U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
_____________________
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000
Commission File Number: 1-11405
F&M NATIONAL CORPORATION
(Exact Name of Registrant as specified in its charter)
VIRGINIA 54-0857462
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
9 COURT SQUARE, WINCHESTER, VIRGINIA 22601
(Address of principal executive offices, including Zip Code)
(540) 665-4200
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
Common Stock, $2.00 par value
(Title of Class)
New York Stock Exchange
(Name of each exchange on which registered)
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [X]
Aggregate market value of voting stock held by non-affiliates of the
registrant as of February 28, 2001 was $1,051,072,527 based on the closing price
of the registrant's common stock as reported by the New York Stock Exchange on
such date.
Number of Shares of Common Stock Outstanding at February 28, 2001:
28,396,178
DOCUMENTS INCORPORATED BY REFERENCE
None
INDEX
Part I
ITEM 1. Business
General Development of Business 1
Financial Information about Industry Segments 3
Narrative Description of the Business - The Company 3
General 3
Acquisition Program 6
Anti-takeover Provisions 6
Employees 6
Market Regions 7
Lending Activities 9
Credit Policies and Procedures 10
Loan Approval 10
Loan Review 11
Allowance for Loan Losses 11
Impaired Loans 11
Deposits 12
Liquidity and Sensitivity to Interest Rates 13
Other Activities 14
Competition 15
Supervision and Regulation 15
The Company 15
Regulation of Subsidiary Banks 17
General 17
Deposit Insurance 18
Regulatory Capital Requirements 18
Capital Adequacy and Dividends 19
The Gram-Leach-Bliley Act of 1999 20
Recent Legislative Developments 21
Item 2. Properties 21
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 22
Item 6. Selected Financial Information 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 23
Item 7A. Quantitative and Qualitative Disclosures about Market Risk 42
Item 8. Financial Statements and Supplementary Data 43
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosures 80
PART III
Item 10. Directors and Executive Officers of the Registrant 81
Item 11. Executive Compensation 84
Item 12. Securities Ownership of Certain Beneficial Owners and Management 91
Item 13. Certain Relationships and Related Transactions 92
PART IV
Item 14. Exhibits, Financial Statements, Schedules and Report on Form 8-K 93
Forward-Looking Statements
The disclosure of F&M National Corporation ("F&M" or the "Company") in this
report contains forward-looking statements. These statements can be identified
by the fact that they do not relate strictly to historical or current facts.
Forward-looking statements often use words such as "anticipate," "target,"
"expect," "estimate," "intend," "plan," "goal," "believe" or other words of
similar meaning. The forward-looking statements contained in this report give
F&M's current expectations or forecasts of future events, circumstances or
results. Any forward-looking statements made by or on behalf of F&M speak only
as of the date they are made and F&M does not undertake to update forward-
looking statements to reflect the impact of circumstances or events that arise
after the date the forward-looking statement was made.
All forward-looking statements, by their nature, are subject to risks and
uncertainties. F&M's actual future results may differ materially from those set
forth in F&M's forward-looking statements. The reader should not consider any
discussion in this report to be a complete set of all potential risks or
uncertainties. This discussion is provided as permitted by the Private
Securities Litigation Reform Act of 1995.
PART I
ITEM 1. BUSINESS.
(a) GENERAL DEVELOPMENT OF BUSINESS
The following is a summary of the major developments in F&M National
Corporation's business since January 1, 2000:
On January 3, 2000, the Company acquired The State Bank of the Alleghenies,
Covington, Virginia, for approximately 1,912,000 shares of F&M common stock in a
transaction accounted for as a pooling-of-interests. Upon the effective date of
the share exchange, The State Bank of the Alleghenies changed its name to F&M
Bank-Highlands.
On July 6, 2000, the Company and Atlantic Financial Corp., Newport News,
Virginia ("Atlantic"), announced the signing of a definitive agreement for the
affiliation of Atlantic with F&M. On February 26, 2001, F&M completed the
acquisition of Atlantic by issuing approximately 3,160,000 common shares in
exchange for all of the outstanding common shares of Atlantic. Under terms of
the merger agreement, F&M exchanged 0.753 shares of its common stock for each
share of Atlantic common stock. The transaction is qualified as a tax-free
exchange and is being accounted for as a pooling-of-interests. Atlantic's two
bank subsidiaries, Peninsula Trust Bank and United Community Bank, were combined
in connection with the transaction and now operate together as a separate
banking subsidiary of F&M under the name of F&M Bank-Atlantic.
On July 14, 2000, F&M Bank-Richmond closed a branch bank located at 11450
Midlothian Turnpike, Richmond, Virginia.
On August 23, 2000, the Company and Community Bankshares of Maryland, Inc.,
Bowie, Maryland ("Community"), announced the signing of a definitive agreement
for the affiliation of Community with F&M. On January 25, 2001, F&M completed
the acquisition of Community by issuing 545,131 common shares in exchange for
all of the outstanding common shares of Community. Under terms of the merger
agreement, F&M exchanged 0.75 shares of its common stock for each share of
Community common stock. The transaction was accounted for as a purchase.
1
Community merged into F&M Bank-Maryland to provide one-bank financial services
through the bank's Maryland markets.
On August 25, 2000, the Company completed the acquisition of 15 banking
offices and approximately $300 million in deposits from Wachovia Bank, N.A. The
new locations were acquired by five of F&M's community banks. F&M Bank-
Winchester acquired two locations in Luray, Virginia located at 700 East Main
Street and 1 East Main Street. F&M Bank-Massanutten acquired one branch office
in Staunton located at 205 North Central Avenue. F&M Bank-Highlands acquired
one branch office at 1111 East Washington Avenue, Vinton, Virginia. F&M Bank-
Central Virginia acquired seven branch offices: State Road 15, Route 15 and
Route 6, Fork Union, Virginia; Highway 15 & Highway 601, Palmyra, Virginia; 8260
Seminole Trail, Ruckersville, Virginia; 223 Mineral Avenue, Mineral, Virginia;
202 South Main Street, Gordonsville, Virginia; and 2 North Main Street and 148
Tightsqueeze Plaza, Chatham, Virginia. F&M Bank-Southern Virginia expanded
their market area with four new locations at 200 South Main Street, Blackstone,
Virginia, 4677 Main Street, Drakes Branch, Virginia, 300 East 2/nd/ Avenue,
Franklin, Virginia, and 204 South Broad Street, Kenbridge, Virginia.
On October 13, 2000, F&M Bank-Winchester closed two branch offices located
at 509A Amherst Street, Winchester, Virginia, and at 124 West Piccadilly Street,
Winchester, Virginia.
On October 16, 2000, F&M Bank-Winchester opened a branch office located at
1800 Amherst Street, Winchester, Virginia.
On November 1, 2000, F&M Bank-Emporia changed the bank name to F&M Bank-
Southern Virginia.
On November 3, 2000, F&M Bank-Allegiance changed the bank name to F&M Bank-
Maryland.
On November 8, 2000, F&M Bank-Peoples opened a branch office at 501C
Jefferson Davis Highway, Fredericksburg, Virginia.
On November 20, 2000, F&M Bank-Central Virginia opened a branch office at
7003 Seminole Trail, Ruckersville, Virginia.
On January 24, 2001, BB&T Corporation ("BB&T") announced plans to acquire
F&M in a transaction valued at $1.17 billion, based on the fixed exchange ratio
of 1.09 shares of BB&T common stock for each share of F&M common stock and the
market price of BB&T common stock on January 23, 2001. The transaction,
approved by the boards of directors of both companies, was valued at $40.67 for
each F&M share based on BB&T's closing price of $37.31 on January 23, 2001. The
transaction will be accounted for as a pooling-of-interests. The merger, which
is subject to the approval of F&M stockholders and banking regulators, is
expected to be completed in the third quarter 2001.
2
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
F&M and its subsidiaries are engaged primarily in only one industry
segment, banking, the making of commercial and personal loans and similar credit
transactions, and other activities closely related to banking.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS
THE COMPANY
GENERAL
F&M National Corporation is a multi-bank holding company headquartered in
Winchester, Virginia. F&M provides financial, insurance, and trust services to
individuals and commercial customers through 18 subsidiary corporations
including 144 banking locations, 13 mortgage banking offices, 3 trust offices,
and 6 insurance offices in Virginia, West Virginia and Maryland. F&M offers a
full range of banking services principally to individuals and small and middle-
market businesses throughout Virginia, the eastern panhandle of West Virginia,
and the counties of Montgomery and Prince George's in Maryland. At December 31,
2000, F&M had assets of $3.569 billion, deposits of $2.991 billion and
shareholders' equity of $339.4 million.
F&M was formed in 1969 to serve as the parent holding company of its then
sole subsidiary bank, F&M Bank-Winchester, organized in 1902. Since its
organization, F&M has acquired 24 banks, which expanded its market area and
increased market share in Virginia, West Virginia and Maryland.
The following table sets forth certain information concerning F&M and its
operating subsidiaries at December 31, 2000:
3
DATE BANKING TOTAL TOTAL TOTAL
ACQUIRED OFFICES ASSETS LOANS DEPOSITS
------------------------------------------------------------------------------
(Dollars in thousands)
F&M Bank-Winchester
Winchester, VA (1) 1970 35 $ 911,018 $ 563,821 $ 778,033
F&M Bank-Massanutten
Harrisonburg, VA 1980 10 287,962 227,122 240,244
F&M Bank-Richmond
Richmond, VA (2) 1982 15 295,923 182,874 262,828
F&M Bank-Central Va.
Charlottesville, VA 1985 15 215,204 47,564 189,354
F&M Bank-West Virginia
Ranson, WV (3) 1988 13 301,813 185,503 263,205
F&M Bank-Southern Va.
Emporia, VA 1993 7 173,686 40,543 155,638
F&M Bank-Peoples
Warrenton, VA 1994 5 141,297 104,682 123,869
F&M Bank-Northern Va
Fairfax, VA (4) 1996 31 861,092 490,708 692,719
F&M Bank-Maryland
Bethesda, MD 1996 9 167,874 121,060 135,592
F&M Bank-Highlands
Covington, VA 2000 4 168,088 104,826 149,949
F&M (Parent only) (1) - - 44,823 - -
--- ---------- ---------- ----------
Total 144 $3,568,780 $2,068,703 $2,991,431
_________________
(1) Includes F&M Trust Company and F&M Services Inc. incorporated in 1998.
(2) Includes the acquisition in 1998 of Peoples Bank of Virginia, Chesterfield,
Virginia.
(3) Created from the consolidation in 1998 of F&M Bank-Blakeley, F&M Bank-
Martinsburg and F&M Bank-Keyser.
(4) Includes the acquisition in 1995 of The Bank of the Potomac, Herndon,
Virginia, the acquisition in 1996 of FB&T Financial Corporation, Fairfax,
Virginia, the acquisition in 1998 of The Bank of Alexandria, Alexandria,
Virginia, and the acquisition in 1999 of Security Bank Corporation,
Manassas, Virginia.
The business strategy of F&M is to provide its customers with the financial
sophistication and breadth of products of a regional bank, while retaining the
local appeal and level of service of a community bank. F&M has maintained its
community orientation by allowing its subsidiary banks latitude to tailor
products and services to meet community and customer needs. While F&M has
preserved the autonomy of its subsidiary banks, it has established system-wide
policies governing, among other things, lending practices, credit analysis and
approval procedures, as well as guidelines for deposit pricing and investment
portfolio management. In addition, F&M has established a centralized loan
review team that regularly performs a detailed, on-site review and analysis of
each subsidiary bank's loan portfolio to ensure the consistent application of
credit policies and procedures system-wide. An officer or representative of F&M
serves on the board of directors of each subsidiary bank to monitor operations
and to serve as a liaison to the Company.
4
F&M's subsidiary banks are community-oriented and offer services
customarily provided by full-service banks, including individual and commercial
demand and time deposit accounts, commercial and consumer loans, residential
mortgages, credit card services, safe deposit boxes, and home banking. Lending
is focused on individuals and small and middle-market businesses in the local
market regions of each of F&M's subsidiary banks. In 1998, F&M Trust Company was
formed by consolidating the trust departments of F&M Bank-Winchester, F&M Bank-
Peoples, and F&M Bank-Northern Virginia. F&M Trust Company provides a variety of
personal trust services including management of common trust funds, estate
administration and planning specifically addressing the investment and financial
management needs of its customers. At December 31, 2000, F&M Trust Company
managed assets and accounts totaling $760.9 million.
F&M operates in eight market regions: the Shenandoah Valley of Virginia;
the eastern panhandle of West Virginia; central Virginia
Charlottesville/Albemarle County and surrounding counties; southern Virginia
counties along the Virginia border with North Carolina; Highland county in the
southwestern Allegheny mountains, suburban Richmond, primarily Henrico and
Chesterfield Counties; the northern Virginia areas of Loudoun, Fairfax, and
Prince William Counties; Stafford, Warrenton and surrounding Fauquier County
area; and the counties of Montgomery and Prince George's in Maryland. The more
populous sectors within each of the eight market regions experienced substantial
population growth between 1980 and 1990, most of which exceeded 20% growth. At
December 31, 2000, F&M operated 35 banking offices in the Shenandoah Valley from
Winchester to Harrisonburg with deposits of $864.6 million; 13 banking offices
in the eastern panhandle of West Virginia with deposits of $263.2 million; 15
banking offices in the Central Virginia Charlottesville/Albemarle County area
with deposits of $189.4 million; 4 banking offices in southwestern Virginia with
deposits of $149.9 million; 8 banking offices in counties along the southern
Virginia border with deposits of $155.6 million; 15 banking offices in suburban
Richmond, Virginia, with deposits of $262.8 million; 40 banking offices in
Loudoun, Fairfax and Prince William Counties of northern Virginia with deposits
of $848.3 million; 5 offices in the town of Warrenton and Fauquier and Stafford
Counties with deposits of $123.9 million; and 9 offices in the counties of
Montgomery and Prince George's in Maryland with deposits of $135.6 million.
F&M's principal market is Winchester and the surrounding six Virginia counties
where its lead bank, F&M Bank-Winchester, is the dominant financial institution
in terms of deposit market share, with a 50% share of total deposits in
Winchester, a 20% share of total deposits in surrounding Frederick County, a 29%
share of total deposits in Warren County, and a 15% share of total deposits in
Loudoun County. In Rockingham County, which has the largest population of any
county or city in the Shenandoah Valley, F&M has a 26% deposit market share. In
F&M's three-county West Virginia market, F&M has a 23% deposit market share in
Jefferson County (which includes Charles Town), a 14% deposit market share in
Berkeley County (which includes Martinsburg) and a 35% deposit market share in
Mineral County (which includes Keyser). In Fairfax, Prince William and Fauquier
Counties (including Warrenton), F&M has a 10%, 4%, and 15% deposit market share,
respectively. In F&M's southwestern market located in the Allegheny Mountains,
Covington and Clifton Forge have a 45% and 18% deposit market share,
respectively. F&M's southwestern market's surrounding counties of Bath and
Roanoke has a deposit market share of 25% and 13%, respectively. Although F&M's
deposit market share in the Richmond and Charlottesville areas is small, on a
percentage basis, F&M has positioned its banking offices in these two markets to
5
increase deposit market share as a result of continued business and population
growth in the suburban markets surrounding the areas. In F&M's two-county
Maryland market, F&M is positioning itself to increase deposit market share in
Montgomery County and Prince George's County.
F&M's subsidiary banks have not experienced loan quality deterioration due to
conservative underwriting standards and focused in-market lending practices. At
December 31, 2000, F&M had total nonperforming assets of approximately $22.0
million, representing 1.06% of period end loans and foreclosed properties.
F&M also operates F&M Mortgage Services, Inc., which offers both fixed and
adjustable rate residential mortgage loans and servicing. F&M Mortgage Services
Inc., F&M Bank-Northern Virginia and F&M Bank-Peoples sell into the secondary
market permanent residential mortgage loans that conform to GNMA and FNMA
underwriting guidelines. These F&M subsidiaries purchase government insured 1-4
family FHA and VA loans and resell them immediately in package form.
ACQUISITION PROGRAM
F&M has expanded its market area and increased its market share through both
internal growth and strategic acquisitions. Since the beginning of 1988, F&M
has acquired approximately $1.577 billion in assets and approximately $1.370
billion in deposits through 16 acquisitions. F&M's acquisitions during 2000 are
outlined in "PART I, ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS."
ANTI-TAKEOVER PROVISIONS
The Company's Articles of Incorporation and the Virginia Stock Corporation Act
contain certain anti-takeover provisions, including (i) the Affiliated
Transactions statue which places restrictions on any significant transaction
between a publicly held Virginia corporation and any shareholder who owns more
than 10% of any class of its outstanding shares, (ii) the Control Share
Acquisitions statue which provides that a shareholder who purchases shares in
any one of three statutory ranges (20%-33 1/3%, 33 1/3%-50%, and 50% or more of
the outstanding shares) cannot vote those shares on any matter unless the
acquisition of the additional shares has been approved by disinterested
shareholders, and (iii) a super-majority provision in the Articles of
Incorporation that requires the affirmative vote of at lease 80% of the
outstanding voting shares on significant transactions, unless at least two-
thirds of the Board of Directors then in office have approved the transaction.
EMPLOYEES
At December 31, 2000, F&M had 1,529 full time and 301 part time employees. No
employees are represented by any collective bargaining unit. F&M considers
relations with its employees to be good.
