<PAGE>
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, 1999
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, 2000:
$ 524,192,934.00
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT FEBRUARY 28, 2000: 24,934,076
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1999, are incorporated by reference in Parts II and
IV hereof; and
(2) Portions of Registrant's 2000 Proxy Statement dated March 24, 2000, are
incorporated by reference in Part III hereof.
<PAGE>
PART I
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS
The following is a summary of the major developments in F&M's business
since January 1, 1999 (F&M National Corporation is referred to herein as "F&M"
or the "Company"):
On February 1, 1999, F&M Bank-West Virginia opened a branch office at Wal-
Mart, Foxcroft Avenue, Martinsburg, West Virginia.
On March 22, 1999, Security Bank Corporation ("Security"), Manassas,
Virginia, merged with and into F&M Bank-Northern Virginia. Each share of common
stock of Security outstanding immediately prior to consummation of the merger
was exchanged, in a tax-free exchange, for 0.653 shares of F&M common stock with
cash being paid in lieu of issuing fractional shares. The merger was accounted
for as a pooling of interests. At December 31, 1998, Security had total assets
of $61.2 million, total loans of $34.3 million, total deposits of $52.4 million
and total shareholders' equity of $7.9 million.
On March 22, 1999, F&M Bank-Northern Virginia opened branch offices at the
following locations: 13927 Jefferson Davis Highway, Woodbridge, Virginia; 7801
Sudley Road, Manassas, Virginia; and 8780 Centreville Road, Centreville,
Virginia.
On April 1, 1999, F&M Bank-Northern Virginia closed a branch office at 7900
Sudley Road, Catharpin, Virginia and on April 5, 1999 opened a branch office at
4665 Sudley Road, Catharpin, Virginia.
On June 1, 1999, F&M Bank-Richmond opened a branch office at 600 East Main
Street, Richmond, Virginia and closed a branch office at 209 West Franklin
Street, Richmond, Virginia.
On July 1, 1999, F&M Bank-Richmond opened a branch office at 11900 Chester
Village Drive, Chester, Virginia
On July 25, 1999, F&M Bank-Richmond closed a branch office at 4310 West
Hundred Road, Chester, Virginia.
On August 10, 1999, F&M Bank-Winchester ("Winchester") acquired loans,
deposits, property, plant and equipment that was formerly a bank branch of
Wachovia Bank Corporation located at 126 Fairfax Pike, Stephens City, Virginia.
The acquisition was accounted for as a purchase transaction. The new branch of
Winchester opened on August 19, 1999.
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On August 18, 1999, F&M Bank-Northern Virginia opened a branch office at
4736 Lee Highway, Arlington, Virginia.
On August 27, 1999, F&M Bank-Winchester relocated a branch office at 158
South Main Street, Woodstock, Virginia, to 115 West Spring Street, Woodstock,
Virginia. F&M Bank-Winchester acquired loans, deposits, property and equipment
that was formerly a branch bank of Wachovia Bank Corporation located at 115 West
Spring Street, Woodstock, Virginia. The acquisition was accounted for as a
purchase transaction. The relocated branch in Woodstock opened on August 27,
1999.
On August 31, 1999, the Company reinstated a Dividend Reinvestment Plan.
All registered shareholders are eligible to reinvest up to 100% of their
dividends. In addition, shareholders may purchase additional shares of F&M
common stock by making optional cash payments at any time subject to a minimum
of $25. The plan will be funded by shares of F&M purchased in open market
transactions. Purchases will begin on the first business day of each month and
continue until the necessary shares are acquired. The effective date of the
plan will be January 25, 2000.
On October 31, 1999, F&M Bank-West Virginia closed a branch office located
at Hilldale Shopping Center, Charles Town, West Virginia.
On December 20, 1999, F&M Bank-Winchester opened a branch bank located at
432 South Street, Front Royal, 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 provides financial, insurance, and trust services to
individuals and commercial customers through 17 subsidiary corporations
including 125 banking locations, 13 mortgage banking offices, 3 trust offices,
and 6 insurance offices in Virginia, West Virginia and Maryland. F&M offers a
full range of banking services principally to individuals and small and middle-
market businesses in north, central and south Virginia including the Shenandoah
Valley, the eastern panhandle of West Virginia, and the counties of Montgomery
and Prince George's in Maryland. At December 31, 1999, F&M had assets of $2.946
billion, deposits of $2.482 billion and shareholders' equity of $291.6 million.
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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 24 banks, which expanded its market area and
increased market share in Virginia, West Virginia and Maryland.
The following table sets forth certain information concerning F&M and its
operating subsidiaries at December 31, 1999:
<TABLE>
<CAPTION>
DATE BANKING TOTAL TOTAL TOTAL
ACQUIRED OFFICES ASSETS LOANS DEPOSITS
--------------------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
F&M Bank-Winchester
Winchester, VA (1) 1970 34 $ 844,167 $ 496,910 $ 756,326
F&M Bank-Massanutten
Harrisonburg, VA (2) 1980 9 264,688 218,557 208,430
F&M Bank-Richmond
Richmond, VA (3) 1982 15 280,988 165,338 251,597
F&M Bank-Central Virginia
Charlottesville, VA 1985 7 92,364 42,683 77,848
F&M Bank-West Virginia
Ranson, WV (4) 1988 13 309,105 190,013 268,405
F&M Bank-Emporia
Emporia, VA 1993 3 74,806 39,378 66,350
F&M Bank-Peoples
Warrenton, VA 1994 4 128,155 95,064 114,404
F&M Bank-Northern VA
Fairfax, VA (5) 1996 31 766,627 425,964 614,710
F&M Bank-Allegiance
Bethesda, MD 1996 9 154,653 110,823 124,135
F&M (Parent only) (6) - - 30,381 0 0
--- ---------- ---------- ----------
Total 125 $2,945,934 $1,784,730 $2,482,205
</TABLE>
_________________
(1) Includes F&M Mortgage Services, Inc., and two insurance agencies.
(2) Includes the merger in 1995 of F&M Bank-Broadway, Broadway, Virginia, into
F&M Bank-Massanutten.
(3) Includes the acquisition in 1998 of Peoples Bank of Virginia, Chesterfield,
Virginia.
(4) Created from the consolidation in 1998 of F&M Bank-Blakeley, F&M Bank-
Martinsburg and F&M Bank-Keyser.
(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, the acquisition in 1996 of FB&T Financial Corporation, Fairfax,
Virginia, the acquisition in 1998 of The Bank of Alexandria, Alexandria,
Virginia, and the acquisition in 1999 of Security Bank Corporation,
Manassas, Virginia.
(6) Includes F&M Trust Company and F&M Services Inc. each of which was
incorporated in 1998.
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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 attends
meetings of 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, safe deposit boxes, and home banking. 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 1998, F&M Trust Company was
formed by consolidating the trust departments of F&M Bank-Winchester, F&M Bank-
Peoples, and F&M Bank-Northern Virginia. F&M Trust Company provides a variety of
personal trust services including management of common trust funds, estate
administration and planning specifically addressing the investment and financial
management needs of its customers. At December 31, 1999, F&M Trust Company
managed assets and accounts totaling $712.1 million.
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 June 30, 1999, F&M operated 33 banking offices in
the Shenandoah Valley from Winchester to Harrisonburg with deposits of $743.9
million; 14 banking offices in the eastern panhandle of West Virginia with
deposits of $281.1 million; 7 banking offices in the Charlottesville/Albemarle
County area with deposits of $71.0 million; 3 banking offices in Emporia,
Virginia, and surrounding Greenville County with deposits of $63.7 million; 16
banking offices in suburban Richmond, Virginia, with deposits of $259.1 million;
38 banking offices in Loudoun, Fairfax and Prince William Counties of northern
Virginia and including the cities of Alexandria, Fairfax, Falls Church, and
Manassas with deposits of $802.9 million; 4 offices in the town of Warrenton and
Fauquier and Stafford Counties with deposits of $110.1 million; and 9 offices in
the counties of Montgomery and Prince George's in Maryland with deposits of
$130.4 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 50%
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share of total deposits in Winchester, a 22% share of total deposits in
surrounding Frederick County, a 28% share of total deposits in Warren County,
and a 16% 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 20% 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 15% deposit market share in Berkeley County (which includes
Martinsburg) and a 41% deposit market share in Mineral County (which includes
Keyser). In Fairfax, Prince William and Fauquier Counties (including Warrenton),
F&M has 2%, 4%, and 15%, respectively, of deposit market share and, in the
cities of Alexandria, Fairfax, Falls Church and Manassas, F&M's deposit market
share, respectively, is 3%, 9%, 3% and 19%. 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.
F&M's subsidiary banks have not experienced loan quality deterioration due
to conservative underwriting standards and focused in-market lending practices.
At December 31, 1999, F&M had total nonperforming assets of approximately $19.6
million, representing 1.09% of period end loans and foreclosed properties.
F&M also operates F&M Mortgage Services, Inc., which offers both fixed and
adjustable rate residential mortgage loans and servicing. F&M Mortgage Services
Inc., 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 $1.423 billion in assets and approximately $1.233
billion in deposits through 15 acquisitions. 1999 acquisitions by F&M are
outlined in "ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS."
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.
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ANTI-TAKEOVER PROVISIONS
The Company's 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 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, 1999, F&M had 1,446 full time and 259 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:
<TABLE>
<CAPTION>
BANKING % MARKET MARKET 1990
COUNTY/CITY (1) OFFICES SHARE (2) RANK (2) POPULATION
- ------------------------ ------- --------- -------- ----------
<S> <C> <C> <C> <C>
State of Virginia:
Shenandoah Valley:
City of Winchester 10 50 2 21,947
Frederick County 5 22 1 45,723
Warren County 4 28 1 26,142
Shenandoah County 3 8 5 31,636
Clarke County 1 21 2 12,101
Rappahannock County 1 45 2 6,622
Rockingham County 4 20 2 57,482
City of Harrisonburg 5 15 4 30,707
</TABLE>
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<TABLE>
<CAPTION>
BANKING % MARKET MARKET 1990
COUNTY/CITY (1) OFFICES SHARE (2) RANK (2) POPULATION
- ------------------------ ------- --------- -------- ----------
<S> <C> <C> <C> <C>
Northern Virginia:
City of Alexandria 5 3 7 111,182
City of Fairfax 1 9 5 20,959
City of Falls Church 2 3 6 8,982
City of Manassas 4 19 2 33,399
Loudoun County 9 16 1 86,100
Fairfax County 12 2 11 819,000
Fauquier County 3 15 3 52,000
Prince William County 5 4 8 216,000
Stafford County 1 1 11 61,000
Charlottesville/
Albemarle County:
City of Charlottesville 1 * 9 40,341
Albemarle County 3 8 7 68,040
Nelson County 2 32 2 12,778
Amherst County 1 3 6 28,578
Richmond:
City of Richmond 3 1 9 203,056
Henrico County 5 3 8 217,881
Chesterfield County 8 7 6 209,274
Emporia:
City of Emporia 3 32 1 14,109
State of West Virginia:
Jefferson County 5 23 2 35,926
Berkeley County 5 15 3 59,253
Mineral County 4 41 1 26,697
State of Maryland:
Montgomery County 7 1 15 821,035
Prince George's 2 1 19 769,747
State of Virginia 101 3 7 6,187,358
State of West Virginia 14 2 10 1,793,477
State of Maryland 9 * NM 4,781,000
</TABLE>
_________________
* Represents less than 1% deposit market share NM=Not meaningful
(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, 1999, which is the most recently available
information.
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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 respective subsidiary banks' market regions. Four
of F&M's subsidiary banks, F&M Bank-Massanutten, F&M Bank-West Virginia, 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 large 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>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Commercial 16.2% 16.6% 16.7%
Real estate construction 6.1 6.0 5.8
Real estate mortgage:
Residential (1-4 family) 27.5 28.0 28.5
Loans held for sale 1.3 1.7 2.4
Home equity lines 3.4 3.4 4.2
Multifamily 1.5 1.7 2.0
Nonfarm, nonresidential(1) 29.6 29.4 28.4
Agricultural 1.0 1.0 1.1
Real estate mortgage subtotal 64.3 65.2 66.6
Loans to individuals:
Consumer 12.2 10.9 9.3
Credit card 1.2 1.3 1.6
Loans to individuals subtotal 13.4 12.2 10.9
Total Loans (%) 100.0% 100.0% 100.0%
Total Loans (dollars) $1,784,730 $1,727,320 $1,681,113
</TABLE>
________________
(1) This category generally consists of commercial and industrial loans where
real estate constitutes a source of collateral.
Approximately 48.3% of F&M's loan portfolio at December 31, 1999, 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
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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 and loans held for sale) was 32.2 % of its total loan portfolio at
December 31, 1999. The residential mortgage loans made by F&M's subsidiary
banks and F&M Mortgage Services, Inc., 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. In
addition, F&M Mortgage Services and several subsidiaries 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.
F&M's real estate construction portfolio historically has been a
relatively small portion of the total loan portfolio. At December 31, 1999,
construction loans were $108.4 million or 6.1% 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. 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 since 1993 of less than one-half of 1%.
Consumer loans were 13.4% of F&M's total loan portfolio at December 31,
1999. 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.
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.
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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 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 an individual 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
that 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 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 Company's 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 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, 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 $15.0 million at year end 1999 as
compared to $11.5 million at year end 1998, of which $5.3 million was classified
as nonperforming. Included in
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1999 impaired loans are $3.7 million secured by commercial real estate. All
impaired loans at year-end 1999 and 1998 had a related valuation allowance
totaling $2.6 million and $2.4 million, respectively. The average recorded
investment in certain impaired loans for 1999 and 1998 was approximately $15.3
million and $14.5 million, respectively. For the years 1999 and 1998, interest
income recognized on impaired loans totaled $1.6 million and $847 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:
<TABLE>
<CAPTION>
December 31,
1999 1998 1997
<S> <C> <C> <C>
Noninterest-bearing demand 21.4% 22.2% 19.3%
Interest checking 18.0 17.8 16.1
Savings accounts 8.6 8.7 9.0
Money market accounts 10.0 10.0 10.3
Time deposit accounts:
Under $100,000 32.2 31.3 35.7
$100,000 and over 9.8 10.0 9.6
100.0% 100.0% 100.0%
</TABLE>
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, 1999, F&M's subsidiary banks had $243.1 million of certificates of
deposit greater than $100,000, or 9.8% of total deposits. F&M's subsidiary
banks do not accept brokered deposits.
11
<PAGE>
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 1999 was four years three 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 limited to calls and maturities. The maturity ranges of
the securities and the average taxable-equivalent yields as of December 31,
1999, are shown in the following table:
<TABLE>
<CAPTION>
U.S. Government State and
And its Agencies Municipal Other
Book Value Yield Book Value Yield Book Value Yield
------------------------- ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
One year or less $102,419 6.00% $ 3,196 7.64% $ 905 6.28%
After one year
through five years 443,171 6.02 12,625 7.03 201 6.48
After five through
ten years 151,875 6.42 4,400 7.11 206 6.62
After ten years 104,212 6.97 1,865 7.57 17,947 6.71
-------- ------- -------
Total $801,677 6.21% $22,086 7.22% $19,259 6.69%
======== ======= =======
</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
12
<PAGE>
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
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------
Commercial,
Financial and Real estate and
Agricultural Construction
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Within 1 year $ 137,603 $ 69,425
Variable Rate:
1 to 5 years 29,504 5,032
After 5 years 16,981 9,255
Total 46,485 14,287
Fixed Rate:
1 to 5 years 93,712 17,557
After 5 years 11,258 7,112
Total $ 104,970 $ 24,669
Total Maturities $ 289,058 $ 108,381
</TABLE>
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.
FORWARD-LOOKING STATEMENTS
- --------------------------
This report contains certain forward-looking statements with respect to the
financial condition, results of operations, plans, objectives and business of
the Company. These forward-looking statements involve certain risks and
uncertainties. Factors that may cause actual results to differ materially from
those contemplated by such forward-looking statements include, among others, the
following possibilities: (a) competitive pressure in the financial services
industry increases significantly; (b) changes in the interest rate environment
reduce margins; (c) general economic conditions, either nationally or
regionally, are less favorable than expected, resulting in, among other things,
a deterioration in credit quality; (d) changes occur in the financial services
regulatory environment; and (e) changes occur in the securities markets.
13
<PAGE>
OTHER ACTIVITIES
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.
In 1999, F&M Trust Company offered a range of trust services. At December
31, 1999, F&M Trust Company managed $ 712.1 million in assets in approximately
1,712 fiduciary accounts, covering both personal trust activities and employee
benefit plans.
COMPETITION
Each of the market regions in which the Company operates is 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, regional, and national 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. 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, 2000, of each of the executive officers of the Company:
14
<PAGE>
<TABLE>
<CAPTION>
YEAR
FIRST
NAME AGE ELECTED OFFICE
- ---- --- ------- ------
<S> <C> <C> <C>
W. M. Feltner 80 1970 Chairman of the Board and Chief
Executive Officer of the Company
Alfred B. Whitt 61 1998 Vice Chairman, President and Chief
Financial Officer of the Company;
Chairman of F&M Bank-Winchester
Charles E. Curtis 61 1998 Vice Chairman and Chief
Administrative Office of the
Company; Vice Chairman of F&M Bank-
Winchester
F. Dixon Whitworth, Jr. 55 1985 Executive Vice President of the
Company; President of F&M Trust
Company
Betty H. Carroll 62 1987 Senior Vice President of the
Company; President, Vice Chairman
and Chief Executive Officer of F&M
Bank-Winchester
Michael L. Bryan 48 1998 Corporate Secretary and General
Counsel of the Company
Barbara H. Ward 54 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. On June 7, 1999, Mr. Whitt was
appointed Chairman 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.
15
<PAGE>
Mr. 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 President and Chief Executive Officer of F&M
Bank-Winchester since December 1988, and was appointed Vice Chairman of the bank
on June 7, 1999. She was appointed Senior Vice President of the Company in
1987.
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. On June 7, 1999, Mr. Bryan was appointed Secretary of F&M
Bank-Winchester.
Mrs. Ward was appointed Senior Vice President of F&M Bank-Winchester in
March of 1992. Prior thereto, she was 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 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
16
<PAGE>
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 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
17
<PAGE>
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.
The states also permit 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-West Virginia, Inc., is a 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
18
<PAGE>
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.
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.
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, 1999, all F&M's subsidiary
banks exceeded the required regulatory capital requirements under FDICIA.
19
<PAGE>
CAPITAL ADEQUACY AND DIVIDENDS. Information on "Capital Adequacy" may be found
under "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS", "Capital Resources".
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."
FINANCIAL MODERNIZATION LEGISLATION
The Gramm-Leach-Bliley Act of 1999 ("GLBA") was signed into law on November
12, 1999. The main purpose of GLBA is to permit greater affiliations within the
financial services
20
<PAGE>
industry, primarily banking, securities and insurance. While certain portions of
GLBA became effective upon enactment and on March 11, 2000, many other
provisions do not become effective until May 2001 and most of the regulations
implementing the law have not yet been issued. As a result, the overall impact
of GLBA on the Company cannot be predicted at this time. The provisions of GLBA
that are believed to be of most significance to the Company are discussed below.
GLBA repeals sections 20 and 32 of the Glass-Steagall Act, which separated
commercial banking from investment banking, and substantially amends the BHCA,
which limited the ability of bank holding companies to engage in the securities
and insurance businesses. To achieve this purpose, GLBA creates a new type of
company, the "financial holding company." A financial holding company may
engage in or acquire companies that engage in a broad range of financial
services, including
. securities activities such as underwriting, dealing, brokerage,
investment and merchant banking; and
. insurance underwriting, sales and brokerage activities.
A bank holding company may elect to become a financial holding company only if
all of its depository institution subsidiaries are well-capitalized, well-
managed and have at least a satisfactory Community Reinvestment Act rating.
GLBA establishes a system of functional regulation under which the federal
banking agencies will regulate the banking activities of financial holding
companies and banks' financial subsidiaries, the Securities and Exchange
Commission ("SEC") will regulate their securities activities and state insurance
regulators will regulate their insurance activities.
With regard to Federal securities laws, GLBA removes the blanket exemption
for banks from being considered brokers or dealers under the Securities Exchange
Act of 1934, and sets out a number of limited activities, including trust and
fiduciary activities, in which a bank may engage without being considered a
broker, and a set of activities in which a bank may engage without being
considered a dealer. The Investment Advisers Act of 1940 also will be amended
to eliminate certain provisions exempting banks from the registration
requirements of that statute, and the Investment Company Act of 1940 will be
amended to provide the SEC with regulatory authority over various bank mutual
fund activities.
GLBA also provides new protections against the transfer and use by financial
institutions of consumers nonpublic personal information. A financial
institution must provide to its customers, at the beginning of the customer
relationship and annually thereafter, the institution's policies and procedures
regarding the handling of customers' nonpublic personal financial information.
The new privacy provisions will generally prohibit a financial institution from
providing a customer's personal financial information to unaffiliated third
21
<PAGE>
parties unless the institution discloses to the customer that the information
may be so provided and the customer is given the opportunity to opt out of such
disclosure.
At this time, the Company is unable to predict the impact GLBA may have
upon its or its subsidiaries' financial condition or results of operations. The
Company is currently reviewing the new law and at this time has not elected to
be treated as a financial holding company under GLBA.
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 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.
22
<PAGE>
ITEM 2. PROPERTIES.
The principal executive offices of F&M is located at 9 Court Square,
Winchester, Virginia, in a multi-story building complex that is owned free of
any encumbrances. The Company operates a total of 125 banking offices (103 in
Virginia, 13 in West Virginia, and 9 in Maryland), 66 of which are owned by the
Company or one of its subsidiary banks free of any encumbrances, and 54 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 27, 1999.
23
<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 declared per share on the Common Stock for the
periods indicated:
PRICE RANGE CASH
HIGH LOW DIVIDENDS
---- --- ---------
1999
First Quarter 30.00 23.87 0.195
Second Quarter 33.18 23.93 0.235
Third Quarter 33.50 26.00 0.235
Fourth Quarter 30.25 26.00 0.235
1998
First Quarter 36.25 31.75 0.185
Second Quarter 34.31 32.00 0.185
Third Quarter 31.56 26.13 0.195
Fourth Quarter 31.69 25.06 0.195
At December 31, 1999, there were 22,984,500 shares of Common Stock
outstanding held by 8,466 holders of record.
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.
The Company or F&M Bank-Winchester has paid regular cash dividends for more
than 57 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
subsidiary banks. F&M subsidiary banks are subject to certain legal restrictions
on the amount of dividends they are permitted to pay to the Company. At December
31, 1999, F&M's subsidiary banks had available for distribution as dividends to
the Company approximately $20.0 million.
24
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ITEM 6. SELECTED FINANCIAL DATA.
Incorporated herein by reference, as Exhibit 13, to page 1 of the
1999 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
25 of the 1999 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Incorporated herein by reference, as Exhibit 13, to pages 9 and 12 of
the 1999 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Incorporated herein by reference, as Exhibit 13, to pages 26 through
49 of the 1999 Annual Report.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
25
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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 24, 2000,
for the Company's Annual Meeting of Shareholders to be held April 25,
2000, which definitive proxy statement was filed with the Commission
pursuant to Rule 14a-6 on March 24, 2000. 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".
26
<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 1999 Annual Report (see Exhibit 13):
1. Financial Statements Pages
F&M National Corporation and Subsidiaries:
Consolidated Balance Sheets at December 31, 1999 and 1998 26
Consolidated Statements of Income for the years
ended December 31, 1999, 1998, and 1997 27
Consolidated Statements of Changes in Shareholders'
Equity for years ended December 31, 1999, 1998 and 1997 28
Consolidated Statements in Cash Flows for the years
ended December 31, 1999, 1998 and 1997 29
Notes to Consolidated Financial Statements 30
Report of Independent Certified Public Accountants 48
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.
(3)
(i) Registrant's Articles of Incorporation (incorporated herein by
reference to Exhibit 3.1 to Registration Statement #33-45717).
(ii) Registrant's Bylaws (incorporated herein by reference to Exhibit
3.2 to Registration Statement #33-45717).
(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).
27
<PAGE>
(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) Form of Management Continuity Agreement entered into between
the Registrant and certain of its and its subsidiaries'
executive officers (filed herewith).
(iv) Registrant's 1992 Incentive and Non-Qualified Stock Option
Plan, as amended and restated February 2, 1998 (incorporated
herein by reference to Exhibit 99.0 to Registration Statement
#333-63111 filed on September 9, 1998).
(v) Registrant's 1998 Employee Stock Discount Plan (incorporated
herein by reference to Exhibit 99.1 to Registration Statement
#333-63113 filed on September 9, 1998).
(11) Statement re computation of per share earnings (incorporated by
reference as Note 11, page 37, of the 1999 Annual Report to
Shareholders filed herewith as Exhibit 13).
