SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended June 30, 1996 Commission File No. 0-5929
F & M NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Commonwealth of Virginia 54-0857462
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
38 Rouss Avenue, Winchester, Virginia 22601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 540-665-4200
NO CHANGES
(Former name, former address and former fiscal year, if
changes since last report)
Indicate by check mark whether the registrant (l) has filed all
reports to be filed by Section 13 or 15(d) of the Securities and
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the close of the period covered by this
report:
19,002,781 shares
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (000 OMITTED)
(Unaudited)
June 30, December 31,
1996 1995
Assets:
Cash and due from banks $ 105,499 $ 107,642
Interest-bearing deposits in other banks 520 100
Securities-held to maturity(market value
June 30, 1996-$319,925;
December 31, 1995, $341,313) 320,371 331,550
Securities-available for sale
(at market value) 288,531 279,517
Federal funds sold and securities
purchased under agreements to resell 49,423 80,901
Loans 1,275,477 1,209,308
Unearned income (7,016) (6,418)
Loans (net of unearned income) 1,268,461 1,202,890
Allowance for loan losses (17,342) (17,211)
Net loans 1,251,119 1,185,679
Bank premises and equipment, net 41,174 38,405
Other assets 57,746 53,095
Total assets $2,114,383 $2,076,889
Liabilities and Shareholders' Equity:
Liabilities:
Deposits:
Non-interest bearing $ 306,316 $ 292,200
Interest bearing 1,510,430 1,482,791
Total deposits 1,816,748 1,774,991
Federal funds purchased and securities
sold under agreements to repurchase 35,774 48,466
Federal Home Loan Bank advances 3,537 4,737
Other short-term borrowings 24,252 18,792
Long-term debt 4,575 3,225
Other liabilities 17,671 16,262
Total liabilities $1,902,555 $1,866,473
/TABLE
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (000 OMITTED)
(Unaudited)
June 30, December 31,
1996 1995
Stockholders' Equity
Preferred stock, no par value:
(Authorized 5,000,000 shares,
no shares outstanding) 0 0
Common stock par value $2.00 per
share, authorized 30,000,000 shares:
issued June 30, 1996 - 19,002,781
shares; issued December 31,
1995-19,069,901 shares 38,006 38,140
Capital surplus 61,413 63,087
Retained earnings 113,521 105,730
Unrealized gain (loss) on securities
available for sale, net (1,112) 3,459
Total shareholders' equity 211,828 210,416
Total liabilities and
shareholders' equity $2,114,383 $2,076,889
See Accompanying Notes to Consolidated Financial Statements
/TABLE
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (000 OMITTED)
(Unaudited) (Unaudited)
For the Six Months For the Quarter
Ended June 30, Ended June 30,
1996 1995 1996 1995
Interest and fees on loans $ 57,186 $ 53,605 $ 28,736 $ 27,181
Securities held to maturity:
Taxable interest income 9,282 8,632 4,710 4,367
Interest income exempt from
Federal income taxes 769 1,016 371 498
Securities available for sale:
Taxable interest income 8,369 7,132 4,172 3,540
Dividend income 254 228 133 114
Total security interest income 18,674 17,008 9,386 8,519
Interest on federal funds sold
and securities purchased
under agreements to resell 2,036 1,914 1,028 1,245
Interest on deposits in banks 12 18 7 7
Total interest income 77,908 72,545 39,157 36,952
Interest expense:
Interest on deposits 32,192 28,618 16,026 15,166
Interest on short-term
borrowings 903 1,014 457 479
Interest on long-term debt 161 127 79 69
Total interest expense 33,256 29,759 16,562 15,714
Net interest income 44,652 42,786 22,595 21,238
Provision for loan losses 1,028 582 556 220
Net interest income after
provision for loan losses 43,624 42,204 22,039 21,018
/TABLE
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (000 OMITTED)
(Unaudited) (Unaudited)
For the Six Months For the Quarter
Ended June 30, Ended June 30,
1996 1995 1996 1995
Other Income:
Commissions and fees from
