SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 1999 Commission File No. 0-5929
F & M NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Commonwealth of Virginia 54-0857462
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
9 Court Square, Winchester, Virginia 22601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 540-665-4200
NO CHANGES
(Former name, former address and former fiscal year, if
changes since last report)
Indicate by check mark whether the registrant (l) has filed all
reports to be filed by Section 13 or 15(d) of the Securities and
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
As of October 26, 1999, there were 22,984,240 shares of the
Registrant's common stock outstanding.
<TABLE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (000 OMITTED)
<CAPTION>
(Unaudited)
Sept. 30, December 31,
1999 1998
<S> <C> <C>
Assets:
Cash and due from banks 123,273 164,207
Interest-bearing deposits in other banks 2,426 38,820
Securities-held to maturity(market value
September 30, 1999-$435,921;
December 31, 1998-$408,399) 443,066 402,770
Securities-available for sale
(market value) 390,773 386,150
Federal funds sold and securities
purchased under agreements to resell 63,000 113,305
Loans 1,773,314 1,730,114
Unearned income (1,207) (2,794)
Loans (net of unearned income) 1,772,107 1,727,320
Allowance for loan losses (23,065) (22,646)
Net loans 1,749,042 1,704,674
Bank premises and equipment, net 71,288 67,330
Other assets 79,390 72,678
Total assets 2,922,258 2,949,934
Liabilities and Shareholders' Equity:
Liabilities:
Deposits
Non-interest bearing 534,585 552,916
Interest bearing 1,915,487 1,935,501
Total deposits 2,450,072 2,488,417
Federal funds purchased and securities
sold under agreements to repurchase 102,205 103,264
Other short-term borrowings 25,135 17,312
Long-term debt 25,661 21,058
Other liabilities 27,861 24,864
Total liabilities 2,630,934 2,654,915
</TABLE>
<TABLE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (000 OMITTED)
<CAPTION>
(Unaudited)
Sept. 30, December 31,
1999 1998
<S> <C> <C>
Stockholders' Equity
Preferred stock, no par value:
(Authorized 5,000,000 shares,
no shares outstanding) 0 0
Common stock par value $2.00 per
share, authorized 30,900,000 shares:
issued September 30, 1999-22,987,678
shares; issued December 31,
1998-22,510,582 shares 45,975 45,021
Capital surplus 94,813 82,723
Retained earnings 156,771 161,280
Accumulated other
comprehensive income (loss) (6,235) 5,995
Total shareholders' equity 291,324 295,019
Total liabilities and
shareholders' equity 2,922,258 2,949,934
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<TABLE>
F & M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (000 OMITTED)
<CAPTION>
(Unaudited) (Unaudited)
For the Nine For the Three
Months Ended Months Ended
Sept. 30, Sept. 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Interest Income:
Interest and fees on loans 112,257 113,536 37,677 38,187
Securities held to maturity:
Taxable interest income 17,492 18,668 6,171 6,398
Interest income exempt from
Federal income taxes 789 958 257 277
Securities available for sale:
Taxable interest income 16,890 12,443 5,883 4,334
Interest income exempt from
Federal income taxes 41 38 14 12
Dividend income 731 658 266 210
Total security interest income 35,943 32,765 12,591 11,231
Interest on federal funds sold
and securities purchased
under agreements to resell 2,448 4,817 390 1,389
Interest on deposits in banks 1,144 889 515 420
Total interest income 151,792 152,007 51,173 51,227
Interest Expense:
Interest on deposits 54,356 59,387 17,888 19,626
Interest on short-term
borrowings 2,445 2,951 651 992
Interest on long-term debt 1,228 766 486 276
Total interest expense 58,029 63,104 19,025 20,894
Net interest income 93,763 88,903 32,148 30,333
Provision for loan losses 2,814 2,995 793 1,455
Net interest income after
provision for loan losses 90,949 85,908 31,355 28,878
Other Income:
Commissions and fees from
fiduciary activities 2,158 1,969 702 659
Service charges on deposit
accounts 11,202 9,717 3,888 3,525
Credit card fees 3,448 2,996 1,247 1,086
Fees for other customer services 6,140 2,270 2,519 715
Insurance commissions 6,947 6,568 2,431 2,291
Other operating income 3,556 2,258 1,250 210
Profits on securities available
for sale 3,112 742 0 539
Investment securities gains, net 1 1 0 0
Total other income 36,564 26,521 12,037 9,025
</TABLE>
<TABLE>
F & M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (000 OMITTED)
<CAPTION>
(Unaudited) (Unaudited)
For the Nine For the Three
Months Ended Months Ended
Sept. 30, Sept. 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Other Expenses:
Salaries and employees'
benefits 45,963 38,879 15,708 12,743
Net occupancy expense of
premises 6,685 6,273 2,240 2,137
Furniture and equipment expense 5,403 5,378 1,991 1,800
Deposit insurance 223 219 70 67
Credit card expense 2,701 2,269 991 892
Other operating expense 18,777 17,905 6,617 6,134
Total other expense 79,752 70,923 27,617 23,773
Income before income taxes 47,761 41,506 15,775 14,130
Income tax expense 16,759 14,420 5,370 4,869
Net income 31,002 27,086 10,405 9,261
Average shares:
Basic 23,082 23,196 23,007 23,190
Assuming dilution 23,268 23,404 23,158 23,404
Earnings per common share:
Basic $1.34 $1.17 $0.45 $0.40