6
MARKET REGIONS
The market regions of F&M extend from the eastern panhandle of West Virginia
southward to Virginia in Winchester, the surrounding Shenandoah Valley through
Harrisonburg and Rockingham County and eastward to Loudoun, Fauquier, Stafford
and Prince William counties, to the central Virginia markets of Charlottesville
and Richmond, southern Virginia market in Emporia and Greenville County and
Montgomery and Prince George's counties in Maryland. The following table
displays the market and population data for each of the market regions:
BANKING % MARKET MARKET 1999 ESTIMATED
COUNTY/CITY (1) OFFICES SHARE (2) RANK (2) POPULATION
- ---------------------------------- --------------- ---------------- --------------- ---------------------
State of Virginia:
Shenandoah Valley:
City of Winchester 10 50 1 22,477
Frederick County 5 20 2 56,555
Warren County 4 29 1 30,620
Page County 2 22 2 23,165
Shenandoah County 2 11 4 35,141
Clarke County 1 22 2 12,838
Rappahannock County 1 42 2 7,664
Rockingham County 4 21 2 63,078
City of Harrisonburg 5 17 3 34,129
Augusta County 1 6 7 61,166
BANKING % MARKET MARKET 1990
COUNTY/CITY (1) OFFICES SHARE (2) RANK (2) POPULATION
Northern Virginia:
City of Alexandria 4 3 6 117,390
City of Fairfax 1 10 4 20,697
City of Falls Church 2 4 6 9,944
City of Manassas 2 17 2 33,498
Arlington County 1 * * 174,848
Loudoun County 8 15 2 156,284
Fairfax County 15 10 4 945,717
Fauquier County 3 15 3 55,206
Prince William County 7 4 9 270,841
Stafford County 1 4 9 93,160
Charlottesville/
Albemarle County:
City of Charlottesville 1 * 9 36,815
Albemarle County 3 10 6 80,145
Nelson County 2 31 2 14,186
Amherst County 1 3 6 30,351
Fluvanna County 2 100 1 19,622
Greene County 2 21 2 14,685
7
Louisa County 1 36 2 25,029
Orange County 1 25 2 25,759
Pittsylvania County 2 20 2 56,760
Richmond:
City of Richmond 3 1 9 189,700
Henrico County 5 2 9 244,652
Chesterfield County 7 8 6 253,365
Southwestern Virginia:
City of Covington 1 45 1 6,846
City of Clifton Forge 1 18 3 4,205
Bath County 1 25 2 4,926
Roanoke County 1 13 2 81,163
Southern Virginia:
City of Emporia 3 31 1 5,662
Nottoway County 1 13 3 15,291
Southhampton County 1 * * 17,678
Lunenburg County 1 26 2 11,789
Charlotte County 1 16 3 12,414
City of Franklin 1 14 4 8,139
BANKING % MARKET MARKET 1990
COUNTY/CITY (1) OFFICES SHARE (2) RANK (2) POPULATION
State of West Virginia:
Jefferson County 4 23 2 42,271
Berkeley County 5 14 3 72,846
Mineral County 4 35 1 27,069
State of Maryland:
Montgomery County 6 1 17 852,174
Prince George's 3 1 18 781,781
State of Virginia 122 3 8 6,872,912
State of West Virginia 13 1 15 1,806,928
State of Maryland 9 * NM 5,171,634
____________
* Represents less than 1% deposit market share NM=Not meaningful
(1) In Virginia, certain cities are separate political entities and not part of
the counties that surround them. The city of Winchester and Frederick
County, the city of Harrisonburg and Rockingham County, the city of
Charlottesville and Albemarle County, the city of Fairfax and Fairfax County
and the city of Richmond and Henrico and Chesterfield Counties are examples.
The Federal Deposit Insurance Corporation ("FDIC") and the Office of Thrift
Supervision (the "OTS") provide deposit data for each separately
incorporated city.
8
(2) Deposit data includes total bank and thrift deposits and is based on FDIC
and OTS data as of June 30, 2000, which is the most recently available
information.
LENDING ACTIVITIES
All of F&M's subsidiary banks offer both commercial and consumer loans,
but lending activity is generally focused on consumers and small to middle
market businesses within each subsidiary banks' respective market regions. Four
of F&M's subsidiary banks, F&M Bank-Massanutten, F&M Bank-West Virginia, F&M
Bank-Southern Virginia, and F&M Bank-Peoples, emphasize consumer lending with
activities focused primarily on residential real estate and consumer lending.
F&M Bank-Richmond, F&M Bank-Central Virginia, F&M Bank-Northern Virginia and F&M
Bank-Maryland are based in larger markets where commercial loan demand is
stronger and, as a result, their lending activities place a greater emphasis on
small to medium sized businesses. F&M Bank-Winchester, because of its size and
dominant position in its market, has a greater opportunity to appeal to large
commercial customers in addition to consumers.
The following table sets forth the composition of F&M's loan portfolio
(by percentage) for the three years ended December 31, 2000:
December 31,
----------------------------------------------------
2000 1999 1998
----------------------------------------------------
Commercial, financial and agricultural 12.9% 15.9% 16.3%
Real estate construction 5.9% 5.7% 5.7%
Real estate mortgage :
Loans held for sale 2.9% 1.2% 1.6%
Residential (1-4 family) 29.3% 29.5% 29.6%
Home equity lines 3.3% 3.1% 3.6%
Multifamily 1.2% 1.5% 1.6%
Non-farm, non-residential (1) 28.0% 28.1% 27.9%
Agricultural 0.9% 1.0% 0.8%
----------------------------------------------------
Real estate subtotal 65.6% 64.4% 65.1%
Loans to individuals:
Consumer 14.6% 12.9% 11.7%
Credit card 1.0% 1.1% 1.2%
----------------------------------------------------
Loans to individuals subtotal 15.6% 14.0% 12.9%
Loans - net of unearned income 100.0% 100.0% 100.0%
====================================================
Total Loans (dollars) $2,068,703 $1,865,098 $1,825,420
________________
(1) This category generally consists of commercial and industrial loans where
real estate constitutes a source of collateral.
Approximately 12.9% of F&M's loan portfolio at December 31, 2000, was
comprised of commercial loans, which included loans secured by real estate shown
in the table above under the categories of multifamily, non-farm, non-
residential and agricultural where real estate is among the sources of
collateral securing the loan. F&M's subsidiary banks offer a variety of
commercial loans within their market regions, including revolving lines of
credit, working capital loans, equipment financing loans, and letters of credit.
Although F&M's subsidiary banks typically look to the borrower's cash flow as
the principal source of repayment for such loans, many of the loans within
9
this category are secured by assets, such as accounts receivable, inventory and
equipment. In addition, a number of commercial loans are secured by real estate
used by such businesses and are generally personally guaranteed by the
principals of the business. F&M's commercial loans generally bear a floating
rate of interest tied to a system-wide prime rate set by F&M Bank-Winchester.
F&M's residential real estate loan portfolio (including home equity
lines and loans held for sale) was 65.6 % of its total loan portfolio at
December 31, 2000. The residential mortgage loans made by F&M's subsidiary
banks and F&M Mortgage Services, Inc., are made only for single family, owner-
occupied residences within their respective market regions. Residential
mortgage loans offered by F&M's subsidiary banks are either adjustable rate
loans or fixed rate loans with 20 to 30 year amortization schedules that mature
with a balloon payment on the third or fifth year anniversary of the loan. In
addition, F&M Mortgage Services and several subsidiaries sell into the secondary
market permanent residential mortgage loans that conform to GNMA and FNMA
underwriting guidelines. These F&M subsidiaries purchase government insured 1-4
family FHA and VA loans and resell them immediately in package form.
F&M's real estate construction portfolio historically has been a
relatively small portion of the total loan portfolio. At December 31, 2000,
construction loans were $122.8 million or 5.9% of the total loan portfolio.
Generally, all construction loans are made to finance owner-occupied properties
with permanent financing commitments in place. F&M's subsidiary banks make a
limited number of loans for acquisition, development and construction of
residential real estate. F&M's construction loans, including its acquisition
and development loans, generally bear a floating rate of interest and mature in
one year or less. Loan underwriting standards for such loans generally limit
the loan amount to 75% of the finished appraised value of the project. As a
result of strict underwriting guidelines, F&M has experienced charge-offs
involving residential construction since 1993 of less than one-half of 1%.
Consumer loans were 15.6% of F&M's total loan portfolio at December
31, 2000. F&M's subsidiary banks offer a wide variety of consumer loans, which
include installment loans, credit card loans, home equity lines, and other
secured and unsecured credit facilities. The performance of the consumer loan
portfolio is directly tied to and dependent upon the general economic conditions
in each subsidiary banks' respective market regions.
CREDIT POLICIES AND PROCEDURES
F&M has established system-wide guidelines governing, among other
things, lending practices, credit analysis and approval procedures, and credit
quality review. Within these guidelines, F&M's subsidiary banks have latitude
to tailor their loan products to meet the needs of the communities and specific
customers. A holding company officer or representative serves on the board of
directors of each subsidiary bank to monitor practices and to serve as the
liaison with F&M.
Loan Approval. F&M's loan approval policies provide for various
-------------
levels of officer lending authority. When the aggregate outstanding loans to a
single borrower exceed an individual officer's lending authority, the loan
request must be approved by an officer with a higher lending limit or by the
subsidiary bank's loan review committee. F&M has assigned a lending limit for
each subsidiary bank. Loans that would result in a subsidiary bank exceeding its
assigned limit must be approved
10
first by the subsidiary bank's loan review committee and then by a central
credit committee appointed by the holding company. The central credit committee
consists of six senior officers of F&M Bank-Winchester and the Company, along
with outside directors of either F&M Bank-Winchester or the Company, who rotate
at the twice weekly meetings.
All loans to an individual borrower are reviewed each time the borrower
requests a renewal or extension of any loan or requests an additional loan. All
lines of credit are reviewed annually prior to renewal. These reviews are
conducted by each subsidiary bank and, if necessary, by F&M's central credit
committee.
Loan Review. Each subsidiary bank of F&M has a formal loan review
-----------
function that consists of a committee of bank officers that regularly reviews
loans and assigns a classification, if required, based on current perceived
credit risk. In addition, the holding company has a loan review team that
performs a detailed on-site review and analysis of each subsidiary bank's
portfolio on at least an annual basis to ensure the consistent application of
system-wide policies and procedures. The holding company loan review team
reviews all loans over an established principal amount for each subsidiary bank,
which results in a review of 60% to 75% of the total principal amount of the
subsidiary bank's loan portfolio. In addition, all lending relationships
involving a classified loan are reviewed regardless of size. The holding company
loan review team has the authority to classify any loan it determines is not
satisfactory or to change the classification of a loan within F&M's loan grading
system.
All classified loans are reviewed at least quarterly by F&M's senior
officers and monthly by the subsidiary banks' boards of directors. All past due
and nonaccrual loans are reviewed monthly by the subsidiary banks' boards of
directors. As a matter of policy, F&M's subsidiary banks place loans on
nonaccrual status when management determines that the borrower can no longer
service debt from current cash flows and/or collateral liquidation. This
generally occurs when a loan becomes 90 days past due as to principal and
interest.
Allowance for Loan Losses. Each subsidiary bank of F&M maintains its
-------------------------
allowance for loan losses based on loss experience for each loan category over a
period of years and adjusts the allowance for existing economic conditions as
well as performance trends within specific areas, such as real estate. In
addition, each subsidiary bank periodically reviews significant individual
credits and adjusts the allowance when deemed necessary. The allowance also is
increased to support projected loan growth.
Impaired Loans. The recorded investment in certain loans that were
--------------
considered to be impaired in accordance to FASB 114 was $20.5 million at year-
end 2000 as compared to $15.0 million at year-end 1999, of which $5.7 million
was classified as nonperforming. Included in 2000 impaired loans are $11.9
million secured by commercial real estate. All impaired loans at year-end 2000
and 1999 had a related valuation allowance totaling $3.0 million and $2.6
million, respectively. The average recorded investment in certain impaired loans
for 2000 and 1999 was approximately $19.2 million and $15.3 million,
respectively. For the years 2000 and 1999, interest income recognized on
impaired loans totaled $1.7 million and $1.6 million, respectively, all of which
was recognized on a cash basis.
11
Loans are placed on nonaccrual when a loan is specifically determined to be
impaired or when principal or interest is delinquent for 90 days or more. Any
unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Cash payments received on such loans
are applied as a reduction of the loan principal balance. Interest income on
other nonaccrual loans is recognized only to the extent of interest payments
received. Changes in the allowance relating to impaired loans are charged or
credited to the provision for loan losses.
An impaired loan is charged-off when management determines that the
prospect of recovery of the principal of the loan has significantly diminished.
DEPOSITS
F&M's subsidiary banks offer a number of programs to consumers and to small
and middle market businesses at interest rates consistent with local market
conditions. The following table sets forth the mix of depository accounts
offered by the subsidiary banks as a percentage of total deposits at the dates
indicated:
December 31,
-----------------------------------------------
2000 1999 1998
------ ------- --------
Noninterest-bearing demand 21.6% 20.7% 21.4%
Interest checking 17.8 18.5 18.5
Savings accounts 8.0 8.6 8.6
Money market accounts 9.4 9.7 9.7
Time deposit accounts:
Under $100,000 33.2 32.5 31.7
$100,000 and over 10.0 10.0 10.0
------ ------- --------
100.0% 100.0% 100.0%
F&M's subsidiary banks control deposit flows primarily through pricing of
deposits and, to a lesser extent, through promotional activities. F&M's
subsidiary banks establish deposit rates based on a variety of factors,
including competitive conditions, liquidity needs and compliance with net
interest margin requirements established by F&M for all subsidiary banks. As of
December 31, 2000, F&M's subsidiary banks had $300.1 million of certificates of
deposit greater than $100,000, or 10.0% of total deposits. F&M's subsidiary
banks do not accept brokered deposits.
No material portion of the deposits of F&M's subsidiary banks has been
obtained from a single or a small group of customers, and the loss of any
customer's deposits or a small group of customers' deposits would not have a
material adverse effect on the business of any of F&M's subsidiary banks. See
"Business-Market Regions" for information regarding each subsidiary bank's
deposit share and rank in its respective market.
12
LIQUIDITY AND SENSITIVITY TO INTEREST RATES
The primary functions of asset/liability management are to ensure adequate
liquidity and maintain an appropriate balance between interest-sensitive assets
and interest-sensitive liabilities. Liquidity management involves the ability to
meet the cash flow requirements of F&M's loan and deposit customers. Interest
rate sensitivity management seeks to avoid fluctuating net interest margins and
to enhance consistent growth of net interest income through periods of changing
interest rates. F&M does not hedge its position with swaps, options or futures
but instead maintains a highly liquid and short-term position in all of its
earning assets and interest-bearing liabilities.
In order to meet its liquidity needs, F&M schedules the maturity of its
investment securities according to its needs. The weighted-average life of the
securities portfolio at the end of 2000 was 4 years 5 months, which is
indicative of F&M's investment philosophy of investing in U.S. Government
securities with maturities between three and ten years. F&M views its securities
portfolio primarily as a source of liquidity and safety. However, if the market
is favorable, F&M may make changes in the available for sale portfolio to take
advantage of changes in the yield curve. F&M views the total available for sale
securities portfolio as a source of liquidity, whereas, liquidity in the held to
maturity portfolio is limited to calls and maturities. A cash reserve,
consisting primarily of overnight investments such as Federal Funds, is also
maintained to meet any contingencies and to provide additional capital, if
needed.
Most of F&M's loans are fixed-rate installment loans to consumers and
mortgage loans whose maturities are generally longer than the deposits by which
they are funded. A degree of interest-rate risk is incurred if the interest
rate on deposits should rise before the loans mature. However, the substantial
liquidity provided by the monthly repayments on these loans can be reinvested at
higher rates that largely reduce the interest-rate risk. Home equity lines of
credit have adjustable rates that are tied to the prime rate. Many of the loans
not in the installment or mortgage categories have maturities of less than one
year or have floating rates that may be adjusted periodically to reflect current
market rates.
F&M's asset/liability/risk committee is responsible for reviewing the
Company's liquidity requirements and maximizing the Company's net interest
income consistent with capital requirements, liquidity, interest rate and
economic outlooks, competitive factors and customer needs. Liquidity
requirements are also reviewed in detail for each of F&M's individual banks;
however, overall asset/liability management is performed on a consolidated basis
to achieve a consistent and coordinated approach.
13
OTHER ACTIVITIES
Effective January 1, 1998, F&M Trust Company, a wholly-owned trust
subsidiary of the Company, began operations and assumed responsibility for all
the trust and fiduciary activities of the Virginia banking subsidiaries of the
Company.
In 2000, F&M Trust Company offered a range of trust services. At December
31, 2000, F&M Trust Company managed $ 760.9 million in assets in approximately
1,646 fiduciary accounts, covering both personal trust activities and employee
benefit plans.
14
COMPETITION
Each of the market regions in which the Company operates has a highly
competitive banking market involving commercial banks and thrifts. Other
competitors, including credit unions, consumer finance companies, brokerage
firms, insurance companies and money market mutual funds, compete with the
Company for certain lending and deposit gathering services. In its
Charlottesville/Albemarle County, northern Virginia, and suburban Richmond
markets, the Company faces particularly intense competition from several
national and regional banking institutions which have substantial operations in
those market regions. Management believes, however, that the Company enjoys
certain competitive advantages in its principal market of Winchester, the
surrounding northern Shenandoah Valley and Loudoun County where F&M Bank-
Winchester is the largest financial institution headquartered in the area and
the dominant bank in terms of deposit market share.
Competition among the various financial institutions is based on interest
rates offered on deposit accounts, interest rates charged on loans, credit and
service charges, the quality of services, the convenience of banking facilities
and, in connection with loans to larger borrowers, relative lending limits. Many
of the financial organizations in competition with the Company have much greater
financial resources, diversified markets, and branch networks than F&M and are
able to offer similar services at varying costs with higher lending limits. With
reciprocal interstate banking, the Company also faces the prospect of additional
competitors entering its markets as well as additional competition in its
efforts to acquire other financial institutions.
SUPERVISION AND REGULATION
The Company and its subsidiary banks are subject to state and federal
banking laws and regulations, which impose specific requirements or restrictions
on and provide for general regulatory oversight with respect to virtually all
aspects of operations. The following is a brief summary of certain statues,
rules and regulations affecting the Company and its subsidiary banks. This
summary is qualified in its entirety by reference to the particular statutory
and regulatory provisions referred to below and is not intended to be an
exhaustive description of the statutes or regulations applicable to the business
of the Company and its subsidiary banks. A change in applicable laws or
regulations may have a material effect on the business and prospects of the
Company.
THE COMPANY
The Company is registered as a bank holding company under the Bank Holding
Company Act ("BHCA") and the Virginia Financial Institution Holding Company Act,
and is therefore subject to regulation and examination by the Board of Governors
of the Federal Reserve System (the "Federal Reserve") and the Virginia State
Corporation Commission (the "Virginia SCC"). F&M's subsidiary banks are subject
to examination and regulation by the Virginia SCC, the West Virginia Board of
Banking and Financial Institutions (the "West Virginia Board of Banking") and
the Commissioner of Financial Regulation of the State of Maryland (the "Maryland
CFR"). In addition, the Company and its
15
subsidiary banks are subject to certain minimum capital standards established by
the Federal Reserve and the FDIC.