(13) Portions of the 1999 Annual Report to Shareholders for the fiscal year
ended December 31, 1999 (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:
None.
28
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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 8th day of
March, 2000:
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 8th day of March, 2000:
SIGNATURE TITLE
- --------- -----
/s/ W. M. Feltner Chairman of the Board, Chief
- -------------------------------------- Executive Officer, Director
W. M. FELTNER
/s/ Alfred B. Whitt Vice Chairman, President, Chief
- -------------------------------------- Financial Officer, Director
ALFRED B. WHITT
/s/ Charles E. Curtis Vice Chairman, Chief Administrative
- -------------------------------------- Officer, Director
CHARLES E. CURTIS
/s/ Frank Armstrong, III Director
- --------------------------------------
FRANK ARMSTRONG, III
/s/ William H. Clement Director
- --------------------------------------
WILLIAM H. CLEMENT
/s/ John E. Fernstrom Director
- --------------------------------------
JOHN E. FERNSTROM
/s/ William R. Harris Director
- --------------------------------------
WILLIAM R. HARRIS
29
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/s/ L. David Horner, III Director
- ----------------------------------------------
L DAVID HORNER, III
/s/ Jack R. Huyett Director
- ----------------------------------------------
JACK R. HUYETT
/s/ George L. Romine Director
- ----------------------------------------------
GEORGE L. ROMINE
/s/ J. D. Shockey, Jr. Director
- ----------------------------------------------
J. D. SHOCKEY, JR.
/s/ Ronald W. Tydings Director
- ----------------------------------------------
RONALD W. TYDINGS
/s/ Fred G. Wayland, Jr. Director
- ----------------------------------------------
FRED G. WAYLAND, JR.
30
<PAGE>
EXHIBIT 13.
1999 ANNUAL REPORT TO SHAREHOLDERS
Filed herewith.
31
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Exhibit 10(iii)
MANAGEMENT CONTINUITY AGREEMENT
This Agreement ("Agreement"), dated as of ___________, ______, is
between F&M National Corporation, a Virginia corporation (the "Company"), and
_________________ (the "Executive") and provides as follows.
1. Purpose
The Company recognizes that the possibility of a Change in
Control exists, and the uncertainty and questions that it may raise among
management may result in the departure or distraction of management personnel to
the detriment of the Company and its shareholders. Accordingly, the purpose of
this Agreement is to encourage the Executive to continue employment after a
Change in Control by providing reasonable employment security to the Executive
and to recognize the prior service of the Executive in the event of a
termination of employment under certain circumstances after a Change in Control.
2. Term of the Agreement
This Agreement is effective September 30, 1999 and will expire
on December 31, 2002; provided that on December 31, 2000 and on each December
31st thereafter (each such December 31st is referred to as the "Renewal Date"),
this Agreement will be automatically extended for an additional calendar year so
as to terminate three years from such Renewal Date. This Agreement will not,
however, be extended if the Company gives written notice of such non-renewal to
the Executive no later than September 30 before the Renewal Date (the original
and any extended term of this Agreement is referred to as the "Change in Control
Period").
3. Employment after a Change in Control
If a Change in Control of the Company (as defined in Section
13) occurs during the Change in Control Period and the Executive is employed by
the Company on the date the Change in Control occurs (the "Change in Control
Date"), the Company will continue to employ the Executive in accordance with the
terms and conditions of this Agreement for the period beginning on the Change in
Control Date and ending on the third anniversary of such date (the "Employment
Period"). If a Change in Control occurs on account of a series of transactions,
the Change in Control Date is the date of the last of such transactions.
4. Terms of Employment
(a) Position and Duties. During the Employment Period, (i) the
Executive's position, authority, duties and responsibilities will be at least
commensurate in all material respects with the most significant of those held,
<PAGE>
exercised and assigned at any time during the 90-day period immediately
preceding the Change in Control Date and (ii) the Executive's services will be
performed at the location where the Executive was employed immediately preceding
the Change in Control Date or any office that is the headquarters of the Company
and is less than 35 miles from such location.
(b) Compensation.
(i) Base Salary. During the Employment Period, the Executive will
receive an annual base salary (the "Annual Base Salary") at least equal to the
base salary paid or payable to the Executive by the Company and its affiliated
companies for the twelve-month period immediately preceding the Change of
Control Date. During the Employment Period, the Annual Base Salary will be
reviewed at least annually and will be increased at any time and from time to
time as will be substantially consistent with increases in base salary generally
awarded in the ordinary course of business to other peer executives of the
Company and its affiliated companies. Any increase in the Annual Base Salary
will not serve to limit or reduce any other obligation to the Executive under
this Agreement. The Annual Base Salary will not be reduced after any such
increase, and the term Annual Base Salary as used in this Agreement will refer
to the Annual Base Salary as so increased. The term "affiliated companies"
includes any company controlled by, controlling or under common control with the
Company.
(ii) Annual Bonus. In addition to the Annual Base Salary, the
Executive will be awarded for each year ending during the Employment Period an
annual bonus (the "Annual Bonus") in cash at least equal to the highest annual
bonus paid or payable, including by reason of any deferral, for the two years
immediately preceding the year in which the Change in Control Date occurs. Each
such Annual Bonus will be paid no later than the end of the third month of the
year next following the year for which the Annual Bonus is awarded.
(iii) Incentive, Savings and Retirement Plans. During the Employment
Period, the Executive will be entitled to participate in all incentive
(including stock incentive), savings and retirement, insurance plans, policies
and programs applicable generally to other peer executives of the Company and
its affiliated companies, but in no event will such plans, policies and programs
provide the Executive with incentive opportunities, savings opportunities and
retirement benefit opportunities, in each case, less favorable, in the
aggregate, than those provided by the Company and its affiliated companies for
the Executive under such plans, policies and programs as in effect at any time
during the six months immediately preceding the Change in Control Date.
(iv) Welfare Benefit Plans. During the Employment Period, the
Executive and/or the Executive's family, as the case may be, will be eligible
for participation in and will receive all benefits under welfare benefit plans,
policies and programs provided by the Company and its affiliated companies to
the extent applicable generally to other peer executives of the Company and its
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<PAGE>
affiliated companies, but in no event will such plans, policies and programs
provide the Executive with benefits that are less favorable, in the aggregate,
than the most favorable of such plans, policies and programs in effect at any
time during the six months immediately preceding the Change in Control Date.
(v) Fringe Benefits. During the Employment Period, the Executive will
be entitled to fringe benefits in accordance with the most favorable plans,
policies and programs of the Company and its affiliated companies in effect for
the Executive at any time during the six months immediately preceding the Change
in Control Date or, if more favorable to the Executive, as in effect generally
from time to time after the Change in Control Date with respect to other peer
executives of the Company and its affiliated companies.
(vi) Vacation. During the Employment Period, the Executive will be
entitled to paid vacation in accordance with the most favorable plans, policies
and programs of the Company and its affiliated companies in effect for the
Executive at any time during the six months immediately preceding the Change in
Control Date or, if more favorable to the Executive, as in effect generally from
time to time after the Change in Control Date with respect to other peer
executives of the Company and its affiliated companies.
5. Termination of Employment Following Change in Control
(a) Death or Disability. The Executive's employment will
terminate automatically upon the Executive's death during the Employment Period.
If the Company determines in good faith that the Disability of the Executive has
occurred during the Employment Period, it may terminate the Executive's
employment. For purposes of this Agreement, "Disability" means the Executive's
inability to perform his duties with the Company on a full time basis for 180
consecutive days or a total of at least 240 days in any twelve month period as a
result of the Executive's incapacity due to physical or mental illness (as
determined by an independent physician selected by the Board).
(b) Cause. The Company may terminate the Executive's
employment during the Employment Period for Cause. For purposes of this
Agreement, "Cause" means (i) gross incompetence, gross negligence, willful
misconduct in office or breach of a material fiduciary duty owed to the Company
or any affiliated company; (ii) conviction of a felony or a crime of moral
turpitude (or a plea of nolo contendere thereto) or commission of an act of
embezzlement or fraud against the Company or any affiliated company; (iii) any
material breach by the Executive of a material term of this Agreement,
including, without limitation, material failure to perform a substantial portion
of his duties and responsibilities hereunder; or (iv) deliberate dishonesty of
the Executive with respect to the Company or any affiliated company.
-3-
<PAGE>
(c) Good Reason; Window Period. The Executive's employment may
be terminated (i) during the Employment Period by the Executive for Good Reason
or (ii) during the Window Period by the Executive without any reason. For
purposes of this Agreement, the "Window Period" means the 90-day period
beginning on the later of the one-year anniversary of the Change in Control Date
or the date of closing of the corporate transaction that is the subject of
shareholder approval in Section 13. For purposes of this Agreement, "Good
Reason" means:
(i) a material reduction in the Executive's duties or
authority;
(ii) a material adverse change in the Executive's overall
working environment;
(iii) a failure by the Company to comply with any of the
provisions of Section 4(b);
(iv) the Company's requiring the Executive to be based at
any office or location other than that described in Section 4(a)(ii);
(v) the failure by the Company to comply with and satisfy
Section 7(b);
(vi) the Executive is directed by the Board of Directors or
an officer of the Company or any affiliated company to engage in conduct that is
unethical, illegal or contrary to the Company's good business practices; or
(vii) the Company fails to honor any term or provision of
this Agreement;
Any good faith determination of Good Reason made by the Executive shall be
conclusive.
(d) Notice of Termination. Any termination during the
Employment Period by the Company or by the Executive for Good Reason or during
the Window Period shall be communicated by written Notice of Termination to the
other party hereto. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination provision in
this Agreement relied upon.
(e) Date of Termination. "Date of Termination" means (i) if
the Executive's employment is terminated by the Company for Cause, or by the
Executive during the Window Period or for Good Reason, the date of receipt of
the Notice of Termination or any later date specified therein, as the case may
be, (ii) if the Executive's employment is terminated by the Company other than
for Cause or Disability, the date specified in the Notice of Termination (which
shall not be less than 30 nor more than 60 days from the date such Notice of
Termination is given), and (iii) if the Executive's employment is terminated for
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<PAGE>
Disability, 30 days after Notice of Termination is given, provided that the
Executive shall not have returned to the full-time performance of his duties
during such 30-day period.
6. Compensation Upon Termination
(a) Termination Without Cause or for Good Reason or During Window Period.
The Executive will be entitled to the following benefits if, during the
Employment Period, the Company terminates his employment without Cause or the
Executive terminates his employment with the Company or any affiliated company
for Good Reason or during the Window Period.
(i) Accrued Obligations. The Accrued Obligations are the sum of: (1)
the Executive's Annual Base Salary through the Date of Termination at the rate
in effect just prior to the time a Notice of Termination is given; (2) the
amount, if any, of any incentive or bonus compensation theretofore earned which
has not yet been paid; (3) the product of the Annual Bonus paid or payable,
including by reason of deferral, for the most recently completed year and a
fraction, the numerator of which is the number of days in the current year
through the Date of Termination and the denominator of which is 365; and (4) any
benefits or awards (including both the cash and stock components) which pursuant
to the terms of any plans, policies or programs have been earned or become
payable, but which have not yet been paid to the Executive (but not including
amounts that previously had been deferred at the Executive's request, which
amounts will be paid in accordance with the Executive's existing directions).
The Accrued Obligations will be paid to the Executive in a lump sum cash payment
within ten days after the Date of Termination;
(ii) Salary Continuance Benefit. The Salary Continuance Benefit is an
amount equal to 2.99 times the Executive's Final Compensation. For purposes of
this Agreement, "Final Compensation" means the Annual Base Salary in effect at
the Date of Termination, plus the highest Annual Bonus paid or payable for the
two most recently completed years and any amount contributed by the Executive
during the most recently completed year pursuant to a salary reduction agreement
or any other program that provides for pre-tax salary reductions or compensation
deferrals. The Salary Continuance Benefit will be paid to the Executive in a
lump sum cash payment not later than the 45th day following the Date of
Termination;
(iii) Welfare Continuance Benefit. For 36 months following the Date of
Termination, the Executive and his dependents will continue to be covered under
all health and dental plans, disability plans, life insurance plans and all
other welfare benefit plans (as defined in Section 3(1) of ERISA) ("Welfare
Plans") in which the Executive or his dependents were participating immediately
prior to the Date of Termination (the "Welfare Continuance Benefit"). The
Company will pay all or a portion of the cost of the Welfare Continuance Benefit
for the Executive and his dependents under the Welfare Plans on the same basis
as applicable, from time to time, to active employees covered under the Welfare
Plans and the Executive will pay any additional costs. If participation in any
one or more of the Welfare Plans included in the Welfare Continuance Benefit is
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<PAGE>
not possible under the terms of the Welfare Plan or any provision of law would
create an adverse tax effect for the Executive or the Company due to such
participation, the Company will provide substantially identical benefits
directly or through an insurance arrangement. The Welfare Continuance Benefit as
to any Welfare Plan will cease if and when the Executive has obtained coverage
under one or more welfare benefit plans of a subsequent employer that provides
for equal or greater benefits to the Executive and his dependents with respect
to the specific type of benefit. The Executive or his dependents will become
eligible for COBRA continuation coverage as of the date the Welfare Continuance
Benefit ceases for all health and dental benefits.
(b) Death. If the Executive dies during the Employment Period,
this Agreement will terminate without any further obligation on the part of the
Company under this Agreement, other than for (i) payment of the Accrued
Obligations and three months of the Executive's Base Salary (which shall be paid
to the Executive's beneficiary designated in writing or his estate, as
applicable, in a lump sum cash payment within 30 days of the date of death);
(ii) the timely payment or provision of the Welfare Continuance Benefit to the
Executive's spouse and other dependents for 36 months following the date of
death; and (iii) the timely payment of all death and retirement benefits
pursuant to the terms of any plan, policy or arrangement of the Company and its
affiliated companies.
(c) Disability. If the Executive's employment is terminated
because of the Executive's Disability during the Employment Period, this
Agreement will terminate without any further obligation on the part of the
Company under this Agreement, other than for (i) payment of the Accrued
Obligations and three months of the Executive's Base Salary (which shall be paid
to the Executive in a lump sum cash payment within 30 days of the Date of
Termination); (ii) the timely payment or provision of the Welfare Continuance
Benefit for 36 months following the Date of Termination; and (iii) the timely
payment of all disability and retirement benefits pursuant to the terms of any
plan, policy or arrangement of the Company and its affiliated companies.
(d) Cause; Other than for Good Reason. If the Executive's
employment is terminated for Cause during the Employment Period, this Agreement
will terminate without further obligation to the Executive other than the
payment to the Executive of the Annual Base Salary through the Date of
Termination, plus the amount of any compensation previously deferred by the
Executive. If the Executive terminates employment during the Employment Period,
excluding a termination either for Good Reason or during the Window Period, this
Agreement will terminate without further obligation to the Executive other than
for the Accrued Obligations (which will be paid in a lump sum in cash within 30
days of the Date of Termination) and any other benefits to which the Executive
may be entitled pursuant to the terms of any plan, program or arrangement of the
Company and its affiliated companies.
-6-
<PAGE>
(e) Gross-Up Payment. In the event any payment or distribution
by the Company to or for the benefit of the Executive (whether paid or payable
or distributed or distributable pursuant to the terms of this Agreement or
otherwise, but determined without regard to any additional payments required
under this Section 6(e)) (a "Payment") would be subject to the excise tax
imposed by Section 4999 of the Internal Revenue Code of 1986 (the "Code") or any
interest or penalties are incurred by the Executive with respect to such excise
tax (collectively, the "Excise Tax"), then the Executive will be entitled to
receive an additional payment (a "Gross-Up Payment") in an amount such that
after payment by the Executive of all taxes (including any income taxes and
interest or penalties imposed with respect to such taxes) and the Excise Tax
imposed on the Gross-Up Payment, the Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed on the Payments. All determinations
required to be made under this Section 6(e), including whether and when a
Gross-Up Payment is required and the amount of such Gross-Up Payment, will be
made by the independent accounting firm of the Company immediately prior to the
Executive's termination of employment (the "Accounting Firm"). All fees and
expenses of the Accounting Firm will be borne solely by the Company, and any
determination by the Accounting Firm will be binding upon the Company and the
Executive. Any Gross-Up Payment, as determined pursuant to this Section 6(e),
will be paid by the Company to the Executive within ten days of the receipt of
the Accounting Firm's determination.
(i) If the Accounting Firm determines that no Excise Tax is
payable by the Executive, it shall so indicate to the Executive in writing.
(ii) In the event there is an under-payment of the Gross-Up
Payment due to the uncertainty in the application of Section 4999 of the Code at
the time of the initial determination by the Accounting Firm and the Executive
thereafter is required to make a payment of any Excise Tax, the Accounting Firm
will determine the amount of any such under-payment that has occurred and such
amount will be promptly paid by the Company to or for the benefit of the
Executive.
7. Binding Agreement; Successors
(a) This Agreement will be binding upon and inure to the
benefit of the Executive (and his personal representative), the Company and any
successor organization or organizations which shall succeed to substantially all
of the business and property of the Company, whether by means of merger,
consolidation, acquisition of all or substantially of all of the assets of the
Company or otherwise, including by operation of law.
(b) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to assume
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<PAGE>
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
(c) For purposes of this Agreement, the term "Company"
includes any subsidiaries of the Company and any corporation or other entity
which is the surviving or continuing entity in respect of any merger,
consolidation or form of business combination in which the Company ceases to
exist; provided, however, that for purposes of determining whether a Change in
Control has occurred herein, the term "Company" refers to F&M National
Corporation or its successors.
(d) This Agreement supersedes and replaces the Executive
Severance Agreement dated ________________, or any similar agreements between
the Executive and the Company.
8. Fees and Expenses; Mitigation
(a) The Company will pay or reimburse the Executive, on a
current basis, for all costs and expenses, including without limitation court
costs and reasonable attorneys' fees, incurred by the Executive (i) in
contesting or disputing any termination of the Executive's employment or (ii) in
seeking to obtain or enforce any right or benefit provided by this Agreement, in
each case regardless of whether or not the Executive's claim is upheld by a
court of competent jurisdiction; provided, however, the Executive will be
required to repay any such amounts to the Company to the extent that a court
issues a final and non-appealable order setting forth the determination that the
position taken by the Executive was frivolous or advanced by him or her in bad
faith.
(b) The Executive shall not be required to mitigate the amount
of any payment the Company becomes obligated to make to the Executive in
connection with this Agreement, by seeking other employment or otherwise. Except
as specifically provided above with respect to the Wefare Continuance Benefit,
the amount of any payment provided for in Section 6 shall not be reduced, offset
or subject to recovery by the Company by reason of any compensation earned by
the Executive as the result of employment by another employer after the Date of
Termination, or otherwise.
9. No Employment Contract
Nothing in this Agreement will be construed as creating an
employment contract between the Executive and the Company prior to Change in
Control.
10. Outplacement Services
If the Executive is entitled to the severance benefits under
Section 6(a), the Executive will be entitled to receive complete outplacement
services, including job search services, paid by the Company up to a total of
$25,000. The services will be provided by a recognized outplacement organization
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<PAGE>
selected by the Executive with the approval of the Company (which approval will
not be unreasonably withheld). The services will be provided for up to two years
after the Date of Termination.
11. Continuance of Welfare Benefits Upon Death
If the Executive dies while receiving a Welfare Continuation
Benefit, the Executive's spouse and other dependents will continue to be covered
under all applicable Welfare Plans during the remainder of the 36-month coverage
period. The Executive's spouse and other dependents will become eligible for
COBRA continuation coverage for health and dental benefits at the end of such
36-month period.
12. Notice
Any notices and other communications provided for by this
Agreement will be sufficient if in writing and delivered in person or sent by
registered or certified mail, postage prepaid (in which case notice will be
deemed to have been given on the third day after mailing), or by overnight
delivery by a reliable overnight courier service (in which case notice will be
deemed to have been given on the day after delivery to such courier service).
Notices to the Company shall be directed to the Secretary of the Company, with a
copy directed to the Chairman of the Board of the Company. Notices to the
Executive shall be directed to his last known address.
13. Definition of a Change in Control
For purposes of this Agreement, a "Change in Control" means:
(a) The acquisition by any Person of beneficial ownership of
20% or more of the then outstanding shares of common stock of the Company;
(b) Individuals who constitute the Board on the date of this
Agreement (the "Incumbent Board") cease to constitute a majority of the Board,
provided that any director whose nomination was approved by a vote of at least
two-thirds of the directors then comprising the Incumbent Board will be
considered a member of the Incumbent Board, but excluding any such individual
whose initial assumption of office is in connection with an actual or threatened
election contest relating to the election of the directors of the Company (as
such terms are used in Rule 14a-11 promulgated under the Securities Exchange Act
of 1934 (the "Exchange Act"));
(c) Approval by the shareholders of the Company of a
reorganization, merger, share exchange or consolidation (a "Reorganization"),
provided that shareholder approval of a Reorganization will not constitute a
Change in Control if, upon consummation of the Reorganization, each of the
following conditions is satisfied:
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(i) more than 60% of the then outstanding shares of common
stock of the corporation resulting from the Reorganization is beneficially owned
by all or substantially all of the former shareholders of the Company in
substantially the same proportions as their ownership existed in the Company
immediately prior to the Reorganization;
(ii) no Person beneficially owns 20% or more of either (1)
the then outstanding shares of common stock of the corporation resulting from
the transaction or (2) the combined voting power of the then outstanding voting
securities of such corporation entitled to vote generally in the election of
directors; and
(iii) at least a majority of the members of the board of
directors of the corporation resulting from the Reorganization were members of
the Incumbent Board at the time of the execution of the initial agreement
providing for the Reorganization.
(d) Approval by the shareholders of the Company of a complete
liquidation or dissolution of the Company, or of the sale or other disposition
of all or substantially all of the assets of the Company.
(e) For purposes of this Agreement, "Person" means any
individual, entity or group (within the meaning of Section 13(d)(3) of the
Exchange Act, other than any employee benefit plan (or related trust) sponsored
or maintained by the Company or any affiliated company, and "beneficial
ownership" has the meaning given the term in Rule 13d-3 under the Exchange Act.
14. Confidentiality
The Executive will hold in a fiduciary capacity for the
benefit of the Company all secret or confidential information, knowledge or data
relating to the Company or any of its affiliated companies and their respective
businesses, which was obtained by the Executive during the Executive's
employment by the Company or any of its affiliated companies and which will not
be or become public knowledge. After termination of the Executive's employment
with the Company, the Executive will not, without the prior written consent of
the Company or except as may otherwise be required by law or legal process,
communicate or divulge any such information, knowledge or data to anyone other
than the Company and those designated by it. In no event shall an asserted
violation of the provisions of this Section 13 constitute a basis for deferring
or withholding any amounts otherwise payable to the Executive under this
Agreement.
-10-
<PAGE>
15. Miscellaneous
No provision of this Agreement may be amended, modified,
waived or discharged unless such amendment, modification, waiver or discharge is
agreed to in a writing signed by the Executive and the Chairman of the Board or
President of the Company. No waiver by either party hereto at any time of any
breach by the other party hereto of, or of compliance with, any condition or
provision of this Agreement to be performed by such other party shall be deemed
a waiver of similar or dissimilar provisions or conditions at the same or at any
prior or subsequent time. No agreements or representations, oral or otherwise,
express or implied, with respect to the subject matter hereof have been made by
either party which are not expressly set forth in this Agreement.
16. Governing Law
The validity, interpretation, construction and performance of
this Agreement shall be governed by the laws of the Commonwealth of Virginia.
17. Validity
The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
-11-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed as a sealed
instrument by F&M National Corporation by its duly authorized officer, and by
the Executive, as of the date first above written.
