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, 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 August 11, 1998, there were 21,889,790 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)
June 30, December 31,
1998 1997
Assets:
Cash and due from banks 138,635 132,138
Interest-bearing deposits in other banks 12,292 11,843
Securities-held to maturity(market value
June 30, 1998-$427,295;
December 31, 1997, $413,286) 419,269 406,707
Securities-available for sale
(market value) 299,506 254,466
Federal funds sold and securities
purchased under agreements to resell 151,940 113,077
Loans 1,644,953 1,652,415
Unearned income (3,357) (3,661)
Loans (net of unearned income) 1,641,596 1,648,754
Allowance for loan losses (22,048) (21,690)
Net loans 1,619,548 1,627,064
Bank premises and equipment, net 62,344 60,958
Other assets 73,699 71,683
Total assets 2,777,233 2,677,935
Liabilities and Shareholders' Equity:
Liabilities:
Deposits
Non-interest bearing 492,960 437,208
Interest bearing 1,865,979 1,838,173
Total deposits 2,358,939 2,275,381
Federal funds purchased and securities
sold under agreements to repurchase 85,904 81,336
Other short-term borrowings 15,347 14,508
Long-term debt 16,673 17,202
Other liabilities 25,577 24,657
Total liabilities 2,502,440 2,413,084
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (000 OMITTED)
(Unaudited)
June 30, 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 June 30, 1998 - 21,878,248
shares; issued December 31,
1997-21,889,413 shares 43,756 43,779
Capital surplus 77,092 77,827
Retained earnings 150,869 141,015
Accumulated other comprehensive income 3,076 2,230
Total shareholders' equity 274,793 264,851
Total liabilities and
shareholders' equity 2,777,233 2,677,935
See Accompanying Notes to Consolidated Financial Statements
F & M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (000 OMITTED)
(Unaudited) For (Unaudited) For
the Six Months the Three Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
Interest Income:
Interest and fees on loans 73,820 72,090 37,011 36,513
Securities held to maturity:
Taxable interest income 12,067 9,743 6,107 4,939
Interest income exempt from
Federal income taxes 678 788 336 391
Securities available for sale:
Taxable interest income 7,863 8,409 4,131 4,177
Dividend income 441 380 229 187
Total security interest
income 21,049 19,320 10,803 9,694
Interest on federal funds sold
and securities purchased
under agreements to resell 3,362 1,858 1,745 935
Interest on deposits in banks 469 278 279 93
Total interest income 98,700 93,546 49,838 47,235
Interest Expense:
Interest on deposits 38,953 36,980 19,566 18,729
Interest on short-term
borrowings 1,945 1,395 990 697
Interest on long-term debt 490 416 199 214
Total interest expense 41,388 38,791 20,755 19,640
Net interest income 57,312 54,755 29,083 27,595
Provision for loan losses 1,380 1,969 663 873
Net interest income after
provision for loan losses 55,932 52,786 28,420 26,722
Other Income:
Commissions and fees from
fiduciary activities 1,989 1,187 1,331 578
Service charges on deposit
accounts 5,342 5,022 2,533 2,604
Credit card fees 1,907 1,709 1,013 875
Fees for other customer services 1,537 1,382 742 630
Insurance commission 4,277 1,536 2,064 902
Other operating income 2,045 1,252 900 474
Profits on securities available
for sale 192 429 187 335
Investment securities gains, net 1 (2) -- --
Total other income 17,290 12,515 8,770 6,398
F & M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (000 OMITTED)
(Unaudited) For (Unaudited) For
the Six Months the Three Months
Ended June 30, Ended June 30,
1998 1997 1998 1997
Other Expenses:
Salaries and employees'
benefits 25,597 21,859 13,215 11,214
Net occupancy expense of
premises 4,030 3,517 1,921 1,744
Furniture and equipment expense 3,493 3,065 1,791 1,580
Deposit insurance 149 120 81 75
Credit card expense 1,377 1,184 742 636
Other operating expense 11,402 10,753 5,874 5,480
Total other expense 46,048 40,498 23,624 20,729
Income before income taxes 27,174 24,803 13,566 12,391
Income tax expense 9,493 8,456 4,800 4,235
Net income 17,681 16,347 8,766 8,156
Average shares:
Basic 21,886 21,753 21,867 21,731
Assuming dilution 22,108 21,961 22,074 21,942
Earnings per common share:
Basic $0.81 $0.75 $0.40 $0.38
Assuming dilution $0.80 $0.74 $0.40 $0.37
Dividends per share $0.358 $0.36 $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 SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (000
OMITTED)
Accumulated
Other
Compre- Compre-
Common Capital Retained hensive hensive
Stock Surplus Earnings Income Income Total
Balances -
January 1, 1997 43,569 77,678 124,389 416 246,052
