, Maryland.
On February 24, 1997, F&M Bank-Northern Virginia opened a new branch
bank located at 7900 Sudley Road, Manassas, Virginia.
On March 29, 1997, F&M Bank-Massanutten opened a new branch bank
located at 430 Highlands Place, Harrisonburg, Virginia.
On June 16, 1997, F&M Bank-Richmond opened a new branch bank located at
6980 Forest Hill Avenue, Richmond, Virginia.
On July 14, 1997, F&M Bank-Martinsburg opened a new branch bank located
at 704 Foxcroft Avenue North, Martinsburg, West Virginia.
On July 16, 1997, F&M Bank-Northern Virginia opened a new branch bank
located at 440 Maple Avenue East, Vienna, Virginia.
On August 4, 1997, F&M Bank-Blakeley opened a new branch bank located
at 1504 Tuscawilla Hills, Charles Town, West Virginia.
On August 20, 1997, F&M Bank-Northern Virginia opened a new branch bank
located at 3829 South George Mason Drive, Falls Church, Virginia.
On September 8,1997, F&M Bank-Allegiance opened a new branch bank
located at 9401 Key West Avenue, Rockville, Maryland.
On September 24, 1997, F&M Bank-Northern Virginia opened a new branch
bank located at 8432 Old Keene Mill Road, Springfield, Virginia.
On October 6, 1997, F&M Bank-Northern Virginia opened a new branch bank
located at 200 North Washington Street, Alexandria, Virginia.
On October 15, 1997, F&M Bank-Blakeley opened a new branch bank located
at 4 Charles Town Plaza, Charles Town, West Virginia.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
F&M and its subsidiaries are engaged primarily in only one industry
segment, banking, the making of commercial and personal loans and similar credit
transactions, and other activities closely related to banking.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS
THE COMPANY
GENERAL
F&M National Corporation is a multi-bank holding company headquartered
in Winchester, Virginia. F&M's eleven subsidiary banks operate 108 banking
offices offering a full range of banking services principally to individuals and
small and middle-market business in north, central and south Virginia including
the Shenandoah Valley, and the eastern panhandle of West Virginia, and the
counties of Montgomery and Prince George in Maryland. At December 31, 1997, F&M
had assets of $2.520 billion, deposits of $2.138 billion and shareholders'
equity of $247.8 million.
F&M was formed in 1969 to serve as the parent holding company of its
then sole subsidiary bank, F&M Bank-Winchester, organized in 1902. Since its
organization, F&M has acquired eighteen banks, which expanded its market area
and increased market share in Virginia, West Virginia and Maryland.
<PAGE>
The following table sets forth certain information concerning F&M and
its operating subsidiaries as of December 31, 1997:
<TABLE>
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<S> <C>
DATE BANKING TOTAL TOTAL TOTAL
ACQUIRED OFFICES ASSETS LOANS DEPOSITS
----------------------------------------------------------------------------------
F&M Bank-Winchester
Winchester, VA (1) 1970 31 $ 831,374 $ 506,498 $ 741,283
F&M Bank-Massanutten
Harrisonburg, VA (2) 1980 9 184,810 119,423 154,278
F&M Bank-Richmond
Richmond, VA (3) 1982 10 173,810 107,705 158,391
F&M Bank-Central
Virginia (4)
Charlottesville, VA 1985 7 77,353 41,719 66,016
F&M Bank-Blakeley
Charles Town/
Ranson, WV 1988 5 114,089 85,800 95,887
F&M Bank-Martinsburg
Martinsburg, WV 1988 4 99,609 76,383 84,848
F&M Bank-Keyser
Keyser, WV 1992 3 97,347 65,078 82,580
F&M Bank-Emporia
Emporia, VA 1993 3 68,840 37,843 59,852
F&M Bank-Peoples
Warrenton, VA 1994 4 125,090 71,390 112,309
F&M Bank-Northern VA
Fairfax, VA (5) 1996 23 529,377 310,372 430,959
F&M Bank-Allegiance
Bethesda, MD 1996 9 188,637 121,387 151,431
F&M (Parent only) - - 29,976 - -
Total 108 $ 2,520,312 $ 1,543,598 $ 2,137,834
</TABLE>
- -----------------------------
(1) Includes Big Apple Mortgage, an insurance agency, and a general credit
reporting agency. Also includes the 1985 acquisition of Stonewall Jackson
Bank and Trust and the 1993 purchase of substantially all of the assets and
assumption of certain liabilities of Farmers and Merchants Bank of Hamilton
(the "Hamilton Bank').
(2) Includes the acquisition in 1989 of The First National Bank of Broadway,
Broadway , Virginia
(3) Includes the acquisition in 1986 of Virginia Capital Bank, Richmond,
Virginia.
(4) Includes the acquisition in 1990 of Peoples Bank of Central Virginia,
Lovingston, Virginia.
(5) Includes the acquisition in 1994 of Hallmark Bank and Trust, Springfield,
Virginia, the acquisition in 1995 of The Bank of the Potomac, Herndon,
Virginia and the acquisition in 1996 of FB&T Financial Corporation,
Fairfax, Virginia.
The business strategy of F&M is to provide its customers with the
financial sophistication and breadth of products of a regional bank, while
retaining the local appeal and level of service of a community bank. F&M has
maintained its community orientation by allowing its subsidiary banks latitude
to tailor products and services to meet community and customer needs. While F&M
has preserved the autonomy of its subsidiary banks, it has established
system-wide policies governing, among other things, lending practices, credit
analysis and approval procedures, as well as guidelines for deposit pricing and
investment portfolio management. In addition, F&M has established a centralized
loan review team that regularly performs a detailed, on-site review and analysis
of each subsidiary bank's loan portfolio to ensure the consistent application of
credit policies and procedures system-wide. An officer or representative of F&M
serves on the board of directors of each subsidiary bank to monitor operations
and to serve as a liaison to the Company.
F&M's subsidiary banks are community-oriented and offer services
customarily provided by full-service banks, including individual and commercial
demand and time deposit accounts, commercial and consumer loans, residential
mortgages, credit card services and safe deposit boxes. Lending is focused on
individuals and small and middle-market businesses in the local market regions
of each of F&M's subsidiary banks. In addition, F&M Bank-Winchester, F&M
Bank-Massanutten, F&M Bank-Northern Virginia, and F&M Bank-Peoples in Virginia
and F&M Bank-Blakeley, F&M Bank-Martinsburg and F&M Bank-Keyser have trust
powers offering a range of fiduciary services. At December 31, 1997, trust
assets under management at these seven banks totaled $489.4 million.
Effective January 1, 1998, F&M Trust Company, a wholly-owned
trust subsidiary of the Company, began operations and assumed responsibility for
all the trust and fiduciary activities of the Virginia banking subsidiaries of
the Company.
F&M operates in seven market regions: the Shenandoah Valley of
Virginia; the eastern panhandle of West Virginia; Charlottesville/Albemarle
County and surrounding areas; Greenville County in southside Virginia; suburban
Richmond, primarily Henrico and Chesterfield Counties; the northern Virginia
areas of Loudoun, Fairfax, and Prince William Counties; Stafford, Warrenton and
surrounding Fauquier County area and the counties of Montgomery and Prince
George's in Maryland. The more populous sectors within each of the seven market
regions experienced substantial population growth between 1980 and 1990, most of
which exceeded 20% growth. At December 31, 1997, F&M operated 33 banking offices
in the Shenandoah Valley from Winchester to Harrisonburg with deposits of $726.6
million; 12 banking offices in the eastern panhandle of West Virginia with
deposits of $263.3 million; 7 banking offices in the Charlottesville/Albemarle
County area with deposits of $66.0 million; 3 banking offices in Emporia,
Virginia, and surrounding Greenville County with deposits of $59.9 million; 10
banking offices in suburban Richmond, Virginia, with deposits of $158.4 million;
and 30 banking offices in Loudoun, Fairfax and Prince William Counties of
northern Virginia with deposits of $603.4 million; 4 offices in the city of
Warrenton and Fauquier and Stafford Counties with deposits of $112.3 million and
9 offices in the counties of Montgomery and Prince George in Maryland with
deposits of $151.4 million. F&M's principal market is Winchester and the
surrounding six Virginia counties where its lead bank, F&M Bank-Winchester, is
the dominant financial institution in terms of deposit market share, with a 44%
share of total deposits in Winchester, a 28% share of total deposits in
surrounding Frederick County, a 30% share of total deposits in Warren County,
and a 18% share of total deposits in Loudoun County. In Rockingham County, which
has the largest population of any county or city in the Shenandoah Valley, F&M
has a 46% deposit market share. In F&M's three-county West Virginia market, F&M
has a 23 % deposit market share in Jefferson County (which includes Charles
Town), a 18% deposit market share in Berkeley County (which includes
Martinsburg) and a 46% deposit market share in Mineral County (which includes
Keyser). In Fairfax, Prince William and Fauquier Counties (including Warrenton),
F&M has 11%, 3%, and 15% of deposit market share. Although F&M's deposit market
share in the Richmond and Charlottesville areas is small, F&M has positioned its
banking offices in these two markets to increase deposit market share as a
result of continued business and population growth in the suburban markets
surrounding Richmond and Charlottesville. In F&M's two-county Maryland market,
F&M is positioning itself to increase market share in Montgomery County and
Prince George's County.
At December 31, 1997, F&M had total nonperforming assets of
approximately $32.2 million, representing 2.07% of period end loans and
foreclosed properties. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Asset Quality."
F&M also operates Big Apple Mortgage Co. Inc., which offers both fixed
and adjustable rate residential mortgage loans and servicing . Big Apple
Mortgage (also t/a F&M Mortgage Company), F&M Bank-Northern Virginia and F&M
Bank-Peoples sell into the secondary market permanent residential mortgage loans
that conform to GNMA and FNMA underwriting guidelines. These F&M subsidiaries
purchase government insured 1-4 family FHA and VA loans and resell them
immediately in package form.
ACQUISITION PROGRAM
F&M has expanded its market area and increased its market share through
both internal growth and strategic acquisitions. Since the beginning of 1988,
F&M has acquired approximately $1.206 billion in assets and approximately $1.043
billion in deposits through twelve bank acquisitions. In 1997, F&M made the
following acquisitions:
INSURANCE AGENCY. On November 1, 1997, F&M expanded its product base with the
acquisition of Shomo and Lineweaver Insurance Agency ("Shomo Insurance") located
in Harrisonburg, Virginia. Shomo Insurance offers a full line of insurance
products including automobile, home, group, life and business insurance. The
acquisition was accounted for as a tax-free purchase with the exchange of
265,853 shares of F&M common stock.
PEOPLES BANK OF VIRGINIA. On December 1, 1997, F&M entered into an agreement for
the acquisition of Peoples Bank of Virginia ("PBV"), a Virginia chartered bank
based in Chesterfield, Virginia. The acquisition of PBV is subject to the
approval of shareholders of PBV and the appropriate regulatory agencies and is
expected to close on or about April 1, 1998. The acquisition of PBV is expected
to be accounted for as a pooling of interests for financial reporting purposes
and provides for a tax-free exchange of 2.58 shares of F&M common stock for each
common share of PBV. At December 31, 1997, PBV had 301,376 common shares
outstanding and 6,842 shares issuable upon outstanding stock options (excluding
a stock option granted to F&M). PBV had assets of $80.4 million as of December
31, 1997 and operates four banking offices in Chesterfield and the surrounding
Richmond metropolitan area.
THE BANK OF ALEXANDRIA. On December 12, 1997, F&M entered into an agreement for
the acquisition of The Bank of Alexandria ("BOA"), a Virginia chartered bank
based in Alexandria, Virginia. The acquisition of BOA, like that of PBV, is
subject to the approval of shareholders of BOA and the appropriate regulatory
agencies and is expected to close in the second quarter of 1998. The acquisition
of BOA is expected to be accounted for as a pooling of interests for financial
reporting purposes and provides for a tax-free exchange of 0.942 of a share of
F&M common stock for each common share of BOA. At December 31, 1997, BOA had
686,461 common shares outstanding and 66,476 issuable upon outstanding stock
options (excluding a stock option granted to F&M). BOA had assets of $78.9
million as of December 31, 1997 and operates four banking offices in Alexandria
and the surrounding area.
Management believes there are additional opportunities to acquire
financial institutions or to acquire assets and deposits that will allow F&M to
enter adjacent markets or increase market share in existing markets. Management
intends to pursue acquisition opportunities in strategic markets where its
managerial, operational and capital resources will enhance the performance of
acquired institutions. There can be no assurance that F&M will be able to
successfully effect any additional acquisition activity, or that any such
acquisition activity will have a positive effect on the value of shares of F&M
Common Stock.
ANTI-TAKEOVER PROVISIONS
The Articles of Incorporation and the Virginia Stock Corporation Act
contain certain anti-takeover provisions, including (I) the Affiliated
Transactions statue which places restrictions on any significant transaction
between a publicly held Virginia corporation and any shareholder who owns more
than 10% of any class of its outstanding shares, (ii) the Control Share
Acquisitions statue which provides that a shareholder who purchases shares in
any one of three statutory ranges (20%-33 1/3%, 33 1/3%-50%, and 50% or more of
the outstanding shares) cannot vote those shares on any matter unless the
acquisition of the additional shares has been approved by disinterested
shareholders, and (iii) a super-majority provision in the Company's Articles of
Incorporation that requires the affirmative vote of at lease 80% of the
outstanding voting shares on significant transactions, unless at least
two-thirds of the Board of Directors then in office have approved the
transaction.
EMPLOYEES
At December 31, 1997, F&M had 1,077 full time and 248 part time
employees. No employees are represented by any collective bargaining unit. F&M
considers relations with its employees to be good.
MARKET REGIONS
The market regions of F&M extend from the eastern panhandle of West
Virginia southward to Virginia in Winchester, the surrounding Shenandoah Valley
through Harrisonburg and Rockingham County and eastward to Loudoun, Fauquier,
Stafford and Prince William counties, to the central Virginia markets of
Charlottesville and Richmond, southern Virginia market in Emporia and Greenville
County and Montgomery and Prince George's counties in Maryland. The following
table displays the market and population data for each of the market regions:
<PAGE>
<TABLE>
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<S> <C>
BANKING % MARKET MARKET 1990
COUNTY/CITY (1) OFFICES SHARE (2) RANK (2) POPULATION
- ------------------------------------- -------------- --------------- -------------- --------------------
State of Virginia:
Shenandoah Valley:
City of Winchester 10 46 1 21,947
Frederick County 5 24 1 45,723
Warren County 4 30 1 26,142
Shenandoah County 3 12 4 31,636
Clarke County 1 25 2 12,101
Rappahannock County 1 43 2 6,622
Rockingham County 5 18 3 57,482
City of Harrisonburg 4 11 5 30,707
Northern Virginia:
City of Fairfax 1 8 5 20,959
City of Falls Church 1 1 8 8,982
City of Manassas 3 9 4 33,399
Loudoun County 7 16 1 86,100
Fairfax County 11 2 12 819,000
Fauquier County 3 16 2 52,000
Prince William County 3 3 7 216,000
Stafford County 1 * NM 61,000
Charlottesville/
Albemarle County:
City of Charlottesville 1 * NM 40,341
Albemarle County 3 7 7 68,040
Nelson County 2 35 2 12,778
Amherst County 1 2 7 28,578
Richmond:
City of Richmond 3 1 11 203,056
Henrico County 4 2 11 217,881
Chesterfield County 3 2 13 209,274
Emporia:
City of Emporia 3 33 1 14,109
State of West Virginia:
Eastern Panhandle:
Jefferson County 3 22 2 35,926
Berkeley County 3 17 3 59,253
Mineral County 3 43 1 26,697
State of Maryland:
Montgomery County 6 1 15 821,035
Prince George 2 * NM 769,747
- ----------------------------------------------------------------------------------------------------------
* Represents less than 1% deposit market share NM=Not meaningful
</TABLE>
<PAGE>
(1) In Virginia, certain cities are separate political entities and not
part of the counties that surround them. The city of Winchester and
Frederick County, the city of Harrisonburg and Rockingham County, the
city of Charlottesville and Albemarle County, the city of Fairfax and
Fairfax County and the city of Richmond and Henrico and Chesterfield
Counties are examples. The FDIC and OTS provide deposit data for each
separately incorporated city.
(2) Deposit data includes total bank and thrift deposits and is based on
FDIC and OTS data as of June 30, 1997, which is the most recently
available information.
LENDING ACTIVITIES
All of F&M's subsidiary banks offer both commercial and consumer loans,
but lending activity is generally focused on consumers and small to middle
market businesses within each subsidiary banks' respective market regions. Six
of F&M's subsidiary banks, F&M Bank-Massanutten, F&M Bank Blakeley, F&M
Bank-Martinsburg, F&M Bank-Keyser, F&M Bank-Emporia, and F&M Bank-Peoples
emphasize consumer lending with activities focused primarily on residential real
estate and consumer lending. F&M Bank-Richmond, F&M Bank-Central Virginia, F&M
Bank-Northern Virginia and F&M Bank-Allegiance are based in larger markets where
commercial loan demand is stronger and, as a result, their lending activities
place a greater emphasis on small to medium sized business. F&M Bank-Winchester,
because of its size and dominant position in its market, has a greater
opportunity to appeal to larger commercial customers in addition to consumers.
The following table sets forth the composition of F&M's loan portfolio
(by percentage) for the three years ended December 31:
<TABLE>
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<S> <C>
1997 1996 1995
------------------- ------------------ -------------------
Commercial 16.8 % 15.6 % 14.5 %
Real estate construction 5.4 4.6 4.2
Real estate mortgage:
Residential (1-4 family) 31.2 31.6 31.7
Home equity lines 4.4 4.8 5.2
Multifamily 2.0 2.2 1.9
Nonfarm, nonresidential(1) 27.8 28.4 28.9
Agricultural 1.0 1.4 1.4
Real estate mortgage
Subtotal 66.4 68.4 69.1
Loans to individuals:
Consumer 9.9 9.8 10.5
Credit card 1.5 1.6 1.6
Loans to Individuals:
Subtotal 11.4 11.4 12.5
Total Loans 100.0 % 100.0 % 100.0 %
Total loans (dollars) $ 1,543,598 $ 1,439,108 $ 1,296,204
</TABLE>
(1) This category generally consists of commercial and industrial loans where
real estate constitutes a source of collateral.
<PAGE>
Approximately 47.6% of F&M's loan portfolio at December 31, 1997, was
comprised of commercial loans, which included loans secured by real estate shown
in the Table above under the categories of multifamily, non-farm,
non-residential and agricultural where real estate is among the sources of
collateral securing the loan. F&M's subsidiary banks offer a variety of
commercial loans within their market regions, including revolving lines of
credit, working capital loans, equipment financing loans, and letters of credit.
Although F&M's subsidiary banks typically look to the borrower's cash flow as
the principal source of repayment for such loans, many of the loans within this
category are secured by assets, such as accounts receivable, inventory and
equipment. In addition, a number of commercial loans are secured by real estate
used by such businesses and are generally personally guaranteed by the
principals of the business. F&M's commercial loans generally bear a floating
rate of interest tied to a system-wide prime rate set by F&M Bank-Winchester.
F&M's residential real estate loan portfolio (including home equity
lines) was 36.2 % of its total loan portfolio at December 31, 1997. The
residential mortgage loans made by F&M's subsidiary banks and Big Apple Mortgage
are made only for single family, owner-occupied residences within their
respective market regions. Residential mortgage loans offered by F&M's
subsidiary banks are either adjustable rate loans or fixed rate loans with 20 to
30 year amortization schedules that mature with a balloon payment on the third
or fifth year anniversary of the loan.
Big Apple Mortgage (also t/a F&M Mortgage Company), F&M Bank-Northern
Virginia and F&M Bank-Peoples sell into the secondary market permanent
residential mortgage loans that conform to GNMA and FNMA underwriting
guidelines. These F&M subsidiaries purchase government insured 1-4 family FHA
and VA loans and resell them immediately in package form. At December 31, 1997,
only Big Apple Mortgage had $13.3 million in loans that it had committed to
purchase, but had not settled upon.
F&M's real estate construction portfolio historically has been a
relatively small portion of the total loan portfolio. At December 31, 1997,
construction loans were $83.9 million or 5.4% of the total loan portfolio.
Generally, all construction loans are made to finance owner-occupied properties
with permanent financing commitments in place. F&M's subsidiary banks make a
limited number of loans for acquisition, development and construction of
residential real estate. F&M's construction loans, including its acquisition and
development loans, generally bear a floating rate of interest and mature in one
year or less. Loan underwriting standards for such loans generally limit the
loan amount to 75% of the finished appraised value of the project.
Consumer loans were 11.4% of F&M's total loan portfolio at December 31,
1997. F&M's subsidiary banks offer a wide variety of consumer loans, which
include installment loans, credit card loans, home equity lines and other
secured and unsecured credit facilities. The performance of the consumer loan
portfolio is directly tied to and dependent upon the general economic conditions
in each subsidiary banks' respective market regions.
<PAGE>
CREDIT POLICIES AND PROCEDURES
F&M has established system-wide guidelines governing, among other
things, lending practices, credit analysis and approval procedures, and credit
quality review. Within these guidelines, F&M's subsidiary banks have latitude to
tailor their loan products to meet the needs of the communities and specific
customers. A holding company officer or representative serves on the Board of
Directors of each subsidiary bank to monitor practices and to serve as the
liaison with F&M.
LOAN APPROVAL
F&M's loan approval policies provide for various levels of officer
lending authority. When the aggregate outstanding loans to a single borrower
exceed an individual officer's lending authority, the loan request must be
approved by an officer with a higher lending limit or by the subsidiary bank's
loan review committee. F&M has assigned a lending limit for each subsidiary
bank. Loans that would result in a subsidiary bank exceeding its assigned limit
must be approved first by the subsidiary bank's loan review committee and then
by a central credit committee appointed by the holding company. The central
credit committee consists of six senior officers of F&M Bank-Winchester and the
Company, along with outside directors of either F&M Bank-Winchester or the
Company, who rotate at the twice weekly meetings.
All loans to a particular borrower are reviewed each time the borrower
requests a renewal or extension of any loan or requests an additional loan. All
lines of credit are reviewed annually prior to renewal. These reviews are
conducted by each subsidiary bank and, if necessary, by F&M's central credit
committee.
LOAN REVIEW
Each subsidiary bank of F&M has a formal loan review function which
consists of a committee of bank officers that regularly reviews loans and
assigns a classification, if required, based on current perceived credit risk.
In addition, the holding company has a loan review team that performs a detailed
on-site review and analysis of each subsidiary bank's portfolio on at least an
annual basis to ensure the consistent application of system-wide policies and
procedures. The holding company loan review team reviews all loans over an
established principal amount for each subsidiary bank, which results in a review
of 60% to 75% of the total principal amount of the subsidiary bank's loan
portfolio. In addition, all lending relationships involving a classified loan
are reviewed regardless of size. The holding company loan review team has the
authority to classify any loan it determines is not satisfactory or to change
the classification of a loan within F&M's loan grading system.
All classified loans are reviewed at least quarterly by F&M's senior
officers and monthly by the subsidiary bank's boards of directors. All past due
and nonaccrual loans are reviewed monthly by the subsidiary banks' boards of
directors. As a matter of policy,
<PAGE>
F&M's subsidiary banks place loans on nonaccrual status when management
determines that the borrower can no longer service debt from current cash
flows and/or collateral liquidation. This generally occurs when a loan
becomes 90 days past due as to principal and interest.
ALLOWANCE FOR LOAN LOSSES
Each subsidiary bank of F&M maintains its allowance for loan losses
based on loss experience for each loan category over a period of years and
adjusts the allowance for existing economic conditions as well as performance
trends within specific areas, such as real estate. In addition, each subsidiary
bank periodically reviews significant individual credits and adjusts the
allowance when deemed necessary. The allowance also is increased to support
projected loan growth.
IMPAIRED LOANS
The recorded investment in certain loans that were considered to be
impaired in accordance to FASB 114 was $13.3 million at year end 1997 as
compared to $8.9 million at year end 1996, of which $12.5 million was classified
as nonperforming. Included in 1997 impaired loans are $11.3 million secured by
commercial real estate. All impaired loans at year end 1997 and 1996 had a
related valuation allowance totaling $3.8 million and $1.4 million,
respectively,. The average recorded investment in certain impaired loans for
1997 and 1996 was approximately $8.5 million and $9.3 million, respectively. For
1997 and 1996, interest income recognized on impaired loans totaled $513
thousand and $154 thousand, respectively, all of which was recognized on a cash
basis.
Loans are placed on nonaccrual when a loan is specifically determined
to be impaired or when principal or interest is delinquent for 90 days or more.
Any unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Cash payments received on such loans
are applied as a reduction of the loan principal balance. Interest income on
other nonaccrual loans is recognized only to the extent of interest payments
received. Changes in the allowance relating to impaired loans are charged or
credited to the provision for loan losses.
An impaired loan is charged-off when management determines that the
prospect of recovery of the principal of the loan has significantly diminished.
DEPOSITS
F&M's subsidiary banks offer a number of programs to consumers and to
small and middle market businesses at interest rates consistent with local
market conditions. The following table sets forth the mix of depository accounts
offered by the subsidiary banks as a percentage of total deposits at the dates
indicated:
<PAGE>
December 31,
--------------------------------------------
1997 1996 1995
----------- ------------- -------------
Noninterest-bearing demand 19.1% 17.0% 16.7%
Interest checking 16.4 15.5 15.1
Savings accounts 9.2 10.4 11.2
Money market accounts 9.8 10.6 11.3
Time deposit accounts:
Under $100,000 36.2 37.7 36.8
$100,000 and over 9.3 8.8 8.9
----------- ------------- -------------
100.0% 100.0% 100.0%
F&M's subsidiary banks control deposit flows primarily through pricing
of deposits and, to a lesser extent, through promotional activities. F&M's
subsidiary banks establish deposit rates based on a variety of factors,
including competitive conditions, liquidity needs and compliance with net
interest margin requirements established by F&M for all subsidiary banks. As of
December 31, 1997, F&M's subsidiary banks had $198.2 million of certificates of
deposit greater than $100,000, or 9.6% of total deposits. F&M's subsidiary banks
do not accept brokered deposits.
No material portion of the deposits of F&M's subsidiary banks has been
obtained from a single or a small group of customers, and the loss of any
customer's deposits or a small group of customers' deposits would not have a
material adverse effect on the business of any of F&M's subsidiary banks. See
"Business-Market Regions" for information regarding each subsidiary bank's
deposit share and rank in its respective market.
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 F&M'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. F&M 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, F&M schedules the maturity of its
investment securities according to its needs. The weighted-average life of the
securities portfolio at the end of 1997 was 4 years 5 months which is indicative
of F&M's investment philosophy of investing in U.S. Government securities with
maturities between five and ten years. F&M views its securities portfolio
primarily as a source of liquidity and safety, however, it may if the market is
favorable, make changes in the available for sale portfolio to take advantage of
changes in the yield curve. F&M views the total available for sale securities
portfolio as a source of liquidity, whereas, liquidity in the held to maturity
portfolio is
<PAGE>
limited to calls and maturities. The maturity ranges of the securities and the
average taxable-equivalent yields as of December 31, 1997, are shown in the
following table
<TABLE>
<CAPTION>
<S> <C>
U.S. Government State and
and its Agencies Municipal Other
Book Value Yield Book Value Yield Book Value Yield
--------------------------------- ------------------------- -------------------------------
One year or less $ 100,937 5.52% $ 3,256 5.22% $ 7,870 4.42%
After one year
through five years 354,312 6.16 13,887 5.39 6,821 5.98
After five through 99,636 6.61 9,214 5.41 - -
ten years
After ten years 38,053 6.97 2,916 5.29 - -
------------------ -------------- -------------
Total $ 592,938 6.18% $ 29,273 5.37% $ 14,691 5.22%
================== ============== =============
</TABLE>
A cash reserve, consisting primarily of overnight investments such as
Federal Funds, is also maintained to meet any contingencies and to provide
additional capital, if needed.
Most of F&M's loans are fixed-rate installment loans to consumers and
mortgage loans whose maturities are generally 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:
REMAINING MATURITIES OF SELECTED LOANS
December 31, 1997
------------------------------------
Commercial,
Financial and Real estate-
Agricultural Construction
------------------------------------
(Dollars in thousands)
Within 1 year $156,960 $56,238
------------------- --------------
Variable Rate:
1 to 5 years 15,006 2,971
After 5 years 5,566 2,684
------------------- --------------
Total 20,572 5,655
------------------- --------------
Fixed Rate:
1 to 5 years 69,835 14,328
After 5 years 12,514 7,683
------------------- --------------
Total 82,349 22,011
------------------- --------------
Total Maturities $259,881 $83,904
=================== ==============
<PAGE>
F&M's asset/liability/risk committee is responsible for reviewing the
Company's liquidity requirements and maximizing the Company's net interest
income consistent with capital requirements, liquidity, interest rate and
economic outlooks, competitive factors and customer needs. Liquidity
requirements are also reviewed in detail for each of F&M's individual banks,
however, overall asset/liability management is performed on a consolidated basis
to achieve a consistent and coordinated approach.