F&M NATIONAL CORPORATION
By:______________________
EXECUTIVE:
_________________________
-12-
<PAGE>
F&M NATIONAL CORPORATION
1999 ANNUAL REPORT
[LOGO]
30
1969-1999
30TH ANNIVERSARY YEAR
<PAGE>
TABLE OF CONTENTS
Selected Financial Data....................................... 1
Letter from the Chairman of the Board......................... 2
Letter from the President..................................... 4
1999 Highlights............................................... 5
Management's Discussion and
Analysis of Financial Condition
and Results of Operations................................... 7
Financial Statements......................................... 26
Notes to Financial Statements................................ 30
Independent Auditor's Report................................. 48
F&M Trust Company............................................ 49
Corporate Directors and
Officers................................................... 50
Directors and Officers of Affiliates......................... 51
Office Locations............................................. 55
Corporate Profile............................................ 58
General Information.......................................... 59
<PAGE>
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(In thousands, except ratios and per share amounts)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Interest income ............................ $ 204,166 $ 202,993 $ 194,203 $ 181,943 $ 171,719
Interest expense ........................... 78,295 83,475 81,519 77,223 73,067
----------- ----------- ----------- ----------- -----------
Net interest income ........................ 125,871 119,518 112,684 104,720 98,652
Provision for loan losses .................. 3,621 5,541 5,850 2,278 2,732
----------- ----------- ----------- ----------- -----------
Net interest income after
provision for loan losses ................ 122,250 113,977 106,834 102,442 95,920
Noninterest income ......................... 44,530 36,605 26,934 23,980 22,575
Securities gains ........................... 3,112 2,436 4,217 314 519
Noninterest expense ........................ 106,893 97,541 88,259 79,324 78,250
----------- ----------- ----------- ----------- -----------
Income before income taxes ................. 62,999 55,477 49,726 47,412 40,764
Income taxes ............................... 21,714 19,012 16,396 15,869 13,467
----------- ----------- ----------- ----------- -----------
Net income ................................. $ 41,285 $ 36,465 $ 33,330 $ 31,543 $ 27,297
=========== =========== =========== =========== ===========
Per Share Data:
Net income per share, basic (1) ............ $ 1.79 $ 1.57 $ 1.45 $ 1.37 $ 1.19
Net income per share,
diluted (1) .............................. 1.78 1.56 1.44 1.35 1.18
Cash dividends ............................. 0.90 0.76 0.73 0.69 0.61
Book value at period end ................... 12.69 13.11 12.11 11.25 10.76
Tangible book value ........................ 12.23 12.66 11.61 10.93 10.40
Average basic shares
outstanding (1) .......................... 23,058 23,187 23,011 23,064 22,850
Average diluted shares
outstanding (1) .......................... 23,233 23,417 23,194 23,284 23,132
Balance Sheet Data:
Assets ..................................... $2,945,934 $2,949,934 $2,734,293 $2,508,202 $2,390,636
Loans, net of unearned income .............. 1,784,730 1,727,320 1,681,113 1,554,571 1,402,521
Securities ................................. 843,022 788,920 678,974 643,483 673,854
Deposits ................................... 2,482,205 2,488,417 2,323,054 2,144,531 2,043,943
Shareholders' equity ....................... 291,565 295,019 272,651 253,303 239,831
Performance Ratios:
Return on average assets ................... 1.42% 1.29% 1.28% 1.29% 1.21%
Return on average equity ................... 13.99% 12.73% 12.80% 12.79% 11.92%
Dividend payout ............................ 49.12% 44.86% 44.55% 44.89% 39.99%
Efficiency (2) ............................. 60.89% 61.07% 62.30% 60.32% 63.28%
Asset Quality Ratios:
Allowance for loan losses to
period end loans, net .................... 1.28% 1.31% 1.32% 1.25% 1.39%
Allowance for loan losses to
nonaccrual loans ......................... 269.90% 184.66% 109.23% 152.63% 129.29%
Nonperforming assets to
period end loans and
foreclosed properties (2) ................ 1.09% 1.66% 2.19% 1.80% 2.34%
Net charge-offs to average
loans .................................... 0.19% 0.30% 0.20% 0.16% 0.18%
Capital and Liquidity Ratios:
Leverage ................................... 9.99% 9.90% 9.99% 10.11% 10.09%
Risk-based capital ratios:
Tier 1 capital ........................... 15.56% 15.12% 15.14% 15.66% 15.86%
Total capital ............................ 16.78% 16.37% 16.43% 16.90% 17.11%
Average loans to average
deposits ................................. 72.06% 70.88% 73.66% 70.78% 68.65%
</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 Security Bank on March 22, 1999, Peoples Bank of
Virginia on April 1, 1998, J. V. Arthur Inc. on April 30, 1998, Bank
of Alexandria on June 1, 1998, FB&T Financial Corporation on March 29,
1996, Allegiance Banc Corporation on October 1, 1996, and Bank of the
Potomac on April 6, 1995.
(1) Retroactively restated for a 3% stock dividend declared in 1999.
(2) Computed by dividing noninterest expense minus foreclosed property and
amortization of intangibles by the sum of net interest income on a tax
equivalent basis and noninterest income, net of securities gains or losses.
1
<PAGE>
- --------------------------------------------------------------------------------
Dear Shareholders, Customers, Friends:
[PHOTO]
W.M. Feltner
January 3, 2000
Last year at F&M's annual meeting, I announced that I would step down as the
company's Chief Executive Officer on May 1, 2000. Since this is my last year as
your CEO, I thought it only appropriate that this annual report contain not only
a report by me but also from your new Chief Executive Officer, Alfred B. Whitt.
While I intend to remain Chairman of the Board, Mr. Whitt will be in charge of
the company's overall operations.
I started my F&M banking career on January 2, 1942, as a teller. At that
time, our only location was 100 North Loudoun Street in Winchester and the bank
had approximately three million dollars in assets. That figure had grown to $70
million by the end of 1969, at which time we formed the F&M National Corporation
as a one bank holding company.
Over the ensuing 30 years, we acquired 21 additional banks. Through
mergers and consolidations, F&M now consists of ten banks with 128 banking
offices, two insurance companies with six locations, one trust company with
three locations, a mortgage company and several smaller affiliates. With the
completion of our acquisition in January of The State Bank of the Alleghenies,
assets now exceed 3 billion dollars.
A word also needs to be said about the growth of our income. Net income in
1970, our first year of operation, was $718,123.00. This past year it amounted
to $41,284,000.00. That's an average annual compound growth rate of 15 percent.
Also, along that line, it is of interest to know we have never had a losing
quarter and that we increased our net income every year during that period with
the exception of the years 1980, 1981 and 1982. Those were serious depression
years when the prime interest rate rose to 21 percent.
I know many of you have heard my complaints pertaining to the banking
regulations and the U.S. Congress concerning the constraints placed on banks
brought about by the depression of the 30's. There was a time when banks were
limited to taking deposits, cashing checks and making loans. We were limited to
one location (no branching was allowed) -- we were told how much we could pay on
savings accounts -- how much interest we could charge on loans and how much we
could lend on property. Slowly, you might even say at a snail's pace, the
restrictions began to lift, and lo and behold, finally, this past year Congress
passed legislation that lifts most of the restrictions that have been in force
for approximately 65 years. With the passage of the new law, financial
institutions can be
2
<PAGE>
- --------------------------------------------------------------------------------
"Additionally, I know you have an outstanding board of directors, one that has
always put the interest of our shareholders foremost in their minds. They have
and will continue to weigh their options carefully and will endeavor to
represent your best interest."
more competitive. It also means we will have more competition. Truly banking has
now entered into a whole new era -- one that is much more challenging, one that
offers many more opportunities and rewards, and also one that will require more
diligence, more expertise and certainly more expense.
New horizons are now before us. Ones that will require vision, alertness
and intellect in order to compete, prosper and advance. When I step down on May
1, I will do so knowing I have left the company in the hands of a management
team that fulfills these attributes and I know you will support them as you have
supported me in the past.
December 31, brought to a close the decade of the 90's and the end of the
20th century. Additionally, it was your company's 30th Anniversary. One has to
wonder what the new millennium will bring forth. Unquestionably, there will be
new discoveries in medicine that will enhance health and, yes, prolong one's
life span. New advances in electronics, transportation and communications will
open up an age that has been unattainable and even unthinkable in the past.
And what about the future of banking, and in more particular, your
investment in F&M. At present the financial services industry is out of favor
with the investing public. Most bank stocks are presently selling substantially
lower than they were several years ago, F&M included. According to the The Wall
Street Journal's year-end report, it may surprise you to know that of the top 50
banks in the United States only one ended the year with a stock price higher
than the previous year and that was by a mere fraction of 1/8. Also, only six of
the 50 had a better stock performance than the F&M. This tells me that although
our stock did not perform well, it did perform better than most. It also tells
me that investors seem to have lost sight of soundness and conservatism and
prefer fast moving internet stocks without regard or concern of the
consequences. A correction will come -- at least in the past it always has.
But what of F&M. What will the 21st century bring about? That is a question
I am unable to answer. I know F&M is a good, strong company that can continue to
operate profitably. I also know that competition is, and will continue to be,
more intense than it has ever been. I also know we have a franchise that is the
envy of several larger bank holding companies. Additionally, I know you have an
outstanding board of directors, one that has always put the interest of our
shareholders foremost in their minds. They have and will continue to weigh their
options carefully and will endeavor to represent your best interest.
Some of you have been disappointed that the board has not sold the company.
It is my personal opinion that the greatest service they have performed for you
has been their not being stampeded into selling the company to some out-of-state
holding company when merger mania was at its highest. They did and continue to
give it every consideration but to date have not seen fit to think it was in the
best interest of our shareholders. For example, suppose they had. Take a look at
what has happened to the return of the stock of the out-of-state acquirers over
the past 12 months. First Union minus 45.8 percent, Bank of America (Nations
Bank) minus 16.50 percent, Wachovia minus 22.20 percent, BB&T minus 32.10
percent. Sure F&M's stock is minus 4.4 percent also, but it is not because of
our performance. You have a board of directors who is conscientious, capable and
committed to your interest. I hope you realize and appreciate that fact.
Thank you for allowing me to serve as your CEO these past 30 years. Your
support and friendship will always be treasured.
Sincerely,
/s/ W.M. Feltner
W.M. Feltner
Chairman of the Board
3
<PAGE>
To Our Owners, Customers and Employees:
[PHOTO]
Alfred B. Whitt
F&M has revised its policies and banking practices every year to adjust to the
changes in banking regulations. The year 1999 was no different. However, the
Financial Modernization Bill enacted into law on November 12, 1999, is a
positive change for financial institutions. We will now have the ability to
offer all financial products and services, today and in the future.
The opportunities for financial institutions to deliver services by the
Internet will curtail the need for "brick and mortar" branches. F&M now offers
some of its banking services via the Internet. Additional services will be
offered in the new year. These services will include business and personal
loans, mortgage loans, deposit accounts, investment opportunities, brokerage
services, auto and homeowners' insurance, commercial insurance, trust services,
cash management, and home banking with bill paying options. We continue to
review the Internet capabilities and security procedures.
F&M will be required to invest in new computer equipment and software
programs in order to deliver the services required and expected by our
customers. F&M is prepared to deliver on its promises.
F&M has adopted "Privacy" policies to protect its customers' accounts and
personal information. F&M does not and will not share its customer information
-------- --------
with non-subsidiary third parties for the purpose of solicitations for services
or products.
The year 1999 was a mixed blessing for F&M and its shareholders. F&M
increased its dividend from 78 cents per share to 94 cents per share, an
increase of 20.5 percent. The Board of Directors has consistently paid out 45
percent to 50 percent of its earnings in dividends. F&M repurchased 250,000
shares of its stock at market prices. The Board of Directors noted that they
believe F&M's stock is undervalued, does not take into account the company's
success to date and understates the current and long-term value of F&M shares.
The "Return on Assets" (R.O.A.), a measurement of the ability of a
company's managers to invest and earn on its total assets, increased to 1.42
percent for 1999 compared to 1.29 percent for 1998. F&M's peer group of 155
similarly-sized financial institutions reported R.O.A. for the period ending
September 30, 1999, of 1.19 percent and 1.20 percent for the period ending
December 31, 1998.
F&M's goal for 2000 is an R.O.A. of 1.50 percent. We continue to review all
operations of the Company. Our strategy has been to operate independent banks in
local communities. This is still our strategy. However, we will consider mergers
by regions if this becomes important in the delivery of our services at a fair
price.
F&M provides its financial services through many offices but the key to its
success is the dedication of its directors and employees. F&M's banks and other
subsidiaries currently have 173 directors and 1,750 employees.
J. Blackwell ("Blackie") Davis, who passed away in 1999, was a director of
F&M Bank-West Virginia for 50 years. Dr. James Moler, a director of F&M
Bank-West Virginia, is completing his 41st year of service, and Garnett Turner,
a director of F&M Bank-Massanutten is completing his 40th year of service.
Our Directors, Officers, and Employees are committed to providing the best
services and financial products to all of our customers at the least possible
cost.
Our Directors, Officers, and Employees are committed to providing you, our
shareholders, with the best possible return on your investment.
Sincerely,
/s/ Alfred B. Whitt
Alfred B. Whitt
President
4
<PAGE>
- --------------------------------------------------------------------------------
1999 Highlights
1969 - 1999
30 Years of Success and Progress
1969 - 1999 Celebration
F&M National Corporation, in 1999, celebrated 30 years of offering
financial services to its shareholders, customers and employees.
However, F&M's history began early in the 20th century. F&M Bank-Winchester
was organized in 1902 in Winchester, Virginia and F&M Bank-Massanutten at
Broadway, Virginia, in 1903. We are now into our second century of providing
banking services.
F&M was a one-bank holding company for the first 10 years. F&M
Bank-Winchester was its only bank, and it acquired banks to expand its service
area. The first bank acquired was Union Bank of Winchester in 1940. Other banks
to merge with the Winchester bank were: First National Bank of Berryville,
Middletown State Bank, Citizens National Bank (Front Royal), Stonewall Jackson
Bank & Trust Company (Shenandoah County), and Harvest Bancorp (Hamilton). Also,
two Winchester branches of Bank of Virginia were purchased.
F&M's financial services expanded during the decades of the 70's and 80's
to include credit bureau services, small loan companies, and first and second
mortgage lending. A full service mortgage company was organized in the 80's.
F&M Bank-Massanutten was acquired in 1980 and continued to operate as an
independent bank. F&M National Corporation became a multi-bank holding company
with this acquisition.
F&M has acquired 20 banks during the 1980s and 1990s and 25 banks in its
banking history. Financial services were further expanded by the addition of two
insurance agencies and other financial services in the 90's.
F&M ends the decade of the 90's as a full-service financial holding
company.
[PHOTO]
Security Bank's main office in Manassas
5
<PAGE>
F&M Employees
The loyalty of F&M's employees is a tremendous asset and is appreciated by
management and its customers. Our banks have provided banking and financial
services for more than 98 years, and we have employees with more than 30 years
of service to F&M's customers.
Employees of F&M and Subsidiaries with 30 or more years of service:
Robert E. Aylor, III Ida Mary B. Hull
Carla K. Baker Phyllis W. Jeffries
Phyllis K. Bishop Linda G. Jones
Marsha C. Boden Mary Lou Jones
M. Lee Boppe Geraldine G. Keys
Larry S. Bowman Edwin J. Kight, Jr.
John E. Burke Robert E. Lee
Walter H. Bursey Peggy J. Marcus
Margaret S. Carpenter Joanne G. Moffett
Betty H. Carroll Joan B. Oliver
Doris A. Cooley Miles R. "Buddy" Orndorff, Jr.
Paul R. Cooper, Jr. Arvilla S. "Belle" Rinker
Juanita H. "Fay" Dehaven Linda P. Russell
James L. "Jimmy" Dix Barbara H. Schwartz
Amy T. Dove Patricia S. Spitzer
Jeannette M. Doyle Joyce H. Sutherland
Frances H. Fortune Mary E. "Libby" Swanson
Judy A. Paige-Grim Jo Ann Unger
Bobbie M. Haines Barbara H. Ward
David E. Harr, Jr. Bobbie W. Whirley
Shelby C. Hodgson
Y2K -- No More
Y2K became a non-event for F&M Banks and their subsidiaries. However, our
employees tested and re-tested our data systems to ensure that F&M's service to
you would continue uninterrupted into the Year 2000. We upgraded systems and
equipment and are better prepared to offer data processing services to all of
our customers, both now and in the future.
Expansion
F&M continued to expand its service facilities by adding six branches and
13 new ATM locations. In 1999, F&M service area grew when F&M Bank-Winchester
acquired two new branch locations in Stephens City and Woodstock, Virginia,
adding $22 million in deposits.
The acquisition of Security Bank at Manassas, with its $60 million in
deposits, added to F&M Bank-Northern Virginia's growing market area.
The State Bank of the Alleghenies officially became a member of the F&M
family on January 3, 2000. State Bank, renamed F&M Bank-Highlands, has offices
in Covington, Clifton Forge, and Hot Springs, Virginia. F&M Bank-Highlands has
$152 million in assets and the largest market share of deposits in its trade
area.
The two bank acquisitions added approximately $220 million in assets and
1,500 new shareholders.
Feltner Building
The renovation of 9 Court Square continues to receive recognition. The
building is named after W. M. Feltner, F&M's Chairman, who in 1999 completed 60
years of service to the Winchester community and F&M. The National Historical
Society presented its "National Trust Award" to Mr. Feltner at its National
Convention in Washington, D.C.
F&M Bank-Winchester is expanding its lending facilities for 2000 by
remodeling the Clowser Building, also known as the Miller's Hardware building.
This is an important addition and continues the bank's commitment to downtown
Winchester.
The State Bank of the Alleghenies headquarters in Covington
[PHOTO]
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 National Corporation ("F&M" or the "Company") is a multi-state,
multi-bank holding company headquartered in Winchester, Virginia. With total
resources of $2.946 billion at year-end 1999, F&M provides financial, insurance,
and trust services to individuals and commercial customers through 17 subsidiary
corporations including 125 banking locations, 13 mortgage banking offices, 3
trust offices, and 6 insurance offices in Virginia, West Virginia and Maryland.
Record earnings have been recorded in 1999 through the management of asset
quality, interest margin, and operating efficiencies. For 1999, net loan
charge-offs were 0.19% of average loans, interest margin was 4.77%, and the
efficiency ratio was 60.9%.
F&M expanded its operations through the merger of one bank in the first
quarter of 1999 and announced the merger of a second bank to take place in the
first quarter 2000. Security Bank ("Security"), Manassas, Virginia and the
Corporation entered into an agreement, dated November 10, 1998, for the
affiliation of Security with the Corporation. Under the agreement, Security
would merge with F&M's affiliate, F&M Bank-Northern Virginia. Under terms of the
agreement, Security 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 became effective as of the close of
business on March 22, 1999.
On October 6, 1999, F&M and The State Bank of the Alleghenies ("State
Bank"), Covington, Virginia, announced that their respective Boards of Directors
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 share 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
December 31, 1999, State Bank reported total assets of approximately $151.9
million, deposits of $135.4 million, and total stockholders' equity of
approximately $17.0 million. The transaction was subject to regulatory and State
Bank's shareholders approval. The transaction was completed on January 3, 2000
with the exchange ratio of 0.646 where upon 1,912,160 shares were issued.
Results of Operations
Net income increased 13.2% in 1999 to $41.3 million compared with $36.5
million earned in 1998 and $33.3 million earned in 1997. Net income per share,
basic, increased to $1.79 in 1999 compared to $1.57 in 1998 and $1.45 for 1997.
Net income per share, diluted increased to $1.78 in 1999 compared to $1.56 for
1998 and $1.44 for 1997.
Profitability ratios compare favorably in 1999, 1998 and 1997. Return on
average assets on an annualized basis was 1.42% for 1999, 1.29% for 1998 and
1.28% for 1997. Return on average shareholders' equity is another significant
measure of profitability which in 1999 improved to 13.99%, compared to 12.73% in
1998, and 12.80% in 1997. These performance ratios have varied since 1995, with
return on average assets increasing from 1.21% in 1995 to 1.29% in 1996,
decreasing slightly to 1.28% in 1997 and increasing slightly to 1.29% in 1998.
Return on average shareholders' equity increased from 11.92% in 1995 to 12.79%
in 1996, increasing to 12.80% in 1997 and decreasing to 12.73% in 1998.
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 1999, net interest margin, on a tax-equivalent
basis, was 4.77% compared to 4.71% for 1998 and 4.82% for 1997. 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 1999, the yield on interest-earning
assets decreased 25 basis points from 7.96% in 1998 to 7.71% in 1999 and the
cost of interest-bearing liabilities decreased 35 basis points from 4.14% in
1998 to 3.79% in 1999. The decrease in the yield on earning assets was the
result of lower rates received on loans due to competitive pressures in the
market place. In the second half of 1999, the Federal Reserve increased the
prime rate 75 basis points, which increased the yield on interest rate sensitive
loans and reduced the market value on the investment portfolio. Conversely, in
the latter part of 1998, the Federal Reserve cut the prime rate 75 basis points,
which reduced the yield on interest rate sensitive loans and increased the
market value of the investment portfolio.
7
<PAGE>
In 1999, interest-earning assets have increased to $2.694 billion from
$2.668 billion in 1998 and $2.486 billion in 1997. Competition for potential
loan customers have increased to the point that customers are shopping for
rates, consequently, the rate relative to volume of increase in loans has
declined. Loans, net of unearned discount, in 1999 increased $58.0 million to
$1.785 billion as compared to $1.727 billion in 1998 and $1.681 billion in 1997.
F&M's securities portfolio represents the second largest component of
interest earning assets. At December 31, 1999, F&M's securities portfolio
totaled $843.0 million, $54.1 million or 6.9% higher than year-end 1998. The
securities portfolio at year-end 1998 totaled $788.9 million, which was $109.9
million or 16.2% higher than year-end 1997. In 1999, funds were invested in
investment securities due to the decline in the demand for loan funds and to
take advantage of attractive yields.
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 1999, 1998 and 1997 was 60.9%, 61.1% and 62.3%, respectively. A lower
efficiency ratio represents a greater control of non-interest related costs.
This ratio is influenced 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.
Since the beginning of 1988, F&M has acquired approximately $1.423 billion
in assets and $1.233 billion in deposits through fifteen bank acquisitions and
two non-bank acquisitions. Fourteen of these acquisitions were accounted for as
a pooling-of-interests and three 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 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 1 -- Summary of Financial Results By Quarter
<TABLE>
<CAPTION>
1999 (1) 1998 (1)
---------------------------------------- ----------------------------------------
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 ............................ $52,375 $51,173 $50,644 $49,974 $50,986 $51,227 $50,876 $49,904
Interest expense ........................... 20,267 19,025 19,513 19,490 20,371 20,894 21,171 21,039
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income ........................ 32,108 32,148 31,131 30,484 30,615 30,333 29,705 28,865
Provision for loan losses .................. 807 793 1,101 920 2,546 1,455 778 762
-------- -------- -------- -------- -------- -------- -------- --------
Net interest income after
provision for loan losses................. 31,301 31,355 30,030 29,564 28,069 28,878 28,927 28,103
Noninterest income ......................... 11,078 12,037 11,213 13,314 12,520 9,025 8,867 8,629
Noninterest expense ........................ 27,141 27,617 26,244 25,891 26,618 23,773 24,195 22,955
Income before income taxes ................. 15,238 15,775 14,999 16,987 13,971 14,130 13,599 13,777
Applicable income taxes .................... 4,955 5,370 5,362 6,027 4,592 4,869 4,806 4,745
-------- -------- -------- -------- -------- -------- -------- --------
Net income ................................. $10,283 $10,405 $ 9,637 $10,960 $ 9,379 $ 9,261 $ 8,793 $ 9,032
======== ======== ======== ======== ======== ======== ======== ========
Earnings per share, basic (2) .............. $ 0.45 $ 0.45 $ 0.42 $ 0.47 $ 0.40 $ 0.40 $ 0.38 $ 0.39
Earnings per share, assuming dilution (2) .. $ 0.44 $ 0.45 $ 0.41 $ 0.47 $ 0.40 $ 0.40 $ 0.38 $ 0.38
</TABLE>
(1) The amounts previously reported on Form 10Q for the periods presented have
been retroactively restated to reflect the acquisitions of Security Bank on
March 22, 1999, Peoples Bank of Virginia on April 1, 1998, and The Bank of
Alexandria on June 1, 1998.
(2) Retroactively restated to reflect a 3% stock dividend declared in August,
1999.
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.
8
<PAGE>
Net interest income increased to $125.9 million for the year ended December
31, 1999, up 5.3% over the $119.5 million reported for the same period in 1998
and was up 6.1% in 1998 over the $112.7 million reported for 1997. Net interest
income in 1999 was affected by increased competition for loans resulted in lower
loan rates, however, the economy was considered strong and continued to expand.
Loans grew $58.0 million or 3.3% to $1.785 billion in 1999 from $1.727 billion
in 1998. Loans increased in 1998 by $46.0 million or 2.8% over $1.681 billion in
1997. In 1999, deposits provided the source of funds by increasing on average to
$2.452 billion, up $67.0 million or 2.8% from $2.385 billion in 1998.
Interest-bearing deposits increased on average $30.0 million in 1999 to $1.925
billion from $1.895 billion in 1998. Deposit and loan growth in 1999 was
affected by intense competition for deposit dollars, rising interest rates, a
bull stock market coupled with very low unemployment. The Federal Reserve
lowered the discount rate in the latter part of 1998 in order to preserve
economic stability. In 1999, the Federal Reserve raised interest rates in an
effort to slow down the economy. Efforts to slow the economy by the Federal
Reserve through raising interest rates has had only a slight impact on economic
conditions and the economy continues to grow and prosper.
