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, 1999 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 7, 1999, there were 22,426,234 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,
1999 1998
Assets:
Cash and due from banks 124,126 164,207
Interest-bearing deposits in other banks 38,681 38,820
Securities-held to maturity(market value
March 31, 1999-$384,390;
December 31, 1998-$408,399) 382,039 402,770
Securities-available for sale
(market value) 385,986 386,150
Federal funds sold and securities
purchased under agreements to resell 101,985 113,305
Loans 1,760,252 1,730,114
Unearned income (2,091) (2,794)
Loans (net of unearned income) 1,758,161 1,727,320
Allowance for loan losses (23,054) (22,646)
Net loans 1,735,107 1,704,674
Bank premises and equipment, net 69,791 67,330
Other assets 78,049 72,678
Total assets 2,915,764 2,949,934
Liabilities and Shareholders' Equity:
Liabilities:
Deposits
Non-interest bearing 513,178 552,916
Interest bearing 1,938,758 1,935,501
Total deposits 2,451,936 2,488,417
Federal funds purchased and securities
sold under agreements to repurchase 94,664 103,264
Other short-term borrowings 18,282 17,312
Long-term debt 23,787 21,058
Other liabilities 30,251 24,864
Total liabilities 2,618,920 2,654,915
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (000 OMITTED)
(Unaudited)
March 31, December 31,
1999 1998
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, 1999-22,497,022
shares; issued December 31,
1998-22,510,582 shares 44,994 45,021
Capital surplus 82,624 82,723
Retained earnings 167,858 161,280
Accumulated other comprehensive income 1,368 5,995
Total shareholders' equity 296,844 295,019
Total liabilities and
shareholders' equity 2,915,764 2,949,934
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
Ended March 31,
1999 1998
Interest Income:
Interest and fees on loans 37,075 37,574
Securities held to maturity:
Taxable interest income 5,655 6,069
Interest income exempt from
Federal income taxes 281 331
Securities available for sale:
Taxable interest income 5,358 3,869
Interest income exempt from
Federal income taxes 14 13
Dividend income 230 215
Total security interest
income 11,538 10,497
Interest on federal funds sold
and securities purchased
under agreements to resell 1,080 1,643
Interest on deposits in banks 281 190
Total interest income 49,974 49,904
Interest Expense:
Interest on deposits 18,299 19,786
Interest on short-term
borrowings 845 962
Interest on long-term debt 346 291
Total interest expense 19,490 21,039
Net interest income 30,484 28,865
Provision for loan losses 920 762
Net interest income after
provision for loan losses 29,564 28,103
Other Income:
Commissions and fees from
fiduciary activities 730 658
Service charges on deposit
accounts 3,523 2,897
Credit card fees 1,043 895
Fees for other customer services 1,601 803
Insurance commission 2,306 2,213
Other operating income 1,006 1,148
Profits on securities available
for sale 3,105 15
Investment securities gains, net -- --
Total other income 13,314 8,629
F & M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (000 OMITTED)
(Unaudited)
For the Three Months Ended
Ended March 31,
1999 1998
Other Expenses:
Salaries and employees'
benefits 14,761 12,634
Net occupancy expense of
premises 2,227 2,160
Furniture and equipment expense 1,879 1,746
Deposit insurance 76 69
Credit card expense 767 635
Other operating expense 6,181 5,711
Total other expense 25,891 22,955
Income before income taxes 16,987 13,777
Income tax expense 6,027 4,745
Net income 10,960 9,032
Average shares:
Basic 22,470 22,531
Assuming dilution 22,675 22,792
Earnings per common share:
Basic $0.49 $0.40
Assuming dilution $0.48 $0.40
Dividends per share $0.195 $0.185
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, 1999 AND 1998
(000 OMITTED)
Accumulated
Other
Compre- Compre-
Common Capital Retained hensive hensive
Stock Surplus Earnings Income Income Total
Balances -
January 1, 1998 45,030 84,208 141,173 2,240 272,651
Comprehensive
Income:
Net income 9,032 9,032 9,032
Other comprehensive
income net of tax:
Unrealized gain on
available-for-sale
securities 93 93
Reclassification
adjustment for