OTHER ACTIVITIES
In 1997, F&M's subsidiary banks offered a range of trust services. At
December 31, 1997, the Trust Department of F&M Bank-Winchester managed $311
million in assets in approximately 1,182 accounts, covering both personal trust
activities and employee benefit plans. F&M Bank-Northern Virginia and F&M
Bank-Peoples offered similar trust services in 1997 and managed assets totaling
$34 million and $145 million, respectively, at December 31, 1997. F&M's other
subsidiary banks did not operate trust departments in 1997.
Effective January 1, 1998, F&M Trust Company, a wholly-owned trust
subsidiary of the Company, began operations and assumed responsibility for all
the trust and fiduciary activities of the Virginia banking subsidiaries of the
Company.
COMPETITION
Each of the market regions in which the Company operates has a highly
competitive banking market involving commercial banks and thrifts. Other
competitors, including credit unions, consumer finance companies, insurance
companies and money market mutual funds, compete with the Company for certain
lending and deposit gathering services. In its Charlottesville/Albemarle County,
northern Virginia, and suburban Richmond markets, the Company faces particularly
intense competition from several state-wide and regional banking institutions
which have substantial operations in those market regions. Management believes,
however, that the Company enjoys certain competitive advantages in its principal
market of Winchester, the surrounding northern Shenandoah Valley and Loudoun
County where F&M Bank-Winchester is the largest financial institution
headquartered in the area and the dominant bank in terms of deposit market
share.
Competition among the various financial institutions is based on
interest rates offered on deposit accounts, interest rates charged on loans,
credit and service charges, the quality of services, the convenience of banking
facilities and, in connection with loans to larger borrowers, relative lending
limits. Many of the financial organizations in competition with the Company have
much greater financial resources, diversified markets, and branch networks than
F&M and are able to offer similar services at varying costs with higher lending
limits.
<PAGE>
With reciprocal interstate banking, the Company also faces the prospect
of additional competitors entering its markets as well as additional competition
in its efforts to acquire other financial institutions.
EXECUTIVE OFFICERS OF THE REGISTRANT
All officers of the Company and its subsidiaries are elected annually
to serve at the pleasure of the Board of Directors of the Company. The following
table sets forth the name, age, year first elected, and offices held at February
28, 1998, of each of the executive officers of the Company:
<TABLE>
<CAPTION>
YEAR FIRST
NAME AGE ELECTED OFFICE
- ---- --- ------- ------
<S> <C>
W. M. Feltner 78 1970 Chairman and Chief Executive Officer of
the Company; Chairman of the Board of
F&M Bank-Winchester
Alfred B. Whitt 59 1998 President, Vice Chairman, and Chief
Financial Officer of the Company; Vice
Chairman and Secretary of F&M
Bank-Winchester
Charles E. Curtis 59 1998 Vice Chairman and Chief Administrative
Office of the Company; Vice Chairman of
F&M Bank-Winchester
F. Dixon Whitworth, Jr. 53 1985 Executive Vice President of the
Company; President of F&M
Trust Company
Betty H. Carroll 60 1985 Senior Vice President of the Company
and President, Chief Executive Officer
of F&M Bank-Winchester
Michael L. Bryan 46 1998 Corporate Secretary and General
Counsel of the Company
<PAGE>
Barbara H. Ward 52 1983 Treasurer of the Company; Senior Vice
President of F&M Bank-Winchester
</TABLE>
Mr. Feltner has been a senior executive officer of the Company since
its inception in 1970.
Mr. Whitt joined the Company in 1987 as Director of Human Resources,
before which time he served as President of F&M Bank-Massanutten, Harrisonburg,
Virginia, since its organization in 1973. In July of 1991, he was appointed
Senior Vice President, Senior Financial Officer and Secretary of the Company and
F&M Bank-Winchester. As of January 1, 1998, Mr. Whitt was appointed President,
Vice Chairman and Chief Financial Officer of the Company, and Vice Chairman and
Secretary to the Board of F&M Bank-Winchester.
In March of 1996, Mr. Curtis joined the Company as President and Chief
Executive Officer of Fairfax Bank and Trust Company, now F&M Bank-Northern
Virginia. Mr. Curtis served in this position from July 22, 1985 to December 31,
1997. As of January 1, 1998, Mr. Curtis was appointed Vice Chairman and Chief
Administrative Officer of the Company, and Vice Chairman of F&M Bank-Winchester.
F. Dixon Whitworth, Jr. joined the Company in August 1985, as President
of the Suburban Bank, now F&M Bank-Richmond, and served as such until November,
1985, when he became Executive Vice President of the Company. As of January 1,
1998, Mr. Whitworth was appointed President of F&M Trust Company.
Mrs. Carroll has served as Chief Executive Officer of F&M
Bank-Winchester since December 1988.
Mr. Bryan was appointed Corporate Secretary and General Counsel of the
Company effective January 1, 1998. Prior to this appointment, Mr. Bryan was a
partner in the law firm of Bryan & Coleman, P.C., Winchester, Virginia, since
February 1, 1995.
Mrs. Ward was appointed Senior Vice President of F&M Bank-Winchester in
March of 1992. Prior thereto, she was a Vice President of F&M Bank-Winchester
since 1974. She has been Treasurer of the Company since 1983.
SUPERVISION AND REGULATION
The Company and its subsidiary banks are subject to state and federal
banking laws and regulations which impose specific requirements or restrictions
on and provide for general regulatory oversight with respect to virtually all
aspects of operations. The following is a brief summary of certain statues,
rules and regulations affecting the Company and its subsidiary banks. This
summary is qualified in its entirety by reference to
<PAGE>
the particular statutory and regulatory provisions referred to below and
is not intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and its subsidiary banks. A
change in applicable laws or regulations may have a material effect on the
business and prospects of the Company.
THE COMPANY
The Company is registered as a bank holding company under the Bank
Holding Company Act ("BHCA") and the Virginia Financial Institution Holding
Company Act, and is therefore subject to regulation and examination by the Board
of Governors of the Federal Reserve System (the "Federal Reserve") and the
Virginia State Corporation Commission (the "Virginia SCC"). F&M's subsidiary
banks are subject to examination and regulation by the Virginia SCC, the West
Virginia Board of Banking and Financial Institutions (the "West Virginia Board
of Banking") and the Commissioner of Financial Regulation of the State of
Maryland (the "Maryland-CFR") . In addition, the Company and its subsidiary
banks are subject to certain minimum capital standards established by the
Federal Reserve and the FDIC.
Under the BHCA, the Company is required to secure the prior approval of
the Federal Reserve before it can merge or consolidate with any other bank
holding company, or acquire all or substantially all of the assets of any bank
or acquire direct or indirect ownership or control of any voting shares of any
bank that is not already majority owned by it if after such acquisition the
Company would directly or indirectly own or control more than 5% of the voting
shares of such bank. The BHCA also prohibits the Company from acquiring,
directly or indirectly voting shares of, or interests in, or all or
substantially all of the assets of, any bank located outside the State of
Virginia unless the acquisition is specifically authorized by the laws of the
state in which such bank is located, as discussed below.
The Company is prohibited under the BHCA, and regulations promulgated
thereunder, from engaging in, and from acquiring direct or indirect ownership or
control of more than 5% of voting shares of any company engaged in, nonbanking
activities unless the Federal Reserve, by order or regulation, has found such
activities to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. The Federal Reserve has by regulation
determined that certain activities are closely related to banking within the
meaning of the BHCA. These activities include, among others, operating a
mortgage, finance, credit card or factoring company; performing certain data
processing operations; providing investment and financial advice; acting as an
insurance agent for certain types of credit-related insurance; leasing personal
property on a full-payout, non-operating basis; and providing certain stock
brokerage and investment advisory services.
The Company, as an affiliate of its subsidiary banks within the meaning
of the Federal Reserve Act, is subject to certain restrictions under the Federal
Reserve Act
<PAGE>
regarding transactions between a bank and companies with which it is affiliated.
These provisions limit extensions of credit (including guarantees of loans) by
the subsidiary banks to affiliates, investments in the stock or other
securities of the Company by the subsidiary banks and the nature and amount of
collateral that subsidiary banks may accept from any affiliate to secure loans
extended to the affiliate. Further, under the Federal Reserve Act and the
regulations promulgated thereunder, a bank holding company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit or provision of any property or service.
The BHCA and the Change in Bank Control Act, together with regulations
of the Federal Reserve, require that, depending on the particular circumstances,
either Federal Reserve approval must be obtained or notice must be furnished to
the Federal Reserve and not disapproved prior to any person or company acquiring
"control" of a bank holding company, such as the Company, subject to exemptions
for certain transactions. Control is conclusively presumed to exist if an
individual or company acquires 25% or more of any class of voting securities of
the bank holding company. Control is rebuttably presumed to exist if a person
acquires 10% or more but less than 25% of any class of voting securities and
either the company has registered securities under Section 12 of the Securities
Exchange Act of 1934, as amended, or no other person will own a greater
percentage of that class of voting securities immediately after the transaction.
The regulations provide a procedure for challenge of the rebuttable control
presumption.
Federal Reserve policy requires a bank holding company to act as a
source of financial strength to each of its bank subsidiaries and to take
certain measures to preserve and protect bank subsidiaries in situations where
additional investments in a troubled bank subsidiary may not otherwise be
warranted. Under the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), in order to avoid receivership of an insured depository
institution subsidiary, a bank holding company is required to guarantee up to
certain maximum limits the compliance with the terms of any capital restoration
plan filed by such subsidiary with its appropriate federal banking regulator. In
addition, if a bank holding company has more than one bank or thrift subsidiary,
the bank holding company's other subsidiary depository institutions are
responsible under a cross guarantee for any losses to the FDIC resulting from
the failure of a depository institution subsidiary. Under these provisions, a
bank holding company may be required to loan money to its depository institution
subsidiaries in the form of capital notes or other instruments. However, any
such loans likely would be unsecured and subordinated to such institution's
depositors and certain other creditors.
Under federal legislation, restrictions on interstate bank acquisitions
were abolished effective September 29, 1995, and bank holding companies from any
state are now able to acquire banks and bank holding companies located in any
other state. Effective June 1, 1997, the law permits banks to merge across state
lines, subject to earlier "opt-in" or "opt-out" action by individual states. The
law also allows interstate branch acquisitions and de novo branching if
permitted by the host state. Virginia, Maryland and West Virginia have adopted
early "opt-in" legislation that allows interstate bank mergers.
<PAGE>
The states also permits interstate branch acquisitions and de novo branching
if reciprocal treatment is accorded Virginia banks in the state of the
acquiror.
All acquisitions, whether by an in-state or out-of-state acquiror,
involving a Virginia bank or bank holding company require the prior approval of
the Virginia SCC, in addition to approval by the appropriate federal regulatory
authority. Similarly, the West Virginia Board of Banking must approve all
acquisitions of a West Virginia bank or bank holding company, and the
Maryland-CFR must approve all acquisitions of a Maryland bank or bank holding
company.
REGULATION OF SUBSIDIARY BANKS
GENERAL
All of F&M's subsidiary banks are state-chartered institutions organized
under either Virginia, West Virginia, or Maryland law. Seven of the subsidiary
banks, F&M Bank-Winchester, F&M Bank-Massanutten, F&M Bank-Richmond, F&M
Bank-Central Virginia, F&M Bank-Emporia, F&M Bank-Northern Virginia, and F&M
Bank-Peoples are Virginia-chartered institutions regulated and examined by the
Virginia SCC. F&M Bank-Blakeley, F&M Bank-Martinsburg and F&M Bank-Keyser are
West Virginia-chartered institutions regulated and examined by the West Virginia
Board of Banking. F&M Bank-Allegiance is a Maryland state-chartered bank
regulated and examined by the Maryland-CFR.
F&M's subsidiary banks are all members of the Federal Reserve System and
are, therefore, supervised and examined by the Federal Reserve, their primary
federal regulator. The Federal Reserve and the Virginia SCC, West Virginia Board
of Banking, or the Maryland-CFR, as appropriate, conduct regular examinations of
each subsidiary bank, reviewing the adequacy of their allowance for loan losses,
quality of loans and investments, propriety of management practices, compliance
with laws and regulations and other aspects of operations. In addition to these
regular examinations, each subsidiary bank must furnish the Federal Reserve with
quarterly reports containing detailed financial statements and schedules. The
FDIC, which provides deposit insurance, also has authority to examine and
regulate F&M's subsidiary banks.
Federal and state banking laws and regulations govern all areas of the
operations of F&M's subsidiary banks, including maintenance of cash reserves,
loans, mortgages maintenance of minimum capital, payment of dividends, and
establishment of branch offices. Federal and state bank regulatory agencies also
have the general authority to eliminate dividends paid by insured banks if such
payment is deemed to constitute an unsafe and unsound practice. As their primary
federal regulator, the Federal Reserve has authority to impose penalties,
initiate civil administrative actions and take other steps to prevent F&M's
subsidiary banks from engaging in unsafe or unsound practices. In this regard,
the Federal Reserve has adopted capital adequacy requirements applicable to its
member banks.
<PAGE>
DEPOSIT INSURANCE
The deposits of F&M's subsidiary banks are currently insured to a
maximum of $100,000 per depositor, subject to certain aggregation rules. The
FDIC has implemented a risk-related assessment system for deposit insurance
premiums and all depository institutions have been assigned to one of nine risk
assessment classifications based upon certain capital and supervisory measures.
All deposits of F&M's subsidiary banks are subject to the rates of the Bank
Insurance Fund ("BIF"), the federal deposit insurance fund that covers
commercial bank deposits. In 1997, all F&M's banks received a "1A" risk
classification rating, the highest possible rating.
REGULATORY CAPITAL REQUIREMENTS
On December 19, 1991, FDICIA was enacted. Among other things, FDICIA
requires the federal banking agencies to take "prompt corrective action" with
respect to banks that do not meet minimum capital requirements. FDICIA
establishes five capital tiers: "well capitalized," "adequately capitalized",
"under capitalized", "significantly undercapitalized", and "critically
undercapitalized", which terms are each further defined by federal regulations.
A depository institution is "well capitalized" if it significantly exceeds the
minimum level required by regulation for each relevant capital measure,
"adequately capitalized" if it meets each such measure, "undercapitalized" if it
fails to meet any such measure, "significantly undercapitalized" if it is
significantly below any such measure, and "critically undercapitalized" if it
fails to meet any critical capital level set forth in the regulations. The
critical capital level must be a level of tangible equity capital equal to not
less than 2.0% of total assets and not more than 65% of the minimum leverage
ratio to be prescribed by regulation (except to the extent that 2.0% would be
higher than such 65% level). An institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position if it receives an unsatisfactory examination rating. In order to be
classified as a "well capitalized institution," the institution must have a
total risk-based capital ratio of 10% and a leverage ratio of 5%.
If a depository institution fails to meet regulatory capital
requirements, regulatory agencies can require submission and funding of a
capital restoration plan by the institution, place limits on its activities,
require the raising of additional capital, and, ultimately, require the
appointment of a conservator or receiver for the institution. As of December 31,
1997, all F&M's subsidiary banks exceeded the required regulatory capital
requirements under FDICIA.
CAPITAL ADEQUACY
Information on "Capital Adequacy" may be found under ITEM 7.
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS", "Capital Resources".
<PAGE>
Dividends from F&M's subsidiary banks constitute the major source of
funds for dividends to be paid by the Company. The amount of dividends payable
by each subsidiary bank to the Company depends upon its earnings and capital
position, and is limited by federal and state law, regulations and policy. The
Federal Reserve has the general authority to limit dividends paid by F&M's
subsidiary banks and the Company if such payments are deemed to constitute an
unsafe and unsound practice.
As state member banks subject to the regulations of the Federal Reserve,
each subsidiary bank must obtain approval of the Federal Reserve for any
dividend if the total of all dividends declared by F&M's subsidiary banks in any
calendar year would exceed the total of its net profits for such year, as
defined by the Federal Reserve, plus its retained net profits for the preceding
two years. In addition, each subsidiary bank may not pay a dividend in an amount
greater than its undivided profits then on hand after deducting current losses
and bad debts. For this purpose, bad debts are generally defined to include the
principal amount of all loans which are in arrears with respect to interest by
six months or more, unless such loans are fully secured and in the process of
collection.
In addition, Virginia law imposes restrictions on the ability of all
banks chartered under Virginia law to pay dividends. Under Virginia law, no
dividend may be declared or paid that would impair a bank's paid-in capital. The
Virginia SCC also can limit the payment of dividends by any Virginia bank if it
determines the limitation is in the public interest and is necessary to ensure
the bank's financial soundness.
Under West Virginia law, a state bank may declare a dividend only from
its undivided profits and, if the bank's surplus account is not greater than or
equal to the par value of the bank's stock, the bank may not declare a dividend
unless a portion of the bank's profits for the period for which dividends are
declared is credited to the bank's surplus account. Also, a West
Virginia-chartered bank must obtain the approval of the West Virginia Board of
Banking prior to declaring a dividend if the total of all dividends paid by the
bank in any calendar year exceeds the total of its profits for that year plus
its undivided profits for the preceding two years.
Pursuant to Maryland law, a state bank may declare a cash dividend only
from (i) its undivided profits or (ii) with the prior approval of the
Maryland-CFR, its surplus in excess of 100% of its required capital stock. For
further information about the Company's dividends, see Part II., Item 5.,
"Market for Registrant's Common Equity and Related Stockholder Matters."
RECENT LEGISLATIVE DEVELOPMENTS
From time to time, various legislative and regulatory proposals with
respect to the regulation of financial institutions are considered by the
executive branch of the Federal government, Congress and various state
governments, including Virginia, West Virginia, and Maryland. Certain of these
proposals, if adopted, could significantly change the
<PAGE>
regulation of banks and the financial services industry. The Company cannot
predict whether any of these proposals will be adopted or, if adopted, how
these proposals would affect the Company.
ITEM 2. PROPERTIES
The principal executive offices of F&M were moved January 1, 1998, to 9
Court Square, Winchester, Virginia, a multi-story building complex which is
owned free of any encumbrances. The Company operates a total of 108 banking
offices (87 in Virginia, 12 in West Virginia, and 9 in Maryland), 60 of which
are owned by the Company or one of its subsidiary banks free of any
encumbrances, and 48 of which are leased under agreements expiring at various
dates, including renewal options. The Company also owns additional office
facilities for various of its lending, audit, accounting, and data processing
functions. Additional information regarding F&M's lease agreements may be found
under ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, Note 15.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its operations, the Company and its
subsidiary banks are parties to various legal proceedings. Based on information
presently available, and after consultation with legal counsel, management
believes that the ultimate outcome in such proceedings, in the aggregate, will
not have a material adverse effect on the business or the financial condition or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company has not submitted any matters to its security holders since
its Annual Meeting of Shareholders held April 22, 1997.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The following table sets forth the per share high and low last sale
prices for the common stock of the Company as reported on the New York Stock
Exchange, and the cash dividends paid or declared per share on the Common Stock
for the period indicated:
PRICE RANGE CASH
HIGH LOW DIVIDENDS
---- --- ---------
1996
First Quarter 19.750 17.250 0.160
Second Quarter 18.500 16.000 0.160
Third Quarter 19.375 17.250 0.175
Fourth Quarter 21.375 18.125 0.230
1997
First Quarter 22.875 19.625 0.180
Second Quarter 26.375 19.875 0.180
Third Quarter 30.4375 26.00 0.185
Fourth Quarter 36.25 28.5625 0.185
At December 31, 1997, there were 20,374,957 shares of Common Stock
outstanding held by 7,881 holders of record.
On November 1, 1997, the Company issued 265,853 shares of its common
stock in connection with the acquisition of Shomo & Lineweaver Insurance Agency,
a closely-held insurance agency based in Harrisonburg, Virginia ("Shomo &
Lineweaver"). The acquisition was structured as a tax-free transaction involving
the exchange of 265,853 shares of Company common stock in exchange for all the
outstanding shares of Shomo & Lineweaver. The shares of Company common stock
issued in the transaction were not registered under the Securities Act of 1933
in reliance on the private offering and intrastate offering exemptions
thereunder.
The Company historically has paid cash dividends on a quarterly basis.
The final determination of the timing, amount and payment of dividends on the
Common Stock is at the discretion of the Board of Directors and will depend upon
the earnings of the Company and its subsidiaries, principally its subsidiary
banks, the financial condition of the Company and other factors, including
general economic conditions and applicable governmental regulations and
policies.
<PAGE>
The Company or F&M Bank-Winchester has paid regular cash dividends for
more than 55 consecutive years.
The Company is a legal entity separate and distinct from its
subsidiaries, and its revenues depend primarily on the payment of dividends from
F&M's subsidiary banks. F&M's subsidiary banks are subject to certain legal
restrictions on the amount of dividends they are permitted to pay to the
Company. At December 31, 1997, F&M's subsidiary banks had available for
distribution as dividends to the Company approximately $40.784 million.
ITEM 6. SELECTED FINANCIAL INFORMATION
Incorporated herein by reference, as Exhibit 13, to page 1 of the 1997
Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated herein by reference, as Exhibit 13, to pages 7 through 24
of the 1997 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated herein by reference, as Exhibit 13, to pages 12 and 13 of
the 1997 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference, as Exhibit 13, to pages 25 through 46
of the 1997 Annual Report.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3), the information called for by
Part III, Items 10. through 13., is incorporated herein by reference
from the Company's definitive proxy statement, dated March 30, 1998,
for the Company's Annual Meeting of Shareholders to be held April 28,
1998, which definitive proxy statement is to be filed with the
Commission pursuant to Rule 14a-6 on or prior to March 30, 1998. The
information regarding executive officers called for by Item 401 of
Regulation S-K is included in Part I under "EXECUTIVE OFFICERS OF THE
REGISTRANT".
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents included in Part II of this report are
incorporated by reference to the Company's 1997 Annual Report (see
Exhibit 13):
1. Financial Statements Page
Report of Independent Certified Public Accountants 47
F&M National Corporation and Subsidiaries:
Consolidated Balance Sheets at December 31, 1997 and 1996 25
Consolidated Statements of Income at December 31, 1997,
1996, and 1995 26
Consolidated Statements of Changes in Shareholders'
Equity for years ended December 31, 1997,
1996 and 1995 27
Consolidated Statements in Cash Flows for the periods
ended December 31, 1997, 1996 and 1995 28
Notes to Consolidated Financial Statements 29
2. Financial Statement Schedules
All schedules are omitted because of the absence of conditions under
which they are required or because the required information is given
in the financial statements or notes thereto.
3. Exhibits.
(10) Material Contracts.
(i) Form of agreement between officers of the Registrant
under the Registrant's Defined Benefit Deferred
Compensation and Salary Continuation Plan
(incorporated herein by reference to Exhibit 10(b) to
Registration Statement #33-10696, filed on December
9, 1986).
(ii) Registrant's Officers' Incentive Bonus Plan
(incorporated herein by reference to Exhibit 28(i) to
Registration Statement #33-25867 filed on December 2,
1988).
(iii) Registrant's 1992 Incentive and Non-Qualified Stock
Option Plan (incorporated herein by reference to
Exhibit 10(b) to Registration Statement #33-50902,
filed on August 14, 1992).
(iv) Executive Severance Agreements entered into with the
Registrant and the following Executive Officers of
the Registrant on December 1, 1995: Jack R. Huyett,
Betty H. Carroll, Alfred B. Whitt, and F. Dixon
Whitworth, Jr. (incorporated herein by reference to
Form 10-K/405 for the calendar year ended December
31, 1995, filed with the Commission on March 28,
1996).
(11) Statement re computation of per share earnings (filed
herewith).
(13) Portions of the 1997 Annual Report to Shareholders for the
fiscal year ended December 31, 1997 (filed herewith).
(21) Subsidiaries of the Registrant (filed herewith).
(23) Consent of Yount, Hyde & Barbour, P. C., Certified Public
Accountants (filed herewith).
(27) Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K.
During 1997, the Company filed the following reports:
(i) October 23, 1997, for event of October 22, 1997, under ITEMS
5. to report the changes in management of F&M National
Corporation.
(ii) December 4, 1997, for event of December 2, 1997, under ITEM
5., to announce that the Registrant had entered into an
Agreement and Plan of Reorganization with Peoples Bank of
Virginia, Chesterfield, Virginia
(iii) December 15, 1997, for event of December 12, 1997, under ITEM
5., to announce that the Registrant had entered into an
Agreement and Plan of Reorganization with The Bank of
Alexandria, Alexandria, Virginia.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the 11th day of
March, 1998:
F&M NATIONAL CORPORATION
Winchester, Virginia
/s/ W. M. Feltner
--------------------------------
W. M. Feltner, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities on the 11th day of March, 1998:
SIGNATURE TITLE
/s/ W. M. Feltner Chairman of the Board, Chief
W. M. FELTNER Executive Officer, Director
/s/ Alfred B. Whitt Vice Chairman, President, Chief
ALFRED B. WHITT Financial Officer, Director
/s/ Charles E. Curtis Vice Chairman, Chief
CHARLES E. CURTIS Administrative Officer
/s/ Frank Armstrong, III
FRANK ARMSTRONG, III Director
/s/ William H. Clement
WILLIAM H. CLEMENT Director
/s/ Charles E. Curtis
CHARLES E. CURTIS Director
/s/ John E. Fernstrom
JOHN E. FERNSTROM Director
/s/ William R. Harris
WILLIAM R. HARRIS Director
<PAGE>
/s/ L. David Horner, III
L. DAVID HORNER, III Director
/s/ Jack R. Huyett
JACK R. HUYETT Director
/s/ George L. Romine
GEORGE L. ROMINE Director
/s/ John S. Scully, III
JOHN S. SCULLY, III Director
/s/ J. D. Shockey, Jr.
J. D. SHOCKEY, JR. Director
/s/ Ronald W. Tydings
RONALD W. TYDINGS Director
/s/ Fred G. Wayland, Jr.
FRED G. WAYLAND, JR. Director
EXHIBIT 11
F&M NATIONAL CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF WEIGHTED AVERAGE SHARES
OUTSTANDING AND EARNINGS PER SHARE - 1997
(in thousands, except per share amounts)
Basic EPS:
1997 Weighted average shares outstanding (1) 20,235
Net income - 1997 $ 31,115
Earnings per share, basic - 1997 $ 1.54
Diluted EPS:
1997 Weighted average shares outstanding (1) 20,235
Effect of dilutive securities 163
1997 Weighted average shares outstanding, assuming dilution 20,398
Net income - 1997 $ 31,115
Earnings per share, assuming dilution - 1997 $ 1.53
(1) Weighted average shares outstanding is based on a daily average.
<PAGE>
EXHIBIT 11
F&M NATIONAL CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF WEIGHTED AVERAGE SHARES
OUTSTANDING AND EARNINGS PER SHARE - 1996
(in thousands, except per share amounts)
<TABLE>
<S> <C>
Basic EPS:
Average shares outstanding - 1996 16,570
Restatement related to Fairfax Bank and Trust Company 2,485 (1)
Restatement related to F&M Bank-Allegiance 1,354 (1)
1996 Weighted average shares outstanding 20,409
Net income - 1996 $ 29,298
Earnings per share, basic - 1996 $ 1.44
Diluted EPS:
1996 Weighted average shares outstanding 20,409
Effect of dilutive shares 211
1996 Weighted average shares outstanding, assuming dilution 20,620
Net income - 1996 $ 29,298
Earnings per share, assuming dilution - 1996 $ 1.42
</TABLE>
(1) On March 29, 1996, the merger with FB&T Financial Corporation was
consummated with 2,517,577 shares of F&M National Corporation common stock
being issued. The transaction was accounted for using the
pooling-of-interests method of accounting. Accordingly, the shares
outstanding have been restated for all reported periods to reflect the
acquisition.
Additionally, on October 1, 1996, the merger with Allegiance Banc
Corporation was consummated with 1,455,628 shares of F&M National
Corporation common stock being issued. The transaction was accounted for
using the pooling-of-interests method of accounting. Accordingly, the
shares outstanding have been restated for all reported periods to reflect
the acquisition.
<PAGE>
EXHIBIT 11
F&M NATIONAL CORPORATION AND SUBSIDIARIES
COMPUTATIONS OF WEIGHTED AVERAGE SHARES
OUTSTANDING AND EARNINGS PER SHARE - 1995
(in thousands, except per share amounts)
<TABLE>
<S> <C>
Basic EPS:
Average shares outstanding - 1995 15,657
Restatement related to F&M Bank-Potomac acquisition 872 (1)
Restatement related to Fairfax Bank & Trust Company
acquisition 2,485 (2)
Restatement related to F&M Bank-Allegiance acquisition 1,354 (2)
1995 Weighted average shares outstanding 20,368
Net income - 1995 $ 25,835
Earnings per share, basic - 1995 $ 1.27
Diluted EPS:
1995 Weighted average shares outstanding 20,368
Effective of dilutive shares 274
1995 Weighted average shares outstanding, assuming dilution 20,642
Net income - 1995 $ 25,835
Earnings per share, assuming dilution - 1995 $ 1.25
</TABLE>
(1) On April 6, 1995, the merger with Bank of the Potomac was consummated with
872,187 shares of F&M National Corporation common stock being issued. The
transaction was accounted for using the pooling-of-interests method of
accounting. Accordingly, the shares outstanding have been restated for all
reported periods to reflect the acquisition.
(2) See description under Exhibit 11 for 1996.