Net interest income was $119.5 million for the year 1998, up 6.0% over the
$112.7 million reported for the same period in 1997. Net interest income in 1998
was affected by a rebound of loan demand following a recessionary period. Loans
grew $46.0 million or 2.8% to $1.727 billion in 1998 from $1.681 billion in
1997. In 1998, total noninterest bearing deposits provided the primary source of
funds increasing to $552.9 million, up $103.5 million or 23.0% from $449.4
million in 1997.
Net interest income for 1997 increased $8.0 million to $112.7 million,
compared to $104.7 million for 1996. The net interest margin for 1997 was 4.82%.
At year-end 1997, the securities portfolio was $679.0 million, down $35.5
million or 5.5% over the same period 1996. During 1997, funds were kept in
liquid interest-earning assets to be available when securities yields and loan
demand improved.
Table 2 analyzes changes 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>
1999 1998
------------------------------------ -----------------------------------
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 ................................ $ 5,513 $ (209) $ 5,304 $ 4,790 $ (661) $ 4,129
Tax-exempt securities ............................. (237) (55) (292) (318) (61) (379)
Taxable loans ..................................... 9,694 (10,822) (1,128) 5,419 (3,452) 1,967
Tax-exempt loans .................................. 164 (112) 52 (32) (36) (68)
Federal funds sold and repurchase agreements ...... (1,833) 466 (1,367) 2,125 (137) 1,988
Interest-bearing deposits in other banks .......... 38,462 (39,942) (1,480) 984 12 996
--------- --------- --------- --------- --------- ---------
Total earning assets ............................ $ 51,763 $(50,674) $ 1,089 $ 12,968 $ (4,335) $ 8,633
--------- --------- --------- --------- --------- ---------
Interest-Bearing Liabilities:
Checking deposits ................................. $ 39,249 (39,330) (81) 1,288 (34) 1,254
Savings deposits - regular ........................ 194 (577) (383) (31) (282) (313)
Savings deposits - money market ................... 228 (573) (345) 297 (96) 201
CD's & other time deposits - under $100,000 ....... (1,692) (2,218) (3,910) (344) (87) (431)
CD's & other time deposits - $100,000 & over ...... 450 (1,498) (1,048) 842 (319) 523
--------- --------- --------- --------- --------- ---------
Total interest-bearing deposits ................. 38,429 (44,196) (5,767) 2,052 (818) 1,234
Borrowed funds short-term ....................... 273 (155) 118 545 109 654
Borrowed funds long-term ........................ 450 19 469 159 (91) 68
--------- --------- --------- --------- --------- ---------
Total interest-bearing liabilities .............. 39,152 (44,332) (5,180) 2,756 (800) 1,956
--------- --------- --------- --------- --------- ---------
Change in net interest income ................... $ 12,611 $ (6,342) $ 6,269 $ 10,212 $ (3,535) $ 6,677
========= ========= ========= ========= ========= =========
</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.
9
<PAGE>
Table 3-- Average Balances, Income and Expense, Yields and Rates (1)
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999
Annual
Average Income/ Yield/
Balance Expense Rate
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS (Dollars in thousands)
<S> <C> <C> <C>
Securities:
Taxable .............................................. $ 783,887 $ 47,927 6.11%
Tax-exempt (1) ....................................... 21,674 1,774 8.18%
- ---------------------------------------------------------------------------------------------------------------------------
Total securities .................................. 805,561 49,701 6.17%
Loans (net of unearned income):
Taxable .............................................. 1,750,293 148,982 8.51%
Tax-exempt (1) ....................................... 16,765 1,672 9.97%
- ---------------------------------------------------------------------------------------------------------------------------
Total loans ....................................... 1,767,058 150,654 8.53%
Federal funds sold and repurchase agreements ............ 91,714 4,976 5.43%
Interest-bearing deposits in other banks ................ 835 41 4.91%
- ---------------------------------------------------------------------------------------------------------------------------
Total earning assets .............................. 2,665,168 205,372 7.71%
Less: allowance for loan losses ......................... (23,000)
Total nonearning assets ................................. 271,762
-----------
Total assets ...................................... $ 2,913,930
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Checking ............................................. $ 440,401 $ 8,755 1.99%
Regular savings ...................................... 218,445 5,194 2.38%
Money market savings ................................. 254,101 7,108 2.80%
Certificates of deposit:
Less than $100,000 ................................ 780,948 40,746 5.22%
$100,000 and more ................................. 231,359 10,952 4.73%
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits ......................... 1,925,254 72,755 3.78%
Short-term borrowings ................................... 116,277 3,968 3.41%
Long-term borrowings .................................... 25,884 1,572 6.07%
- ---------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities ................ 2,067,415 78,295 3.79%
Noninterest-bearing liabilities:
Demand deposits ...................................... 526,915
Other liabilities .................................... 24,551
-----------
Total liabilities ....................................... 2,618,881
Stockholders' equity .................................... 295,049
-----------
Total liabilities and shareholders` equity .............. $ 2,913,930
===========
Net interest income ..................................... $ 127,077
-----------
Interest rate spread .................................... 3.92%
Interest expense as a percent of average earning assets.. 2.94%
Net interest margin ..................................... 4.77%
</TABLE>
(1) Income and yields are reported on a taxable-equivalent basis.
10
<PAGE>
<TABLE>
<CAPTION>
Twelve Months Ended December 31,
- ---------------------------------------------------------------------------------------------------------
1998 1997
Annual Annual
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ---------------------------------------------------------------------------------------------------------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C> <C>
$ 694,530 $ 42,623 6.14% $ 615,929 $ 38,494 6.25%
24,556 2,066 8.41% 28,320 2,445 8.63%
- ---------------------------------------------------------------------------------------------------------
719,086 44,689 6.21% 644,249 40,939 6.35%
1,674,940 150,110 8.96% 1,614,209 148,143 9.18%
14,473 1,620 11.19% 14,754 1,688 11.44%
- ---------------------------------------------------------------------------------------------------------
1,689,413 151,730 8.98% 1,628,963 149,831 9.20%
125,292 6,343 5.06% 83,302 4,355 5.23%
31,216 1,521 4.87% 11,024 525 4.76%
- ---------------------------------------------------------------------------------------------------------
2,565,007 204,283 7.96% 2,367,538 195,650 8.26%
(22,540) (20,067)
273,935 247,769
---------- ----------
$ 2,816,402 $ 2,595,240
========== ==========
$ 400,604 $ 8,836 2.21% $ 341,823 $ 7,582 2.22%
211,439 5,577 2.64% 212,531 5,890 2.77%
247,245 7,453 3.01% 237,591 7,252 3.05%
812,517 44,656 5.50% 818,389 45,087 5.51%
223,365 12,000 5.37% 207,520 11,477 5.53%
- ---------------------------------------------------------------------------------------------------------
1,895,170 78,522 4.14% 1,817,854 77,288 4.25%
102,017 3,850 3.77% 87,574 3,196 3.65%
18,469 1,103 5.97% 15,198 1,035 6.81%
- ---------------------------------------------------------------------------------------------------------
2,015,656 83,475 4.14% 1,920,626 81,519 4.24%
488,151 393,681
26,187 20,522
---------- ----------
2,529,994 2,334,829
286,405 260,411
---------- ----------
$ 2,816,399 $ 2,595,240
========== ==========
$ 120,808 $ 114,131
----------- -----------
3.82% 4.02%
3.25% 3.44%
4.71% 4.82%
</TABLE>
11
<PAGE>
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. Average
balances are calculated based on month-end averages.
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, selling shorter-term investments and buying
longer maturities can extend 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.
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. F&M's Board of Directors
reviews guidelines established by ALCO.
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 1999 and 1998, was -6.5% and -4.7% of total
earning assets, respectively. 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-
12
<PAGE>
backed securities in the time frames 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 1.1% of stable-rate net income if rates fell by two
hundred basis points over the next year. It projects an increase of
approximately 0.6% if rates rise over the next year by two hundred basis 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 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 8.7%. Additionally, NPV is projected to increase by 6.3% 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 4 -- Interest-rate Risk Measures
<TABLE>
<CAPTION>
Year-end Year-end
1999 1998
---------- ----------
<S> <C> <C>
Static 1-Year Cumulative Gap ........................ -6.5% -4.7%
1-Year Net Income Simulation Projection (1)
-200 bp Shock vs Stable Rate ...................... -1.1% -8.1%
+200 bp Shock vs Stable Rate ...................... 0.6% 7.3%
Static Net Present Value Change
-200 bp Shock vs Stable Rate ...................... 6.3% 2.2%
+200 bp Shock vs Stable Rate ...................... -8.7% -5.1%
</TABLE>
(1) The net income simulation projection for 1999 is based on a ramp of
interest rates where the rate change is spread over a 12 month period. The
1998 net income simulation projection is an immediate shock of 200 bp.
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.
13
<PAGE>
Management expects interest rates will increase less than 1% during 2000
and believes that the current modest level of liability sensitivity is
appropriate.
Noninterest Income
Noninterest income for 1999 increased $8.6 million, or 22.0%, from $39.0
million at year-end 1998 to $47.6 million at year-end 1999. Trust Company income
increased $230 thousand or 8.7% from $2.6 million for 1998 to $2.9 million for
1999 as a result of increased fiduciary activities and the settlement of
estates. Service charges on deposit accounts increased $1.9 million for 1999, up
14.3% over the comparable period a year ago as a result of adding additional
services and improving existing deposit services. Credit card fees increased to
$4.8 million for 1999 as compared to $4.2 million for 1998 as a result of
increased card loan volume. Fees for other customer services, the largest single
item of noninterest income, were $8.5 million for 1999, which increased $5.2
million or 155.4% from 1998 as a result of increased secondary market
activities, increased marketing of current services and providing new services
for customers. Insurance commissions increased $563 thousand or 6.7% from $8.4
million in 1998 to $9.0 million in 1999 as a result of F&M's two full service
insurance agencies expanding their customer base. Gains on sale of securities
were $3.1 million for 1999 as compared to $2.4 million for 1998. Security gains
are realized when market conditions exist that are favorable to F&M and/or
conditions dictate additional liquidity is desirable. In 1999 and to a lesser
extent in 1998, F&M took advantage of stock market gains in other corporate
stock and securities held by the corporation. Other operating income decreased
to $4.3 million in 1999, down $527 thousand or 11.0% over 1998. The decrease in
other operating income was the result of fewer charges for various nondeposit
related fees.
In 1998, noninterest income increased $7.8 million or 25.3% from $31.2
million in 1997 to $39.0 million. Trust Company income increased $306 thousand
or 13.1% from $2.3 million for 1997 to $2.6 million for 1998 as a result of
additional and increased fiduciary activities. Service charges on deposit
accounts were $13.2 million for 1998, up 20.6% over the previous year. Credit
card fees were $4.2 million and $3.7 million for 1998 and 1997, respectively, up
$541 thousand or 14.8% as a result of increased card lending activities. Fees
for other customer services were $3.3 million for 1998, which increased $764
thousand or 29.8% from 1997 as a result of a reduction in loan refinancing
activity. Insurance commissions increased $5.2 million or 161.8% from $3.2
million in 1997 to $8.4 million in 1998 as a result of acquiring F&M's insurance
subsidiaries. Gains on sale of securities were $2.4 million for 1998 as compared
to $4.2 million for 1997. 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 1998 reducing the appeal to
reposition securities, therefore, security gains were smaller in 1998 than in
1997.
Table 5 -- Noninterest Income
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Commissions and fees from fiduciary activities .................. $ 2,871 $ 2,641 $ 2,335
Service charges on deposit accounts ............................. 15,138 13,239 10,978
Credit card fees ................................................ 4,779 4,193 3,652
Fees for other customer services ................................ 8,503 3,329 2,565
Insurance commission income ..................................... 8,960 8,397 3,208
Other operating income .......................................... 4,279 4,806 4,196
-------- -------- --------
Noninterest income ............................................ 44,530 36,605 26,934
Profits on securities available for sale ........................ 3,112 2,436 4,217
-------- -------- --------
Total noninterest income ...................................... $ 47,642 $ 39,041 $ 31,151
======== ======== ========
</TABLE>
Noninterest Expense
Total noninterest expense increased $9.4 million or 9.6%, from $97.5
million in 1998 to $106.9 million in 1999. Salaries and employee benefits
increased $7.6 million or 14.0%, net occupancy expense including furniture and
equipment expense increased $1.4 million or 9.5%, credit card expense increased
$487 thousand or 15.5% and other operating expense decreased $133 thousand or
0.05%. Growth in 1999 noninterest expense is attributable to expanding secondary
market activities, branch bank expansion and remodeling older bank offices,
computer networking, and other costs associated with handling asset and
liability growth.
14
<PAGE>
For 1998, noninterest expense increased by $9.3 million, or 10.5%, from
$88.3 million in 1997 to $97.5 million in 1998. This increase was primarily due
to a $6.5 million, or 13.6% increase in salary and employee benefits, a $662
thousand or 4.6% increase in net occupancy expense including furniture and
equipment expense and a $573 thousand, or 22.4% increase in credit card expense.
Other operating expenses also increased $1.6 million or 6.7% in 1998. Increases
in noninterest expense in 1998 were attributable to branch expansion and other
overhead expenses associated with loan and deposit growth. 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 6 -- Noninterest Expense
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1999 1998 1997
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Salaries and employee benefits ............... $ 61,628 $ 54,044 $ 47,588
Net occupancy expense of premises ............ 8,933 8,423 7,568
Furniture and equipment expense .............. 7,419 6,515 6,708
Credit card expense .......................... 3,623 3,136 2,563
Other operating expenses ..................... 25,290 25,423 23,832
-------- -------- --------
Total ...................................... $106,893 $ 97,541 $ 88,259
======== ======== ========
</TABLE>
Income Taxes
Income tax expense was $21.7 million, $19.0 million, and $16.4 million at
December 31, 1999, 1998, and 1997, respectively. The increase in income taxes is
attributable to increased taxable earnings at the federal statutory income tax
rate of 35% and state income taxes levied by West Virginia and Maryland. This
corresponds to an effective tax rate of 34.4%, 34.3% and 33.0% for the three
years ended December 31, 1999, 1998 and 1997, respectively. Note 16 to the
Consolidated Financial Statements for year-end provide 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 $1.785 billion at December 31,
1999, up $58.0 million or 3.3% from $1.727 billion at year-end 1998 and up $46.0
million or 2.8% from $1.681 billion at year-end 1997. The loan activity increase
for 1999 is indicative of a highly competitive market coupled with an expanding
economy. 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 the subsidiary banks' respective market regions.
Four of F&M's subsidiary banks, F&M Bank-Massanutten, F&M Bank-West Virginia,
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-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 16.2% of F&M's loan portfolio at December 31, 1999 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, assets, such as real property, accounts receivable, inventory and
equipment, secure many of the loans within this category. 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
and loans held for sale) was 64.3% of total loans at December 31, 1999. The
residential mortgage loans made by F&M's subsidiary banks and F&M
15
<PAGE>
Mortgage Services are made only for single family, owner-occupied residences
within their respective market regions. 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. In addition, F&M Mortgage Services
and several subsidiaries 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.
F&M's real estate construction portfolio historically has been a relatively
small portion of the total loan portfolio. At December 31, 1999, construction
loans were $108.4 million or 6.1% 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 1995 of less than one half of 1%.
Consumer loans were 13.4% of F&M's total loan portfolio at December 31,
1999. F&M 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, 1999
comprised 28.8% of the loan portfolio. Loans secured by commercial real estate
comprised 29.6% of the loan portfolio at December 31, 1999 and consist
principally of commercial and industrial loans where real estate constitutes a
source of collateral (shown in Table 7 under the category of "Non-farm,
non-residential"), multifamily loans (1.5%) and agricultural loans (1.0%). 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 6.1% of total loans
outstanding at December 31, 1999. F&M's net charge-off rate for all loans
secured by real estate was 0.02% of period end loans. This is consistent with
1998 when the charge-off rate for all loans secured by real estate was 0.07% 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.
F&M's unfunded loan commitments amounted to $508.9 million at December 31,
1999, compared to $388.6 million at December 31, 1998. This increase in unfunded
loan commitments is due to increased commitments in the secondary market.
On December 31, 1999, F&M had a concentration of loans in non-farm,
non-residential loans, consisting primarily of commercial loans secured by real
estate of $528.7 million and 1-4 family residential mortgage loans of $513.6
million which were in excess of 10 percent of the total loan portfolio. Loan
collateral is predominantly real estate related due to the nature of F&M's
market. Consumer loans to individuals which were $219.9 million also were in
excess of 10% of the total loan portfolio.
A number of economic factors in conjunction with loan activity in 1999
suggest that loan growth in 2000 should continue at a slow pace. At present
there is an inverse relationship with short-term rates being higher than
long-term rates. Interest rates in 1999 were below the floors they reached in
1998 and were attractive to borrowers. New home construction continues to grow
in spite of higher interest rates. Resale of older homes remain strong due to
the strong economy. Auto sales were strong in 1999 and the forecast is for it to
grow in 2000. The economy is continuing to create new jobs, however, the lack of
available workers is having an impact on production. Reports suggest that
borrowers are showing a strong degree of confidence in the economy and are
willing to incur additional debt. These factors resulted in a positive loan
growth trend in 1999, which is expected to continue in 2000.
16
<PAGE>
Table 7 -- Loan Portfolio
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------------
1999 1998 1997 1996 1995
------------ ------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Commercial, financial and agricultural ................ $ 289,058 $ 288,057 $ 280,767 $ 242,816 $ 202,220
Real estate construction .............................. 108,381 104,043 98,566 79,587 68,956
Real estate mortgage:
Residential (1-4 family) ............................ 491,342 482,833 473,461 442,897 414,019
Loans held for sale ................................. 22,217 29,479 39,923 35,858 21,985
Home equity lines ................................... 59,405 59,507 68,991 69,011 70,275
Multifamily ......................................... 27,624 30,060 32,860 34,614 27,530
Non-farm, non-residential (1) ....................... 528,667 508,565 488,500 457,129 412,793
Agricultural ........................................ 18,435 15,297 18,516 19,199 17,576
------------ ------------ ------------ ------------ ------------
Real estate subtotal ................................ 1,147,690 1,125,741 1,122,251 1,058,708 964,178
Loans to individuals:
Consumer ............................................ 219,934 191,199 160,218 155,846 150,877
Credit card ......................................... 20,547 21,074 23,047 23,389 23,043
------------ ------------ ------------ ------------ ------------
Loans to individuals subtotal ....................... 240,481 212,273 183,265 179,235 173,920
Total loans ....................................... 1,785,610 1,730,114 1,684,849 1,560,346 1,409,274
Less unearned income .................................. (880) (2,794) (3,736) (5,775) (6,733)
------------ ------------ ------------ ------------ ------------
Loans-- net of unearned income ........................ $ 1,784,730 $ 1,727,320 $ 1,681,113 $ 1,554,571 $ 1,402,541
============ ============ ============ ============ ============
</TABLE>
(1) This category generally consists of commercial and industrial loans where
real estate constitutes a source of collateral.
Remaining Maturities of Selected Loans
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------
Commercial,
Financial and Real Estate-
Agricultural Construction
------------- ------------
(Dollars in thousands)
<S> <C> <C>
Within 1 year ............................. $ 137,603 $ 69,425
------------- ------------
Variable Rate:
1 to 5 years ............................ 29,504 5,032
After 5 years ........................... 16,981 9,255
------------- ------------
Total ................................... $ 46,485 $ 14,287
------------- ------------
Fixed Rate:
1 to 5 years ............................ 93,712 17,557
After 5 years ........................... 11,258 7,112
------------- ------------
Total ................................... $ 104,970 $ 24,669
------------- ------------
Total Maturities ........................ $ 289,058 $ 108,381
============= ============
</TABLE>
Asset Quality
F&M has always been supportive of new business and business expansion
through involvement in loans to developing enterprises. Most of these
investments have yielded great dividends in the form of new jobs and the
improvement of local economies. From time to time, however, success is not
realized and assets, which serve as collateral, must be liquidated, often at
values which are inadequate to repay the entire debt. F&M will, however,
continue to play a significant role in the economic development process within
the bounds of prudent underwriting and tolerable risk, as we believe that
community involvement and willingness to invest in efforts to improve the
economic health of our communities is one of the primary roles of F&M.
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 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
17
<PAGE>
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. The subsidiary bank's Boards of Directors review all past due and
nonaccrual loans monthly. 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 decreased $4.4 million from $13.0 million at year-end
1998 to $8.6 million at year-end 1999. In keeping with F&M's conservative
philosophy, the amount provided for the provision for loan losses was $3.6
million after careful analysis of possible losses in the loan portfolio. The
nature of loan quality in the portfolio and improved underwriting standards in
1999 allowed F&M to maintain a lower allowance for loan losses. The ratio of
allowance for loan losses to period end loans, net for 1999, 1998 and 1997 was
1.28%, 1.31% and 1.32%, respectively. In 1999, F&M included in its loan
portfolio $12.0 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 1999, the ratio of allowance for loan
losses to period end loans, net, would be 1.30%. In 1999, 1998 and 1997, the
ratio of allowance for loan losses to nonaccrual loans were 269.9%, 184.7% and
109.2%, respectively. A larger percentage 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 Federal Reserve Bank of Richmond examined all
Virginia banking subsidiaries, the West Virginia Division of Banking examined
the West Virginia bank subsidiary and the Federal Reserve Bank of Baltimore
examined F&M's Maryland bank subsidiary during 1999. 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 8 -- Allocation of Allowance for Loan Losses
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ---------------------------- ---------------------------
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 .............. $ 9,262 16.2% $ 9,180 16.6% $ 9,031 16.7%
Real estate-construction ... 778 6.1 779 6.0 770 5.8
Real estate-mortgage ....... 7,753 64.3 7,672 65.2 7,410 66.6
Consumer ................... 5,077 13.4 5,015 12.2 4,904 10.9
--------- ----- --------- ----- --------- -----
$ 22,870 100.0% $ 22,646 100.0% $ 22,115 100.0%
========= ===== ========= ===== ========= =====
<CAPTION>
1996 1995
--------------------------- ---------------------------
Percent of Percent of
Loans in Each Loans in Each
Category to Category to
Allowance Total Loans Allowance Total Loans
--------- ----------- --------- -----------
December 31:
<S> <C> <C> <C> <C>
Commercial, financial and .. $ 6,741 15.6% $ 6,788 14.4%
agriculture .............. 763 4.6 750 4.9
Real estate-construction ... 7,221 68.0 7,195 68.7
Real estate-mortgage ....... 4,761 11.8 4,811 12.0
--------- ----- --------- -----
Consumer ................... $ 19,486 100.0% $ 19,544 100.0%
========= ===== ========= =====
</TABLE>
F&M provided $3.6 million, $5.5 million and $5.9 million for provision for
loan losses for the years 1999, 1998 and 1997, 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 decreased in 1999 to $3.4 million, lower than the
1998 level of $5.0 million and slightly higher than 1997 net charge-offs of $3.2
million. The lower net charge-offs in 1999 was due to a higher degree of
18
<PAGE>
quality loans in the loan portfolio. Commercial, financial and agricultural
loans represented the highest category of net charge-offs in 1999 of $1.7
million compared to $2.1 million in 1998. Loans to individuals made up of
consumer and credit card loans represented the second highest category of net
charge-offs in 1999 of $1.3 million as compared to $1.6 million in 1998. In 1999
and 1998, 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%, 0.30% and 0.20% for the years 1999, 1998 and 1997,
respectively.