fiduciary activities $ 1,080 $ 886 533 450
Service charges on deposit
accounts 3,827 3,657 1,978 1,849
Credit card fees 1,606 1,521 829 765
Fees for other customer services 819 593 361 244
Other operating income 2,062 2,400 803 1,275
Profits on securities available
for sale 26 340 1 333
Investment securities gains, net 0 17 0 9
Total other income 9,420 9,414 4,505 4,925
Other Expenses:
Salaries and employee benefits 16,786 16,308 8,270 8,039
Net occupancy expense of
premises 2,541 2,553 1,221 1,220
Furniture and equipment expense 2,479 2,124 1,323 1,116
Deposit insurance 42 1,849 19 1,017
Credit card expense 1,008 941 547 588
Other operating expense 8,953 8,754 4,188 4,581
Total other expense 31,809 32,529 15,568 16,561
Income before income tax expense 21,235 19,089 10,976 9,382
Income tax expense 7,345 6,342 3,816 3,156
Net income $13,890 $12,747 $ 7,160 $ 6,226
Earnings per average share:
(1996 - 19,040,752 shares;
1995 - 18,962,935 shares)
Net income per share $ 0.73 $ 0.67 $ 0.38 $ 0.33
Dividends per share $ 0.32 $ 0.27 $ 0.16 $ 0.13
See Accompanying Notes to Consolidated Financial Statements
/TABLE
F&M NATIONAL CORPORATION AND SUBSIDIARIES-CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1995
(000 OMITTED)
Unrealized
Gain
(Loss) on
Securities
Common Capital Retained Available
Stock Surplus Earnings for Sale-Net Total
Balances:
January 1, 1995 $37,638 $61,408 $ 92,753 (6,942) $184,857
Net income 12,747 12,747
Cash dividends (5,238) (5,287)
Acquisition of common
stock (155) (1,041) (1,196)
Issuance of authorized
common stock:
Stock dividend, FB&T
Financial Corporation 232 836 (1,068) --
Dividend reinvestment
plan 145 991 1,136
Stock options 24 99 123
Stock options under
non-variable
compensatory plan 207 207
Sale of common stock 24 176 200
Employee Stock Ownership
Plan 75 525 600
Market value adjustment,
net of income tax 7,578 7,578
Balances:
June 30, 1995 $37,983 $63,201 $ 99,194 $ 636 $201,014
Balances:
January 1, 1996 $38,140 $63,087 $105,730 $ 3,459 $210,416
Net Income 13,890 13,890
Cash dividends (6,099) (6,099)
Acquisition of common
stock (415) (3,150) (3,565)
Issuance of authorized
common stock:
Stock options 176 120 296
Stock options under
non-variable
compensatory plan 500 500
Employee stock
ownership plan 105 856 961
Market value adjustment,
net of income tax (4,571) (4,571)
Balances:
June 30, 1996 $38,006 $61,413 $113,521 $(1,112) $211,828
See Accompanying Notes to Consolidated Financial Statements
/TABLE
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (000 Omitted)
(Unaudited)
Consolidated for the
Six Months Ended
June 30, June 30,
1996 1995
Cash Flows From Operating Activities
Net income $ 13,890 $ 12,747
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,138 2,620
Provision for loan losses 1,028 582
Profits on securities available for sale (26) (339)
Profits on securities held to maturity 0 (17)
Increase in other assets (3,225) (299)
Increase in other liabilities 1,409 4,825
Net cash provided by operating activities 14,214 20,119
Cash Flows From Investing Activities
(Increase) in interest-bearing
deposits in other banks (420) (87)
Proceeds from maturities, calls, and sales
of available for sale securities 32,316 38,937
Purchase of securities available for sale (48,336) (22,751)
Proceeds from maturities and calls of investment
securities 61,312 47,007
Purchase of investment securities (50,133) (39,795)
(Increase) decrease in federal funds sold
and securities purchased under agreements
to resell 31,478 (59,943)
Net increase in loans (67,540) (25,987)
Purchases of bank premises and equipment (3,711) (2,883)
Proceeds from sale of OREO 2,411 0
Net cash (used in) investing activities (42,623) (65,502)
Cash Flows From Financing Activities
Net increase (decrease) in noninterest-
bearing and interest-bearing demand
deposits and savings accounts 12,354 (57,944)
Net increase in certificates of deposit 29,401 118,168
Dividends paid (6,099) (5,238)
Decrease in other short-term borrowings (8,432) (735)