Assuming dilution $1.33 $1.16 $0.45 $0.40
Dividends per share $0.665 $0.565 $0.235 $0.195
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<TABLE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES-CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(000 OMITTED)
<CAPTION>
Accumulated
Other
Compre- Compre-
Common Capital Retained hensive hensive
Stock Surplus Earnings Income Income Total
<S> <C> <C> <C> <C> <C> <C>
Balances -
January 1, 1998 45,030 84,208 141,173 2,240 272,651
Comprehensive
Income:
Net income 27,086 27,086 27,086
Other comprehensive
income-net of tax:
Unrealized gain on
available-for-sale
securities 2,971 2,971
Reclassification
adjustment for
gains realized
in net income (482) (482)
Other comprehensive
income, net of tax 2,489 2,489
Total compre-
hensive income 29,575
Cash dividends (12,096) (12,096)
Acquisition of common
stock (204) (3,118) (3,322)
Issuance of authorized
stock-benefit plans 217 2,456 2,673
Balances -
September 30, 1998 45,043 83,546 156,163 4,729 289,481
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<TABLE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES-CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(000 OMITTED)
<CAPTION>
Accumulated
Other
Compre- Compre-
Common Capital Retained hensive hensive
Stock Surplus Earnings Income(Loss) Income
Total
<S> <C> <C> <C> <C> <C> <C>
Balances -
January 1, 1999 45,021 82,723 161,280 5,995 295,019
Comprehensive
Income:
Net income 31,002 31,002 31,002
Other comprehensive
income net of tax:
Unrealized losses
on available-
for-sale
securities (10,207) (10,207)
Reclassification
adjustment for
gains realized
in net income (2,023) (2,023)
Other compre-
hensive income,
net of tax (12,230) (12,230)
Total compre-
hensive income 18,772
Cash dividends (14,881) (14,881)
Stock dividends 1,339 19,291 (20,630) 0
Acquisition of
common stock (837) (11,657) (12,494)
Issuance of
stock-benefit plans 452 4,456 4,908
Balances -
September 30, 1999 45,975 94,813 156,771 (6,235) 291,324
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<TABLE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (000 Omitted)
<CAPTION>
(Unaudited)
For the Nine Months Ended
Sept. 30, Sept. 30,
1999 1998
<S> <C> <C>
Cash Flows From Operating Activities
Net income 31,002 27,086
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 5,175 4,960
Provision for loan losses 2,814 2,995
Profit on securities available for sale (3,112) (742)
Profit on securities held to maturity (1) (1)
Increase in other assets (257) (1,759)
Increase in other liabilities 2,997 2,041
Net cash provided by operating activities 38,618 34,580
Cash Flows From Investing Activities
(Increase) decrease in interest-bearing
deposits in other banks 36,394 (33,176)
Proceeds from maturities, calls and sales
of available for sale securities 134,784 124,538
Purchase of securities available for sale (155,110) (146,833)
Proceeds from maturities of investment
securities 64,947 133,599
Purchase of investment securities (105,242) (150,838)
Decrease in federal funds sold
and securities purchased under agreements
to resell 50,305 13,059
Net increase in loans (50,175) (36,245)
Purchases of bank premises and equipment (8,260) (6,569)
Proceeds from sale of other real estate owned 3,253 2,410
Net cash (used in) investing activities (29,104) (100,055)
Cash Flows From Financing Activities
Net increase in noninterest-bearing
and interest-bearing demand deposits
and savings accounts 341 80,203
Net decrease in certificates
of deposit (38,686) (32,753)
Dividends paid (14,881) (12,096)
Increase in other
short-term borrowings 6,764 14,560
Increase in long-term debt 4,603 4,368
Acquisition of common stock (12,494) (3,322)
Net proceeds from issuance of common stock 3,905 1,467
</TABLE>
<PAGE>
<TABLE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (000 Omitted)
<CAPTION>
(Unaudited)
For the Nine Months Ended
Sept. 30, Sept. 30,
1999 1998
<S> <C> <C>
Net cash provided by (used in)
financing activities (50,448) 52,427
Decrease in cash and
cash equivalents (40,934) (13,048)
Cash and Cash Equivalents
Beginning 164,207 135,040
Ending 123,273 121,992
Supplemental Disclosures of Cash Flows
Information
Cash payments for:
Interest paid to depositors 57,980 55,937
Interest paid on other short-term
borrowings 2,445 3,698
60,425 59,635
Income taxes 16,761 13,762
Supplemental Schedule of Noncash Investing
and Financing Activities
Issuance of stock options under
nonvariable compensatory plan:
1999 - 67,000 shares;
1998 - 84,680 shares 1,003 1,308
Loan balances transferred to foreclosed
properties 2,993 3,161
Market value adjustment available for
sale securities (18,815) 3,830
Common stock issued for 3%
stock dividend (20,630) --
</TABLE>
See Accompanying Notes to Consolidated Financial Statements
<PAGE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
SEPTEMBER 30, 1999 (UNAUDITED) AND DECEMBER 31, 1998
1. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the
financial position as of September 30, 1999, and December 31, 1998,
and the results of operations and changes in cash flows for the nine
months ended September 30, 1999 and 1998. The statements should be
read in conjunction with the Consolidated Notes to Financial
Statements included in F&M's Annual Report for the year ended
December 31, 1998.