Table 9 -- Allowance for Loan Losses
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Balance, beginning of period ....................................... $ 22,646 $ 22,115 $ 19,486 $ 19,544 $ 19,173
Loans charged-off:
Commercial, financial and agriculture .......................... 1,876 2,291 931 1,498 796
Real estate construction ....................................... 6 57 171 20 74
Real estate mortgage:
Residential (1-4 family) ..................................... 359 478 390 198 1,054
Home equity lines ............................................ -- 13 -- 27 --
Multifamily .................................................. -- -- -- 45 --
Non-farm, non-residential (1) ................................ 201 1,041 265 81 95
Agricultural ................................................. 66 15 400 -- --
-------- -------- -------- -------- --------
Real estate subtotal ....................................... 626 1,547 1,055 351 1,149
Consumer ......................................................... 856 1,263 1,235 716 1,160
Credit card ...................................................... 860 632 1,000 544 373
-------- -------- -------- -------- --------
Loans to individuals subtotal .............................. 1,716 1,895 2,235 1,260 1,533
Total loans charged-off .................................... 4,224 5,790 4,392 3,129 3,552
Recoveries:
Commercial, financial and agriculture .......................... 163 148 780 240 733
Real estate construction ....................................... -- 30 -- -- --
Real estate mortgage:
Residential (1-4 family) ..................................... 60 32 24 244 75
Home equity lines ............................................ 11 -- -- -- 56
Multifamily .................................................. -- -- -- 3 --
Non-farm, non-residential (1) ................................ 205 106 36 37 19
Agricultural ................................................. -- 120 -- -- --
-------- -------- -------- -------- --------
Real estate subtotal ....................................... 276 258 60 284 150
Loans to individuals:
Consumer ....................................................... 241 241 277 239 289
Credit card .................................................... 147 103 54 29 19
-------- -------- -------- -------- --------
Loans to individuals subtotal .............................. 388 344 331 268 308
Total recoveries ........................................... 827 780 1,171 792 1,191
-------- -------- -------- -------- --------
Net charge-offs .................................................... 3,397 5,010 3,221 2,337 2,361
Provision for loan losses .......................................... 3,621 5,541 5,850 2,279 2,732
-------- -------- -------- -------- --------
Balance, end of period ............................................. $ 22,870 $ 22,646 $ 22,115 $ 19,486 $ 19,544
======== ======== ======== ======== ========
Ratio of allowance for loan losses to loans outstanding
at end of period .................................................. 1.28% 1.31% 1.32% 1.25% 1.39%
Ratio of net charge-offs to average loans outstanding during period. 0.19% 0.30% 0.20% 0.16% 0.18%
</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, 1999, 1998 and 1997
was $182 thousand, $847 thousand and $222 thousand, respectively. If these loans
had been accruing interest at their originally contracted rates, related income
would have been $871 thousand in 1999, $1.2 million in 1998 and $1.7 million in
1997.
Nonperforming Assets. Total nonperforming assets, which consist of
nonaccrual loans, restructured loans and foreclosed properties, were $19.6
million, $29.0 million, and $37.1 million at year-end 1999, 1998 and 1997,
respectively. The decrease in nonperforming assets in 1999 was due to a
reduction 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.
19
<PAGE>
Nonperforming loans (nonaccrual loans and restructured loans) at
December 31, 1999 were $8.6 million, or 0.5% of total loans, down from $13.0
million, or 0.8% of total loans at December 31, 1998 and down from $20.8
million, or 1.2% of total loans, at December 31, 1997. Nonperforming loans at
year-end 1999 were composed of $5.4 million secured by real estate, $2.3 million
commercial and industrial loans and loans to individuals for household, family,
and other personal expenditures amounting to $402 thousand. Nonperforming loans
that were guaranteed by the U.S. government were $370 thousand in 1999.
Nonperforming loans are those loans where, in the opinion of management,
the full collection of principal or interest is unlikely. In 1999 and 1998,
nonperforming loans decreased 31.6% and 38.8%, while they increased 58.6% in
1997. The increase in nonperforming loans in 1997 was primarily due to one large
commercial customer. The amount provided in 1997 for the reserve for loan losses
was more than adequate to absorb the loss.
The recorded investment in certain loans that were considered to be
impaired was $15.0 million at year-end 1999 as compared to $11.5 million at
year-end 1998, of which $5.3 million was classified as nonperforming. Included
in 1999 impaired loans are $3.7 million secured by commercial real estate. All
impaired loans at year-end 1999 and 1998 had a related valuation allowance
totaling $2.6 million in 1999 and $2.4 million in 1998. The average recorded
investment in certain impaired loans for the years ended December 31, 1999 and
December 31, 1998 was approximately $15.3 million and $14.5 million,
respectively. For the years 1999 and 1998, interest income recognized on
impaired loans totaled $1.6 million and $847 thousand, all of which was
recognized on a cash basis.
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $4.3 million and $4.5 million at December 31, 1999 and 1998,
respectively. If interest on these loans had been accrued, such income would
have approximated $295 thousand and $546 thousand for 1999 and 1998,
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, 1999, F&M had $11.0 million in foreclosed property upon which it
does not anticipate incurring any material loss on the final disposition.
Table 10 -- Nonperforming Assets
<TABLE>
<CAPTION>
December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Nonaccrual loans ...................................... $ 8,472 $ 12,385 $ 20,247 $ 12,767 $ 15,116
Restructured loans .................................... 166 625 523 259 487
-------- -------- -------- -------- --------
Total nonperforming loans ........................... 8,638 13,010 20,770 13,026 15,603
Foreclosed property ................................... 10,974 15,970 16,326 15,190 17,657
-------- -------- -------- -------- --------
Total nonperforming assets .......................... $ 19,612 $ 28,980 $ 37,096 $ 28,216 $ 33,260
======== ======== ======== ======== ========
Loans past due 90 days accruing interest .............. $ 4,271 $ 2,010 $ 2,963 $ 4,785 $ 3,832
Allowance for loan losses to period end loans ......... 1.28% 1.31% 1.32% 1.25% 1.39%
Allowance for loan losses to nonaccrual loans ......... 269.90% 184.66% 109.23% 152.63% 129.29%
Nonperforming assets to period end loans and
foreclosed properties ................................ 1.09% 1.66% 2.19% 1.80% 2.34%
Net charge-offs to average loans ...................... 0.19% 0.30% 0.20% 0.16% 0.18%
<CAPTION>
The loss of income associated with nonperforming loans at December 31 were:
December 31,
------------------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Income that would have been recorded in accordance (Dollars in thousands)
with original terms:
<S> <C> <C> <C> <C> <C>
Nonaccrual loans and restructured loans ............. $ 871 $ 1,176 $ 1,696 $ 1,565 $ 1,313
Income actually recorded:
Nonaccrual and restructured loans ................... 182 847 222 777 229
</TABLE>
On December 31, 1999, there were no material outstanding commitments to
lend additional funds with respect to nonperforming loans.
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
20
<PAGE>
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, 1999, loans past due 90 days or more and still accruing
interest because they are both well secured and in the process of collection
were $4.3 million, compared to $2.0 million and $3.0 million at year end 1998
and 1997, respectively.
Potential Problem Loans. At December 31, 1999, potential problem loans were
approximately $17.3 million, including 7 lending relationships with principal
balances in excess of $500,000, which had an aggregate principal balance
outstanding of $7.6 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, 1999 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 2000. 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 2000 should not be
materially greater than those in 1999. At such relatively low levels of loan
losses as were experienced in 1999, however, a minor dollar fluctuation in
losses could represent a large percentage increase. Loan loss expectations for
2000 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 2000.
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 $843.0 million at December
31, 1999, compared to $788.9 million at December 31, 1998. The securities
portfolio increased $54.1 million in 1999 over 1998, which followed an increase
of $109.9 million in 1998 over 1997. Investment in U.S. Government securities
increased $56.8 million, or 7.6%, for the year 1999. For the year 1998, U.S.
Government securities increased $115.8 million, or 18.4%. 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
prior years.
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 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, 1999 was $393.2 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 Shareholders' Equity as unrealized loss of $10.5 million
at December 31, 1999, a gain of $6.0 million at December 31, 1998 and a gain of
$2.2 million at December 31, 1997. Investment rates have increased in 1999
causing currently held bond portfolio market values to decrease in value by
$16.4 million. The decline in market yields is due to interest rate fluctuations
only and not a result of re-ratings or down grading of securities. F&M can take
a variety of measures to preclude any realization of the loss in the securities
portfolio such as attracting new deposits, adjusting loan rates, reinvestment of
loan paydowns, and borrowing funds from the Federal Home Loan Bank, Federal
Reserve Bank, or correspondent banks.
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.
21
<PAGE>
Table 11 -- Investment Portfolio and Securities Available For Sale
The carrying value of investment securities at the dates indicated was:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Government securities ................. $ 427,579 $ 377,723 $ 381,922
States and political subdivisions .......... 20,963 23,532 29,383
Corporate securities ....................... 1,312 1,515 2,320
---------- ---------- ----------
Total investment securities ............ $ 449,854 $ 402,770 $ 413,625
========== ========== ==========
</TABLE>
The carrying value of securities available for sale at the dates indicated was:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
U.S. Government securities ................. $ 374,098 $ 367,109 $ 247,139
States and political subdivisions .......... 1,123 1,179 1,846
Other securities and corporate securities .. 17,947 17,862 16,364
---------- ---------- ----------
Total securities available for sale .... $ 393,168 $ 386,150 $ 265,349
========== ========== ==========
</TABLE>
Table 12 -- Maturity Distribution and Yields of Securities
December 31, 1999
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)
Securities held for investment:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government securities ........ $ 55,310 5.98% $282,944 6.00% $ 56,402 6.64% $ 32,923 7.66% $427,579 6.21%
Other taxable securities .......... 905 6.28% 201 6.48% 206 6.62% -- 0.00% 1,312 6.45%
-------- -------- -------- -------- --------
Total taxable ................... 56,215 5.98% 283,145 6.00% 56,608 6.64% 32,923 7.66% 428,891 6.21%
Tax-exempt securities (1) .......... 3,196 7.64% 12,625 7.03% 3,277 7.22% 1,865 7.57% 20,963 7.24%
-------- -------- -------- -------- --------
Total ........................... $ 59,411 6.07% $295,770 6.04% $ 59,885 6.67% $ 34,788 7.66% $449,854 6.26%
Securities held for sale:
U.S. Government securities ........ $ 47,109 6.02% $160,227 6.05% $ 95,473 6.29% $ 71,289 6.65% $374,098 6.22%
Other taxable securities .......... -- 0.00% -- 0.00% -- 0.00% 17,947 6.71% 17,947 6.71%
-------- -------- -------- -------- --------
Total taxable ................... 47,109 6.02% 160,227 6.05% 95,473 6.29% 89,236 6.66% 392,045 6.24%
Tax-exempt securities (1) .......... -- 0.00% -- 0.00% 1,123 6.79% -- 0.00% 1,123 6.79%
-------- -------- -------- -------- --------
Total ........................... $ 47,109 6.02% $160,227 6.05% $ 96,596 6.30% $ 89,236 6.66% $393,168 6.24%
-------- -------- -------- -------- --------
Total securities ................... $106,520 6.05% $455,997 6.05% $156,481 6.44% $124,024 6.94% $843,022 6.25%
======== ======== ======== ======== ========
</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, 1999
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, 1999 decreased $6.0 million or 0.3% to $2.482
billion from $2.488 billion at year-end 22 1998. Non-interest bearing demand
deposits decreased $21.1 million or 3.8% from $552.9 million in 1998 to $531.8
22
<PAGE>
million in 1999. Interest bearing deposits increased $14.9 million or 0.8% to
$1.950 billion in 1999. Savings deposits including interest checking in 1999
decreased $226 thousand or 0.03% to $659.0 million, while money market deposits
also decreased $1.0 million. Certificates of deposit over $100,000 experienced a
$4.8 million or 2.0% decrease in deposits. Certificates of deposit under
$100,000 increased $21.0 million or 2.7% from $778.5 million at year-end 1998 to
$799.5 million at year-end 1999. Depositors were attracted to higher returns in
the stock market and other financial institutions that F&M was not willing to
match. F&M, in the short term, was willing to maintain its interest margin in
lieu of attracting expensive deposits.
F&M does not have any other time deposits, other than certificates of
deposits, that are over $100,000.
Deposits at December 31, 1998 grew $165.4 million or 7.1% to $2.488 billion
from $2.323 billion at year-end 1998. Non-interest bearing demand deposits
increased $103.5 million or 23.0% from $449.4 million in 1997 to $552.9 million
in 1998. Interest bearing deposits increased $61.9 million or 3.3% to $1.936
billion in 1998. Interest checking, savings deposits, and money market deposits
experienced a reduction in deposits in 1998, whereas, certificates of deposit
over and under $100,000 experienced an increase in deposits. Deposit growth in
1998 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,
--------------------------------------------------------------------------------
1999 1998 1997
----------------------- ------------------------ ----------------------------
Amount Rate Amount Rate Amount Rate
----------- ---------- ---------- --------- -------------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Noninterest-bearing accounts ....... $ 531,781 $ 552,916 $ 449,421
---------- ---------- -------------
Interest-bearing accounts:
Interest checking ................ 446,197 1.99% 443,883 2.21% 373,155 2.22%
Regular savings .................. 212,849 2.38% 215,389 2.64% 209,344 2.77%
Money-market ..................... 248,800 2.80% 249,805 3.01% 238,507 3.05%
Time deposits:
Less than $100,000 ........... 799,488 5.22% 778,489 5.50% 829,807 5.51%
$100,000 and more ............ 243,090 4.73% 247,935 5.37% 222,620 5.53%
---------- ---------- -------------
Total interest-bearing ............. 1,950,424 3.78% 1,935,501 4.14% 1,873,433 4.25%
---------- ---------- -------------
Total ............................ $2,482,205 $2,488,417 $ 2,322,854
========== ========== =============
</TABLE>
Maturities of CD's of $100,000 and More
<TABLE>
<CAPTION>
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, 1999 .... $ 49,924 $ 45,053 $ 103,404 $ 44,709 $ -- $ 243,090 9.79%
</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 6.0%
must be Tier 1 capital, composed of common equity, retained earnings and a
limited amount of perpetual preferred stock, less certain goodwill items. A
"Well Capitalized" bank will have a Tier 1 capital ratio of at least 6% and a
Total Capital ratio of 10%. F&M had a Tier 1 capital of 15.6% and a Total
Capital ratio of 16.8% at
23
<PAGE>
December 31, 1999, far exceeding 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 of Security
Bank.
Table 14 -- Common Stock Performance and Dividends
<TABLE>
<CAPTION>
Common Stock Price
----------------------------------------------------------
1999 1998 Dividends Declared
----------------------
High Low High Low 1999 1998
---------- --------- --------- ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
First quarter ............. $ 30.00 $ 23.87 $ 36.25 $ 31.75 $ 0.195 $ 0.185
Second quarter ............ $ 33.18 $ 23.93 $ 34.31 $ 32.00 $ 0.235 $ 0.185
Third quarter ............. $ 33.50 $ 26.00 $ 31.56 $ 26.13 $ 0.235 $ 0.195
Fourth quarter ............ $ 30.25 $ 26.00 $ 31.69 $ 25.06 $ 0.235 $ 0.195
Years ended December 31 ... $ 33.50 $ 23.87 $ 36.25 $ 25.06 $ 0.900 $ 0.760
</TABLE>
F&M National Corporation common stock is traded on the New York Stock Exchange
(NYSE) under the symbol FMN. On December 31, 1999 there were approximately 8,466
shareholders of record.
Table 15 -- Analysis of Capital
<TABLE>
<CAPTION>
December 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Tier 1 Capital:
Common stock ........................... $ 45,969 $ 45,021 $ 45,030
Additional paid in capital ............. 94,492 82,723 84,208
Retained earnings ...................... 161,558 161,280 141,173
Less: Goodwill ......................... 10,332 10,090 11,208
---------- ---------- ----------
Total Tier 1 capital ................... 291,687 278,934 259,203
Tier 2 Capital:
Allowance for loan losses .............. 22,870 22,646 22,115
Add: 45% of unrealized equity securities -- 433 --
---------- ---------- ----------
Total Tier 2 capital ................... 22,870 23,079 22,115
Total risk-based capital ............... $ 314,557 $ 302,013 $ 281,318
========== ========== ==========
Risk-weighted assets .................... $1,874,107 $1,845,142 $1,712,152
CAPITAL RATIOS:
Tier 1 risk-based capital ratio ........ 15.56% 15.12% 15.14%
Total risk-based capital ratio ......... 16.78% 16.37% 16.43%
Tier 1 capital to average total assets . 9.99% 9.90% 9.99%
</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, 1999, approximately $777.6 million or 28.9% of total
earning assets is due to mature or reprice within the next year.
In July 1999, F&M began pooling excess funds from its subsidiary banks in
F&M Bank-Winchester. Serving as the lead bank, F&M Bank-Winchester began acting
as a conduit to invest pooled funds and provide an internal line of credit for
all F&M's subsidiaries. Instead of selling excess funds to correspondent banks,
subsidiaries sell to F&M Bank-Winchester. This procedure provides funds for
short term borrowing to those subsidiaries that are in a borrowing position and
also maximizes the earning potential for F&M.
24
<PAGE>
F&M has established a relationship with the Federal Home Loan Bank of
Atlanta to extend, in aggregate, a $530 million short-term line of credit for
any potential borrowing needs. In addition to this credit, a large regional and
money-center bank has extended a short-term borrowing line totaling $30 million.
F&M's credit lines are more than adequate to absorb any potential borrowing
needs that may arise.
At December 31, 1999, certain of F&M's subsidiary banks had outstanding
$95.0 million on borrowings pursuant to securities repurchase agreement
transactions, ranging in maturity from one day to three months.
F&M engages in short-term borrowings at the parent company level, as well.
At December 31, 1999, F&M had $19.3 million outstanding in short-term
obligations issued to commercial customers of F&M's subsidiary banks pursuant to
master note agreements. As a back-up source of funds, the parent has approved
bank lines of credit totaling $6.0 million. These lines are used infrequently
with the average aggregate balance outstanding under the lines not exceeding
$1.0 million since they have been in place. At year end 1999, 1998 and 1997,
there were no outstanding balances under these lines of credit.
All F&M banks are members of the Federal Home Loan Bank system. Some of
F&M's FHLB member banks utilize long-term borrowing, which must be invested in
Residential Housing Finance Assets ("RHFA"). RHFA is 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 1999, long-term borrowings from the Federal Home Loan
Bank system for RHFA investments were $25.4 million maturing through 2006.
Year 2000 (Y2K)
The century date change did not have any operational impact on F&M National
Corporation and its subsidiaries due to corporate management addressing
potential problems and correcting them well in advance of the millennium change.
F&M took very seriously all possible infrastructure problems that could have
occurred by mitigating risks associated to the problem. Obtaining a corporate
line of credit with the FHLB-Atlanta for $530 million and updating borrowing
procedures from the Federal Reserve Bank of Richmond mitigated liquidity risk.
Upgrading computer equipment, computer software, and testing all systems and
services that F&M is dependent upon mitigated operational risk. F&M spent
approximately $1.0 million on Y2K related expenditures, expensing $400 thousand
for expenditures which had no future benefit and capitalizing $600 thousand
which had future benefit. These funds were well spent, in the respect, that
faced with an unprecedented event, F&M was dedicated to serving its customers
with the finest banking service that they have been accustomed to receiving. F&M
stands ready to meet any future challenge that may occur -- to meet and exceed
its customers banking needs.
25
<PAGE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1999 and 1998
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1999 1998
----------- -----------
<S> <C> <C>
Assets
Cash and due from banks ................................................................ $ 122,782 $ 164,207
Interest-bearing deposits in other banks ............................................... 225 389
Federal funds sold ..................................................................... 66,512 151,736
Securities (fair value 1999, $830,706; 1998, $794,549) ................................. 843,022 788,920
Loans held for sale .................................................................... 22,217 29,479
Loans, net of allowance for loan losses, 1999, $22,870; 1998, $22,646 .................. 1,739,643 1,675,195
Bank premises and equipment, net ....................................................... 73,092 67,330
Other assets ........................................................................... 78,441 72,678
----------- -----------
Total assets ...................................................................... $ 2,945,934 $ 2,949,934
=========== ===========
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand deposits .................................................... $ 531,781 $ 552,916
Savings and interest-bearing demand deposits ........................................... 907,846 909,077
Time deposits .......................................................................... 1,042,578 1,026,424
----------- -----------
Total deposits .................................................................... $ 2,482,205 $ 2,488,417
Federal funds purchased and securities sold under
agreements to repurchase ............................................................... 95,008 103,264
Other short-term borrowings ............................................................ 24,120 17,312
Long-term debt ......................................................................... 25,443 21,058
Other liabilities ...................................................................... 27,593 24,864
Commitments and contingent liabilities ................................................. -- --
----------- -----------
Total liabilities ................................................................. $ 2,654,369 $ 2,654,915
----------- -----------
Shareholders' Equity
Preferred stock, no par value, authorized 5,000,000 shares,
no shares outstanding ................................................................. $ -- $ --
Common stock, par value $2 per share, authorized 30,900,000 shares,
issued 1999, 22,984,500 shares; issued 1998, 22,510,500 shares ........................ 45,969 45,021
Capital surplus ........................................................................ 94,492 82,723
Retained earnings ...................................................................... 161,558 161,280
Accumulated other comprehensive income (loss) .......................................... (10,454) 5,995
----------- -----------
Total shareholders' equity ........................................................ $ 291,565 $ 295,019
----------- -----------
Total liabilities and shareholders' equity ........................................ $ 2,945,934 $ 2,949,934
=========== ===========
</TABLE>
- ---------------
See Notes to Consolidated Financial Statements.
26
<PAGE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For Each of the Three Years in the Period Ended December 31, 1999
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Interest Income
Interest and fees on loans .................................................. $150,068 $151,163 $149,240
Interest and dividends on investment securities:
Taxable interest income .................................................... 24,161 24,445 20,972
Interest income exempt from federal income taxes ........................... 1,096 1,290 1,518
Interest and dividends on securities available for sale:
Taxable interest income .................................................... 22,769 17,287 16,737
Interest income exempt from federal income taxes ........................... 58 53 85
Dividends .................................................................. 997 891 771
Interest income on federal funds sold ....................................... 4,976 7,816 4,355
Interest on deposits in banks ............................................... 41 48 525
-------- -------- --------
Total interest income .................................................. $204,166 $202,993 $194,203
-------- -------- --------
Interest Expense
Interest on deposits ........................................................ $ 72,755 $ 78,523 $ 77,288
Interest on short-term borrowings ........................................... 3,968 3,849 3,196
Interest on long-term debt .................................................. 1,572 1,103 1,035
-------- -------- --------
Total interest expense .................................................. $ 78,295 $ 83,475 $ 81,519
-------- -------- --------
Net interest income ..................................................... $125,871 $119,518 $112,684
Provision for loan losses ................................................... 3,621 5,541 5,850
-------- -------- --------
Net interest income after provision
for loan losses ........................................................ $122,250 $113,977 $106,834
-------- -------- --------
Other Income
Commissions and fees from fiduciary activities .............................. $ 2,871 $ 2,641 $ 2,335
Service charges on deposit accounts ......................................... 15,138 13,239 10,978
Credit card fees ............................................................ 4,779 4,193 3,652
Fees for other customer services ............................................ 8,503 3,329 2,565
Insurance commissions ....................................................... 8,960 8,397 3,208
Other operating income ...................................................... 4,279 4,806 4,196
Profits on securities available for sale .................................... 3,112 2,436 4,217
-------- -------- --------
Total other income ...................................................... $ 47,642 $ 39,041 $ 31,151
-------- -------- --------
Other Expenses
Salaries and employees' benefits ............................................ $ 61,628 $ 54,044 $ 47,588
Net occupancy expense of premises ........................................... 8,933 8,423 7,568
Furniture and equipment expenses ............................................ 7,419 6,515 6,708
Credit card expense ......................................................... 3,623 3,136 2,563
Other operating expenses .................................................... 25,290 25,423 23,832
-------- -------- --------
Total other expenses ................................................... $106,893 $ 97,541 $ 88,259
-------- -------- --------
Income before income taxes ............................................. $ 62,999 $ 55,477 $ 49,726
Income tax expense .......................................................... 21,714 19,012 16,396
-------- -------- --------
Net income ............................................................. $ 41,285 $ 36,465 $ 33,330
======== ======== ========
Earnings per common share, basic ............................................. $ 1.79 $ 1.57 $ 1.45
======== ======== ========
Earnings per common share, assuming dilution ................................. $ 1.78 $ 1.56 $ 1.44
======== ======== ========
</TABLE>
- ----------
See Notes to Consolidated Financial Statements.
