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 March 31, 1998 Commission File No. 0-5929
F & M NATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Commonwealth of Virginia 54-0857462
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
9 Court Square, Winchester, Virginia 22601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 540-665-4200
NO CHANGES
(Former name, former address and former fiscal year, if
changes since last report)
Indicate by check mark whether the registrant (l) has filed all
reports to be filed by Section 13 or 15(d) of the Securities and
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes X No
As of May 11, 1998, there were 21,140,439 shares of the
Registrant's common stock outstanding.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (000 OMITTED)
(Unaudited)
March 31, December 31,
1998 1997
Assets:
Cash and due from banks 119,357 125,154
Interest-bearing deposits in other banks 17,359 7,839
Securities-held to maturity(market value
March 31, 1998-$419,771;
December 31, 1997, $413,286) 413,507 406,707
Securities-available for sale
(market value) 254,815 231,771
Federal funds sold and securities
purchased under agreements to resell 133,048 101,802
Loans 1,524,845 1,547,259
Unearned income (3,438) (3,661)
Loans (net of unearned income) 1,521,407 1,543,598
Allowance for loan losses (20,901) (20,641)
Net loans 1,500,506 1,522,957
Bank premises and equipment, net 58,009 57,102
Other assets 68,022 66,980
Total assets 2,564,623 2,520,312
Liabilities and Shareholders' Equity:
Liabilities:
Deposits
Non-interest bearing 434,083 408,449
Interest bearing 1,747,638 1,729,385
Total deposits 2,181,721 2,137,834
Federal funds purchased and securities
sold under agreements to repurchase 70,342 79,876
Other short-term borrowings 12,013 14,509
Long-term debt 18,932 17,136
Other liabilities 27,310 23,133
Total liabilities 2,310,318 2,272,488
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (000 OMITTED)
(Unaudited)
March 31, December 31,
1998 1997
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 March 31, 1998 - 20,432,528
shares; issued December 31,
1997-20,374,957 shares 40,865 40,750
Capital surplus 69,994 68,206
Retained earnings 141,158 136,700
Accumulated other comprehensive income 2,288 2,168
Total shareholders' equity 254,305 247,824
Total liabilities and
shareholders' equity 2,564,623 2,520,312
See Accompanying Notes to Consolidated Financial Statements
F & M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (000 OMITTED)
(Unaudited)
For the Three Months
Ended March 31,
1998 1997
Interest Income:
Interest and fees on loans 34,378 33,422
Securities held to maturity:
Taxable interest income 5,960 4,804
Interest income exempt from
Federal income taxes 342 396
Securities available for sale:
Taxable interest income 3,391 3,749
Dividend income 202 186
Total security interest income 9,895 9,135
Interest on federal funds sold
and securities purchased
under agreements to resell 1,491 882
Interest on deposits in banks 86 49
Total interest income 45,850 43,488
Interest Expense:
Interest on deposits 18,108 17,072
Interest on short-term
borrowings 941 688
Interest on long-term debt 291 200
Total interest expense 19,340 17,960
Net interest income 26,510 25,528
Provision for loan losses 699 1,070
Net interest income after
provision for loan losses 25,811 24,458
Other Income:
Commissions and fees from
fiduciary activities 658 609
Service charges on deposit
accounts 2,652 2,256
Credit card fees 895 834
Fees for other customer services 647 646
Insurance commission 1,439 110
Other operating income 1,137 655
Profits on securities available
for sale 5 95
Investment securities gains, net 1 (2)
Total other income 7,434 5,203
F & M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (000 OMITTED)
(Unaudited)
For the Three Months
Ended March 31,
1998 1997
Other Expenses:
Salaries and employees' benefits 11,278 9,643
Net occupancy expense of
premises 1,833 1,508
Furniture and equipment expense 1,577 1,385
Deposit insurance 66 42
Credit card expense 635 548
Other operating expense 5,103 4,895
Total other expense 20,492 18,021
Income before income taxes 12,753 11,640
Income tax expense 4,515 3,985
Net income 8,238 7,655
Average shares:
Basic 20,391 20,348
Assuming dilution 20,569 20,507
Earnings per common share:
Basic $0.40 $0.38
Assuming dilution $0.40 $0.37
Dividends per share $0.185 $0.18
See Accompanying Notes to Consolidated Financial Statements
F&M NATIONAL CORPORATION AND SUBSIDIARIES-CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(000 OMITTED)
Accumulated
Other
Compre- Compre-
Common Capital Retained hensive hensive
Stock Surplus Earnings Income Income Total
Balances -
January 1, 1997 40,747 69,197 120,350 429 230,723