Under the BHCA, the Company is required to secure the prior approval of the
Federal Reserve before it can merge or consolidate with any other bank holding
company, or acquire all or substantially all of the assets of any bank or
acquire direct or indirect ownership or control of any voting shares of any bank
that is not already majority owned by it if after such acquisition the Company
would directly or indirectly own or control more than 5% of the voting shares of
such bank. The BHCA also prohibits the Company from acquiring, directly or
indirectly voting shares of, or interests in, or all or substantially all of the
assets of, any bank located outside the State of Virginia unless the acquisition
is specifically authorized by the laws of the state in which such bank is
located, as discussed below.
The Company is prohibited under the BHCA, and regulations promulgated
thereunder, from engaging in, and from acquiring direct or indirect ownership or
control of more than 5% of voting shares of any company engaged in, nonbanking
activities unless the Federal Reserve, by order or regulation, has found such
activities to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. The Federal Reserve has by regulation
determined that certain activities are closely related to banking within the
meaning of the BHCA. These activities include, among others, operating a
mortgage, finance, credit card or factoring company; performing certain data
processing operations; providing investment and financial advice; acting as an
insurance agent for certain types of credit-related insurance; leasing personal
property on a full-payout, non-operating basis; and providing certain stock
brokerage and investment advisory services.
The Company, as an affiliate of its subsidiary banks within the meaning of
the Federal Reserve Act, is subject to certain restrictions under the Federal
Reserve Act regarding transactions between a bank and companies with which it is
affiliated. These provisions limit extensions of credit (including guarantees of
loans) by the subsidiary banks to affiliates, investments in the stock or other
securities of the Company by the subsidiary banks and the nature and amount of
collateral that subsidiary banks may accept from any affiliate to secure loans
extended to the affiliate. Further, under the Federal Reserve Act and the
regulations promulgated thereunder, a bank holding company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit or provision of any property or service.
The BHCA and the Change in Bank Control Act, together with regulations of
the Federal Reserve, require that, depending on the particular circumstances,
either Federal Reserve approval must be obtained or notice must be furnished to
the Federal Reserve and not disapproved prior to any person or company acquiring
"control" of a bank holding company, such as the Company, subject to exemptions
for certain transactions. Control is conclusively presumed to exist if an
individual or company acquires 25% or more of any class of voting securities of
the bank holding company. Control is rebuttably presumed to exist if a person
acquires 10% or more but less than 25% of any class of voting securities and
either the company has registered securities under Section 12 of the Securities
Exchange Act of 1934, as amended, or no other person will own a greater
percentage of that class of voting securities immediately after the transaction.
The regulations provide a procedure for challenge of the rebuttable control
presumption.
16
Federal Reserve policy requires a bank holding company to act as a source
of financial strength to each of its bank subsidiaries and to take certain
measures to preserve and protect bank subsidiaries in situations where
additional investments in a troubled bank subsidiary may not otherwise be
warranted. Under the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), in order to avoid receivership of an insured depository
institution subsidiary, a bank holding company is required to guarantee up to
certain maximum limits the compliance with the terms of any capital restoration
plan filed by such subsidiary with its appropriate federal banking regulator. In
addition, if a bank holding company has more than one bank or thrift subsidiary,
the bank holding company's other subsidiary depository institutions are
responsible under a cross guarantee for any losses to the FDIC resulting from
the failure of a depository institution subsidiary. Under these provisions, a
bank holding company may be required to loan money to its depository institution
subsidiaries in the form of capital notes or other instruments. However, any
such loans likely would be unsecured and subordinated to such institution's
depositors and certain other creditors.
Under federal legislation, restrictions on interstate bank acquisitions
were abolished effective September 29, 1995, and bank holding companies from any
state are now able to acquire banks and bank holding companies located in any
other state. Effective June 1, 1997, the law permits banks to merge across state
lines, subject to earlier "opt-in" or "opt-out" action by individual states. The
law also allows interstate branch acquisitions and de novo branching if
permitted by the host state. Virginia, Maryland and West Virginia have adopted
early "opt-in" legislation that allows interstate bank mergers. The states also
permit interstate branch acquisitions and de novo branching if reciprocal
treatment is accorded Virginia banks in the state of the acquiror.
All acquisitions, whether by an in-state or out-of-state acquiror,
involving a Virginia bank or bank holding company require the prior approval of
the Virginia SCC, in addition to approval by the appropriate federal regulatory
authority. Similarly, the West Virginia Board of Banking must approve all
acquisitions of a West Virginia bank or bank holding company, and the Maryland-
CFR must approve all acquisitions of a Maryland bank or bank holding company.
REGULATION OF SUBSIDIARY BANKS
General. All of F&M's subsidiary banks are state-chartered institutions
-------
organized under either Virginia, West Virginia, or Maryland law. Seven of the
subsidiary banks, F&M Bank-Winchester, F&M Bank-Massanutten, F&M Bank-Richmond,
F&M Bank-Central Virginia, F&M Bank-Southern Virginia, F&M Bank-Northern
Virginia, and F&M Bank-Peoples are Virginia-chartered institutions regulated and
examined by the Virginia SCC. F&M Bank-West Virginia, Inc., is a West Virginia-
chartered institutions regulated and examined by the West Virginia Board of
Banking. F&M Bank-Maryland is a Maryland state-chartered bank regulated and
examined by the Maryland CFR.
F&M's subsidiary banks are all members of the Federal Reserve System and
are, therefore, supervised and examined by the Federal Reserve, their primary
federal regulator. The Federal Reserve and the Virginia SCC, West Virginia Board
of Banking, or the Maryland CFR, as appropriate, conduct regular examinations of
each subsidiary bank, reviewing the adequacy of their allowance for loan losses,
quality of loans and investments, propriety of management practices, compliance
with laws and regulations and other aspects of operations. In addition to these
regular examinations, each subsidiary
17
bank must furnish the Federal Reserve with quarterly reports containing detailed
financial statements and schedules. The FDIC, which provides deposit insurance,
also has authority to examine and regulate F&M's subsidiary banks.
Federal and state banking laws and regulations govern all areas of the
operations of F&M's subsidiary banks, including maintenance of cash reserves,
loans, mortgages maintenance of minimum capital, payment of dividends, and
establishment of branch offices. Federal and state bank regulatory agencies also
have the general authority to eliminate dividends paid by insured banks if such
payment is deemed to constitute an unsafe and unsound practice. As their primary
federal regulator, the Federal Reserve has authority to impose penalties,
initiate civil administrative actions and take other steps to prevent F&M's
subsidiary banks from engaging in unsafe or unsound practices. In this regard,
the Federal Reserve has adopted capital adequacy requirements applicable to its
member banks.
Deposit Insurance. The deposits of F&M's subsidiary banks are currently
-----------------
insured to a maximum of $100,000 per depositor, subject to certain aggregation
rules. The FDIC has implemented a risk-related assessment system for deposit
insurance premiums and all depository institutions have been assigned to one of
nine risk assessment classifications based upon certain capital and supervisory
measures. All deposits of F&M's subsidiary banks are subject to the rates of the
Bank Insurance Fund ("BIF"), the federal deposit insurance fund that covers
commercial bank deposits.
REGULATORY CAPITAL REQUIREMENTS
On December 19, 1991, FDICIA was enacted. Among other things, FDICIA
requires the federal banking agencies to take "prompt corrective action" with
respect to banks that do not meet minimum capital requirements. FDICIA
establishes five capital tiers: "well capitalized," "adequately capitalized",
"under capitalized", "significantly undercapitalized", and "critically
undercapitalized", which terms are each further defined by federal regulations.
A depository institution is "well capitalized" if it significantly exceeds the
minimum level required by regulation for each relevant capital measure,
"adequately capitalized" if it meets each such measure, "undercapitalized" if it
fails to meet any such measure, "significantly undercapitalized" if it is
significantly below any such measure, and "critically undercapitalized" if it
fails to meet any critical capital level set forth in the regulations. The
critical capital level must be a level of tangible equity capital equal to not
less than 2.0% of total assets and not more than 65% of the minimum leverage
ratio to be prescribed by regulation (except to the extent that 2.0% would be
higher than such 65% level). An institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position if it receives an unsatisfactory examination rating. In order to be
classified as a "well capitalized institution," the institution must have a
total risk-based capital ratio of 10% and a leverage ratio of 5%.
If a depository institution fails to meet regulatory capital requirements,
regulatory agencies can require submission and funding of a capital restoration
plan by the institution, place limits on its activities, require the raising of
additional capital, and, ultimately, require the appointment of a conservator or
receiver for the institution. As of December 31, 2000, all of F&M's subsidiary
banks exceeded the required regulatory capital requirements under FDICIA.
18
CAPITAL ADEQUACY AND DIVIDENDS
Information on "Capital Adequacy" may be found under "ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS",
"Capital Resources".
Dividends from F&M's subsidiary banks constitute the major source of funds
for dividends to be paid by the Company. The amount of dividends payable by each
subsidiary bank to the Company depends upon its earnings and capital position,
and is limited by federal and state law, regulations and policy. The Federal
Reserve has the general authority to limit dividends paid by F&M's subsidiary
banks and the Company if such payments are deemed to constitute an unsafe and
unsound practice.
As state member banks subject to the regulations of the Federal Reserve,
each subsidiary bank must obtain approval of the Federal Reserve for any
dividend if the total of all dividends declared by F&M's subsidiary banks in any
calendar year would exceed the total of its net profits for such year, as
defined by the Federal Reserve, plus its retained net profits for the preceding
two years. In addition, each subsidiary bank may not pay a dividend in an amount
greater than its undivided profits then on hand after deducting current losses
and bad debts. For this purpose, bad debts are generally defined to include the
principal amount of all loans which are in arrears with respect to interest by
six months or more, unless such loans are fully secured and in the process of
collection.
In addition, Virginia law imposes restrictions on the ability of all banks
chartered under Virginia law to pay dividends. Under Virginia law, no dividend
may be declared or paid that would impair a bank's paid-in capital. The
Virginia SCC also can limit the payment of dividends by any Virginia bank if it
determines the limitation is in the public interest and is necessary to ensure
the bank's financial soundness.
Under West Virginia law, a state bank may declare a dividend only from its
undivided profits and, if the bank's surplus account is not greater than or
equal to the par value of the bank's stock, the bank may not declare a dividend
unless a portion of the bank's profits for the period for which dividends are
declared is credited to the bank's surplus account. Also, a West Virginia-
chartered bank must obtain the approval of the West Virginia Board of Banking
prior to declaring a dividend if the total of all dividends paid by the bank in
any calendar year exceeds the total of its profits for that year plus its
undivided profits for the preceding two years.
Pursuant to Maryland law, a state bank may declare a cash dividend only
from (i) its undivided profits or (ii) with the prior approval of the Maryland
CFR, its surplus in excess of 100% of its required capital stock. For further
information about the Company's dividends, see PART II., ITEM 5., "MARKET FOR
REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS."
19
THE GRAMM-LEACH-BLILEY ACT OF 1999
The Gramm-Leach-Bliley Act of 1999 ("GLBA") was signed into law on November
12, 1999. The main purpose of GLBA is to permit greater affiliations within the
financial services industry, primarily banking, securities and insurance. The
provisions of GLBA that are believed to be of most significance to the Company
are discussed below.
GLBA repeals sections 20 and 32 of the Glass-Steagall Act, which separated
commercial banking from investment banking, and substantially amends the BHCA,
which limited the ability of bank holding companies to engage in the securities
and insurance businesses. To achieve this purpose, GLBA creates a new type of
company, the "financial holding company." A financial holding company may
engage in or acquire companies that engage in a broad range of financial
services, including
. securities activities such as underwriting, dealing, brokerage,
investment and merchant banking; and
. insurance underwriting, sales and brokerage activities.
A bank holding company may elect to become a financial holding company only if
all of its depository institution subsidiaries are well-capitalized, well-
managed and have at least a satisfactory Community Reinvestment Act rating. For
various reasons, the Company has not elected to be treated as a financial
holding company under GLBA.
GLBA establishes a system of functional regulation under which the federal
banking agencies will regulate the banking activities of financial holding
companies and banks' financial subsidiaries, the Securities and Exchange
Commission ("SEC") will regulate their securities activities and state insurance
regulators will regulate their insurance activities.
With regard to Federal securities laws, GLBA removes the blanket exemption
for banks from being considered brokers or dealers under the Securities Exchange
Act of 1934, and sets out a number of limited activities, including trust and
fiduciary activities, in which a bank may engage without being considered a
broker, and a set of activities in which a bank may engage without being
considered a dealer. The Investment Advisers Act of 1940 also will be amended
to eliminate certain provisions exempting banks from the registration
requirements of that statute, and the Investment Company Act of 1940 will be
amended to provide the SEC with regulatory authority over various bank mutual
fund activities.
GLBA also provides new protections against the transfer and use by
financial institutions of consumers nonpublic personal information. A financial
institution must provide to its customers, at the beginning of the customer
relationship and annually thereafter, the institution's policies and procedures
regarding the handling of customers' nonpublic personal financial information.
The new privacy provisions will generally prohibit a financial institution from
providing a customer's personal financial information to unaffiliated third
parties unless the institution discloses to the
20
customer that the information may be so provided and the customer is given the
opportunity to opt out of such disclosure.
Many of GLBA's provisions, including the customer privacy protection
provisions, require the Federal bank regulatory agencies and other regulatory
bodies to adopt regulations to implement those respective provisions. Most of
the required implementing regulations have been proposed and/or adopted by the
bank regulatory agencies as of December 31, 2000. Neither the provisions of
GLBA nor the act's implementing regulations as proposed or adopted have had a
material impact on the Company's or its subsidiaries regulatory capital ratios
(as discussed above) or ability to continue to operate in a safe and sound
manner.
RECENT LEGISLATIVE DEVELOPMENTS
From time to time, various legislative and regulatory proposals with
respect to the regulation of financial institutions are considered by the
executive branch of the Federal government, Congress and various state
governments, including Virginia, West Virginia, and Maryland. Certain of these
proposals, if adopted, could significantly change the regulation of banks and
the financial services industry. The Company cannot predict whether any of these
proposals will be adopted or, if adopted, how these proposals would affect the
Company.
ITEM 2. PROPERTIES.
The principal executive offices of F&M is located at 9 Court Square,
Winchester, Virginia, in a multi-story building complex that is owned free of
any encumbrances. The Company operates a total of 144 banking offices (122 in
Virginia, 13 in West Virginia, and 9 in Maryland), 102 of which are owned by the
Company or one of its subsidiary banks free of any encumbrances, and 42 of which
are leased under agreements expiring at various dates, including renewal
options. The Company also owns additional office facilities for various of its
lending, audit, accounting, and data processing functions. Additional
information regarding F&M's lease agreements may be found under "ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, Note 15."
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of its operations, the Company and its subsidiary
banks are parties to various legal proceedings. Based on information presently
available, and after consultation with legal counsel, management believes that
the ultimate outcome in such proceedings, in the aggregate, will not have a
material adverse effect on the business or the financial condition or results of
operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company has not submitted any matters to its security holders since its
Annual Meeting of Shareholders held April 25, 2000.
21
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The following table sets forth the per share high and low last sale
prices for the common stock of the Company as reported on the New York Stock
Exchange, and the cash dividends declared per share on the common stock for the
periods indicated:
PRICE RANGE CASH
HIGH LOW DIVIDENDS
---- --- ---------
1999
First Quarter $30.00 $23.87 $0.195
Second Quarter 33.18 23.93 1.235
Third Quarter 33.50 26.00 0.235
Fourth Quarter 30.25 26.00 0.235
PRICE RANGE CASH
HIGH LOW DIVIDENDS
---- --- ---------
2000
First Quarter $26.63 $21.94 $0.235
Second Quarter 25.00 21.00 0.250
Third Quarter 25.00 21.25 0.250
Fourth Quarter 27.50 22.56 0.250
At December 31, 2000, there were 24,613,382 shares of common stock
outstanding held by 9,042 holders of record.
The Company historically has paid cash dividends on a quarterly basis. The
final determination of the timing, amount and payment of dividends on the common
stock is at the discretion of the Board of Directors and will depend upon the
earnings of the Company and its subsidiaries, principally its subsidiary banks,
the financial condition of the Company and other factors, including general
economic conditions and applicable governmental regulations and policies.
The Company or F&M Bank-Winchester has paid regular cash dividends for more
than 57 consecutive years.
The Company is a legal entity separate and distinct from its subsidiaries,
and its revenues depend primarily on the payment of dividends from F&M's
subsidiary banks. F&M's subsidiary banks are subject to certain legal
restrictions on the amount of dividends they are permitted to pay to the
Company. At December 31, 2000, F&M's subsidiary banks had available for
distribution as dividends to the Company approximately $26.8 million.
22
ITEM 6. SELECTED FINANCIAL DATA.