The amounts previously reported for the periods presented have been
retroactively restated to reflect the acquisition of Security Bank
Corporation on March 22, 1999. The transaction was accounted for
under the pooling of interests method.
2. The results of operations for the nine-month periods ended
September 30, 1999 and 1998, are not necessarily indicative of the
results to be expected for the full year.
3. F&M National Corporation's ("F&M" or the "Corporation") amortized
cost and market value of securities being held to maturity as of
September 30, 1999, are as follows:
<TABLE>
<CAPTION>
September 30, 1999 (000 omitted)
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies 418,996 1,463 (8,710) 411,749
Obligations of states and
political subdivisions 22,756 214 (130) 22,840
Corporate securities 1,314 19 (1) 1,332
443,066 1,696 (8,841) 435,921
</TABLE>
<PAGE>
F&M's amortized cost and market value of the available for sale
securities as of September 30, 1999, are as follows:
<TABLE>
<CAPTION>
September 30, 1999 (000 omitted)
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies 381,271 1,103 (10,849) 371,525
Obligations of states and
political subdivisions 1,134 5 (7) 1,132
Corporate securities 5,656 0 (94) 5,562
Other 12,239 315 0 12,554
400,300 1,423 (10,950) 390,773
</TABLE>
4. F&M's loan portfolio is composed of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(000 Omitted)
<S> <C> <C>
Commercial, financial and agricultural 286,339 288,020
Real estate-construction 107,991 104,043
Real estate-mortgage 1,143,099 1,125,741
Consumer loans to individuals 235,885 212,310
Total loans 1,773,314 1,730,114
Less: Unearned income (1,207) (2,794)
Allowance for loan losses (23,065) (22,646)
Loans, net 1,749,042 1,704,674
</TABLE>
F&M had $9,637,000 in loans in a non-accrual category at September
30, 1999.
5. Reserve for Loan Losses:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(000 Omitted)
<S> <C> <C>
Balance at January 1 22,646 22,115
Provision charged to operating expense 2,814 5,541
Recoveries added to the reserve 607 779
Loan losses charged to the reserve (3,002) (5,789)
Balance at end of period 23,065 22,646
</TABLE>
6. Earnings per common share:
<TABLE>
<CAPTION>
September 30, 1999 September 30, 1998
Per Per
(in 000s) Share (in 000s) Share
Shares Amount Shares Amount
<S> <C> <C> <C> <C>
Basic EPS 23,082 1.34 23,196 1.17
Effective of
dilutive securities:
Stock options 186 208
Diluted EPS 23,268 1.33 23,404 1.16
</TABLE>
7. Security Bank ("Security") and the Corporation entered into an
agreement, dated as of November 10, 1998, for the affiliation of
Security Bank Corporation, Manassas, Virginia, with the Corporation.
Under the terms of the agreement, Security Bank exchanged all of its
shares of common stock for approximately 643,000 shares of the
Corporation's common stock. The transaction qualified as a tax-free
exchange and was accounted for as a pooling of interests. The merger
was consummated and become effective as of the close of business on
March 22, 1999.
8. F&M, on August 11, 1999, declared a 3% stock dividend payable on
October 26, 1999, to shareholders of record on September 24, 1999.
F&M will issue approximately 669,544 shares of common stock with cash
being paid in lieu of fractional shares.
9. On October 6, 1999, F&M and The State Bank of the Alleghenies
("State Bank"), Covington, Virginia, announced that their respective
Boards of Directors have approved a definitive agreement for the
affiliation of State Bank with F&M. Under terms of the agreement, F&M
would exchange the number of its shares of common stock whose
aggregate market value determined as of the date of closing equals
$18.00, subject to a maximum of 0.651 and a minimum of 0.554 shares
of F&M stock being exchanged for each shares of State Bank stock. The
transaction has an indicated value of approximately $53.3 million and
is intended to qualify as a tax-free exchange and be accounted for as
a pooling of interests. At June 30, 1999, State Bank reported total
assets of approximately $155.6 million and total stockholders' equity
of approximately $17.1 million. The transaction is expected to be
completed in the first quarter of 2000.