Comprehensive
Income:
Net income 7,655 7,655 7,655
Other compre-
hensive income,
net of tax:
Unrealized loss
on available-
for-sale
securities (1,722) (1,722)
Less: Reclassi-
fication
adjustment for
gains realized
in net income 95 95
Other compre-
hensive income,
net of tax (1,627) (1,627)
Total compre-
hensive income 6,028
Cash dividends (3,662) (3,662)
Acquisition of
common stock (232) (2,646) (2,878)
Issuance of
authorized stock:
Stock options 61 556 617
Stock options
under nonvariable
compensatory plan 732 732
Employee stock
ownership plan 100 950 1,050
Balances -
March 31, 1997 40,676 68,789 124,343 (1,198) 232,610
See Accompanying Notes to Consolidated Financial Statements
F&M NATIONAL CORPORATION AND SUBSIDIARIES-CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY FOR THE THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(000 OMITTED)
Accumulated
Other
Compre- Compre-
Common Capital Retained hensive hensive
Stock Surplus Earnings Income Income Total
Balances -
January 1, 1998 40,750 68,206 136,700 2,168 247,824
Comprehensive
Income:
Net income 8,238 8,238 8,238
Other compre-
hensive income,
net of tax:
Unrealized loss
on available-
for-sale
securities 125 125
Less: Reclassi-
fication
adjustment for
gains realized
in net income (5) (5)
Other compre-
hensive income,
net of tax 120 120
Total compre-
hensive income 8,358
Cash dividends (3,780) (3,780)
Issuance of
authorized stock:
Stock options 71 448 519
Stock options
under nonvariable
compensatory plan 1,151 1,151
Employee stock
ownership plan 44 189 233
Balances -
March 31, 1998 40,865 69,994 141,158 2,288 254,305
See Accompanying Notes to Consolidated Financial Statements
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (000 Omitted)
(Unaudited)
For the Three Months Ended
March 31, March 31,
1998 1997
Cash Flows From Operating Activities
Net income 8,238 7,655
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,521 1,227
Provision for loan losses 699 1,070
Profit on securities available for sale (5) (95)
(Gain) loss on securities held to maturity (1) 2
Increase in other assets (1,391) (1,398)
Increase in other liabilities 3,944 2,062
Net cash provided by operating activities 13,005 10,523
Cash Flows From Investing Activities
(Increase) in interest-bearing
deposits in other banks (9,520) (202)
Proceeds from maturities, calls and sales
of available for sale securities 27,303 20,671
Purchase of securities available for sale (49,989) (5,970)
Proceeds from maturities of investment
securities 41,739 16,797
Purchase of investment securities (48,538) (16,705)
Increase in federal funds sold
and securities purchased under agreements
to resell (31,246) (14,059)
Net decrease (increase) in loans 20,970 (26,076)
Purchases of bank premises and equipment (2,138) (7,021)
Proceeds from sale of OREO 1,992 474
Net cash (used in) investing activities (49,427) (32,091)
Cash Flows From Financing Activities
Net increase in noninterest-bearing
and interest-bearing demand deposits
and savings accounts 42,045 8,104
Net increase in certificates of deposit 1,842 21,378
Dividends paid (3,780) (3,662)
Decrease in other short-term borrowings (12,030) (1,317)
Increase in long-term debt 1,796 745
Acquisition of common stock 0 (2,520)
Net proceeds from issuance of common stock 752 1,309
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (000 Omitted)
(Unaudited)
For the Three Months Ended
March 31, March 31,
1998 1997
Net cash provided by financing activities 30,625 24,037
Increase in cash and
cash equivalents (5,797) 2,469
Cash and Cash Equivalents
Beginning 125,154 112,866
Ending 119,357 115,335
Supplemental Disclosures of Cash Flows
Information
Cash payments for:
Interest paid to depositors 18,697 16,807
Interest paid on other short-term
borrowings 941 688
19,638 17,495
Income taxes 4,131 11
Supplemental Schedule of Noncash Investing
and Financing Activities
Issuance of stock options under
nonvariable compensatory plan:
1998 - 67,000 shares;
1997 - 68,500 shares 1,151 732
Loan balances transferred to foreclosed
properties 782 1,159
Market value adjustment available for
sale securities (353) (2,487)
See Accompanying Notes to Consolidated Financial Statements
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997
1. In the opinion of management, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting
of only normal recurring accruals) necessary to present fairly the
financial position as of March 31, 1998, and December 31, 1997, and
the results of operations and changes in cash flows for the three
months ended March 31, 1998 and 1997. The statements should be read
in conjunction with the Consolidated Notes to Financial Statements
included in F&M's Annual Report for the year ended December 31, 1997.
