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, 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 July 31, 1999, there were 22,349,134 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,
1999 1998
Assets:
Cash and due from banks 122,017 164,207
Interest-bearing deposits in other banks 34,735 38,820
Securities-held to maturity(market value
June 30, 1999-$420,788;
December 31, 1998-$408,399) 425,252 402,770
Securities-available for sale
(market value) 399,057 386,150
Federal funds sold and securities
purchased under agreements to resell 39,168 113,305
Loans 1,775,286 1,730,114
Unearned income (1,584) (2,794)
Loans (net of unearned income) 1,773,702 1,727,320
Allowance for loan losses (22,816) (22,646)
Net loans 1,750,886 1,704,674
Bank premises and equipment, net 71,092 67,330
Other assets 77,931 72,678
Total assets 2,920,138 2,949,934
Liabilities and Shareholders' Equity:
Liabilities:
Deposits
Non-interest bearing 562,044 552,916
Interest bearing 1,898,115 1,935,501
Total deposits 2,460,159 2,488,417
Federal funds purchased and securities
sold under agreements to repurchase 98,504 103,264
Other short-term borrowings 18,351 17,312
Long-term debt 28,176 21,058
Other liabilities 23,330 24,864
Total liabilities 2,628,520 2,654,915
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (000 OMITTED)
(Unaudited)
June 30, 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 June 30, 1999-22,342,716
shares; issued December 31,
1998-22,510,582 shares 44,685 45,021
Capital surplus 78,309 82,723
Retained earnings 172,236 161,280
Accumulated other comprehensive income (3,612) 5,995
Total shareholders' equity 291,618 295,019
Total liabilities and
shareholders' equity 2,920,138 2,949,934
See Accompanying Notes to Consolidated Financial Statements
F & M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (000 OMITTED)
(Unaudited) (Unaudited)
For the Six For the Three
Months Ended Months Ended
June 30, June 30,
1999 1998 1999 1998
Interest Income:
Interest and fees on loans 74,580 75,349 37,506 37,775
Securities held to maturity:
Taxable interest income 11,321 12,270 5,666 6,201
Interest income exempt from
Federal income taxes 532 681 264 350
Securities available for sale:
Taxable interest income 11,007 8,109 5,635 4,240
Interest income exempt from
Federal income taxes 27 26 13 13
Dividend income 465 448 234 233
Total security interest income 23,352 21,534 11,812 11,037
Interest on federal funds sold
and securities purchased
under agreements to resell 2,058 3,428 978 1,785
Interest on deposits in banks 629 469 348 279
Total interest income 100,619 100,780 50,644 50,876
Interest Expense:
Interest on deposits 36,468 39,761 18,167 19,975
Interest on short-term
borrowings 1,794 1,959 950 997
Interest on long-term debt 742 490 396 199
Total interest expense 39,004 42,210 19,513 21,171
Net interest income 61,615 58,570 31,131 29,705
Provision for loan losses 2,021 1,540 1,101 778
Net interest income after
provision for loan losses 59,594 57,030 30,030 28,927
Other Income:
Commissions and fees from
fiduciary activities 1,456 1,310 726 652
Service charges on deposit
accounts 7,314 6,192 3,791 3,295
Credit card fees 2,201 1,910 1,158 1,016
Fees for other customer services 3,621 1,555 2,020 752
Insurance commissions 4,516 4,277 2,210 2,064
Other operating income 2,306 2,048 1,300 901
Profits on securities available
for sale 3,112 203 7 187
Investment securities gains, net 1 1 1 0
Total other income 24,527 17,496 11,213 8,867
F & M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (000 OMITTED)
(Unaudited) (Unaudited)
For the Six For the Three
Months Ended Months Ended
June 30, June 30,
1999 1998 1999 1998
Other Expenses:
Salaries and employees'
benefits 30,255 26,136 15,494 13,502
Net occupancy expense of
premises 4,445 4,136 2,218 1,976
Furniture and equipment expense 3,412 3,578 1,533 1,832
Deposit insurance 153 152 77 83
Credit card expense 1,710 1,377 943 742
Other operating expense 12,160 11,771 5,979 6,060
Total other expense 52,135 47,150 26,244 24,195
Income before income taxes 31,986 27,376 14,999 13,599
Income tax expense 11,389 9,551 5,362 4,806
Net income 20,597 17,825 9,637 8,793
Average shares:
Basic 22,447 22,523 22,423 22,493
