SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For Quarter Ended September 30, 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:
18,979,814 shares
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (000 OMITTED)
(Unaudited)
Sept. 30, December 31,
1996 1995
Assets:
Cash and due from banks $ 112,145 $ 107,642
Interest-bearing deposits in other banks 412 100
Securities-held to maturity(market value
September 30, 1996-$335,725;
December 31, 1995, $341,313) 336,478 331,550
Securities-available for sale
(at market value) 253,419 279,517
Federal funds sold and securities
purchased under agreements to resell 52,429 80,901
Loans 1,303,217 1,209,308
Unearned income (6,682) (6,418)
Loans (net of unearned income) 1,296,535 1,202,890
Allowance for loan losses (17,328) (17,211)
Net loans 1,279,207 1,185,679
Bank premises and equipment, net 42,289 38,405
Other assets 57,905 53,095
Total assets $2,134,284 $2,076,889
Liabilities and Shareholders' Equity:
Liabilities:
Deposits:
Non-interest bearing $ 309,700 $ 292,200
Interest bearing 1,518,109 1,482,791
Total deposits 1,827,809 1,774,991
Federal funds purchased and securities
sold under agreements to repurchase 37,702 48,466
Federal Home Loan Bank advances 3,400 4,737
Other short-term borrowings 19,038 18,792
Long-term debt 11,700 3,225
Other liabilities 19,062 16,262
Total liabilities $1,918,711 $1,866,473
/TABLE
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (000 OMITTED)
(Unaudited)
Sept. 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 September 30, 1996 - 18,979,814
shares; issued December 31,
1995-19,069,901 shares 37,960 38,140
Capital surplus 60,914 63,087
Retained earnings 117,279 105,730
Unrealized gain (loss) on securities
available for sale, net (580) 3,459
Total shareholders' equity 215,573 210,416
Total liabilities and
shareholders' equity $2,134,284 $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 Nine Months For the Quarter
Ended Sept. 30, Ended Sept. 30,
1996 1995 1996 1995
Interest and fees on loans $ 86,496 $ 81,111 $ 29,310 $ 27,506
Securities held to maturity:
Taxable interest income 13,822 13,348 4,540 4,716
Interest income exempt from
Federal income taxes 1,139 1,455 370 439
Securities available for sale:
Taxable interest income 12,681 10,685 4,312 3,553
Dividend income 390 327 136 99
Total security interest income 28,032 25,815 9,358 8,807
Interest on federal funds sold
and securities purchased
under agreements to resell 2,793 3,369 757 1,455
Interest on deposits in banks 22 24 10 6
Total interest income 117,343 110,319 39,435 37,774
Interest expense:
Interest on deposits 48,254 44,608 16,062 15,990
Interest on short-term
borrowings 1,457 1,480 554 466
Interest on long-term debt 276 201 115 74
Total interest expense 49,987 46,289 16,731 16,530
Net interest income 67,356 64,030 22,704 21,244
Provision for loan losses 1,590 844 562 262
Net interest income after
provision for loan losses 65,766 63,186 22,142 20,982
/TABLE
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (000 OMITTED)
(Unaudited) (Unaudited)
For the Nine Months For the Quarter
Ended Sept. 30, Ended Sept. 30,
1996 1995 1996 1995
Other Income:
Commissions and fees from
fiduciary activities 1,628 1,359 548 473
Service charges on deposit
accounts 6,077 5,516 2,250 1,859
Credit card fees 2,510 2,368 904 847
Fees for other customer services 1,274 850 455 257
Other operating income 2,783 3,465 721 1,065
Profits on securities available
for sale 24 337 (2) (3)
Investment securities gains, net 1 20 1 3
Total other income 14,297 13,915 4,877 4,501
Other Expenses:
Salaries and employee benefits 25,431 24,344 8,645 8,036
Net occupancy expense of
premises 3,791 3,867 1,250 1,314
Furniture and equipment expense 3,818 3,381 1,339 1,257
Deposit insurance 176 1,763 134 (86)
Credit card expense 1,618 1,507 610 566
Other operating expense 13,485 12,942 4,532 4,188
Total other expense 48,319 47,804 16,510 15,275
Income before income tax expense 31,744 29,297 10,509 10,208