2. The results of operations for the three-month periods ended March
31, 1998 and 1997, are not necessarily indicative of the results to
be expected for the full year.
3. F&M National Corporation's ("F&M" or the "Corporation") amortized
cost and market value of securities being held to maturity as of
March 31, 1998, are as follows:
March 31, 1998 (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 $384,632 $6,301 $ (706) $390,227
Corporate securities 974 46 - 1,020
Obligations of states and
political subdivisions 27,901 660 (37) 28,524
$413,507 $7,007 $ (743) $419,771
F&M's amortized cost and market value of the available for sale
securities as of March 31, 1998, are as follows:
March 31, 1998 (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 $237,535 $1,621 $ (530) $238,626
Corporate securities 3,758 2,431 -- 6,189
Other 9,797 203 -- 10,000
$251,090 $4,255 $ (530) $254,815
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1998 (UNAUDITED) AND DECEMBER 31, 1997
4. F&M's loan portfolio is composed of the following:
March 31, December 31,
1998 1997
(000 Omitted)
Loans-held to maturity (HTM):
Commercial, financial and agricultural $ 252,151 $ 259,881
Real estate-construction 81,228 83,904
Real estate-mortgage 1,019,373 1,028,478
Installment loans to individuals 172,093 174,996
Total loans 1,524,845 1,547,259
Less: Unearned income (3,438) (3,661)
Allowance for loan losses (20,901) (20,641)
Loans, net $1,500,506 $1,522,957
F&M had $17,777,000 in non-accrual loans at March 31, 1998.
5. Reserve for Loan Losses:
March 31, December 31,
1998 1997
(000 Omitted)
Balance at January 1 $ 20,641 $ 17,936
Provision charged to operating expense 699 5,685
Recoveries added to the reserve 79 1,099
Loan losses charged to the reserve (518) (4,079)
Balance at end of period $ 20,901 $ 20,641
6. Earnings Paid Per Share:
March 31, 1998 March 31, 1997
Per Per
Share Share
Shares Amount Shares Amount
Basic EPS 20,390,976 0.40 20,347,855 0.38
Effective of
dilutive securities:
Stock options 177,336 158,670
Diluted EPS 20,568,312 0.40 20,506,525 0.37
/TABLE
7. On September 11, 1997, the Corporation and Shomo & Lineweaver
Insurance Agency, Inc., announced that their respective Board of
Directors have approved an agreement for the affiliation of Shomo &
Lineweaver Insurance Agency, Inc., with F&M Bank-Winchester. The
transaction was completed in the fourth quarter 1997.
8. On April 22, 1998, the Corporation and J.V. Arthur, Inc.,
(insurance agency) announced that their respective Board of Directors
had approved an agreement for the affiliation of J.V. Arthur, Inc.
with F&M Bank-Winchester. The transaction will be completed in the
second quarter 1998.
9. Peoples Bank of Virginia ("PBVA") and the Corporation have
entered into a Definitive Agreement and Plan of Reorganization, dated
as of December 21, 1997, and a related Plan of Merger (collectively,
the "Merger Agreement"). This transaction was consummated on April 1,
1998. Under the terms of the Merger Agreement, PBVA was merged with
F&M Bank-Richmond and each share of common stock of PBVA outstanding
immediately prior to consummation of the Merger will be exchanged, in
a tax-free exchange, for 2.58 shares of common stock of F&M, with
cash being paid in lieu of issuing fractional shares. The merger
became effective by April 1, 1998. As of December 31, 1997, PBVA had
total assets of $80.4 million, total loans of $47.0 million, total
deposits of $70.4 million and total shareholders' equity of $8.2
million.