Year Ended December 31,
----------------------------------------------------------------
2000 1999 1998 1997 1996
------------------------- ---------- -----------------------
(In thousands, except ratios and per share amounts)
Income Statement Data:
Interest income.................. $ 238,817 $ 215,675 $ 214,305 $ 204,908 $ 191,969
Interest expense................. 100,133 83,911 89,220 86,810 82,185
---------- --------- ---------- ---------- ----------
Net interest income.............. 138,684 131,764 125,085 118,098 109,784
Provision for loan losses........ 3,951 4,021 5,541 5,915 2,378
---------- -------- --------- ---------- ----------
Net interest income after
provision for loan losses..... 134,733 127,743 119,544 112,183 107,406
Noninterest income.............. 54,802 44,995 37,118 27,376 24,415
Securities gains................ 51 3,118 2,436 4,221 317
Noninterest expense............. 116,448 110,442 100,036 90,544 81,622
---------- --------- ---------- ---------- ----------
Income before income taxes...... 73,138 65,414 59,062 53,236 50,516
Income taxes.................... 25,184 22,412 20,124 17,462 16,752
---------- --------- ---------- ---------- ----------
Net income...................... $ 47,954 $ 43,002 $ 38,938 $ 35,774 $ 33,764
========== ========= ========== ========== ===========
Per Share Data:
Net income per share, basic(1)...... $ 1.93 $ 1.72 $ 1.55 $ 1.44 $ 1.35
Net income per share, diluted(1)..... 1.92 1.71 1.54 1.42 1.34
Cash dividends....................... 0.99 0.90 0.76 0.73 0.69
Book value at period end............. 13.79 12.36 12.77 11.79 10.93
Tangible book value.................. 12.50 11.94 12.36 11.33 10.63
Average basic shares outstanding(1).. 24,820 24,970 25,099 24,923 24,976
Average duluted shares outstanding(1) 24,961 25,145 25,329 25,106 25,196
Balance Sheet Data:
Assets............................... $3,568,780 $3,098,167 $3,100,117 $2,875,438 $2,642,237
Loans, net of unearned income........ 2,068,702 1,887,315 1,825,420 1,773,048 1,638,293
Securities........................... 1,152,639 883,801 828,862 715,091 683,110
Deposits............................. 2,991,431 2,617,855 2,620,404 2,447,883 2,264,210
Shareholders' equity................. 339,428 307,682 311,949 287,948 266,844
Performance Ratios:
Return on average assets................ 1.43% 1.40% 1.31% 1.31% 1.31%
Return on average equity............... 14.81% 13.77% 12.86% 13.01% 13.01%
Dividend payout........................ 50.91% 49.91% 44.67% 43.99% 44.12%
Efficiency............................. 58.24% 60.32% 59.32% 59.55% 59.42%
Asset Quality Ratios:
Allowance for loan losses to period
end loans, net........................ 1.19% 1.27% 1.29% 1.30% 1.25%
Allowance for loan losses to
nonaccrual loans.................... 183.48% 275.94% 189.82% 114.07% 160.29%
Nonperforming assets to period end
loans and foreclosed properties..... 1.06% 1.05% 1.57% 2.08% 1.71%
Net charge-offs to average loans........ 0.17% 0.19% 0.29% 0.19% 0.15%
Capital and Liquidity Ratios:
Leverage................................ 8.56% 10.06% 9.97% 10.04% 10.09%
Risk-based capital ratios:
Tier 1 capital....................... 14.02% 15.39% 14.97% 14.96% 15.41%
Total capital........................ 15.17% 16.59% 16.18% 16.21% 16.62%
Average loans to average deposits...... 70.68% 72.11% 71.02% 73.78% 70.57%
- -----------
Note: The amounts previously reported in Form 10-Q and Form 10-K for the periods
presented have been retroactively restated to reflect the acquisitions of
The State Bank of the Alleghenies on January 3, 2000, Security Bank on
March 22, 1999, Peoples Bank of Virginia on April 1, 1998, J. V. Arthur
Inc. on April 30, 1998, Bank of Alexandria on June 1, 1998, FB&T Financial
Corporation on March 29, 1996, and Allegiance Banc Corporation on October
1, 1996.
(1) Retroactively restated for 3% stock dividend declared in 1999.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion provides information about the major components of
the results of operations and financial condition, liquidity and capital
resources of F&M. This discussion and analysis should be read in conjunction
with Item 6, "Selected Consolidated Financial Data," of this report and the
Consolidated Financial Statements and Notes to Consolidated Financial Statements
contained in Item 8, "Financial Statements and Supplementary Data," of this
report.
Overview
F&M National Corporation is a multi-state, multi-bank holding company
headquartered in Winchester, Virginia. With total resources of $3.569 billion
at year-end 2000, F&M provides financial, insurance, and trust services to
individuals and commercial customers through 18 subsidiary corporations
including 144 banking locations, 13 mortgage banking offices, 3 trust offices,
and 6 insurance offices in Virginia, West Virginia and Maryland. Record
earnings have been recorded in 2000 through the management of asset growth and
quality, interest margin, and operating efficiencies. For 2000, net loan
charge-offs were 0.17% of average loans, interest margin was 4.58%, and the
efficiency ratio was 58.24%.
F&M expanded its operations through the merger of one bank in the first
quarter of 2000, the acquisition of 15 banking offices including approximately
$300 million in deposits in the third quarter 2000, and announcing the merger of
two banks to take place in the first quarter 2001.
On January 3, 2000, the Company acquired The State Bank of the
Alleghenies, Covington, Virginia, for approximately 1,912,000 shares of F&M
common stock in a transaction accounted for as a pooling-of-interests. Upon the
effective date of the share exchange, The State Bank of the Alleghenies changed
its name to F&M Bank-Highlands.
On August 25, 2000, the Company acquired deposits of approximately
$300 million and 15 branch offices valued at approximately $8.0 million from
Wachovia Bank, N.A. F&M immediately invested net proceeds of approximately $242
million of the acquired funds in U.S. Agency securities. Goodwill associated
with the acquisition was approximately $23 million, which will be amortized over
15 years. All former employees of the acquired branches were invited to become
employees of F&M after the acquisition. The new locations, all of which were
located in Virginia, were acquired by five of F&M's community banks. F&M Bank-
Winchester acquired two locations in Luray. F&M Bank-Massanutten acquired one
location in Staunton. F&M Bank-Highlands acquired one location in Vinton. F&M
Bank-Central Virginia acquired locations in Fork Union, Gordonsville, Mineral,
Palmyra, and Ruckersville, and two locations in Chatham. F&M Bank-Southern
Virginia expanded their market area with new locations in Blackstone, Drakes
Branch, Franklin, and Kenbridge.
23
On July 6, 2000, the Company and Atlantic Financial Corp., Newport News,
Virginia ("Atlantic"), announced the signing of a definitive agreement for the
affiliation of Atlantic with F&M. On February 26, 2001, F&M completed the
acquisition of Atlantic by issuing approximately 3,160,000 common shares in
exchange for all of the outstanding common shares of Atlantic. Under terms of
the merger agreement, F&M exchanged 0.753 shares of its common stock for each
share of Atlantic common stock. The transaction is qualified as a tax-free
exchange and is being accounted for as a pooling-of-interests. Atlantic's two
bank subsidiaries, Peninsula Trust Bank and United Community Bank, were combined
in connection with the transaction and now operate together as a separate
banking subsidiary of F&M under the name of F&M Bank-Atlantic. For additional
information see Note 23 of the Notes to Consolidated Financial Statements
contained in Item 8, "Financial Statements and Supplementary Data," of this
report (the "Notes to Consolidated Financial Statements").
On August 23, 2000, the Company and Community Bankshares of Maryland, Inc.,
Bowie, Maryland ("Community") announced the signing of a definitive agreement
for the affiliation of Community with F&M. On January 25, 2001, F&M completed
the acquisition of Community by issuing 545,131 common shares in exchange for
all of the outstanding common shares of Community. Under terms of the merger
agreement, F&M exchanged 0.75 shares of its common stock for each share of
Community common stock. The transaction was accounted for as a purchase.
Community merged with F&M Bank-Maryland on the day of exchange. For additional
information see Note 23 of the Notes to Consolidated Financial Statements.
During 2000, F&M implemented a program known as "Getting Better Quicker" or
GBQ. This program, spearheaded by F&M's software vendor, established policies
and procedures aimed at improving service to bank customers. GBQ provided cross
training to employees to better serve customers and realign back office
departments, thereby, reducing overhead expenditures and improving earnings.
Results of Operations
Net income increased 11.5% in 2000 to $48.0 million compared with $43.0
million earned in 1999 and $38.9 million earned in 1998. Net income per share,
basic increased to $1.93 per share in 2000 compared to $1.72 and $1.55 per share
in 1999 and 1998. Net income per share, diluted increased to $1.92 per share in
2000 compared to $1.71 and $1.54 per share for 1999 and 1998.
Profitability ratios compare favorably in 2000, 1999 and 1998. Return on
average assets on an annualized basis was 1.43% for 2000 compared to 1.40% and
1.31% for 1999 and 1998. Return on average shareholders' equity is another
significant measure of profitability, which in 2000 improved to 14.81%, compared
to 13.77% and 12.86% in 1999 and 1998.
Net interest margin represents tax-equivalent net interest income
divided by average earning assets. It reflects the average effective rate
earned by F&M on its average earning assets. In 2000, net interest margin, on a
tax-equivalent basis, was 4.58% compared to 4.74% and 4.67% for 1999 and 1998.
Net interest income and net interest margin are influenced by fluctuations in
market rates
24
and changes in both the volume and mix of average earning assets and the
liabilities that fund those assets. In 2000, the yield on interest earning
assets increased 13 basis points from 7.72% in 1999 to 7.85% in 2000 and the
cost of interest-bearing liabilities increased 37 basis points from 3.82% in
1999 to 4.19% in 2000. The increase in the yield on earning assets was the
result of higher rates received on loans due to increases in the prime rate.
Similarly, the cost of attracting and maintaining interest-bearing liabilities
increased as a result of increases in the prime rate. In the year 2000, the
Federal Reserve increased the prime rate 100 basis points, which increased the
yield on interest rate sensitive loans and reduced the market value on the
investment portfolio. Conversely, in early January 2001, the Federal Reserve cut
the prime rate 100 basis points, which will influence the yield on interest rate
sensitive loans and market value of the investment portfolio.
In 2000, average interest-earning assets have increased to $3.065 billion
from $2.812 billion and $2.707 billion in 1999 and 1998. Two factors contributed
to the growth in interest-earning assets. First, on August 25, 2000,
approximately $242 million of the funds acquired from the 15 branch acquisition
were invested in securities. Secondly, competition for potential loan customers
have made potential customers rate sensitive, consequently, the rate relative to
the volume of increase in loans has increased. Loans, net of unearned discount
in 2000 increased $181.4 million to $2.069 billion as compared to $1.887 billion
and $1.825 billion in 1999 and 1998.
F&M's securities portfolio represents the second largest component of
interest earning assets. At December 31, 2000, F&M's securities portfolio
totaled $1.153 billion, $268.8 million or 30.4% higher than year-end 1999. The
securities portfolio at year-end 1999 totaled $883.8 million, which was $54.9
million or 6.6% higher than year-end 1998. Investment in securities increased
approximately $26.8 million for the 12-month period 2000 if investment in
securities attributable to the branch acquisitions were eliminated. Strong loan
demand limited funds to be invested in securities prior to the branch
acquisition. Funds invested in the securities portfolio were primarily invested
in U.S. agency securities, which had attractive yield and maturity offerings.
F&M's efficiency ratio, a measure of its performance based upon the
relationship between non-interest expense and income less securities gains,
compares favorably to other Virginia financial institutions. F&M's efficiency
ratio for 2000, 1999 and 1998 was 58.2%, 60.3% and 59.3%, respectively. A lower
efficiency ratio represents a greater control of non-interest related costs.
This ratio is influenced as a result of acquisition and affiliation costs due to
F&M's program of acquiring financial institutions. A fluctuation in the
efficiency ratio can be attributed to relative changes in both non-interest
expense and net interest income.
Since the beginning of 1988, F&M has acquired approximately $1.575 billion
in assets and $1.369 billion in deposits through sixteen bank acquisitions and
two non-bank acquisitions. Fifteen of these acquisitions were accounted for as a
pooling-of-interests and three as a purchase. These transactions enabled F&M to
expand its market into the eastern panhandle of West Virginia, northern Virginia
market of Loudoun, Fauquier, Fairfax and Prince William counties, southern
Virginia market of Greensville County, increase its market share in two of its
other Virginia markets and enter the Maryland markets of Montgomery and Prince
George counties. In addition, the acquisition of 15 branch banks in 2000, which
was accounted for as a purchase, expanded F&M's
25
market primarily along the border of Virginia and North Carolina, southern and
southwestern Virginia.
F&M is not aware of any current recommendations by any regulatory
authorities, which, if they were implemented, would have a material effect on
the registrant's liquidity, capital resources, or results of operation.
Table 1 sets forth, for the periods indicated, selected quarterly results
of F&M's operations.
Table 1
Summary of Financial Results By Quarter
2000 (1) 1999 (1)
--------------------------------------------- --------------------------------------------
Dec. 31 Sept. 30 June 30 Mar. 31 Dec. 31 Sept. 30 June 30 Mar. 31
--------- ---------- ----------- ----------- ---------- ---------- ---------- ----------
(In thousands, except per share amounts)
Interest income................ $ 63,788 $60,704 $58,527 $55,798 $55,269 $ 54,112 $53,514 $52,780
Interest expense............... 28,080 25,621 24,188 22,244 21,664 20,454 20,924 20,869
--------- ---------- ----------- ---------- ---------- ----------- ---------- ----------
Net interest income............ 35,708 35,083 34,339 33,554 33,605 33,658 32,590 31,911
Provision for loan
losses....................... 1,061 1,101 1,026 763 1,207 793 1,101 920
--------- ---------- ----------- ---------- ---------- ----------- ---------- ----------
Net interest income
after provision
for loan losses.............. 34,647 33,982 33,313 32,791 32,398 32,865 31,489 30,991
Noninterest income............. 13,593 14,093 15,628 11,539 11,189 12,153 11,951 12,820
Noninterest expense............ 29,645 28,644 30,706 27,453 29,019 28,205 27,412 25,806
Income before income
taxes........................ 18,595 19,431 18,235 16,877 14,568 16,813 16,028 18,005
Applicable income
taxes....................... 6,208 6,782 6,367 5,827 4,709 5,686 5,673 6,344
--------- ---------- ----------- ---------- ---------- ----------- ---------- ----------
Net income..................... $ 12,387 $12,649 $11,868 $11,050 $9,859 $11,127 $10,355 $11,661
========= ========== =========== ========== ========== =========== ========== ==========
Earnings per share, basic (2).. $0.50 $0.51 $0.48 $0.44 $0.39 $0.45 $0.41 $0.47
Earnings per share,
assuming dilution (2)....... $0.50 $0.51 $0.47 $0.44 $0.39 $0.44 $0.41 $0.46
(1) The amounts previously reported on Form 10Q for the periods presented have
been retroactively restated to reflect the acquisition of State Bank of the
Alleghenies on January 3, 2000 and Security Bank on March 22, 1999.
(2) Retroactively restated to reflect 3% stock dividend declared in August,
1999.
Net Interest Income
Net interest income represents the principal source of earnings for F&M.
Net interest income equals the amount by which interest income exceeds interest
expense and represents F&M's gross profit margin. Changes in the volume and mix
of interest-earning assets and interest-bearing liabilities, as well as their
respective yields and rates, have a significant impact on the level of net
interest income.
Net interest income increased to $138.7 million for the year ended December
31, 2000, up 5.3% over the $131.8 million reported for the same period in 1999
and was also up 5.3% in 1999 over the $125.1 million reported for 1998. Net
interest income in 2000 was affected by increased demand for loans coupled with
rising market rates in a strong, expansionary economy.
Loans grew $181.4 million or 9.6% to $2.069 billion in 2000 from $1.887
billion in 1999. Loans increased in 1999 by $61.9 million or 3.4% over $1.825
billion in 1998. In 2000, deposit growth and deposit acquisition provided the
sources of funds by increasing to $2.991 billion, up $373.6 million or 14.3%
from $2.618 billion in 1999. Interest-bearing deposits increased $269.4 million
in 2000 to $2.346 billion from $2.076 billion in 1999. Deposit and loan growth
in 2000 was affected by intense competition for deposit dollars, rising interest
rates, a bull stock market coupled with very low unemployment. The Federal
Reserve lowered the discount rate in the latter part of 1998 in order to
preserve economic stability. In 1999 and 2000, the Federal Reserve raised
interest rates in an effort to slow down the economy. Efforts to slow the
economy by the Federal Reserve through raising interest rates reduced economic
expansion in the fourth quarter 2000. The Federal Reserve lowered interest rates
by 50 bps. on January 4, 2000 to again spur growth in the economy.
Net interest income was $131.8 million for the year 1999, up 5.3% over the
$125.1 million reported for the same period in 1998. Net interest income in 1999
was affected by increased competition for loans that resulted in lower loan
rates, however, the economy was considered strong and continued to expand. Loans
grew $61.9 million or 3.4% to $1.887 billion in 1999 from $1.825 billion in
1998. In 1999, deposits provided the source of funds by increasing on average to
$2.589 billion up $75 million or 3.0% from $2.514 in 1998. Interest-bearing
deposits increased on average $36.0 million in 1999 to $2.053 billion from
$2.017 billion in 1998. The Federal Reserve lowered interest rates in 1998 to
spur the economy and raised interest rates in 1999 to slow the economy.
26
This change in economic management by the Fed effected loan and deposit growth
in 1999 and 1998.
Net interest income was $125.1 million for the year 1998, up 5.9% over the
$118.1 million reported for the same period for 1997. Net interest income in
1998 was affected by a rebound of loan demand following a recessionary period.
Loans grew $52.4 million or 3.0% to $1.825 billion in 1998 from $1.773 billion
in 1997. In 1998, total noninterest bearing deposits provided the primary source
of funds increasing to an average balance of $496.9 million.
Table 2 analyzes changes in net interest income attributable to changes in
the volume of interest-bearing assets and liabilities compared to changes in
interest rates. Nonaccruing loans are included in average loans outstanding.
Table 2
Volume and Rate Analysis
Tax equivalent basis
2000 1999
------------------------------ ------------------------------------
Change in Change in
Volume Rate Income/ Volume Rate Income/
Effect Effect Expense Effect Effect Expense
--------- --------- --------- ----------- ----------- ------------
(Dollars in thousands) (Dollars in thousands)
Earning Assets:
Taxable securities.................... $ 9,352 $ 2,449 $11,801 $ 5,537 $ (218) $ 5,319
Tax-exempt securities................. 34 465 499 (90) (116) (206)
Taxable loans......................... 10,283 - 10,283 13,051 (13,970) (919)
Tax-exempt loans...................... 378 (5) 373 167 (115) 52
Fed funds sold and repurchase
agreements........................... (583) 1,061 478 (3,558) 635 (2,923)
Interest-bearing deposits
in other banks....................... 11 3 14 (142) 135 (7)
-------- ------- -------- -------- -------- --------
Total earning assets................ 19,475 3,973 23,448 14,965 (13,649) 1,316
-------- ------- -------- -------- -------- --------
Interest-Bearing Liabilities:
Checking deposits..................... 400 539 939 (1,475) 1,417 (58)
Savings deposits - regular............ 58 (100) (42) 244 (621) (377)
Savings deposits-
money market......................... 255 985 1,240 202 (718) (516)
CD's & other time deposits-
under $100,000....................... 5,084 3,556 8,640 (1,673) (2,527) (4,200)
CD's & other time deposits-
$100,000 & over...................... 1,771 723 2,494 562 (1,308) (746)
-------- ------- ------- -------- -------- --------
Total interest-bearing
deposits........................... 7,568 5,703 13,271 (2,140) (3,757) (5,897)
Borrowed funds short-term............. 1,501 1,539 3,040 376 (257) 119
Borrowed funds long-term.............. (203) 114 (89) 450 19 469
--------- ------- ------- -------- -------- --------
Total interest-bearing
liabilities........................... 8,866 7,356 16,222 (1,314) (3,995) (5,309)
--------- ------- ------- -------- -------- --------
Change in net interest income......... $10,609 $(3,383) $ 7,226 $16,279 $ (9,654) $ 6,625
========= ======= ======= ======== ======== ========
Note: The change in interest due to both rate and volume has been allocated to
change due to volume and change due to rate in proportion to the relationship of
the absolute dollar amounts of the change in each.