gains realized
in net income (10) (10)
Other comprehensive
income, net of tax 83 83
Total compre-
hensive income 9,115
Cash dividends (3,779) (3,779)
Issuance of authorized
stock-benefit plans 116 1,810 1,926
Balances -
March 31, 1998 45,146 86,018 146,426 2,323 279,913
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, 1999 AND 1998
(000 OMITTED)
Accumulated
Other
Compre- Compre-
Common Capital Retained hensive hensive
Stock Surplus Earnings Income Income Total
Balances -
January 1, 1999 45,021 82,723 161,280 5,995 295,019
Comprehensive
Income:
Net income 10,960 10,960 10,960
Other comprehensive
income net of tax:
Unrealized losses
on available-
for-sale
securities (2,609) (2,609)
Reclassification
adjustment for
gains realized
in net income (2,108) (2,018)
Other compre-
hensive income,
net of tax (4,627) (4,627)
Total compre-
hensive income 6,333
Cash dividends (4,382) (4,382)
Acquisition of
common stock (252) (3,330) (3,582)
Issuance of
stock-benefit plans 225 3,231 3,456
Balances -
March 31, 1999 44,994 82,624 167,858 1,368 296,844
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,
1999 1998
Cash Flows From Operating Activities
Net income 10,960 9,032
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 1,763 1,625
Provision for loan losses 920 742
Profit on securities available for sale (3,105) (15)
Increase in other assets (500) (1,413)
Increase in other liabilities 5,387 (4,175)
Net cash provided by operating activities 15,425 14,146
Cash Flows From Investing Activities
(Increase) decrease in interest-bearing
deposits in other banks 139 (5,772)
Proceeds from maturities, calls and sales
of available for sale securities 82,001 27,088
Purchase of securities available for sale (85,850) (51,031)
Proceeds from maturities of investment
securities 31,038 42,639
Purchase of investment securities (10,307) (48,538)
(Increase) decrease in federal funds sold
and securities purchased under agreements
to resell 11,320 (34,241)
Net (increase) decrease in loans (33,035) 19,880
Purchases of bank premises and equipment (3,925) (2,138)
Proceeds from sale of OREO 6 1,934
Net cash (used in) investing activities (8,613) (50,179)
Cash Flows From Financing Activities
Net increase (decrease) in noninterest-bearing
and interest-bearing demand deposits
and savings accounts (32,799) 47,456
Net increase (decrease) in certificates
of deposit (3,682) 5,866
Dividends paid (4,382) (3,779)
Increase in other short-term borrowings (7,630) (11,136)
Increase in long-term debt 2,729 1,860
Acquisition of common stock (3,582) --
Net proceeds from issuance of common stock 2,453 752
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (000 Omitted)
(Unaudited)
For the Three Months Ended
March 31, March 31,
1999 1998
Net cash provided by financing activities (46,893) 41,019
Increase in cash and
cash equivalents (40,081) 4,986
Cash and Cash Equivalents
Beginning 164,207 133,995
Ending 124,126 138,981
Supplemental Disclosures of Cash Flows
Information
Cash payments for:
Interest paid to depositors 18,299 19,786
Interest paid on other short-term
borrowings 845 962
19,144 20,748
Income taxes 6,120 4,131
Supplemental Schedule of Noncash Investing
and Financing Activities
Issuance of stock options under
nonvariable compensatory plan:
1999 - 67,000 shares;
1998 - 84,680 shares 1,003 1,174
Loan balances transferred to foreclosed
properties 1,682 782
Market value adjustment available for
sale securities 7,118 (128)
See Accompanying Notes to Consolidated Financial Statements
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
MARCH 31, 1999 (UNAUDITED) AND DECEMBER 31, 1998
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, 1999, and December 31, 1998, and
the results of operations and changes in cash flows for the three
months ended March 31, 1999 and 1998. 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, 1998.
The amounts previously reported for the periods presented have been
retroactively restated to reflect the acquisitions of Peoples Bank of
Virginia on April 1, 1998, The Bank of Alexandria on June 1, 1998,
J.V. Arthur, Inc., on April 22, 1998, and Security Bank Corporation
on March 22, 1999.