10. The Bank of Alexandria ("BOA") and the Corporation have entered
into a Definitive Agreement and Plan of Reorganization, dated as of
December 12, 1997, and related Plan of Merger (collectively, the
"Merger Agreement"). This transaction is subject to the approval of
regulatory authorities and shareholders of BOA. Under the terms of
the Merger Agreement, BOA will be merged with F&M Bank-Northern
Virginia and each share of common stock of BOA outstanding
immediately prior to consummation of the Merger will be exchanged, in
a tax-free exchange, for 0.942 shares of common stock of F&M, with
cash being paid in lieu of issuing fractional shares. It is
anticipated that the Merger will become effective in the second
quarter of 1998. As of December 31, 1997, BOA had total assets of
$76.1 million, total loans of $58.2 million, total deposits of $67.6
million, and total shareholders' equity of $7.9 million.
11. It is the opinion of F&M that the cost of addressing the Year
2000 problems will not be a material event or uncertainty that would
cause previously reported financial information to no longer be
accurate. Also, F&M is of the opinion that the cost or consequences
of the Year 2000 will not represent a known material event or
uncertainty that will reasonably be expected to adversely affect
future financial results.
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 March 31, 1998, and the
related consolidated statements of income, changes in shareholders'
equity and cash flows for the three-month periods ended March 31,
1998 and 1997. 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, 1997, 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
28, 1998, 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, 1997 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
May 13, 1998
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Management's discussion and analysis of financial information is
presented to aid the reader in understanding and evaluating the
financial condition and results of operations of F&M National
Corporation ("F&M" or the "Corporation").
FINANCIAL CONDITION
Total assets on March 31, 1998, amounted to $2.565 billion, up $229.0
million or 9.7% from $2.336 billion at March 31, 1997. Total assets
at December 31, 1997, were $2.520 billion. For the first three
months of 1998, total assets averaged $2.531 billion, 9.9% above the
first three months of 1997 average of $2.304 billion.
Total loans, net of unearned income, amounted to $1.521 billion at
March 31, 1998, an increase of $58.1 million or 4.0% from $1.463
billion at March 31, 1997. At December 31, 1997, total loans, net,
were $1.544 billion. Total loans (net) as a percent of total assets
were 59.3% at March 31, 1998, as compared to 62.6% at March 31, 1997,
and 60.4% at December 31, 1997. Net loan volume for the first three
months of 1998 was $21.0 million as compared to $26.1 million for the
first three months of 1997. Loan volume decreased as a result of
increased competition for loans.
On March 31, 1998, the securities portfolio totalled $668.3 million,
which was $88.5 million or 15.3% higher than the year before and
$29.3 million or 4.7% higher than at December 31, 1997. In the first
three months 1998, as funds became available, they were primarily
utilized for investing in the securities portfolio. Funds were
invested in the securities portfolio by acquiring U.S. government and
U.S. agency securities in an effort to balance the asset risk
portfolio. Federal funds sold and securities purchased under
agreements to resell were $133.0 million on March 31, 1998, $31.2
million or 30.7% higher than $101.8 million outstanding at December
31, 1997. The large increase in federal funds sold is the result of
a special short-term time deposit promotion. It is anticipated that
as interest rates improve, these funds will be invested in higher
yielding financial instruments.
FASB 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 March 31, 1998, was
$254.8 million as compared to $231.8 million at year end 1997. The
Corporation increased the investment in AFS securities as a result of
attractive rates and the high quality of U.S. government securities.
The effect of the market value of AFS securities less the book value
of AFS securities, net of income taxes, is reflected in Stockholders'
Equity which was $2.3 million at March 31, 1998, and an increase from
year end 1997 by $120 thousand.
Total deposits increased $185.3 million or 9.3% to $2.182 billion at
March 31, 1998, compared to one year earlier. At December 31, 1997,
total deposits were $2.138 billion. F&M offers attractive, yet
competitive, rates that have contributed to the increase in deposits.
Long-term debt was $18.9 million at March 31, 1998, as compared to
$12.2 million at March 31, 1997, and $17.1 million at year end 1997.
Long-term debt 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 three months of 1998 amounted to $8.238
million, increasing $583 thousand or 7.6% from $7.655 million for the
first three months of 1997. The yield on interest-earning assets was
8.11% for the first three months 1998 as compared to 8.32% for the
first three months 1997 and the yield on interest-bearing deposits
was 4.26% for the first three months 1998 and 1997.