Comprehensive
Income:
Net income 16,347 16,347 16,347
Other compre-
hensive income,
net of tax:
Unrealized loss
on available-
for-sale
securities (60) (60)
Less: Reclassi-
fication
adjustment for
gains realized
in net income 427 427
Other compre-
hensive income,
net of tax 367 367
Total compre-
hensive income 16,714
Cash dividends (7,296) (7,296)
Issuance of common
stock-Stock dividend:
Peoples Bank
of VA 141 760 (901) 0
Bank of Alexandria 60 369 (429) 0
Cash for
fractional shares (7) (7)
Acquisition of
common stock (573) (5,780) (6,353)
Issuance of
authorized stock:
Stock options 93 302 395
Stock options
under nonvariable
compensatory plan 732 732
Employee stock
ownership plan 100 950 1,050
Balances -
June 30, 1997 43,390 75,011 132,103 783 251,287
See Accompanying Notes to Consolidated Financial Statements
F&M NATIONAL CORPORATION AND SUBSIDIARIES-CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS' EQUITY FOR THE SIX MONTHS ENDED JUNE 30, 1998 AND 1997 (000
OMITTED)
Accumulated
Other
Compre- Compre-
Common Capital Retained hensive hensive
Stock Surplus Earnings Income Income Total
Balances -
January 1, 1998 43,779 77,827 141,015 2,230 264,851
Comprehensive
Income:
Net income 17,681 17,681 17,681
Other compre-
hensive income,
net of tax:
Unrealized loss
on available-
for-sale
securities 653 653
Less: Reclassi-
fication
adjustment for
gains realized
in net income 193 193
Other compre-
hensive income,
net of tax 846 846
Total compre-
hensive income 18,527
Cash dividends (7,827) (7,827)
Acquisition of
common stock (201) (3,058) (3,259)
Issuance of
authorized stock:
Stock options 108 554 662
Stock options
under nonvariable
compensatory plan 1,206 1,206
Employee stock
ownership plan 70 563 633
Balances -
June 30, 1998 43,756 77,092 150,869 3,076 274,793
See Accompanying Notes to Consolidated Financial Statements
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (000 Omitted)
(Unaudited)
For the Six Months Ended
June 30, June 30,
1998 1997
Cash Flows From Operating Activities
Net income 17,681 16,347
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,176 3,077
Provision for loan losses 1,380 1,969
Profit on securities available for sale (192) (429)
Gain on securities held to maturity (1) 2
Increase in other assets (285) (7,909)
Increase (decrease) in other liabilities (920) (697)
Net cash provided by operating activities 22,679 12,854
Cash Flows From Investing Activities
(Increase) in interest-bearing
deposits in other banks (449) (4,558)
Proceeds from maturities, calls and sales
of available for sale securities 77,536 31,432
Purchase of securities available for sale (121,082) (14,479)
Proceeds from maturities of investment
securities 79,885 33,370
Purchase of investment securities (92,446) (47,224)
(Increase) decrease in federal funds sold
and securities purchased under agreements
to resell (38,863) 24,780
Net (increase) decrease in loans 2,559 (74,965)
Purchases of bank premises and equipment (3,979) (11,009)
Proceeds from sale of OREO 2,012 4,918
Net cash (used in) investing activities (94,827) (57,735)
Cash Flows From Financing Activities
Net increase in noninterest-bearing
and interest-bearing demand deposits
and savings accounts 94,798 10,002
Net increase (decrease) in certificates
of deposit (11,240) 40,149
Dividends paid (7,827) (7,296)
Increase in other short-term borrowings 5,407 9,309
Increase (decrease) in long-term debt (529) 3,840
Acquisition of common stock (3,259) (6,353)
Net proceeds from issuance of common stock 1,295 1,438
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (000 Omitted)
(Unaudited)
For the Six Months Ended
June 30, June 30,
1998 1997
Net cash provided by financing activities 78,645 51,089
Increase in cash and
cash equivalents 6,497 6,208
Cash and Cash Equivalents
Beginning 132,138 131,943
Ending 138,635 138,151
Supplemental Disclosures of Cash Flows
Information
Cash payments for:
Interest paid to depositors 35,875 37,504
Interest paid on other short-term
borrowings 1,945 1,397
37,820 38,901
Income taxes 12,810 8,543
Supplemental Schedule of Noncash Investing
and Financing Activities
Issuance of stock options under
nonvariable compensatory plan:
1998 - 84,680 shares;
1997 - 68,500 shares 1,206 732
Loan balances transferred to foreclosed
properties 3,577 2,884
Market value adjustment available for
sale securities 1,302 565
See Accompanying Notes to Consolidated Financial Statements
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 June 30, 1998, and December 31, 1997, and
the results of operations and changes in cash flows for the six
months ended June 30, 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.