2. The results of operations for the three-month periods ended March
31, 1999 and 1998, 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, 1999, are as follows:
March 31, 1999 (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 357,353 3,750 (2,012) 359,091
Obligations of states and
political subdivisions 23,171 624 (46) 23,749
Corporate securities 1,515 35 0 1,550
382,039 4,409 (2,058) 384,390
F&M's amortized cost and market value of the available for sale
securities as of March 31, 1999, are as follows:
March 31, 1999 (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 366,445 3,221 (1,960) 367,706
Obligations of states and
political subdivisions 1,186 0 (4) 1,182
Corporate securities 4,425 574 0 4,999
Other 11,718 381 0 12,099
383,774 4,176 (1,964) 385,986
4. F&M's loan portfolio is composed of the following:
March 31, December 31,
1999 1998
(000 Omitted)
Loans Held to Maturity (HTM):
Commercial, financial and agricultural 289,502 288,020
Real estate-construction 100,511 104,043
Real estate-mortgage 1,145,027 1,125,741
Consumer loans to individuals 225,212 212,310
Total loans 1,760,252 1,730,114
Less: Unearned income (2,091) (2,794)
Allowance for loan losses (23,054) (22,646)
Loans, net 1,735,107 1,704,674
F&M had $11,873,000 in loans in a non-accrual category at March 31,
1999.
5. Reserve for Loan Losses:
March 31, December 31,
1999 1998
(000 Omitted)
Balance at January 1 22,647 22,115
Provision charged to operating expense 920 5,541
Recoveries added to the reserve 206 779
Loan losses charged to the reserve (719) (5,789)
Balance at end of period 23,054 22,646
6. Earnings and dividends paid per share:
March 31, 1999 March 31, 1997
Per Per
Share Share
Shares Amount Shares Amount
Basic EPS 22,470,000 0.49 22,531,000 0.40
Effective of
dilutive securities:
Stock options 205,000 261,000
Diluted EPS 22,675,000 0.48 22,792,000 0.40
7. 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 was 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.
8. The Bank of Alexandria ("BOA") and the Corporation entered into a
Definitive Agreement and Plan of Reorganization, dated as of December
12, 1998, 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.
9. On April 22, 1998, J. V. Arthur, Inc. ("JVA") and the Corporation
announced an agreement of affiliation. JVA is an insurance agency
located in Winchester, Virginia, which offers a full line of
insurance products. The affiliation was effective April 30, 1998.
10. On January 7, 1999, Shomo & Lineweaver, Inc. and J.V. Arthur,
Inc., ("JVA") merged to form F&M Insurance Agency, Inc., a wholly-
owned subsidiary of F&M Bank-Winchester.
11. Security Bank ("Security") and the Corporation entered into an
agreement, dated as of November 10, 1998, for the affiliation of
Security Bank Corporation, Manassas, Virginia, with the Corporation.
This transaction was consummated and became effective on March 22,
1999. Under the terms of the agreement, Security Bank (Security's
banking subsidiary) was merged with and into F&M Bank-Northern
Virginia (a bank subsidiary of F&M). Each share of Security common
stock outstanding immediately prior to consummation of the Merger was
exchanged, in a tax-free exchange, for 0.653 shares of common stock
of F&M, with cash being paid in lieu of issuing fractional shares.
Security also granted F&M an option, exercisable under certain
circumstances, to acquire 191,300 shares of Security's common stock
(subject to adjustment).
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, 1999, and the
related consolidated statements of income, changes in shareholders'
equity and cash flows for the three-month periods ended March 31,
1999 and 1998. 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, 1998, 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
27, 1999, 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, 1998 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 12, 1999
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, 1999, were $2.916 billion, up $126.0
million or 4.5% from $2.790 billion at March 31, 1998. Total assets
at December 31, 1998, were $2.950 billion. For the first three months
of 1998, total assets averaged $2.874 billion, 4.6% above the first
three months of 1998 average of $2.748 billion.
Total loans, net of unearned income, amounted to $1.758 billion at
March 31, 1999, an increase of $98.3 million or 5.9% from $1.660
billion at March 31, 1998. At December 31, 1998, total loans, net,
were $1.727 billion. Total loans (net) as a percent of total assets
were 60.3% at March 31, 1999, as compared to 59.5% at March 31, 1998,
and 58.6% at December 31, 1998. Net loan volume for the first three
months of 1999 increased $30.8 million as compared to an decrease of
$21.2 million for the first three months of 1998. Loan volume
increased as a result of a robust, thriving economy in all markets
served by F&M.
On March 31, 1999, the securities portfolio totalled $768.0 million,
which was $59.1 million or 8.3% higher than the year before and $20.9
million or 2.7% lower than at December 31, 1998. In the first three
months of 1999, as funds became available, they were primarily
utilized for funding loans rather than investing in securities. Funds
that were invested in the securities portfolio were invested in 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 $102.0 million on March 31, 1999,
$11.3 million or 10.0% lower than $113.3 million outstanding at
December 31, 1998. Federal funds sold are one-day sales of funds to
large regional correspondent banks. It is anticipated that as
interest rates improve, these funds will be invested in higher
yielding financial instruments.