Table 3
Average Balances, Income and Expense, Yields and Rates
Twelve Months Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
2000 1999 1998
Annual Annual Annual
Average Income/ Yield/ Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate Balance Expense Rate
- -----------------------------------------------------------------------------------------------------------------------------------
ASSETS (Dollars In thousands)
Securities:
Taxable.......................... $ 963,190 $61,736 6.41% $ 815,613 $ 49,935 6.12% $ 725,707 $ 44,616 6.15%
Tax-exempt (1)................... 31,261 2,910 9.31% 30,825 2,411 7.82% 31,939 2,617 8.19%
------------------------------ ----------------------------- ------------------------------
Total securities............... 994,451 64,646 6.50% 846,438 52,346 6.18% 757,646 47,233 6.23%
Loans (net of unearned income):
Taxable.......................... 1,970,525 168,033 8.53% 1,850,260 157,750 8.53% 1,770,865 158,669 8.96%
Tax-exempt (1)................... 20,574 2,045 9.94% 16,765 1,672 9.97% 14,473 1,620 11.19%
------------------------------ ----------------------------- ------------------------------
Total loans.................... 1,991,099 170,078 8.54% 1,867,025 159,422 8.54% 1,785,338 160,289 8.98%
Fed funds sold and repur-
chase agreements................. 78,379 5,773 7.37% 97,689 5,295 5.42% 162,459 8,218 5.06%
Interest-bearing deposits in
other banks...................... 1,056 55 5.21% 835 41 4.91% 1,319 48 3.64%
------------------------------ ----------------------------- ------------------------------
Total earning assets........... 3,064,985 240,552 7.85% 2,811,987 217,104 7.72% $2,706,762 215,788 7.97%
Less: allowance for loan losses..... (24,461) (23,861) (23,431)
Total nonearning assets............. 306,479 280,593 280,472
---------- ---------- -----------
Total assets........................ $3,347,003 $3,068,719 $2,963,803
========== ========== ===========
LIABILITIES and SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Checking......................... $ 501,958 $ 10,820 2.16% $ 482,755 $ 9,881 2.05% $ 440,179 $ 9,939 2.26%
Regular savings.................. 232,523 5,484 2.36% 230,293 5,526 2.40% 221,768 5,903 2.66%
Money market savings............. 267,444 8,472 3.17% 258,595 7,232 2.80% 252,350 7,748 3.07%
Certificates of deposit:
Less than $100,000............. 927,533 52,193 5.63% 833,911 43,553 5.22% 865,039 47,753 5.52%
$100,000 and more.............. 281,958 14,673 5.20% 247,434 12,179 4.92% 237,673 12,925 5.44%
------------------------------ ----------------------------- ------------------------------
Total interest-bearing deposits..... 2,211,416 91,642 4.14% 2,052,988 78,371 3.82% 2,017,009 84,268 4.18%
Short-term borrowings............... 154,186 7,008 4.55% 116,277 3,968 3.41% 102,017 3,849 3.77%
Long-term borrowings................ 22,998 1,483 6.45% 25,884 1,572 6.07% 18,469 1,103 5.97%
------------------------------ ----------------------------- ------------------------------
Total interest-bearing liabilities.. 2,388,600 100,133 4.19% 2,195,149 83,911 3.82% 2,137,495 89,220 4.17%
Noninterest-bearing liabilities:
Demand deposits.................. 605,460 535,997 496,856
Other liabilities................ 29,248 25,338 26,548
---------- ---------- -----------
Total liabilities................... 3,023,308 2,756,484 $2,660,899
Stockholders' equity................ 323,695 312,235 302,904
---------- ---------- -----------
Total liabilities and share-
holders' equity.................. $3,347,003 $3,068,719 $2,963,803
========== ========== ===========
Net interest income................. $140,419 $133,193 $126,568
--------- --------- ---------
Interest rate spread................ 3.66% 3.90% 3.80%
Interest expense as a percent
of average earning assets........... 3.27% 2.98% 3.30%
Net interest margin ................ 4.58% 4.74% 4.67%
(1) Income and yields are reported on a taxable-equivalent basis.
Table 3 depicts interest income on earning assets and related average
yields as well as interest expense on interest-bearing liabilities and related
average rates paid for the periods indicated. Loans placed on a nonaccrual
status are included in the balances and were included in the computation of
yields, upon which they had no material effect. Average balances are calculated
based on month-end averages.
Interest Sensitivity
The primary goals of interest rate risk management are to minimize
fluctuations in net interest margin as a percentage of earning assets and to
increase the dollars of net interest margin at a growth rate consistent with the
growth rate of total assets. These goals are accomplished by balancing the
volume of floating-rate liabilities with a similar volume of floating-rate
assets, by keeping the average maturity of fixed rate asset and liability
contracts reasonably consistent and short, and by routinely adjusting pricing
rates to market conditions on a weekly basis.
The goal of F&M is to generally maintain a position that is to provide
flexibility enough to move to an equality between rate-sensitive assets and
rate-sensitive liabilities, which may be desirable when there are wide and
frequent fluctuations in interest rates. Interest rate gaps are managed through
investments, loan pricing and deposit pricing. When an unacceptable positive gap
within a one-year time frame occurs, selling shorter-term investments and buying
longer maturities
27
can extend maturities. The same effect can also be accomplished by reducing
emphasis on variable rate loans. When an unacceptable negative gap occurs,
variable rate loans can be increased and more investment in shorter-term
investments can be made. Pricing policies on either or both loans and deposits
can be changed to accomplish any of the goals. F&M reviews the interest
sensitivity position of each subsidiary bank at least once a quarter.
It is F&M's policy not to engage in activities considered to be derivative
in nature such as futures, option contracts, swaps, caps, floors, collars or
forward commitments. F&M considers derivatives as speculative which is contrary
to F&M's historical or prospective philosophy. F&M does not hold or issue
financial instruments for trading purposes. F&M does hold in its loan and
security portfolio investments that adjust or float according to changes in the
"prime" lending rate which is not considered speculative, but necessary for good
asset/liability management. Off-balance sheet risks such as commitments to
extend credit, standby letters of credit and other items are discussed in Note
19 in the Notes to Consolidated Financial Statements.
Market Risk Management
Market risk is the risk of loss arising from adverse changes in the fair
value of financial instruments due to changes in interest rates, exchange rates
and equity prices. F&M's market risk is composed primarily of interest rate
risk. F&M's Asset/Liability/Risk Committee ("ALCO") is responsible for reviewing
the interest rate sensitivity position of F&M and establishing policies to
monitor and limit exposure to interest rate risk. F&M's Board of Directors
reviews guidelines established by ALCO.
Asset/Liability/Risk Management: The primary goals of asset/liability
management are to maximize net interest income and the net value of F&M's future
cash flows within the interest rate risk limits set by ALCO.
Interest Rate Risk Measurement: Interest rate risk is monitored through the
use of three complementary measures: static gap analysis, earnings simulation
modeling and net present value estimation. While each of the interest rate risk
measurements has limitations, taken together they represent a reasonably
comprehensive view of the magnitude of interest rate risk in the Company, the
distribution of risk along the yield curve, the level of risk through time, and
the amount of exposure to changes in certain interest rate relationships.
Static Gap: Gap analysis measures the amount of repricing risk embedded in
the balance sheet at a point in time. It does so by comparing the differences in
the repricing characteristics of assets and liabilities. A gap is defined as the
difference between the principal amount of assets and liabilities, adjusted for
off-balance sheet instruments, which reprice within a specified time period. The
cumulative one-year gap, at year-end 2000 and 1999 was -10.0% and -6.5% of total
earning assets, respectively. The policy limit for the one-year gap is plus or
minus 15% of adjusted total earning assets.
28
Core deposits and loans with noncontractual maturities are included in the
gap repricing distributions based upon historical patterns of balance attrition
and pricing behavior which are reviewed at least annually.
The gap repricing distributions include principal cash flows from
residential mortgage loans and mortgage-backed securities in the timeframes in
which they are expected to be received. Mortgage prepayments are estimated by
applying industry median projections of prepayment speeds to portfolio segments
based on coupon range and loan age.
Earnings Simulation: The earnings simulation model forecasts one-year net
income under a variety of scenarios that incorporate changes in the absolute
level of interest rates, changes in the shape of the yield curve and changes in
interest rate relationships. Management evaluates the effects on income of
alternative interest rate scenarios against earnings in a stable interest rate
environment. This type of analysis is also most useful in determining the short-
run earnings exposures to changes in customer behavior involving loan payments
and deposit additions and withdrawals.
The most recent earnings simulation model projects net income would
decrease by approximately 0.7% of stable-rate net income if rates fell by two
hundred basis points over the next year. It projects an increase of
approximately 0.5% if rates rise over the next year by two hundred basis points.
Management believes this reflects an asset-sensitive rate risk position for the
one-year horizon. This one-year forecast is within the ALCO guideline of 15.0%.
This dynamic simulation model includes assumptions about how the balance
sheet is likely to evolve through time, in different interest rate environments.
Loan and deposit growth rate assumptions are derived from historical analysis
and management's outlook, as are the assumptions used to project yields and
rates for new loans and deposits. All maturities, calls and prepayments in the
securities portfolio are assumed to be reinvested in like instruments. Mortgage
loan prepayment assumptions are developed from industry median estimates of
prepayment speeds for portfolios with similar coupon ranges and seasoning.
Noncontractual deposit growth rates and pricing are assumed to follow historical
patterns. The sensitivities of key assumptions are analyzed at least annually
and reviewed by ALCO.
Net Present Value: The Net Present Value ("NPV") of the balance sheet, at a
point in time, is defined as the discounted present value of asset cash flows
minus the discounted value of liability cash flows. Interest rate risk analysis
using NPV involves changing the interest rates used in determining the cash
flows and in discounting the cash flows. The resulting percentage change in NPV
is an indication of the longer term repricing risk and options risk embedded in
the balance sheet.
At year-end, a 200 basis point immediate increase in rates is estimated to
reduce NPV by 10.3%. Additionally, NPV is projected to increase by 3.7% if rates
fall immediately by 200 basis points.
As with gap analysis and earnings simulation modeling, assumptions about
the timing and variability of balance sheet cash flows are critical in NPV
analysis. Particularly important are the
29
assumptions driving mortgage prepayments and the assumptions about expected
attrition of the core deposit portfolios. These assumptions are applied
consistently across the different rate risk measures.
Summary information about interest-rate risk measures is presented below.
Table 4
Interest-rate Risk Measures
Year-end
2000 1999
-------- -------
Static 1-Year Cumulative Gap -10.0% -6.5%
1-Year Net Income Simulation Projection (1)
-200 bp Rate Change vs Stable Rate -0.7% -1.1%
+200 bp Rate Change vs Stable Rate 0.5% 0.6%
Static Net Present Value Change
-200 bp Shock vs Stable Rate 3.7% 6.3%
+200 bp Shock vs Stable Rate -10.3% -8.7%
(1) The net income simulation projection for 2000 is based on a ramp of interest
rates where the rate change is spread over a 12 month period.
Due to borrowers' preferences for floating-rate loans and depositors'
preferences for fixed-rate deposits, F&M's balance sheet tends to move toward
less liability sensitivity with the passage of time. The earnings simulation
model indicates that if all prepayments, calls and maturities of the securities
portfolios expected over the next year were to remain uninvested, then the
current liability sensitivity position would be lessened. Purchases of fixed-
rate securities have been made to offset the natural tendency toward a less
liability sensitive interest rate risk position.
Management expects interest rates will decrease approximately 150 bps.
during 2001 and believes that the current modest level of liability sensitivity
is appropriate.
Noninterest Income
Noninterest income for 2000 increased $6.7 million, or 14.0%, from $48.1
million at year-end 1999 to $54.9 million at year-end 2000. If security gains
were eliminated for the 12 month period 2000 and 1999, noninterest income
increased $9.8 million or 21.8%. For the year 1999, gains realized on securities
available for sale were $3.1 million or 6.5% of total noninterest income,
whereas, for the year 2000 only $51 thousand gains were taken. Security gains
are realized when market conditions exist that are favorable to the Company
and/or conditions dictate additional liquidity is desirable. It is the intent of
the Company 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.
F&M Trust Company income increased $478 thousand or 16.6% from $2.9 million
for 1999 to $3.3 million for 2000 as a result of increased fiduciary activities
and the settlement of estates. Service charges on deposit accounts, the largest
single item of noninterest income, increased $2.7 million for 2000, up 17.5%
over the comparable period a year ago. Revenues have increased from fees
charged for debit card transactions, point of sale charges, and ATM
transactions. Credit card fees increased to $5.1 million for 2000 as compared
to $4.8 million for 1999 as a result of increased card loan volume. Fees for
other customer services were $15.1 million for 2000, which increased $6.6
million or 77.4% from 1999 primarily as a result of fees charged customers in
the secondary market. Insurance commissions increased $841 thousand or 9.4%
from $9.0 million in 1999 to $9.8 million in 2000 as a result of F&M's two full
service insurance agencies expanding their customer base. Other operating3,349
income decreased to $3.2 million in 2000, down $1.2 million or 26.8% over 1999.
The decrease in other operating income was primarily the result of additional
merger related expenditures incurred in 1999.
30
In 1999, noninterest income increased $8.6 million or 21.6% from $39.6
million in 1998 to $48.1 million. F&M Trust Company income increased $230
thousand or 8.7% from $2.6 million for 1998 to $2.9 million for 1999 as a result
of additional and increased fiduciary activities. Service charges on deposit
accounts were $15.5 million for 1999, up 12.8% over the previous year. Credit
card fees were $4.8 million and $4.2 million for 1999 and 1998, respectively, up
$586 thousand or 14.0% as a result of increased card lending activities. Fees
for other customer services were $8.6 million for 1999, which increased $5.2
million or 156.6% from 1998 as a result of increased secondary market
activities, increased marketing of current services and providing new services
for customers. Insurance commissions increased $589 thousand or 7.0% from $8.4
million in 1998 to $9.0 million in 1999 as a result of acquiring F&M's insurance
subsidiaries, which expanded their customer base. Gains on sale of securities
were $3.1 million for 1999 as compared to $2.4 million for 1998. Security gains
are realized when market conditions exist that are favorable to F&M and/or
conditions dictate additional liquidity is desirable. Interest rates were rising
in 1999 increasing the appeal to reposition securities, therefore, security
gains were larger in 1999 than in 1998.
Table 5
Noninterest Income
Year ended December 31,
------------------------------
2000 1999 1998
------------------------------
(Dollars in thousands)
Commissions and fees from fiduciary activities................... $ 3,349 $$2,871 $ 2,641
Service charges on deposit accounts.............................. 18,229 15,509 13,752
Credit card fees................................................. 5,095 4,779 4,193
Fees for other customer services................................. 15,149 8,54 3,329
Insurance commission income...................................... 9,827 8,986 8,397
Other operating income........................................... 3,153 4,309 4,806
-------------------------------
Noninterest income............................................ 54,802 44,995 37,118
Profits on securities available for sale......................... 51 3,118 2,436
------------------------------
Total noninterest income....................................... $54,853 $48,113 $39,554
===============================
Noninterest Expense
Growth in 2000 noninterest expense was primarily attributable to expanding
secondary market activities, branch bank expansion and remodeling older bank
offices, computer networking, and other costs associated with handling asset and
liability growth. Total noninterest expense increased $6.0 million or 5.4%, from
$110.4 million in 1999 to $116.4 million in 2000. Salaries and employee benefits
increased $2.7 million or 4.3% from $63.2 million for 1999 to $65.9 million for
2000 as a result of employing additional personnel due to the branch expansion,
certain employees who are paid on a commission basis, and increases in costs
associated with salaries and benefits. The acquisition price associated with
acquiring 15 branches included land, buildings and equipment was approximately
$8.0 million, which is being amortized over the appropriate depreciable life of
each asset. The cost of net occupancy expense has increased $908 thousand or
10.1% to $9.9 million for 2000, as a result of acquiring new branches and
remodeling older branches. Furniture and equipment expense increased $386
thousand or 5.0% to $8.0 million for 2000, which reflects higher 2000 costs
related to intercompany networking and equipment and software upgrades. Other
operating expense increased $2.0 million from $27.0 million in 1999 to $29.0
million in 2000.
For 1999, noninterest expense increased by $10.4 million, or 10.4%, from
$100.0 million in 1998 to $110.4 million in 1999. This increase was primarily
due to a $7.7 million, or 13.9% increase in salary and employee benefits, a $515
thousand or 6.1% increase in net occupancy expense including furniture and
equipment expense and a $487 thousand, or 15.5% increase in credit card expense.
Other operating expenses also increased $782 thousand or 3.0% in 1999. Increases
in noninterest expense in 1999 were attributable to branch expansion and other
overhead expenses associated with loan and deposit growth. Credit card expenses
increased as a result of higher card lending activity coupled with a computer
conversion. Other operating expenses increased as a result of professional fees
associated with acquiring new banks and training and conversion costs associated
with converting to a new consolidated data processing system.
31
Table 6
Noninterest Expense
Year ended December 31,
-------------------------------
2000 1999 1998
-----------------------------
(Dollars in thousands)
Salaries and employee benefits............... $ 65,851 $63,165 $55,442
Net occupancy expense of premises............ 9,934 9,026 8,511
Furniture and equipment expense.............. 8,040 7,654 6,755
Credit card expense.......................... 3,647 3,623 3,136
Other operating expenses..................... 28,976 26,974 26,192
-------------------------------
Total..................................... $116,448 $110,442 $100,036
===============================
Income Taxes
Income tax expense was $25.2 million, $22.4 million, and $20.1 million at
December 31, 2000, 1999, and 1998, respectively. The increase in income taxes is
attributable to increased taxable earnings at the federal statutory income tax
rate of 35% and state income taxes levied by West Virginia and Maryland. This
corresponds to an effective tax rate of 34.4%, 34.3% and 34.1% for the three
years ended December 31, 2000, 1999 and 1998, respectively. Note 17 to Notes to
Consolidated Financial Statements for year-end provide reconciliation between
income tax expense computed using the federal statutory income tax rate and
F&M's actual income tax expense. Also included in Note 17 to Notes to
Consolidated Financial Statements is information regarding the principal items
giving rise to deferred taxes for each of the three years ended December 31,
2000.