The amounts previously reported for the periods presented have been
retroactively restated to reflect the acquistions of Peoples Bank of
Virginia on April 1, 1998, The Bank of Alexandria on June 1, 1998,
and J. V. Arthur, Inc., on April 22, 1998.
2. The results of operations for the six-month periods ended June
30, 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 June
30, 1998, are as follows:
June 30, 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 391,039 7,788 (384) 398,443
Corporate securities 973 47 - 1,020
Obligations of states and
political subdivisions 27,257 590 (15) 27,832
419,269 8,425 (399) 427,295
F&M's amortized cost and market value of the available for sale
securities as of June 30, 1998, are as follows:
June 30, 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 279,427 2,718 (276) 281,869
Corporate securities 4,363 2,262 -- 6,625
Other 10,817 195 -- 11,012
294,607 5,175 (276) 299,506
/TABLE
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1998 (UNAUDITED) AND DECEMBER 31, 1997
4. F&M's loan portfolio is composed of the following:
June 30, December 31,
1998 1997
(000 Omitted)
Commercial, financial and agricultural 282,662 275,600
Real estate-construction 97,453 95,310
Real estate-mortgage 1,081,239 1,100,923
Installment loans to individuals 183,599 180,582
Total loans 1,644,953 1,652,415
Less: Unearned income (3,357) (3,661)
Allowance for loan losses (22,048) (21,690)
Loans, net 1,619,548 1,627,064
F&M had $18,366,000 in non-accrual loans at June 30, 1998.
5. Reserve for Loan Losses:
June 30, December 31,
1998 1997
(000 Omitted)
Balance at January 1 21,690 19,077
Provision charged to operating expense 1,380 5,802
Recoveries added to the reserve 233 1,126
Loan losses charged to the reserve (1,255) (4,315)
Balance at end of period 22,048 21,690
6. Earnings and dividends paid per share:
June 30, 1998 June 30, 1997
Per Per
Share Share
Shares Amount Shares Amount
Basic EPS 21,886,080 0.81 21,731,379 0.75
Effective of
dilutive securities:
Stock options 221,772 210,144
Diluted EPS 21,107,852 0.80 21,941,523 0.74
/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. Peoples Bank of Virginia ("PBVA") and the Corporation 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 and the merger
became effective 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. 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.
9. The Bank of Alexandria ("BOA") and the Corporation 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 was consummated and became effective on
June 1, 1998. Under the terms of the Merger Agreement, BOA was merged
with F&M Bank-Northern Virginia and each share of common stock of BOA
outstanding immediately prior to consummation of the Merger was
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. As
of December 31, 1997, BOA had total assets of $75.9 million, total
loans of $58.2 million, total deposits of $67.6 million, and total
shareholders' equity of $7.9 million.
10. On April 22, 1998, the Corporation and J.V. Arthur, Inc.,
("JVA") announced an agreement of affiliation of J.V. Arthur, Inc.
with F&M Bank-Winchester, F&M's lead bank. JVA is an insurance agency
located in Winchester, Virginia, which offers a full line of
insurance products. The affiliation was effective on April 30, 1998.
11. F&M, in the normal course of business, continually replaces and
upgrades computer software and equipment in order to provide services
demanded by our customers. Normal replacement and upgrade of computer
software and equipment is not considered an expenditure for Year
2000, but the normal conduct of business. Any expenditure that must
be made to eliminate Year 2000 problems are addressed as unusual. It
has been estimated that the cost of addressing Year 2000 will be 1.6%
of earnings or 0.006% of assets which is immaterial when considering
the size of the Corporation. Year 2000 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 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 June 30, 1998, and the
related consolidated statements of income, changes in shareholders'
equity and cash flows for the six-month periods ended June 30, 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
August 11, 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 June 30, 1998, amounted to $2.777 billion, up $251.0
million or 9.9% from $2.526 billion at June 30, 1997. Total assets at
December 31, 1997, were $2.678 billion. For the first six months of
1998, total assets averaged $2.715 billion, 8.6% above the first six
months of 1997 average of $2.499 billion.