Assuming dilution 22,650 22,724 22,625 22,792
Earnings per common share:
Basic $0.92 $0.79 $0.43 $0.39
Assuming dilution $0.91 $0.78 $0.43 $0.38
Dividends per share $0.430 $0.370 $0.235 $0.185
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, 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 17,825 17,825 17,825
Other comprehensive
income net of tax:
Unrealized gain on
available-for-sale
securities 703 703
Reclassification
adjustment for
gains realized
in net income (132) (132)
Other comprehensive
income, net of tax 835 835
Total compre-
hensive income 19,495
Cash dividends (7,826) (7,826)
Acquisition of common
stock (201) (3,058) (3,259)
Issuance of authorized
stock-benefit plans 180 2,325 2,505
Balances -
June 30, 1998 45,009 83,475 151,172 3,075 282,731
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, 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 20,597 20,597 20,597
Other comprehensive
income net of tax:
Unrealized losses
on available-
for-sale
securities (7,553) (7,553)
Less: Reclassification
adjustment for
gains realized
in net income (2,054) (2,054)
Other compre-
hensive income,
net of tax (9,607) (9,607)
Total compre-
hensive income 10,990
Cash dividends (9,641) (9,641)
Acquisition of
common stock (580) (7,744) (8,324)
Issuance of
stock-benefit plans 244 3,330 3,574
Balances -
June 30, 1999 44,685 78,309 172,236 (3,612) 291,618
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,
1999 1998
Cash Flows From Operating Activities
Net income 20,597 17,825
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,606 3,223
Provision for loan losses 2,021 1,540
Profit on securities available for sale (3,112) (203)
Profit on securities held to maturity (1) (1)
(Increase) decrease in other assets 366 (316)
Increase (decrease) in other liabilities (1,534) 973
Net cash provided by operating activities 21,943 23,041
Cash Flows From Investing Activities
(Increase) decrease in interest-bearing
deposits in other banks 4,085 (449)
Proceeds from maturities, calls and sales
of available for sale securities 112,645 82,525
Purchase of securities available for sale (136,995) (125,367)
Proceeds from maturities of investment
securities 47,678 81,304
Purchase of investment securities (70,160) (92,446)
(Increase) decrease in federal funds sold
and securities purchased under agreements
to resell 74,137 (38,863)
Net (increase) decrease in loans (50,491) 258
Purchases of bank premises and equipment (6,781) (3,995)
Proceeds from sale of other real estate owned 2,004 2,012
Net cash (used in) investing activities (23,878) (95,021)
Cash Flows From Financing Activities
Net increase (decrease) in noninterest-bearing
and interest-bearing demand deposits
and savings accounts (3,501) 99,017
Net (decrease) in certificates
of deposit (31,759) (10,730)
Dividends paid (9,641) (7,827)
Increase (decrease) in other
short-term borrowings (3,721) 5,894
Increase (decrease) in long-term debt 7,118 (529)
Acquisition of common stock (8,324) (3,259)
Net proceeds from issuance of common stock 2,571 1,298
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (000 Omitted)
(Unaudited)
For the Six Months Ended
June 30, June 30,
1999 1998
Net cash provided by financing activities (40,255) 83,864
Increase in cash and
cash equivalents (42,190) 11,884
Cash and Cash Equivalents
Beginning 164,207 133,995
Ending 122,017 145,879
Supplemental Disclosures of Cash Flows
Information
Cash payments for:
Interest paid to depositors 36,041 36,664
Interest paid on other short-term
borrowings 1,794 1,945
37,835 38,609
Income taxes 12,280 12,810
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 1,261
Loan balances transferred to foreclosed
properties 2,258 3,637
Market value adjustment available for
sale securities 14,556 1,292
See Accompanying Notes to Consolidated Financial Statements
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENT
JUNE 30, 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 June 30, 1999, and December 31, 1998, and
the results of operations and changes in cash flows for the six
months ended June 30, 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 acquisition of Security Bank
Corporation on March 22, 1999.