Income tax expense 10,788 9,791 3,443 3,449
Net income $20,956 $19,506 $ 7,066 $ 6,759
Earnings per average share:
(1996 - 19,025,157 shares;
1995 - 19,020,506 shares)
Net income per share $ 1.10 $ 1.04 $ 0.37 $ 0.37
Dividends per share $ 0.49 $ 0.43 $ 0.17 $ 0.16
See Accompanying Notes to Consolidated Financial Statements
F&M NATIONAL CORPORATION AND SUBSIDIARIES-CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 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 19,506 19,506
Cash dividends (8,076) (8,076)
Acquisition of common
stock (209) (1,561) (1,770)
Issuance of authorized
common stock:
Stock dividend, FB&T
Financial Corporation 232 836 (1,068) --
Dividend reinvestment
plan 218 1,512 1,730
Stock options 32 112 144
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 7,863 7,863
Balances:
September 30, 1995 $38,010 $63,215 $103,115 $ 921 $205,261
Balances:
January 1, 1996 $38,140 $63,087 $105,730 $ 3,459 $210,416
Net Income 20,956 20,956
Cash dividends (9,407) (9,407)
Acquisition of common
stock (481) (3,679) (4,160)
Issuance of authorized
common stock:
Stock options 196 154 350
Stock options under
non-variable
compensatory plan 500 500
Employee stock
ownership plan 105 852 957
Market value adjustment,
net of income tax (4,039) (4,039)
Balances:
September 30, 1996 $37,960 $60,914 $117,279 $( 580) $215,573
See Accompanying Notes to Consolidated Financial Statements
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (000 Omitted)
(Unaudited)
Consolidated for the
Nine Months Ended
Sept. 30, Sept. 30,
1996 1995
Cash Flows From Operating Activities
Net income $ 20,956 $ 19,506
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,338 2,949
Provision for loan losses 1,590 844
Profits on securities available for sale (24) (337)
Profits on securities held to maturity (1) (20)
(Increase) decrease in other assets (5,873) 577
Increase in other liabilities 2,800 6,908
Net cash provided by operating activities 22,786 30,427
Cash Flows From Investing Activities
Increase in interest-bearing
deposits in other banks (312) (33)
Proceeds from calls and sales
of available for sale securities 55,525 42,166
Proceeds from maturities of available for
sale securities 18,264 23,580
Purchase of securities available for sale (53,881) (67,627)
Proceeds from maturities and calls of investment
securities 56,413 71,136
Purchase of investment securities (61,340) (80,740)
(Increase) decrease in federal funds sold
and securities purchased under agreements
to resell 28,472 (78,822)
Net increase in loans (96,190) (33,097)
Purchases of bank premises and equipment (6,629) (5,158)
Proceeds from sale of OREO 4,217 0
Net cash (used in) investing activities (55,461) (128,595)
Cash Flows From Financing Activities
Net increase (decrease) in noninterest-
bearing and interest-bearing demand
deposits and savings accounts 9,140 (58,663)
Net increase in certificates of deposit 43,678 165,558
Dividends paid (9,407) (8,076)
(Increase) decrease in other
short-term borrowings (11,855) 4,354
Increase in long-term debt 8,475 316
Acquisition of common stock (4,160) (1,770)
Net proceeds from issuance of common stock 1,307 2,674
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (000 Omitted)
(Unaudited)
Consolidated for the
Nine Months Ended
Sept. 30, Sept. 30,
1996 1995
Net cash provided by financing activities 37,178 104,393
Increase in cash and
cash equivalents 4,503 6,225
Cash and Cash Equivalents
Beginning 107,642 94,508
Ending 112,145 100,733
Supplemental Disclosures of Cash Flows
Information
Cash payments for:
Interest paid to depositors 50,655 44,608
Interest paid on other short-term
borrowings 1,457 1,480
52,112 46,088
Income taxes 9,717 6,993
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 6,340
Market value adjustment available for
sale securities 6,214 12,097
See Accompanying Notes to Consolidated Financial Statements
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 1996, and December 31, 1995,
and the results of operations and changes in cash flows for the nine