Total loans, net of unearned income, amounted to $1.642 billion at
June 30, 1998, an increase of $43.6 million or 2.7% from $1.598
billion at June 30, 1997. At December 31, 1997, total loans, net,
were $1.649 billion. Total loans (net) as a percent of total assets
were 59.1% at June 30, 1998, as compared to 63.3% at June 30, 1997,
and 62.1% at December 31, 1997. Net loan volume for the first six
months 1998 decreased $7.2 million as compared to an increase of
$70.1 million for the first six months 1997. Loan volume decreased as
a result of increased competition for loans.
On June 30, 1998, the securities portfolio totalled $718.8 million,
which was $91.4 million or 14.6% higher than the year before and
$57.6 million or 8.7% higher than at December 31, 1997. In the first
six 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 $152.0 million on June 30, 1998, $38.9
million or 34.4% higher than $113.1 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 June 30, 1998, was
$299.5 million as compared to $254.5 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 $3.1 million at June 30, 1998, and an increase from
year end 1997 of $846 thousand.
Total deposits increased $205.9 million or 9.6% to $2.359 billion at
June 30, 1998, compared to one year earlier. At December 31, 1997,
total deposits were $2.275 billion. F&M offers attractive, yet
competitive, rates that have contributed to the increase in deposits.
Long-term debt was $16.7 million at June 30, 1998, as compared to
$15.4 million at June 30, 1997, and $17.2 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 six months of 1998 amounted to $17.7
million, increasing $1.3 million or 8.2% from $16.3 million for the
first six months of 1997. The yield on interest-earning assets was
8.12% for the first six months 1998 as compared to 8.28% for the
first six months 1997, and the yield on interest-bearing deposits was
4.25% for the first six months 1998 as compared to 4.19% for the
first six months 1997.
Return on average assets was 1.31% for the first six months 1998,
compared with 1.33% for the same period in 1997 and 1.29% for the
year 1997. F&M's return on average equity was 13.07% for the first
six months 1998 and 13.15% for the first six months 1997 and 12.95%
for the year ended 1997.
Net interest income totaled $57.3 million for the first six months
1998, a $2.6 million or 4.7% increase over F&M's performance for the
first six months 1997. The net interest margin for the first six
months 1998 was 4.68%, down 23 basis points from 4.91% for the first
six months 1997. The decrease in net interest margin is the effect of
lower yields related to loans and investment securities.
Total nonperforming assets, which consist of nonaccrual loans,
restructured loans, and foreclosed properties were $33.5 million at
June 30, 1998, an decrease of $1.7 million or 4.8% from $35.2 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 June
30, 1998, were $18.9 million, or 1.1% of total loans, compared to
$20.0 million, or 1.12% 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
June 30, 1998, impaired loans totaled $15.8 million upon which an
allowance of $5.5 million has been provided, which is included in the
total loan portfolio allowance for loan losses. Interest income
recognized on impaired loans as of June 30, 1998, was $106 thousand.
The average balance of impaired loans for the first six months 1998
was $15.1 million. Loans past due 90 days or more and still accruing
interest because they were well secured and in the process of
collection were $2.9 million at December 31, 1997, and $3.0 million
at June 30, 1998.
Foreclosed properties consists of 33 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, 1998, foreclosed properties were $14.8
million as compared to $15.2 million at December 31, 1997.
The allowance for loan losses has increased to $22.0 million at June
30, 1998, as compared to $21.7 million at year end 1997. The
allowance for loan losses increased $358 thousand in the first six
months 1998 as compared to $122 thousand for the first six 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 1.34% at June 30, 1998, as compared to
1.20% at June 30, 1997, and 1.32% at year end 1997.