Return on average assets was 1.32% for the first three months of
1998, compared with 1.33% for the same period in 1997 and 1.30% for
the year 1997. F&M's return on average equity was 13.17% for the
first three months of 1998 and 13.11% for the first three months of
1997 and 13.09% for the year ended 1997.
Net interest income totaled $26.5 million for the first three months
of 1998, a $982 thousand or 3.9% increase over F&M's performance for
the first three months of 1997. The net interest margin for the
first three months 1998 was 4.66%, down 25 basis points from 4.91%
for the first three months of 1997. The decrease in net interest
margin is the result of higher interest costs related to special
deposit promotions and unrecorded interest on nonaccrual loans.
Total nonperforming assets, which consist of nonaccrual loans,
restructured loans, and foreclosed properties were $28.9 million at
March 31, 1998, an decrease of $3.3 million or 10.2% from $32.2
million at December 31, 1997. 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
March 31, 1998, were $17.8 million, or 1.7% of total loans, compared
to $19.0 million, or 1.23% of total loans at December 31, 1997. 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
March 31, 1998, impaired loans totaled $14.4 million upon which an
allowance of $4.5 million has been provided, which is included in the
total loan portfolio allowance for loan losses. Interest income
recognized on impaired loans as of March 31, 1998, was $76 thousand.
The average balance of impaired loans for the first three months 1998
was $14.4 million. Loans past due 90 days or more and still accruing
interest because they were well secured and in the process of
collection were $2.7 million at December 31, 1997, and $2.1 million
at March 31, 1998.
Foreclosed properties consists of 16 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 March 31, 1998, foreclosed properties were
$12.6 million as compared to $13.2 million at December 31, 1997.
The allowance for loan losses has increased to $20.9 million at March
31, 1998, as compared to $20.6 million at year end 1997. The
allowance for loan losses increased $260 thousand in the first three
months 1998 as compared to $1.070 million for the first three months
1997. The amount provided for loan losses in 1997 and 1998 is an
amount, in management's judgment, in sufficient for the risk
associated with the loan portfolio. The ratio of allowance for loan
losses to total loans was 1.37% at March 31, 1998, as compared to
1.25% at March 31, 1997, and 1.34% at year end 1997.
Total noninterest income increased $2.231 million or 42.9% from $5.2
million for the first three months of 1997 to $7.4 million for the
first three months of 1998. For the first three months 1998, gains
on securities available for sale were $6 thousand or 0.1% of total
noninterest income, whereas, for the first three months of 1997
securities gains were $95 thousand or 1.8% of total noninterest
income. Security gains are realized when market conditions exist
that are favorable to the Corporation and/or conditions dictate
additional liquidity is desirable. It is the intent of the
Corporation not to sell any security that is held in its "held to
maturity" portfolio and any gain or loss in this category is the
result of securities being called prior to maturity by the issuer.
Credit card fees were $895 thousand for the first three months 1998,
up $61 thousand or 7.3% over the first three months 1997 as a result
of a marketing effort to attract new credit card customers. Insurance
commission income for the first three months 1998 was $1.439 million,
up $1.329 million from the first three months 1997 primarily as a
result of the purchase of Shomo & Lineweaver Insurance Agency
("Shomo"), whose source of income is derived from selling insurance
policies to customers. Other operating income increased $482
thousand, up from $655 thousand for the first three months 1997 to
$1.1 million for the first three months of 1998. Other operating
income consists of other fees and charges that have increased as a
result of providing additional banking services to customers.
Total noninterest expenses increased $2.5 million or 13.7% from $18.0
million for the first three months 1997 to $20.5 million for the
first three months 1998. Salary expense increased $1.635 million or
17.0% from $9.6 million for the first three months 1997 to $11.278
million for the first three months 1998 as a result of normal
increases in salaries and benefits and the purchase of Shomo. The
cost of net occupancy expense has increased $325 thousand or 21.6%
from $1.5 million for the first three months of 1997 to $1.8 million
for the first three months of 1998, as a result of acquisition of new
branches, remodeling of older branches, and completion of F&M
headquarters renovated office complex. Furniture and equipment
expense has increased $192 thousand or 13.9% from $1.4 million for
the first three months 1997 to $1.6 million for the first three
months 1998, which reflects an increase in the acquisition of new
furniture, equipment, and computer software. Inherent in furniture
and equipment expense, F&M is testing, replacing, and upgrading
computer equipment and software in order to be ready for Year 2000.