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
F & M National Corporation
Winchester, Virginia
We have reviewed the accompanying consolidated balance sheet of F&M
National Corporation and Subsidiaries as of September 30, 1999, and
the related consolidated statements of income, changes in
shareholders' equity and cash flows for the nine-month periods ended
September 30, 1999 and 1998. These financial statements are the
responsibility of the Corporation's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying condensed consolidated
financial statements referred to above for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of F&M National Corporation and
Subsidiaries as of December 31, 1998, and the related statements of
income, changes in shareholders' equity and cash flows for the year
then ended (not presented herein); and in our report dated January
27, 1999, we expressed an unqualified opinion on those financial
statements. In our opinion, the information set forth in the
accompanying condensed balance sheet as of December 31, 1998 is
fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
/s/
YOUNT, HYDE & BARBOUR, P.C.
Winchester, Virginia
November 10, 1999
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial information is
presented to aid the reader in understanding and evaluating the
financial condition and results of operations of F&M National
Corporation ("F&M" or the "Corporation").
FINANCIAL CONDITION
Total assets on September 30, 1999, were $2.922 billion, up $102.8
million or 3.6% from $2.819 billion at September 30, 1998. Total
assets at December 31, 1998, were $2.950 billion. For the first nine
months of 1999, total assets averaged $2.904 billion, 4.3% above the
first nine months 1998 average of $2.785 billion.
Total loans, net of unearned income, amounted to $1.772 billion at
September 30, 1999, an increase of $60.7 million or 3.6% from $1.711
billion at September 30, 1998. At December 31, 1998, total loans,
net, were $1.727 billion. Total loans (net) as a percent of total
assets were 60.6% at September 30, 1999, as compared to 60.7% at
September 30, 1998, and 58.6% at December 31, 1998. Net loan volume
for the first nine months of 1999 increased $44.8 million as compared
to $30.3 million for the first nine months of 1998. Loan volume
increased as a result of a robust, thriving economy in all markets
served by F&M.
On September 30, 1999, the securities portfolio totaled $833.8
million, which was $110.7 million or 15.3% higher than September 30,
1998, and $44.9 million or 5.7% higher than at December 31, 1998.
Funds invested in the securities portfolio were invested in U. S.
Government and U. S. Agency securities in an effort to balance the
asset risk portfolio between available-for-sale and held-to-maturity
securities. Federal funds sold and securities purchased under
agreement to resell were $63.0 million at September 30, 1999, $50.3
million or 44.4% lower than $113.3 million outstanding at December
31, 1998. Federal funds sold are one-day sales of funds to large
regional correspondent banks and are the lowest earning pool of
interest-earning funds. Federal funds have decreased due to funding
demand for loans and the acquisition of investment securities.
The market value of available for sale ("AFS") securities according
to FASB 115 at September 30, 1999, was $390.8 million as compared to
$292.2 million at September 30, 1998. F&M increased the investment in
AFS securities as a result of attractive rates and the high quality
of U.S. Government securities. The effect of the market value of AFS
securities less the book value of AFS securities, net of income taxes
reflected in Stockholders' Equity was $(6.2) million at September 30,
1999, a decrease from September 30, 1998 of $10.9 million. Recent
increases in interest rates by the Federal Reserve has a converse
relationship to the market rates in the investment portfolio
contributing to the decline in market value of securities. The
decline in the market value of available-for-sale securities below
book value is a temporary market condition and is not indicative of a
deterioration of asset rating or quality.
Total deposits increased $79.6 million or 3.4% to $2.450 billion at
September 30, 1999, compared to one year earlier. At December 31,
1998, total deposits were $2.488 billion. Noninterest-bearing
deposits increased $44.5 million or 9.1% from $490.1 million at
September 30, 1998, to $534.6 million at September 30, 1999.
Interest-bearing deposits increased $35.1 million or 1.9% from $1.880
billion at September 30, 1998, to $1.915 billion at September 30,
1999. F&M customers are balancing the liquidity of a demand deposit
position with investing in short-term time deposits in anticipation
of the possibility of higher interest rates in the near term by the
Federal Reserve. F&M offers attractive, yet competitive, rates that
are set to maintain a fair net interest margin.
Long-term debt was $25.7 million at September 30, 1999, up $4.1
million or 19.0% as compared to $21.6 million at September 30, 1998.
Long-term debt was $21.1 million at year-end 1998. Long-term debt
consists of borrowed funds from Federal Home Loan Banks that supports
loans to eligible bank customers for a period of 10 to 15 years for
low-income housing.
RESULTS OF OPERATIONS
Net income for the first nine months of 1999 amounted to $31.0
million, increasing $3.9 million or 14.5% from $27.1 million for the
first nine months of 1998. The yield on interest-earning assets was
7.68% for the first nine months of 1999 as compared to 8.14% for the
first nine months of 1998 and the yield on interest-bearing deposits
was 3.77% for the first nine months of 1999 as compared to 4.46% for
the first nine months of 1998.