Loan Portfolio
Loans, net of unearned income, increased to $2.069 billion at December 31,
2000, up $181.4 million or 9.6% from $1.887 billion at year-end 1999 and up
$61.9 million or 3.4% from $1.825 billion at year-end 1998. The loan activity
increase for 2000 is indicative of a highly competitive market coupled with an
expanding economy. All of F&M's subsidiary banks offer both commercial and
consumer loans, but lending activity is generally focused on consumers and small
to middle-market businesses within the subsidiary banks' respective market
regions. Five of F&M's subsidiary banks, F&M Bank-Massanutten, F&M Bank-West
Virginia, F&M Bank-Southern Virginia, F&M Bank-Highlands, and F&M Bank-Peoples
emphasize consumer lending, with activities focused primarily on residential
real estate and consumer lending. F&M Bank-Richmond, F&M Bank-Northern Virginia,
F&M Bank-Central Virginia and F&M Bank-Maryland are based in larger markets
where the commercial loan demand is stronger and, as a result, their lending
activities place a greater emphasis on small to medium-size business. F&M Bank-
Winchester, because of its size and dominant position in its market, has a
greater opportunity to appeal to larger commercial customers in addition to
consumers.
Approximately 45.0% of F&M's loan portfolio at December 31, 2000 was
comprised of commercial loans, which includes certain loans secured by real
estate in categories of multifamily, non-farm, non-residential and agricultural
where real estate is among the sources of collateral securing the loan. F&M's
subsidiary banks offer a variety of commercial loans within their market
regions, including revolving lines of credit, working capital loans, equipment
financing loans and letters of credit. Although F&M's subsidiary banks typically
look to the borrower's cash flow as the principal source of repayment for such
loans, assets, such as real property, accounts receivable, inventory and
equipment, secure many of the loans within this category. In addition, a number
of commercial loans are secured by real estate used by such businesses and are
generally personally guaranteed by the principals of the businesses. F&M's
commercial loans generally bear a floating rate of interest tied to a system-
wide prime rate set by F&M Bank-Winchester.
32
F&M's residential real estate loan portfolio (including home equity lines)
was 35.5% of total loans at December 31, 2000. The residential mortgage loans
made by F&M's subsidiary banks and F&M Mortgage Services are made only for
single family, owner-occupied residences within their respective market regions.
Residential mortgage loans offered by F&M's subsidiaries are either adjustable
rate loans or fixed rate loans with 20 to 30 year amortization schedules that
mature with a balloon payment on the third or fifth year anniversary of the
loan.
F&M Mortgage Services, F&M Bank-Northern Virginia and F&M Bank-Peoples sell
into the secondary market permanent residential mortgage loans that conform to
GNMA and FNMA underwriting guidelines. These F&M subsidiaries purchase
government insured 1-4 family FHA and VA loans and resell them immediately in
package form.
F&M's real estate construction portfolio historically has been a relatively
small portion of the total loan portfolio. At December 31, 2000, construction
loans were $122.8 million or 5.9 % of the total loan portfolio. Generally, all
construction loans are made to finance owner-occupied properties with permanent
financing commitments in place. F&M's subsidiary banks make a limited number of
loans for acquisition, development and construction of residential real estate.
F&M's construction loans, including its acquisition and development loans,
generally bear a floating rate of interest and mature in one year or less. Loan
underwriting standards for such loans generally limit the loan amount to 75% of
the finished appraised value of the project. As a result of strict underwriting
guidelines, F&M has experienced charge-offs involving residential construction
loans since 1996 of less than one half of 1% of total loans.
Consumer loans were 13.7% of F&M's total loan portfolio at December 31,
2000. F&M subsidiary banks offer a wide variety of consumer loans, which include
installment loans, credit card loans, and other secured and unsecured credit
facilities. The performance of the consumer loan portfolio is directly tied to
and dependent upon the general economic conditions in each of F&M's subsidiary
banks' respective market regions.
Loans secured by real estate consist of a diverse portfolio of
predominantly single-family residential loans, which at December 31, 2000
comprised 29.3% of the loan portfolio. Loans secured by commercial real estate
comprised 30.1% of the loan portfolio at December 31, 2000 and consist
principally of commercial and industrial loans where real estate constitutes a
source of collateral (shown in Table 7 under the category of "Non-farm, non-
residential"), multifamily loans (1.2%) and agricultural loans (0.9%). F&M
attempts to reduce its exposure to the risks of the local real estate market by
limiting the aggregate size of its commercial real estate portfolio and by
making such loans primarily on owner-occupied properties. F&M has historically
engaged in limited mortgage lending on multifamily and agricultural properties.
Real estate construction loans accounted for only 5.9% of total loans
outstanding at December 31, 2000. F&M's net charge-off rate for all loans
secured by real estate was 0.02% of period end loans. This is consistent with
1999 when the charge-off rate for all loans secured by real estate was 0.006% of
period end loans outstanding. F&M's consumer loan portfolio, its second largest
loan category, consists principally of personal loans.
33
Consistent with its focus on providing community-based financial services,
F&M generally does not make loans outside its principal market regions. F&M does
not engage in foreign lending activities, consequently, the loan portfolio is
not exposed to risk from foreign credits. F&M maintains a policy not to
originate or purchase loans classified by regulators as highly leveraged
transactions or loans to foreign entities or individuals.
F&M's unfunded loan commitments amounted to $602.3 million at December 31,
2000, compared to $535.9 million at December 31, 1999. The increase in unfunded
loan commitments is due to new customers requiring commitments.
On December 31, 2000, F&M had a concentration of loans in non-farm, non-
residential loans, consisting primarily of commercial loans secured by real
estate of $579.1 million and 1-4 family residential mortgage loans of $605.7
million which were in excess of 10 percent of the total loan portfolio. Loan
collateral is predominantly real estate related due to the nature of F&M's
market. Consumer loans to individuals and commercial, financial and agricultural
loans of $283.9 million and $308.0 million, respectively, also were in excess of
10% of the total loan portfolio.
A number of economic factors in conjunction with loan activity in 2000
suggest that loan growth in 2001 may progress at a slower pace. Interest rates
at year-end 2000 were above the levels they reached in 1999, which are
unattractive to borrowers. Never the less, new home construction continues to
grow in spite of higher interest rates. Resale of older homes has been strong
due to the growing economy. Auto sales were strong in early quarters of 2000,
but are slowing by the end of 2000. The economic forecast for 2001 is unclear.
The economy is continuing to create new jobs, however, the lack of available
workers is having an impact on production. Economic reports suggest that
borrowers are still showing a strong degree of confidence in the economy and are
willing to incur additional debt. During 2000, the Federal Reserve took steps to
slow the economy by raising interest rates, but has since lowered rates in early
2001 and is likely to consider lowering interest rates further during the year
to spur the economy. These factors may result in a positive loan growth trend in
2001.
December 31,
-----------------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------------
Commercial, financial and agricultural............ $308,019 $300,016 $298,367 $287,813 $247,276
Real estate construction........................... 122,803 108,631 104,358 99,007 80,207
Real estate mortgage :
Loans held for sale 59,414 22,217 29,479 39,923 35,858
Residential (1-4 family)........................ 605,745 557,744. 539,406 525,712 490,744
Home equity lines............................... 69,347 59,545 64,942 74,901 74,582
Multifamily..................................... 25,671 27,624 30,060 32,860 34,614
Non-farm, non-residential (1).................. 579,091 528,667 508,565 488,500 457,129
Agricultural................................... 18,075 18,435 15,297 18,516 19,199
-----------------------------------------------------------------
Real estate subtotal........................... 1,357,343 1,214,232 1,187,749 1,180,412 1,112,126
Loans to individuals:
Consumer....................................... 262,963 247,503 219,394 189,400 183,811
Credit card.................................... 20,955 20,547 21,074 23,047 23,389
-----------------------------------------------------------------
Loans to individuals subtotal................. 283,918 268,050 240,468 212,447 207,200
Total loans.................................. 2,072,083 1,890,929 1,830,942 1,779,679 1,646,809
Less unearned income............................. (3,381) (3,614) (5,522) (6,631) (8,516)
-----------------------------------------------------------------
Loans - net of unearned income.................. $2,068,702..$1,887,315 $1,825,420 $1,773,048 $1,638,293
=================================================================
(1) This category generally consists of commercial and industrial loans where
real estate constitutes a source of collateral.
REMAINING MATURITIES OF SELECTED LOANS
December 31, 2000
----------------------------------------
Commercial,
Financial and Real estate-
Agricultural Construction
----------------------------------------
(Dollars in thousands)
Within 1 year......................... $167,569 $78,594
-------------- --------------
Variable Rate:
1 to 5 years........................ 27,339 5,649
After 5 years........................ 15,814 10,438
-------------- --------------
Total.............................. 43,153 16,087
-------------- --------------
Fixed Rate:
1 to 5 years...................... 86,843 19,894
After 5 years..................... 10,454 8,228
-------------- --------------
Total............................. 97,297 28,122
-------------- --------------
Total Maturities.................. $308,019 $122,803
============== ==============
34
Allowance for Loan Losses. The allowance for loan losses is an estimate of
an amount adequate to provide for potential losses in the loan portfolio of each
of F&M's subsidiary banks. The amount of the allowance is based on management's
evaluation of the collectability of the loan portfolio, credit concentrations,
trends in historical loss experience, specific impaired loans, and economic
conditions. Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows. The allowance is
increased by a provision for loan losses, which is charged to expense and
reduced by charge-offs, net of recoveries. Changes in the allowances relating to
impaired loans are charged or credited to the provision for loan losses. Each of
F&M's subsidiary banks' has a formal loan review function, which consists of a
committee of bank officers that regularly reviews loans and assigns a
classification based on current perceived credit risk. In addition, the holding
company has an independent loan review team that performs a detailed on-site
review and analysis of each of F&M's subsidiary bank's loan portfolio on at
least an annual basis reviewing 60% to 75% of the total principal amount of each
of F&M's subsidiary bank's loan portfolio. In addition, all lending
relationships involving an adversely classified loan are reviewed. The review
team has the authority to classify any loan it determines is not satisfactorily
classified within F&M's grading system. All classified loans are reviewed at
least quarterly by F&M's senior officers and by the subsidiary banks' board of
directors. The subsidiary bank's boards of directors review all past due and
nonaccrual loans monthly. As a matter of policy, F&M's subsidiary banks place
loans on nonaccrual status when management determines that the borrower can no
longer service debt from current cash flows and/or collateral liquidation. This
generally occurs when a loan becomes 90 days past due as to principal and
interest. This detailed management analysis forms the basis for determining the
amount needed in the allowance for loan losses. Although the ratio of the
allowance to total loans and nonaccrual loans may be less than its peers, F&M
believes the ratio to be adequate based on this loan risk review analysis.
Nonperforming loans increased $4.5 million from $8.9 million at year-end
1999 to $13.4 million at year-end 2000. In keeping with F&M's conservative
philosophy, the amount provided for the provision for loan losses was $4.0
million after careful analysis of possible losses in the loan portfolio. The
nature of loan quality in the portfolio and improved underwriting standards in
2000 allowed F&M to maintain a lower ratio of allowance for loan losses to
period end loans. The ratio of allowance for loan losses to period end loans,
net for 2000, 1999 and 1998 was 1.19%, 1.27% and 1.29%, respectively. In 2000,
F&M included in its loan portfolio $14.4 million loans composed of SBA, FHA and
VA residential housing loans that were guaranteed by the US government, upon
which no or little reserve is required. In 2000, 1999 and 1998, the ratios of
allowance for loan losses to nonaccrual loans were 183.5%, 275.9% and 189.8%,
respectively. This ratio indicates the relationship between the amount of
nonaccrual loans and the amount reserved for loan losses.
The allowance is also subject to regulatory examinations and determinations
as to adequacy, which may take into account such factors as the methodology used
to calculate the allowance and the size of the allowance in comparison to peer
companies identified by regulatory agencies. F&M's subsidiary banks are examined
at different times, but the Virginia Bureau of Financial Institutions examined
all Virginia banking subsidiaries, the West Virginia Division of Banking
examined the West Virginia bank subsidiary and the Maryland Department of Labor,
Licensing and Regulation examined F&M's Maryland bank subsidiary during 2000.
Loans classified for regulatory purposes
35
as loss, doubtful, substandard, or special mention, do not represent or result
from trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity, or capital resources or represent
material credits about which management is aware of any information which causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
F&M maintains a general allowance for loan losses and does not allocate its
allowance for loan losses to individual categories for management purposes.
Table 8 shows an allocation among loan categories based upon analysis of the
loan portfolio's composition, historical loan loss experience, and other factors
and the ratio of the related outstanding loan balances to total loans.
2000 1999 1998 1997
------------------------- ----------------------- ------------------------ ------------------------
Percent of Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each Loans in Each
Category to Category to Category to Category to
December 31: Allowance Total Loans Allowance Total Loans Allowance Total Loans Allowance Total Loans
----------- ------------- --------- ------------ ---------- ------------- ----------- ------------
(Dollars in thousands)
Commercial, financial, and
agriculture................. $ 9,594 14.9% $ 9,388 15.9% $ 9,272 16.3% $ 9,136 16.2%
Real estate-construction........ 785 5.9 780 5.7 781 5.7 772 5.6
Real estate-mortgage........... 8,686 65.5 8,519 64.2 8,232 64.9 8,046 66.3
Consumer....................... 5,472 13.7 5,364 14.2 5,224 13.1 5,141 11.9
----------- ----------- -------- ---------- --------- -------- -------- --------
$24,537 100.0% $24,051 100.0% $23,509 100.0% $23,095 100.0%
1996
----------------------------
Percent of
Loans in Each
Category to
December 31: Allowance Total Loans
------------- ---------------
Commercial, financial, and
agriculture................. $6,846 15.0%
Real estate-construction........ 765 4.9
Real estate-mortgage........... 7,856 67.5
Consumer....................... 4,997 12.6
---------- -------------
$20,464 100.0%
F&M provided $4.0 million, $4.0 million and $5.5 million for provision for
loan losses for the years 2000, 1999 and 1998, respectively. These charges to
the provision represent management's decision to provide an amount necessary to
achieve a level in the allowance for loan losses to adequately cover possible
losses to the portfolio.
F&M's net charge-offs were $3.5 million in 2000 and 1999 which were lower
than 1998 net charge-offs of $5.1 million. The lower net charge-offs in 2000
were the result of a high degree of quality loans in the loan portfolio. Loans
to individuals made up of consumer and credit card loans represented the highest
category of net charge-offs in 2000 of $2.0 million as compared to $1.4 million
in 1999. Commercial, financial and agricultural loans represented the second
highest category of net charge-offs in 2000 at $1.3 million compared to $1.7
million in 1999. In 2000 and 1999, personal bankruptcies and credit card losses
contributed largely to the charge-offs in the loan to individuals' category. Net
charge-offs to average loans was 0.17%, 0.19% and 0.29% for the years 2000, 1999
and 1998, respectively.
December 31,
-----------------------------------------------------------
2000 1999 1998 1997 1996
-----------------------------------------------------------
(Dollars in thousands)
Balance, beginning of period................................. $24,051 $23,509 $23,095 $20,463 $20,377
Loans charged-off:
Commercial, financial and agriculture................... 1,595 1,892 2,294 932 1,509
Real estate construction................................ 4 6 57 171 20
Real estate mortgage:
Residential (1-4 family).............................. 64 359 486 392 200
Home equity lines..................................... 30 - 13 - 27
Multifamily........................................... - - - - 45
Non-farm, non-residential(1).......................... 48 201 1,057 265 81
Agricultural.......................................... 31 66 15 400 -
-------------------------------------------------------
Real estate subtotal................................ 173 626 1,571 1,057 353
Consumer................................................. 1,972 945 1,381 1,327 775
Credit card............................................... 518 860 632 1,000 544
-------------------------------------------------------
Loans to individuals subtotal......................... 2,490 1,805 2,013 2,327 1,319
Total loans charged-off............................... 4,262 4,329 5,935 4,487 3,201
Recoveries:
Commercial, financial and agriculture................... 300 163 148 786 240
Real estate construction................................ - - 30 - -
Real estate mortgage:
Residential (1-4 family).............................. 0 60 32 24 244
Home equity lines..................................... - 11 - - -
Multifamily........................................... - - - - 3
Non-farm, non-residential(1).......................... 38 205 106 36 137
Agricultural.......................................... - - 120 - -
-------------------------------------------------------
Real estate subtotal................................ 48 276 258 60 384
Loans to individuals:
Consumer................................................ 345 264 269 304 254
Credit card............................................. 104 147 103 54 29
-------------------------------------------------------
Loans to individuals subtotal......................... 449 411 372 358 283
Total recoveries...................................... 797 850 808 1,204 907
-------------------------------------------------------
Net charge-offs.............................................. 3,465 3,479. 5,127 3,283 2,294
Provision for loan losses.................................... 3,951 4,021 5,541 5,915 2,380
-------------------------------------------------------
Balance, end of period....................................... $24,537 $24,051 $23,509 $23,095 $20,463
=======================================================
Ratio of allowance for loan losses to
loans outstanding at end of period......................... 1.19% 1.27% 1.29% 1.30% 1.25%
Ratio of net charge-offs to
average loans outstanding
during period............................................ 0.17% 0.19% 0.29% 0.19% 0.15%
The net amount of interest recorded during each year on loans that were
classified as nonperforming or restructured on December 31, 2000, 1999 and 1998
was $484 thousand, $182 thousand and $847 thousand, respectively. If these loans
had been accruing interest at their originally contracted rates, related income
would have been $1.1 million, $871 thousand, and $1.2 million in 2000, 1999, and
1998.
Nonperforming Assets Total nonperforming assets, which consist of
nonaccrual loans, restructured loans and foreclosed properties, were $22.0
million, $19.9 million, and $29.0 million at year-end 2000, 1999 and 1998,
respectively. The increase in nonperforming assets in 2000 was due to an
increase in nonaccrual loans. F&M management exerts great effort to identify
deteriorating assets early in the business cycle to ensure that prompt action is
taken while working toward final resolution of all nonperforming assets.