Increase in long-term debt 1,350 537
Acquisition of common stock (3,565) (1,196)
Net proceeds from issuance of common stock 1,257 2,059
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (000 Omitted)
(Unaudited)
Consolidated for the
Six Months Ended
June 30, June 30,
1995 1995
Net cash provided by financing activities 26,266 55,651
Increase (decrease) in cash and
cash equivalents (2,143) 10,268
Cash and Cash Equivalents
Beginning 107,642 94,508
Ending 105,499 104,776
Supplemental Disclosures of Cash Flows
Information
Cash payments for:
Interest paid to depositors 33,142 29,795
Interest paid on other short-term
borrowings 903 1,014
34,045 30,809
Income taxes 5,782 3,853
Supplemental Schedule of Noncash Investing
and Financing Activities
Issuance of stock options under
nonvariable compensatory plan:
1996 - 50,000 shares;
1995 - 26,000 shares 500 207
Loan balances transferred to foreclosed
properties 1,072 6,257
Market value adjustment available for
sale securities (7,032) 11,658
See Accompanying Notes to Consolidated Financial Statements
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995
l. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the
financial position as of June 30, 1996, and December 31, 1995, and
the results of operations and changes in cash flows for the six
months ended June 30, 1996 and 1995. The statements should be read
in conjunction with the Notes to Financial Statements included in
F&M's Annual Report for the year ended December 31, 1995.
2. F&M acquired FB&T Financial Corporation effective March 29, 1996.
The transaction was accounted for using the pooling-of-interest
method of accounting. Accordingly, the financial statements of F&M
have been restated for all periods presented to reflect the
acquisition. See Note 8 for further details.
3. The results of operations for the six-month periods ended June 30,
1996 and 1995, are not necessarily indicative of the results to be
expected for the full year.
4. F&M National Corporation's ("F&M" or the "Corporation") amortized
cost and market value of securities being held to maturity as of June
30, 1996, are as follows:
June 30, 1996 (000 omitted)
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $287,536 $2,366 ($2,922) $286,980
Corporate securities 1,489 32 (146) 1,375
Obligations of states and
political subdivisions 31,346 521 (297) 31,570
$320,371 $2,919 ($3,365) $319,925
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995
F&M's amortized cost and market value of the available for sale
securities as of June 30, 1996, are as follows:
June 30, 1996 (000 omitted)
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains (Losses) Value
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $274,836 $1,303 ($3,114) $273,025
Corporate securities 7,933 43 (5) 7,971
Mortgage-backed securities 660 22 0 682
Other 6,857 0 (4) 6,853
$290,286 $1,368 ($3,123) $288,531
5. F&M's loan portfolio is composed of the following:
June 30, December 31,
1996 1995
(000 Omitted)
Loans-held to maturity (HTM):
Commercial, financial and agricultural $ 177,182 $ 161,798
Real estate-construction 56,649 51,900
Real estate-mortgage 883,126 838,630
Installment loans to individuals 158,520 156,980
Total loans 1,275,477 1,209,308
Less: Unearned income (7,016) (6,418)
Allowance for loan losses (17,342) (17,211)
Loans, net $1,251,119 $1,185,679
F&M had $11,100,000 in non-performing loans at June 30, 1996.
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995
6. Reserve for Loan Losses:
June 30, December 31,
1996 1995
(000 Omitted)
Balance at January 1 $ 17,211 $ 16,795
Provision charged to operating expense 1,028 2,148
Recoveries added to the reserve 338 882
Loan losses charged to the reserve (1,235) (2,614)
Balance at end of period $ 17,342 $ 17,211
7. Earnings and Dividends Paid Per Share:
The weighted average number of shares outstanding for the six-
month periods ended June 30, 1996 and 1995 were 19,040,752 shares and
18,962,935 shares, respectively.