Return on average assets was 1.43% for the first nine months of 1999,
compared with 1.30% for the same period in 1998 and for the year
1998. F&M's return on average equity was 14.02% for the first nine
months of 1999, 12.79% for the first nine months of 1998, and 12.73%
for the year ended 1998.
Net interest income totaled $93.8 million for the first nine months
of 1999, a $4.9 million or 5.5% increase over F&M's performance for
the first nine months of 1998. The net interest margin on a Federal
tax equivalent basis for the first nine months of 1999 was 4.71%,
down 11 basis points from 4.82% for the first nine months of 1998.
The decrease in net interest margin is primarily the effect of lower
yield related to interest-earning assets.
Total nonperforming assets, which consist of nonaccrual loans,
restructured loans, and foreclosed properties were $22.3 million at
September 30, 1999, a decrease of $6.3 million or 22.0% from $28.6
million at December 31, 1998. Nonperforming assets are composed
largely of 1-4 family residential loans and commercial loans secured
by real property.
Nonperforming loans (nonaccrual loans and restructured loans) at
September 30, 1999, were $9.9 million or 0.6% of total loans, down
$2.2 million from $12.1 million at December 31, 1998. Nonperforming
loans are those loans where, in the opinion of management, the full
collection of principal or interest is unlikely.
FASB 114 defines impaired loans as all loans excluding personal real
estate and consumer loans about which there is doubt as to the
ability of the customer to meet their contractual obligations.
September 30, 1999
Commercial nonaccrual loans $ 4,674
Commercial accrual loans 11,951
Total impaired loans $16,625
At September 30, 1999, impaired loans totaled $16.6 million upon
which an allowance of $3.2 million has been provided, which is
included in the total loan portfolio allowance for loan losses.
Interest income recognized on impaired loans as of September 30,
1999, was $1.0 million. The average balance of impaired loans for the
first nine months 1999 was $15.6 million. Loans past due 90 days or
more and still accruing interest because they were well secured and
in the process of collection were $4.3 million at September 30, 1999,
and $2.0 million at December 31, 1998.
Foreclosed properties consists of 26 parcels of real estate acquired
through debt previously contracted. These properties consist
primarily of commercial and residential real estate whose value is
determined through sale at public auction or fair market value,
whichever is less. At September 30, 1999, foreclosed properties were
$11.1 million as compared to $16.5 million at December 31, 1998.
The allowance for loan losses has increased to $23.1 million at
September 30, 1999, as compared to $22.6 million at year end 1998.
The allowance for loan losses increased $419 thousand in the first
nine months of 1999 as compared to $319 thousand for the first nine
months of 1998. The amount provided for loan losses in 1999 and 1998
is an amount, in management's judgment is sufficient for the risk
associated with the loan portfolio. The ratio of allowance for loan
losses to total loans was 1.30% at September 30, 1999, as compared to
1.31% for both September 30, 1998 and year-end 1998.
Total noninterest income increased $8.1 million or 30.5% from $26.5
million for the first nine months of 1998 to $36.6 million for the
first nine months of 1999. For the first nine months of 1999, gains
realized on securities available for sale were $3.1 million or 8.5%
of total noninterest income, whereas, for the first nine months of
1998 securities gains were $743 thousand or 2.8% of total noninterest
income. Security gains are realized when market conditions exist that
are favorable to the Corporation and/or conditions dictate additional
liquidity is desirable. It is the intent of the Corporation not to
sell any security that is held in its "held to maturity" portfolio
and any gain or loss in this category is the result of securities
being called prior to maturity by the issuer.
Credit card fees were $3.4 million for the first nine months of 1999,
up $452 thousand or 15.1% over the first nine months of 1998 as a
result of marketing efforts to attract new credit card customers and
additional customer activity. Insurance commission income for the
first nine months of 1999 was $6.9 million, up $379 thousand from the
first nine months of 1998 primarily as a result of increased business
activity of F&M's insurance agencies, whose primary sources of
revenue are derived from selling insurance policies to customers.
Revenues from fees for other customer services increased $3.9 million
or 170.5% from $2.3 million for the first nine months of 1998 to $6.1
million for the first nine months of 1999 primarily as a result of
fees charged customers in the secondary market. Other operating
income increased $1.3 million or 57.5%, up from $2.3 million for the
first nine months of 1998 to $1.6 million for the first nine months
of 1999. The increase in other operating income is a seasonal
variation in other fees and charges.