<PAGE>
TABLE OF CONTENTS
Selected Financial Data ................................................... 1
To Our Owners, Customers,
Neighbors and Other Friends .......................................... 2
1997 Highlights ........................................................... 4
Management's Discussion and
Analysis of Financial Condition
and Results of Operations ............................................ 7
Financial Statements ...................................................... 25
Notes to Financial Statements ............................................. 29
Independent Auditor's Report .............................................. 47
Corporate Directors and
Officers ............................................................. 48
Directors and Officers of Affiliates ...................................... 49
Office Locations .......................................................... 52
General Information ....................................................... 55
F&M NATIONAL CORPORATION
CORPORATE PROFILE
F&M National Corporation is a bank holding company registered under the
Bank Holding Company Act of 1956, as amended. It was incorporated under the laws
of Virginia on November 26, 1968, and commenced business on December 31, 1969.
The Corporation, headquartered in Winchester, Virginia, was organized primarily
as a financial holding company which operates through subsidiary organizations
or establishments which are engaged in banking and in bank and finance related
businesses.
The Corporation has eleven commercial banks, seven located in Virginia,
three located in West Virginia and one in Maryland. Each of these financial
institutions is operated independently which is contrary to the way most bank
holding companies operate. By operating as independent units, they can be more
responsive to their customers' needs since they can make their own decisions on
the local level and they can be better attuned to the needs of the communities
they serve. And yet, though they operate independently, they have the financial
backing and strength of the F&M National Corporation's 2 1/2 billion in assets.
The combination of the affiliates' independence and the corporation's financial
strength makes the F&M National Corporation a truly unique and outstanding
financial institution.
The F&M National Corporation also has five indirect subsidiaries: Big
Apple Title Company, Big Apple Mortgage Company, Credit Bureau of Winchester,
Winchester Credit Corporation and F&M-Shomo & Lineweaver Insurance Agency.
Cover Photo courtesy Rick Foster - The Winchester Star
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------------
1997 1996 1995 1994 1993
------------- ------------- ------------ ------------ ------------
(In thousands, except ratios and per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income................ $ 178,589 $ 168,034 $ 158,529 $ 139,806 $ 124,103
Interest expense............... 75,162 71,231 67,157 53,409 49,142
------------- ------------- ------------ ------------ ------------
Net interest income............ 103,427 96,803 91,372 86,397 74,961
Provision for loan losses...... 5,685 2,050 2,048 2,669 3,295
------------- ------------- ------------ ------------ ------------
Net interest income after
provision for loan losses... 97,742 94,753 89,324 83,728 71,666
Noninterest income............. 22,811 20,478 18,999 18,248 15,579
Securities gains............... 4,234 267 519 293 2,055
Noninterest expense............ 78,241 71,105 70,166 67,547 57,678
------------- ------------- ------------ ------------ ------------
Income before income taxes..... 46,546 44,393 38,676 34,722 31,622
Income taxes................... 15,431 15,095 12,841 10,450 9,770
------------- ------------- ------------ ------------ ------------
Net income..................... $ 31,115 $ 29,298 $ 25,835 $ 24,272 $ 21,852
============= ============= ============ ============ ============
Per Share Data:
Net income per share, basic.... $1.54 $ 1.44 $ 1.27 $ 1.19 $ 1.12
Net income per share, diluted.. 1.53 1.42 1.25 1.17 1.11
Cash dividends ................ 0.73 0.69 0.61 0.54 0.58
Book value at period end....... 12.16 11.32 10.87 9.69 9.65
Tangible book value............ 11.60 10.96 10.48 9.26 9.34
Average basic shares
outstanding.................. 20,235 20,409 20,368 20,381 19,563
Average diluted shares
outstanding.................. 20,398 20,620 20,641 20,660 19,757
Balance Sheet Data:
Assets......................... $2,520,312 $ 2,303,751 $2,207,989 $2,020,491 $1,940,967
Loans, net of unearned income.. 1,543,598 1,439,108 1,296,204 1,209,511 1,120,866
Securities..................... 638,478 596,993 634,747 590,389 591,003
Deposits....................... 2,137,834 1,966,938 1,882,849 1,754,131 1,693,029
Shareholders' equity........... 247,824 230,723 222,046 195,436 189,039
Performance Ratios:
Return on average assets....... 1.30% 1.30% 1.23% 1.21% 1.24%
Return on average equity....... 13.09% 12.89% 12.18% 12.50% 12.46%
Dividend payout................ 47.45% 48.08% 42.05% 39.52% 43.91%
Efficiency (1)................. 61.31% 59.91% 62.93% 63.69% 62.37%
Asset Quality Ratios:
Allowance for loan losses to
period end loans, net....... 1.34% 1.25% 1.41% 1.47% 1.46%
Allowance for loan losses to
nonaccrual loans............ 109.38% 161.35% 137.53% 86.94% 56.73%
Nonperforming assets to
period end loans and
foreclosed properties (2)... 2.07% 1.63% 2.17% 2.90% 3.72%
Net charge-offs to average
loans....................... 0.19% 0.17% 0.13% 0.10% 0.21%
Capital and Liquidity Ratios:
Leverage....................... 9.55% 9.90% 10.09% 9.72% 10.34%
Risk-based capital ratios:
Tier 1 capital.............. 15.02% 15.53% 15.94% 14.87% 15.69%
Total capital............... 16.27% 16.78% 17.19% 16.12% 16.94%
Average loans to average
deposits.................... 73.66% 70.99% 68.54% 66.82% 64.48%
</TABLE>
Note: The amounts previously reported in Form 10Q and Form 10K for the periods
presented have been retroactively restated to reflect the acquisitions of
FB&T Financial Corporation on March 29, 1996, Allegiance Banc Corporation
on October 1, 1996, Bank of the Potomac on April 6, 1995, PNB Financial
Corporation on July 1, 1994 and Hallmark Bank & Trust on July 1, 1994 and
a 2.5% stock dividend effective September 1, 1994.
(1) Computed by dividing noninterest expense by the sum of net interest income
on a tax equivalent basis and noninterest income, net of securities gains
or losses.
(2) Nonperforming assets do not include loans past due 90 days accruing
interest.
1
<PAGE>
- --------------------------------------------------------------------------------
(Photo of W.M. Feltner) "We call it `on the
spot service.' . . .
that is what they
deserve and that
is what we
provide."
W.M. Feltner
To Our Owners, Customers,
Neighbors and Other Friends:
Well folks, we did it again. 1997 was another record-setting year for the "Big
Apple." Both earnings and assets reached new highs, we increased our dividend
payout and the price of our stock (FMN) zoomed. Not too bad for a combination of
11 community banks.
I say community banks because that's exactly what they are -- operated by
local people with local boards of directors, both of whom understand the needs
of their customers, satisfy those needs and fulfill their obligations to their
localities through their participation in civic affairs and charitable
contributions. What I am saying is, they make the decisions. There is no waiting
for an answer from North Carolina or any other place. We call it "on the spot
service." That is what the public demands, that is what they deserve and that is
what we provide.
Our 28th year of operation was a continuation of the progress that we have
enjoyed over the past many years. Would you be surprised if I told you that over
the past five years our earnings have increased 76.1%, our assets are up 52.2%,
that our total banking offices are up 103.7% and that the average annual yield
on our stock was 23.9%. I could go on but I think you get my drift.
From an operational standpoint, the year was fairly significant. I'll not
bore you with a lot of figures because they are covered in other sections of
this annual report. I will merely say assets exceeded 2 1/2 billion dollars for
the first time. Earnings exceeded 31 million and were up 6.2% over 1997.
Earnings per share were $1.54 and book value of our stock at year's end was
$12.16.
With the corporation's continued growth, work space was becoming a major
concern. That problem was resolved with the completion of our new headquarters
at 9 Court Square, Winchester, Virginia. A celebration was held on August 30,
1997, and approximately 2,000 shareholders were in attendance. The new quarters
are truly a thing to behold and in the event you have not seen it, I am
extending you a personal invitation to do so. I know you will enjoy and
appreciate the visit. Incidentally, the cover of this report gives you a bird's
eye view of the building's exterior. You really owe it to yourself to see the
interior.
During the year, the F&M Bank-Winchester acquired the Shomo & Lineweaver
Insurance Agency in Harrisonburg. This affiliation will permit us to offer all
types of insurance to you and our other customers. I do hope you will take
advantage of this because we do have a special inducement for our shareholders.
Offering all types of insurance coverage to our customers should be a great
convenience for them and should be beneficial to the corporation.
We also took another major step in our service to the public by creating a
new trust company. This new entity will posture the company for a statewide
presence in Virginia as a corporate fiduciary and will mean better service and
financial management for our customers, shareholders and personnel.
From a statewide perspective, Virginia banking in 1997 took another giant
step backward. Four of the state's largest financial institutions sold to
out-of-state bank holding companies. Merger mania, or should I say money mania,
has again taken its toll. I can understand why the smaller banks are seeking
help from larger institutions. With government regulations as stringent as they
are, they don't have a lot of choice. Other than money, however, the larger
organizations have little or no excuse for their actions.
And while I am on the subject, I can't let our friendly congressional
legislators off the hook. Another year has passed and the only thing they have
done for the banking industry is agree to disagree. They can't reach agreement
among themselves on what is good for us. Every time a new proposal or bill is
discussed, it steps on someone's toes like the insurance companies, credit
unions, or whoever, so as a result nothing ever gets done. You know, if we had
term limits, that wouldn't happen but you'll not see it. A year ago it was a hot
subject, now you seldom hear anything about it. You can say what you please, and
regardless of how you
"You can say what you please, and regardless of how you look at it, Congress has
done more harm than good to the banking industry during my 60 years in banking."
2
<PAGE>
- --------------------------------------------------------------------------------
"The mergers we (Photo of Jack R. Huyett)
have accomplished
have been brought
about by our being
contacted by
banks that are
looking for a
strong partner
with which to
work."
Jack R. Huyett
look at it, Congress has done more harm than good to the banking industry during
my 60 years in banking. They have let everyone into the banking business but
still have the banks strapped with laws passed in the 30's. Now that's their
idea of being progressive! Need an ATM? Go to your nearest gas station. They'll
own one. Want a checking or savings account, home or mostly any other type of
loan, go to any brokerage firm, insurance company, credit union or any of a
dozen or so different types of commercial enterprises and they will provide it.
And don't overlook the bankruptcy law. What once was looked upon as a shame and
disgrace has been so liberalized by Congress that it has become a legal and
convenient way for one to get out of debt. In 1997, personal bankruptcies were
up 19.5% over 1996. 1.3 million people took the escape route to the tune of 40
billion dollars. Think Congress will take a hand? Don't bet on it. Now you have
a small idea why I'm so fond of our legislators.
On December 31, 1997, Jack Huyett, the company's President and Chief
Administrative Officer, retired. Jack was Blakeley Bank's Chief Executive
Officer when they joined the F&M. He had served Blakeley for 37 years and was
President of F&M National Corporation for six years. His banking knowledge and
experience will be greatly missed and we extend him our very best in a
well-deserved retirement.
Several important officer positions have changed for the coming year. Alfred
B. Whitt becomes the Corporation's Vice Chairman, President and Senior Financial
Officer. Charles E. Curtis becomes Vice Chairman and Chief Administrative
Officer and Michael L. Bryan becomes Corporate Attorney and Secretary of the
Board.
On an extremely sad note, our director William A. Julias passed away on
January 1, 1998. Bill was Chairman of the Board of F&M Bank-Massanutten in
Harrisonburg, Virginia, and served on the corporate board for 18 years. He will
be greatly missed by all of us.
During the fourth quarter, we were fortunate to reach agreements with two
very fine banking institutions whereby they will become an integral part of our
company. They are Peoples Bank of Virginia with assets in excess of 79 million
located in Chesterfield, Virginia, with two branches in Richmond and one in
Midlothian; and the Bank of Alexandria with assets in excess of 75 million and
four Alexandria City locations. Because of their proximity to existing F&M
Banks, we will be combining them, thereby, strengthening each institution which
will be better situated to serve the public in those areas. Peoples Bank will
become F&M Bank-Richmond and Bank of Alexandria will become F&M Bank-Northern
Virginia. We are delighted to have these institutions join our company. Not only
because they are superior banks but because they permit us to expand our
position in those areas. Regulatory approval is anticipated and hopefully the
transactions will be completed in the second quarter.
Many bankers and others have asked me how we have been so successful in
acquiring banks. Contrary to what most holding companies do, we do not go out
and solicit acquisitions. The mergers we have accomplished have been brought
about by our being contacted by banks that are looking for a strong partner with
which to work. We have an excellent reputation in that regard because we do not
let people go and an acquired bank remains in control of its own operation.
While 1997 was an outstanding year for the economy, it was an unsettling one.
It has left me with a feeling of uncertainty. Business in general was too good,
the stock market was too good and too volatile, threats of higher interest rates
were the order of the day despite no inflation; lagging corporate earnings seem
a certainty for 1998.
So where do we go from here? Let's hope the slowdown will be just that. No
better -- no worse.
As for the F&M, we are looking forward to a challenging and rewarding year.
Certainly these are questionable and uncertain times. After all, isn't every new
year the same? I am going to tell you exactly what I have told you for the last
umpteenth years. We face the new year with confidence and with your support, the
support of our customers, employees, officers and directors of our 11 banks,
1998, hopefully, will be another record year. GOD BLESS!
Sincerely yours,
/s/ W.M. Feltner /s/ Jack R. Huyett
W.M. Feltner Jack R. Huyett
Chairman of the Board President
3
<PAGE>
- --------------------------------------------------------------------------------
1997 Highlights
A Bit of History
A group of structures, which became known as 9 Court Square, were built over
a period of more than one hundred years. Among these buildings were the law
offices of Jacob Senseney, the Office of the Court Clerk, the County Records
Room, and the old Palace Bar.
Starting in 1995, F&M National Corporation undertook a massive restoration
project which joined these various structures into one building, now known as
"The Wilbur M. Feltner Building." This complex will serve as the new
headquarters of the Corporation.
(Photo appears here with the following caption)
W. M. Feltner and Jack R. Huyett in front of the Feltner Building
(Photo appears here with the following caption)
Descriptive marker adjacent to Corporate Headquarters
(Photo appears here with the following caption)
Entry and Lobby of Corporate Headquarters
(Photo appears here with the following caption)
Gallery of Feltner Building
4
<PAGE>
A Lot of Service
F&M expanded its branch network to 108 offices by opening 12 new locations
with seven in Northern Virginia, Harrisonburg, and Richmond, three in West
Virginia, and two in Maryland. F&M also improved its ATM network by adding an
additional 51 units throughout the Company's service area.
Additional Financial Services
Shomo & Lineweaver Insurance Agency, Inc., Harrisonburg, Virginia, joined F&M
on November 1, 1997. Shomo & Lineweaver fills a void in the financial services
previously offered by F&M as it is a full service insurance agency. The
affiliation will enable F&M to offer a full line of insurance products, such as
automobile, home, business, life, health, and disability.
Other financial services available will include annuities, employee benefits
programs, and brokerage services.
F&M Trust Company opened for business on January 1, 1998. F&M Trust Company
was formed to better serve the financial management needs of F&M's customers
throughout Virginia, and to better posture for F&M's future state-wide presence
as a corporate fiduciary.
[Photograph appears here with the following caption]
F&M-Shomo & Lineweaver's Headquarters in Harrisonburg
The combination of the three existing trust departments of the F&M banks into
the F&M Trust Company will enable F&M to maximize the professional expertise of
its combined resources for the benefit of its current and future clients.
F. Dixon Whitworth, Jr. will serve as President. Its headquarters will be in
Winchester, Virginia. Regional offices will be operated at F&M Bank-Peoples,
Warrenton, Virginia, and F&M Bank-Northern Virginia, Fairfax, Virginia, with
additional offices expected to open in other communities in the future.
Fiduciary services to be offered include estate administration, investment
management, employee benefits administration, and custody and trust
administration.
A Bit of the Future
Peoples Bank of Virginia, Chesterfield, Virginia, with assets of $79 million,
will join F&M in the second quarter of 1998, and will merge with our F&M
Bank-Richmond.
The Bank of Alexandria, Alexandria, Virginia, with assets of $75 million,
will join F&M in the second quarter and will merge with our F&M Bank-Northern
Virginia.
We are extremely pleased to have such quality institutions join the F&M
family of community banks and to help us expand and strengthen our franchises in
the Richmond market and the growing Northern Virginia market.
Home Banking will be introduced in Winchester, Northern Virginia, and
Warrenton. This service will later be expanded to our other market areas.
5
<PAGE>
Five Years of Growth
DOLLARS (IN MILLIONS)
ASSETS
93 1.941
94 2.020
95 2.208
96 2.304
97 2.520
EARNINGS
DOLLARS (IN MILLIONS)
93 21.852
94 24.272
95 25.835
96 29.298
97 31.115
DIVIDENDS
DOLLARS (IN MILLIONS)
93 9.595
94 9.592
95 10.864
96 14.087
97 14.765
6
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the major components
of the results of operations and financial condition, liquidity and capital
resources of F&M. This discussion and analysis should be read in conjunction
with "Selected Consolidated Financial Data" and the Consolidated Financial
Statements and Notes to Consolidated Financial Statements.
Overview
F&M produced record earnings during 1997, performing well in a highly
complex, competitive business environment. F&M's continued high asset quality,
an excellent interest margin and improved management efficiencies contributed to
record net income of $31.1 million, a return on assets of 1.30% and a return on
equity of 13.09%.
F&M expanded its product base on November 1, 1997 with the acquisition of
Shomo and Lineweaver Insurance Agency ("Shomo Ins.") located in Harrisonburg,
Virginia. Shomo Ins. offers automobile, home, group, life and business
insurance, as well as, financial counseling. The acquisition of Shomo Ins. was
accounted for as a tax-free purchase with the exchange of 265,853 shares of F&M
common stock.
F&M's banking market expanded in 1997 by 12 branch locations to include
108 branches located in Virginia, West Virginia and Maryland.
Results of Operations
Net income increased 6.2% in 1997 to $31.1 million, compared with $29.3
million earned in 1996 and $25.8 million earned in 1995. Net income per share,
basic increased to $1.54 per share in 1997 compared to $1.44 and $1.27 per share
for 1996 and 1995. Net income per share, diluted increased to $1.53 per share in
1997 compared to $1.42 per share for 1996 and $1.25 for 1995.
Profitability ratios compare favorably in 1997, 1996 and 1995. Return on
average assets on an annualized basis was 1.30% for 1997 and 1996. In 1995, this
ratio was 1.23%. Return on average shareholders' equity is another significant
measure of profitability which in 1997 improved to 13.09%, compared to 12.89%
and 12.18% for 1996 and 1995, respectively. These performance ratios have varied
since 1993, with return on average assets decreasing slightly from 1.24% in 1993
to 1.21% in 1994, increasing slightly to 1.23% in 1995 and increasing to 1.30%
in 1996. Return on average shareholders' equity rebounded from 12.46% in 1993 to
12.50% in 1994, decreasing to 12.18% in 1995 and increasing to 12.89% in 1996.
Net interest margin represents tax-equivalent net interest income divided
by average earning assets. It reflects the average effective rate earned by F&M
on its average earning assets. In 1997, net interest margin, on a tax-equivalent
basis, was 4.81% compared to 4.76% for 1996 and 4.82% for 1995. Net interest
income and net interest margin are influenced by fluctuations in market rates
and changes in both the volume and mix of average earning assets and the
liabilities that fund those assets. In 1997, the yield on interest-earning
assets increased 4 basis points from 8.21% in 1996 to 8.25% in 1997 and the cost
of interest-bearing liabilities increased 2 basis points from 4.22% in 1996 to
4.24% in 1997. The change in the yield on earning assets and liabilities is a
result of competitive pressures in the market place resulting in higher rates
paid on deposits and consequentially, higher rates received on loans.
In 1997, interest-earning assets have increased to $2.292 billion from
$2.106 billion in 1996 and $2.018 billion in 1995. Loan demand remained strong
in each of these years, although competitive forces have increased for potential
loan customers. Loans, net of unearned discount in 1997 increased $105 million
to $1.544 billion as compared to $1.439 billion in 1996 and $1.296 billion in
1995. F&M's securities portfolio represents the second largest component of
interest earning assets. At December 31, 1997, F&M's securities portfolio
totaled $638.5 million, $41.5 million or 7.0% higher than year end 1996. The
securities portfolio at year end 1996 totaled $597.0 million, which was $37.8
million or 5.9% lower than year end 1995. Funds invested in securities in 1997
were an effort to balance the portfolio of interest earning assets and take
advantage of attractive yields. In 1996, funds were invested in loans due to
strong customer demand.
F&M's efficiency ratio, a measure of its performance based upon the
relationship between non-interest expense and income less securities gains,
compares favorably to other Virginia financial institutions. F&M's efficiency
ratio for 1997, 1996 and 1995 was 61.31%, 59.91% and 62.93%, respectively. A
lower efficiency ratio represents a greater control of non-interest related
costs. This ratio is higher as a result of acquisition and affiliation costs due
to F&M's program of acquiring financial institutions. A fluctuation in the
efficiency ratio can be attributed to relative changes in both non-interest
expense and net interest income.
7
<PAGE>
Since the beginning of 1988, F&M has acquired approximately $1.206 billion
in assets and $1.043 billion in deposits through twelve bank acquisitions and
one nonbank acquisition. Eleven of these acquisitions were accounted for as a
pooling-of-interests and two as a purchase, which enabled F&M to expand its
market into the eastern panhandle of West Virginia, northern Virginia market of
Loudoun, Fauquier, Fairfax and Prince William counties, southern Virginia market
of Greensville County, increase its market share in two of its other Virginia
markets and enter the Maryland markets of Montgomery and Prince George's
counties.
F&M is not aware of any current recommendations by any regulatory
authorities which, if they were implemented, would have a material effect on the
registrant's liquidity, capital resources, or results of operations.
Table 1 sets forth, for the periods indicated, selected quarterly results
of F&M's operations.
<TABLE>
<CAPTION>
Table 1 -- Summary of Financial Results By Quarter
1997 1996*
--------------------------------- -------------------------------------
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
------- -------- ------- -------- ------- -------- ------- --------
(In thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest income .................................... $ 45,699 $ 45,024 $ 44,378 $ 43,488 $ 42,793 $ 42,153 $ 41,769 $ 41,319
Interest expense ................................... 19,736 19,015 18,451 17,960 18,073 17,771 17,614 17,773
------- ------- -------
Net interest income ................................ 25,963 26,009 25,927 25,528 24,720 24,382 24,155 23,546
Provision for loan losses .......................... 2,994 779 842 1,070 460 562 556 472
------- ------- -------
Net interest income after provision for loan losses 22,969 25,230 25,085 24,458 24,260 23,820 23,599
23,074
Noninterest income ................................. 9,546 6,843 5,453 5,203 5,606 5,143 4,847 5,149
Noninterest expense ................................ 21,349 20,074 18,797 18,021 18,405 18,133 17,030 17,537
Income before income taxes ......................... 11,166 11,999 11,741 11,640 11,461 10,830 11,416 10,686
Applicable income taxes ............................ 3,325 4,114 4,007 3,985 3,830 3,643 3,946 3,676
------- ------- -------
Net income ......................................... $ 7,841 $ 7,885 $ 7,734 $ 7,655 $ 7,631 $ 7,187 $ 7,470 $ 7,010
======== ========= ========= ======== ======== ========= ========= ========
Earnings per share, basic......................... $ 0.39 $ 0.39 $ 0.38 $ 0.38 $ 0.38 $ 0.35 $ 0.37 $ 0.34
Earnings per share, assuming dilution............. $ 0.38 $ 0.39 $ 0.38 $ 0.37 $ 0.37 $ 0.35 $ 0.36 $ 0.34
</TABLE>
*The amounts previously reported on Form 10Q for the periods presented have been
retroactively restated to reflect the acquisitions of FB&T Financial Corporation
on March 29, 1996, Allegiance Banc Corporation on October 1, 1996.
Net Interest Income
Net interest income represents the principal source of earnings for F&M.
Net interest income equals the amount by which interest income exceeds interest
expense and represents F&M's gross profit margin. Changes in the volume and mix
of interest-earning assets and interest-bearing liabilities, as well as their
respective yields and rates, have a significant impact on the level of net
interest income.
Net interest income increased to $103.4 million for the year ended
December 31, 1997, up 6.8% over the $96.8 million reported for the same period
in 1996 and up 5.9% in 1996 over the $91.4 million reported for 1995. Net
interest income in 1997 was affected by a greater demand for loans coupled with
attractive market rates and a strong, expanding economy. Loans grew $105 million
or 7.3% to $1.544 billion in 1997 from $1.439 billion in 1996. Loans increased
in 1996 by $143 million or 11.0% over $1.296 billion in 1995. In 1997, deposits
provided the source of funds by increasing to $2.138 billion, up $171 million or
8.7% from $1.967 billion in 1996. Interest-bearing deposits increased $97
million in 1997 to $1.729 billion from $1.632 billion in 1996. Strong deposit
and loan growth was the result of offering attractive market rates coupled with
customers' desire to place investments in a strong, highly capitalized financial
corporation.
Net interest income was $96.8 million for the year 1996, up 12.0% over the
$91.4 million reported for the same period in 1995 and up 5.8% in 1995 over the
$86.4 million reported for 1994. Net interest income in 1996 was affected by
strong loan demand following a recessionary period. Loans grew $143 million or
11.0% to $1.439 billion in 1996 from $1.296 billion in 1995. In 1996, total
interest-bearing deposits provided the primary source of funds increasing to
$1.632 billion, up $63.6 million or 4.0% from $1.569 billion in 1995.
Interest-bearing deposits increased $106 million in 1995 from $1.463 billion in
1994.
Net interest income for 1995 increased $5.0 million to $91.4 million,
compared to $86.4 million for 1994 and the net interest margin for 1995 was
4.82%. At year end 1995, the securities portfolio was $634.8 million, up $44.4
million
8
<PAGE>
or 7.5% over the same period 1994. During 1995, funds were kept in liquid
interest-earning assets to be available when securities yields and loan demand
improved.
Table 2 analyzes charges in net interest income attributable to changes in
the volume of interest-bearing assets and liabilities compared to changes in
interest rates. Nonaccruing loans are included in average loans outstanding.
Table 2 -- Volume and Rate Analysis
Tax equivalent basis
<TABLE>
<CAPTION>
1997 1996
------------------------------ -----------------------------
Change in Change in
Volume Rate Income/ Volume Rate Income/
Effect Effect Expense Effect Effect Expense
---------- --------- --------- -------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Earning Assets:
Taxable securities.................................... $ (681) $ (118) $ (799) $1,931 $ 113 $ 2,044
Tax-exempt securities................................. (475) 170 (305) (503) (59) (562)
Taxable loans......................................... 11,563 (271) 11,292 11,270 (2,627) 8,643
Tax-exempt loans...................................... 216 (4) 212 358 (13) 345
Federal funds sold and repurchase agreements.......... (69) 14 (55) (757) (321) (1,078)
Interest-bearing deposits in other banks.............. 201 (22) 179 49 (14) 35
---------- --------- --------- -------- --------- ---------
Total earning assets............................. $10,755 $ (231) $10,524 $12,348 $(2,921) $ 9,427
---------- --------- --------- -------- --------- ---------
Interest-Bearing Liabilities:
Checking deposits..................................... $ 716 $ 29 $ 745 $ 313 $ (705) $ (392)
Savings deposits - regular............................ (161) (162) (323) (135) (832) (967)
Savings deposits - money market....................... (242) 166 (76) (376) (459) (835)
CD's & other time deposits - $100,000 & over.......... 1,510 (372) 1,138 4,160 878 5,038
CD's & other time deposits - under $100,000........... 1,165 33 1,198 771 91 862
---------- --------- --------- -------- --------- ---------
Total interest-bearing deposits.................. 2,988 (306) 2,682 4,733 (1,027) 3,706
Borrowed funds short-term........................ 539 198 737 389 (227) 162
Borrowed funds long-term......................... 507 5 512 216 (10) 206
---------- --------- --------- -------- --------- ---------
Total interest-bearing liabilities............... 4,034 (103) 3,931 5,338 (1,264) 4,074
---------- --------- --------- -------- --------- ---------
Change in net interest income.................... $6,721 $ (128) $ 6,593 $7,010 $(1,657) $ 5,353
========== ========= ========= ======== ========= =========
</TABLE>
Note: The change in interest due to both rate and volume has been allocated to
change due to volume and change due to rate in proportion to the relationship of
the absolute dollar amounts of the change in each.
Table 3 (page 10 and 11) depicts interest income on earning assets and
related average yields as well as interest expense on interest-bearing
liabilities and related average rates paid for the periods indicated. Loans
placed on a nonaccrual status are included in the balances and were included in
the computation of yields, upon which they had no material effect.
Interest Sensitivity
The primary goals of interest rate risk management are to minimize
fluctuations in net interest margin as a percentage of earning assets and to
increase the dollars of net interest margin at a growth rate consistent with the
growth rate of total assets. These goals are accomplished by balancing the
volume of floating-rate liabilities with a similar volume of floating-rate
assets, by keeping the average maturity of fixed rate asset and liability
contracts reasonably consistent and short, and by routinely adjusting pricing
rates to market conditions on a weekly basis.