months ended September 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 nine-month periods ended
September 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
September 30, 1996, are as follows:
September 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 $299,199 $2,375 ($3,409) $298,165
Corporate securities 1,077 32 -- 1,109
Obligations of states and
political subdivisions 36,202 552 (303) 36,451
$336,478 $2,959 ($3,712) $335,725
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995
F&M's amortized cost and market value of the available for sale
securities as of September 30, 1996, are as follows:
September 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 $226,327 $1,050 ($2,515) $224,862
Corporate securities 13,452 801 (3) 14,250
Mortgage-backed securities 12,663 54 (242) 12,475
Other 1,832 -- -- 1,832
$254,274 $1,905 ($2,760) $253,419
5. F&M's loan portfolio is composed of the following:
Sept. 30, December 31,
1996 1995
(000 Omitted)
Loans-held to maturity (HTM):
Commercial, financial and agricultural $ 184,119 $ 161,798
Real estate-construction 60,925 51,900
Real estate-mortgage 897,728 838,630
Installment loans to individuals 160,445 156,980
Total loans 1,303,217 1,209,308
Less: Unearned income (6,682) (6,418)
Allowance for loan losses (17,328) (17,211)
Loans, net $1,279,207 $1,185,679
F&M had $7,500,000 in non-performing loans at September 30, 1996.
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996 (UNAUDITED) AND DECEMBER 31, 1995
6. Reserve for Loan Losses:
Sept. 30, December 31,
1996 1995
(000 Omitted)
Balance at January 1 $ 17,211 $ 16,795
Provision charged to operating expense 1,590 2,148
Recoveries added to the reserve 432 882
Loan losses charged to the reserve (1,905) (2,614)
Balance at end of period $ 17,328 $ 17,211
7. Earnings and Dividends Paid Per Share:
The weighted average number of shares outstanding for the nine-
month periods ended September 30, 1996 and 1995 were 19,025,157
shares and 19,020,506 shares, respectively.
8. Business Combination:
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. Accounting Rule Changes:
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.
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.
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.
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.
10. Proposed Merger:
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 of 1996. As of September 30, 1996, Allegiance's total assets
were $139.4 million, total deposits were $121.3 million, and total
shareholders' equity was $12.9 million. The merger became effective
on October 1, 1996, with an exchange of 1,455,628 shares of F&M
National Corporation common stock.
INDEPENDENT ACCOUNTANT'S REPORT
To the Board of Directors
F & M National Corporation
Winchester, Virginia
We have reviewed the accompanying consolidated balance sheet of F & M
National Corporation and Subsidiaries as of September 30, 1996, and
the related consolidated statements of income, changes in
shareholders' equity and cash flows for the nine-month periods ended
September 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
November 12, 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.
On August 9, 1996, F&M Bank-Potomac, Herndon, Virginia and Fairfax
Bank & Trust Company, Fairfax, Virginia, merged into F&M Bank-
Hallmark, Springfield, Virginia, and became F&M Bank-Northern
Virginia ("NOVA"). NOVA has 18 branch banks with its main office
located at 4117 Chain Bridge Road, Fairfax, Virginia, with assets of
$439.2 million, loans of $285.6 million and deposits of $360.4
million as of September 30, 1996.
FINANCIAL CONDITION
Total assets on September 30, 1996, amounted to $2.134 billion, up
$81.2 million or 4.0% from $2.053 billion at September 30, 1995.
Total assets at December 31, 1995, were $2.077 billion. For the
first nine months 1996, total assets averaged $2.105 billion, 7.5%
above the first nine months 1995 average of $1.958 billion.