27
<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, 1999
(In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>
Accumulated
Other Com-
prehensive Compre-
Common Capital Retained Income hensive
Stock Surplus Earnings (Loss) Income Total
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 ......................... $ 45,021 $ 85,188 $ 122,691 $ 403 $ 253,303
Comprehensive income:
Net income-- 1997 ................................ -- -- 33,330 -- $ 33,330 33,330
Other comprehensive income net of tax:
Unrealized holding gains arising during
the period (net of tax, $2,458) ................ -- -- -- -- 4,578 --
Reclassification adjustment (net of
tax, $1,476) .................................... -- -- -- -- (2,741) --
---------
Other comprehensive income
(net of tax, $982) .............................. -- -- -- 1,837 $ 1,837 1,837
---------
Total comprehensive income ....................... -- -- -- -- $ 35,167 --
=========
Cash dividends declared ........................... -- -- (14,848) -- (14,848)
Acquisition of common stock
(441,500 shares) ................................. (883) (9,711) -- -- (10,594)
Issuance of common stock-benefit plans
(180,000 shares) ................................. 360 2,966 -- -- 3,326
Issuance of common stock in exchange for
net assets in acquisition (266,000 shares) ........ 532 5,765 -- -- 6,297
--------- --------- --------- --------- ---------
Balance, December 31, 1997 ......................... $ 45,030 $ 84,208 $ 141,173 $ 2,240 $ 272,651
Comprehensive income:
Net income-- 1998 ................................ -- -- 36,465 -- $ 36,465 36,465
Other comprehensive income net of tax:
Unrealized holding gains arising during
the period (net of tax, $2,819) ................ -- -- -- -- 5,338 --
Reclassification adjustment (net of
tax, $853) ..................................... -- -- -- -- (1,583) --
---------
Other comprehensive income
(net of tax, $1,966) ........................... -- -- -- 3,755 $ 3,755 3,755
---------
Total comprehensive income ....................... -- -- -- -- $ 40,220 --
=========
Cash dividends declared ........................... -- -- (16,358) -- (16,358)
Acquisition of common stock
(188,000 shares) ................................. (376) (5,733) -- -- (6,109)
Issuance of common stock-benefit plans
(183,500 shares) ................................. 367 4,248 -- -- 4,615
--------- --------- --------- --------- ---------
Balance, December 31, 1998 ......................... $ 45,021 $ 82,723 $ 161,280 $ 5,995 $ 295,019
Comprehensive income:
Net income-- 1999 ................................ -- -- 41,285 -- $ 41,285 41,285
Other comprehensive income net of tax:
Unrealized holding losses arising
during the period (net of tax, $10,133) ........ -- -- -- -- (14,426) --
Reclassification adjustment (net of
tax, $1,089) ................................... -- -- -- -- (2,023) --
---------
Other comprehensive income
(net of tax, $9,044) ........................... -- -- -- (16,449) $ (16,449) (16,449)
---------
Total comprehensive income ...................... -- -- -- -- $ 24,836 --
=========
Cash dividends declared .......................... -- -- (20,280) -- (20,280)
Acquisition of common stock
(421,500 shares) ................................ (843) (11,658) -- -- (12,501)
Issuance of common stock-benefit plans
(229,500 shares) ................................ 459 4,138 -- -- 4,597
Issuance of 3% common stock dividend
(666,000 shares) ................................ 1,332 19,289 (20,621) -- --
Cash paid in lieu of fractional shares ............ -- -- (106) -- (106)
--------- --------- --------- --------- ---------
Balance, December 31, 1999 ......................... $ 45,969 $ 94,492 $ 161,558 $ (10,454) $ 291,565
========= ========= ========= ========= =========
</TABLE>
- ----------
See Notes to Consolidated Financial Statements.
28
<PAGE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For Each of the Three Years in the Period Ended December 31, 1999
(In Thousands)
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net income ...................................................................... $ 41,285 $ 36,465 $ 33,330
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization .................................................. 6,945 5,953 6,069
Provision for loan losses ...................................................... 3,621 5,541 5,850
Deferred income taxes (benefit) ................................................ (63) 300 1,346
Profits on securities available for sale ....................................... (3,112) (2,436) (4,217)
(Gain) loss on sale of other real estate ....................................... (120) (99) 98
Net amortization and accretion of securities ................................... 987 56 (100)
Origination of loans held for sale ............................................. (359,749) (265,643) (304,264)
Proceeds from sale of loans held for sale ...................................... 367,011 276,087 300,199
Increase in other assets ....................................................... (2,105) (1,029) (5,117)
Increase (decrease) in other liabilities ....................................... 1,591 (836) 1,917
--------- --------- ---------
Net cash provided by operating activities ............................. $ 56,291 $ 54,359 $ 35,111
--------- --------- ---------
Cash Flows From Investing Activities
(Increase) decrease in interest-bearing deposits in other banks ................. $ 164 $ (26,977) $ (4,133)
Proceeds from sales, principal repayments and calls of securities
available for sale ............................................................. 65,924 146,570 71,864
Proceeds from maturities of securities available for sale ....................... 85,939 61,155 59,125
Proceeds from principal repayments and calls of investment securities ........... 41,468 131,673 55,333
Proceeds from maturities of investment securities ............................... 38,382 75,646 61,389
Purchase of securities available for sale ....................................... (187,519) (266,688) (83,510)
Purchase of investment securities ............................................... (121,663) (250,197) (192,430)
(Increase) decrease in federal funds sold ....................................... 85,224 817 (34,550)
Net (increase) in loans ......................................................... (71,290) (66,761) (129,742)
Purchases of bank premises and equipment ........................................ (11,539) (8,822) (16,597)
Proceeds from sale of other real estate ......................................... 8,624 4,731 2,478
Cash acquired in acquisition .................................................... -- -- 529
--------- --------- ---------
Net cash (used in) investing activities ............................... $ (66,286) $(198,853) $(210,224)
--------- --------- ---------
Cash Flows From Financing Activities
Net increase (decrease) in noninterest-bearing and interest-bearing
demand deposits and savings accounts ........................................... $ (22,366) $ 191,366 $ 115,294
Net increase (decrease) in certificates of deposit .............................. 16,154 (26,003) 63,388
Dividends paid .................................................................. (19,142) (15,856) (15,762)
Increase (decrease) in federal funds purchased and securities sold under
agreements to repurchase ........................................................ (8,256) 21,498 27,846
Increase (decrease) in other short-term borrowings .............................. 6,808 2,803 (367)
Net proceeds from issuance and sale of common stock ............................. 3,588 3,085 2,594
Acquisition of common stock ..................................................... (12,495) (6,109) (10,594)
Cash paid in lieu of fractional shares .......................................... (106) -- --
Decrease in Federal Home Loan Bank advances ..................................... -- -- (8,297)
Proceeds from long-term debt .................................................... 7,500 9,900 8,500
Principal payments on long-term debt ............................................ (3,115) (5,978) (2,861)
--------- --------- ---------
Net cash provided by (used in ) financing activities .................. $ (31,430) $ 174,706 $ 179,741
--------- --------- ---------
Increase (decrease) in cash and cash equivalents ...................... $ (41,425) $ 30,212 $ 4,628
Cash and Cash Equivalents
Beginning ....................................................................... 164,207 133,995 129,367
--------- --------- ---------
Ending .......................................................................... $ 122,782 $ 164,207 $ 133,995
========= ========= =========
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest ....................................................................... $ 79,009 $ 83,783 $ 80,460
========= ========= =========
Income taxes ................................................................... $ 22,649 $ 19,166 $ 17,433
========= ========= =========
Supplemental Schedule of Noncash Investing and Financing Activities
Issuance of stock options under nonvariable compensatory plan ................... $ 1,003 $ 1,529 $ 732
========= ========= =========
Issuance of common stock - 3% stock dividend .................................... $ 20,621 $ -- $ --
========= ========= =========
Loan balances transferred to foreclosed properties .............................. $ 3,221 $ 5,030 $ 4,504
========= ========= =========
Unrealized gain (loss) on securities available for sale ......................... $ (25,493) $ 5,721 $ 2,819
========= ========= =========
Issuance of common stock in exchange for net assets in acquisition .............. $ -- $ -- $ 6,297
========= ========= =========
</TABLE>
- ----------
See Notes to Consolidated Financial Statements.
29
<PAGE>
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended December 31, 1999
Note 1 -- Nature of Banking Activities and Significant Accounting Policies
F&M National Corporation is a bank holding company whose principal banking
subsidiaries provide a wide range of financial services, including a variety of
deposit accounts, as well as commercial, consumer and mortgage lending to
customers in Virginia, West Virginia and Maryland. In addition to commercial
activities, the Corporation operates insurance and trust companies which
generate noninterest income by sales of insurance, trust and fiduciary services.
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.
Cash and Cash Equivalents
For the purposes of reporting cash flows, cash and cash equivalents include
cash on hand and amounts due from banks.
Securities
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, 1999 and 1998.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are carried
at the lower of cost or estimated fair value in the aggregate. Net unrealized
losses, if any, are recognized through a valuation allowance by charges to
income.
Loans
The Corporation grants mortgage, commercial and consumer loans to
customers. The ability of the Corporation's debtors to honor their contracts is
dependent upon the real estate and general economic conditions in their market
area.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported at their
outstanding unpaid principal balances less the allowance for loan losses and
unearned 30 income. Interest income is accrued on the unpaid principal balance.
30
<PAGE>
The accrual of interest on mortgage and commercial loans is discontinued at
the time the loan is 90 days delinquent unless the credit is well-secured and in
process of collection. Credit card loans and other personal loans are typically
charged off no later than 180 days past due. In all cases, loans are placed on
nonaccrual or charged-off at an earlier date if collection of principal or
interest is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income. The interest on
these loans is accounted for on the cash-basis or cost-recovery method, until
qualifying for return to accrual. Loans are returned to accrual status when all
the principal and interest amounts contractually due are brought current and
future payments are reasonably assured.
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the collectibility
of the loans in light of historical experience, the nature and volume of the
loan portfolio, adverse situations that may affect the borrower's ability to
repay, estimated value of any underlying collateral and prevailing economic
conditions. This evaluation is inherently subjective as it requires estimates
that are susceptible to significant revision as more information becomes
available.
A loan is considered impaired when, based on current information and
events, it is probable that the Corporation will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management in
determining impairment include payment status, collateral value, and the
probability of collecting scheduled principal and interest payments when due.
Loans that experience insignificant payment delays and payment shortfalls
generally are not classified as impaired. Management determines the significance
of payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower's
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan-by-loan basis for
commercial and construction loans by either the present value of expected future
cash flows discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the loan is
collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Corporation does not separately
identify individual consumer and residential loans for impairment disclosures.
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.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure are held for sale
and are initially recorded at fair value at the date of foreclosure,
establishing a new cost basis. Subsequent to foreclosure, valuations are
periodically performed by management and the assets are carried at the lower of
carrying amount or fair value less cost to sell. Revenue and expenses from
operations and changes in the valuation allowance are included in net expenses
from foreclosed assets.
Pension Plan
The Corporation has a trusteed, noncontributory defined contribution
pension plan covering substantially all full-time employees.
Income Taxes
Deferred income tax assets and liabilities are determined using the balance
sheet method. Under this method, the net deferred tax asset or liability is
determined based on the tax effects of the temporary differences between the
book and tax bases of the various balance sheet assets and liabilities and gives
current recognition to changes in tax rates and laws.
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.
31
<PAGE>
Earnings Per Share
Basic earnings per share represents income available to common stockholders
divided by the weighted-average number of common shares outstanding during the
period. Diluted earnings per share reflects additional common shares that would
have been outstanding if dilutive potential common shares had been issued, as
well as any adjustment to income that would result from the assumed issuance.
Potential common shares that may be issued by the Corporation relate solely to
outstanding stock options, and are determined using the treasury stock method.
Trust Division
Securities and other property held by the F&M Trust Company 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.
Comprehensive Income
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," as
of January 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although certain
changes in assets and liabilities, such as unrealized gains and losses on
available for sale securities, are reported as a separate component of the
equity section of the balance sheet, such items, along with net income, are
components of comprehensive income. The adoption of SFAS No. 130 had no effect
on the Corporation's net income or shareholders' equity.
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. Material
estimates that are particularly susceptible to significant change in the near
term relate to the determination of the allowance for loan losses, the valuation
of foreclosed real estate and deferred taxes.
Derivative Financial Instruments
As of October 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and
Hedging Activities." Statement 133 establishes accounting and reporting
standards for derivative financial instruments and other similar financial
instruments and for hedging activities. The Statement also allowed securities
classified as held to maturity to be transferred to the available for sale
category at the date of initial application of this standard. The Corporation
does not have any derivative instruments and hedging activities as defined under
this Statement.
Segments
As of December 31, 1999 and 1998, the Corporation does not have any
segments that meet the disclosure requirements established by Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures about Segments of an
Enterprise and Related Information."
Note 2 -- Securities
The amortized cost and fair values of securities being held to maturity as
of December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ---------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies ................... $ 427,579 $ 876 $ (13,160) $ 415,295
Obligations of states and political
subdivisions ................................................ 20,963 137 (175) 20,925
Corporate securities ......................................... 1,312 8 (2) 1,318
----------- ---------- --------- ---------
$ 449,854 $ 1,021 $ (13,337) $ 437,538
=========== ========== ========= =========
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
----------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
----------- ---------- --------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies ................... $ 377,723 $ 6,102 $ (1,122) $ 382,703
Obligations of states and political
subdivisions ................................................ 23,532 627 (32) 24,127
Corporate securities ......................................... 1,515 54 -- 1,569
----------- ---------- --------- ---------
$ 402,770 $ 6,783 $ (1,154) $ 408,399
=========== ========== ========= =========
</TABLE>
The amortized cost and fair value of securities being held to maturity as of
December 31, 1999, by contractual maturity are shown below. Expected maturities
may differ from contractual maturities because the corporate securities may be
called or repaid without any penalties. Therefore, these securities are not
included in the maturity categories in the maturity summary.
Amortized Fair
Cost Value
--------- --------
(In Thousands)
Due in one year or less .......................... $ 59,162 $ 58,479
Due after one year through five years ............ 294,707 285,878
Due after five years through ten years ........... 59,885 57,475
Due after ten years .............................. 34,788 34,388
Corporate securities ............................. 1,312 1,318
--------- --------
$ 449,854 $437,538
========= ========
The amortized cost and fair value of securities available for sale as of
December 31, 1999 and 1998, are as follows:
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------- ---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies ................... $ 389,696 $ 623 $ (16,221) $ 374,098
Obligations of states and political
subdivisions ................................................ 1,134 1 (12) 1,123
Corporate securities ......................................... 6,202 -- (649) 5,553
Other ........................................................ 12,211 183 -- 12,394
--------- --------- --------- ---------
$ 409,243 $ 807 $ (16,882) $ 393,168
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------- ---------- ---------- ---------
(In Thousands)
<S> <C> <C> <C> <C>
U.S. Treasury securities and obligations of
U.S. government corporations and agencies ................... $ 358,681 $ 9,100 $ (672) $ 367,109
Obligations of states and political
subdivisions ................................................ 1,135 44 -- 1,179
Corporate securities ......................................... 5,147 564 -- 5,711
Other ........................................................ 11,751 400 -- 12,151
--------- --------- --------- ---------
$ 376,714 $ 10,108 $ (672) $ 386,150
========= ========= ========= =========
</TABLE>
33
<PAGE>
The amortized cost and fair value of securities available for sale, as of
December 31, 1999, by contractual maturity are shown below. Expected maturities
may differ from contractual maturities because the corporate securities may be
called or prepaid without any penalties. Therefore, these securities are not
included in the maturity categories in the maturity summary.
Amortized Fair
Cost Value
--------- ---------
(In Thousands)
Due in one year or less ............................... $ 48,042 $ 47,108
Due after one year through five years ................. 164,693 160,227
Due after five years through ten years ................ 102,569 96,597
Due after ten years ................................... 75,526 71,289
Corporate securities .................................. 6,202 5,553
Other ................................................. 12,211 12,394
-------- --------
$409,243 $393,168
======== ========
Proceeds from principal repayments and calls of securities held to
maturity during 1999, 1998 and 1997 were $41,468,000, $131,673,000 and
$55,333,000. There were no sales of securities held to maturity during 1999,
1998 and 1997.
Proceeds from sales, principal repayments and calls of securities
available for sale during 1999, 1998 and 1997 were $65,924,000, $146,570,000 and
$71,864,000. Gross gains of $3,112,000, $2,579,000 and $4,272,000 and gross
losses of $-0-, $143,000 and $55,000 were realized on those sales and calls
during 1999, 1998 and 1997, respectively.
The book value of securities pledged to secure deposits and for other
purposes amounts to $350,084,000 and $223,953,000 at December 31, 1999 and 1998,
respectively.
As permitted under SFAS No. 133, the Corporation transferred securities
held to maturity with a book value of $65,937,000 and a market value of
$71,911,000 to securities available for sale as of October 1, 1998.
Note 3 -- Loans
Major classifications of loans are as follows:
December 31,
----------------------------
1999 1998
------------ ------------
(In Thousands)
Commercial, financial and agricultural ........ $ 289,058 $ 288,057
Real estate -- construction ................... 108,381 104,043
Real estate -- mortgage:
Residential (1-4 family) ................... 491,342 482,833
Home equity lines .......................... 59,405 59,507
Multifamily ................................ 27,624 30,060
Non-farm, non-residential .................. 528,667 508,565
Agricultural ............................... 18,435 15,297
Loans to individuals:
Consumer ................................... 219,934 191,199
Credit card ................................ 20,547 21,074
------------ ------------
Total loans .......................... $ 1,763,393 $ 1,700,635
Less: Unearned income ......................... (880) (2,794)
Allowance for loan losses ............... (22,870) (22,646)
------------ ------------
Loans, net ........................... $ 1,739,643 $ 1,675,195
============ ============
34
<PAGE>
Note 4 -- Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
December 31,
---------------------------------
1999 1998 1997
--------- --------- ---------
(In Thousands)
Balance at beginning of year ............ $ 22,646 $ 22,115 $ 19,486
Provision charged to operating expense .. 3,621 5,541 5,850
Recoveries added to the allowance ....... 827 780 1,171
Loan losses charged to the allowance .... (4,224) (5,790) (4,392)
--------- --------- ---------
Balance at end of year .................. $ 22,870 $ 22,646 $ 22,115
========= ========= =========
Impairment of loans having recorded investments of $15,009,000 at December
31, 1999 and $11,473,000 at December 31, 1998, has been recognized in conformity
with SFAS Statement No. 114. The average recorded investment in impaired loans
during 1999, 1998 and 1997 was $15,285,000, $14,451,000 and $10,284,000,
respectively. The total allowance for loan losses related to these loans was
$2,600,000, $2,444,000 and $4,414,000 on December 31, 1999, 1998 and 1997,
respectively. Interest income on impaired loans of $1,623,000, $847,000 and
$519,000 was recognized for cash payments received in 1999, 1998 and 1997,
respectively.
Nonaccrual loans excluded from impaired loan disclosure amounted to
$4,266,000 and $4,510,000 at December 31, 1999 and 1998, respectively. If
interest on these loans had been accrued, such income would have approximated
$295,000 and $546,000 for 1999 and 1998, respectively.
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, 1999
and 1998, these loans totaled $38,424,000 and $43,236,000, respectively. During
1999, total principal additions were $4,253,000 and total principal payments
were $9,065,000.
The Corporation was indebted to related parties for short-term borrowings
totaling $8,460,000 and $6,400,000 at December 31, 1999 and 1998, respectively.
The Corporation paid $186,585 in 1999 to the law firm of one director who
serves as legal counsel for a bank subsidiary.
Construction of bank premises during 1999 included $577,184 paid to
companies of related parties.
Note 6 -- Bank Premises and Equipment, Net
Premises and equipment are summarized as follows:
December 31,
----------------------
1999 1998
---------- ----------
(In Thousands)
Premises ............................................... $ 60,823 $ 59,149
Leasehold improvements ................................. 8,909 7,754
Furniture and equipment ................................ 42,269 36,644
Construction in progress ............................... 4,439 1,835
---------- ----------
$ 116,440 $ 105,382
Less accumulated depreciation and amortization ......... (43,348) (38,052)
---------- ----------
$ 73,092 $ 67,330
========== ==========
Depreciation and amortization of bank premises and equipment included in
operating expenses for the years ended December 31, 1999, 1998 and 1997, were
$5,777,000, $4,790,000 and $5,095,000, respectively.
35
<PAGE>
Note 7 -- Deposits
The aggregate amount of jumbo time deposits, each with a minimum
denomination of $100,000, was $243,090,000 and $247,935,000 in 1999 and 1998,
respectively.
At December 31, 1999, the scheduled maturities of time deposits (in
thousands) are as follows:
2000 .......................................... $ 763,815
2001 .......................................... 162,499
2002 .......................................... 55,611
2003 .......................................... 43,488
2004 .......................................... 11,183
Later years ................................... 5,982
----------
$1,042,578
==========
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 $541,880,000 at December 31, 1999.
The table below presents selected information on the combined totals of
repurchase agreements and other short-term borrowings for the years ended
December 31:
1999 1998
--------- ---------
(In Thousands)
Maximum balance at any month end during the year ...... $147,805 $121,165
Average balance for the year .......................... 119,061 102,017
Weighted average rate for the year .................... 3.41% 3.77%
Weighted average rate on borrowings at year end ....... 4.22% 3.53%
Estimated fair value .................................. 119,128 120,576
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, 1999 and 1998.
Note 9 -- Long-Term Debt
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 $25,443,000 and $21,058,000 at December 31, 1999 and 1998, maturing
through 2006. The interest rate on the notes payable range from 5.57% to 8.18%
at December 31, 1999. Principal payments on the notes (in thousands) are due as
follows:
2000 ............................................... $ 3,800
2001 ............................................... 3,857
2002 ............................................... 2,866
2003 ............................................... 2,875
2004 ............................................... 2,885
Later years ........................................ 9,160
-------
$25,443
=======
36
<PAGE>
Note 10 -- Business Combinations
On April 1, 1998, the Corporation completed its acquisition of Peoples Bank
of Virginia. A total of approximately 778,000 shares of the Corporation's stock
was issued in the transaction, which was accounted for as a pooling-of-
interests.
On April 30, 1998, the Corporation completed its acquisition of J. V.
Arthur, Inc. A total of approximately 91,000 shares of the Corporation's stock
was issued in the transaction, which was accounted for as a pooling-of-
interests.
On June 1, 1998, the Corporation completed its acquisition of The Bank of
Alexandria. A total of approximately 646,000 shares of the Corporation's stock
was issued in the transaction, which was accounted for as a pooling-of-
interests.
On March 22, 1999, the Corporation completed its acquisition of Security
Bank Corporation. A total of approximately 643,000 shares of F&M stock was
issued in the transaction, which was accounted for as a pooling-of-interests.
Total assets and results of operations as originally reported for 1998 and
1997 have been restated to reflect the accounts of the pooled entities as
follows:
<TABLE>
<CAPTION>
Net Income Per Share
------------------------
Total Total Net Assuming
Assets Income Income Basic Dilution
---------- ---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
1998 originally reported ..................... $2,888,714 $ 237,444 $ 36,485 $ 1.67 $ 1.65
======== ========
1998 results of pooled entities .............. 61,220 4,590 (20)
---------- ---------- ----------
As restated ............................. $2,949,934 $ 242,034 $ 36,465 $ 1.57 $ 1.56
========== ========== ========== ======== ========
<CAPTION>
Net Income Per Share
------------------------
Total Total Net Assuming
Assets Income Income Basic Dilution
---------- ---------- ---------- ---------- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
1997 originally reported ..................... $2,520,312 $ 205,634 $ 31,115 $ 1.54 $ 1.53
======== ========
1997 results of pooled entities .............. 213,981 19,720 2,215
---------- ---------- ----------
As restated ............................. $2,734,293 $ 225,354 $ 33,330 $ 1.45 $ 1.44
========== ========== ========== ======== ========
</TABLE>
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.
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 shareholders. Earnings per share amounts for prior
periods have been restated to give effect to the acquisition of Peoples Bank of
Virginia, The Bank of Alexandria and J.V. Arthur Inc. in 1998, the acquisition
of Security Bank Corporation in 1999 and a 3% stock dividend in 1999.
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- ---------------------------
Per Per Per
Share Share Share
Shares Amount Shares Amount Shares Amount
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Basic EPS .................... 23,058,000 $ 1.79 23,187,000 $ 1.57 23,011,000 $ 1.45
========== ========== ==========
Effect of dilutive
securities:
Stock options ............ 175,000 230,000 183,000
----------- ----------- -----------
Diluted EPS .............. 23,233,000 $ 1.78 23,417,000 $ 1.56 23,194,000 $ 1.44
=========== ========== =========== ========== =========== ==========
</TABLE>
37
<PAGE>
Note 12 -- Stock-Based Compensation Plans
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 $735,000, $276,000 and $173,000 for the years ended December 31,
1999, 1998 and 1997, 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 Corporation 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, 1999, 1998
and 1997 and changes during the years ended on those dates is as follows:
<TABLE>
<CAPTION>
1999 1998 1997
----------------------- ----------------------- -----------------------
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 ................................... 279,443 $ 11.71 310,222 $ 9.84 272,496 $ 9.12
Granted ............................................... 67,000 14.97 69,285 17.22 93,069 11.53
Effect of 3%
stock dividend ...................................... 6,303 -- -- -- -- --
Exercised ............................................. (133,835) 11.93 (96,930) 9.91 (55,343) 9.15
Forfeited ............................................. (3,346) 11.93 (3,134) 13.92 -- --
---------- ---------- ----------
Outstanding and
exercisable at end
of year ............................................. 215,565 $ 12.23 279,443 $ 11.71 310,222 $ 9.84
========== ========== ==========
Weighted-average fair
value per option of
options granted during
the year ............................................ $ 18.72 $ 22.60 $ 14.75
</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 are determined based on the grant date fair
values of awards (the method described in SFAS 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 1999, 1998 and 1997, respectively: dividend yields of .26%, .26% and
.30%; expected volatility of 18.5%, 19.1% and 18.1% ; a risk-free interest rate
of 6.5%, 4.5% and 5.8%; and an expected option life of 5 years from the date of
grant.