The market value of available for sale ("AFS") securities according
to FASB 115 at March 31, 1999, was $386.0 million as compared to
$289.4 million at March 31, 1998. F&M has 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
reflected in Stockholders' Equity was $1.4 million at March 31, 1999,
a decrease from the first quarter 1998 of $2.3 million.
Total deposits increased $75.6 million or 3.2% to $2.452 billion at
March 31, 1999, compared to one year earlier. At December 31, 1998,
total deposits were $2.488 billion. Noninterest-bearing deposits
declined $39.7 million during the first quarter 1999 as a result of
the cyclical nature of the real estate market and withdrawals by
customers for other investment needs. Interest-bearing deposits
increased $3.3 million in the first quarter 1999. F&M offers
attractive, yet competitive, rates that are set to maintain a fair
net interest margin.
Long-term debt was $23.8 million at March 31, 1999, as compared to
$19.0 million at March 31, 1998, and $21.1 million at year end 1998.
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 1999 amounted to $11.0
million, increasing $2.0 million or 21.4% from $9.0 million for the
first three months of 1998. The yield on interest-earning assets was
7.74% for the first three months of 1999 as compared to 8.04% for the
first three months of 1998, and the yield on interest-bearing
deposits was 3.85% for the first three months of 1999 as compared to
4.14% for the first three months of 1998.
Return on average assets was 1.55% for the first three months of
1999, compared with 1.31% for the same period in 1998 and 1.29% for
the year 1998. F&M's return on average equity was 14.97% for the
first three months of 1999, 12.95% for the first three months of
1998, and 12.73% for the year ended 1998.
Net interest income totaled $30.5 million for the first three months
of 1999, a $1.6 million or 5.6% increase over F&M's performance for
the first three months of 1998. The net interest margin on a Federal
tax equivalent basis for the first three months of 1999 was 4.70%, up
3 basis points from 4.67% for the first three months of 1998. The
increase in net interest margin is the effect of lower interest costs
related to deposits.
Total nonperforming assets, which consist of nonaccrual loans,
restructured loans, and foreclosed properties were $28.5 million at
March 31, 1999, a decrease of $100 thousand or 0.3% from $28.6
million at December 31, 1998. 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, 1999, and December 31, 1998, were $12.1 million, or 0.7% of
total loans. Included in nonperforming loans are $7.6 million in
loans considered impaired where management is concerned about the
ability of the customer to repay the loan and related interest at the
original contractual terms. At March 31, 1999, impaired loans totaled
$14.9 million upon which an allowance of $3.3 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, 1999, was $148 thousand. The average balance of impaired loans
for the first three months of 1999 was $14.9 million. Loans past due
90 days or more and still accruing interest because they were well
secured and in the process of collection were $3.6 million at March
31, 1999, and $2.0 million at December 31, 1998.
Foreclosed properties consists of 35 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, 1999, foreclosed properties were
$16.4 million as compared to $16.0 million at December 31, 1998.
The allowance for loan losses has increased to $23.1 million at March
31, 1999, as compared to $22.6 million at year end 1998. The
allowance for loan losses increased $408 thousand in the first three
months of 1999 as compared to $201 thousand for the first three
months of 1998. The amount provided for loan losses in 1999 and 1998
is an amount, in management's judgment, sufficient for the risk
associated with the loan portfolio. The ratio of allowance for loan
losses to total loans was 1.31% at March 31, 1999, as compared to
1.34% at March 31, 1998, and 1.31% at year-end 1998.
Total noninterest income increased $4.7 million or 54.3% from $8.6
million for the first three months of 1998 to $13.3 million for the
first three months of 1999. For the first three months of 1999, gains
realized on securities available for sale were $3.1 million or 23.3%
of total noninterest income, whereas, for the first three months of
1998 securities gains were $15 thousand or 0.2% 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
$1.0 million for the first three months of 1999, up $148 thousand or
16.5% over the first three months of 1998 as a result of marketing
efforts to attract new credit card customers.