36
Nonperforming loans (nonaccrual loans and restructured loans) at
December 31, 2000 were $13.4 million, or 0.6% of total loans, down from $8.9
million, or 0.5% of total loans at December 31, 1999 and down from $13.0
million, or 0.7% of total loans, at December 31, 1998. Nonperforming loans at
year-end 2000 were composed of $8.0 million secured by real estate, $1.6 million
commercial and industrial loans and loans to individuals for household, family,
and other personal expenditures amounting to $3.7 million. Nonperforming loans
that were guaranteed by the US government agencies were $980 thousand in 2000.
Nonperforming loans are those loans where, in the opinion of management, the
full collection of principal or interest is unlikely. In 2000, 1999, and 1998,
nonperforming loans as a percentage of net loans were 0.6%, 0.5%, and 0.7%.
These very low percentages of nonperforming loans is the result of maintaining
high loan quality standards.
The recorded investment in certain loans that were considered to be
impaired was $20.5 million at year-end 2000 as compared to $15.0 million at
year-end 1999. Included in 2000 impaired loans are $11.9 million secured by
commercial real estate. All impaired loans at year-end 2000 and 1999 had a
related valuation allowance totaling $3.0 million in 2000 and $2.6 million in
1999. The average recorded investment in certain impaired loans for the year
ended December 31, 2000 and December 31, 1999 was approximately $19.2 million
and $15.3 million, respectively. For the year 2000 and 1999, interest income
recognized on impaired loans totaled $1.7 million and $1.6 million, all of which
was recognized on a cash basis.
Nonaccrual loans excluded from impaired loan disclosure under
Financial Accounting Standards Board Pronouncement ("FASB") No. 114 amounted to
$7.6 million and $4.3 million at December 31, 2000 and 1999, respectively. If
interest on these loans had been accrued, such income would have approximated
$644 thousand and $295 thousand for 2000 and 1999, respectively.
Foreclosed properties consist of 20 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. In 1995, F&M acquired
through foreclosure approximately 1,000 acres of real estate located in
Jefferson County, West Virginia, valued in excess of $4 million. F&M is
marketing this property and will dispose of it as expediently as possible. At
December 31, 2000, F&M had $8.6 million in foreclosed property upon which it
does not anticipate incurring any material loss on the final disposition.
Table 10
Nonperforming Assets
At December 31,
----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------------
(Dollars in Thousands)
Nonaccrual loans.................................... $ 13,373 $ 8,716 $ 12,385 $ 20,247 $ 12,767
Restructed Loans.................................... - 166 625 523 259
----------------------------------------------------------------------
Total nonperforming loans........................ 13,373 8,882 13,010 20,770 13,026
Foreclosed property................................. 8,603 10,974 15,970 16,525 15,190
----------------------------------------------------------------------
Total nonperforming assets....................... $ 21,976 $ 19,856 $ 28,980 $ 37,295 $ 28,216
======================================================================
Loans past due 90 days accruing interest............... 4,674 $ 4,271 $ 2,010 $ 2,963 $ 4,785
Allowance for loan losses to period end loans.......... 1.19% 1.27% 1.29% 1.30% 1.25%
Allowance for loan losses to nonaccrual loans.......... 183.48% 275.94% 189.82% 114.07% 160.29%
Nonperforming assets to period end loans and
foreclosed properties............................... 1.06% 1.05% 1.57% 2.08% 1.71%
Net charge-offs to average loans....................... 0.17% 0.19% 0.29% 0.19% 0.15%
The loss of income associated with nonperforming loans at December 31 were:
----------------------------------------------------------------------
2000 1999 1998 1997 1996
----------------------------------------------------------------------
Income that would have been recorded
in accordance with original terms:
Nonaccrual loans & restructed
--------------
loans........................................... $ 1,064 $ 871 $ 1,176 $ 1,696 $ 1,565
--------------
Income actually recorded:
Nonaccrual and restructed loans.................... $ 484 182 847 222 777
On December 31, 2000, there were no material outstanding commitments to lend
additional funds with respect to nonperforming loans.
Loans are placed on nonaccrual status when collection of interest and
principal is doubtful, generally when loans become 90 days past due. There are
three negative implications for earnings when a loan is placed on nonaccrual
status. First, all interest accrued but unpaid at the date the loan is placed on
nonaccrual status is either deducted from interest income or written off as a
loss. Second, accruals of interest are discontinued until it becomes certain
that both principal and interest
37
can be repaid. Third, there may be actual losses that necessitate additional
provisions for loan losses be charged against earnings.
At December 31, 2000, loans past due 90 days or more and still
accruing interest because they are both well secured and in the process of
collection were $4.7 million, compared to $4.3 million and $2.0 million at year
end 1999 and 1998, respectively.
Potential Problem Loans. At December 31, 2000, potential problem loans
were approximately $17.4 million, including 11 lending relationships with
principal balances in excess of $500,000, which had an aggregate principal
balance outstanding of $10.0 million. Loans are viewed as potential problem
loans according to the ability of such borrowers to comply with current
repayment terms. These loans are subject to constant management attention, and
their status is reviewed on a regular basis. The potential problem loans
identified at December 31, 2000 are generally secured by residential and
commercial real estate with appraised values that exceed the principal balance.
Continued positive economic conditions and an assessment of the loan
portfolio and problem assets suggest that loan losses in 2001 should not be
materially greater than those in 2000. At such relatively low levels of loan
losses as were experienced in 2000 however, a minor dollar fluctuation in losses
could represent a large percentage increase. Loan loss expectations for 2001 are
influenced by economic forecasts of continued growth and moderate interest
rates. Financial circumstances of individual borrowers also will affect loan
loss results. Unforeseen changes, either in economic conditions or borrowers'
financial conditions, could also impact actual loan losses in 2001. F&M will
maintain and follow its policies and practices intended to minimize future
credit losses.
Securities
The book value of the securities portfolio was $1.153 billion at
December 31, 2000, compared to $883.8 million and $828.9 million at December 31,
1999 and 1998. The securities portfolio increased $268.8 million in 2000 over
1999, which followed an increase of $54.9 million in 1999 over 1998. Investment
in U.S. Government securities increased $263.8 million, or 31.7%, for the year
2000. For the year 1999, U.S. Government securities increased $56.9 million, or
7.3%. Investment in states and political subdivisions remained at relatively low
levels. F&M has generally not reinvested funds in securities issued by states
and political subdivisions, because those securities do not have the same after
tax yields that they have had in prior years.
The securities portfolio consists of two components, securities held
to maturity and securities available for sale. Securities are classified as held
to maturity when management has the intent and F&M has the ability at the time
of purchase to hold the securities to maturity. Securities held to maturity are
carried at cost adjusted for amortization of premiums and accretion of
discounts. Securities to be held for indefinite periods of time are classified
as available for sale and accounted for at the market value. Securities
available for sale include securities that may be sold in response to changes in
market interest rates, changes in the a prepayment risk, increases in
loan demand, general liquidity needs and other similar factors.
38
FASB No. 115 effective January 1, 1994, required F&M to show the effect of
market changes in the value of securities available for sale ("AFS"). The market
value of AFS securities at December 31, 2000 was $629.5 million. The effect of
the market value of AFS securities less the book value of AFS securities, net of
income taxes is reflected as a line in Stockholders' Equity as unrealized gain
of $3.5 million at December 31, 2000, a loss of $11.4 million at December 31,
1999 and a gain of $6.4 million at December 31, 1998. Investment rates have
increased in 2000 causing currently held bond portfolio market values to
increase in value by $14.9 million. The increase in market yields is due to
interest rate fluctuations only and not a result of re-ratings of securities.
F&M can take a variety of measures to preclude any realization of gain or loss
in the securities portfolio such as attracting new deposits, adjusting loan
rates, reinvestment of loan paydowns, and borrowing funds from the Federal Home
Loan Bank of Atlanta ("FHLB"), the Federal Reserve Bank of Richmond, or
correspondent banks.
It is F&M's policy not to engage in activities considered to be derivative
in nature such as futures, option contracts, swaps, caps, floors, collars or
forward commitments. F&M considers derivatives as speculative which is contrary
to F&M's historical or prospective philosophy. F&M does not hold or issue
financial instruments for trading purposes. F&M does hold in its loan and
security portfolio investments that adjust or float according to changes in the
"prime" lending rate which is not considered speculative, but necessary for good
asset/liability management. Off-balance sheet risks such as commitments to
extend credit, standby letters of credit, and other items are discussed in Note
19 in the Notes to Consolidated Financial Statements.
Table 11
Investment Portfolio and Securities Available for Sale
Investment Portfolio and Securities Available For Sale
The carrying value of investment securities at the dates indicated was:
December 31,
---------------------------------------------
2000 1999 1998
--------------- ------------- -------------
(Dollars in thousands)
U.S. Government securities........................... $499,777 $427,579 $377,723
States and political subdivisions.................... 22,337 20,963 23,532
Corporate securities................................. 1,058 1,312 1,515
--------------- ------------- -------------
Total investment securities....................... $523,172 $449,854 $402,770
=============== ============= =============
The carrying value of securities available for sale at the dates indicated was:
December 31,
---------------------------------------------
2000 1999 1998
--------------- ----------- --------------
(Dollars in thousands)
U.S. Government securities.......................... $597,044 $405,467 $398,440
States and political subdivisions 10,740 10,443 9,700
Other securities and corporate securities........... 21,683 18,037 17,952
--------------- ------------- -------------
Total securities available for sale.............. $629,467 $433,947 $426,092
=============== ============= =============
TABLE 12
December 31, 2000
Taxable-Equivalent Basis
Due after 1 Due after 5 Due after 10
Due in 1 year through 5 through 10 years and
or less years years Equity Securities Total
------------------ --------------- ------------------ ------------------ -------------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
------------------ --------------- ------------------ ------------------ -------------------
(Dollars in thousands)
Securities held for investment:
U.S. Government securities..... $ 44,045 6.12% $321,872 6.19% $ 87,185 7.27% $ 46,675 7.75% $ 499,777 6.52%
Other taxable securities....... 803 7.28% 255 7.21% - 0.00% - 0.00% 1,058 7.28%
----------- --------- -------- -------- ----------
Total Taxable............... 44,848 6.14% 322,127 6.19% 87,185 7.27% 46,675 7.75% 500,835 6.52%
Tax-exempt securities.(1)...... 4,092 7.41% 13,402 7.36% 2,976 7.74% 1,867 7.67% 22,337 7.45%
----------- --------- -------- -------- ----------
Total....................... $ 48,940 6.25% $335,529 6.24% $ 90,161 7.29% $ 48,542 7.75% $ 523,172 6.56%
----------- --------- -------- -------- ----------
Securities held for sale:
U.S. Government securities..... $ 43,809 5.92% $221,938 6.32% $193,759 6.98% $137,538 7.23% $ 597,044 6.72%
----------
Other taxable securities....... 11 3.87% 660 7.93% 17,610 7.54% 3,402 6.51% 21,683 7.29%
----------- --------- -------- -------- ----------
Total Taxable............... $ 43,820 5.92% 222,598 6.33% 211,369 7.01% 140,940 7.21% 618,727 6.74%
Tax-exempt securities.(1)...... 455 6.46% 3,030 6.44% 6,750 6.42% 505 7.25% 10,740 6.47%
----------- --------- -------- -------- ----------
Total....................... $ 44,275 5.93% $225,628 6.33% $218,119 7.01% $141,445 7.21% 629,467 6.74%
----------- --------- -------- -------- ----------
Total Securities................. $ 93,215 6.10% $561,157 6.27% $308,280 7.09% $189,987 7.35% $1,152,639 6.66%
=========== ========= ======== ======== ==========
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.
Maturity Distribution and Yields of Securities
See Note 3 to the Notes to Consolidated Financial Statements as of December
31, 2000 for an analysis of gross unrealized gains and losses in the securities
portfolio.
Deposits
F&M has made an effort in recent years to increase core deposits and reduce
cost of funds. Deposits provide funding for F&M's investments in loans and
securities, and the interest paid for deposits must be managed carefully to
control the level of interest expense.
Deposits at December 31, 2000 increased $373.6 million or 14.3% to $2.991
billion from $2.618 billion at year-end 1999. Non-interest bearing demand
deposits increased $104.1 million or 19.2% from $541.4 million in 1999 to $645.6
million in 2000. Interest bearing deposits increased $269.4 million or 13.0% to
$2.346 billion in 2000. Savings deposits including interest checking in 2000
increased $60.6 million or 8.5% to $770.6 million, while money market deposits
also increased $27.6 million. Certificates of deposit over $100,000 experienced
a $37.9 million or 14.5% increase in deposits. Certificates of deposit under
$100,000 increased $143.3 million or 16.8% from $851.7
39
million at year-end 1999 to $995.0 million at year-end 2000. Growth in deposits
in 2000 was influenced by the acquisition of approximately $242 million in
deposits from the 15 branch bank acquisition and F&M marketing strategy to offer
special certificate of deposit promotions to attract deposits. In 1999,
customers were attracted to higher returns in the stock market and other
financial institutions that F&M was not willing to match. F&M in 1999 was
willing to maintain its interest margin in lieu of attracting expensive
deposits.
F&M does not have any other time deposits, other than certificates of
deposits, which are over $100,000.
Deposits at December 31, 1999 were $2.618 billion, $2.5 million less than
the $2.620 billion at year-end 1998. Non-interest bearing demand deposits
decreased $20.0 million or 3.6% from $561.5 million in 1998 to $541.4 million in
1999. Conversely, interest-bearing deposits increased $17.5 million or 0.8% to
$2.076 billion in 1999. Interest checking, savings deposits, and money market
deposits experienced a reduction in deposits in 1999, whereas, certificates of
deposit over and under $100,000 experienced an offsetting increase in deposits.
Deposit growth in 1999 was affected by comparatively low interest rates and the
consequent movement of funds out of demand deposit accounts and into interest
bearing alternative investments.
Table 13
Deposits and Rates Paid
December 31,
-------------------------------------------------------------------
2000 1999 1998
-------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
----------- -------------------- -------------------- ----------
(Dollars in thousands)
Noninterest-bearing accounts......... $605,460 $535,997 $496,856
---------- ---------- ------------
Interest-bearing accounts:
Interest checking.................. 501,958 2.16% 482,755 2.05% 440,179 2.26%
Regular savings.................... 232,523 2.36% 230,293 2.40% 221,768 2.66%
Money-market....................... 267,444 3.17% 258,595 2.80% 252,350 3.07%
Time deposits:
Less than $100,000.............. 927,533 5.63% 833,911 5.22% 865,039 5.52%
$100,000 and more............... 281,958 5.20% 247,434 4.92% 237,673 5.44%
---------- ---------- ----------
Total interest-bearing............... 2,211,416 4.14% 2,052,988 3.82% 2,017,009 4.18%
---------- ---------- ----------
Total.............................. $2,816,876 $2,588,985 $2,513,865
========== ========== ==========
Maturities of CD's of $100,000 and More
Within Three to Six to One to Over Percent
Three Six Twelve Five Five of Total
Months Months Months Years Years Total Deposits
-------------------------------------------------------------------
(Dollars in thousands)
At December 31, 2000 $68,016 $63,612 $92,505 $75,712 $228 $300,073 10.65%
Capital Resources
Management seeks to maintain a capital structure that will assure an
adequate level of capital to support anticipated asset growth and absorb
potential losses. The adequacy of F&M's capital is reviewed by management on an
ongoing basis with emphasis on the size, composition and quality of F&M's asset
and liability levels and consistent with regulatory requirements and industry
standards.
The Federal Reserve, along with the Office of the Comptroller of the
Currency and the FDIC, have adopted capital guidelines to supplement the
definitions of capital for regulatory purposes and to establish minimum capital
standards. Specifically, the guidelines categorize assets and off-balance sheet
items into four risk-weighted categories. The minimum ratio of qualifying total
capital to risk-weighted assets is 8.0%, of which at least 4.0% must be Tier I
capital, composed of common equity, retained earnings and a limited amount of
perpetual preferred stock, less certain goodwill items. A "well capitalized"
bank will have a Tier 1 capital ratio of 6% and a Total capital ratio of 10%.
F&M had a Tier 1 capital ratio of 14.0% and a Total capital ratio of 15.2% at
December 31, 2000, far exceeding the capital requirements adopted by the federal
bank regulatory agencies.
Table 14 reflects the cash dividends per share declared during each quarter
of the periods indicated. The information in Table 14 may vary for certain
periods from the dividends paid during the quarter in cases where the dividend
was paid in the quarter following its declaration. In addition,
40
the amounts shown have not been restated and adjusted to reflect the acquisition
of The State Bank of the Alleghenies.
Table 14
Common Stock Performance and Dividends
Common Stock Price
----------------------------------------------
2000 1999 Dividends Declared
---------------------------------------------- ------------------
High Low High Low 2000 1999
---------------------------------------------- ------------------
First quarter $ 26.63 $ 21.94 $ 30.00 $ 23.87 $0.235 $ 0.195
Second quarter $ 25.00 $ 21.00 $ 33.18 $ 23.93 $0.250 $ 0.235
Third quarter $ 25.00 $ 21.25 $ 33.50 $ 26.00 $0.250 $ 0.235
Fourth quarter $ 27.50 $ 22.56 $ 30.25 $ 26.00 $0.250 $ 0.235
Years ended December 31 $ 27.50 $ 21.00 $ 33.50 $ 23.87 $0.985 $ 0.900
F & M National Corporation common stock is traded on the New York Stock Exchange
(NYSE) under the symbol FMN. On December 31, 2000 there were approximately 9,042
shareholders of record.
Table 15
Analysis of Capital
December 31,
----------------------------------
2000 1999 1998
----------------------------------
(Dollars in thousands)
Tier 1 Capital:
Common stock.................................... $ 49,227 $ 49,793 $ 48,845
Additional paid in capital...................... 87,524 93,679 81,910
Retained earnings............................... 199,129 175,588 174,777
Less: Goodwill.................................. 31,598 10,332 10,090
------------------------------------
Total Tier 1 capital............................ 304,282 308,728 295,442
Tier 2 Capital:
Allowance for loan losses....................... 24,537 24,051 23,509
Add: 45% of unrealized equity securities........ 406 - 433
------------------------------------
Total Tier 2 capital............................ 24,943 24,051 23,942
------------------------------------
Total risk-based capital........................ $ 329,225 $ 332,779 $ 319,384
====================================
Risk-weighted assets............................... $2,170,891 $2,005,473 $1,974,044
CAPITAL RATIOS:
Tier 1 risk-based capital ratio................. 14.02% 15.39% 14.97%
Total risk-based capital ratio.................. 15.17% 16.59% 16.18%
Tier 1 capital to average total assets.......... 8.56% 10.06% 9.97%
Liquidity
Liquidity represents an institution's ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds through liability management. Liquid assets
include cash, interest-bearing deposits with banks, federal funds sold,
securities and loans classified as available for sale and loans and investment
securities maturing within one year. As a result of F&M's management of liquid
assets and the ability to generate liquidity through liability funding,
management believes that F&M maintains overall liquidity sufficient to satisfy
its depositors' requirements and meet its customers' credit needs.