The goal of F&M is to generally maintain a position that is to provide
flexibility enough to move to an equality between rate-sensitive assets and
rate-sensitive liabilities, which may be desirable when there are wide and
frequent fluctuations in interest rates. Interest rate gaps are managed through
investments, loan pricing and deposit pricing. When an unacceptable positive gap
within a one-year time frame occurs, maturities can be extended by selling
shorter term investments and buying longer maturities. The same effect can also
be accomplished by reducing emphasis on variable rate loans. When an
unacceptable negative gap occurs, variable rate loans can be increased and more
investment in shorter term investments can be made. Pricing policies on either
or both loans and deposits can be changed to accomplish any of the goals. F&M
reviews the interest sensitivity position of each subsidiary bank at least once
a quarter.
9
<PAGE>
Table 3 -- Average Balances, Income and Expense, Yields and Rates (1)
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
1997
Annual
Average Income/ Yield/
Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------
ASSETS (Dollars in thousands)
Securities:
<S> <C> <C> <C>
Taxable............................................................ $ 576,900 $ 35,899 6.22%
Tax-exempt (1)..................................................... 26,428 2,335 8.84%
- ------------------------------------------------------------------------------------------------------------
Total securities............................................... 603,328 38,234 6.34%
Loans (net of unearned income):
Taxable............................................................ 1,483,223 135,994 9.17%
Tax-exempt (1)..................................................... 14,754 1,583 10.73%
Total loans.................................................... 1,497,977 137,577 9.18%
Federal funds sold and repurchase agreements........................... 71,409 3,859 5.40%
Interest-bearing deposits in other banks............................... 8,022 290 3.62%
- ------------------------------------------------------------------------------------------------------------
Total earning assets........................................... 2,180,736 179,960 8.25%
Less: allowance for loan losses........................................ (18,496)
Total nonearning assets................................................ 227,955
Total assets...................................................$ 2,390,195
============
LIABILITIES AND SHAREHOLDERS' EQUITY Interest-bearing deposits:
Checking...........................................................$ 320,344 $ 7,087 2.21%
Regular savings.................................................... 200,345 5,556 2.77%
Money market savings.............................................. 204,923 6,020 2.94%
Certificates of deposit:
Less than $100,000............................................. 763,085 42,057 5.51%
$100,000 and more.............................................. 186,398 10,345 5.55%
- ------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits........................................ 1,675,095 71,065 4.24%
Short-term borrowings.................................................. 84,148 3,066 3.64%
Long-term borrowings................................................... 15,198 1,031 6.78%
- ------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities............................. 1,774,441 75,162 4.24%
Noninterest-bearing liabilities:
Demand deposits.................................................... 358,652
Other liabilities.................................................. 19,389
------
Total liabilities...................................................... 2,152,482
Stockholders' equity................................................... 237,713
-------
Total Liabilities and shareholders` equity.............................$ 2,390,195
============
Net interest income.................................................... $104,798
--------
Interest rate spread................................................... 4.01%
Interest expense as a percent of average earning assets................ 3.45%
Net interest margin.................................................... 4.81%
</TABLE>
(1) Income and yields are reported on a taxable-equivalent basis.
10
<PAGE>
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
- ------------------------------------------------------------------------------------------------------------
1996 1995
Annual Annual
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(Dollars in thousands) (Dollars in thousands)
$ 587,823 $ 36,698 6.24% $ 557,258 $ 34,654 6.22%
31,605 2,640 8.35% 37,645 3,202 8.51%
- ------------------------------------------------------------------------------------------------------------
619,428 39,338 6.35% 594,9035 37,856 6.36%
1,357,220 124,702 9.19% 1,233,488 116,059 9.41%
12,739 1,371 10.76% 9,409 1,026 10.90%
- ------------------------------------------------------------------------------------------------------------
1,369,959 126,073 9.20% 1,242,897 117,085 9.42%
72,706 3,914 5.38% 86,474 4,992 5.77%
2,127 111 5.22% 975 76 7.79%
- ------------------------------------------------------------------------------------------------------------
2,064,220 169,436 8.21% 1,925,249 160,009 8.31%
(18,335) (17,835)
205,932 189,361
------- -------
$2,251,817 $2,096,775
========== ==========
$ 288,494 $ 6,342 2.20% $ 276,417 $ 6,734 2.44%
207,739 5,879 2.83% 211,987 6,846 3.23%
212,471 6,096 2.87% 225,065 6,931 3.08%
736,193 40,919 5.56% 661,188 35,881 5.43%
165,304 9,147 5.53% 151,384 8,285 5.47%
- ------------------------------------------------------------------------------------------------------------
1,610,201 68,383 4.25% 1,526,041 64,677 4.24%
69,039 2,329 3.37% 51,818 2,167 4.18%
7,725 519 6.72% 4,513 313 6.94%
- ------------------------------------------------------------------------------------------------------------
1,686,965 71,231 4.22% 1,582,372 67,157 4.24%
319,596 287,311
17,937 15,028
------ ------
2,024,498 1,884,711
227,319 212,064
------- -------
$2,251,817 $2,096,775
========== ==========
$ 98,205 $ 92,852
--------- ---------
3.99% 4.07%
3.45% 3.49%
4.76% 4.82%
</TABLE>
11
<PAGE>
It is F&M's policy not to engage in activities considered to be derivative
in nature such as futures, option contracts, swaps, caps, floors, collars or
forward commitments. F&M considers derivatives as speculative which is contrary
to F&M's historical or prospective philosophy. F&M does not hold or issue
financial instruments for trading purposes. F&M does hold in its loan and
security portfolio investments that adjust or float according to changes in the
"prime" lending rate which is not considered speculative, but necessary for good
asset/liability management. Off-balance sheet risks such as commitments to
extend credit, standby letters of credit and other items are discussed in Note
18 in the Notes to Consolidated Financial Statements.
Forward-Looking Statements
The sections that follow, Market Risk Management, contain certain
forward-looking statements (as defined in the Private Securities Litigation
Reform Act of 1995). These forward-looking statements may involve significant
risks and uncertainties. Although F&M believes that the expectations reflected
in such forward-looking statements are reasonable, actual results may differ
materially from the results discussed in these forward-looking statements.
Market Risk Management
Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to changes in interest rates, exchange rates
and equity prices. F&M's market risk is composed primarily of interest rate
risk. F&M's Asset/Liability/Risk Committee ("ALCO") is responsible for reviewing
the interest rate sensitivity position of F&M and establishing policies to
monitor and limit exposure to interest rate risk. Guidelines established by ALCO
are reviewed by F&M's Board of Directors.
Asset/Liability/Risk Management: The primary goals of asset/liability/risk
management are to maximize net interest income and the net value of F&M's future
cash flows within the interest rate risk limits set by ALCO.
Interest Rate Risk Measurement: Interest rate risk is monitored through
the use of three complementary measures: static gap analysis, earnings
simulation modeling and net present value estimation. While each of the interest
rate risk measurements has limitations, taken together they represent a
reasonably comprehensive view of the magnitude of interest rate risk in the
Corporation, the distribution of risk along the yield curve, the level of risk
through time, and the amount of exposure to changes in certain interest rate
relationships.
Static Gap: Gap analysis measures the amount of repricing risk embedded in
the balance sheet at a point in time. It does so by comparing the differences in
the repricing characteristics of assets and liabilities. A gap is defined as the
difference between the principal amount of assets and liabilities, adjusted for
off-balance sheet instruments, which reprice within a specified time period. The
cumulative one-year gap, at year-end, was -12.2% of total earning assets. The
policy limit for the one-year gap is plus or minus 15% of adjusted total earning
assets.
Core deposits and loans with noncontractual maturities are included in the
gap repricing distributions based upon historical patterns of balance attrition
and pricing behavior which are reviewed at least annually.
The gap repricing distributions include principal cash flows from
residential mortgage loans and mortgage-backed securities in the timeframes in
which they are expected to be received. Mortgage prepayments are estimated by
applying industry median projections of prepayment speeds to portfolio segments
based on coupon range and loan age.
Earnings Simulation: The earnings simulation model forecasts one year net
income under a variety of scenarios that incorporate changes in the absolute
level of interest rates, changes in the shape of the yield curve and changes in
interest rate relationships. Management evaluates the effects on income of
alternative interest rate scenarios against earnings in a stable interest rate
environment. This type of analysis is also most useful in determining the
short-run earnings exposures to changes in customer behavior involving loan
payments and deposit additions and withdrawals.
The most recent earnings simulation model projects net income would
decrease by approximately 3.2% of stable-rate net income if rates immediately
fall by two percentage points over the next year. It projects an increase of
approximately 2.7% if rates rise immediately by two percentage points.
Management believes this reflects a liability-sensitive rate risk position for
the one-year horizon. This one-year forecast is within the ALCO guideline of
15.0%.
This dynamic simulation model includes assumptions about how the balance
sheet is likely to evolve through time, in different interest rate environments.
Loan and deposit growth rate assumptions are derived from historical analysis
and management's outlook, as are the assumptions used to project yields and
rates for new loans and deposits. All maturities, calls and prepayments in the
securities portfolio are assumed to be reinvested in like instruments. Mortgage
loan prepayment assumptions are developed from industry median estimates of
prepayment speeds for portfolios with similar coupon ranges and seasoning.
Noncontractual deposit growth rates and pricing are assumed to follow historical
patterns. The sensitivities of key assumptions are analyzed at least annually
and reviewed by ALCO.
Net Present Value: The Net Present Value ("NPV") of the balance sheet, at
a point in time, is defined as the discounted present value of asset cash flows
minus the discounted value of liability cash flows. Interest rate risk
12
<PAGE>
analysis using NPV involves changing the interest rates used in determining the
cash flows and in discounting the cash flows. The resulting percentage change in
NPV is an indication of the longer term repricing risk and options risk embedded
in the balance sheet.
At year-end, a 200 basis point immediate increase in rates is estimated to
reduce NPV by 7.8%. Additionally, NPV is projected to increase by 5.0% if rates
fall immediately by 200 basis points. Analysis of the average quarterly change
in the Treasury yield curve over the past ten years indicates that a parallel
curve shift of 200 basis points or more is an event that has less than a .1%
chance of occurrence.
As with gap analysis and earnings simulation modeling, assumptions about
the timing and variability of balance sheet cash flows are critical in NPV
analysis. Particularly important are the assumptions driving mortgage
prepayments and the assumptions about expected attrition of the core deposit
portfolios. These assumptions are applied consistently across the different rate
risk measures.
Summary information about interest-rate risk measures are presented below.
<TABLE>
<CAPTION>
Table 4 -- Interest-rate Risk Measures
Year-end
1997
--------------
<S> <C> <C>
Static 1-Year Cumulative Gap -12.2%
1-Year Net Income Simulation Projection
-200 bp Shock vs Stable Rate -3.2%
+200 bp Shock vs Stable Rate 2.7%
Static Net Present Value Change
-200 bp Shock vs Stable Rate 5.0%
+200 bp Shock vs Stable Rate -7.8%
</TABLE>
Due to borrowers' preferences for floating-rate loans and depositors'
preferences for fixed-rate deposits, F&M's balance sheet tends to move toward
less liability sensitivity with the passage of time. The earnings simulation
model indicates that if all prepayments, calls and maturities of the securities
portfolios expected over the next year were to remain uninvested, then the
current liability sensitivity position would be lessened. Purchases of
fixed-rate securities have been made to offset the natural tendency toward a
less liability sensitive interest rate risk position.
Management expects interest rates to be relatively stable during 1998 and
believes that the current modest level of liability sensitivity is appropriate.
Noninterest Income
Noninterest income for 1997 increased $6.3 million, or 30.4%, over the
same period in 1996. Trust Department income increased $139 thousand or 6.3%
from $2.2 million for 1996 to $2.3 million for 1997 as a result of increased
fiduciary activities and the settlement of estates. Service charges on deposit
accounts, the largest single item of noninterest income, increased to $842
thousand for 1997, up 9.3% over the comparable period a year ago as a result of
adding additional services and improving existing deposit services. Credit card
fees increased to $3.7 million for 1997 as compared to $3.4 million for 1996 as
a result of increased card loan volume. Fees for other customer services were
$2.3 million for 1997, which increased $409 thousand or 22.1% from 1996 as a
result of increased marketing of current services and providing new services for
customers. Gains on sale of securities increased to $4.2 million for 1997 as
compared to $267 thousand for 1996. Security gains are realized when market
conditions exist that are favorable to F&M and/or conditions dictate additional
liquidity is desirable. In 1997, F&M took advantage of significant stock market
gains in other corporate stock held by the corporation which when sold, realized
security gains of $3.3 million. Other operating income increased in 1997, up
$692 thousand or 17.5% from 1996 to 1997. The increase in other operating income
was the result of increased charges for various nondeposit related fees such as
checkbook sales, safe deposit box fees, and loan documentation fees.
In 1996, noninterest income increased $1.2 million or 6.3% from $19.5
million in 1995 to $20.7 million. Trust Department income increased $384
thousand or 21.2% from $1.8 million for 1995 to $2.2 million for 1996 as a
result of increased fiduciary activities. Service charges on deposit accounts
were $9.1 million for 1996, up 12.8% over the previous year. Credit card fees
were $3.4 million and $3.2 million for 1996 and 1995, up $208 thousand as a
result of increased card lending activities. Fees for other customer services
were $1.8 million for 1996, which increased $115 thousand or 6.6% from 1995 as a
result of a reduction in loan refinancing activity. Gains on sale of securities
were $267 thousand for 1996 as compared to $519 thousand for 1995. Security
gains are realized when market conditions exist that are favorable to F&M and/or
conditions dictate additional liquidity is desirable. Interest rates were rising
in 1996 reducing the appeal to reposition securities, therefore, security gains
were smaller in 1996 than in 1995.
13
<PAGE>
<TABLE>
<CAPTION>
Table 5 -- Noninterest Income
Year ended December 31,
--------------------------------
1997 1996 1995
--------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Commissions and fees from fiduciary activities............ $ 2,335 $ 2,196 $ 1,812
Service charges on deposit accounts....................... 9,929 9,087 8,054
Credit card fees.......................................... 3,652 3,401 3,193
Fees for other customer services.......................... 2,258 1,849 1,734
Other operating income.................................... 4,637 3,945 4,207
---------- ---------- ----------
Noninterest income................................ 22,811 20,478 19,000
Profits on securities available for sale.................. 4,218 265 519
Investment securities gains, net.......................... 16 2 --
---------- ---------- ----------
Total noninterest income.......................... $ 27,045 $ 20,745 $ 19,519
========== ========== ==========
</TABLE>
Noninterest Expense
Total noninterest expense increased $7.1 million or 10.0%, from $71.1
million in 1996 to $78.2 million in 1997. Salaries and employee benefits
increased $4.7 million or 12.6%, net occupancy expense including furniture and
equipment expense increased $1.1 million or 9.3%, credit card expense increased
$332 thousand or 14.9% and other operating expense increased $1.0 million or
5.1%. Deposit insurance increased from $205 thousand in 1996 to $240 thousand in
1997 as a result of higher fees due to deposit growth. Growth in 1997
noninterest expense is attributable to branch bank expansion and costs
associated with handling asset and liability growth.
For 1996, noninterest expense increased by $939 thousand, or 1.3%, from
$70.2 million in 1995 to $71.1 million in 1996. This increase was primarily due
to a $1.7 million, or 4.9% increase in salary and employee benefits, a $377
thousand, or 5.3% increase in net occupancy expense including furniture and
equipment expense and a $260 thousand, or 13.2% increase in credit card expense.
Other operating expenses also increased $461 thousand or 2.4% in 1996. The
primary reason for the increases in noninterest expense was costs associated
with acquiring and opening new bank offices and remodeling other banking
offices. Credit card expenses increased as a result of higher card lending
activity coupled with a computer conversion. Other operating expenses increased
as a result of professional fees associated with acquiring new banks and
training and conversion costs associated with converting to a new consolidated
data processing system.
<TABLE>
<CAPTION>
Table 6 -- Noninterest Expense
Year ended December 31,
--------------------------------
1997 1996 1995
--------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Salaries and employee benefits............................ $ 41,908 $ 37,229 $ 35,507
Net occupancy expense of premises......................... 6,531 5,957 5,966
Furniture and equipment expense........................... 5,853 5,370 4,984
Deposit insurance......................................... 240 205 2,086
Credit card expense....................................... 2,563 2,231 1,971
Other operating expenses.................................. 21,146 20,113 19,652
---------- ---------- ----------
Total.............................................. $ 78,241 $ 71,105 $ 70,166
========== ========== ==========
</TABLE>
Income Taxes
Income tax expense at December 31, 1997 was $15.4 million, up from $15.1
million for 1996 and up from $12.8 million for 1995. The increase in income
taxes is attributable to increased taxable earnings at the federal statutory
income tax rate of 35%. This corresponds to an effective tax rate of 33.2%,
34.0% and 33.2% for the three years ended December 31, 1997, 1996 and 1995,
respectively. Note 16 to the Consolidated Financial Statements for year end
provide a reconciliation between income tax expense computed using the federal
statutory income tax rate and F&M's actual income tax expense. Also included in
Note 16 to the Consolidated Financial Statements is information regarding the
principal items giving rise to deferred taxes for each of the three years ended
December 31.
Loan Portfolio
Loans, net of unearned income, increased to $1.544 billion at December 31,
1997, up $105 million or 7.3% from $1.439 billion at year end 1996 and up $143
million or 11.0% from $1.296 billion at year end 1995. The strong increase in
loan activity for 1997 is indicative of a healthy economic environment in F&M's
banking market area. All of F&M's
14
<PAGE>
subsidiary banks offer both commercial and consumer loans, but lending activity
is generally focused on consumers and small to middle-market businesses within
the subsidiary banks' respective market regions. Six of F&M's subsidiary banks,
F&M Bank-Massanutten, F&M Bank-Blakeley, F&M Bank-Emporia, F&M Bank-Peoples, F&M
Bank-Martinsburg, and F&M Bank-Keyser, emphasize consumer lending, with
activities focused primarily on residential real estate and consumer lending.
F&M Bank-Richmond, F&M Bank-Northern Virginia, F&M Bank-Central Virginia and F&M
Bank-Allegiance are based in larger markets where the commercial loan demand is
stronger and, as a result, their lending activities place a greater emphasis on
small to medium-size business. F&M Bank-Winchester, because of its size and
dominant position in its market, has a greater opportunity to appeal to larger
commercial customers in addition to consumers.
Approximately 47.8% of F&M's loan portfolio at December 31, 1997 was
comprised of commercial loans, which includes certain loans secured by real
estate in categories of multifamily, non-farm, non-residential and agricultural
where real estate is among the sources of collateral securing the loan. F&M's
subsidiary banks offer a variety of commercial loans within their market
regions, including revolving lines of credit, working capital loans, equipment
financing loans and letters of credit. Although F&M's subsidiary banks typically
look to the borrower's cash flow as the principal source of repayment for such
loans, many of the loans within this category are secured by assets, such as
real property, accounts receivable, inventory and equipment. In addition, a
number of commercial loans are secured by real estate used by such businesses
and are generally personally guaranteed by the principals of the businesses.
F&M's commercial loans generally bear a floating rate of interest tied to a
system-wide prime rate set by F&M Bank-Winchester.
F&M's residential real estate loan portfolio (including home equity lines)
was 35.5% of total loans at December 31, 1997. The residential mortgage loans
made by F&M's subsidiary banks and Big Apple Mortgage Company are made only for
single family, owner-occupied residences within their respective market regions.
The residential mortgage loans offered by F&M's subsidiaries are either
adjustable rate loans or fixed rate loans with 20 to 30 year amortization
schedules that mature with a balloon payment on the third or fifth year
anniversary of the loan.
Big Apple Mortgage (also t.a. F&M Mortgage Company), F&M Bank-Northern
Virginia and F&M Bank-Peoples sell into the secondary market permanent
residential mortgage loans that conform to GNMA and FNMA underwriting
guidelines. These F&M subsidiaries purchase government insured 1-4 family FHA
and VA loans and resell them immediately in package form. At December 31, 1997,
only Big Apple Mortgage had $13.3 million in loans that it had committed to
purchase, but had not settled upon.
F&M's real estate construction portfolio historically has been a
relatively small portion of the total loan portfolio. At December 31, 1997,
construction loans were $83.9 million or 5.4% of the total loan portfolio.
Generally, all construction loans are made to finance owner-occupied properties
with permanent financing commitments in place. F&M's subsidiary banks make a
limited number of loans for acquisition, development and construction of
residential real estate. F&M's construction loans, including its acquisition and
development loans, generally bear a floating rate of interest and mature in one
year or less. Loan underwriting standards for such loans generally limit the
loan amount to 75% of the finished appraised value of the project. As a result
of strict underwriting guidelines, F&M has experienced charge-offs involving
residential construction loans since 1993 of less than one half of 1%.
Consumer loans were 11.3% of F&M's total loan portfolio at December 31,
1997. F&M's subsidiary banks offer a wide variety of consumer loans, which
include installment loans, credit card loans, home equity lines and other
secured and unsecured credit facilities. The performance of the consumer loan
portfolio is directly tied to and dependent upon the general economic conditions
in each of F&M's subsidiary banks' respective market regions.
Loans secured by real estate consist of a diverse portfolio of
predominantly single family residential loans, which at December 31, 1997
comprised 35.5% of the loan portfolio. Loans secured by commercial real estate
comprised 31.0% of the loan portfolio at December 31, 1997 and consist
principally of commercial and industrial loans where real estate constitutes a
source of collateral (27.8%) (shown in Table 7 under the category of "Non-farm,
non-residential"), multifamily loans (2.0%) and agricultural loans (1.2%). F&M
attempts to reduce its exposure to the risks of the local real estate market by
limiting the aggregate size of its commercial real estate portfolio and by
making such loans primarily on owner-occupied properties. F&M has historically
engaged in limited mortgage lending on multifamily and agricultural properties.
Real estate construction loans accounted for only 5.4% of total loans
outstanding at December 31, 1997. F&M's charge-off rate for all loans secured by
real estate was 0.07% of period end loans. This is consistent with 1996 when the
charge-off rate for all loans secured by real estate was 0.02% of period end
loans outstanding. F&M's consumer loan portfolio, its second largest loan
category, consists principally of personal loans.
Consistent with its focus on providing community-based financial services,
F&M generally does not make loans outside its principal market regions. F&M does
not engage in foreign lending activities, consequently, the loan portfolio is
not exposed to risk from foreign credits. F&M maintains a policy not to
originate or purchase loans classified by regulators as highly leveraged
transactions or loans to foreign entities or individuals.
15
<PAGE>
F&M's unfunded loan commitments amounted to $316.6 million at December 31,
1997, compared to $323.2 million at December 31, 1996. This decrease in unfunded
loan commitments is due to review by management of available lines and reducing
excessive lines.
On December 31, 1997, F&M had a concentration of loans in non-farm,
non-residential loans, consisting primarily of commercial loans secured by real
estate of $429.8 million and 1-4 family residential mortgage loans of $481.6
million which were in excess of 10 percent of the total loan portfolio. Because
of the nature of F&M's market, loan collateral is predominately real estate
related.
A number of economic factors in conjunction with loan activity in 1997
suggest that loan growth in 1998 should continue to be strong, but not as
vibrant as it was in 1996 and 1995. Although interest rates are above the floors
they reached in 1996, they remain at reasonable levels for borrowers. New home
construction is increasing as are home sales. Auto sales were up in 1997, and
the forecast is for continued strength. The economy is creating new jobs and
absorbing the unemployment that was created during the recession and business
restructuring in 1996 and 1995. Importantly, reports suggest that borrowers are
showing a great degree of confidence in the economy. These factors resulted in a
positive loan growth trend in 1997 and represent the necessary elements for
growth in 1998.
<TABLE>
<CAPTION>
Table 7 -- Loan Portfolio
December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------- ------------ ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural............. $ 259,881 $ 225,327 $ 187,991 $ 180,736 $ 146,880
Real estate construction........................... 83,904 66,477 53,682 46,081 50,280
Real estate mortgage:
Residential (1-4 family)....................... 481,637 454,109 410,889 385,842 372,174
Home equity lines.............................. 67,232 67,326 67,848 68,022 60,367
Multifamily.................................... 31,266 31,712 25,191 26,106 22,445
Non-farm, non-residential (1).................. 429,827 409,563 374,634 322,146 290,193
Agricultural................................... 18,516 19,199 17,576 17,511 16,615
------------ ------------- ------------ ------------ -------------
Real estate subtotal........................... 1,028,478 981,909 896,138 819,627 761,794
Loans to individuals:
Consumer....................................... 152,092 147,917 142,151 150,135 151,566
Credit card.................................... 22,904 23,197 22,832 19,119 16,865
------------ ------------- ------------ ------------ -------------
Loans to individuals subtotal.................. 174,996 171,114 164,983 169,254 168,431
Total loans................................ 1,547,259 1,444,827 1,302,794 1,215,698 1,127,385
Less unearned income............................... (3,661) (5,719) (6,590) (6,187) (6,519)
------------ ------------- ------------ ------------ -------------
Loans-- net of unearned income..................... $ 1,543,598 $ 1,439,108 $ 1,296,204 $ 1,209,511 $ 1,120,866
============ ============= ============ ============ =============
</TABLE>
(1) This category generally consists of commercial and industrial loans where
real estate constitutes a source of collateral.
<TABLE>
<CAPTION>
Remaining Maturities of Selected Loans
December 31, 1997
---------------------------
Commercial,
Financial and Real Estate-
Agricultural Construction
------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Within 1 year....................................................... $ 156,960 $ 56,238
------------ ------------
Variable Rate:
1 to 5 years.................................................... 15,006 2,971
After 5 years................................................... 5,566 2,684
------------ ------------
Total........................................................... $ 20,572 $ 5,655
------------ ------------
Fixed Rate:
1 to 5 years.................................................... 69,835 14,328
After 5 years................................................... 12,514 7,683
------------ ------------
Total........................................................... $ 82,349 $ 22,011
------------ ------------
Total Maturities................................................ $ 259,881 $ 83,904
============ ============
</TABLE>
Asset Quality
Allowance for Loan Losses. The allowance for loan losses is an estimate of
an amount adequate to provide for potential losses in the loan portfolio of each
of F&M's subsidiary banks. The amount of the allowance is based on
16
<PAGE>
management's evaluation of the collectability of the loan portfolio, credit
concentrations, trends in historical loss experience, specific impaired loans,
and economic conditions. Allowances for impaired loans are generally determined
based on collateral values or the present value of estimated cash flows. The
allowance is increased by a provision for loan losses, which is charged to
expense and reduced by charge-offs, net of recoveries. Changes in the allowances
relating to impaired loans are charged or credited to the provision for loan
losses. Each of F&M's subsidiary banks has a formal loan review function which
consists of a committee of bank officers that regularly reviews loans and
assigns a classification based on current perceived credit risk. In addition,
the holding company has an independent loan review team that performs a detailed
on-site review and analysis of each of F&M's subsidiary bank's loan portfolio on
at least an annual basis reviewing 60% to 75% of the total principal amount of
each of F&M's subsidiary bank's loan portfolio. In addition, all lending
relationships involving an adversely classified loan are reviewed. The review
team has the authority to classify any loan it determines is not satisfactorily
classified within F&M's grading system. All classified loans are reviewed at
least quarterly by F&M's senior officers and by the subsidiary banks' board of
directors. All past due and nonaccrual loans are reviewed monthly by the
subsidiary banks' board of directors. As a matter of policy, F&M's subsidiary
banks place loans on nonaccrual status when management determines that the
borrower can no longer service debt from current cash flows and/or collateral
liquidation. This generally occurs when a loan becomes 90 days past due as to
principal and interest. This detailed management analysis forms the basis for
determining the amount needed in the allowance for loan losses. Although the
ratio of the allowance to total loans and nonaccrual loans may be less than its
peers, F&M believes the ratio to be adequate based on this loan risk review
analysis.
Nonperforming loans increased $7.8 million from $11.1 million at year end
1996 to $18.9 million at year end 1997. In keeping with F&M's conservative
philosophy, the amount provided for the provision for loan losses was increased
to $5.7 million after careful analysis of possible losses in the loan portfolio.
In 1996 and 1995, the nature of loan quality in the portfolio and improved
underwriting standards allowed F&M to maintain a lower allowance for loan
losses. The ratio of allowance for loan losses to period end loans, net for
1997, 1996 and 1995 was 1.34%, 1.25% and 1.41%, respectively. In 1997, F&M
included in its loan portfolio $64.7 million loans composed of SBA, FHA and VA
residential housing loans that were guaranteed by the U.S. government. If these
guaranteed loans were excluded from total average loans for 1997, the ratio of
allowance for loan losses to period end loans, net would be 1.40%. In 1997, 1996
and 1995, the ratio of allowance for loan losses to nonaccrual loans were
109.38%, 161.35% and 137.53%, respectively, which is an indication that the
allowance is adequate with respect to nonaccrual loans.
The allowance is also subject to regulatory examinations and
determinations as to adequacy, which may take into account such factors as the
methodology used to calculate the allowance and the size of the allowance in
comparison to peer companies identified by regulatory agencies. F&M's subsidiary
banks are examined at different times, but the Virginia Bureau of Financial
Institutions examined all Virginia banking subsidiaries, the West Virginia
Division of Banking examined all West Virginia banking subsidiaries and Federal
Reserve Bank of Baltimore examined F&M's Maryland bank subsidiary during 1997.