2. The results of operations for the six-month periods ended June
30, 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 June
30, 1999, are as follows:
June 30, 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 400,926 1,780 (6,483) 396,223
Obligations of states and
political subdivisions 23,012 319 (100) 23,231
Corporate securities 1,314 21 (1) 1,334
425,252 2,120 (6,584) 420,788
F&M's amortized cost and market value of the available for sale
securities as of June 30, 1999, are as follows:
June 30, 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 386,232 1,923 (7,776) 380,379
Obligations of states and
political subdivisions 1,134 24 (3) 1,155
Corporate securities 4,892 10 0 4,902
Other 12,461 160 0 12,621
404,719 2,117 (7,779) 399,057
4. F&M's loan portfolio is composed of the following:
June 30, December 31,
1999 1998
(000 Omitted)
Commercial, financial and agricultural 288,392 288,020
Real estate-construction 97,668 104,043
Real estate-mortgage 1,156,030 1,125,741
Consumer loans to individuals 233,196 212,310
Total loans 1,775,286 1,730,114
Less: Unearned income (1,584) (2,794)
Allowance for loan losses (22,816) (22,646)
Loans, net 1,750,886 1,704,674
F&M had $10,197,000 in loans in a non-accrual category at June 30,
1999.
5. Reserve for Loan Losses:
June 30, December 31,
1999 1998
(000 Omitted)
Balance at January 1 22,646 22,115
Provision charged to operating expense 2,021 5,541
Recoveries added to the reserve 407 779
Loan losses charged to the reserve (2,258) (5,789)
Balance at end of period 22,816 22,646
6. Earnings and dividends paid per share:
June 30, 1999 June 30, 1998
Per Per
(in 000s) Share (in 000s) Share
Shares Amount Shares Amount
Basic EPS 22,447 0.92 22,493 0.79
Effective of
dilutive securities:
Stock options 203 231
Diluted EPS 22,650 0.91 22,724 0.78
7. 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 subject to the approval of regulatory
authorities and shareholders of Security. Under the terms of the
agreement, Security Bank exchanged all of its shares of common stock
for approximately 643,000 shares of the Corporation's common stock.
The transaction qualified as a tax-free exchange and was accounted
for as a pooling of interests. The merger was consummated and become
effective as of the close of business on March 22, 1999.
8. 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.
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, 1999, and the
related consolidated statements of income, changes in shareholders'
equity and cash flows for the six-month periods ended June 30, 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
August 11, 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 June 30, 1999, were $2.920 billion, up $81.2 million
or 2.9% from $2.839 billion at June 30, 1998. Total assets at
December 31, 1998, were $2.950 billion. For the first six months of
1998, total assets averaged $2.895 billion, 4.4% above the first six
months 1998 average of $2.773 billion.
Total loans, net of unearned income, amounted to $1.774 billion at
June 30, 1999, an increase of $97.8 million or 5.8% from $1.676
billion at June 30, 1998. At December 31, 1998, total loans, net,
were $1.727 billion. Total loans (net) as a percent of total assets
were 60.7% at June 30, 1999, as compared to 59.0% at June 30, 1998,
and 58.6% at December 31, 1998. Net loan volume for the first six
months of 1999 increased $46.4 million as compared to an decrease of
$5.2 million for the first six months of 1998. Loan volume increased
as a result of a robust, thriving economy in all markets served by
F&M.
On June 30, 1999, the securities portfolio totaled $824.3 million,
which was $89.9 million or 12.2% higher than the year before and
$35.4 million or 4.5% higher than at December 31, 1998. Funds
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 between available-for-sale and held-to-maturity
securities. Federal funds sold and securities purchased under
agreement to resell were $39.2 million at June 30, 1999, $74.1
million or 65.4% lower than $113.3 million outstanding at December
31, 1998. Federal funds sold are one-day sales of funds to large
regional correspondent banks and are the lowest earning pool of
interest-earning funds. Federal funds have decreased due to funding
demand for loans and the acquisition of investment securities.