8. FB&T Financial Corporation ("FB&T") and F&M National Corporation
entered in to a Definitive Agreement and Plan of Reorganization dated
November 22, 1995, and a related Plan of Merger (collectively, the
Merger Agreement). The merger entitled the shareholders of FB&T to
receive, in a tax-free exchange shares of F&M common stock with an
aggregate market value equal to $35.00, with cash being paid in lieu
of issuing fractional shares. The market value of F&M common stock
was the average closing price as reported on the New York Stock
Exchange for each of the ten trading days immediately preceding the
closing date. The merger became effective on March 29, 1996, with an
exchange of 2,517,577 shares of F&M National Corporation common
stock.
9. Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-lived Assets and for Long-lived Assets to
be Disposed of", which established standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill
related to those assets to be held and used and for long-lived
assets, certain identifiable intangibles to be disposed of became
effective for fiscal years beginning after December 15, 1995. The
implementation of the Statement did not have a material impact on the
Corporation.
10. Statement of Financial Accounting Standards No. 122, "Accounting
for Mortgages Servicing Rights", which amended FASB Statement No. 65,
"Accounting for Certain Mortgage Banking Activities", required that a
mortgage banking enterprise recognize as separate assets rights to
service mortgage loans for others, however those servicing rights are
acquired. A mortgage banking enterprise that acquires mortgage
servicing rights through either the purchase or origination of
mortgage loans and sells or securitizes those loans with servicing
rights retained should allocate the total cost of the mortgage loans
to the mortgage servicing rights and the loans (without the mortgage
servicing rights) based on their relative fair values if it is
practicable to estimate those fair values. If it is not practicable
to estimate the fair value of the mortgage servicing rights and the
mortgage loans (without the mortgage servicing rights), the entire
cost of purchasing or originating the loans should be allocated to
the mortgage loans (without the mortgage servicing rights) and no
cost should be allocated to the mortgage servicing rights. The
Statement became effective for transactions in fiscal years beginning
after December 15, 1995. The implementation of the Statement did not
have a material impact on the Corporation.
11. Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-based Compensation", establishes financial accounting and
reporting standards for stock-based employee compensation plans.
Those plans include all arrangements by which employees receive
shares of stock or other equity instruments of the employer or the
employer incurs liabilities to employees in amounts based on the
price of the employer's stock. Examples are stock purchase plans,
stock options, restricted stock and stock appreciation rights.
This Statement also applies to transactions in which an entity
issues its equity instruments to acquire goods or services from
nonemployees. Those transactions must be accounted for based on the
fair value of the consideration received or the fair value of the
equity instruments issued, which ever is more reliably measurable.
This Statement defines a fair value based method of accounting
for an employee stock option or similar equity instrument and
encourages all entities to adopt that method of accounting for all of
their employee stock compensation plans. However, it also allows an
entity to continue to measure compensation cost for those plans using
the intrinsic value based method of accounting prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees". The fair
value based method is preferable to the Opinion 25 method for
purposes of justifying a change in accounting principle under APB
Opinion 20, "Accounting Changes". Entities electing to remain with
the accounting in Opinion 25 must make pro forma disclosures of net
income and, if presented, earnings per share, as if the fair value
based method of accounting defined in this Statement had been
applied.
Under the fair value based method, compensation cost is measured
at the grant date based on the value of the award and is recognized
over the service period, which is usually the vesting period. Under
the intrinsic value based method, compensation cost is the excess, if
any, of the quoted market price of the stock option plans, the most
common type of stock compensation, have no intrinsic value at grant
date, and under Opinion 25 no compensation cost is recognized for
them. Compensation cost is recognized for other types of stock based
compensation plans under Opinion 25, including plans with variable,
usually performance-based features.
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995
The Statement became effective for fiscal years beginning after
December 15, 1995. The disclosures must include the pro forma
effects of other awards granted in fiscal years beginning after
December 31, 1994. The implementation of the Statement did not have
a material impact on the Corporation.