Total noninterest expenses increased $8.8 million or 12.5% from $70.9
million for the first nine months of 1998 to $79.8 million for the
first nine months of 1999. Salary expense increased $7.1 million or
18.2% from $38.9 million for the first nine months of 1998 to $46.0
million for the first nine months of 1999 as a result of employing
additional personnel due to branch expansion, certain employees who
are paid on a commission basis, and increases in costs associated
with salaries and benefits. The cost of net occupancy expense has
increased $412 thousand or 6.6% to $6.7 million for the first nine
months of 1999, as a result of acquiring new branches and remodeling
older branches. Furniture and equipment expense increased $25
thousand or 0.5% from $5.4 million for the first nine months of 1999,
which is reflective of higher 1998 costs related to equipment and
software upgrades. Deposit insurance was $223 thousand for the first
nine months of 1999, which approximated the cost of the first nine
months of 1998. Credit card expense was up $432 thousand or 19.0%
from $2.3 million for the first nine months of 1998 to $2.7 million
for the first nine months of 1999 as a result of direct marketing and
additional card customer activity. Other operating expense increased
$872 thousand from $17.9 million for the first nine months of 1998 to
$18.8 million for the first nine months of 1999.
Income taxes increased $2.4 million or 16.2% from $14.4 million for
the first nine months of 1998 to $16.8 million for the first nine
months of 1999. The increase in income taxes is the result of greater
amounts of income subject to income taxes.
ASSET QUALITY
Loan quality continues to be good based on reviews by management.
Loan quality is the result of management employing conservative
principles of lending while meeting the needs of customers. Good loan
quality results in reduced need for additional provision for loan
losses and efforts to collect past due loans, which has a positive
impact on net income.
Total loan charge offs less recoveries amounted to $2.4 million for
the first nine months of 1999, representing a ratio of net charge
offs to total average loans, net of unearned income of 0.18%,
annualized. This compares to 1998 twelve-month net charge-offs of
$5.0 million, or 0.30% of average loans.
As of September 30, 1999, loans on non-accrual basis amounted to $9.6
million, or 0.5% of total loans, net of unearned discount, down from
$15.3 million for the same period 1998. Loans 90 days or more past
due and still accruing totaled $4.3 million, or 0.24% of total loans,
net of unearned discount. In management's judgment, the balance in
the reserve for loan losses is adequate to cover future losses in the
existing loan portfolio.
F&M closely monitors those loans that are deemed to be potential
problem loans. Loans are viewed as potential problem loans when
possible credit problems of the borrowers cause management to have
doubts as to the ability of such borrowers to comply with current
repayment terms. Those loans are subject to constant management
attention, and their classification is reviewed on a regular basis.
At September 30, 1999, the potential problem loans were $16.7 million
and included seven lending relationships with principal balance in
excess of $500,000. Those seven lending relationships had an
aggregate principal balance outstanding of $9.8 million.
LIQUIDITY
Liquidity requirements are measured by the need to meet deposit
withdrawals, fund loans, maintain reserve requirements and operate
the organization. To meet its liquidity needs, F&M maintains cash
reserves and has an adequate flow of funds from maturing loans,
investment securities, and short-term investments. In addition, F&M's
affiliate banks have the ability to borrow from the Federal Reserve
Bank and the Federal Home Loan Bank. F&M considers its sources of
liquidity to be ample to meet its estimated needs.
CAPITAL RESOURCES
F&M's strong capital position provides the resources and flexibility
for anticipated growth.
F&M's risk-based capital position at September 30, 1999 was $286.9
million, or 15.5% of risk-weighted assets, for Tier I capital and
$310.0 million, or 16.7% for total risk based capital.
Tier I capital consists primarily of common shareholders' equity,
while total risk-based capital adds the allowance for loan losses to
Tier I. Risk-weighted assets are determined by assigning various
levels of risk to different categories of assets and off-balance
sheet activities. Under current risk-based capital standards, all
banks are required to have Tier I capital of at least 4% and total
capital of 8%.
YEAR 2000 ("Y2K")
THE PROBLEM
The impact the century date change will have on date-sensitive
computer programs worldwide is one of the biggest challenges ever
faced by the business world. On older computers, memory and storage
space were limited and expensive. In most cases, only the last two
digits of the year (99) were used, with the century (19) being
implied. At the turn of the century, some computers may recognize the
year "00" as 1900 instead of 2000, causing problems ranging from
minor inaccuracies to systems failures. F&M is committed to achieving
Year 2000 readiness well in advance of the millennium change. It is
F&M's goal to continue to deliver uninterrupted and unparalleled
service into the 21st century and beyond.
In 1998, F&M estimated that costs of addressing Year 2000 issues was
1.6% of 1998 earnings (or 0.02% of assets), which was immaterial when
considering the size of the Corporation. Year 2000 costs in 1999 have
been immaterial and for the year 2000 are also expected to be
immaterial. The projections of total costs of F&M's Year 2000 project
and the expected completion dates are based on F&M's best estimates,
which are necessarily based in part on assumptions of future events
including the continued availability of adequate resources and
completion of third party modification plans. There can be no
guarantee that these estimates will be achieved; actual results could
differ from the Corporation's current estimates. Specific risk
factors that might cause material differences include, but are not
limited to, the availability and cost of personnel with adequate
programming skills and the ability to locate and correct all relevant
computer codes. The inability to control the actions and plans of
vendors and suppliers, customers, government entities, and other
third parties with respect to Year 2000 issues are associated risks.