Loans classified for regulatory purposes as loss, doubtful, substandard, or
special mention, do not represent or result from trends or uncertainties which
management reasonably expects will materially impact future operating results,
liquidity, or capital resources or represent material credits about which
management is aware of any information which causes management to have serious
doubts as to the ability of such borrowers to comply with the loan repayment
terms.
F&M maintains a general allowance for loan losses and does not allocate
its allowance for loan losses to individual categories for management purposes.
Table 8 shows an allocation among loan categories based upon analysis of the
loan portfolio's composition, historical loan loss experience, and other factors
and the ratio of the related outstanding loan balances to total loans.
<TABLE>
<CAPTION>
Table 8 -- Allocation of Allowance for Loan Losses
1997 1996 1995
-------------------------- -------------------------- --------------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Allowance Total Loans Allowance Total Loans Allowance Total Loans
---------- ------------ ---------- ----------- ----------- -----------
December 31: (Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial, financial and
agriculture............. $ 8,524 16.8% $ 6,278 15.6% $ 6,388 14.4%
Real estate-construction.. 746 5.4 717 4.6 710 4.1
Real estate-mortgage...... 6,785 66.5 6,529 68.0 6,644 68.8
Consumer.................. 4,586 11.3 4,412 11.8 4,510 12.7
---------- ------------ ---------- ----------- ----------- -----------
$ 20,641 100.0% $ 17,936 100.0% $ 18,252 100.0%
========== ============ ========== =========== =========== ===========
</TABLE>
17
<PAGE>
F&M provided $5.7 million, $2.1 million and $2.0 million for provision for
loan losses for the years 1997, 1996 and 1995, respectively. These charges to
the provision represent management's decision to provide an amount necessary to
achieve a level in the allowance for loan losses to adequately cover possible
losses to the portfolio.
F&M's net charge-offs increased in 1997 to $3.0 million, higher than the
1996 level of $2.4 million and higher than 1995 net charge-offs of $1.6 million.
The higher net charge-offs in 1997 was due to a few customers inability to
manage their finances. Loans to individuals made up of consumer and credit card
loans represented the highest category of net charge-offs in 1997 of $1.8
million as compared to $963 thousand in 1996. In 1997, personal bankruptcies and
credit card losses contributed largely to the charge-offs in the loans to
individuals category. Net charge-offs to average loans was 0.19%, 0.17% and
0.13% for the years 1997, 1996 and 1995, respectively.
Table 9 -- Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1997 1996 1995 1994 1993
---------- --------- --------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period............................... $ 17,936 $ 18,252 $ 17,826 $ 16,317 $ 13,592
Loans charged-off:
Commercial, financial and agriculture.............. 867 1,409 591 1,288 1,331
Real estate construction........................... 48 -- 74 45 4
Real estate mortgage:
Residential (1-4 family)....................... 362 142 583 280 376
Home equity lines.............................. -- 27 -- 14 239
Multifamily.................................... -- 45 -- -- --
Non-farm, non-residential (1).................. 256 81 95 -- 89
Agricultural................................... 400 -- -- -- --
---------- --------- --------- --------- ---------
Real estate subtotal................... 1,018 295 678 294 704
Consumer............................................... 1,147 643 952 669 1,316
Credit card............................................ 999 537 343 146 144
---------- --------- --------- --------- ---------
Loans to individuals subtotal.......... 2,146 1,180 1,295 815 1,460
Total loans charged-off................ 4,079 2,884 2,638 2,442 3,499
Recoveries:
Commercial, financial and agriculture.............. 727 142 642 817 506
Real estate construction........................... -- -- -- -- 8
Real estate mortgage:
Residential (1-4 family)....................... 24 119 68 125 332
Home equity lines.............................. -- -- 56 22 --
Multifamily.................................... -- 3 -- -- --
Non-farm, non-residential (1).................. 36 37 19 4 31
Agricultural................................... -- -- -- -- --
---------- --------- --------- --------- ---------
Real estate subtotal................... 60 159 143 151 363
Loans to individuals:
Consumer........................................... 260 192 218 301 487
Credit card........................................ 52 25 13 12 22
---------- --------- --------- --------- ---------
Loans to individuals subtotal.......... 312 217 231 313 509
Total recoveries....................... 1,099 518 1,016 1,281 1,386
---------- --------- --------- --------- ---------
Net charge-offs............................................ 2,980 2,366 1,622 1,161 2,113
Provision for loan losses.................................. 5,685 2,050 2,048 2,670 3,395
Increase from purchase..................................... -- -- -- -- 1,443
---------- --------- --------- --------- ---------
Balance, end of period..................................... $ 20,641 $ 17,936 $ 18,252 $ 17,826 $ 16,317
========== ========= ========= ========= =========
Ratio of allowance for loan losses to loans outstanding
at end of period......................................... 1.34% 1.25% 1.41% 1.47% 1.46%
Ratio of net charge-offs to average loans outstanding
during period ............................................. 0.19% 0.17% 0.13% 0.10% 0.21%
</TABLE>
(1) This category generally consists of commercial and industrial loans where
real estate constitutes a source of collateral.
The net amount of interest recorded during each year on loans that were
classified as nonperforming or restructured on December 31, 1997, 1996 and 1995
was $216 thousand, $769 thousand and $229 thousand, respectively. If these loans
had been accruing interest at their originally contracted rates, related income
would have been $1.7 million in 1997, $1.5 million in 1996 and $1.3 million in
1995.
18
<PAGE>
Nonperforming Assets. Total nonperforming assets, which consist of
nonaccrual loans, restructured loans and foreclosed properties, were $32.2
million, $23.6 million, and $28.5 million at year end 1997, 1996 and 1995,
respectively. The increase in nonperforming assets in 1997 was due to an
increase in nonaccrual loans. F&M management exerts great effort to identify
deteriorating assets early in the business cycle to ensure that prompt action is
taken while working toward final resolution of all nonperforming assets.
Nonperforming loans (nonaccrual loans and restructured loans) at December
31, 1997 were $19.0 million, or 1.2% of total loans, up from $11.2 million, or
0.8% of total loans at December 31, 1996 and up from $13.3 million, or 1.0% of
total loans, at December 31, 1995. Nonperforming loans at year end 1997 were
composed largely of 1-4 family residential loans amounting to $3.3 million,
construction and land development amounting to $776 thousand, real estate
secured by farmland amounting to $1.5 million and commercial loans secured by
real estate amounting to $9.4 million. Nonperforming loans which were guaranteed
by the US government were $470 thousand in 1997.
Nonperforming loans are those loans where, in the opinion of management,
the full collection of principal or interest is unlikely. Nonperforming loans
increased 69.8% during 1997, while they decreased 17.8% in 1996. The increase in
nonperforming loans in 1997 was primarily due to the inclusion of loans made to
one commercial customer for $6.6 million. In 1997, F&M increased the provision
for loan losses by $2.0 million to adequately provide for any possible loses
attributable to this customer.
The recorded investment in certain loans that were considered to be
impaired was $13.3 million at year end 1997 as compared to $8.9 million at year
end 1996, of which $12.5 million was classified as nonperforming. Included in
1997 impaired loans are $11.3 million secured by commercial real estate. All
impaired loans at year end 1997 and 1996 had a related valuation allowance
totaling $3.8 million and $1.4 million. The average recorded investment in
certain impaired loans for the years ended December 31, 1997 and December 31,
1996 was approximately $8.5 million and $9.3 million, respectively. For the year
1997 and 1996, interest income recognized on impaired loans totaled $513
thousand and $154 thousand, all of which was recognized on a cash basis.
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $6.4 million and $4.6 million at December 31, 1997 and 1996,
respectively. If interest on these loans had been accrued, such income would
have approximated $320 thousand and $345 thousand for 1997 and 1996,
respectively.
Foreclosed properties consists of 27 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. In 1995, F&M acquired
through foreclosure approximately 1,000 acres of real estate located in
Jefferson County, West Virginia, valued in excess of $4 million. F&M is
marketing this property and will dispose of it as expediently as possible. At
December 31, 1997, F&M had $13.2 million in foreclosed property upon which it
does not anticipate incurring any material loss on the final disposition.
<TABLE>
<CAPTION>
Table 10 -- Nonperforming Assets
December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------- ------------ ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans................................... $ 18,871 $ 11,116 $ 13,272 $ 20,504 $ 28,761
Restructured loans................................. 79 82 358 382 770
Foreclosed property................................ 13,230 12,396 14,839 14,657 12,584
------------ ------------- ------------ ------------ -------------
Total nonperforming assets................. $ 32,180 $ 23,594 $ 28,469 $ 35,543 $ 42,115
============ ============= ============ ============ =============
Loans past due 90 days accruing interest........... $ 2,713 $ 4,487 $ 3,789 $ 1,973 $ 2,887
Allowance for loan losses to period end loans...... 1.34% 1.25% 1.41% 1.47% 1.46%
Allowance for loan losses to nonaccrual loans...... 109.38% 161.35% 137.53% 86.94% 56.73%
Nonperforming assets to period end loans and
foreclosed properties............................ 2.07% 1.63% 2.17% 2.90% 3.72%
Net charge-offs to average loans................... 0.19% 0.17% 0.13% 0.10% 0.21%
</TABLE>
The loss of income associated with nonperforming loans at December 31 were:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1997 1996 1995 1994 1993
------------ ------------- ------------ ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Income that would have been recorded in accordance with original terms:
Nonaccrual loans and restructured loans...... $ 1,680 $ 1,549 $ 1,343 $ 1,444 $ 1,244
Income actually recorded:
Nonaccrual and restructured loans............ 216 769 229 159 33
</TABLE>
On December 31, 1997, there were no material outstanding commitments to
lend additional funds with respect to nonperforming loans.
19
<PAGE>
Loans are placed on nonaccrual status when collection of interest and
principal is doubtful, generally when loans become 90 days past due. There are
three negative implications for earnings when a loan is placed on nonaccrual
status. First, all interest accrued but unpaid at the date the loan is placed on
nonaccrual status is either deducted from interest income or written off as a
loss. Second, accruals of interest are discontinued until it becomes certain
that both principal and interest can be repaid. Third, there may be actual
losses which necessitate additional provisions for loan losses be charged
against earnings.
At December 31, 1997, loans past due 90 days or more and still accruing
interest because they are both well secured and in the process of collection
were $2.7 million, compared to $4.5 million at December 31, 1996 and $3.8
million at December 31, 1995.
Potential Problem Loans. At December 31, 1997, potential problem loans
were approximately $11.0 million, including 4 lending relationships with
principal balances in excess of $500,000, which had an aggregate principal
balance outstanding of $9.9 million. Loans are viewed as potential problem loans
according to the ability of such borrowers to comply with current repayment
terms. These loans are subject to constant management attention, and their
status is reviewed on a regular basis. The potential problem loans identified at
December 31, 1997 are generally secured by residential and commercial real
estate with appraised values that exceed the principal balance.
Although trends for credit quality factors, such as loan losses and
non-performing assets, continue to improve, it is likely that F&M will continue
modest provisions for loan losses in 1998. The principal factor for additional
provisions is expected growth in the loan portfolio as the result of continued
improvement in economic conditions.
Continued positive economic conditions and an assessment of the loan
portfolio and problem assets suggest that loan losses in 1998 should not be
materially greater than those in 1997. At such relatively low levels of loan
losses as were experienced in 1997, however, a minor dollar fluctuation in
losses could represent a large percentage increase. Loan loss expectations for
1998 are influenced by economic forecasts of continued growth and moderate
interest rates. Financial circumstances of individual borrowers also will affect
loan loss results. Unforeseen changes, either in economic conditions or
borrowers' financial conditions, could also impact actual loan losses in 1998.
F&M will maintain and follow its policies and practices intended to minimize
future credit losses.
Securities
The book value of the securities portfolio was $638.5 million at December
31, 1997, compared to $597.0 million at December 31, 1996. The securities
portfolio increased $41.5 million in 1997 over 1996, which followed a decrease
of $37.8 million in 1996 over 1995. Investment in U.S. Government securities
increased $45.4 million, or 8.3%, for the year 1997, however, for the year 1996
they decreased $38.0 million, or 6.5%. Investment in states and political
subdivisions remained at relatively low levels. F&M has generally not reinvested
funds in securities issued by states and political subdivisions, because those
securities do not have the same tax benefits that they have had in the past.
The securities portfolio consists of two components, securities held to
maturity and securities available for sale. Securities are classified as held to
maturity when management has the intent and F&M has the ability at the time of
purchase to hold the securities to maturity. Securities held to maturity are
carried at cost adjusted for amortization of premiums and accretion of
discounts. Securities to be held for indefinite periods of time are classified
as available for sale and accounted for at the lower of cost or market value.
Securities available for sale include securities that may be sold in response to
changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, general liquidity needs and other similar factors.
Financial Accounting Standards Board Pronouncement No. 115 effective
January 1, 1994, required F&M to show the effect of market changes in the value
of securities available for sale (AFS). The market value of AFS securities at
December 31, 1997 was $231.8 million. The effect of the market value of AFS
securities less the book value of AFS securities, net of income taxes is
reflected as a line in Stockholders' Equity as unrealized gain of $2.2 million
and $429 thousand at December 31, 1997 and December 31, 1996, respectively.
Investment rates have decreased in 1997 and 1996, thereby, causing currently
held bond portfolio market values to increase. In 1995, the decline in market
yields was due to interest rate fluctuations only and not a result of re-ratings
or down grading of securities.
20
<PAGE>
<TABLE>
<CAPTION>
Table 11 -- Investment Portfolio and Securities Available For Sale
The carrying value of investment securities at the dates indicated was:
December 31,
--------------------------------
1997 1996 1995
--------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Government securities................................ $ 375,858 $301,630 $ 309,506
States and political subdivisions......................... 29,273 30,351 33,112
Other securities.......................................... 1,576 1,584 985
---------- ---------- ----------
Total investment securities....................... $ 406,707 $333,565 $ 343,603
========== ========== ==========
</TABLE>
The carrying value of securities available for sale at the dates indicated
was:
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996 1995
--------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Government securities................................ $ 217,080 $245,853 $ 276,017
Other securities.......................................... 14,691 17,575 15,127
---------- ---------- ----------
Total securities available for sale............... $ 231,771 $263,428 $ 291,144
========== ========== ==========
</TABLE>
Table 12 -- Maturity Distribution and Yields of Securities
December 31, 1997
Taxable-Equivalent Basis
<TABLE>
<CAPTION>
Due after 1 Due after 5 Due after 10
Due in 1 year through 5 through 10 years and
or less years years Equity Securities Total
----------------- ----------------- ----------------- ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
--------- ------ --------- ------ -------- ------ -------- ------ --------- ------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities held for investment:
U.S. Government securities $ 68,725 5.50% $222,624 6.34% $ 63,616 6.77% $ 20,893 7.45% $375,858 6.32%
Other taxable securities... -- 0.00% 1,317 8.42% 259 5.70% -- 0.00% 1,576 7.70%
--------- --------- -------- -------- ---------
Total taxable.......... 68,725 5.50% 223,941 6.35% 63,875 6.77% 20,893 7.45% 377,434 6.32%
Tax-exempt securities (1).. 3,256 5.22% 13,887 5.39% 9,214 5.41% 2,916 5.29% 29,273 5.37%
--------- --------- -------- -------- ---------
Total ................. $ 71,981 5.49% $ 237,828 6.30% $ 73,089 6.59% $ 23,809 7.19% $ 406,707 6.26%
--------- --------- -------- -------- ---------
Securities held for sale:
U.S. Government securities. $ 32,212 5.55% $ 131,688 5.85% $ 36,020 6.32% $ 17,160 6.38% $ 217,080 5.93%
Other taxable securities... 7,870 4.42% 6,821 5.98% -- 0.00% -- 0.00% 14,691 5.22%
--------- --------- -------- -------- ---------
Total ................. $ 40,082 5.33% $ 138,509 5.86% $ 36,020 6.32% $ 17,160 6.38% $ 231,771 5.88%
--------- --------- -------- -------- ---------
Total securities............. $ 112,063 5.43% $ 376,337 6.13% $ 109,109 6.50% $ 40,969 6.85% $ 638,478 6.12%
========= ========= ======== ======== =========
</TABLE>
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.
See Note 2 to the Consolidated Financial Statements as of December 31,
1997 for an analysis of gross unrealized gains and losses in the securities
portfolio.
Deposits
F&M has made an effort in recent years to increase core deposits and
reduce cost of funds. Deposits provide funding for F&M's investments in loans
and securities, and the interest paid for deposits must be managed carefully to
control the level of interest expense.
Deposits at December 31, 1997 increased $170.9 million or 8.7% to $2.138
billion from $1.967 billion at year end 1996. Non-interest bearing demand
deposits increased $73.9 million or 22.1% from $334.5 million in 1996 to $408.4
million in 1997. Interest bearing deposits increased $96.9 million or 5.9% to
$1.729 billion in 1997. In 1997, savings deposits increased $37.9 million or
7.4% to $548.0 million, while money market deposits increased by only $1.1
million. Certificates of deposit over and under $100,000 experienced a $57.9
million or 6.3% increase in deposits. Unlike deposit growth in 1996 which was
affected by comparatively low interest rates and the consequent
21
<PAGE>
movement of funds out of deposit accounts and into alternative investments,
depositors in 1997 were seeking attractive guaranteed rates provided by
certificates of deposits.
F&M does not have any other time deposits, other than certificates of
deposits, over $100,000.
Deposits at December 31, 1996 grew $84.1 million or 4.5% to $1.967
billion. Non-interest bearing demand deposits increased $20.5 million or 6.5%
from $314.0 million in 1995 to $334.5 million in 1996. Interest bearing deposits
increased $63.6 million or 4.1% to $1.632 billion in 1996. Interest checking,
savings deposits, and money market deposits experienced a reduction in deposits
in 1996, whereas, certificates of deposit over and under $100,000 experienced an
increase in deposits. Deposit growth in 1996 was affected by comparatively low
interest rates and the consequent movement of funds out of deposit accounts and
into alternative investments. In addition to moving funds out of deposit
accounts, depositors continued to shift funds into more liquid accounts.
Table 13 -- Deposits and Rates Paid
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------- -------------------------- --------------------------
Amount Rate Amount Rate Amount Rate
----------- ------------ ------------ ----------- ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing accounts... $ 408,449 $ 334,499 $ 314,037
----------- ------------ ------------
Interest-bearing accounts:
Interest checking.......... 350,911 2.21% 305,040 2.20% 283,857 2.44%
Regular savings............ 197,095 2.77% 205,029 2.83% 211,982 3.23%
Money-market............... 208,970 2.94% 207,860 2.87% 213,722 3.08%
Time deposits:
Less than $100,000. 774,216 5.51% 742,433 5.56% 692,028 5.43%
$100,000 and more. 198,193 5.55% 172,077 5.53% 167,223 5.47%
----------- ------------ ------------
Total interest-bearing......... 1,729,385 4.24% 1,632,439 4.25% 1,568,812 4.24%
----------- ------------ ------------
Total.................. $ 2,137,834 $ 1,966,938 $ 1,882,849
=========== ============ ============
</TABLE>
<TABLE>
<CAPTION>
Maturities of CD's of $100,000 and More
Within Three to Six to One to Over Percent
Three Six Twelve Five Five of Total
Months Months Months Years Years Total Deposits
------------ ------------ ------------ ------------- ------------ ------------ -------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
At December 31, 1997. $ 66,157 $ 37,582 $ 63,588 $ 30,866 $ -- $ 198,193 9.27%
</TABLE>
Capital Resources
Management seeks to maintain a capital structure that will assure an
adequate level of capital to support anticipated asset growth and absorb
potential losses. The adequacy of F&M's capital is reviewed by management on an
ongoing basis with emphasis on the size, composition and quality of F&M's asset
and liability levels and consistent with regulatory requirements and industry
standards.
The Federal Reserve, along with the Comptroller of the Currency and the
Federal Deposit Insurance Corporation, have adopted capital guidelines to
supplement the definitions of capital for regulatory purposes and to establish
minimum capital standards. Specifically, the guidelines categorize assets and
off-balance sheet items into four risk-weighted categories. The minimum ratio of
qualifying total capital to risk-weighted assets is 8.0%, of which at least 4.0%
must be Tier I capital, composed of common equity, retained earnings and a
limited amount of perpetual preferred stock, less certain goodwill items. F&M
had a ratio of risk-weighted assets to total capital of 16.27% at December 31,
1997 and a ratio of risk-weighted assets to Tier I capital of 15.02%. Both of
these exceed the capital requirements adopted by the federal bank regulatory
agencies.
Table 14 reflects the cash dividends per share declared during each
quarter of the periods indicated. The information in Table 14 may vary for
certain periods from the dividends paid during the quarter in cases where the
dividend was paid in the quarter following its declaration. In addition, the
amounts shown have not been restated and adjusted to reflect the acquisition on
March 29, 1996 of FB&T Financial Corporation and on October 1, 1996 of
Allegiance Banc Corporation.
22
Table 14 -- Common Stock Performance and Dividends
<TABLE>
<CAPTION>
Common Stock Price
-------------------------------------------------------
1997 1996 Dividends Declared
---------------------------
High Low High Low 1997 1996
------------ ------------ ------------- ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
First quarter....................... $ 22.875 $ 19.625 $ 19.750 $ 17.250 $ 0.180 $ 0.160
Second quarter...................... 26.375 19.875 18.500 16.000 0.180 0.160
Third quarter....................... 30.438 26.000 19.375 17.250 0.185 0.175
Fourth quarter...................... 36.250 28.563 21.375 18.125 0.185 0.230
Years ended December 31............. $ 36.250 $ 19.625 $ 21.375 $ 16.000 $ 0.730 $ 0.725
</TABLE>
F&M National Corporation common stock is traded on the New York Stock Exchange
(NYSE) under the symbol FMN. On December 31, 1997 there were approximately 7,881
shareholders of record.
Table 15 -- Analysis of Capital
<TABLE>
<CAPTION>
December 31,
--------------------------------
1997 1996 1995
--------- ---------- ----------
(Dollars in thousands)
Tier 1 Capital:
<S> <C> <C> <C>
Common stock.......................................... $ 40,750 $ 40,747 $ 40,848
Additional paid in capital............................ 68,206 69,197 72,716
Retained earnings..................................... 136,700 120,350 105,140
Less: Goodwill........................................ 11,158 7,195 7,947
---------- ---------- ----------
Total Tier 1 capital.................................. 234,498 223,099 210,757
Tier 2 Capital:
Allowance for loan losses............................. 19,478 17,936 16,527
Allowable long term debt.............................. -- -- --
---------- ---------- ----------
Total Tier 2 capital.................................. 19,478 17,936 16,527
Total risk-based capital.............................. $ 253,976 $241,035 $ 227,284
========== ========== ==========
Risk-weighted assets...................................... $1,561,141 $1,436,341 $1,322,144
CAPITAL RATIOS:
Tier 1 risk-based capital ratio....................... 15.02% 15.53% 15.94%
Total risk-based capital ratio........................ 16.27% 16.78% 17.19%
Tier 1 capital to average total assets................ 9.55% 9.90% 10.09%
</TABLE>
Liquidity
Liquidity represents an institution's ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds through liability management. Liquid assets
include cash, interest-bearing deposits with banks, federal funds sold,
securities and loans classified as available for sale and loans and investment
securities maturing within one year. As a result of F&M's management of liquid
assets and the ability to generate liquidity through liability funding,
management believes that F&M maintains overall liquidity sufficient to satisfy
its depositors' requirements and meet its customers' credit needs.
At December 31, 1997, approximately $934.6 million or 41.1% of total
earning assets is due to mature or reprice within the next year.
F&M also maintains additional sources of liquidity through a variety of
borrowing arrangements. F&M's subsidiary banks maintain federal fund lines with
a number of larger regional and money-center banking institutions totaling in
excess of $65.3 million, of which $3.0 million was borrowed at December 31,
1997. Federal funds borrowed by F&M's subsidiary banks during 1997 averaged less
than $500,000. At December 31, 1997, certain of F&M's subsidiary banks had
outstanding $76.9 million of borrowings pursuant to securities repurchase
agreement transactions, ranging in maturity from one day to three months. Also,
F&M has credit lines totaling $301.9 million from the Federal Home Loan Bank
that can be utilized for short and/or long-term borrowing.
F&M engages in short-term borrowings at the parent company level, as well.
At December 31, 1997, F&M had $14.2 million outstanding in short-term
obligations issued to selected customers of F&M's subsidiary banks pursuant to a
master agreement. As a back-up source of funds, F&M has approved bank lines of
credit totaling $9.0 million. These lines are used infrequently with the average
aggregate balance outstanding under the lines not exceeding $1.0
23
<PAGE>
million since they have been in place. At year end 1997, 1996 and 1995, there
were no outstanding balances under these lines of credit.
In 1994, some of F&M's subsidiary banks joined the Federal Home Loan Bank
system in order to enter a program of long-term borrowing which must be invested
in Residential Housing Finance Assets (RHFA). RHFA are defined as (1) Loans
secured by residential real property; (2) Mortgage-backed securities; (3)
Participations in loans secured by residential real property; (4) Loans financed
by Community Investment Program advances; (5) Loans secured by manufactured
housing, regardless of whether such housing qualifies as residential real
property; or (6) Any loans or investments which the Federal Housing Finance
Board and the Bank, in their discretion, otherwise determine to be residential
housing finance assets. In 1997, long-term borrowings from the Federal Home Loan
Bank system for RHFA investments were $17.1 million maturing through 2006.
Accounting Rule Changes
In June 1996, the FASB issued FASB Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities".
This Statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishments of liabilities. Those
standards are based on consistent application of a financial components approach
that focuses on control of the affected asset or liability that it controls or
surrenders. This Statement is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996, and
is to be applied prospectively.
In October 1996, the FASB issued FASB Statement No. 127, which deferred
for one year paragraphs 9-12 (Accounting for Transfers and Servicing of
Financial Assets) under FASB No. 125 for securities lending, repurchase
agreements, dollar rolls and other secured transactions. The FASB also agreed to
defer for one year paragraph 15 (Secured Borrowings and Collateral) under FASB
No. 125 for all transactions.
During June 1997, the FASB issued FASB No. 130, "Reporting Comprehensive
Income." This pronouncement established 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. FASB No. 130 is effective
for financial statements beginning after December 15, 1997.
Additionally during June of 1997, the FASB issued FASB No. 131,
"Disclosures about Segments of an Enterprise and Related Information." FASB No.
131 establishes standards for the way that public enterprises report information
about operating segments in annual financial statements and requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. This statement becomes effective for financial statements for periods
beginning after December 31, 1997.
Year 2000
F&M has established a committee at each subsidiary bank to address and
evaluate problems that may be encountered with respect to the Year 2000. These
committees are charged with identifying potential problems and uncertainties
that would cause financial reporting to be inaccurate, addressing the cost
associated with resolving any Year 2000 problems, and compilation of
documentation relating to testing of computer programs and equipment.
It is the opinion of F&M that the cost of addressing the Year 2000
problems 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 the Year 2000 will not represent a
known material event or uncertainty that will reasonably be expected to
adversely affect future financial results.
24
<PAGE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1997 and 1996
(In Thousands, Except Share Data)
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
--------------- ---------------
<S> <C> <C>
Assets
Cash and due from banks (Notes 1, 15 and 19)........................................ $ 125,154 $ 112,866
Interest-bearing deposits in other banks............................................ 7,839 1,262
Securities (fair value 1997, $645,057; 1996, $598,970)
(Notes 1 and 2).................................................................. 638,478 596,993
Federal funds sold and securities purchased under
agreements to resell............................................................. 101,802 69,045
Loans (Notes 1, 3, 5 and 19)....................................................... 1,547,259 1,444,827
Unearned income.................................................................... (3,661) (5,719)
--------------- ---------------
Loans (net of unearned income)......................................... $ 1,543,598 $ 1,439,108
Allowance for loan losses (Notes 1 and 4)........................................ (20,641) (17,936)
--------------- ---------------
Net loans.............................................................. $ 1,522,957 $ 1,421,172
Bank premises and equipment, net (Notes 1 and 6)................................... 57,102 45,939
Other assets (Note 16)............................................................. 66,980 56,474
--------------- ---------------
Total assets........................................................... $ 2,520,312 $ 2,303,751
=============== ===============
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand deposits.............................................. $ 408,449 $ 334,499
Savings and interest-bearing demand deposits..................................... 756,975 717,929
Time deposits (Note 7)........................................................... 972,410 914,510
--------------- ---------------
Total deposits......................................................... $ 2,137,834 $ 1,966,938
Federal funds purchased and securities sold under
agreements to repurchase (Note 8)................................................ 79,876 51,537
Federal Home Loan Bank advances (Note 8)........................................... -- 8,297
Other short-term borrowings (Notes 5 and 8)........................................ 14,509 14,876
Long-term debt (Note 9)............................................................ 17,136 11,497
Other liabilities.................................................................. 23,133 19,883
Commitments and contingent liabilities
(Notes 15 and 18)................................................................ -- --
--------------- ---------------
Total liabilities...................................................... $ 2,272,488 $ 2,073,028
--------------- ---------------
Shareholders' Equity
Preferred stock, no par value, authorized 5,000,000 shares,
no shares outstanding............................................................ $ -- $ --
Common stock, par value $2 per share, authorized 30,000,000 shares,
issued 1997, 20,374,957 shares; issued 1996, 20,373,697 shares................... 40,750 40,747
Capital surplus.................................................................... 68,206 69,197
Retained earnings (Note 17)........................................................ 136,700 120,350
Unrealized gain on securities available for sale, net.............................. 2,168 429
--------------- ---------------
Total shareholders' equity............................................. $ 247,824 $ 230,723
--------------- ---------------
Total liabilities and shareholders' equity............................. $ 2,520,312 $ 2,303,751
=============== ===============
</TABLE>
- ------------------
See Notes to Consolidated Financial Statements.