12. On April 22, 1996, Allegiance Banc Corporation ("Allegiance"),
Bethesda, Maryland, and F&M announced that they entered into a
Definitive Agreement and a Plan of Reorganization and a related Plan
of Merger. The transaction is subject to the approval of regulatory
authorities and shareholders of Allegiance. The proposed merger will
entitle the shareholders of Allegiance to receive, in a tax-free
exchange, shares of F&M common stock with an aggregate market value
equal to $15.00, with cash being paid in lieu of issuing fractional
shares. The market value of F&M common stock will be its average
closing price as reported on the New York Stock Exchange for each of
the ten trading days immediately preceding the closing date. It is
anticipated that the merger will be effective during the fourth
quarter 1996. As of June 30, 1996, Allegiance's total assets were
$133.2 million, total deposits were $116.8 million and total
shareholders' equity was $12.4 million.
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
F & M National Corporation
Winchester, Virginia
We have reviewed the accompanying consolidated balance sheet of F & M
National Corporation and Subsidiaries as of June 30, 1996, and the
related consolidated statements of income, changes in shareholders'
equity and cash flows for the six-month periods ended June 30, 1996
and 1995. These financial statements are the responsibility of the
Corporation's management.
We conducted our review in accordance with standards established by
the American Institute of Certified Public Accountants. A review of
interim financial information consists principally of applying
analytical procedures to financial data and making inquiries of
persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken
as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications
that should be made to the accompanying condensed consolidated
financial statements referred to above for them to be in conformity
with generally accepted accounting principles.
We have previously audited, in accordance with generally accepted
auditing standards, the balance sheet of F & M National Corporation
and Subsidiaries as of December 31, 1995, and the related statements
of income, changes in shareholders' equity and cash flows for the
year then ended (not presented herein); and in our report dated
January 31, 1996, except for Notes 10 and 21 as to which the date is
April 22, 1966, we expressed an unqualified opinion on those
financial statements. In our opinion, the information set forth in
the accompanying condensed balance sheet as of December 31, 1995 is
fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
/s/
YOUNT, HYDE & BARBOUR, P.C.
Winchester, Virginia
August 9, 1996
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial information is
presented to aid the reader in understanding and evaluating the
financial condition and results of operations of F&M National
Corporation ("F&M" or the "Corporation").
On March 17, 1995, the Company acquired Farland Investment
Management, Inc., through the exchange of 11,980 shares of F&M common
stock.
On April 6, 1995, Bank of the Potomac ("Potomac"), Herndon, Virginia,
became a wholly-owned subsidiary of the Corporation with a tax-free
exchange of 872,187 shares of F&M common stock for all of the
outstanding shares of Potomac. The share exchange of Potomac has
been accounted for as a pooling of interests and, therefore, all
financial statements have been restated to reflect the share
exchange.
On March 29, 1996, FB&T Financial Corporation ("FB&T"), Fairfax,
Virginia, became a wholly-owned subsidiary of the Corporation with a
tax-free exchange of 2,517,577 shares of F&M common stock for all of
the outstanding shares of FB&T. The merger of FB&T has been
accounted for as a pooling of interests and, therefore, all financial
statements have been restated to reflect the merger.
FINANCIAL CONDITION
Total assets on June 30, 1996, amounted to $2.114 billion, up $119.2
million or 6.0% from $1.995 billion at June 30, 1995. Total assets
at December 31, 1995, were $2.077 billion. For the first six months
1996, total assets averaged $2.094 billion, 8.6% above the first six
months 1995 average of $1.929 billion.
Total loans, net of unearned income, amounted to $1.268 billion at
June 30, 1996, an increase of $106.2 million (9.1%) from $1.162
billion at June 30, 1995. At December 31, 1995, total loans, net,
were $1.203 billion. Total loans (net) as a percent of total assets
were 60.0% at June 30, 1996, as compared to 58.3% at June 30, 1995,
and 57.9% at December 31, 1995. Net loan volume for the first six
months 1996 was $67.5 million as compared to $26.0 million for the
first six months 1995. The 1996 increase in loan volume was affected
by increased customer demand, secondary market funding of $36.2
million invested in FHA and VA government guaranteed residential real
estate, and the purchase of $5.2 million adjustable rate FHA mortgage
loans.