Total noninterest income increased $4.8 million or 38.2% from $12.5
million for the first six months 1997 to $17.3 million for the first
six months 1998. For the first six months 1998, gains on securities
available for sale were $192 thousand or 1.1% of total noninterest
income, whereas, for the first six months of 1997 securities gains
were $429 thousand or 3.4% 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 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 $1.9 million for the first six months 1998, up
$198 thousand or 11.6% over the first six months 1997 as a result of
marketing efforts to attract new credit card customers. Insurance
commission income for the first six months 1998 was $4.3 million, up
$2.7 million from the first six months 1997 primarily as a result of
the purchase of Shomo & Lineweaver Insurance Agency ("Shomo") and
J.V. Arthur, Inc. ("JVA"), whose source of income is derived from
selling insurance policies to customers. Other operating income
increased $793 thousand, up from $1.3 million for the first six
months 1997 to $2.0 million for the first six 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 $5.6 million or 13.7% from $40.5
million for the first six months 1997 to $46.5 million for the first
six months 1998. Salary expense increased $3.7 million or 17.1% from
$21.9 million for the first six months 1997 to $25.6 million for the
first six months 1998 as a result of increases in salaries and
benefits and the purchase of Shomo and JVA. The cost of net occupancy
expense has increased $513 thousand or 14.6% from $3.5 million for
the first six months 1997 to $4.0 million for the first six months
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 $428 thousand
or 14.0% from $3.1 million for the first six months 1997 to $3.5
million for the first six 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 $149 thousand for the
first six months 1998, an increase of $29 thousand from $120 thousand
for the same period 1997 which is attributable to growth in deposits.
Credit card expense was up $193 thousand or 16.3% from $1.2 million
for the first six months 1997 to $1.4 million for the first six
months 1998 as a result of direct marketing and offering new
products. Other operating expense increased $649 thousand from $10.8
million for the first six months of 1997 to $11.4 million for the
first six months 1998.
Income taxes increased $1.0 million or 12.3% from $8.5 million for
the first six months 1997 to $9.5 million for the first six months
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 $1.0 million for
the first six 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 $3.2 million,
or 0.20% of average loans.
As of June 30, 1998, loans on a non-accrual basis amounted to $18.4
million, or 1.12% of total loans, net of unearned discount, up from
$8.9 million for the same period 1997. Loans 90 days or more past due
and still accruing totaled $3.0 million, or 0.18% 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 customer for
$7.1 million. F&M has provided $3.0 million in the allowance for loan
losses to adequately provide for any possible losses attributable to
this customer. 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, 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 $3.0 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 June 30, 1998 was $261.1
million, or 15.5% of risk-weighted assets, for Tier I capital and
$282.2 million, or 16.7% for total risk based capital.
Tier I capital consists primarily of common shareholders' equity,
while total risk-based capital adds the allowance for loan losses to
Tier I. Risk-weighted assets are determined by assigning various
levels of risk to different categories of assets and off-balance
sheet activities. Under current risk-based capital standards, all
banks are required to have Tier I capital of at least 4% and total
capital of 8%.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pensions and Other Post Retirement Benefits." This
statement revises employers' disclosures about pension and other post
retirement benefits plans. It does not change the measurement or
recognition of those plans. This Statement standardizes the
disclosure requirements for pensions and other post retirement
benefits to the extent practicable, requires additional information
on changes in the benefit obligations and fair values of plan assets
that will facilitate financial analysis, and eliminates certain
disclosures. Restatement of disclosures for earlier periods is
required. This Statement is effective for the Corporation's financial
statements for the year ended December 31, 1998.
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities." This statement
requires companies to record derivatives on the balance sheet as
assets and liabilities, measured at fair value. Gains or losses
resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it
qualifies for hedge accounting. This Statement is not expected to
have a material impact on the Corporation's financial statements.
This Statement is effective for fiscal years beginning after June 15,
1999, with earlier adoption encouraged. The Corporation will adopt
this accounting standard as required by January 1, 2000.
In March 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position ("SOP") 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal
Use." This SOP provides guidance on accounting for the costs of
computer software developed or obtained for internal use. This SOP
requires that entities capitalize certain internal-use software costs
once certain criteria are met. This Statement is not expected to have
a material impact on the Corporation's financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities", which requires the costs of start-up activities
and organization costs to be expensed as incurred. This Statement is
effective for the fiscal year 1998 financial statements. This
Statement is not expected to have a material impact on the
Corporation's financial statements.
Effective January 1, 1998, the Corporation adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and
display of comprehensive income and its components (revenues,
expenses, gains, and losses) in a full set of general purpose
financial statements. Financial statements for prior periods have
been restated as required.
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) June 1, 1998, for event of June 1, 1998, under ITEM 5. to
report the consummation of the acquisition of The Bank of
Alexandria merger of that bank in the Registrant's existing
subsidiary, F&M Bank-Northern Virginia.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
F & M NATIONAL CORPORATION
/s/ Alfred B. Whitt
Alfred B. Whitt
President, Vice Chairman, and Chief Financial Officer
/s/ Charles E. Curtis
Vice Chairman and Chief Administrative Officer
Date: August 13, 1998