The market value of available for sale ("AFS") securities according
to FASB 115 at June 30, 1999, was $399.1 million as compared to
$309.7 million at June 30, 1998. F&M 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 $(3.6) million at June 30,
1999, a decrease from June 30, 1998 of $9.6 million. The decline in
the market value of available-for-sale securities below book value is
a temporary market condition and is not indicative of a deterioration
of asset rating or quality.
Total deposits increased $48.8 million or 2.0% to $2.460 billion at
June 30, 1999, compared to one year earlier. At December 31, 1998,
total deposits were $2.488 billion. Noninterest-bearing deposits
increased $52.9 million or 10.4% from $509.1 million at June 30,
1998, to $562.0 million at June 30, 1999. Interest-bearing deposits
decreased $4.1 million or 0.2% from $1.902 billion at June 30, 1998,
to $1.898 billion at June 30, 1999. Some F&M customers have shifted
deposits from interest-bearing to non-interest bearing in favor of
the available liquid position. Customers appear to be awaiting higher
yields in anticipation of an increase in interest rates by the
Federal Reserve. F&M offers attractive, yet competitive, rates that
are set to maintain a fair net interest margin.
Long-term debt was $28.2 million at June 30, 1999, up $11.5 million
or 69.0% as compared to $16.7 million at June 30, 1998. Long-term
debt was $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 six months of 1999 amounted to $20.6
million, increasing $2.8 million or 15.6% from $17.8 million for the
first six months of 1998. The yield on interest-earning assets was
7.70% for the first six months of 1999 as compared to 8.15% for the
first six months of 1998 and the yield on interest-bearing deposits
was 3.82% for the first six months of 1999 as compared to 4.21% for
the first six months of 1998.
Return on average assets was 1.43% for the first six months of 1999,
compared with 1.30% for the same period in 1998 and for the year
1998. F&M's return on average equity was 14.01% for the first six
months of 1999, 12.70% for the first six months of 1998, and 12.73%
for the year ended 1998.
Net interest income totaled $61.6 million for the first six months of
1999, a $3.0 million or 5.2% increase over F&M's performance for the
first six months of 1998. The net interest margin on a Federal tax
equivalent basis for the first six months of 1999 was 4.69%, down 11
basis points from 4.80% for the first six months of 1998. The
decrease in net interest margin is primarily the effect of lower
yield related to interest-earning assets.
Total nonperforming assets, which consist of nonaccrual loans,
restructured loans, and foreclosed properties were $25.2 million at
June 30, 1999, a decrease of $3.4 million or 11.9% 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 June
30, 1999, were $10.4 million or 0.6% of total loans. Nonperforming
loans at December 31, 1998, were $12.1 million. Also included in
nonperforming loans are loans considered impaired for 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, 1999, impaired loans totaled $15.4 million upon which an
allowance of $2.8 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, 1999, was $627 thousand.
The average balance of impaired loans for the first six 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 $2.6 million at June 30, 1999, and $2.0 million at
December 31, 1998.
Foreclosed properties consists of 37 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, 1999, foreclosed properties were $14.8
million as compared to $16.5 million at December 31, 1998.
The allowance for loan losses has increased to $22.8 million at June
30, 1999, as compared to $22.6 million at year end 1998. The
allowance for loan losses increased $170 thousand in the first six
months of 1999 as compared to $271 thousand for the first six months
of 1998. The amount provided for loan losses in 1999 and 1998 is an
amount, in management's judgment is sufficient for the risk
associated with the loan portfolio. The ratio of allowance for loan
losses to total loans was 1.29% at June 30, 1999, as compared to
1.34% at June 30, 1998, and 1.31% at year-end 1998.