On June 30, 1996, the securities portfolio totalled $608.9 million,
which was $57.9 million (10.5%) higher than the year before and $2.2
million (-0.4%) lower than at December 31, 1995. Funds invested in
the securities portfolio are an effort to balance the asset risk
portfolio by acquiring U. S. government and U. S. Agency securities.
Federal funds sold and securities purchased under agreements to
resell were $49.4 million on June 30, 1996, $31.5 million (-38.9%)
lower than $80.9 million outstanding at December 31, 1995. The large
decrease in federal funds sold is the result of increased demand for
mortgage loan funding in the secondary market.
Financial Accounting Standards Board Pronouncement #115 requires the
Corporation to show the effect of market changes in the value of
securities available for sale (AFS). The market value of AFS
securities at June 30, 1996, was $288.5 million as compared to
$279.442 million at year end 1995. The effect of the market value of
AFS securities less the book value of AFS securities, net of income
taxes, is reflected as a line in Stockholders' Equity which was
$-1.112 million at June 30, 1996, a decline from year end 1995 by
$4.6 million. Market security yields have improved, thereby causing
existing portfolio securities to have a lower value when written to
market. The decline in the market value of available for sale
securities below book value is a temporary market condition.
Total deposits increased $95.5 million (5.6%) to $1.817 billion at
June 30, 1996, compared to one year earlier. At December 31, 1995,
total deposits were $1.775 billion. F&M offers attractive, yet
competitive rates, that have contributed to the increase in deposits.
Long-term debt of $4.575 million consists of borrowed funds from
Federal Home Loan Banks that are lent to eligible bank customers for
a period of 10 to 15 years for low income housing.
RESULTS OF OPERATIONS
Net income for the first six months of 1996 amounted to $13.890
million, increasing $1.143 million or 9.0% from $12.747 million for
the first six months of 1995. The yield on interest-earning assets
was 8.17% for the first six months of 1996 as compared to 8.28% for
the first six months 1995 and the yield on interest-bearing
liabilities was 4.22% for the first six months 1996 as compared to
4.01% for the first six months 1995. Net interest income was
positively affected by the collection of interest and fees on real
estate which had previously been on nonaccrual of interest.
Return on average assets was 1.33% for the first six months of 1996,
compared with 1.31% for the same period in 1995 and 1.26% for the
year 1995. F&M's return on average equity was 13.07% for the first
six months of 1996 and 12.44% for the year 1995. Return on average
equity was 13.04% for the first six months 1995.
Net interest income totaled $44.652 million for the first six months
of 1996, a $1.866 million (4.4%) increase over F&M's performance for
the first six months of 1995. The net interest margin for the first
six months 1996 was 4.71%, down 17 basis points from 4.88% for the
first six months of 1995. The decrease in net interest margin is the
result of a reduction in the prime interest rate affecting adjustable
rate loans and the delayed effect on a reduction in rates on fixed
rate interest-bearing deposits.
Total nonperforming assets, which consist of nonperforming loans, and
foreclosed properties were $23.000 million at June 30, 1996, a
decrease of $4.4 million (16.1%) from $27.400 million at December 31,
1995. Nonperforming assets are composed largely of 1-4 family
residential loans and commercial loans secured by real property.
Nonperforming loans (nonaccrual loans and restructured loans) at June
30, 1996, were $11.100 million, or 0.87% of total loans, compared to
$13.300 million, or 1.10% of total loans at December 31, 1995. Also
included in nonperforming loans are loans considered impaired which
management is concerned about the ability of the customer to repay
the loan and related interest at the original contractual terms. At
June 30, 1996, impaired loans totaled $7.404 million upon which an
allowance of $0.9 million has been provided, which is included in the
total loan portfolio allowance for loan losses. Interest income
recognized on impaired loans as of June 30, 1996, was $101 thousand.
The average balance of impaired loans for the first six months 1996
was $7.719 million. Loans past due 90 days or more and still
accruing interest because they were well secured and in the process
of collection were $4.2 million at June 30, 1996, and $3.8 million at
December 31, 1995.