1999 1998 1997
---------- ---------- ----------
(In Thousands)
Net Income: As Reported ........ $ 41,285 $ 36,465 $ 33,330
Pro Forma .......... 40,823 35,542 32,455
Basic EPS: As Reported ........ 1.79 1.57 1.45
Pro Forma .......... 1.77 1.53 1.41
Diluted EPS: As Reported ........ 1.78 1.56 1.44
Pro Forma .......... 1.76 1.52 1.40
38
<PAGE>
A further summary about options outstanding at December 31, 1999, is as follows:
Options Outstanding and Exercisable
-----------------------------------------
Weighted Weighted
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life Price
- ------------------- ----------- ------------- ----------
$ 7.90 - 10.63 4,952 .2 years $ 9.38
11.54 3,697 1.2 11.54
13.51 4,871 2.4 13.51
7.47 - 19.49 40,505 4.4 9.46
7.70 - 8.95 12,026 5.0 7.77
6.70 - 12.53 26,919 6.1 9.68
10.37 - 13.78 33,500 7.0 10.64
16.68 43,775 8.0 16.68
14.53 45,320 9.0 14.53
-----------
$ 6.70 - 19.49 215,565 6.5 12.23
===========
Employee Stock Discount Plan
In 1998, 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. An eligible employee is one who is customarily employed for more
than 20 hours per week and more than five months per year.
All officers and directors who are eligible employees may participate.
46,501 shares were issued for the 1999 plan year at a discount of $192,000.
30,411 shares were issued for the 1998 plan year at a discount of $136,000.
46,259 shares were issued for the 1997 plan year at a discount of $148,000.
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 their 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 1999, 1998 and 1997, was $417,500, $347,000 and
$259,000, 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 (proportionately based on
eligible W-2 salaries) 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 was 5% in cash for 1999, 1998 and 1997.
The total plan expense for 1999, 1998 and 1997 was $1,745,000, $1,521,000
and $1,268,000, 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 $1,517,000 in 1999,
$1,344,000 in 1998 and $1,320,000 in 1997.
39
<PAGE>
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 1999, 1998 and 1997, based on the present value of the
retirement benefits, amounted to approximately $323,000, $336,000 and $505,000,
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 (a subsidiary of F&M
National Corporation as of March 29, 1996) implemented a Nonemployee Director
Stock Compensation Plan. Allegiance Bank, N.A. (a subsidiary of F&M National
Corporation as of October 1, 1996) implemented a Director Stock Warrant Plan
effective February 8, 1994. Security Bank Corporation (a subsidiary of F&M
National Corporation as of March 22, 1999) implemented a Director Stock Option
Plan effective in 1997. 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 three years as restated to equivalent shares of the Corporation's
common stock:
<TABLE>
<CAPTION>
1999 1998 1997
------------------------ ------------------------ -----------------------
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 ........... 46,989 $ 10.93 54,029 $ 10.32 48,267 $ 7.15
Granted ...................... -- -- -- -- 31,336 12.65
Effect of 3%
stock dividend .............. 1,116 -- -- -- -- --
Exercised .................... (6,970) 7.27 (7,040) 6.26 (25,574) 7.19
Forfeited .................... (2,635) 6.26 -- -- -- --
------- ------- ------
38,500 $ 11.58 46,989 $ 10.93 54,029 $ 10.32
======= ======= ======
</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 1999, 1998 and 1997, was $4,331,000, $3,519,000
and $3,183,000, respectively. Minimum rental commitments under noncancelable
leases with terms in excess of one year as of December 31, 1999, were as
follows:
Year Operating Leases
---------------------- ----------------
(In Thousands)
2000 ............................. $ 3,258
2001 ............................. 2,745
2002 ............................. 2,036
2003 ............................. 1,800
2004 ............................. 1,096
Later years ...................... 3,375
-------------
Total minimum payments ........... $ 14,310
=============
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, 1999 and 1998, the
aggregate amounts of daily average required balances were approximately
$15,705,000 and $13,416,000, 40 respectively.
40
<PAGE>
Note 16 -- Income Taxes
Net deferred tax assets consist of the following components as of December
31, 1999 and 1998:
1999 1998
------- -------
Deferred tax assets: (In Thousands)
Allowance for loan losses ..................... $ 7,847 $ 7,512
Salary continuation plan ...................... 1,171 1,427
Other real estate owned ....................... 694 684
Nonaccrual interest ........................... 111 109
Securities available for sale ................. 5,734 --
Other ......................................... 586 393
------- -------
$16,143 $10,125
------- -------
Deferred tax liabilities:
Depreciation .................................. $ 2,390 $ 2,087
Excess tax basis - acquisition ................ 231 271
Securities available for sale ................. -- 3,310
Other ......................................... 60 102
------- -------
$ 2,681 $ 5,770
------- -------
$13,462 $ 4,355
======= =======
The provision for income taxes charged to operations for the years ended
December 31, 1999, 1998 and 1997, consists of the following:
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Current tax expense .......................................... $ 21,777 $ 18,712 $ 15,050
Deferred tax (benefit) expense ............................... (63) 300 1,346
--------- --------- ---------
$ 21,714 $ 19,012 $ 16,396
========= ========= =========
</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, 1999, 1998 and 1997 due to the following:
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Computed "expected" tax expense .............................. 35.0% 35.0% 35.0%
Increase (decrease) in income taxes resulting from:
Tax-exempt interest .......................................... (1.0) (1.2) (1.7)
Nondeductible merger expenses ................................ .1 .1 --
Other, net ................................................... .3 .4 (.3)
------- ------- -------
34.4% 34.3% 33.0%
======= ======= =======
</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, 1999, the aggregate amount of
unrestricted funds which could be transferred from the Corporation's
subsidiaries to the Parent Corporation, without prior regulatory approval,
totaled $19,997,000 or 6.86% of the consolidated net assets.
Note 18 -- Financial Instruments With Off-Balance-Sheet Risk
The Corporation is 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
41
<PAGE>
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 has in particular classes of financial instruments.
The Corporation's 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 amount of those instruments. The Corporation uses the same
credit policies in making commitments and conditional obligations as it does for
on-balance-sheet instruments.
At December 31, 1999 and 1998, the following financial instruments were
outstanding whose contract amounts represent credit risk:
1999 1998
-------- --------
(In Thousands)
Commitments to extend credit and unfunded
commitments under lines of credit ............ $508,884 $388,639
Commercial and standby letters of credit .......... $ 22,968 $ 23,036
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. The commitments may expire without being drawn
upon, and therefore do not necessarily represent future cash requirements. The
Corporation evaluates each customer's credit worthiness on a case-by-case basis.
The amount of collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation of the customer.
Unfunded commitments under lines of credit are commitments for possible
future extensions of credit to existing customers. Those lines of credit may not
be drawn upon to the total extent to which the Corporation is committed.
Commercial and standby letters of credit are conditional commitments issued
by the Corporation to guarantee the performance of a customer to a third party.
Those letters of credit are primarily issued to support public and private
borrowing arrangements. The credit risk involved in issuing letters of credit is
essentially the same as that involved in extending loan facilities to customers.
The Corporation generally holds collateral supporting those commitments if
deemed necessary.
Note 19 -- Credit Risk
As of December 31, 1999, the Corporation had a concentration of loans in
non-farm, non-residential loans, consisting primarily of commercial loans
secured by real estate of $528,667,000 which were in excess of 10% of the total
loan portfolio. The Corporation does not engage in any foreign lending
activities.
As of December 31, 1999, the Corporation had $7,164,000 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.
42
<PAGE>
Loans Held For Sale
Fair values of loans held for sale are based on commitments on hand from
investors or prevailing market prices.
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.
Deposits and Borrowings
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. For all
other deposits and borrowings, the fair value is determined using the discounted
cash flow method. The discount rate was equal to the rate currently offered on
similar products.
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, 1999 and 1998, the carrying amounts of loan commitments,
and stand-by letters of credit, were deemed to approximate fair values.
The estimated fair values of the Corporation's financial instruments are as
follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------- ----------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ----------- ---------- ----------
(In Thousands) (In Thousands)
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments ..................... $ 189,519 $ 189,519 $ 316,332 $ 316,332
Investments securities .............................. 449,854 437,538 402,770 408,399
Securities available for sale ....................... 393,168 393,168 386,150 386,150
Loans and loans held for sale, net .................. 1,761,860 1,761,331 1,704,674 1,742,429
---------- ---------- ---------- ----------
Total financial assets .......................... $2,794,401 $2,781,556 $2,809,926 $2,853,310
========== ========== ========== ==========
Financial liabilities:
Deposits ............................................ $2,482,205 $2,342,457 $2,488,417 $2,492,962
Federal funds purchased and securities sold
under agreement to repurchase ..................... 95,008 95,008 103,264 103,264
Other short-term borrowings ......................... 24,120 24,120 17,312 17,312
Long-term debt ...................................... 25,443 25,443 21,058 19,857
---------- ---------- ---------- ----------
Total financial liabilities ..................... $2,626,776 $2,487,028 $2,630,051 $2,633,395
========== ========== ========== ==========
</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. Prompt
corrective action provisions are not applicable to bank holding companies.
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, 1999, that the Corporation meets all capital
adequacy requirements to which it is subject.
43
<PAGE>
As of December 31, 1999, 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.
<TABLE>
<CAPTION>
Minimum
Capital
Actual Requirements
----------------- -------------------------------------------------------------
Amount Ratio Amount Ratio
-------- ----- -------------------------------- ---------------------------
(In Thousands)
<S> <C> <C> <C> <C>
As of December 31, 1999:
Total Capital (to Risk Weighted Assets)
Consolidated........................... $314,557 16.8% (more than or equal to) $ 149,929 (more than or equal to) 8.0%
F&M Bank-Winchester.................... $ 83,013 16.2% (more than or equal to) $ 41,081 (more than or equal to) 8.0%
F&M Bank-NOVA.......................... $ 65,808 13.8% (more than or equal to) $ 38,124 (more than or equal to) 8.0%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated........................... $291,687 15.6% (more than or equal to) $ 74,964 (more than or equal to) 4.0%
F&M Bank-Winchester.................... $ 76,511 14.9% (more than or equal to) $ 20,540 (more than or equal to) 4.0%
F&M Bank-NOVA.......................... $ 60,643 12.7% (more than or equal to) $ 19,062 (more than or equal to) 4.0%
Tier 1 Capital (to Average Assets)
Consolidated........................... $291,687 10.0% (more than or equal to) $ 116,808 (more than or equal to) 4.0%
F&M Bank-Winchester.................... $ 76,511 8.9% (more than or equal to) $ 34,428 (more than or equal to) 4.0%
F&M Bank-NOVA.......................... $ 60,643 8.1% (more than or equal to) $ 29,923 (more than or equal to) 4.0%
As of December 31, 1998:
Total Capital (to Risk Weighted Assets)
Consolidated........................... $302,013 16.4% (more than or equal to) $ 147,611 (more than or equal to) 8.0%
F&M Bank-Winchester.................... $ 80,942 16.4% (more than or equal to) $ 39,615 (more than or equal to) 8.0%
F&M Bank-NOVA.......................... $ 64,662 14.1% (more than or equal to) $ 36,762 (more than or equal to) 8.0%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated........................... $278,933 15.1% (more than or equal to) $ 73,806 (more than or equal to) 4.0%
F&M Bank-Winchester.................... $ 74,752 15.1% (more than or equal to) $ 19,808 (more than or equal to) 4.0%
F&M Bank-NOVA.......................... $ 58,997 12.8% (more than or equal to) $ 18,381 (more than or equal to) 4.0%
Tier 1 Capital (to Average Assets)
Consolidated........................... $278,933 9.9% (more than or equal to) $ 112,252 (more than or equal to) 4.0%
F&M Bank-Winchester.................... $ 74,752 9.6% (more than or equal to) $ 31,125 (more than or equal to) 4.0%
F&M Bank-NOVA.......................... $ 58,997 8.2% (more than or equal to) $ 28,805 (more than or equal to) 4.0%
<CAPTION>
Minimum to Be Well
Capitalized Under Prompt
Corrective Action Provisions
---------------------------------------------------------------------
Amount Ratio
------------------------------------ ----------------------------
<S> <C> <C>
As of December 31, 1999:
Total Capital (to Risk Weighted Assets)
Consolidated....................................... N/A
F&M Bank-Winchester................................ (more than or equal to) $ 51,351% (more than or equal to) 10.0%
F&M Bank-NOVA...................................... (more than or equal to) $ 47,655 (more than or equal to) 10.0%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated....................................... N/A
F&M Bank-Winchester................................ (more than or equal to) $ 30,811 (more than or equal to) 6.0%
F&M Bank-NOVA...................................... (more than or equal to) $ 28,593 (more than or equal to) 6.0%
Tier 1 Capital (to Average Assets)
Consolidated....................................... N/A
F&M Bank-Winchester................................ (more than or equal to) $ 43,035 (more than or equal to) 5.0%
F&M Bank-NOVA...................................... (more than or equal to) $ 37,404 (more than or equal to) 5.0%
As of December 31, 1998:
Total Capital (to Risk Weighted Assets)
Consolidated....................................... N/A
F&M Bank-Winchester................................ (more than or equal to) $ 49,519 (more than or equal to) 10.0%
F&M Bank-NOVA...................................... (more than or equal to) $ 45,952 (more than or equal to) 10.0%
Tier 1 Capital (to Risk Weighted Assets)as follows:
Consolidated....................................... N/A
F&M Bank-Winchester................................ (more than or equal to) $ 29,711 (more than or equal to) 6.0%
F&M Bank-NOVA...................................... (more than or equal to) $ 27,571 (more than or equal to) 6.0%
Tier 1 Capital (to Average Assets)
Consolidated....................................... N/A
F&M Bank-Winchester................................ (more than or equal to) $ 38,906 (more than or equal to) 5.0%
F&M Bank-NOVA...................................... (more than or equal to) $ 36,006 (more than or equal to) 5.0%
</TABLE>
Note 22 -- Subsequent Event
On January 3, 200, the Corporation acquired The State Bank of the
Alleghenies for approximately 1,912,000 common shares in a transaction to be
accounted for as pooling-of-interests. If the transaction had been consummated
prior to December 31,1999, the accompanying financial statements would have
included the financial position and results of operations of The State Bank of
the Alleghenies. Total assets and results of operations, (in thousands except
per share data), for 1999 would have been as follows:
Total assets $ 3,098,167
Total income $ 263,789
Net income $ 43,002
Earnings per share, basic $ 1.72
Earnings per share, diluted $ 1.71
44
<PAGE>
Note 23 -- Condensed Financial Information -- Parent Company Only
F&M NATIONAL CORPORATION
(Parent Corporation Only)
BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
December 31,
------------------------
1999 1998
--------- ---------
(In Thousands)
<S> <C> <C>
Assets
Cash on deposit with subsidiary banks ............................................ $ 2 $ 1
Investment in subsidiaries, at cost, plus equity in undistributed net income ..... 261,814 273,220
Securities available for sale .................................................... 10,282 10,063
Other short-term investments ..................................................... 32,081 24,401
Bank premises and equipment, net ................................................. 5,684 1,345
Intangible, goodwill, at amortized cost .......................................... 125 185
Other assets ..................................................................... 13,320 10,719
--------- ---------
Total assets .................................................................. $ 323,308 $ 319,934
========= =========
Liabilities and Shareholders' Equity
Liabilities
Short-term borrowings ............................................................ $ 19,341 $ 17,483
Dividends payable ................................................................ 5,401 4,263
Other liabilities ................................................................ 7,001 3,169
--------- ---------
Total liabilities ............................................................. $ 31,743 $ 24,915
--------- ---------
Shareholders' Equity
Preferred stock .................................................................. $ -- $ --
Common stock ..................................................................... 45,969 45,021
Capital surplus .................................................................. 94,492 82,723
Retained earnings, which are substantially undistributed earnings
of subsidiaries ................................................................ 161,558 161,280
Accumulated other comprehensive income (loss) .................................... (10,454) 5,995
--------- ---------
Total shareholders' equity .................................................... $ 291,565 $ 295,019
--------- ---------
Total liabilities and shareholders' equity .................................... $ 323,308 $ 319,934
========= =========
</TABLE>
45
<PAGE>
F&M NATIONAL CORPORATION
(Parent Corporation Only)
STATEMENTS OF INCOME
For Each of the Three Years in the Period Ended December 31, 1999
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1999 1998 1997
-------- -------- --------
(In Thousands)
Revenue
<S> <C> <C> <C>
Dividends from subsidiaries ............................................ $ 37,373 $ 34,435 $ 17,012
Interest on other short-term investments ............................... 793 361 219
Interest and dividends on securities available for sale ................ 484 427 448
Management fees from subsidiaries ...................................... 3,411 3,179 2,826
Rental income from subsidiaries ........................................ 150 123 54
Profits on securities available for sale ............................... 19 546 3,252
Other revenue .......................................................... 26 8 22
-------- -------- --------
Total revenue ................................................... $ 42,256 $ 39,079 $ 23,833
-------- -------- --------
Expenses
Salaries and employee benefits ......................................... $ 3,277 $ 1,859 $ 2,113
Directors` fees ........................................................ 204 205 190
Taxes (other than income) .............................................. 16 51 42
Interest ............................................................... 448 360 348
Amortization of goodwill ............................................... 60 60 60
Depreciation ........................................................... 79 31 34
Merger expenses ........................................................ 231 226 9
Other expenses ......................................................... 1,146 824 1,068
-------- -------- --------
Total expenses ................................................... $ 5,461 $ 3,616 $ 3,864
-------- -------- --------
Income before income taxes and equity
in undistributed net income of subsidiaries .................... $ 36,795 $ 35,463 $ 19,969
Income Tax Expense (Benefit) ............................................. (302) 447 1,143
-------- -------- --------
Income before equity in undistributed
net income of subsidiaries ..................................... $ 37,097 $ 35,016 $ 18,826
Equity in Undistributed Net Income of Subsidiaries ....................... 4,188 1,449 14,504
-------- -------- --------
Net income ....................................................... $ 41,285 $ 36,465 $ 33,330
======== ======== ========
</TABLE>
46
<PAGE>
F&M NATIONAL CORPORATION
(Parent Corporation Only)
STATEMENTS OF CASH FLOWS
For Each of the Three Years in the Period Ended December 31, 1999
<TABLE>
<CAPTION>
December 31,
--------------------------------------------
1999 1998 1997
-------- -------- --------
(In Thousands)
Cash Flows From Operating Activities
<S> <C> <C> <C>
Net income .................................................................. $ 41,285 $ 36,465 $ 33,330
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation .............................................................. 79 31 34
Amortization .............................................................. 60 60 60
Deferred income taxes ..................................................... 147 276 239
Discount accretion ........................................................ (4) (4) (4)
Profits on securities available for sale .................................. (19) (546) (3,252)
Undistributed net income of subsidiaries .................................. (4,188) (1,449) (14,504)
(Increase) decrease in other assets ....................................... (1,185) 1,795 (1,781)
Increase (decrease) in other liabilities .................................. 3,832 (1,990) 1,345
-------- -------- --------
Net cash provided by operating activities ........................ $ 40,007 $ 34,638 $ 15,467
-------- -------- --------
Cash Flows From Investing Activities
Increase in investment in subsidiaries ...................................... $ (62) $ (1,600) $ --
Purchase of securities available for sale ................................... (6,709) (2,151) (2,227)
Proceeds from sale of securities available for sale ......................... 160 1,557 8,447
Proceeds from maturities of securities available for sale ................... 5,000 -- --
(Increase) decrease in other short-term investments ......................... (7,680) (16,675) 2,128
Purchase of bank premises and equipment ..................................... (4,418) (28) (6)
-------- -------- --------
Net cash provided by (used in) investing activities .............. $(13,709) $(18,897) $ 8,342
-------- -------- --------
Cash Flows From Financing Activities
Increase (decrease) in short-term borrowings ................................ $ 1,858 $ 3,265 $ (237)
Net proceeds from issuance and sale of common stock ......................... 3,588 2,959 2,594
Acquisition of common stock ................................................. (12,495) (6,109) (10,594)
Cash paid in lieu of fractional shares ...................................... (106) -- --
Dividends paid .............................................................. (19,142) (15,856) (15,703)
-------- -------- --------
Net cash (used in) financing activities ........................... $(26,297) $(15,741) $(23,940)
-------- -------- --------
Increase (decrease) in cash and cash equivalents .................. $ 1 $ -- $ (131)
Cash and Cash Equivalents
Beginning ................................................................... 1 1 132
-------- -------- --------
Ending ...................................................................... $ 2 $ 1 $ 1
======== ======== ========
Supplemental Disclosures of Cash Flow Information
Cash payments for interest .................................................. $ 448 $ 360 $ 348
======== ======== ========
Supplemental Schedule of Noncash Investing and
Financing Activities
Issuance of stock options under nonvariable compensatory plan ............... $ 1,003 $ 1,529 $ 732
======== ======== ========
Issuance of common stock - 3% stock dividend ................................ $ 20,621 $ -- $ --
======== ======== ========
Issuance of common stock in exchange for net
assets in bank acquisition ................................................. $ -- $ -- $ 6,297
======== ======== ========
Unrealized gain (loss) on securities available for sale ..................... $ (793) $ 1,045 $ (858)
======== ======== ========
</TABLE>
47
<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, 1999 and 1998, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the years ended December 31, 1999, 1998 and 1997. 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, 1999 and 1998, and the results
of their operations and their cash flows for the years ended December 31, 1999,
1998 and 1997, in conformity with generally accepted accounting principles.
Winchester, Virginia /s/ Yount, Hyde & Barbour, P.C.
January 28, 2000 YOUNT, HYDE & BARBOUR, P.C.
48
<PAGE>
[LOGO OF F&M] F&M Trust Company
On January 1, 1998, the newly chartered F&M Trust Company opened its doors
with trust assets totaling $480 million. These assets represented the
consolidation of fiduciary assets from the three F&M affiliate banks which
previously operated bank trust departments. Having just completed our second
year of operations as an independent affiliate of the F&M National Corporation,
the F&M Trust Company closed 1999 with trust assets of $710.8 million, a
two-year growth rate of 48 percent.
The Trust Company is distinguished by having a dedicated staff of 32
seasoned professionals who understand that quality of performance must be
complimented by uncompromised personal attention and service to the customer. It
is that element of personal service upon which our reputation is built and from
which our continuing business growth will be founded. We take comfort that our
historical record of investment performance will speak for itself, for that
record is outstanding.
While most of our larger fiduciary accounts are individually managed by our
investment officers, the underlying investment philosophy employed is consistent
with that utilized in the management of our two Common Trust Funds which are
offered for our smaller accounts. Our investment discipline has remained
steadfast and proven. We are a blended manager utilizing sector diversification
with large cap equities and quality investments. Our investment performance has
consistently and historically outperformed national benchmarks which are
commonly used to measure and compare investment performance. The close of 1999
marked the fifth consecutive year that the Standard and Poors 500 gained over 20
percent, 21.04 percent to be exact. The equity portfolio of the Trust Company's
$26 million Balanced Common Trust Fund reported a return of 24.8 percent, and
the total fund performance was 17.20 percent compared to the Lipper Balanced
Fund Average of 8.72 percent.
The Trust Company's return to its parent, the F&M National Corporation, was
also most favorable. Total revenue for the Trust Company amounted to $2.98
million, an 11.5 percent increase over the prior year and net income was
$574,000, an increase of 34.6 percent. Our strategic goals for the company
remained focused on quality of fiduciary service, growth and increased
profitability. The latter two will come with the former.
/s/ F. Dixon Whitworth
F. Dixon Whitworth, Jr.
President and CEO
Total Fiduciary Assets
(Dollars in Millions)
[GRAPH]
12/31/97 $ 480.0
12/31/98 $ 586.5
12/31/99 $ 710.8
Assets by Type of Account
(Dollars in Millions)
[GRAPH]
Agencies & Other $ 239.3
Employee Benefit $ 213.5
Estates & Other Court $ 2.7
Personal Trusts $ 255.3
Total Number of
Accounts 1,712
12/31/98 12/31/99 Growth
Total Revenue $2,674,009 $2,982,516 +11.5%
Net Income $ 426,463 $ 574,036 +34.6%
Shareholders' Equity $1,374,777 $1,896,813 +37.9%
49
<PAGE>
F&M NATIONAL CORPORATION
DIRECTORS AND OFFICERS:
W. M. Feltner
Chairman of the Board and Chief Executive Officer
Alfred B. Whitt
President, Vice Chairman and Chief Financial Officer
Chairman of the Board, F&M Bank-Winchester
Charles E. Curtis
Vice Chairman, Chief Administrative Officer
Vice Chairman, F&M Bank-Winchester
OUTSIDE DIRECTORS:
Frank Armstrong, III
Chairman, President, and Chief Executive Officer,
National Fruit Product Company, Inc.