F&M has long recognized that the Year 2000 issue is a multifaceted
one. Corporate management and technical teams have been working
steadily on all related aspects of business that could be affected.
F&M has been scrutinized by regulatory authorities to ensure that it
is proceeding with a prudent plan of action for Year 2000 readiness
and are keeping its customers informed.
YEAR 2000 PROJECT PHASES
In 1997, F&M and its affiliates began to develop a comprehensive plan
to ensure that the Corporation would be ready for the millennium
change. This plan encompassed five phases:
Phase I - Organizational Awareness
The Year 2000 Task Force made certain that the strategic importance
of Year 2000 as a business objective is understood by the Board of
Directors, senior management, officers, and employees of all
affiliates.
Phase II - Assessing Actions and Developing Detailed Plans
The Year 2000 Task Force created a detailed inventory covering
centralized and decentralized hardware, software, and networks, as
well as equipment with embedded computer chips and logic. The
inventory included items such as HVAC systems, vaults, security
equipment, and elevators.
Phase III - Renovating Systems, Applications, and Equipment
During this phase, the necessary upgrade of operating system
applications, hardware, and equipment took place. In addition,
contingency plans were developed identifying alternate approaches if
renovations of current software, hardware and equipment lag behind or
fail after January 1, 2000.
Phase IV - Validating the Renovations through Testing
In this phase, F&M developed and coordinated detailed test schedules
with correspondents, vendors, and customers to ensure Year 2000
preparedness. This critical phase encompassed both corrected
applications and those applications already determined to be
compliant.
Phase V - Implementation
Implementation requires careful planning to make sure that
interrelated applications are coordinated as to when they go into
production. This phase also includes monitoring of systems throughout
1999 and into 2000 to ensure date functions and interdependencies
work properly.
"MISSION CRITICAL" SYSTEM TESTING
F&M's "mission critical" system was developed from initial design and
tested in 1998 as Year 2000 ready by its vendor, Kirchman
Corporation. In addition, the Kirchman Corporation received Year 2000
Certification from the ITAA (Information Technology Association of
America) during 1998. Foresight and commitment to serving F&M's
customers has, in many ways, kept F&M one step ahead of the Year 2000
issue.
F&M made great strides on this project during 1998 and in 1999. Test
plans have been completed and strategies developed. F&M has installed
its own separate certification test environment to ensure that F&M
will have the ability to roll into 2000 without impact. F&M has
performed multiple compliance tests to affirm that all applications
interface properly under future-date simulated conditions. F&M has
completed Phase I through Phase IV testing.
F&M places a high priority on the service provided to customers, and
is working diligently to ensure the continued operation of essential
business functions. The Corporation is on schedule and confident that
F&M will make a smooth transition into the Year 2000.
CONTINGENCY PLAN
Simultaneous to the testing of its mission critical systems, F&M has
prepared alternate solutions through a business resumption
contingency plan to mitigate potential risks on January 1, 2000. This
contingency plan was developed for all core business functions and
their supporting information technology systems and includes trigger
dates for implementation of alternative solutions. Core business
risks will be prioritized based upon greater risk posed to the
institution. The contingency plan identifies financial and human
resources necessary for their execution. In addition, it contains a
business risk assessment that identifies potential disruptions on the
bank's operations, the minimum acceptable level of services, the
strategies and resources available to restore system or business
operations, and the processes and equipment needed for the
institution to function at an adequate level.
The risk of failure is not limited to F&M's internal information
system. The institution depends on data provided by its business
partners, correspondent banks, Federal Reserve Bank, and other third
parties. F&M also depends on vendors from which telecommunications,
software, and other services are provided. Finally, F&M depends on
services provided by the public infrastructure including power,
water, transportation, and voice and data telecommunications. F&M's
contingency plans address these concerns and provided for alternate
solutions should Year 2000-related infrastructure problems develop,
ensuring that our institution can operate at an acceptable level.
WORST-CASE YEAR 2000 SCENARIOS
Until the Year 2000 event actually occurs and for a period of time
thereafter, there can be no assurance that there will be no problems
related to Year 2000. The Year 2000 technology challenge is an
unprecedented event. If Year 2000 issues are not adequately addressed
by the Corporation and third parties, the Corporation could face,
among other things, business disruptions, operational problems,
financial losses, legal liability, and similar risks, and the
Corporation's business, results of operations and financial position
could be materially adversely affected.
The Corporation's credit risk associated with borrowers may increase
to the extent borrowers fail to adequately address Year 2000 issues.