Foreclosed properties consists of 29 parcels of real estate acquired
through debt previously contracted. These properties consist
primarily of commercial and residential real estate whose value is
determined through sale at public auction or fair market value,
whichever is less. At June 30, 1996, foreclosed properties were
$12.576 million as compared to $14.000 million at December 31, 1995.
During the first six months of 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 intends to market
this property and dispose of it as expediently as possible. F&M does
not expect to realize any material loss in the final disposition of
this or any of its foreclosed property.
In March 1996, F&M National Corporation (the parent company) acquired
approximately 247 acres in Jefferson County, West Virginia, for
development purposes. The development project consists of single
family residential lots with sales to be directed towards the
commuter market. The parent company has established a $500 thousand
contingency reserve to account for development costs such as
installing roads and utilities associated with the project.
The allowance for loan losses was $17.342 million at June 30, 1996,
as compared to $17.211 million at year end 1995. The allowance for
loan losses increased $131 thousand in the first six months 1996 as
compared to $72 thousand decrease for the first six months 1995. The
1996 increase in the allowance for loan losses was a result of a
larger loan portfolio and the related increased risk. Improvement in
credit quality of the loan portfolio and acquisition of $5.2 million
FHA and VA loans which were 100% guaranteed by the U.S. Government
upon which no reserve is required helped reduce the required
allowance.
Total noninterest income decreased $6 thousand or 0.1% from $9.414
million for the first six months of 1995 to $9.420 million for the
first six months of 1996. For the first six months 1996, gains on
securities available for sale were $26 thousand or 0.3% of total
noninterest income, whereas, for the first six months of 1995
securities gains were $357 thousand or 3.8% of total noninterest
income. Security gains are realized when market conditions exist
that are favorable to the Corporation and/or conditions dictate
additional liquidity is desirable. It is the intent of the
Corporation not to sell any security that is held in its "held to
maturity" portfolio. Credit card fees were $1.606 million for the
first six months 1996, up $85 thousand (5.6%) over the first six
months 1995 as a result of a marketing effort to attract new credit
card customers. Other operating income decreased $338 thousand, down
from $2.479 million for the first six months 1995 to $2.124 million
for the first six months of 1996. Other operating income consists of
other fees and charges that have decreased due to a change in the mix
of charges for transactions.
Total noninterest expenses decreased $720 thousand or -2.2% from
$32.529 million for the first six months 1995 to $31.809 million for
the first six months 1996. Salary expense increased $478 thousand or
2.9% from $16.308 million for the first six months 1995 to $16.786
million for the first six months 1996 as a result of normal increases
in salaries and benefits. The cost of net occupancy expense has
decreased $12 thousand (-0.5%) from $2.553 million for the first six
months of 1995 to $2.541 million for the first six months of 1996, as
a result of some branches becoming fully depreciated. Furniture and
equipment expense has increased $355 thousand (16.7%) from $2.124
million for the first six months 1995 to $2.479 million for the first
six months 1996, which reflects an increase in the acquisition of new
furniture and equipment. Deposit insurance was $42 thousand for the
first six months 1996, down $1.849 million for the same period 1995
as a result of the FDIC deposit insurance fund achieving a level
deemed to be adequate to protect deposits; therefore, premiums were
adjusted to reflect this achievement. Credit card expense was up $67
thousand from $941 thousand for the first six months 1995 to $1.008
million for the first six months 1996 as a result of direct marketing
and offering new products. Other operating expense increased $199
thousand from $8.754 million for the first six months of 1995 to
$8.953 million for the first six months 1996 primarily due to a $500
thousand contingency reserve established to account for developmental
costs in Jefferson County, West Virginia.
Income taxes increased $1.003 million (15.8%) from $6.342 million for
the first six months of 1995 to $7.345 million for the first six
months of 1996. The 1996 increase in income taxes is the result of
greater amounts of income subject to income taxes and decreased
investment in tax exempt loans and securities.
ASSET QUALITY
Loan quality continues to be good based on reviews by management.
Loan quality is the result of management employing conservative
principles of lending while meeting the needs of customers. Good
loan quality results in reduced need for additional provision for
loan losses and efforts to collect past due loans which has a
positive impact on net income.