25
<PAGE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For Each of the Three Years in the Period Ended December 31, 1997
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Interest Income
Interest and fees on loans......................................... $ 137,023 $ 125,593 $ 116,726
Interest and dividends on investment securities:
Taxable interest income......................................... 20,656 19,077 18,951
Interest income exempt from federal income taxes................ 1,518 1,716 2,081
Interest and dividends on securities available for sale:
Taxable interest income......................................... 14,504 17,027 15,200
Dividends....................................................... 739 595 503
Interest income on federal funds sold and securities
purchased under agreements to resell............................ 3,859 3,914 4,992
Interest on deposits in banks..................................... 290 111 76
--------------- --------------- ---------------
Total interest income.......................... $ 178,589 $ 168,034 $ 158,529
--------------- --------------- ---------------
Interest Expense
Interest on deposits .............................................. $ 71,065 $ 68,384 $ 64,677
Interest on short-term borrowings................................. 3,066 2,329 2,167
Interest on long-term debt........................................ 1,031 518 313
--------------- --------------- ---------------
Total interest expense......................... $ 75,162 $ 71,231 $ 67,157
--------------- --------------- ---------------
Net interest income............................ $ 103,427 $ 96,803 $ 91,372
Provision for loan losses (Notes 1 and 4)......................... 5,685 2,050 2,048
--------------- --------------- ---------------
Net interest income after provision
for loan losses............................. $ 97,742 $ 94,753 $ 89,324
--------------- --------------- ---------------
Other Income
Commissions and fees from fiduciary activities..................... $ 2,335 $ 2,196 $ 1,812
Service charges on deposit accounts............................... 9,929 9,087 8,053
Credit card fees.................................................. 3,652 3,401 3,193
Fees for other customer services.................................. 2,258 1,849 1,734
Other operating income............................................ 4,637 3,945 4,207
Profits on securities available for sale (Note 2)................. 4,218 265 519
Investment securities gains, net (Note 2)......................... 16 2 --
--------------- --------------- ---------------
Total other income............................. $ 27,045 $ 20,745 $ 19,518
--------------- --------------- ---------------
Other Expenses
Salaries and employees' benefits (Notes 12, 13 and 14)............. $ 41,908 $ 37,229 $ 35,507
Net occupancy expense of premises (Notes 6 and 15)................ 6,531 5,957 5,967
Furniture and equipment expenses (Notes 6 and 15)................. 5,853 5,370 4,984
Deposit insurance................................................. 240 205 2,086
Credit card expense............................................... 2,563 2,231 1,971
Other operating expenses.......................................... 21,146 20,113 19,651
--------------- --------------- ---------------
Total other expenses........................... $ 78,241 $ 71,105 $ 70,166
--------------- --------------- ---------------
Income before income taxes..................... $ 46,546 $ 44,393 $ 38,676
Income tax expense (Notes 1 and 16)................................. 15,431 15,095 12,841
--------------- --------------- ---------------
Net income..................................... $ 31,115 $ 29,298 $ 25,835
=============== =============== ===============
Earnings per common share, basic (Notes 1 & 11)..................... $ 1.54 $ 1.44 $ 1.27
=============== =============== ===============
Earnings per common share, assuming dilution (Notes 1 &11).......... $ 1.53 $ 1.42 $ 1.25
=============== =============== ===============
</TABLE>
- ------------------
See Notes to Consolidated Financial Statements.
26
<PAGE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
For Each of the Three Years in the Period Ended December 31, 1997
(In Thousands, Except Share and Per Share Data)
<TABLE>
<CAPTION>
Unrealized Gain
(Loss) on Secur-
Common Capital Retained ities Available
Stock Surplus Earnings for Sale, Net Total
------------- ------------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance-- December 31, 1994................. $ 40,346 $ 71,036 $ 91,336 $ (7,282) $ 195,436
Net income-- 1995......................... -- -- 25,835 -- 25,835
Cash dividends declared ($0.61 per share). -- -- (10,864) -- (10,864)
Issuance of common stock-- dividend
reinvestment plan (149,443 shares)...... 299 2,091 -- -- 2,390
Acquisition of common stock
(184,014 shares)........................ (368) (2,708) (100) -- (3,176)
Issuance of common stock-- employee
stock ownership plan (37,393 shares).... 75 525 -- -- 600
Issuance of common stock-- exercise of
employee stock options (84,586 shares).. 169 148 -- -- 317
Issuance of stock options under nonvari-
able compensatory plan (26,000 shares).. -- 207 -- -- 207
Issuance of common stock to acquire
investment (11,980 shares).............. 24 176 -- -- 200
Issuance of common stock for employee
stock discount plan (35,357 shares)..... 71 405 -- -- 476
Issuance of common stock-- stock
dividend -- FB&T Financial Corporation
(116,077 shares)........................ 232 836 (1,068) -- --
Change in unrealized gain (loss) on secur-
ities available for sale, net of deferred
income taxes of $5,824.................. -- -- -- 10,625 10,625
------------- ------------- -------------- ------------- -------------
Balance-- December 31, 1995................. $ 40,848 $ 72,716 $ 105,139 $ 3,343 $ 222,046
Net income-- 1996......................... -- -- 29,298 -- 29,298
Cash dividends declared ($0.69 per share). -- -- (14,087) -- (14,087)
Acquisition of common stock
(410,704 shares)........................ (821) (6,635) -- -- (7,456)
Issuance of common stock-- employee
stock ownership plan (55,326 shares).... 110 874 -- -- 984
Issuance of common stock-- exercise of
employee stock options (275,699 shares). 551 1,218 -- -- 1,769
Issuance of stock options under nonvari-
able compensatory plan (50,000 shares).. -- 500 -- -- 500
Issuance of common stock for employee
stock discount plan (29,498 shares)..... 59 524 -- -- 583
Change in unrealized gain (loss) on
securities available for sale, net of
deferred income taxes of $1,627......... -- -- -- (2,914) (2,914)
------------- ------------- -------------- ------------- -------------
Balance-- December 31, 1996................. $ 40,747 $ 69,197 $ 120,350 $ 429 $ 230,723
Net income-- 1997......................... -- -- 31,115 -- 31,115
Cash dividends declared ($0.73 per share). -- -- (14,765) -- (14,765)
Acquisition of common stock
(441,627 shares)........................ (883) (9,711) -- -- (10,594)
Issuance of common stock-- employee
stock ownership plan (49,858 shares).... 100 950 -- -- 1,050
Issuance of common stock-- exercise of
employee stock options (80,917 shares).. 162 525 -- -- 687
Issuance of stock options under nonvari-
able compensatory plan (68,500 shares).. -- 732 -- -- 732
Issuance of common stock for employee
stock discount plan (46,259 shares)..... 92 748 -- -- 840
Issuance of common stock in exchange for
net assets in acquisition (265,853 shares) 532 5,765 -- -- 6,297
Change in unrealized gain (loss) on
securities available for sale, net of
deferred income taxes of $1,049......... -- -- -- 1,739 1,739
------------- ------------- -------------- ------------- -------------
Balance-- December 31, 1997................. $ 40,750 $ 68,206 $ 136,700 $ 2,168 $ 247,824
============= ============= ============== ============= =============
</TABLE>
- ------------------
See Notes to Consolidated Financial Statements.
27
<PAGE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For Each of the Three Years in the Period Ended December 31, 1997
(In Thousands)
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income......................................................... $ 31,115 $ 29,298 $ 25,835
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 5,429 4,784 4,788
Provision for loan losses..................................... 5,685 2,050 2,048
Deferred income taxes (credits)............................... 1,619 (34) 76
Profits on securities available for sale...................... (4,218) (265) (519)
Investment securities gains, net.............................. (16) (2) --
(Gain) loss on sale of other real estate...................... 90 (121) (91)
Net amortization and accretion of securities.................. (102) 304 384
Increase in other assets...................................... (5,538) (2,036) (4,243)
Increase in other liabilities................................. 1,930 977 6,743
--------------- --------------- ---------------
Net cash provided by operating activities....... $ 35,994 $ 34,955 $ 35,021
--------------- --------------- ---------------
Cash Flows From Investing Activities
(Increase) in interest-bearing deposits in other banks............ $ (5,806) $ (76) $ (957)
Proceeds from sales, principal repayments and calls of securities
available for sale ............................................. 60,467 45,979 37,464
Proceeds from maturities of securities available for sale......... 49,551 28,950 37,876
Proceeds from principal repayments and calls of investment
securities ..................................................... 52,714 13,935 20,736
Proceeds from maturities of investment securities................. 61,389 96,915 76,545
Purchase of securities available for sale......................... (71,536) (77,874) (99,372)
Purchase of investment securities................................. (186,946) (74,737) (100,982)
(Increase) decrease in federal funds sold and securities purchased under
agreements to resell............................................ (32,757) 16,761 (40,771)
Net (increase) in loans........................................... (111,146) (147,688) (96,558)
Purchases of bank premises and equipment.......................... (15,069) (9,896) (7,250)
Proceeds from sale of other real estate........................... 2,397 5,052 7,202
Cash acquired in acquisition...................................... 529 -- --
--------------- --------------- ---------------
Net cash (used in) investing activities......... $ (196,213) $ (102,679) $ (166,067)
--------------- --------------- ---------------
Cash Flows From Financing Activities
Net increase (decrease) in noninterest-bearing and interest-bearing
demand deposits and savings accounts............................ $ 112,996 $ 28,830 $ (44,811)
Net increase in certificates of deposit........................... 57,900 55,259 173,529
Dividends paid.................................................... (15,686) (12,049) (10,572)
Increase (decrease) in federal funds purchased and securities sold
under agreements to repurchase.................................. 28,339 (5,935) 19,029
Increase (decrease) in other short-term borrowings................ (367) (3,917) 2,213
Net proceeds from issuance and sale of common stock............... 2,577 3,336 3,783
Acquisition of common stock....................................... (10,594) (7,456) (3,176)
Increase (decrease) in Federal Home Loan Bank advances............ (8,297) 2,560 3,862
Proceeds from long-term debt...................................... 8,500 8,775 1,000
Principal payments on long-term debt.............................. (2,861) (1,503) (968)
--------------- --------------- ---------------
Net cash provided by financing activities...... $ 172,507 $ 67,900 $ 143,889
--------------- --------------- ---------------
Increase in cash and cash equivalents.......... $ 12,288 $ 176 $ 12,843
Cash and Cash Equivalents
Beginning.......................................................... 112,866 112,690 99,847
--------------- --------------- ---------------
Ending............................................................ $ 125,154 $ 112,866 $ 112,690
=============== =============== ===============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest ....................................................... $ 74,138 $ 70,828 $ 65,026
=============== =============== ===============
Income taxes.................................................... $ 16,384 $ 14,260 $ 10,615
=============== =============== ===============
Supplemental Schedule of Noncash Investing and Financing Activities
Issuance of stock options under nonvariable compensatory plan..... $ 732 $ 500 $ 206
=============== =============== ===============
Issuance of common stock to acquire investment.................... $ -- $ -- $ 200
=============== =============== ===============
Loan balances transferred to foreclosed properties................ $ 3,729 $ 2,419 $ 8,133
=============== =============== ===============
Common stock issued for stock dividend............................ $ -- $ -- $ 1,068
=============== =============== ===============
Unrealized gain (loss) on securities available for sale........... $ 2,788 $ (4,541) $ 16,450
=============== =============== ===============
Issuance of common stock in exchange for net assets in acquisition $ 6,297 $ -- $ --
=============== =============== ===============
</TABLE>
- ------------------
See Notes to Consolidated Financial Statements.
28
<PAGE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS For Each of the Three Years in the
Period Ended December 31, 1997
Note 1 -- Nature of Banking Activities and Significant Accounting Policies
F&M National Corporation and Subsidiaries (the Corporation) grant
commercial, financial, agricultural, residential and consumer loans to customers
in Virginia, West Virginia and Maryland. The loan portfolio is well diversified
and generally is collateralized by assets of the customers. The loans are
expected to be repaid from cash flow or proceeds from the sale of selected
assets of the borrowers.
The accounting and reporting policies of F&M National Corporation and
Subsidiaries conform to generally accepted accounting principles and to the
reporting guidelines prescribed by regulatory authorities. The following is a
description of the more significant of those policies and practices.
Principles of Consolidation
The consolidated financial statements include the accounts of F&M National
Corporation and all of its banking and nonbanking affiliates. In consolidation,
significant intercompany accounts and transactions have been eliminated.
Securities
The Corporation adopted FASB Statement No. 115, "Accounting for Certain
Investment in Debt and Equity Securities" effective beginning January 1, 1994.
This statement addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all investments in
debt securities. Those securities are classified in three categories and are
accounted for as follows:
a. Securities Held to Maturity
Securities classified as held to maturity are those debt securities the
Corporation has both the intent and ability to hold to maturity regardless
of changes in market conditions, liquidity needs or changes in general
economic conditions. These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed by the
interest method over their contractual lives.
b. Securities Available for Sale
Securities classified as available for sale are those debt and equity
securities that the Corporation intends to hold for an indefinite period
of time, but not necessarily to maturity. Any decision to sell a security
classified as available for sale would be based on various factors,
including significant movements in interest rates, changes in the maturity
mix of the Corporation's assets and liabilities, liquidity needs,
regulatory capital considerations, and other similar factors. Securities
available for sale are carried at fair value. Unrealized gains or losses
are reported as increases or decreases in shareholders' equity, net of the
related deferred tax effect. Realized gains or losses, determined on the
basis of the cost of specific securities sold, are included in earnings.
c. Trading Securities
Trading securities, which are generally held for the short term in
anticipation of market gains, are carried at fair value. Realized and
unrealized gains and losses on trading account assets are included in
interest income on trading account securities. The Corporation had no
trading securities at December 31, 1997 and 1996.
Loans
Loans are shown on the balance sheets net of unearned income and allowance
for loan losses. Interest income on commercial and real estate mortgage loans is
computed on the loan balance outstanding. Interest income on installment loans
is computed on the sum-of-the-months digits and actuarial methods.
The Corporation has adopted FASB Statement No. 114, "Accounting by
Creditors for Impairment of a Loan", which was amended by FASB Statement No.
118. Statement 114, as amended, requires that the impairment of loans that have
been separately identified for evaluation is to be measured based on the present
value of expected future cash flows or, alternatively, the observable market
price of the loans or the fair value of the collateral. However, for those loans
that are collateral dependent (that is, if repayment of those loans is expected
to be provided solely by the underlying collateral) and for which management has
determined foreclosure is probable, the measure of impairment of those loans is
to be based on the fair value of the collateral. Statement 114, as amended, also
requires certain disclosures about investments in impaired loans and the
allowance for credit losses and interest income recognized on loans.
The Corporation considers all consumer installment loans and residential
mortgage loans to be homogeneous
29
<PAGE>
loans. These loans are not subject to impairment under FASB 114. A loan is
considered impaired when it is probable that the Corporation will be unable to
collect all principal and interest amounts according to the contractual terms of
the loan agreement. Factors involved in determining impairment include, but are
not limited to, expected future cash flows, financial condition of the borrower,
and the current economic conditions. A performing loan may be considered
impaired, if the factors above indicate a need for impairment. A loan on
nonaccrual status may not be impaired if in the process of collection or there
is an insignificant shortfall in payment. An insignificant delay of less than 30
days or a shortfall of less than 5% of the required principal and interest
payment generally does not indicate an impairment situation, if in management's
judgment the loan will be paid in full. Loans that meet the regulatory
definitions of doubtful or loss generally qualify as an impaired loan under FASB
114. Charge-offs for impaired loans occur when the loan, or portion of the loan
is determined to be uncollectible, as is the case for all loans.
Loans are placed on nonaccrual when a loan is specifically determined to
be impaired or when principal or interest is delinquent for 90 days or more. Any
unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Interest payments received on such
loans are applied as a reduction of the loan principal balance. Interest income
on other nonaccrual loans is recognized only to the extent of interest payments
received.
Allowance for Loan Losses
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses inherent in the loan
portfolio. The amount of the allowance is based on management's evaluation of
the collectibility of the loan portfolio, including the nature of the portfolio,
credit concentrations, trends in historical loss experience, specific impaired
loans, and economic conditions. Allowances for impaired loans are generally
determined based on collateral values or the present value of estimated cash
flows. The allowance is increased by a provision for loan losses, which is
charged to expense and reduced by charge-offs, net of recoveries. Changes in the
allowance relating to impaired loans are charged or credited to the provision
for loan losses. Because of uncertainties inherent in the estimation process,
management's estimate of credit losses inherent in the loan portfolio and the
related allowance may change in the near term.
Bank Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation
and amortization. Premises and equipment are depreciated over their estimated
useful lives; leasehold improvements are amortized over the lives of the
respective leases or the estimated useful life of the leasehold improvement,
whichever is less. Depreciation and amortization are recorded on the
straight-line and declining-balance methods.
Costs of maintenance and repairs are charged to expense as incurred. Costs
of replacing structural parts of major units are considered individually and are
expensed or capitalized as the facts dictate.
Pension Plan
The Corporation has a trusteed, noncontributory defined contribution
pension plan covering substantially all full-time employees.
Income Taxes
The Corporation accounts for income taxes using the asset and liability
method of accounting for income taxes as prescribed by FASB Statement No. 109,
"Accounting for Income Taxes". Under the asset and liability method of Statement
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the year that includes the enactment date.
Common Stock
Shares of its own common stock reacquired by the Corporation are cancelled
as a matter of state law and are accounted for as authorized but unissued
shares.
Earnings Per Share
In 1997, the Financial Accounting Standards Board issued Statement No.
128, "Earnings per Share." Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Basic earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been presented, and where appropriate, restated to
conform to the Statement 128 requirements.
30
<PAGE>
Trust Division
Securities and other property held by the Trust Division in a fiduciary or
agency capacity are not assets of the Corporation and are not included in the
accompanying consolidated financial statements.
Loan Fees and Costs
Loan origination and commitment fees and direct loan origination costs are
being recognized as collected and incurred. The use of this method of
recognition does not produce results that are materially different from results
which would have been produced if such costs and fees were deferred and
amortized as an adjustment of the loan yield over the life of the related loan.
Other Real Estate
Other real estate, classified in "other assets" in the accompanying
balance sheets, consists primarily of real estate held for resale which was
acquired through foreclosure on loans secured by real estate. Other real estate
is carried at the lower of cost or appraised market value less an allowance for
estimated selling expenses on the future disposition of the property. Writedowns
to market value at the date of foreclosure are charged to the allowance for loan
losses. Subsequent declines in market value are charged to expense.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand and amounts due from banks.
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 reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Derivative Financial Instruments
FASB Statement No. 119, "Disclosure about Derivative Financial Instruments
and Fair Value of Financial Instruments" requires various disclosures for
derivative financial instruments which are futures, forward swap, or option
contract, or other financial instruments with similar characteristics. The
Corporation does not have any derivative financial instruments as defined under
this Statement.
Note 2 -- Securities
The amortized cost and fair values of securities being held to maturity as
of December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of (In Thousands)
U.S. government corporations and agencies....... $ 375,858 $ 6,494 $ (596) $ 381,756
Obligations of states and political
subdivisions.................................... 29,273 668 (60) 29,881
Corporate securities.............................. 976 49 -- 1,025
Mortgage-backed securities........................ 600 24 -- 624
--------------- --------------- --------------- ---------------
$ 406,707 $ 7,235 $ (656) $ 413,286
=============== =============== =============== ===============
December 31, 1996
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------- --------------- --------------- ---------------
U.S. Treasury securities and obligations of (In Thousands)
U.S. government corporations and agencies....... $ 301,630 $ 3,641 $ (2,105) $ 303,166
Obligations of states and political
subdivisions.................................... 30,350 526 (156) 30,720
Corporate securities.............................. 981 45 -- 1,026
Mortgage-backed securities........................ 604 26 -- 630
--------------- --------------- --------------- ---------------
$ 333,565 $ 4,238 $ (2,261) $ 335,542
=============== =============== =============== ===============
</TABLE>
31
<PAGE>
The amortized cost and fair value of securities being held to maturity as
of December 31, 1997, by contractual maturity are shown below. Expected
maturities may differ from contractual maturities because the corporate
securities and mortgage-backed securities may be called or repaid without any
penalties. Therefore, these securities are not included in the maturity
categories in the maturity summary.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------------- ---------------
(In Thousands)
<S> <C> <C>
Due in one year or less.................................................. $ 71,981 $ 71,881
Due after one year through five years.................................... 236,511 238,469
Due after five years through ten years................................... 72,830 74,012
Due after ten years...................................................... 23,809 27,255
Corporate securities..................................................... 976 1,025
Mortgage-backed securities............................................... 600 624
--------------- ---------------
$ 406,707 $ 413,286
=============== ===============
</TABLE>
The amortized cost and fair value of securities available for sale as of
December 31, 1997 and 1996, are as follows:
<TABLE>
<CAPTION>
December 31, 1997
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
(In Thousands)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies....... $ 215,386 $ 2,054 $ (360) $ 217,080
Corporate securities.............................. 3,951 1,748 (1) 5,698
Other............................................. 8,810 183 -- 8,993
--------------- --------------- --------------- ---------------
$ 228,147 $ 3,985 $ (361) $ 231,771
=============== =============== =============== ===============
December 31, 1996
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------- --------------- --------------- ---------------
(In Thousands)
U.S. Treasury securities and obligations of
U.S. government corporations and agencies....... $ 246,089 $ 1,502 $ (1,737) $ 245,854
Corporate securities.............................. 8,127 781 (1) 8,907
Other............................................. 8,361 306 -- 8,667
--------------- --------------- --------------- ---------------
$ 262,577 $ 2,589 $ (1,738) $ 263,428
=============== =============== =============== ===============
</TABLE>
The amortized cost and fair value of securities available for sale, as of
December 31, 1997 by contractual maturity are shown below. Expected maturities
may differ from contractual maturities because the corporate securities and
mortgage-backed securities may be called or prepaid without any penalties.
Therefore, these securities are not included in the maturity categories in the
maturity summary.
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
--------------- ---------------
(In Thousands)
<S> <C> <C>
Due in one year or less..................................................... $ 32,195 $ 32,212
Due after one year through five years....................................... 130,732 131,688
Due after five years through ten years...................................... 35,716 36,020
Due after ten years......................................................... 16,743 17,160
Corporate securities........................................................ 3,951 5,698
Other....................................................................... 8,810 8,993
--------------- ---------------
$ 228,147 $ 231,771
=============== ===============
</TABLE>
32
<PAGE>
Proceeds from principal repayments and calls of securities held to
maturity during 1997, 1996 and 1995 were $52,714,000, $13,935,000 and
$20,736,000. Gross gains of $20,000, $5,000 and $27,000 and gross losses of
$4,000, $3,000 and $27,000 were realized on those principal repayments and calls
during 1997, 1996 and 1995, respectively. There were no sales of securities held
to maturity during 1997, 1996 and 1995.
Proceeds from sales, principal repayments and calls of securities
available for sale during 1997, 1996 and 1995 were $60,467,000, $45,979,000 and
$37,464,000. Gross gains of $4,272,000, $320,000 and $524,000 and gross losses
of $54,000, $55,000 and $5,000 were realized on those sales and calls during
1997, 1996 and 1995, respectively.
The book value of securities pledged to secure deposits and for other
purposes amounts to $204,861,000 and $129,075,000 at December 31, 1997 and 1996,
respectively.
Note 3 --Loans
Major classifications of loans are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
--------------- ---------------
(In Thousands)
<S> <C> <C>
Commercial, financial and agricultural................................... $ 259,881 $ 225,327
Real estate-- construction............................................... 83,904 66,477
Real estate-- mortgage................................................... 1,028,478 981,909
Consumer loans to individuals............................................ 174,996 171,114
--------------- ---------------
$ 1,547,259 $ 1,444,827
=============== ===============
</TABLE>
Note 4 --Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of year........................................ $ 17,936 $ 18,252 $ 17,825
Provision charged to operating expense.............................. 5,685 2,050 2,048
Recoveries added to the reserve..................................... 1,099 518 1,016
Loan losses charged to the reserve.................................. (4,079) (2,884) (2,637)
--------------- --------------- ---------------
Balance at end of year.............................................. $ 20,641 $ 17,936 $ 18,252
=============== =============== ===============
</TABLE>
Impairment of loans having recorded investments of $13,301,000 at December 31,
1997 and $8,896,000 at December 31, 1996, has been recognized in conformity with
FASB Statement No. 114, as amended by FASB Statement No. 118. The average
recorded investment in impaired loans during 1997 and 1996 was $8,535,000 and
$9,285,000, respectively. The total allowance for loan losses related to these
loans was $3,763,000 and $1,354,000 on December 31, 1997 and 1996, respectively.
Interest income on impaired loans of $513,000 and $154,000 was recognized for
cash payments received in 1997 and 1996, respectively.
Nonaccrual loans excluded from impaired loan disclosure under FASB Statement No.
114 amounted to $6,361,000 and $4,574,000 at December 31, 1997 and 1996,
respectively. If interest on these loans had been accrued, such income would
have approximated $320,000 and $345,000 for 1997 and 1996, respectively.
33
<PAGE>
Note 5 --Related Party Transactions
The Securities and Exchange Commission requires disclosure of loans which
exceed $60,000 to executive officers and directors of the Corporation or to
their associates. Such loans were made on substantially the same terms as those
prevailing for comparable transactions with similar risk. At December 31, 1997
and 1996, these loans totaled $35,533,000 and $48,065,000, respectively. During
1997, total principal additions were $9,406,000 and total principal payments
were $21,938,000.
The Corporation was indebted to related parties for short-term borrowings
totaling $4,004,000 and $2,827,000 at December 31, 1997 and 1996, respectively.
The Corporation paid $95,000 in 1997 to the law firms of two directors who
serve as legal counsel for two bank subsidiaries.
Construction of bank premises during 1997 included $1,978,000 paid to
companies of related parties.
Note 6 --Bank Premises and Equipment,Net
Premises and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1996
--------------- ---------------
(In Thousands)
<S> <C> <C>
Premises............................................................................. $ 50,874 $ 40,006
Leasehold improvements............................................................... 5,207 4,368
Furniture and equipment.............................................................. 29,597 22,582
Construction in progress............................................................. 2,498 5,056
--------------- ---------------
$ 88,176 $ 72,012
Less accumulated depreciation and amortization....................................... (31,074) (26,073)
--------------- ---------------
$ 57,102 $ 45,939
=============== ===============
</TABLE>
Depreciation and amortization of bank premises and equipment included in
operating expenses for the years ended December 31, 1997, 1996 and 1995, were
$4,456,000, $3,987,000 and $3,856,000 respectively.
Note 7 --Deposits
The aggregate amount of jumbo time deposits, each with a minimum
denomination of $100,000, was $198,193,000 and $172,076,000 in 1997 and 1996,
respectively.
At December 31, 1997, the scheduled maturities of time deposits (in
thousands) are as follows:
Less than one year $ 766,501
One year through five years 205,909
--------------
$ 972,410
==============
Note 8 -- Short-Term Borrowings
Short-term borrowings consist of securities sold under agreements to
repurchase which are secured transactions with customers and generally mature
the day following the date sold. Short-term borrowings may also include federal
funds purchased, which are unsecured overnight borrowings from other financial
institutions, and advances from the FHLB of Atlanta, which are secured either by
a blanket floating lien on all real estate mortgage loans secured by 1 to 4
family residential properties, FHLB stock, or other mortgage-related assets.
The Corporation has unused lines of credit for short-term borrowings
totaling approximately $375,200,000 at December 31, 1997.
34
<PAGE>
The table below presents selected information on the combined totals of
repurchase agreements and other short-term borrowings for the years ended
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
(In Thousands)
<S> <C> <C>
Maximum balance at any month end during the year..................................... $ 110,000 $ 76,400
Average balance for the year......................................................... 81,800 68,700
Weighted average rate for the year................................................... 3.64% 3.37%
Weighted average rate on borrowings at year end...................................... 4.72% 4.55%
Estimated fair value................................................................. $ 94,385 $ 74,710
</TABLE>
The weighted average rates shown for borrowings at year end were
calculated by multiplying the effective rate for each transaction by the
principal amount and dividing the aggregate product by the total principal
outstanding.
Due to the short maturities of these financial instruments, the carrying
amounts for both repurchase agreements and other short-term borrowings were
deemed to approximate fair values at December 31, 1997 and 1996.