Total noninterest income increased $7.0 million or 40.2% from $17.5
million for the first six months of 1998 to $24.5 million for the
first six months of 1999. For the first six months of 1999, gains
realized on securities available for sale were $3.1 million or 12.7%
of total noninterest income, whereas, for the first six months of
1998 securities gains were $204 thousand or 1.2% 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
$2.2 million for the first six months of 1999, up $291 thousand or
15.2% over the first six months of 1998 as a result of marketing
efforts to attract new credit card customers.
Insurance commission income for the first six months of 1999 was $4.5
million, up $239 thousand from the first six months of 1998 primarily
as a result of increased business activity of F&M's insurance
agencies, whose primary sources of revenue are derived from selling
insurance policies to customers. Revenues from fees for other
customer services increased $2.1 million or 132.9% from $1.6 million
for the first six months of 1998 to $3.6 million for the first six
months of 1999 primarily as a result of fees charged customers in the
secondary market. Other operating income increased $258 thousand or
12.6%, up from $2.0 million for the first six months of 1998 to $2.3
million for the first six months of 1999. The increase in other
operating income is a seasonal variation in other fees and charges.
Total noninterest expenses increased $5.0 million or 10.8% from $47.2
million for the first six months of 1998 to $52.1 million for the
first six months of 1999. Salary expense increased $4.1 million or
15.8% from $26.1 million for the first six months of 1998 to $30.3
million for the first six months of 1999 as a result of employing
additional personnel, certain employees who are paid on a commission
basis, and increases in salaries and benefits. The cost of net
occupancy expense has increased $309 thousand or 7.5% to $4.4 million
for the first six months of 1999, as a result of acquiring new
branches and remodeling older branches. Furniture and equipment
expense has decreased $166 thousand or 4.6% from $3.6 million for the
first six months of 1998 to $3.4 million for the first six months of
1999, which reflects an reduction in the acquisition of new
furniture, equipment, and computer software. Deposit insurance was
$153 thousand for the first six months of 1999. Credit card expense
was up $333 thousand or 24.2% from $1.4 million for the first six
months of 1998 to $1.7 million for the first six months of 1999 as a
result of direct marketing. Other operating expense increased $389
thousand from $11.8 million for the first six months of 1998 to $12.2
million for the first six months of 1999.
Income taxes increased $1.8 million or 19.2% from $9.6 million for
the first six months of 1998 to $11.4 million for the first six
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 $1.9 million for
the first six months of 1999, representing a ratio of net charge offs
to total average loans, net of unearned income of 0.21%, annualized.
This compares to 1998 twelve-month net charge-offs of $5.0 million,
or 0.30% of average loans.
As of June 30, 1999, loans on non-accrual basis amounted to $10.2
million, or 0.6% of total loans, net of unearned discount, down from
$18.4 million for the same period 1998. Loans 90 days or more past
due and still accruing totaled $2.6 million, or 0.15% of total loans,
net of unearned discount. In management's judgment, the balance in
the reserve for loan losses is adequate to cover future losses in the
existing loan portfolio.
F&M closely monitors those loans that are deemed to be potential
problem loans. Loans are viewed as potential problem loans when
possible credit problems of the borrowers cause management to have
doubts as to the ability of such borrowers to comply with current
repayment terms. Those loans are subject to constant management
attention, and their classification is reviewed on a regular basis.
At June 30, 1999, the potential problem loans were $15.1 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 $4.5 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, 1999 was $285.7
million, or 15.4% of risk-weighted assets, for Tier I capital and
$308.9 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%.
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 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 in 1999. Test
plans have been completed and strategies developed. 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 has
performed multiple compliance tests to affirm that all applications
interface properly under future-date simulated conditions. F&M has
completed Phase I through Phase IV testing.
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 has
prepared alternate solutions through a business resumption
contingency plan to mitigate potential risks on January 1, 2000. This
contingency plan was developed for all core business functions and
their supporting information technology systems and includes trigger
dates for implementation of alternative solutions. Core business
risks will be prioritized based upon greater risk posed to the
institution. The contingency plan identifies financial and human
resources necessary for their execution. In addition, it contains 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) None
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 11, 1999