Insurance commission income for the first three months of 1999 was
$2.3 million, up $93 thousand from the first three months of 1998
primarily as a result of increased business activity of F&M Insurance
Agency, whose primary sources of revenue are derived from selling
insurance policies to customers. Revenues from fees for other
customer services increased $798 thousand or 99.4% from $803 thousand
for the first three months of 1998 to $1.6 million for the first
three months of 1999 primarily as a result of fees charged customers
in the secondary market. Other operating income decreased $142
thousand, down from $1.1 million for the first three months of 1998
to $1.0 million for the first three months of 1999. The decline in
other operating income is a seasonal decline in other fees and
charges and is not seen as a trend that will continue.
Total noninterest expenses increased $2.9 million or 12.8% from $23.0
million for the first three months of 1998 to $25.9 million for the
first three months of 1999. Salary expense increased $2.1 million or
16.8% from $12.6 million for the first three months of 1998 to $14.8
million for the first three months of 1999 as a result of increases
in salaries and benefits. The cost of net occupancy expense has
increased $67 thousand or 3.1% to $2.2 million for the first three
months of 1999, as a result of acquiring new branches and remodeling
older branches. Furniture and equipment expense has increased $133
thousand or 7.6% from $1.7 million for the first three months of 1998
to $1.9 million for the first three months of 1999, which reflects an
increase in the acquisition of new furniture, equipment, and computer
software. Inherent in furniture and equipment expenses, F&M is
testing, replacing, and upgrading computer equipment and software in
order to be ready for Year 2000. Deposit insurance was $76 thousand
for the first three months of 1999. Credit card expense was up $132
thousand or 20.8% from $635 thousand for the first three months of
1998 to $767 thousand for the first three months of 1999 as a result
of direct marketing and offering new products. Other operating
expense increased $470 thousand from $5.7 million for the first three
months of 1998 to $6.2 million for the first three months of 1999.
Income taxes increased $1.3 million or 27.0% from $4.7 million for
the first three months of 1998 to $6.0 million for the first three
months of 1999. 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 $512 thousand for
the first three months of 1999, representing a ratio of net charge
offs to total average loans, net of unearned income of 0.12%,
annualized. This compares to 1998 twelve-month net charge-offs of
$5.0 million, or 0.30% of average loans.
As of March 31, 1999, loans on non-accrual basis amounted to $11.9
million, or 0.7% of total loans, net of unearned discount, down from
$19.1 million for the same period 1998. Loans 90 days or more past
due and still accruing totaled $3.6 million, or 0.20% 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 March 31, 1999, the potential problem loans were $5.8 million and
included four lending relationships with principal balance in excess
of $500,000. Those four lending relationships had an aggregate
principal balance outstanding of $3.8 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, 1999 was $285.7
million, or 15.6% of risk-weighted assets, for Tier I capital and
$309.0 million, or 16.8% 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 1997, the FASB issued FASB No. 131, "Disclosures about Segments of
an Enterprise and Related Information." FASB No. 131 establishes
standards for the way that public enterprises report information
about operating segments in annual financial statements and requires
that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. This statement became
effective in 1998. The Corporation does not have any segments that
meet the disclosure requirements under this statement.
In October 1998, the FASB issued Statement No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise, an
amendment of FASB Statement No. 65." FASB Statement No. 65, as
amended, requires that, after securitization of a mortgage loan held
for sale, an entity engaged in mortgage banking activities classify
the resulting mortgage-backed security as a trading security. This
Statement further amends Statement No. 65 to require that after the
securitization of mortgage loans held for sale, an entity engaged in
mortgage banking activities classify the resulting mortgage-backed
securities or other retained interests based on its ability and
intent to sell or hold those investments. This Statement conforms the
subsequent accounting for securities retained after the
securitization of mortgage loans by a mortgage banking enterprise
with the subsequent accounting for securities retained after the
securitization of other types of assets by a non-mortgage banking
enterprise. This Statement is effective beginning in 1999.
YEAR 2000 ("Y2K")
THE PROBLEM
The impact the century date change will have on date-sensitive
computer programs worldwide is one of the biggest challenges ever
faced by the business world. On older computers, memory and storage
space were limited and expensive. In most cases, only the last two
digits of the year (99) were used, with the century (19) being
implied. At the turn of the century, some computers may recognize the
year "00" as 1900 instead of 2000, causing problems ranging from
minor inaccuracies to systems failures. F&M is committed to achieving
Year 2000 readiness well in advance of the millennium change. It is
F&M's goal to continue to deliver uninterrupted and unparalleled
service into the 21st century and beyond.