W. H. Clement
Vice Chairman, Hidden Creek Industries, Inc.
John R. Fernstrom
Invester
William R. Harris
Chairman of the Board,
Harris Heating and Plumbing, Inc.
L. David Horner, III
Chairman, Horner Properties, Inc.
Jack R. Huyett
Retired President,
F&M National Corporation
George L. Romine
Sales Management Consultant
J. D. Shockey, Jr.
President, Shockey Industries, Inc.
Ronald W. Tydings
Attorney, Odin, Feldman and Pittleman P.C.
Fred G. Wayland, Jr.
Retired President, F&M Bank-Peoples
Directors Emeriti
John S. Scully III
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
F. Dixon Whitworth, Jr.
Executive Vice President
Betty H. Carroll
Senior Vice President
Jack W. Lee, Jr.
Senior Vice President-Auditor
Michael L. Bryan
Corporate Secretary
Barbara H. Ward
Treasurer
Colleen M. Bly
Director of Human Resources
Richard B. Wiltshire, Jr.
Independent Loan Review Officer
50
<PAGE>
F&M BANK-WINCHESTER
DIRECTORS:
Frank Armstrong, IV
Ruth D. Bridgeforth
Michael L. Bryan
Betty H. Carroll
W. H. Clement
Charles E. Curtis
Eugene F. Dearing, III
Jill A. Feltner
David C. Huntsberry
Joseph E. Kalbach
Diane S. Kearns
John R. Marker
Dennis W. Perry
J. D. Shockey, Jr.
Beverley B. Shoemaker
Gerald F. Smith, Jr.
William A. Truban, DVM
Alfred B. Whitt, Chairman
F. Dixon Whitworth, Jr.
James R. Wilkins, III
Directors Emeriti:
Frank Armstrong, III
W. M. Feltner
Mary M. Henkel
George L. Romine
OFFICERS:
Alfred B. Whitt
Chairman of the Board
Charles E. Curtis
Vice Chairman
Betty H. Carroll
President, Vice Chairman and
Chief Executive Officer
Michael L. Bryan
Secretary to the Board
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
Shelby C. Hodgson
Vice President-Loans
OPERATIONS:
Peggy J. Marcus
Senior Vice President-Cashier
Jodi A. Frankenberry
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
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
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
OFFICERS:
Wayne L.Turner
President and
Chief Executive Officer
William K. King
Senior Vice President and Secretary
Vicki T. Miller
Vice President and Cashier
Larry F. Mundy
Vice President-Commercial Lending
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
T. Sean O'Hara
Vice President and Chief Administrative
Officer
D. Elliott Collins
Vice President
Jeannette Doyle
Vice President
F&M BANK-HIGHLANDS
DIRECTORS:
R. Glen Bailey
Dr. William J. Ellis, Chairman
Don E. Stone, Jr., Vice Chairman
Alfred B. Whitt
Benny A. Williams, Jr.
OFFICERS:
Don E. Stone, Jr.
Chief Executive Officer
Benny A. Williams, Jr.
President, Chief Administrative
Officer and Secretary
H. C. Rhodes, Jr.
Senior Vice President
Jean C. Gillilan
Vice President and Cashier
F&M BANK-MASSANUTTEN
DIRECTORS:
J. Robert Black
W. Wallace Hatcher, Chairman
Russell K. Henry, Jr.
Marian G. Jenkins
Curtis F. Kite
W. Price Lineweaver
Harry L. Rawley
Garnett R. Turner
Nancy H. Whitmore
OFFICERS:
Russell K. Henry, Jr.
President and Chief Executive Officer
Writa D. Hill
Senior Vice President,
Senior Operations Officer, Secretary
Edward A. Strunk
Senior Vice President
James G. Link
Vice President
Donna S. Walker
Vice President
Robert Reedy
Vice President
Donnie Ritchie
Vice President
51
<PAGE>
F&M-BANK-NORTHERN VIRGINIA
DIRECTORS:
Daniel R. Baker
Warren E. Barry
Robert H. Bird
Charles E. Curtis
James C. Davis
John T. DeBell
Francis H. Fannon III
David E. Feldman
Howard R. Green
Thom F. Hanes
Scott C. Humphrey
Henry C. Mackall
Michael C. Martin
Charles D. Mercer
Carol B. Moore
Harry J. Parrish II
Jon M. Peterson
T. Earl Rogers
Thomas D. Rust
Edward Semonian
Robert E. Sevila
Danny Snow
Ronald W. Tydings, Chairman
Michael M. Webb
Michael E. Wicks
OFFICERS:
T. Earl Rogers
President and Chief Executive Officer
Donald E. Strehle
Executive Vice President-
Branch Administrator
Ramona W. Rodriguez
Executive Vice President,
Chief Financial Officer and Secretary
Thom F. Hanes
Executive Vice President and
Regional Executive Officer
John R. Lucas
Senior Vice President and
Regional Executive Officer
Alice B. Williams
Senior Vice President and
Regional Officer
J. David Holden
Senior Vice President-
Business Development
Steven R. Wilson
Senior Vice President-
Commercial Lending
Steven P. Tees
Senior Vice President-
Retail Lending
William M. Ramsey
Senior Vice President-
Senior Commercial Lending Officer
Danny R. May
Senior Vice President-
Business Development Officer
Karin M. Johns
Cashier and Assistant Secretary
Edward P. Alton
Vice President-Mortgage Lending
Robert L. Amsler
Vice President-Commercial Lending
Frederick C. Berhalter
Vice President-Commercial Lending
Harvey R. Boltwood
Vice President-Business,
Development Officer
Thomas F. Bradley
Vice President-Mortgage Lending
Carol S. Brandon
Vice President-Cashier's Office
Edna T. Brannan
Vice President-Commercial Lending
Kathleen Bromley
Vice President-Commercial Lending
John Djuric
Vice President-Construction Lending
Cynthia C. Fisher
Vice President-Operations
Deborah A. Free
Vice President-Training
Peter T. Fuge
Vice President-Senior Commercial
Lending Officer
Wayne R. Garcia
Vice President-Senior Commercial
Lending Officer
Arlene F. Haley
Vice President-Senior Commerical
Lending Officer
Edward M. Johnson
Vice President-Commerical Lending
Deborah C. Kahley
Vice President-Marketing
Nancy J. Krause
Vice President-Compliance Officer and
IRA Coordinator
Michael K. Kuhns
Vice President-Commercial Lending
Timothy J. Lueking
Vice President-Commercial Lending
Cynthia E. McGlumphy
Vice President-Loan Administration
James E. Merritt
Vice President-Business Development
Robert C. Miller
Vice President-Commercial Lending
Steve F. Moore
Vice President-Commercial Lending
George T. Pawlak
Vice President-Network Administrator
Charles W. Whittaker
Vice President-Business Development
Carter W. Wormeley
Vice President-Commercial Lending
F&M-PEOPLES
DIRECTORS:
Alice Jane Childs
Alan L. Day, Jr.
Marshall DeF. Doeller
George F. Downes
T. Christopher Jenkins
Thomas H. Kirk
Mark C. Riley
Lewis N. Springer
Edward C. A. Wachtmeister, Chairman
Fred G. Wayland, Jr.
OFFICERS:
Mark C. Riley
President and Chief Executive Officer
Theodore R. Coleman
Senior Vice President-Loans
Caren M. Eastham
Senior Vice President-
Administrative Services
Lisa D. Burnside
Vice President-Marketing and Retail
Sales
Raymond C. Knott
Vice President-Commercial Loans
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
W. S. Carnes
Stephen C. Conte
Quentin L. Corbett
Zane G. Davis
Read F. Goode
Richard H. Hamlin
A. Lee Hanbury
William R. Harris, Chairman
Seale A. Moorer
Thomas L. Newton, Jr.
52
<PAGE>
Thomas E. Pruitt
William H. Pruitt
James R. Reames
Oliver D. Rudy
J. K. Timmons, Jr.
OFFICERS:
James H. Atkinson, Jr.
President and Chief Executive Officer
Quentin L. Corbett
Executive Vice President
Vera H. Primm
Senior Vice President and
Chief Financial Officer
Wayne D. Eaves
Senior Vice President
David L. Shaffer
Senior Vice President-
Regional Manager
Upton S. Martin, III
Senior Vice President-
Regional Manager
Calvin L. Carter
Senior Vice President-Mortgage
Lending
Daily H. Stern
Vice President-Compliance
Marshall E. McCall
Vice President-Commercial Lending
Duncan G. Cooke
Vice President
Donna D. Sorrell
Vice President
Michelle James
Vice President
Joetta Sutphin
Vice President-Operations
Robyn C. Parker
Vice President
F&M BANK-WEST VIRGINIA
DIRECTORS:
William M. Bane
Betty H. Carroll
Craig H. Collis
Charles C. Conrad
Michael A. Ewing
Douglas E. Haines
Joseph W. Kessel
J. Wayne Lancaster
Dr. James M. Moler
Paul L. Reid, Chairman
Glen A. Ryan
Richard B. Schwinabart
Rudy R. Sites
Donald L. Sperow, Sr.
OFFICERS:
Michael A. Ewing
President and Chief Executive Officer
Reginald C. Kimble
Senior Vice President-
Chief Lending Officer
James C. Rodgers
Senior Vice President-Regional
Executive Officer-Panhandle Region
Bruce E. Ludwick
Senior Vice President-Regional Executive
Officer-Highlands Region
Ida Mary Hull
Vice President-Finance, Administration and
Cashier
Mary Catherine Leham
Vice President and Chief Operations Officer
F&M BANK-ALLEGIANCE
DIRECTORS:
Edward P. Alton
Theodore R. Coleman
Charles E. Curtis, Chairman
R. Hugh Rial, Jr.
T. Earl Rogers, Jr.
OFFICERS:
R. Hugh Rial, Jr.
President and Chief
Executive Officer
Elaine B. Durkin
Senior Vice President-Operations
William A. Gallagher
Senior Vice President-
Chief Lending Officer
David W. Irey
Vice President-Consumer Loans
and Compliance Officer
Jaimie B. Jacobson
Vice President-
Branch Administration
Manfred Liebsch
Vice President-Controller
F&M MORTGAGE SERVICES,
INCORPORATED
DIRECTORS:
Betty H. Carroll
Charles E. Curtis
James M. O'Brien
Alfred B. Whitt
OFFICERS:
James M. O'Brien
President and Chief Executive Officer
Monique Fraedrich
Executive Vice President
John Bobko
Senior Vice President
Robert N. Tyson, Jr.
Senior Vice President
Beverly Alexander
Vice President
Betty H. Carroll
Vice President
Robert R. Fiallo
Vice President
Susan Grant
Vice President
Linda L. Logsdon
Vice President
John G. Mortimer
Vice President
M. Louise Riley
Vice President
William Steed
Vice President
Michael L. Bryan
Secretary-Treasurer
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
David D. Addison
Senior Vice President
Marshall J. Beverley, Jr.
Senior Vice President
Thomas H. Kirk
Senior Vice President
W. Blakely Curtis
Vice President
Dennis R. Dorsett
Vice President
E. Lee Earnhardt
Vice President
53
<PAGE>
F&M INSURANCE AGENCY,
INCORPORATED
F&M-SHOMO & LINEWEAVER
DIRECTORS:
Betty H. Carroll
Michael A. Conway
Robert W. Drechsler, Chairman
Michael E. Fiore
W. Michael Heatwole, III
W. Price Lineweaver
Norman J. Stern
Alfred B. Whitt
OFFICERS:
W. Price Lineweaver
President
Michael E. Fiore
Secretary-Treasurer
Thomas L. Beirle
Vice President
Ellen M. Ritchie
Vice President
Jerry D. Sheets
Vice President
Donald W. Wallinger
Vice President
F&M-J. V. ARTHUR,
INCORPORATED
DIRECTORS:
Betty H. Carroll
Gary S. Nichols
Jerry Partlow
Terry S. Plank
Alfred B. Whitt
OFFICERS:
Gary S. Nichols
President
Jerry Partlow
Vice President
Terry S. Plank
Secretary
F&M FINANCIAL SERVICES
CORPORATION
DIRECTORS:
Norman J. Stern
W. Michael Heatwole, III
OFFICERS:
Norman J. Stern
President
Mark W. Gustafson
Senior Vice President
Michael C. Dixon
Vice President
W. Michael Heatwole, III
Secretary
WINCHESTER
CREDIT CORPORATION
DIRECTORS:
Betty H. Carroll
Charles E. Curtis
Alfred B. Whitt
OFFICERS:
Betty H. Carroll
President
Michael L. Bryan
Secretary
Barbara H. Ward
Treasurer
APPLE TITLE COMPANY
DIRECTORS:
Betty H. Carroll
Charles E. Curtis
Alfred B. Whitt
OFFICERS:
Betty H. Carroll
President
Michael L. Byran
Secretary
Frances H. Fortune
Treasurer
54
<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
126 Fairfax Pike
Stephens City, Virginia 22655
540-868-1828
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
10 West Market Street
Leesburg, Virginia 20176
703-771-2782
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:
5180 Main Street
Mount Jackson, Virginia 22842
540-477-2931
115 W. Spring 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
432 South Street
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
2208 Ivy Road
Charlottesville, Virginia 22903
804-293-9181
1113 5th Street Extended
Charlottesville, Virginia 22902
804-293-5211
101 Critzer Shop Road
Afton, Virginia 22920
540-456-8156
340 South Main Street
Amherst, Virginia 24521
804-946-2265
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-HIGHLANDS
116 West Riverside Avenue
Covington, Virginia 24426
540-965-1100
1633 Main Street
Clifton Forge, Virginia 24422
540-862-8600
Route 220 and Kingstown Road
Hot Springs, Virginia 24445
540-839-3400
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
2111 Eisenhower Avenue
Alexandria, Virginia 22314
703-299-3563
55
<PAGE>
606 King Street
Alexandria, Virginia 22314
703-683-4066
1717 King Street
Alexandria, Virginia 22314
703-549-8262
7027A Manchester Boulevard
Alexandria, Virginia 22310
703-922-8001
7901 Richmond Highway
Alexandria, Virginia 22306
703-780-4095
4115 Annandale Road
Annandale, Virginia 22003
703-642-9212
4736 Lee Highway
Arlington, Virginia 22207
703-465-7955
4665 Sudley Road
Catharpin, Virginia 20143
703-753-0886
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
3829 South George Mason Drive
Falls Church, Virginia 22041
703-671-5862
133 South Washington Street
Falls Church, Virginia 22046
703-352-6194
14091 John Marshall Highway
Gainesville, Virginia 20155
703-754-8520
230 Herndon Parkway
Herndon, Virginia 20170
703-435-1000
12493 Dillingham Square
Lake Ridge, Virginia 22192
703-590-8700
8780 Centreville Road
Manassas, Virginia 20110
703-361-1986
9201 Church Street
Manassas, Virginia 20110
703-368-1101
13414 Dumfries Road
Manassas, Virginia 20112
703-791-2265
7801 Sudley Road
Manassas, Virginia 20109
703-335-8768
6257A Old Dominion Drive
McLean, Virginia 22102
703-691-7897
25393 Elklick Road
South Riding, Virginia 20152
703-327-0226
7830 Backlick Road
Springfield, Virginia 22150
703-913-0102
6810 Commerce Street
Springfield, Virginia 22150
703-451-8100
8432 Old Keene Mill Road
Springfield, Virginia 22152
703-451-0074
440 Maple Avenue East
Vienna, Virginia 22180
703-319-0299
8221 Old Courthouse Road
Vienna, Virginia 22182
703-359-9390
13927 Jefferson Davis Highway
Woodbridge, Virginia 22191
703-4497-2766
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
6980 Forest Hill Avenue
Richmond, Virginia 23225
804-272-5337
600 East Main Street
Richmond, Virginia 23219
804-780-0122
5756 Hopkins Road
Richmond, Virginia 23234
804-271-5013
4851 South Laburnum Avenue
Richmond, Virginia 23231
804-236-9142
5001 Lakeside Avenue
Richmond, Virginia 23228
804-264-2783
9960 Midlothian Turnpike
Richmond, Virginia 23235
804-320-6610
11450 Midlothian Turnpike
Richmond, Virginia 23235
804-271-5033
1300 East Parham Road
Richmond, Virginia 23227
804-264-2824
1776 Staples Mill Road
Richmond, Virginia 23230
804-355-7841
9012 Three Chopt Road
Richmond, Virginia 23229
804-282-7527
1190 Chester Village Drive
Chester, Virginia 23831
804-748-2735
9970 Ironbridge Road
Chesterfield, Virginia 23832
804-271-5015
11010 Hull Street Road
Midlothian, Virginia 23112
804-271-5025
17650 Midlothian Turnpike
Midlothian, Virginia 23113
804-897-7187
F&M BANK-WEST VIRGINIA
301 South Mildred Street
Ranson, West Virginia 25438
304-728-4200
Somerset Village Shopping Center
Route 340 North
Charles Town, West Virginia 25414
304-728-4250
1504 Tuscawilla Hills
Charles Town, West Virginia 25414
304-728-4270
Wal-Mart
4 Charles Town Plaza
Charles Town, West Virginia 25414
304-728-4290
Route 51 West
Inwood, West Virginia 25428
304-229-5824
Route 28 and Carroll Lane
Fort Ashby, West Virginia 26719
304-298-3667
Florida & Southern Drive
Keyser, West Virginia 26726
304-788-0883
87 North Main Street
Keyser, West Virginia 26726
304-788-3111
Wal-Mart
Route 220 South
Keyser, West Virginia 26726
304-788-9010
301 W. Burke Street
Martinsburg, West Virginia 25401
304-264-5000
1321 Edwin Miller Boulevard
Martinsburg, West Virginia 25401
304-264-5040
56
<PAGE>
704 Foxcroft Avenue, North
Martinsburg, West Virginia 25401
304-262-6301
Wal-Mart
800 Foxcroft Avenue
Martinsburg, West Virginia 25401
304-267-9000
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
9401 Key West Avenue
Rockville, Maryland 20850
301-417-0422
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
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 INSURANCE AGENCY,
INCORPORATED
F&M-SHOMO AND LINEWEAVER
F&M FINANCIAL SERVICES
328 South Main Street
Harrisonburg, Virginia 22801
800-296-1301
2 East Wolfe Street
Harrisonburg, Virginia 22801
57 East Main Street
Luray, Virginia, 22835
F&M-J.V. ARTHUR,
INCORPORATED
1104 Amherst Street
Winchester, Virginia 22601
540-662-3865
12 Rouss Avenue
Winchester, Virginia 22601
540-665-4385
4046 Valley Pike
Winchester, Virginia 22602
540-869-5300
821-S South King Street
Leesburg, Virginia 20175
703-777-9455
F&M MORTGAGE SERVICES,
INCORPORATED
22550 Davis Drive
Sterling, Virginia 20164
703-733-0123
124 West Piccadilly Street
Winchester, Virginia 22601
540-665-4340
199 Front Royal Pike
Winchester, Virginia 22602
540-665-4311
102 East Main Street
Front Royal, Virginia 22630
540-636-7600
2061 Evelyn Byrd Avenue, Suite A
Harrisonburg, Virginia 22801
540-432-9108
101 Catoctin Circle S.E.
Leesburg, Virginia 21075
703-771-7214
115 West Spring Street
Mount Jackson, Virginia 22664
540-459-5500
6900 Konrad Court
Friendship, Maryland 20758
410-257-1648
7229 "C" Hanover Parkway
Greenbelt, Maryland 20770
301-313-9100
6000 Executive Boulevard, Suite 202
Rockville, Maryland 20852
301-816-3133
527 Kessler Drive, Suite 204
Cary, North Carolina 27551
800-330-7646
APPLE TITLE COMPANY
12 Rouss Avenue
Winchester, Virginia 22601
540-665-4233
WINCHESTER CREDIT CORPORATION
12 Rouss Avenue
Winchester, Virginia 22601
540-338-2962
F&M SERVICES, INCORPORATED
(F&M Data Processing)
9 Court Square
Winchester, Virginia 22601
57
<PAGE>
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 ten commercial banks, eight located in Virginia, one
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 $3.1 billion in assets.
The combination of the affiliates' independence and the corporation's financial
strength makes F&M National Corporation a truly unique and outstanding financial
institution.
F&M National Corporation also has eight indirect subsidiaries: Apple Title
Company, F&M Mortgage Services, Incorporated, Winchester Credit Corporation,
F&M-Shomo & Lineweaver and F&M - J.V. Arthur Insurance Agencies, F&M Trust
Company, F&M Financial Services and F&M Services Incorporated, a data processing
company.
58
<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 25, 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
59
<PAGE>
60
<PAGE>
[LOGO OF F&M]
F&M CORPORATE HEADQUARTERS
9 Court Square/Winchester, VA
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT.
The subsidiaries of the Company as of December 31, 1999, and the state in which
each was organized are as scheduled below:
<TABLE>
<CAPTION>
State or
Jurisdiction
Under Laws of Name Under Which
Name of Subsidiaries Which Organized Subsidiaries Do Business
- -------------------- --------------- -----------------------------
<S> <C> <C>
F&M Bank-Winchester Virginia F&M Bank-Winchester
F&M Mortgage Services, Inc.(1) Virginia F&M Mortgage Services, Inc.
Winchester Credit Corporation(1) Virginia Winchester Credit Corporation
Apple Title Company(1) Virginia Apple Title Company
F&M Insurance Agency, Inc.(1) Virginia F&M Insurance Agency, Inc.
F&M-J. V. Arthur, Inc. (1) Virginia F&M-J. V. Arthur, Inc.
F&M Financial Services, Inc.(1) Virginia F&M Financial Services
F&M Bank-Allegiance, Inc. Maryland F&M Bank-Allegiance
F&M Bank-Central Virginia Virginia F&M Bank-Central Virginia
F&M Bank-Emporia Virginia F&M Bank-Emporia
F&M Bank-Massanutten Virginia F&M Bank-Massanutten
F&M Bank-Northern Virginia Virginia F&M Bank-Northern Virginia
F&M Bank-Peoples Virginia F&M Bank-Peoples
F&M Bank-Richmond Virginia F&M Bank-Richmond
F&M Bank-West Virginia, Inc. West Virginia F&M Bank-West Virginia
F&M Trust Company Virginia F&M Trust Company
F&M Services, Inc. Virginia F&M Services, Inc.
</TABLE>
- ------------------------
(1) F&M Mortgage Services, Inc., Winchester Credit Corporation, Apple Title
Company, F&M Insurance Agency, Inc., F&M-J.V. Arthur, Inc., and F&M Financial
Services, Inc., are wholly-owned subsidiaries of F&M Bank-Winchester. All other
bank subsidiaries are wholly-owned by F&M National Corporation.
<PAGE>
EXHIBIT 23
CONSENT OF CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the use of our report dated January 28, 2000 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 (#333-63111) and Form S-8 (#333-63113) of
F&M National Corporation.
/s/ YOUNT, HYDE & BARBOUR, P.C.
March 22, 2000
Winchester, Virginia
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 122,782
<INT-BEARING-DEPOSITS> 225
<FED-FUNDS-SOLD> 66,512
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 393,169
<INVESTMENTS-CARRYING> 449,854
<INVESTMENTS-MARKET> 437,538
<LOANS> 1,784,730
<ALLOWANCE> 22,870
<TOTAL-ASSETS> 2,954,934
<DEPOSITS> 2,482,205
<SHORT-TERM> 119,128
<LIABILITIES-OTHER> 27,593
<LONG-TERM> 25,443
0
0
<COMMON> 45,969
<OTHER-SE> 245,596
<TOTAL-LIABILITIES-AND-EQUITY> 2,945,934
<INTEREST-LOAN> 150,068
<INTEREST-INVEST> 49,081
<INTEREST-OTHER> 5,017
<INTEREST-TOTAL> 204,166
<INTEREST-DEPOSIT> 72,755
<INTEREST-EXPENSE> 5,540
<INTEREST-INCOME-NET> 125,871
<LOAN-LOSSES> 3,621
<SECURITIES-GAINS> 3,112
<EXPENSE-OTHER> 106,893
<INCOME-PRETAX> 62,999
<INCOME-PRE-EXTRAORDINARY> 62,999
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 41,285
<EPS-BASIC> 1.79
<EPS-DILUTED> 1.78
<YIELD-ACTUAL> 4.77
<LOANS-NON> 8,472
<LOANS-PAST> 4,271
<LOANS-TROUBLED> 166
<LOANS-PROBLEM> 17,301
<ALLOWANCE-OPEN> 22,646
<CHARGE-OFFS> 4,224
<RECOVERIES> 827
<ALLOWANCE-CLOSE> 22,870
<ALLOWANCE-DOMESTIC> 22,870
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