Note 9 -- Long-Term Debt
In 1994, the Corporation joined the Federal Home Loan Bank system in order
to enter a program of long-term borrowing which is restricted to be invested in
Residential Housing Finance Assets (RHFA). RHFA are defined as (1) Loans secured
by residential real property; (2) Mortgage-backed securities; (3) Participations
in loans secured by residential real property; (4) Loans financed by Community
Investment Program advances; (5) Loans secured by manufactured housing,
regardless of whether such housing qualifies as residential real property; or
(6) Any loans or investments which the Federal Housing Finance Board and the
Bank, in their discretion, otherwise determine to be residential housing finance
assets. Borrowings from the Federal Home Loan Bank system for RHFA investments
totaled $17,136,000 and $11,497,000 at December 31, 1997 and 1996, maturing
through 2006. The interest rate on the notes payable range from 5.54% to 8.18%
at December 31, 1997. Principal payments on the notes (in thousands) are due as
follows:
1998 $ 5,271
1999 2,608
2000 2,108
2001 2,117
2002 1,126
Later years 3,906
--------------
$ 17,136
==============
Note 10 -- Business Combinations
On November 1, 1997, the Corporation completed its acquisition of Shomo &
Lineweaver Insurance Agency, Inc. The Corporation issued 265,853 shares of its
common stock in exchange for all of the shares of common stock of Shomo &
Lineweaver Insurance Agency, Inc. The excess of the total acquisition cost over
the fair value of the net assets acquired of $4,823,000 is being amortized over
25 years by the straight-line method. The acquisition has been accounted for as
a purchase and results of operations of Shomo since the date of acquisition are
included in the consolidated financial statements.
On March 29, 1996, the Corporation completed its acquisition of FB&T
Financial Corporation (FB&T), the holding company for Fairfax Bank & Trust
Company. A total of approximately 2,518,000 shares of the Corporation's stock
was issued in the transaction, which was accounted for as a
pooling-of-interests.
On October 1, 1996, the Corporation completed its acquisition of
Allegiance Banc Corporation, the holding company for Allegiance Bank, N.A. A
total of approximately 1,456,000 shares of the Corporation's stock was issued in
the transaction, which was accounted for as a pooling-of-interests.
35
<PAGE>
Total assets and results of operations as originally reported for 1995
have been restated to reflect the accounts of the pooled entities as follows:
<TABLE>
<CAPTION>
Total Total Net Net Income
Assets Income Income Per Share
--------------- --------------- --------------- ---------------
(In Thousands)
<S> <C> <C> <C> <C>
1995 originally reported.......................... $ 1,833,820 $ 149,482 $ 23,432 $ 1.42
1995 results of pooled entities................... 374,169 28,565 2,403 --
--------------- --------------- --------------- ---------------
As restated $ 2,207,989 $ 178,047 $ 25,835 $ 1.27
=============== =============== =============== ===============
</TABLE>
On April 6, 1995, F&M completed its acquisition of Bank of the Potomac,
Inc. (Potomac). A total of approximately 872,000 shares of the Corporation's
stock was issued in the transaction, which was accounted for as a
pooling-of-interests.
Note 11 -- Earnings Per Share
The following shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number of shares
of diluted potential common stock. Potential dilutive common stock has no effect
on income available to common stockholders. Earnings per share amounts for prior
periods have been restated to give effect to the application of Statement 128
which was adopted by the Corporation in 1997.
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
Per Per Per
Share Share Share
Shares Amount Shares Amount Shares Amount
--------------- ----------- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS 20,234,651 $ 1.54 20,409,374 $ 1.44 20,368,000 $ 1.27
=========== ============ ============
Effect of dilutive
securities:
Stock options 163,362 210,834 273,942
--------------- -------------- --------------
Diluted EPS 20,398,013 $ 1.53 20,620,208 $ 1.42 20,641,942 $ 1.25
=============== =========== ============== ============ ============== ============
</TABLE>
Note 12 -- Stock-Based Compensation Plans
At December 31, 1996, the Corporation has two stock-based compensation
plans which are described below. Grants under those plans are accounted for
following APB Opinion No. 25 and related interpretations. Compensation cost
charged to income for the stock option plan was $173,000, $136,000 and $103,000
for the years ended December 1997, 1996 and 1995, respectively. No compensation
cost has been recognized for grants under the Employee Stock Discount Plan.
Stock Option Plan
The Corporation sponsors a stock option plan, which provides for the
granting of both incentive and nonqualified stock options to executive officers
and key employees of the Company and its Subsidiaries. The option price of
incentive options will not be less than the fair market value of the stock at
the time an option is granted. Nonqualified options may be granted at a price
established by the Board of Directors including prices less than the fair market
value on the date of grant.
A summary of the status of the stock option plan at December 31, 1997,
1996 and 1995 and changes during the years ended on those dates is as follows:
36
<PAGE>
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------------- ----------- -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 196,154 $ 9.16 306,441 $ 7.24 344,867 $ 6.08
Granted 68,500 10.69 76,842 10.66 46,160 8.03
Exercised (55,343) 9.15 (186,131) 6.61 (84,586) 2.98
Forfeited -- (998) --
--------------- -------------- --------------
Outstanding and
exercisable at end
of year 209,311 $ 9.67 196,154 $ 9.16 306,441 $ 7.24
=============== ============== ==============
Weighted-average fair
value per option of
options granted during
the year $ 14.75 $ 8.19 $ 6.27
</TABLE>
The Corporation accounts for the stock option plan and the stock discount plan
under APB Opinion No. 25. Proforma adjustments of compensation cost for the
stock-based compensation plans determined based on the grant date fair values of
awards (the method described in FASB Statement No. 123). For the purpose of
computing the proforma amounts indicated below, the fair value of each option on
the date of grant is estimated using the Black-Scholes option-pricing model with
the following weighted average assumptions used for grants in 1997, 1996 and
1995, respectively: dividend yields of 3.0%, 3.6% and 3.8%; expected volatility
of 18.1%, 20.7% and 20.4%; a risk free interest rate of 5.8%, 5.1% and 5.1%; and
an expected option life of 10 years from the date of grant. 37
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
(In Thousands)
<S> <C> <C> <C>
Net Income: As Reported....................................... $ 31,115 $ 29,298 $ 25,835
Pro Forma......................................... 30,459 28,912 25,656
Basic EPS: As Reported....................................... 1.54 1.44 1.27
Pro Forma......................................... 1.51 1.42 1.26
Diluted EPS: As Reported....................................... 1.53 1.42 1.25
Pro Forma......................................... 1.49 1.40 1.24
</TABLE>
A further summary about options outstanding at December 31, 1997, is as follows:
<TABLE>
<CAPTION>
Options Outstanding and Exercisable
-----------------------------------------------------
Weighted Weighted
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life Price
- ------------------------ --------------- --------------- ---------------
<S> <C> <C> <C>
$ 6.26 3,833 .2 years $ 6.26
9.62 13,661 1.0 9.62
8.35 4,983 1.3 8.35
8.14 - 10.95 17,420 2.2 10.31
11.89 6,387 3.2 11.89
7.69 - 7.93 24,527 6.0 7.90
7.94 26,000 7.0 7.94
10.00 45,500 8.0 10.00
10.69 67,000 9.0 10.69
---------------
$ 6.26 - 11.89 209,311 6.6 9.67
===============
</TABLE>
Employee Stock Discount Plan
In 1993, the Corporation adopted an Employee Stock Discount Plan. The Plan
offers eligible employees of the Corporation the opportunity to purchase common
stock through payroll deduction. The price of the shares purchased is the lesser
of 85% of the market price of the shares as determined under the plan at January
1 of the calendar year of purchase or 85% of the market price of the shares as
determined under the plan at December 31 of the calendar year of purchase.
Employees automatically become eligible to participate on January 1 or July 1 as
of the date they reach age 18 and complete 12 months of service, whichever
occurs last. A regular employee is one who is customarily employed for more than
20 hours per week and more than five months per year.
37
<PAGE>
All officers and directors who are eligible employees may participate.
46,259 shares were issued for the 1997 plan year at a discount of $148,000.
29,498 shares were issued for the 1996 plan year at a discount of $91,000.
35,357 shares were issued during 1995 at a discount of $84,000. The number of
shares available to be issued in future years totals 113,046.
A further summary about options outstanding at December 31, 1996, is as
follows:
Note 13 -- Employee Benefit Plans
F&M National Corporation and its affiliates have a defined contribution
retirement plan covering substantially all full-time employees and provides that
employees automatically become eligible to participate on January 1 or July 1 as
of the date they reach age 18 and complete 12 months of service, whichever
occurs last. The plan was amended in 1989 to add a 401(k) or deferred feature.
Under the plan, a participant may contribute to the plan an amount up to
10% of his covered compensation for the year, subject to certain limitations.
For each year in which the employee makes a contribution to the plan, the
Corporation will make a matching contribution. The Corporation may also make,
but is not required to make, a discretionary contribution for each participant
out of its current or accumulated net profits. The amount of the matching
contribution and discretionary contribution, if any, is determined on an annual
basis by the Board of Directors.
The total plan expense for 1997, 1996 and 1995, was $240,000, $234,000 and
$229,000, respectively.
In 1994, the Corporation adopted an Employee Stock Ownership Plan (ESOP)
covering substantially all full-time employees and providing that employees
automatically become eligible to participate on January 1 or July 1 as of the
date they reach age 18 and complete 12 months of service, whichever occurs last.
The Corporation may make, but is not required to make, a discretionary
contribution for each participant out of its current or accumulated net profits.
The total contribution may be contributed in cash or corporate common stock. The
amount of the discretionary contribution, if any, is determined on an annual
basis by the Board of Directors.
The total plan expense for 1997, 1996 and 1995 was $1,214,000, $1,049,000
and $955,000, respectively.
Note 14 -- Executive and Director Compensation Plans
Executive Incentive Compensation Plan
The Executive Incentive Compensation Plan was established for the purpose
of attracting and retaining key executives. The executives and the amounts of
the awards (subject to limits as set forth in the Plan) are determined by a
Committee composed of members of the Corporation's Board of Directors who are
not employees. The aggregate cash awards amounted to $1,320,000 in 1997,
$1,227,000 in 1996 and $885,000 in 1995.
In addition, deferred compensation plans have been adopted for certain key
employees which provide that benefits are to be paid in monthly installments for
15 years following retirement or death. The agreement provides that if
employment is terminated for reasons other than death or disability prior to age
65, the amount of benefits would be reduced or forfeited. The deferred
compensation expense for 1997, 1996 and 1995, based on the present value of the
retirement benefits, amounted to approximately $505,000, $572,000 and $518,000,
respectively. The plan is unfunded. However, life insurance has been acquired on
the lives of these employees in amounts sufficient to discharge the obligations
thereunder.
Nonemployee Director Stock Compensation and Warrant Plans
Effective June 15, 1994, FB&T Financial Corporation ("FB&T") (a subsidiary
of F&M National Corporation as of March 29, 1996) implemented a Nonemployee
Director Stock Compensation Plan (the "Option Plan"). Allegiance Bank, N.A.
("Allegiance") (a subsidiary of F&M National Corporation as of October 1, 1996)
implemented a Director Stock Warrant Plan effective February 8, 1994. The
exercise price of awards were fixed at the fair market value of the share on the
date the option was granted.
The following summarizes the option activity under the stock option plan
for the last two years as restated to equivalent shares of the Corporation's
common stock:
38
<PAGE>
<TABLE>
<CAPTION>
Number Option Price
of Shares Per Share
--------------- ---------------
<S> <C> <C> <C>
Outstanding, December 31, 1995................ 142,624 $6.26 - $8.77
Grants.................................... --
Exercised................................. (89,567) $6.26 - $8.77
Cancelled................................. (4,790)
--------------- ---------------
Outstanding, December 31, 1996 48,267 $6.26 - $8.77
Grants.................................... --
Exercised................................. (25,574) $6.26 - $8.77
--------------- ---------------
Outstanding, December 31, 1997 22,693 $6.26 - $8.77
=============== ===============
</TABLE>
Note 15 -- Lease Commitments and Contingent Liabilities
The Corporation and Subsidiaries were obligated under a number of
noncancelable leases mainly for various banking premises and equipment.
Facilities leases, including renewal options, expire through 2008. Total rental
expense for operating leases for 1997, 1996 and 1995, was $2,837,000, $2,757,000
and $2,757,000, respectively. Minimum rental commitments under noncancelable
leases with terms in excess of one year as of December 31, 1997, were as
follows:
Year Operating Leases
-------------------------------- --------------------
(In Thousands)
1998............................ $ 2,793
1999............................ 2,779
2000............................ 2,439
2001............................ 2,307
2002............................ 1,868
Later years..................... 13,047
------------------
Total minimum payments.......... $ 25,233
==================
In the normal course of business, there are other outstanding commitments
and contingent liabilities which are not reflected in the accompanying financial
statements. The Corporation does not anticipate losses as a result of these
transactions.
As members of The Federal Reserve System, the Corporation's subsidiary
banks are required to maintain certain average reserve balances. For the final
weekly reporting period in the years ended December 31, 1997 and 1996, the
aggregate amounts of daily average required balances were approximately
$28,867,000 and $21,962,000, respectively.
Note 16 -- Income Taxes
Net deferred tax assets consist of the following components as of December
31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
(In Thousands)
<S> <C> <C>
Deferred tax assets:
Provision for loan losses...................................... $ 6,826 $ 5,636
Salary continuation plan....................................... 1,442 1,091
Other real estate owned........................................ 488 271
Nonaccrual interest............................................ 113 34
Other.......................................................... 366 307
------------------ ------------------
$ 9,235 $ 7,339
------------------ ------------------
Deferred tax liabilities:
Depreciation................................................... $ 1,281 $ 1,070
Excess tax basis - acquisition................................. 257 191
Securities available for sale.................................. 1,306 261
Other.......................................................... 26 26
------------------ ------------------
$ 2,870 $ 1,548
------------------ ------------------
$ 6,365 $ 5,791
================== ==================
</TABLE>
39
<PAGE>
The provision for income taxes charged to operations for the years ended
December 31, 1997, 1996 and 1995, consists of the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
(In Thousands)
<S> <C> <C> <C>
Current tax expense................................................. $ 13,812 $ 15,129 $ 12,765
Deferred tax (benefit).............................................. 1,619 (34) 76
--------------- --------------- ---------------
$ 15,431 $ 15,095 $ 12,841
=============== =============== ===============
</TABLE>
The income tax provision differs from the amount of income tax determined
by applying the federal income tax rate to pretax income for the years ended
December 31, 1997, 1996 and 1995 due to the following:
<TABLE>
<CAPTION>
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
Computed "expected" tax expense..................................... 35.0% 35.0% 35.0%
Increase (decrease) in income taxes resulting from:
Tax-exempt interest............................................... (1.7) (2.1) (2.9)
Nondeductible merger expenses..................................... -- .3 .7
Other, net........................................................ (.1) .8 .4
--------------- --------------- ---------------
33.2% 34.0% 33.2%
=============== =============== ===============
</TABLE>
Note 17 -- Restrictions on Transfers to Parent
Transfer of funds from banking subsidiaries to the Parent Corporation in
the form of loans, advances and cash dividends, are restricted by federal and
state regulatory authorities. As of December 31, 1997, the aggregate amount of
unrestricted funds which could be transferred from the Corporation's
subsidiaries to the Parent Corporation, without prior regulatory approval,
totaled $40,785,000 or 16.5% of the consolidated net assets.
Note 18 -- Financial Instruments With Off-Balance-Sheet Risk
The Corporation and Subsidiaries are party to financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to extend
credit, standby letters of credit and financial guarantees. Those instruments
involve, to varying degrees, elements of credit and interest rate risk in excess
of the amount recognized in the balance sheet. The contract or notional amounts
of those instruments reflect the extent of involvement the Corporation and
Subsidiaries have in particular classes of financial instruments.
The Corporation and Subsidiaries' exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit and standby letters of credit and financial guarantees written is
represented by the contractual notional amount of those instruments. The
Corporation and Subsidiaries use the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
Unless noted otherwise, the Corporation and Subsidiaries do not require
collateral or other security to support financial instruments with credit risk.
A summary of the contract or notional amount of the Corporation and
Subsidiaries' exposure to off-balance-sheet risk as of December 31, 1997 and
1996, is as follows:
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
(In Thousands)
<S> <C> <C>
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit....................................................... $ 316,614 $ 323,204
Standby letters of credit and financial guarantees written......................... $ 17,957 $ 17,829
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation
40
<PAGE>
and Subsidiaries evaluate each customer's credit worthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Corporation
and Subsidiaries upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral held varies but may include accounts
receivable, inventory, property and equipment, and income-producing commercial
properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Corporation and Subsidiaries to guarantee the
performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Corporation and Subsidiaries hold
marketable securities as collateral supporting those commitments for which
collateral is deemed necessary. The extent of collateral held for those
commitments at December 31, 1997, varies from 0 percent to 100 percent; the
average amount collateralized is 38.1 percent.
Note 19 -- Credit Risk
As of December 31, 1997, the Corporation had a concentration of loans in
non-farm, non-residential loans, consisting primarily of commercial loans
secured by real estate of $429,827,000 which were in excess of 10 percent of the
total loan portfolio. The Corporation does not engage in any foreign lending
activities.
As of December 31, 1997, the Corporation had $6,485,000 in deposits in
financial institutions in excess of amounts insured by the Federal Deposit
Insurance Corporation (FDIC).
Note 20 -- Disclosures About Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments
for which it is practicable to estimate that value:
Cash and Short-Term Investments
For those short-term instruments, the carrying amount is a reasonable
estimate of fair value.
Investment Securities and Securities Available for Sale
For securities and marketable equity securities held for investment
purposes, fair values are based on quoted market prices or dealer quotes. For
other securities held as investments, fair value equals quoted market price, if
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar securities.
Loan Receivables
For certain homogeneous categories of loans, such as some residential
mortgages, credit card receivables, and other consumer loans, fair value is
estimated using the quoted market prices for securities backed by similar loans,
adjusted for differences in loan characteristics. The fair value of other types
of loans is estimated by discounting the future cash flows using the current
rates at which similar loans would be made to borrowers with similar credit
ratings and for the same remaining maturities.
Deposit Liabilities
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
Off-Balance Sheet Financial Instruments
The fair value of commitments to extend credit is estimated using the fees
currently charged to enter similar agreements, taking into account the remaining
terms of the agreements and the present credit worthiness of the counterparties.
For fixed-rate loan commitments, fair value also considers the difference
between current levels of interest rates and the committed rates.
The fair value of stand-by letters of credit is based on fees currently
charged for similar agreements or on the estimated cost to terminate them or
otherwise settle the obligations with the counterparties at the reporting date.
At December 31, 1997 and 1996, the carrying amounts and fair values of
loan commitments, and stand-by letters of credit, were immaterial.
The estimated fair values of the Corporation's financial instruments are
as follows:
41
<PAGE>
<TABLE>
<CAPTION>
1997 1996
----------------------------------- ------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- ----------------- ----------------- ---------------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments.............. $ 234,795 $ 234,795 $ 183,173 $ 183,173
Investments securities....................... 406,707 413,286 333,565 335,542
Securities available for sale................ 231,771 231,771 263,428 263,428
Loans........................................ 1,543,598 1,542,100 1,439,108 1,456,634
Less: allowance for loan losses.............. (20,641) -- (17,936) --
---------------- ----------------- ----------------- ---------------
Total financial assets................. $ 2,396,230 $ 2,421,952 $ 2,201,338 $ 2,238,777
================ ================= ================= ===============
Financial liabilities:
Deposits..................................... $ 2,137,834 $ 2,144,365 $ 1,966,938 $ 1,971,386
Federal funds purchased and securities sold
under agreement to repurchase.............. 79,876 79,876 51,536 51,536
Other short-term borrowings.................. 14,509 14,509 14,876 14,876
Federal Home Loan Bank advances.............. -- -- 8,297 8,297
Long-term debt............................... 17,136 13,887 11,497 10,453
---------------- ----------------- ----------------- ---------------
Total financial liabilities............ $ 2,249,355 $ 2,252,637 $ 2,053,144 $ 2,056,548
================ ================= ================= ===============
</TABLE>
Note 21 -- Regulatory Matters
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- possibly additional discretionary
- -- actions by regulators that, if undertaken, could have a direct material
effect on the Corporation's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 1997, that the Corporation meets all capital
adequacy requirements to which it is subject.
As of December 31, 1997, the most recent notification from the Federal
Reserve Bank categorized the Corporation as well capitalized under the
regulatory framework for prompt corrective action. To be categorized as well
capitalized, the Corporation must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the institution's category.
The Corporation's and significant Subsidiaries' actual capital amounts and
ratios are also presented in the table:
42
<PAGE>
<TABLE>
<CAPTION>
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------- -------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------------ ------------- ------------ ------------ -------------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
As of December 31, 1997:
Total Capital (to Risk Weighted Assets)
Consolidated.................. $ 253,976 16.3% >$ 124,891 > 8.0% N/A
- -
F&M Bank-Winchester........... $ 78,440 15.7% >$ 40,067 > 8.0% >$ 50,084 > 10.0%
- - - -
F&M Bank-NOVA................. $ 46,160 14.1% >$ 26,204 > 8.0% >$ 32,755 > 10.0%
- - - -
Tier 1 Capital (to Risk Weighted Assets)
Consolidated.................. $ 234,498 15.0% >$ 62,446 > 4.0% N/A
- -
F&M Bank-Winchester........... $ 72,180 14.4% >$ 20,034 > 4.0% >$ 30,050 > 6.0%
- - - -
F&M Bank-NOVA................. $ 42,066 12.9% >$ 13,102 > 4.0% >$ 19,653 > 6.0%
- - - -
Tier 1 Capital (to Average Assets)
Consolidated.................. $ 234,498 9.6% >$ 98,236 > 4.0% N/A
- -
F&M Bank-Winchester........... $ 72,180 8.8% >$ 32,854 > 4.0% >$ 41,067 > 5.0%
- - - -
F&M Bank-NOVA................. $ 42,066 8.3% >$ 20,202 > 4.0% >$ 25,253 > 5.0%
- - - -
As of December 31, 1996:
Total Capital (to Risk Weighted Assets)
Consolidated.................. $ 241,035 16.8% >$ 114,907 > 8.0% N/A
- -
F&M Bank-Winchester........... $ 74,131 16.0% >$ 37,137 > 8.0% >$ 46,421 > 10.0%
- - - -
F&M Bank-NOVA................. $ 42,817 14.3% >$ 24,017 > 8.0% >$ 30,022 > 10.0%
- - - -
Tier 1 Capital (to Risk Weighted Assets)
Consolidated.................. $ 223,099 15.5% >$ 57,454 > 4.0% N/A
- -
F&M Bank-Winchester........... $ 68,328 14.7% >$ 18,568 > 4.0% >$ 27,853 > 6.0%
- - - -
F&M Bank-NOVA................. $ 39,064 13.0% >$ 12,009 > 4.0% >$ 18,013 > 6.0%
- - - -
Tier 1 Capital (to Average Assets)
Consolidated.................. $ 223,099 9.9% >$ 91,331 > 4.0% N/A
- -
F&M Bank-Winchester........... $ 68,328 8.6% >$ 31,625 > 4.0% >$ 39,531 > 5.0%
- - - -
F&M Bank-NOVA................. $ 39,064 9.0% >$ 17,379 > 4.0% >$ 21,724 > 5.0%
- - - -
</TABLE>
Note 22 -- Proposed Merger
Peoples Bank of Virginia ("PVA") and the Corporation have entered into a
Definitive Agreement and Plan of Reorganization, dated as of December 1, 1997
and a related Plan of Merger (collectively, the "Merger Agreement"). This
transaction is subject to the approval of regulatory authorities and
shareholders of PVA. Under the terms of the Merger Agreement, PVA will be merged
with F&M Bank-Richmond and each share of common stock of PVA 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. It is anticipated that the Merger will become
effective by April 1, 1998. As of December 31, 1997, PVA 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.
The Bank of Alexandria ("BA") and the Corporation have 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 is subject to the approval of regulatory authorities and
shareholders of BA. Under the terms of the Merger Agreement, BA will be merged
with F&M Bank-Northern Virginia and each share of common stock of BA outstanding
immediately prior to consummation of the Merger will be 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. It is anticipated that the Merger will become
effective in the second quarter of 1998. As of December 31, 1997, BA had total
assets of $76.1 million, total loans of $58.2 million, total deposits of $67.6
million and total shareholders' equity of $7.9 million.
43
<PAGE>
Note 23 -- Condensed Financial Information -- Parent Company Only
F&M NATIONAL CORPORATION
(Parent Corporation Only)
BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1996
--------------- ---------------
(In Thousands)
<S> <C> <C>
Assets
Cash on deposit with subsidiary banks............................................... $ 1 $ 132
Investment in subsidiaries, at cost, plus equity in undistributed net income....... 240,986 221,151
Securities available for sale...................................................... 9,964 12,072
Other short-term investments....................................................... 7,726 9,854
Bank premises and equipment, net................................................... 1,348 1,376
Intangible, goodwill, at amortized cost............................................ 245 304
Other assets....................................................................... 10,692 8,785
--------------- ---------------
Total assets........................................................ $ 270,962 $ 253,674
=============== ===============
Liabilities and Shareholders' Equity
Liabilities
Short-term borrowings.............................................................. $ 14,218 $ 14,455
Dividends payable.................................................................. 3,761 4,682
Other liabilities.................................................................. 5,159 3,814
--------------- ---------------
Total liabilities.................................................... $ 23,138 $ 22,951
--------------- ---------------
Shareholders' Equity
Preferred stock.................................................................... $ -- $ --
Common stock....................................................................... 40,750 40,747
Capital surplus.................................................................... 68,206 69,197
Retained earnings, which are substantially undistributed earnings
of subsidiaries.................................................................. 136,700 120,350
Unrealized gain on securities available for sale, net.............................. 2,168 429
--------------- ---------------
Total shareholders' equity........................................... $ 247,824 $ 230,723
--------------- ---------------
Total liabilities and shareholders' equity........................... $ 270,962 $ 253,674
=============== ===============
</TABLE>
44
<PAGE>
F&M NATIONAL CORPORATION
(Parent Corporation Only)
STATEMENTS OF INCOME
For Each of the Three Years in the Period Ended December 31, 1997
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
<S> <C> <C> <C>
(In Thousands)
Revenue
Dividends from subsidiaries........................................ $ 17,012 $ 14,418 $ 10,981
Interest on other short-term investments.......................... 219 665 770
Interest and dividends on securities available for sale........... 448 390 343
Management fees from subsidiaries................................. 2,826 2,409 2,116
Rental income from subsidiaries................................... 54 91 402
Profits on securities available for sale.......................... 3,252 407 --
Other revenue..................................................... 22 11 4
--------------- --------------- ---------------
Total revenue...................................... $ 23,833 $ 18,391 $ 14,616
--------------- --------------- ---------------
Expenses
Salaries and employee benefits..................................... $ 2,113 $ 2,029 $ 1,817
Directors` fees................................................... 190 178 189
Taxes (other than income)......................................... 42 13 41
Interest.......................................................... 348 374 367
Amortization of goodwill.......................................... 60 60 60
Depreciation...................................................... 34 35 101
Merger expenses................................................... 9 381 270
Other expenses.................................................... 1,068 956 491
--------------- --------------- ---------------
Total expenses..................................... $ 3,864 $ 4,026 $ 3,336
--------------- --------------- ---------------
Income before income taxes and equity
in undistributed net income of subsidiaries..... $ 19,969 $ 14,365 $ 11,280
Income Tax Expense (Benefit)........................................ 1,143 (164) 309
--------------- --------------- ---------------
Income before equity in undistributed
net income of subsidiaries...................... $ 18,826 $ 14,529 $ 10,971
Equity in Undistributed Net Income of Subsidiaries.................. 12,289 14,769 14,864
--------------- --------------- ---------------
Net income.......................................... $ 31,115 $ 29,298 $ 25,835
=============== =============== ===============
</TABLE>
45
<PAGE>
F&M NATIONAL CORPORATION
(Parent Corporation Only)
STATEMENTS OF CASH FLOWS
For Each of the Three Years in the Period Ended December 31, 1997
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------
1997 1996 1995
--------------- --------------- ---------------
(In Thousands)
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income......................................................... $ 31,115 $ 29,298 $ 25,835
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.................................................. 34 35 101
Amortization.................................................. 60 60 60
Deferred income taxes (credits)............................... 239 (308) (159)
Discount accretion............................................ (4) (3) (3)
Profits on securities available for sale...................... (3,252) (406) --
Undistributed net income of subsidiaries...................... (12,289) (14,769) (14,864)
Decrease in goodwill.......................................... -- 304 28
(Increase) decrease in other assets........................... (1,781) (4,804) 519
Increase in other liabilities................................. 1,345 1,076 1,206
--------------- --------------- ---------------
Net cash provided by operating activities................. $ 15,467 $ 10,483 $ 12,723
--------------- --------------- ---------------
Cash Flows From Investing Activities
Decrease in investment in subsidiaries............................. $ -- $ 162 $ 264
Purchase of securities available for sale......................... (2,227) (6,024) (1,802)
Proceeds from sale of securities available for sale............... 8,447 2,954 --
(Increase) decrease in other short-term investments............... 2,128 12,561 (7,379)
Proceeds from sale of equipment to subsidiaries................... -- -- 2,772
Purchase of bank premises and equipment........................... (6) (3) (292)
--------------- --------------- ---------------
Net cash provided by (used in) investing activities....... $ 8,342 $ 9,650 (6,437)
--------------- --------------- ---------------
Cash Flows From Financing Activities
Increase (decrease) in short-term borrowings....................... $ (237) $ (4,007) $ 3,791
Net proceeds from issuance and sale of common stock............... 2,577 3,336 3,783
Acquisition of common stock....................................... (10,594) (7,456) (3,176)
Dividends paid.................................................... (15,686) (12,049) (10,572)
--------------- --------------- ---------------
Net cash (used in) financing activities................... $ (23,940) $ (20,176) $ (6,174)
--------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents.......... $ (131) $ (43) $ 112
Cash and Cash Equivalents
Beginning.......................................................... 132 175 63
--------------- --------------- ---------------
Ending............................................................ $ 1 $ 132 $ 175
=============== =============== ===============
Supplemental Disclosures of Cash Flow Information
Cash payments for interest......................................... $ 348 $ 374 $ 367
=============== =============== ===============
Supplemental Schedule of Noncash Investing and
Financing Activities
Issuance of stock options under nonvariable compensatory plan...... $ 732 $ 500 $ 206
=============== =============== ===============
Issuance of common stock to acquire investment..................... $ -- $ -- $ 200
=============== =============== ===============
Common stock issued for stock dividends............................ $ -- $ -- $ 1,068
=============== =============== ===============
Issuance of common stock in exchange for net
assets in bank acquisition...................................... $ 6,297 $ -- $ --
=============== =============== ===============
Unrealized gain (loss) on securities available for sale............ $ (858) $ 215 $ 942
=============== =============== ===============
</TABLE>
46
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Directors
of F&M National Corporation
Winchester, Virginia
We have audited the accompanying consolidated balance sheets of F&M
National Corporation and Subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the years ended December 31, 1997, 1996 and 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of F&M National
Corporation and Subsidiaries as of December 31, 1997 and 1996, and the results
of its operations and its cash flows for the years ended December 31, 1997, 1996
and 1995, in conformity with generally accepted accounting principles.