Total loan charge-offs less recoveries, amounted to $897 thousand for
the first six months of 1996, representing a ratio of net charge-offs
to total average loans, net of unearned income, of 0.14%, annualized.
This compares to 1995 twelve-month net charge-offs of $1.32 million,
or 0.15% of average loans.
As of June 30, 1996, loans on a non-accrual basis amounted to $10.253
million, or 0.8% of total loans, net of unearned discount and loans
90 days or more past due and still accruing totaled $4.2 million, or
0.3% of total loans, net of unearned discount. In management's
judgment, the balance in the reserve for loan losses is adequate to
cover future losses in the existing loan portfolio.
F&M closely monitors those loans that are deemed to be potential
problem loans. Loans are viewed as potential problem loans when
possible credit problems of the borrowers cause management to have
doubts as to the ability of such borrowers to comply with current
repayment terms. Those loans are subject to constant management
attention, and their classification is reviewed on a regular basis.
At June 30, 1996, the potential problem loans included seven lending
relationships with principal balances in excess of $500,000 which had
an aggregate principal balance outstanding of $10.760 million.
LIQUIDITY
Liquidity requirements are measured by the need to meet deposit
withdrawals, fund loans, maintain reserve requirements and operate
the organization. To meet its liquidity needs, F&M maintains cash
reserves and has an adequate flow of funds from maturing loans,
investment securities, and short-term investments. In addition,
F&M's affiliate banks have the ability to borrow from the Federal
Reserve Bank and the Federal Home Loan Bank. F&M considers its
sources of liquidity to be ample to meet its estimated needs.
CAPITAL RESOURCES
F&M's strong capital position provides the resources and flexibility
for anticipated growth.
F&M's risk-based capital position at June 30, 1996 was $205.4
million, or 16.2% of risk-weighted assets, for Tier I capital and
$221.3 million, or 17.4% for total risk based capital.
Tier I capital consists primarily of common shareholders' equity,
while total risk-based capital adds the allowance for loan losses to
Tier I. Risk-weighted assets are determined by assigning various
levels of risk to different categories of assets and off-balance
sheet activities. Under current risk-based capital standards, all
banks are required to have Tier I capital of at least 4% and total
capital of 8%.
FORM 10-Q PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Registrant or
any of its subsidiaries, directors or officers is a party or by which
they, or any of them, are threatened. All legal proceedings
presently pending or threatened against F & M and its subsidiaries
involve routine litigation incidental to the business of F&M or the
subsidiary involved and are either not material in respect to the
amount in controversy or fully covered by insurance.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
(1) Underwriting agreement - not applicable.
(2) Plan of Acquisition, Reorganization, Arrangement,
Liquidation, or Succession - not applicable.
(4) Instruments Defining the Rights of Security Holders
Including Indentures - not applicable.
(11) Statement re Computation of Per Share Earnings.
Incorporated herein by reference to Registrant's Form 10-K
Annual Report for the year ended December 31, 1995, filed
with the Commission on March 28, 1996 under Exhibit 11.
(15) Letter re Unaudited Interim Financial Information - not
applicable.
(16) Letter re change in certifying accountant - not applicable.
(17) Letter re director resignation - not applicable.
(22) Published Report Regarding Matters Submitted to Vote of
Security Holders - not applicable.
(23) Consent of Experts and Counsel - not applicable.
(24) Power of Attorney - not applicable.
(27) Financial Data Schedules - Included herein as Exhibit 27.
(99) Additional Exhibits - None.
FORM 10-Q PART II - OTHER INFORMATION
(b) Reports on Form 8-K.
1. Date of Report. July 2, 1996.
Item(s) Reported. The filing of Form 8-K as Items 5. and 7.
relative to restated consolidated
financial statements of F&M National
Corporation and Subsidiaries to reflect
the acquisition of FB&T Financial
Corporation, Fairfax, Virginia, and the
proposed acquisition of Allegiance Banc
Corporation, Bethesda, Maryland.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
F & M NATIONAL CORPORATION
/s/
Jack R. Huyett, President, Chief Administrative Officer
/s/
Alfred B. Whitt
Senior Vice President, Secretary, Senior Financial Officer
Date: August 13, 1996