As a result, there may be increases in the Corporation's problem
loans and credit losses in future years. In addition, the Corporation
may be subject to increased liquidity risks associated with deposit
withdrawals. It is not, however, possible to quantify the potential
impact of any such risks or losses at this time.
FDIC INSURANCE
FDIC-insured deposits are completely safe. FDIC insurance is a
constant, a given, a guarantee you can literally bank on. If a bank
were to experience Year 2000 problems and, in the worst case, were
unable to operate, the FDIC will be there to protect insured
deposits, as it has been for all 65 years of the FDIC's existence. No
depositor has ever lost a cent of insured funds at an FDIC-insured
bank or savings institution.
"First and foremost, the FDIC wants consumers to know that insured
deposits are safe, and that deposit insurance will not be affected by
the century date change," says Sandy Cormenetz, the Y2K Project
Manager for the FDIC's Legal Division in Washington. "We also want
people to know as much as possible about the Year 2000 problem - to
know what it is, and what is not. That way peoples can separate
accurate information from scare stories." (Source: FDIC Consumer
News, Fall 1998).
The foregoing Year 2000 discussion contains "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such statements, including, without limitation,
anticipated costs, the dates by which the Corporation expects to
complete remediation and testing of systems and contingency planning,
and the impact of the re-deployment of existing staff, are based on
management's best current estimates, which were derived utilizing
numerous assumptions about future events, including the continued
availability of certain resources, representations received from
third-party vendors and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual results
could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited
to: the availability and cost of personnel trained in this area; the
ability to identify and convert all relevant systems; results of Year
2000 testing; adequate resolution of Year 2000 issues by governmental
agencies, businesses or other third parties that are service
providers, suppliers, borrowers or customers of the Corporation;
unanticipated system costs; the need to replace hardware; the
adequacy of and ability to implement contingency plans; and similar
uncertainties. The forward-looking statements made in the foregoing
Year 2000 discussion speak only as of the date on which such
statements are made, and the Corporation undertakes no obligation to
update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or
reflect the occurrence of unanticipated events.
The foregoing Year 2000 discussion constitutes a Year 2000 Readiness
Disclosure within the meaning of the Year 2000 Readiness and
Disclosure Act of 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in information reported as of
December 31, 1998, in Form 10-K.
FORM 10-Q PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Registrant or
any of its subsidiaries, directors or officers is a party or by which
they, or any of them, are threatened. All legal proceedings presently
pending or threatened against F & M and its subsidiaries involve
routine litigation incidental to the business of F&M or the
subsidiary involved and are either not material in respect to the
amount in controversy or fully covered by insurance.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
(2) Plan of Acquisition, Reorganization, Arrangement,
Liquidation, or Succession - not applicable.
(3) (i) Articles of Incorporation - not applicable.
(ii) By-laws - not applicable.
(4) Instruments Defining the Rights of Security Holders
Including Indentures - not applicable.
(10) Material Contracts.
Incorporated herein by reference to Registrant's Form 10-K
Annual Report for the year ended December 31, 1998, filed
with the Commission on March 23, 1999, under Exhibit 10.
(11) Statement re Computation of Per Share Earnings.
Incorporated herein by reference to Note 11, page 38, of
Registrant's 1998 Annual Report to Shareholders filed as
Exhibit 13 to Form 10-K for the year ended December 31,
1998, filed with the Commission on March 30, 1999.
(15) Letter re Unaudited Interim Financial Information - not
applicable.
(18) Letter re change in accounting principles - not applicable.
(19) Reports furnished to security holders.
Incorporated herein by reference to Registrant's 1998 Notice
of Annual Meeting and Proxy Statement dated March 23, 1999,
filed with the Commission on March 23, 1999.
<PAGE>
(22) Published Report Regarding Matters Submitted to Vote of
Security Holders - not applicable.
(23) Consent of Experts and Counsel - not applicable.
(24) Power of Attorney - not applicable.
(27) Financial Data Schedules - Included herein as Exhibit 27.
(99) Additional Exhibits - None.
(b) Reports on Form 8-K.
(1) August 26, 1999, for event of August 11, 1999, under ITEM 5.
to report a 3% stock dividend to shareholders of record
September 24, 1999, payable October 26, 1999.
(2) October 4, 1999, for event of September 24, 1999, under ITEM
5. to report an amendment in the Articles of Incorporation
of the Registrant to increase the number of authorized
shares of capital stock from 35,000,000 by 900,000 shares,
to 35,900,000, which consists of 30,900,000 shares of common
stock and 5,000,000 shares of preferred stock.
(3) October 7, 1999, for event of October 6, 1999, to announce
the approval of a definitive agreement for the affiliation
of the Registrant with The State Bank of the Alleghenies,
Covington, Virginia.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
F & M NATIONAL CORPORATION
/s/ Alfred B. Whitt
Alfred B. Whitt
President, Vice Chairman, and Chief Financial Officer
/s/ Charles E. Curtis
Vice Chairman and Chief Administrative Officer
Date: November 10, 1999
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