Winchester, Virginia /s/ Yount, Hyde & Barbour, P.C.
January 28, 1998 YOUNT, HYDE & BARBOUR, P.C.
47
F&M NATIONAL CORPORATION
DIRECTORS:
Frank Armstrong, III
Chairman, President, and Chief Executive Officer,
National Fruit Product Company, Inc.
W. H. Clement
Vice Chairman, Hidden Creek
Industries, Inc.
Charles E. Curtis
Vice Chairman, Chief Administrative Officer
F&M National Corporation
W. M. Feltner
Chairman of the Board and Chief Executive Officer,
F&M National Corporation;
Chairman of the Board, F&M Bank-Winchester
John R. Fernstrom
Chairman of the Board,
F&M Bank-Allegiance
William R. Harris
President and Chairman of the Board,
Harris Heating and Plumbing, Inc.
L. David Horner, III
Chairman, Horner Properties, Inc.
Jack R. Huyett
Retired President and CAO,
F&M National Corporation;
George L. Romine
Sales Management Consultant
John S. Scully, III
Retired President, Winchester Cold Storage Co., Inc.
J. D. Shockey, Jr.
President, Shockey Industries, Inc.
Ronald W. Tydings
President, Tydings Bryan and Adams P.C.
Fred G. Wayland, Jr.
Retired President, F&M Bank-Peoples
Alfred B. Whitt
President, Vice Chairman and Chief Financial Officer
F&M National Corporation
Vice Chairman and Secretary
F&M Bank-Winchester
Director Emeritus
C. Ridgely White
OFFICERS:
W. M. Feltner
Chairman of the Board and
Chief Executive Officer
Alfred B. Whitt
President, Vice Chairman,
Chief Financial Officer
Charles E. Curtis
Vice Chairman and Chief
Administrative Officer
Jack R. Huyett
President and Chief Administrative Officer
Retired December 31, 1997
F. Dixon Whitworth, Jr.
Executive Vice President
Betty H. Carroll
Senior Vice President
Barbara H. Ward
Treasurer
Jack W. Lee, Jr.
Vice President-Auditor
Colleen M. Bly
Director of Human Resources Services
Richard B. Wiltshire, Jr.
Independent Loan Review Officer
48
<PAGE>
F&M BANK-WINCHESTER
DIRECTORS:
Frank Armstrong, III
Betty H. Carroll
W. H. Clement
Charles E. Curtis
W. M. Feltner, Chairman
Joseph E. Kalbach
George L. Romine
J. D. Shockey, Jr.
William A. Truban, DVM
Alfred B. Whitt
F. Dixon Whitworth, Jr.
Director Emeritus:
Mary M. Henkel
OFFICERS:
W. M. Feltner
Chairman of the Board
Alfred B. Whitt
Vice Chairman, Secretary
Charles E. Curtis
Vice Chairman
Betty H. Carroll
President and Chief Executive Officer
Barbara H. Ward
Senior Vice President
LOANS:
M. Lee Boppe
Senior Vice President-Loans
Frances H. Fortune
Senior Vice President-Credit
Robert E. Lee
Senior Vice President-Loans
Fay H. DeHaven
Vice President-Loans
Romaine S. Hess
Vice President-Loan Operations
Steven D. Tavenner
Vice President-Loans
OPERATIONS:
Peggy J. Marcus
Senior Vice President-Cashier
Shelby C. Hodgson
Vice President-Branch Coordinator
Arvilla S. Rinker
Vice President-Operations
Linda P. Russell
Vice President-NSF Officer
Paul E. Shifflett
Vice President-Controller
CHARGE CARDS:
Clyde C. Lamond III
Vice President-Charge Cards
DATA PROCESSING:
G. Hollis Mock
Vice President-Data Processing
MONEY MANAGEMENT:
Phyllis K. Bishop
Vice President
Linda G. Jones
Vice President
MARKETING:
Jill A. Feltner
Marketing Director
Miles R. Orndorff, Jr.
Public Relations Director
F&M BANK-
CENTRAL VIRGINIA
DIRECTORS:
Jacob P. Bailey, Chairman
William J. Camden
James N. Fleming
S. W. Heischman
Larry J. McElwain
Ronald L. Moyer
William B. Pollard, M.D.
Robert C. Raynor, M.D.
Thomas H. Romer
Walter L.Tucker, Jr.
Wayne L. Turner
F. Dixon Whitworth, Jr.
OFFICERS:
Wayne L.Turner
President and
Chief Executive Officer
William K. King
Senior Vice President and Secretary
Donnie L. Snead
Vice President and Cashier
F&M BANK-EMPORIA
DIRECTORS:
C. Butler Barrett
Stephen D. Bloom
Bobby L. Flippen
Dr. Theopolis Gilliam, Jr.
Robert H. Grizzard, Jr., Chairman
O. Wayne Hanks
Arthur H. Kreienbaum, Jr.
Wayne P. Leath
OFFICERS:
O. Wayne Hanks
President and Chief
Executive Officer
Samuel W. Adams, III
Senior Vice President
D. Elliott Collins
Vice President
Ryland A. Winston
Vice President
F&M BANK-
MASSANUTTEN
DIRECTORS:
J. Robert Black
Robert W. Drechsler
Dwight W. Hartman
W. Wallace Hatcher, Vice Chairman
Russell K. Henry, Jr.
Marian G. Jenkins
Curtis F. Kite
W. Price Lineweaver
Harry L. Rawley
Wayne L. Smith
Garnett R. Turner
Nancy H. Whitmore
Alfred B. Whitt
OFFICERS:
Russell K. Henry, Jr.
President and Chief Executive Officer
Writa D. Hill
Executive Vice President,
Senior Operations Officer, Secretary
Edward A. Strunk
Senior Vice President
James G. Link
Vice President
F&M-BANK-NORTHERN
VIRGINIA
DIRECTORS:
Daniel R. Baker
Warren E. Barry
Robert H. Bird
Hugh W. Compton
Charles E. Curtis
James C. Davis
David E. Feldman
Howard R. Green
Thom F. Hanes
Reed E. Larson
Henry C. Mackall
Charles D. Mercer
T. Earl Rogers
Thomas D. Rust
49
<PAGE>
Robert E. Sevila
Ronald W. Tydings, Chairman
Michael M. Webb
Alfred B. Whitt
F. Dixon Whitworth, Jr.
OFFICERS:
T. Earl Rogers
President and Chief Executive Officer
Thom F. Hanes
Executive Vice President and
Regional Executive Officer
Ramona W. Rodriquez
Senior Vice President, Chief
Financial Officer and Secretary
Donald E. Strehle
Senior Vice President, Branch Administrator
Alice B. Williams
Senior Vice President and
Regional Executive Officer
J. David Holden
Senior Vice President
Steven R. Wilson
Senior Vice President
Karin M. Johns
Cashier and Assistant Secretary
Peter T. Fuge
Vice President-Senior Commercial Loan Officer
Wayne R. Garcia
Vice President-Senior Commercial Loan Officer
Edward P. Alton
Vice President-Mortgage Lending
Nancy J. Krause
Vice President-Compliance Officer
Thomas F. Bradley
Vice President
B. Drew Brown
Vice President
George G. Carson
Vice President
John Djuric
Vice President
Cynthia C. Fisher
Vice President
Debbie A. Free
Vice President
Paula A. Grotzinger
Vice President
Arlene F. Haley
Vice President
Phyllis A. Kennerknecht
Vice President
Robert J. Maiorana
Vice President
Cynthia E. McGlumphy
Vice President
James E. Merritt
Vice President
Michele K. Parker
Vice President
George T. Pawlak
Vice President
Jeffery M. Rosati
Vice President
Patsy I. Rust
Vice President
Alex Solis
Vice President
James M. Weaver
Vice President
Charles W. Whittaker
Vice President
F&M-PEOPLES
DIRECTORS:
Alice Jane Childs
Alan L. Day, Jr.
Marshall DeF. Doeller
George F. Downes
T. Christopher Jenkins
Mark C. Riley
Lewis N. Springer
Edward C. A. Wachtmeister, Chairman
Fred G. Wayland, Jr.
Director Emeritus:
Vincent L. Tolson
OFFICERS:
Mark C. Riley
President and Chief Executive Officer
Warren L. Bane
Vice President-Senior Loan Officer
Theodore R. Coleman
Vice President-Loans
Caren M. Eastham
Vice President-
Administrative Services
Richard L. Monahan
Vice President-Lending
Joan B. Oliver
Vice President-Data Processing
Nancy W. Clatterbuck
Vice President-Branch Manager
Daryl A. Urnosky
Vice President-Chief Financial
Officer
F&M BANK-RICHMOND
DIRECTORS:
James H. Atkinson, Jr.
Jeff C. Bane
Stephen C. Conte
Lewis T. Cowardin
Zane G. Davis
Richard H. Hamlin
William R. Harris, Chairman
James R. Reames
F. Dixon Whitworth, Jr.
OFFICERS:
James H. Atkinson, Jr.
President and Chief Executive Officer
Wayne D. Eaves
Senior Vice President
K. Bradley Hildebrandt
Vice President-Commercial Lending
Daily H. Stern
Vice President and Compliance Officer
Marshall E. McCall
Vice President-Commercial Lending
F&M BANK-BLAKELEY
DIRECTORS:
Charles C. Conrad
J. Blackwell Davis, Sr., Chairman
Denver L. Hipp
Dr. JamesM. Moler
Paul L. Reid
OFFICERS:
Denver L. Hipp
President and Chief Executive Officer
Ida M. Hull
Senior Vice President and Cashier
Reginald C. Kimble
Senior Vice President-Lending
Thomas R. Reilly
Senior Vice President-Administration
F&M BANK-KEYSER
DIRECTORS:
William M. Bane
Harlan M. Bell
Joseph W. Kessel
William C. Knott
Harland D. Ridder
Glen A. Ryan, Chairman
Richard B. Schwinabart
Rudy R. Sites
Alfred B. Whitt
50
<PAGE>
OFFICERS:
Douglas E. Haines
President and Chief Executive Officer
David E. Harr, Jr.
Vice President
Dwight C. Metcalf
Vice President
F&M BANK-
MARTINSBURG
DIRECTORS:
Betty H. Carroll
Craig H. Collis
C. William Hammond
J. Wayne Lancaster, Chairman
Craig L. Meadows, D.D.S.
Donald L. Sperow, Sr.
Directors Emeriti:
G. Francis Caton
William R. McCune, M.D.
Evelyn S. Oates
OFFICERS:
C. William Hammond
President and Chief Executive Officer
David C. Jeffcoat
Vice President-Lending
Susan M. Wenger
Vice President-Compliance
Mary K. Hayward
Vice President-Special Projects
Jodi A. Frankenberry
Vice President-Administration
F&M BANK-ALLEGIANCE
DIRECTORS:
Charles E. Curtis
John R. Fernstrom, Chairman
William E. Knight
Linda Greer Spooner
Ronald A. Willoner
OFFICERS:
Robert P. Pugh
Interim President
Mervis V. Samuels
Vice President-Commercial Lending
William A. Gallagher
Vice President-Commercial Lending
Richard D. Corrigan
Vice President-Real Estate Lending
David W. Irey
Vice President-Consumer Loans and
Compliance Officer
Elaine B. Durkin
Vice President-Operations
F&M TRUST COMPANY
DIRECTORS:
Betty H. Carroll
W. H. Clement
Joseph E. Kalbach
Ronald W. Tydings
Edward C. A. Wachtmeister
Michael M. Webb
F. Dixon Whitworth, Jr., Chairman
OFFICERS:
F. Dixon Whitworth, Jr.
President
Marshall J. Beverley, Jr.
Senior Vice President
Thomas H. Kirk
Senior Vice President
W. Blakeley Curtis
Vice President
Dennis R. Dorsett
Vice President
Robert E. Duvall
Vice President
F&M-SHOMO AND LINEWEAVER
INSURANCE AGENCY,
INCORPORATED
DIRECTORS:
Betty H. Carroll
Michael A. Conway
Robert W. Drechsler, Chairman
Michael E. Fiore
W. Michael Heatwole, III
W. Price Lineweaver
Ellen M. Ritchie
Jerry D. Sheets
Norman J. Stern
Donald W. Wallinger
Alfred B. Whitt
OFFICERS:
Robert W. Drechsler
Chairman
W. Price Lineweaver
President
Michael E. Fiore
Secretary
F&M FINANCIAL SERVICES CORPORATION
DIRECTORS:
Norman J. Stern
W. Michael Heatwole, III
OFFICERS:
Norman J. Stern
President
W. Michael Heatwole, III
Secretary
BIG APPLE
MORTGAGECOMPANY
DIRECTORS AND OFFICERS:
Vergil H. Bates
President and Director
James M. O'Brien
Executive Vice President
Beverly A. Alexander
Vice President
Betty H. Carroll
Vice President and Director
Alfred B. Whitt
Secretary-Treasurer and Director
WINCHESTER
CREDIT CORPORATION
DIRECTORS:
Betty H. Carroll
Jack R. Huyett
J. Randolph Larrick
F. Dixon Whitworth, Jr.
OFFICERS:
Jack R. Huyett
President
Richard V. Reedy
Vice President
Special Assets Division-Loudoun County
Betty H. Carroll
Vice President
Alfred B. Whitt
Secretary
Barbara H. Ward
Treasurer
CREDIT BUREAU OF
WINCHESTER, INC.
Sandra K. Hart
Manager
APPLE TITLE COMPANY
DIRECTORS:
Betty H. Carroll
Jack R. Huyett
Barbara H. Ward
Alfred B. Whitt
OFFICERS:
Jack R. Huyett
President
Betty H. Carroll
Vice President
Alfred B. Whitt
Secretary
Frances H. Fortune
Treasurer
51
<PAGE>
Corporate Headquarters
F&M NATIONAL CORPORATION
9 Court Square
Winchester, Virginia 22601
540-665-4200
F&M BANK-WINCHESTER
Main Office
115 North Cameron Street
Winchester, Virginia 22601
540-665-4200
Other Banking Offices:
Winchester, Virginia 22601
540-665-4200
100 North Loudoun Street
509A Amherst Street
2252 Valley Avenue
829 North Loudoun Street
1850 Apple Blossom Drive
748 Berryville Avenue
124 West Piccadilly Street
2082 South Pleasant Valley Road
2004 South Pleasant Valley Road
Clarke County:
23 North Church Street
Berryville, Virginia 22611
540-955-1222
Frederick County:
6701 Northwestern Pike
Gore, Virginia 22637
540-858-2832
7800 Main Street
Middletown, Virginia 22645
540-869-1200
5306 Main Street
Stephens City, Virginia 22655
540-869-3000
1855 Senseny Road
Winchester, Virginia 22602
540-665-4200
300 Westminster Canterbury Drive
Winchester, Virginia 22603
540-665-4200
Loudoun County:
38997 East Colonial Highway
Hamilton, Virginia 20158
540-338-3600
101 Catoctin Circle, SE
Leesburg, Virginia 20175
703-771-7202
7 West Market Street
Leesburg, Virginia 20176
703-771-7245
7 Broad Way
Lovettsville, Virginia 20180
540-822-9034
202 West Washington Street
Middleburg, Virginia 20117
540-687-5731
21 Main Street
Round Hill, Virginia 20141
540-338-6065
22550 Davis Drive
Sterling, Virginia 20164
703-435-0782
Rappahannock County:
644 Zachary Taylor Highway
Flint Hill, Virginia 22627
540-675-3596
Shenandoah County:
Apple Avenue and U.S. Route 11
Mount Jackson, Virginia 22842
540-477-2931
158 South Main Street
Woodstock, Virginia 22664
540-459-5500
9383 Congress Street
New Market, Virginia 22844
540-740-8044
Warren County:
540-635-3134
102 East Main Street
Front Royal, Virginia 22630
215 North Royal Avenue
Front Royal, Virginia 22630
Royal Plaza Shopping Center
433 South Street
Front Royal, Virginia 22630
123 East Sixth Street
Front Royal, Virginia 22630
F&M BANK-CENTRAL VIRGINIA
1425 Seminole Trail
Charlottesville, Virginia 22901
804-973-4233
101 Critzer Shop Road
Afton, Virginia 22920
540-456-8156
840 South Main Street
Amherst, Virginia 24521
804-946-2265
2208 Ivy Road
Charlottesville, Virginia 22903
804-293-9181
1113 5th Street Extended
Charlottesville, Virginia 22902
804-293-5211
93 Front Street
Lovingston, Virginia 22949
804-263-4806
350 Valley Street
Scottsville, Virginia 24590
804-286-2805
F&M BANK-EMPORIA
401 Halifax Street
Emporia, Virginia 23847
804-634-6555
301 West Atlantic Street
Emporia, Virginia 23847
804-634-8855
431 South Main Street
Emporia, Virginia 23847
804-634-8866
F&M BANK-MASSANUTTEN
1855 East Market Street
Harrisonburg, Virginia 22801
540-434-6761
3150 South Main Street
Harrisonburg, Virginia 22801
540-433-1330
611 Mount Clinton Pike
Harrisonburg, Virginia 22801
540-433-9936
157 North Main Street
Broadway, Virginia 22915
540-896-7083
200 Augusta Street
Grottoes, Virginia 24441
540-249-5727
1900 South High Street
Harrisonburg, Virginia 22801
540-432-6490
317 North Main Street
Bridgewater, Virginia 22812
540-828-4737
American Legion Drive and
Route 42
Timberville, Virginia 22853
540-896-5858
430 Highlands Place
Harrisonburg, Virginia 22801
540-433-2702
F&M BANK-NORTHERN VIRGINIA
4117 Chain Bridge Road
Fairfax, Virginia 22030
703-385-3335
200 North Washington Street
Alexandria, Virginia 22314
703-684-1091
4115 Annandale Road
Annandale, Virginia 22003
703-642-9212
7027A Manchester Boulevard
Alexandria, Virginia 22310
703-922-8001
14260 J Centreville Square
Centreville, Virginia 20120
703-359-9387
5105 Westfields Boulevard
Centreville, Virginia 20120
703-359-9393
13821 Lee Jackson Highway
Chantilly, Virginia 20151
703-359-9397
12220 Fairfax Towne Center
Fairfax, Virginia 22033
703-359-7556
133 South Washington Street
Falls Church, Virginia 22046
703-352-6194
3829 South George Mason Drive
Falls Church, Virginia 22041
703-671-5862
52
<PAGE>
14091 John Marshall Highway
Gainesville, Virginia 20155
703-754-8520
230 Herndon Parkway
Herndon, Virginia 22070
703-435-1000
12493 Dillingham Square
Lake Ridge, Virginia 22192
703-590-8700
9201 Church Street
Manassas, Virginia 20110
703-368-1101
13414 Dumfries Road
Manassas, Virginia 20112
703-791-2265
7900 Sudley Road
Manassas, Virginia 20110
703-392-0370
6257A Old Dominion Drive
McLean, Virginia 22101
703-691-7897
7830 Backlick Road
Springfield, Virginia 22150
703-913-0102
8432 Old Keene Mill Road
Springfield, Virginia 22152
703-451-0074
6810 Commerce Street
Springfield, Virginia 22150
703-451-8100
440 Maple Avenue
Vienna, Virginia 22180
703-319-0299
8221 Old Courthouse Road
Vienna, Virginia 22182
703-359-9390
14229 Potomac Mills Road
Woodbridge, Virginia 22192
703-497-2333
F&M BANK-PEOPLES
21 Main Street
Warrenton, Virginia 20186
540-347-1711
251 West Lee Highway
Warrenton, Virginia 20186
540-349-3491
8318 East Main Street
Marshall, Virginia 20115
540-364-1511
760 Warrenton Road
Fredericksburg, Virginia 22406
540-899-3882
F&M BANK-RICHMOND
9401 West Broad Street
Richmond, Virginia 23294
804-346-8080
1776 Staples Mill Road
Richmond, Virginia 23230
804-355-7841
209 West Franklin Street
Richmond, Virginia 23220
804-780-0122
5001 Lakeside Avenue
Richmond, Virginia 23228
804-264-2783
9960 Midlothian Turnpike
Richmond, Virginia 23235
804-320-6610
1300 East Parham Road
Richmond, Virginia 23227
804-264-2824
9012 Three Chopt Road
Richmond, Virginia 23229
804-282-7527
6980 Forest Hill Avenue
Richmond, Virginia 23225
804-272-5337
4310 West Hundred Road
Chester, Virginia 23831
804-748-2735
9440 Ironbridge Road
Chesterfield, Virginia 23832
804-748-7181
F&M BANK-BLAKELEY
301 South Mildred Street
Ranson, West Virginia 25438
304-725-7014
Somerset Village Shopping Center
Route 340 North
Charles Town, West Virginia 25414
304-728-8023
Hilldale Shopping Center
Route 340 South
Charles Town, West Virginia 25414
304-728-0216
1504 Tuscawilla Hills
Charles Town, West Virginia 25414
304-728-4270
Walmart
4 Charles Town Plaza
Charles Town, West Virginia 25414
304-728-4290
F&M BANK-KEYSER
87 North Main Street
Keyser, West Virginia 26726
304-788-3111
Express Office
Florida & Southern Drive
Keyser, West Virginia 26726
304-788-0883
Route 28 and Carroll Lane
Fort Ashby, West Virginia 26719
304-298-3667
F&M BANK-MARTINSBURG
301 West Burke Street
Martinsburg, West Virginia 25401
304-264-5020
1321 Edwin Miller Boulevard
Martinsburg, West Virginia 25401
304-264-5040
704 Foxcroft Avenue, North
Martinsburg, West Virginia 25401
304-262-6301
Route 51 West
Inwood, West Virginia 25428
304-229-5824
F&M BANK-ALLEGIANCE
4719 Hampden Lane
Bethesda, Maryland 20814
301-656-5300
10533 Baltimore Boulevard
Beltsville, Maryland 20705
301-937-9766
8019 Snouffer School Road
Gaithersburg, Maryland 20879
301-417-2640
8401 Corporate Drive
Landover, Maryland 20785
301-731-1700
11921 Rockville Pike
Rockville, Maryland 20852
301-424-3550
99 South Washington Street
Rockville, Maryland 20850
301-217-9494
8602 Colesville Road
Silver Spring, Maryland 20910
301-588-9700
2729 University Boulevard, West
Wheaton, Maryland 20902
301-949-2440
9401 Key West Avenue
Rockville, Maryland 20850
301-417-0422
F&M TRUST COMPANY
38 Rouss Avenue
Winchester, Virginia 22601
540-665-4204
21 Main Street
Warrenton, Virginia 20186
540-349-3474
4117 Chain Bridge Road
Fairfax, Virginia 22030
703-383-1347
F&M-SHOMO AND
LINEWEAVER INSURANCE
AGENCY INCORPORATED
F&M FINANCIAL SERVICES CORPORATION
328 South Main Street
Harrisonburg, Virginia 22801
540-434-1301
2 East Wolfe Street
Harrisonburg, Virginia 22801
57 East Main Street
Luray, Virginia, 22835
5934 Main Street
Mt. Jackson, Virginia 22842
53
<PAGE>
BIG APPLE MORTGAGE COMPANY
124 West Piccadilly Street
Winchester, Virginia 22601
540-665-4340
12 Rouss Avenue
Winchester, Virginia 22601
540-665-4356
Apple Avenue and U.S. Route 11
Mount Jackson, Virginia 22842
540-477-2931
F&M Mortgage Company
22550 Davis Drive
Sterling, Virginia 20164
703-733-0123
1321 Edwin Miller Boulevard
Martinsburg, West Virginia 25401
304-263-7334
APPLE TITLE COMPANY
12 Rouss Avenue
Winchester, Virginia 22601
540-665-4233
WINCHESTER CREDIT CORPORATION
12 Rouss Avenue
Winchester, Virginia 22601
540-338-2962
CREDIT BUREAU OF WINCHESTER, INC.
12 Rouss Avenue
Winchester, Virginia 22601
540-662-0368
54
<PAGE>
GENERAL INFORMATION
Annual Meeting
The annual meeting of shareholders will be held at the TraveLodge Banquet
Room, 1825 Dominion Avenue, Winchester, Virginia, Tuesday, April 28, at 10:00
a.m.
Stock Transfer Agent
American Stock Transfer and Trust Company
46th Floor
40 Wall Street
New York, New York 10005
F&M National Corporation Common Stock is traded on the New York Stock
Exchange under the symbol FMN.
Information
For additional information, contact Alfred B. Whitt, President, or Michael
L. Bryan, Secretary, F&M National Corporation, 540-665-4200.
A copy of the Corporation's Form 10-K annual report to the Securities and
Exchange Commission may be obtained without charge upon written request to
Alfred B. Whitt, F&M National Corporation.
Mailing Address
F&M National Corporation
P.O. Box 2800
Winchester, Virginia 22604
<PAGE>
<TABLE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT.
The subsidiaries of the Company as of December 31, 1997, and the state in which
each was organized are as scheduled below:
<CAPTION>
State or
Jurisdiction
Under Laws of Name Under Which
Name of Subsidiaries Which Organized Subsidiaries Do Business
- -------------------- --------------- ------------------------
<S> <C>
F&M Bank-Winchester Virginia F&M Bank-Winchester
Big Apple Mortgage Big Apple Mortgage
Company, Inc.(1) Virginia Company
Winchester Credit Winchester Credit
Corporation(1) Virginia Corporation
Credit Bureau of Credit Bureau of
Winchester, Inc.(1) Virginia Winchester
Apple Title Company(1) Virginia Apple Title Company
F&M/Shomo & Lineweaver F&M/Shomo & Lineweaver
Insurance, Inc. Virginia Insurance
F&M Financial Services, Inc. Virginia F&M Financial Services
F&M Bank-Central Virginia Virginia F&M Bank-Central Virginia
F&M Bank-Massanutten Virginia F&M Bank-Massanutten
F&M Bank-Richmond Virginia F&M Bank-Richmond
F&M Bank-Martinsburg, Inc. West Virginia F&M Bank-Martinsburg
F&M Bank-Blakeley, Inc. West Virginia F&M Bank-Blakeley
F&M Bank-Keyser, Inc. West Virginia F&M Bank-Keyser
F&M Bank-Emporia Virginia F&M Bank-Emporia
F&M Bank-Peoples Virginia F&M Bank-Peoples
F&M Bank-Northern Virginia Virginia F&M Bank-Northern Virginia
F&M Bank-Allegiance, Inc. Maryland F&M Bank-Allegiance
</TABLE>
(1) Winchester Credit Corporation, Big Apple Mortgage Co., Inc., Apple Title
Company, F&M/Shomo & Lineweaver Insurance, Inc., and F&M Financial Services,
Inc., are wholly-owned subsidiaries of F&M Bank-Winchester. Credit Bureau of
Winchester is a wholly-owned subsidiary of Winchester Credit Corporation. All
other bank subsidiaries are wholly-owned by F&M National.
EXHIBIT 23
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use of our report dated January 28, 1998 in this Annual
Report on Form 10-K relating to the Consolidated Financial Statements of F&M
National Corporation and Subsidiaries, appearing under Item 8, Financial
Statements and Supplementary Data, including, without limitation, the
incorporation by reference in the Prospectuses constituting part of the
Registration Statements on Form S-8 (#2-77374 and #33-47685) of F&M National
Corporation.
Yount, Hyde & Barbour, P.C.
March 5, 1998
Winchester, Virginia
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