In 1998, F&M has estimated that costs of addressing Year 2000 issues
was 1.6% of 1998 earnings (or 0.02% of assets), which was immaterial
when considering the size of the Corporation. Year 2000 costs in 1999
and 2000 are also expected to be immaterial. The projections of total
costs of F&M's Year 2000 project and the expected completion dates
are based on F&M's best estimates, which are necessarily based in
part on assumptions of future events including the continued
availability of adequate resources and completion of third party
modification plans. There can be no guarantee that these estimates
will be achieved; actual results could differ from the Corporation's
current estimates. Specific risk factors that might cause material
differences include, but are not limited to, the availability and
cost of personnel with adequate programming skills and the ability to
locate and correct all relevant computer codes. The inability to
control the actions and plans of vendors and suppliers, customers,
government entities, and other third parties with respect to Year
2000 issues are associated risks.
F&M has long recognized that the Year 2000 issue is a multifaceted
one. Corporate management and technical teams have been working
steadily on all related aspects of business that could be affected.
F&M has been scrutinized by regulatory authorities to ensure that it
is proceeding with a prudent plan of action for Year 2000 readiness
and are keeping its customers informed.
YEAR 2000 PROJECT PHASES
In 1997, F&M and its affiliates began to develop a comprehensive plan
to ensure that the Corporation would be ready for the millennium
change. This plan encompassed five phases:
Phase I - Organizational Awareness
The Year 2000 Task Force will make certain
that the strategic importance of Year 2000 as a business objective is
understood by the Board of Directors, senior management, officers,
and employees of all affiliates.
Phase II - Assessing Actions and Developing Detailed Plans
The Year 2000 Task Force will create a
detailed inventory covering centralized and decentralized hardware,
software, and networks, as well as equipment with embedded computer
chips and logic. The inventory can include items such as HVAC
systems, vaults, security equipment, and elevators.
Phase III - Renovating Systems, Applications, and Equipment
During this phase, the necessary upgrade of
operating system applications, hardware, and equipment take place. In
addition, contingency plans are developed identifying alternate
approaches if renovations of current software, hardware and equipment
lag behind or fail after January 1, 2000.
Phase IV - Validating the Renovations through Testing
In this phase, F&M will develop and coordinate detailed test schedules with
correspondents, vendors, and customers to ensure Year 2000 preparedness.
This phase is critical and encompasses both corrected applications and
those applications already determined to be compliant.
Phase V - Implementation
Implementation requires careful planning to
make sure that interrelated applications are coordinated as to when
they go into production. This phase also includes monitoring of
systems throughout 1999 and into 2000 to ensure date functions and
interdependencies work properly.
"MISSION CRITICAL" SYSTEM TESTING
F&M's "mission critical" system was developed from initial design and
tested in 1998 as Year 2000 ready by its vendor, Kirchman
Corporation. In addition, the Kirchman Corporation received Year 2000
Certification from the ITAA (Information Technology Association of
America) during 1998. Foresight and commitment to serving F&M's
customers has, in many ways, kept F&M one step ahead of the Year 2000
issue.
F&M made great strides on this project during 1998 and are continuing
to do so in 1999. Test plans have been completed, testing strategies
have been developed, and a second phase of testing has begun. F&M has
installed its own separate certification test environment to ensure
that F&M will have the ability to roll into 2000 without impact.
F&M is running multiple compliance tests to affirm that all
applications interface properly under future-date simulated
conditions. F&M expects to complete Phase I through Phase IV testing
in the second quarter of 1999.
F&M places a high priority on the service provided to customers, and
is working diligently to ensure the continued operation of essential
business functions. The Corporation is on schedule and confident that
F&M will make a smooth transition into the Year 2000.
CONTINGENCY PLAN
Simultaneous to the testing of its mission critical systems, F&M will
prepare alternate solutions through a business resumption contingency
plan to mitigate potential risks on January 1, 2000. This contingency
plan will be developed for all core business functions and their
supporting information technology systems and will include trigger
dates for implementation of alternative solutions. Core business
risks will be prioritized based upon greater risk posed to the
institution. The contingency plans will identify financial and human
resources necessary for their execution. In addition, it will contain
a business risk assessment that identifies potential disruptions on
the bank's operations, the minimum acceptable level of services, the
strategies and resources available to restore system or business
operations, and the processes and equipment needed for the
institution to function at an adequate level.