Total loans, net of unearned income, amounted to $1.297 billion at
September 30, 1996, an increase of $127.4 million or 10.9% from
$1.169 billion at September 30, 1995. At December 31, 1995, total
loans, net, were $1.203 billion. Total loans (net) as a percent of
total assets were 60.7% at September 30, 1996, as compared to 56.9%
at September 30, 1995, and 57.9% at December 31, 1995. Net loan
volume for the first nine months 1996 was $96.2 million as compared
to $33.1 million for the first nine months 1995. The 1996 increase
in loan volume was affected by increased customer demand, secondary
market funding of $19.3 million, and investment of $19.7 million in
FHA and VA government guaranteed residential real estate and $1.5
million in SBA loans.
On September 30, 1996, the securities portfolio totalled $589.9
million, which was $3.6 million or 0.6% higher than the year before
and $21.2 million or 3.5% lower than at December 31, 1995. In the
first nine months 1996, as funds became available they were utilized
for lending activities in lieu of investing in securities as a result
of increased lending demand. Funds that were invested in the
securities portfolio were 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 $52.4 million on September 30, 1996, $28.5 million or
- -35.2% lower than $80.9 million outstanding at December 31, 1995.
The large decrease in federal funds sold is primarily the result of
increased demand for mortgage loan funding.
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 September 30, 1996, was $253.419 million as compared to
$279.517 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
$-580 thousand at September 30, 1996, a decline from year end 1995 by
$4.0 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 $59.9 million or 3.4% to $1.828 billion at
September 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 $11.7 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 residential housing finance assets.
RESULTS OF OPERATIONS
Net income for the first nine months of 1996 amounted to $20.956
million, increasing $1.450 million or 7.4% from $19.506 million for
the first nine months of 1995. The yield on interest-earning assets
was 8.18% for the first nine months of 1996 as compared to 8.17% for
the first nine months 1995 and the yield on interest-bearing
liabilities was 4.22% for the first nine months 1996 as compared to
4.20% for the first nine 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 nine months of 1996,
compared with 1.32% for the same period in 1995 and 1.26% for the
year 1995. F&M's return on average equity was 13.10% for the first
nine months of 1996 and 1995. Return on average equity was 12.44%
for the year 1995.
Net interest income totaled $67.356 million for the first nine months
of 1996, a $3.326 million or 5.3% increase over F&M's performance for
the first nine months of 1995. The net interest margin for the first
nine months 1996 was 4.72%, down 3 basis points from 4.75% for the
first nine 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 $23.8 million at September 30, 1996, a
decrease of $3.6 million or 13.1% from $27.4 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
September 30, 1996, were $7.500 million, or 0.58% of total loans,
compared to $13.300 million, or 1.11% 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 September 30, 1996, impaired loans totaled
$4.674 million upon which an allowance of $854 thousand has been
provided, which is included in the total loan portfolio allowance for
loan losses. Interest income recognized on impaired loans as of
September 30, 1996, was $156 thousand. The average balance of
impaired loans for the first nine months 1996 was $7.850 million.
Loans past due 90 days or more and still accruing interest because
they were well secured and in the process of collection were $3.1
million at September 30, 1996, and $3.8 million at December 31, 1995.
Foreclosed properties consists of 26 parcels of real estate acquired
through debt previously contracted. These properties consist
primarily of commercial and residential real estate whose value is
determined through sale at public auction or fair market value,
whichever is less. At September 30, 1996, foreclosed properties were
$12.1 million as compared to $14.0 million at December 31, 1995.
During the first nine 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
is marketing this property and intends to 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. A contingency reserve of $500 thousand has been
established to account for development costs such as installing roads
and utilities associated with the project.
The allowance for loan losses has increased to $17.328 million at
September 30, 1996, as compared to $17.211 million at year end 1995.
The allowance for loan losses increased $117 thousand in the first
nine months 1996 as compared to a decrease of $5 thousand for the
first nine months 1995. The increase in the allowance for loan
losses is a result of improved loan demand requiring an additional
provision. The amount of the allowance that is required is lower as
a result of improvement in credit quality of the loan portfolio and
acquisition of $19.7 million FHA, VA, and SBA loans which were 100%
guaranteed by the U.S. government upon which no reserve is required.