Deposit insurance was $66 thousand for the first three months 1998,
an increase of $24 thousand from $42 thousand for the same period
1997 which is attributable to growth in deposits. Credit card expense
was up $87 thousand from $548 thousand for the first three months
1997 to $635 thousand for the first three months 1998 as a result of
direct marketing and offering new products. Other operating expense
increased $208 thousand from $4.9 million for the first three months
of 1997 to $5.1 million for the first three months 1998.
Income taxes increased $530 thousand or 13.3% from $4.0 million for
the first three months of 1997 to $4.5 million for the first three
months of 1998. The increase in income taxes is the result of
greater amounts of income subject to income taxes.
ASSET QUALITY
Loan quality continues to be good based on reviews by management.
Loan quality is the result of management employing conservative
principles of lending while meeting the needs of customers. Good
loan quality results in reduced need for additional provision for
loan losses and efforts to collect past due loans which has a
positive impact on net income.
Total loan charge-offs less recoveries, amounted to $439 thousand for
the first three months of 1998, representing a ratio of net
charge-offs to total average loans, net of unearned income, of 0.12%,
annualized. This compares to 1997 twelve-month net charge-offs of
$2.980 million, or 0.19% of average loans.
As of March 31, 1998, loans on a non-accrual basis amounted to
$17.777 million, or 1.2% of total loans, net of unearned discount and
loans 90 days or more past due and still accruing totaled $2.1
million, or 0.1% of total loans, net of unearned discount. The
increase in non-accrual loans is primarily due to the inclusion of
loans made to one commercial customers for $6.6. million. F&M has
provided $2.0 million in the allowance for loan losses to adequately
provide for any possible losses attributable to this customers. 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 March 31, 1998, the potential problem loans included two lending
relationships with principal balances in excess of $500,000. Those
lending relationships had an aggregate principal balance outstanding
of $3.1 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 March 31, 1998 was $241.1
million, or 16.1% of risk-weighted assets, for Tier I capital and
$259.9 million, or 17.3% 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%.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in information reported as of
December 31, 1997, in Form 10-K.
FORM 10-Q PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There are no material legal proceedings to which the Registrant or
any of its subsidiaries, directors or officers is a party or by which
they, or any of them, are threatened. All legal proceedings
presently pending or threatened against F & M and its subsidiaries
involve routine litigation incidental to the business of F&M or the
subsidiary involved and are either not material in respect to the
amount in controversy or fully covered by insurance.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
(2) Plan of Acquisition, Reorganization, Arrangement,
Liquidation, or Succession - not applicable.
(3) (i) Articles of Incorporation - not applicable.
(ii) By-laws - not applicable.
(4) Instruments Defining the Rights of Security Holders
Including Indentures - not applicable.
(10) Material Contracts.
Incorporated herein by reference to Registrant's Form 10-K
Annual Report for the year ended December 31, 1997, filed
with the Commission on March 19, 1998, under Exhibit 10.
(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, 1997, filed
with the Commission on March 19, 1998 under Exhibit 11.
(15) Letter re Unaudited Interim Financial Information - not
applicable.
(18) Letter re change in accounting principles - not applicable.
(19) Reports furnished to security holders.
Incorporated herein by reference to Registrant's 1998 Notice
of Annual Meeting and Proxy Statement dated March 30, 1998,
filed with the Commission on March 26, 1998.
(22) Published Report Regarding Matters Submitted to Vote of
Security Holders - not applicable.
(23) Consent of Experts and Counsel - not applicable.
(24) Power of Attorney - not applicable.
(27) Financial Data Schedules - Included herein as Exhibit 27.
(99) Additional Exhibits - None.
(b) Reports on Form 8-K.
(1) April 3, 1998, for event of April 1, 1998, under ITEM 5. to
report the consummation of the acquisition of Peoples Bank
of Virginia and merger of that bank in the Registrant's
existing subsidiary, F&M Bank-Richmond.
(2) April 3, 1998, for event of April 3, 1998, under ITEM 5. to
report authorization by the Registrant's Board of Directors
for management to purchase additional shares of the
Registrant's common stock on the open market.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
F & M NATIONAL CORPORATION
/s/ Alfred B. Whitt
Alfred B. Whitt
President, Vice Chairman, and Chief Financial Officer
/s/ Charles E. Curtis
Vice Chairman and Chief Administrative Officer
Date: May 13, 1998