The risk of failure is not limited to F&M's internal information
system. The institution depends on data provided by its business
partners, correspondent banks, Federal Reserve Bank, and other third
parties. F&M also depends on vendors from which telecommunications,
software, and other services are provided. Finally, F&M depends on
services provided by the public infrastructure including power,
water, transportation, and voice and data telecommunications. F&M's
contingency plans address these concerns and provided for alternate
solutions should Year 2000-related infrastructure problems develop,
ensuring that our institution can operate at an acceptable level.
WORST-CASE YEAR 2000 SCENARIOS
Until the Year 2000 event actually occurs and for a period of time
thereafter, there can be no assurance that there will be no problems
related to Year 2000. The Year 2000 technology challenge is an
unprecedented event. If Year 2000 issues are not adequately addressed
by the Corporation and third parties, the Corporation could face,
among other things, business disruptions, operational problems,
financial losses, legal liability, and similar risks, and the
Corporation's business, results of operations and financial position
could be materially adversely affected.
The Corporation's credit risk associated with borrowers may increase
to the extent borrowers fail to adequately address Year 2000 issues.
As a result, there may be increases in the Corporation's problem
loans and credit losses in future years. In addition, the Corporation
may be subject to increased liquidity risks associated with deposit
withdrawals. It is not, however, possible to quantify the potential
impact of any such risks or losses at this time.
FDIC INSURANCE
FDIC-insured deposits are completely safe. FDIC insurance is a
constant, a given, a guarantee you can literally bank on. If a bank
were to experience Year 2000 problems and, in the worst case, were
unable to operate, the FDIC will be there to protect insured
deposits, as it has been for all 65 years of the FDIC's existence. No
depositor has ever lost a cent of insured funds at an FDIC-insured
bank or savings institution.
"First and foremost, the FDIC wants consumers to know that insured
deposits are safe, and that deposit insurance will not be affected by
the century date change," says Sandy Cormenetz, the Y2K Project
Manager for the FDIC's Legal Division in Washington. "We also want
people to know as much as possible about the Year 2000 problem - to
know what it is, and what is not. That way peoples can separate
accurate information from scare stories." (Source: FDIC Consumer
News, Fall 1998).
The foregoing Year 2000 discussion contains "forward-looking
statements" within the meaning of the Private Securities Litigation
Reform Act of 1995. Such statements, including, without limitation,
anticipated costs, the dates by which the Corporation expects to
complete remediation and testing of systems and contingency planning,
and the impact of the re-deployment of existing staff, are based on
management's best current estimates, which were derived utilizing
numerous assumptions about future events, including the continued
availability of certain resources, representations received from
third-party vendors and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual results
could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited
to: the availability and cost of personnel trained in this area; the
ability to identify and convert all relevant systems; results of Year
2000 testing; adequate resolution of Year 2000 issues by governmental
agencies, businesses or other third parties that are service
providers, suppliers, borrowers or customers of the Corporation;
unanticipated system costs; the need to replace hardware; the
adequacy of and ability to implement contingency plans; and similar
uncertainties. The forward-looking statements made in the foregoing
Year 2000 discussion speak only as of the date on which such
statements are made, and the Corporation undertakes no obligation to
update any forward-looking statement to reflect events or
circumstances after the date on which such statement is made or
reflect the occurrence of unanticipated events.
The foregoing Year 2000 discussion constitutes a Year 2000 Readiness
Disclosure within the meaning of the Year 2000 Readiness and
Disclosure Act of 1998.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
There have been no material changes in information reported as of
December 31, 1998, 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, 1998, filed
with the Commission on March 23, 1999, under Exhibit 10.
(11) Statement re Computation of Per Share Earnings.
Incorporated herein by reference to Note 11, page 38, of
Registrant's 1998 Annual Report to Shareholders filed as
Exhibit 13 to Form 10-K for the year ended December 31,
1998, filed with the Commission on March 30, 1999.
(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 23, 1999,
filed with the Commission on March 23, 1999.
(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) March 22, 1999, for event of March 22, 1999, under ITEM 5.
to report the consummation of the merger of Security Bank
Corpration with F&M National Corporation, resulting in the
merger of Security Bank with and into F&M Bank-Northern
Virginia, a banking subsidiary of F&M National Corporation.
(2) April 15, 1999, for event of April 14, 1999, under ITEM 5.
to report authorization by the Registrant's Board of
Directors for management to purchase 250,000 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, 1999