Total noninterest income increased $382 thousand or 2.7% from $13.915
million for the first nine months of 1995 to $14.297 million for the
first nine months of 1996. For the first nine months 1996, gains on
securities available for sale were $24 thousand or 0.2% of total
noninterest income, whereas, for the first nine months of 1995
securities gains were $337 thousand or 2.4% 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 $2.510 million for the
first nine months 1996, up $142 thousand or 6.0% over the first nine
months 1995 as a result of a marketing effort to attract new credit
card customers. Other operating income decreased $682 thousand, down
from $3.465 million for the first nine months 1995 to $2.783 million
for the first nine 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 increased $515 thousand or 1.1% from
$47.804 million for the first nine months 1995 to $48.319 million for
the first nine months 1996. Salary expense increased $1.087 million
or 4.5% from $24.344 million for the first nine months 1995 to
$25.431 million for the first nine months 1996 as a result of normal
increases in salaries and benefits. The cost of net occupancy
expense has decreased $76 thousand or -2.0% from $3.867 million for
the first nine months of 1995 to $3.791 million for the first nine
months of 1996, as a result of some branches becoming fully
depreciated. Furniture and equipment expense has increased $437
thousand or 12.9% from $3.381 million for the first nine months 1995
to $3.818 million for the first nine months 1996, which reflects an
increase in the acquisition of new furniture and equipment. Deposit
insurance was $176 thousand for the first nine months 1996, down
$1.763 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. In the third quarter 1996, the FDIC imposed a special
one-time assessment of $0.65 per $100 on Thrift deposits. The
assessment charge to F&M was $116 thousand for deposits acquired from
Thrifts. Credit card expense was up $111 thousand from $1.507
million for the first nine months 1995 to $1.618 million for the
first nine months 1996 as a result of direct marketing and offering
new products. Other operating expense increased $543 thousand from
$12.942 million for the first nine months of 1995 to $13.485 million
for the first nine months 1996 primarily due to a $500 thousand
contingency reserve established to account for developmental costs in
Jefferson County, West Virginia.
Income taxes increased $997 million or 10.2% from $9.791 million for
the first nine months of 1995 to $10.788 million for the first nine
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 $1.473 million
for the first nine months of 1996, representing a ratio of net
charge-offs to total average loans, net of unearned income, of 0.12%,
annualized. This compares to 1995 twelve-month net charge-offs of
$1.732 million, or 0.15% of average loans.
As of September 30, 1996, loans on a non-accrual basis amounted to
$11.615 million, or 0.9% of total loans, net of unearned discount and
loans 90 days or more past due and still accruing totaled $3.1
million, or 0.2% of total loans, net of unearned discount. In
management's judgment, the balance in the reserve for loan losses is
adequate to cover future losses in the existing loan portfolio.
F&M closely monitors those loans that are deemed to be potential
problem loans. Loans are viewed as potential problem loans when
possible credit problems of the borrowers cause management to have
doubts as to the ability of such borrowers to comply with current
repayment terms. Those loans are subject to constant management
attention, and their classification is reviewed on a regular basis.
At September 30, 1996, the potential problem loans included six
lending relationships with principal balances in excess of $500,000.
Those lending relationships had an aggregate principal balance
outstanding of $9.385 million.
LIQUIDITY
Liquidity requirements are measured by the need to meet deposit
withdrawals, fund loans, maintain reserve requirements and operate
the organization. To meet its liquidity needs, F&M maintains cash
reserves and has an adequate flow of funds from maturing loans,
investment securities, and short-term investments. In addition,
F&M's affiliate banks have the ability to borrow from correspondent
banks, the Federal Reserve Bank, and the Federal Home Loan Bank. F&M
considers its sources of liquidity to be ample to meet its estimated
needs.
CAPITAL RESOURCES
F&M's strong capital position provides the resources and flexibility
for anticipated growth.
F&M's risk-based capital position at September 30, 1996 was $208.8
million, or 15.8% of risk-weighted assets, for Tier I capital and
$225.3 million, or 17.1% 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: November 13, 1996