At December 31, 2000, approximately $773.9 million or 25.3% of total
average earning assets is due to mature or reprice within the next year.
F&M transfers excess funds from its subsidiary banks to F&M Bank-Winchester
on a daily basis. Serving as the lead bank, F&M Bank-Winchester acts as a
conduit to invest pooled funds and provides an internal line of credit for all
F&M's subsidiaries. Instead of selling excess funds to correspondent banks,
subsidiaries sell to F&M Bank-Winchester. This procedure provides funds for
short term borrowing to those subsidiaries that are in a borrowing position and
also maximizes the earning potential for F&M.
F&M has established a relationship with the FHLB to extend, in
aggregate, a $524.6 million short-term line of credit for any potential
borrowing needs. In 2000, F&M has borrowed from the FHLB on average $13.9
million, whereas, in 1999 no funds were borrowed. In addition to this line of
credit, a large regional and money-center bank has extended a short term
borrowing line totaling $30 million. F&M's credit lines are more than adequate
to absorb any potential borrowing needs that may arise.
At December 31, 2000, certain of F&M's subsidiary banks had outstanding
$135.8 million of borrowings pursuant to securities repurchase agreement
transactions, ranging in maturity from one day to three months.
F&M engages in short-term borrowings at the parent company level, as well.
At December 31, 2000, F&M had $21.4 million outstanding in short-term
obligations issued to selected customers of F&M's subsidiary banks pursuant to a
master agreement. As a back-up source of funds, the
41
parent has approved bank lines of credit totaling $6.0 million. These lines are
used infrequently with the average aggregate balance outstanding under the lines
not exceeding $1.0 million since they have been in place. At year-end 2000, 1999
and 1998, there were no outstanding balances under these lines of credit.
All F&M's banks are members of the Federal Home Loan Bank system. Some of
F&M's FHLB member banks utilize long-term borrowing, which must be invested in
Residential Housing Finance Assets ("RHFA"). RHFA are defined as (1) loans
secured by residential real property; (2) mortgage-backed securities; (3)
participations in loans secured by residential real property; (4) loans financed
by Community Investment Program advances; (5) loans secured by manufactured
housing, regardless of whether such housing qualifies as residential real
property; or (6) any loans or investments which the Federal Housing Finance
Board and the FHLB, in their discretion, otherwise determine to be residential
housing finance assets. In 2000, long-term borrowings from the Federal Home Loan
Bank system for RHFA investments were $20.9 million maturing through 2006.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
See "Market Risk Management" in Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operation" of this report.
42
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to the Consolidated Financial Statements Page
Independent Auditor's Report 44
Consolidated Balance Sheets 45
Consolidated Statements of Income 46
Consolidated Statements of Changes in Shareholders' Equity 48
Consolidated Statements of Cash Flows 49
Notes to Consolidated Financial Statements 52
43
INDEPENDENT AUDITOR'S REPORT
To the Shareholders and Directors
of F & M National Corporation
Winchester, Virginia
We have audited the accompanying consolidated balance sheets of F & M
National Corporation and Subsidiaries as of December 31, 2000 and 1999, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for each of the three years in the period ended December 31, 2000.
These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of F & M
National Corporation and Subsidiaries as of December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000, in conformity with generally accepted
accounting principles.
/s/ Yount, Hyde & Barbour, P. C.
Winchester, Virginia
January 31, 2001, except for the second paragraph of
Note 23 as to which the date is February 26, 2001
44
F & M NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 2000 and 1999
(In Thousands, Except Share Data)
Assets 2000 1999
---------- ----------
Cash and due from banks $ 140,661 $ 127,633
Interest-bearing deposits in other banks 20 225
Federal funds sold 47,295 68,712
Securities (fair value 2000, $1,153,578; 1999, $871,485) 1,152,639 883,801
Loans held for sale 59,414 22,217
Loans, net of allowance for loan losses, 2000, $24,537; 1999, $24,051 1,984,751 1,841,047
Bank premises and equipment, net 88,666 74,501
Other assets 95,334 80,031
---------- ----------
Total assets $3,568,780 $3,098,167
========== ==========
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest-bearing demand deposits $ 645,560 $ 541,417
Savings and interest-bearing demand deposits 1,050,823 962,589
Time deposits 1,295,048 1,113,849
---------- ----------
Total deposits $2,991,431 $2,617,855
Federal funds purchased and securities
sold under agreements to repurchase 161,054 95,008
Other short-term borrowings 25,438 24,120
Long-term debt 20,912 25,443
Other liabilities 30,517 28,059
Commitments and contingent liabilities -- - -
---------- ----------
Total liabilities $3,229,352 $2,790,485
---------- ----------
Shareholders' Equity
Preferred stock, no par value, authorized 5,000,000
shares, no shares outstanding $ -- $ --
Common stock, par value $2 per share, authorized 30,900,000 shares;
issued 2000, 24,613,500 shares; issued 1999, 24,896,500 shares 49,227 49,793
Capital surplus 87,524 93,679
Retained earnings 199,129 175,588
Accumulated other comprehensive income (loss) 3,548 (11,378)
---------- ----------
Total shareholders' equity $ 339,428 $ 307,682
---------- ----------
Total liabilities and shareholders' equity $3,568,780 $3,098,167
========== ==========
See Notes to Consolidated Financial Statements.
45
F & M NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements Of Income
For Each of the Three Years in the Period Ended December 31, 2000
(In Thousands, Except Per Share Data)
2000 1999 1998
-------- -------- --------
Interest and Dividend Income
Interest and fees on loans $169,362 $158,837 $159,722
Interest on investment securities:
Taxable interest income 29,354 24,161 24,445
Interest income exempt from federal income taxes 1,425 1,096 1,290
Interest and dividends on securities
available for sale:
Taxable interest income 31,218 24,772 19,280
Interest income exempt from federal income taxes 466 471 411
Dividends 1,164 1,002 891
Interest income on federal funds 5,773 5,295 8,218
Interest on deposits in banks 55 41 48
-------- -------- --------
Total interest and dividend income $238,817 $215,675 $214,305
-------- -------- --------
Interest Expense
Interest on deposits $ 91,642 $ 78,371 $ 84,268
Interest on short-term borrowings 7,008 3,968 3,849
Interest on long-term debt 1,483 1,572 1,103
-------- -------- --------
Total interest expense $100,133 $ 83,911 $ 89,220
-------- -------- --------
Net interest income $138,684 $131,764 $125,085
Provision for loan losses 3,951 4,021 5,541
-------- -------- --------
Net interest income after provision
for loan losses $134,733 $127,743 $119,544
-------- -------- --------
Other Income
Commissions and fees from fiduciary activities $ 3,349 $ 2,871 $ 2,641
Service charges on deposit accounts 18,229 15,509 13,752
Credit card fees 5,095 4,779 4,193
Fees for other customer services 15,149 8,541 3,329
Insurance commissions 9,827 8,986 8,397
Other operating income 3,153 4,309 4,806
Profits on securities available for sale, net 51 3,118 2,436
-------- -------- --------
Total other income $ 54,853 $ 48,113 $ 39,554
-------- -------- --------
See Notes to Consolidated Financial Statements.
46
F & M NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
(Continued)
For Each of the Three Years in the Period Ended December 31, 2000
(In Thousands, Except Per Share Data)
2000 1999 1998
-------- -------- --------
Other Expenses
Salaries and employees' benefits $ 65,851 $ 63,165 $ 55,442
Net occupancy expense of premises 9,934 9,026 8,511
Furniture and equipment expenses 8,040 7,654 6,755
Credit card expense 3,647 3,623 3,136
Other operating expenses 28,976 26,974 26,192
-------- -------- --------
Total other expenses $116,448 $110,442 $100,036
-------- -------- --------
Income before income taxes $ 73,138 $ 65,414 $ 59,062
Income tax expense 25,184 22,412 20,124
-------- -------- --------
Net income $ 47,954 $ 43,002 $ 38,938
======== ======== ========
Earnings per common share, basic $ 1.93 $ 1.72 $ 1.55
-------- -------- --------
Earnings per common share, assuming dilution $ 1.92 $ 1.71 $ 1.54
-------- -------- --------
See Notes to Consolidated Financial Statements.
47
F & M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For Each of the Three Years in the Period Ended December 31, 2000
(In Thousands, Except Per Share Data)
Accumulated
Other
Compre- Compre-
Common Capital Retained Hensive Hensive
Stock Surplus Earnings Income (Loss) Income Total
--------- -------- --------- ------------ --------- --------
Balance, December 31, 1997 $ 48,854 $ 83,395 $ 153,233 $ 2,466 $287,948
Comprehensive income:
Net income - 1998 -- -- 38,938 -- $ 38,938 38,938
Other comprehensive income net of tax:
Unrealized holding gains arising during the
period (net of tax, $2,885) -- -- -- -- 5,534 --
Reclassification adjustment (net of tax, $853) -- -- -- -- (1,583) --
---------
Other comprehensive income (net of tax, $2,032) -- -- -- 3,951 3,951 3,951
---------
Total comprehensive income -- -- -- -- $ 42,889 --
=========
Cash dividends declared -- -- (17,394) -- (17,394)
Acquisition of common stock (188,000 shares) (376) (5,733) -- -- (6,109)
Issuance of common stock-benefit plans (183,500 shares) 367 4,248 -- -- 4,615
--------- -------- --------- ------------
Balance, December 31, 1998 $ 48,845 $ 81,910 $174,777 $ 6,417 $311,949
Comprehensive income:
Net income - 1999 -- -- 43,002 -- $ 43,002 43,002
Other comprehensive income net of tax:
Unrealized holding losses arising during the
period (net of tax, $8,408) -- -- -- -- (15,768) --
Reclassification adjustment (net of tax, $1,093) -- -- -- -- (2,027) --
----------
Other comprehensive income (net of tax, $9,501) -- -- -- (17,795) (17,795) (17,795)
---------
Total comprehensive income -- -- -- -- $ 25,207 --
=========
Cash dividends declared -- -- (21,464) -- (21,464)
Acquisition of common stock (421,500 shares) (843) (11,658) -- -- (12,501)
Issuance of common stock-benefit plans (229,500 shares) 459 4,138 -- -- 4,597
Issuance of 3% common stock dividend (666,000 shares) 1,332 19,289 (20,621) -- --
Cash paid in lieu of fractional shares -- -- (106) -- (106)
--------- -------- --------- ------------
Balance, December 31, 1999 $ 49,793 $ 93,679 $175,588 $ (11,378) $307,682
Comprehensive income:
Net income - 2000 -- -- 47,954 -- $ 47,954 47,954
Other comprehensive income net of tax:
Unrealized holding gains arising during the
period (net of tax, $8,104) -- -- -- -- 14,957 --
Reclassification adjustment (net of tax, $17) -- -- -- -- (31) --
---------
Other comprehensive income (net of tax, $8,087) -- -- -- 14,926 14,926 14,926
---------
Total comprehensive income -- -- -- -- $ 62,880 --
=========
Cash dividends declared -- -- (24,413) -- (24,413)
Acquisition of common stock (446,500 shares) (893) (10,025) -- -- (10,918)
Issuance of common stock-benefit plans (163,500 shares) 327 3,870 -- -- 4,197
--------- -------- --------- ------------
Balance, December 31, 2000 $ 49,227 $ 87,524 $199,129 $ 3,548 $339,428
========== ======== ======== ============
See Notes to Consolidated Financial Statements.
48
F & M NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For Each of the Three Years in the Period Ended December 31, 2000
(In Thousands)
2000 1999 1998
---------- --------- ----------
Cash Flows from Operating Activities
Net income $ 47,954 $ 43,002 $ 38,938
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 8,246 7,114 6,138
Provision for loan losses 3,951 4,021 5,541
Deferred income taxes (benefit) 310 (287) 356
Profits on securities available for sale, net (51) (3,118) (2,436)
(Gain) loss on sale of other real estate 120 (120) (99)
Net amortization and accretion of securities (267) 923 (14)
Origination of loans held for sale (311,717) (359,749) (265,643)
Proceeds from sales of loans held for sale 274,520 367,011 276,087
Increase in other assets (5,124) (2,006) (961)
Increase (decrease) in other liabilities 1,706 1,492 (814)
---------- --------- ----------
Net cash provided by operating activities $ 19,648 $ 58,283 $ 57,093
---------- --------- ----------
Cash Flows from Investing Activities
(Increase) decrease in interest-bearing deposits
in other banks $ 205 $ 164 $ (26,977)
Proceeds from sales, principal repayments
and calls of securities available for sale 18,277 67,105 147,070
Proceeds from maturities of securities available for sale 30,507 95,635 75,870
Proceeds from principal repayments and
calls of investment securities 11,186 41,468 131,673
Proceeds from maturities of investment securities 40,183 38,382 75,646
Purchase of securities available for sale (220,792) (201,211) (285,358)
Purchase of investment securities (124,868) (121,663) (250,197)
Decrease in federal funds sold 21,417 88,024 2,517
Net (increase) in loans (149,864) (75,857) (73,043)
Purchases of bank premises and equipment (12,825) (11,551) (8,919)
Proceeds from sale of other real estate 5,657 8,624 4,731
Acquistion of branches, net of cash acquired 269,327 - - - -
---------- --------- ----------
Net cash used in investing activities $ (111,590) $ (70,880) $ (206,987)
---------- --------- ----------
See Notes to Consolidated Financial Statements.
49
F & M NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Continued)
For Each of the Three Years in the Period Ended December 31, 2000
(In Thousands)
2000 1999 1998
---------- ---------- ----------
Cash Flows from Financing Activities
Net increase (decrease) in noninterest-bearing and interest-
bearing demand deposits and savings accounts $ 82,739 $ (22,911) $ 195,109
Net increase (decrease) in certificates of deposit (9,277) 20,362 (22,588)
Dividends paid (23,661) (20,326) (16,892)
Increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase 66,046 (8,256) 21,498
Increase in other short-term borrowings 1,318 6,808 2,803
Net proceeds from issuance and sale of common stock 3,254 3,588 3,085
Acquisition of common stock (10,918) (12,495) (6,109)
Cash paid in lieu of fractional shares - - (106) - -
Proceeds from long-term debt - - 7,500 9,900
Principal payments on long-term debt (4,531) (3,115) (5,978)
--------- --------- ---------
Net cash provided by (used in) financing activities $ 104,970 $ (28,951) $ 180,828
--------- --------- ---------
Increase (decrease) in cash and cash equivalents $ 13,028 $ (41,548) $ 30,934
Cash and Cash Equivalents
Beginning 127,633 169,181 138,247
--------- --------- ---------
Ending $ 140,661 $ 127,633 $ 169,181
========= ========= =========
Supplemental Disclosures of Cash Information
Cash payments for:
Interest $ 98,792 $ 84,631 $ 89,489
========= ========= =========
Income taxes $ 23,709 $ 23,595 $ 20,245
========= ========= =========
See Notes to Consolidated Financial Statements.
50
F & M NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Continued)
For Each of the Three Years in the Period Ended December 31, 2000
(In Thousands)
2000 1999 1998
---------- ----------- -----------
Supplemental Schedule of Noncash Investing and
Financing Activities
Issuance of stock options under non-variable
compensatory plan $ 943 $ 1,003 $ 1,529
========== =========== ===========
Issuance of common stock-3% stock dividend $ - - $ 20,621 $ - -
========== =========== ===========
Loan balances transferred to foreclosed properties $ 2,209 $ 3,221 $ 5,030
========== =========== ===========
Unrealized gain (loss) on securities available for sale $ 23,013 $ (26,838) $ 5,917
========== =========== ===========
Details of acquisition of branches:
Fair value of assets acquired $ 10,628 $ - - $ - -
Fair value of liabilities assumed (300,114) - - - -
Purchase price in excess of net assets acquired 22,852 - - - -
---------- ----------- -----------
Cash received $ (266,634) $ - - $ - -
Less cash acquired 2,693 - - - -
---------- ----------- -----------
Net cash received for acquisition $ 269,327 $ - - $ - -
========== =========== ===========
See Notes to Consolidated Financial Statements.
51
F & M NATIONAL CORPORATION AND SUBSIDIARIES
Notes to Consolidated Financial Statements
For Each of the Three Years in the Period Ended December 31, 2000
Note 1. Nature of Banking Activities and Significant Accounting Policies
F & M National Corporation ("F & M" or the Company) is a bank holding
company whose principal banking subsidiaries provide a wide range of
financial services, including a variety of deposit accounts, as well
as commercial, consumer and mortgage lending to customers in Virginia,
West Virginia and Maryland. In addition to commercial activities, the
Corporation operates insurance and trust companies which generate
noninterest income by sales of insurance, trust and fiduciary
services.
The accounting and reporting policies of F & M National Corporation
and Subsidiaries conform to generally accepted accounting principles
and to the reporting guidelines prescribed by regulatory authorities.
The following is a description of the more significant of those
policies and practices.
Principles of Consolidation
The consolidated financial statements include the accounts of F & M
National Corporation and all of its banking and nonbanking
affiliates. In consolidation, significant intercompany accounts and
transactions have been eliminated.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand and amounts due from banks.
Securities
Securities are classified in three categories and are accounted for
as follows:
a. Securities Held to Maturity
Securities classified as held to maturity are those debt
securities the Corporation has both the intent and ability to hold
to maturity regardless of changes in market conditions, liquidity
needs or changes in general economic conditions. These securities
are carried at amortized cost.
b. Securities Available for Sale
Securities classified as available for sale are those debt and
equity securities that the Corporation intends to hold for an
indefinite period of time, but not necessarily to maturity. Any
decision to sell a security classified as available for sale would
be based on various factors, including significant movements in
interest rates, changes in the maturity mix of the Corporation's
assets and liabilities, liquidity needs, regulatory
52
capital considerations, and other similar factors. Securities
available for sale are carried at fair value. Unrealized gains or
losses are reported as increases or decreases in shareholders'
equity, net of the related deferred tax effect. Realized gains or
losses, determined on the basis of the cost of specific securities
sold, are included in earnings.
c. Trading Securities
Trading securities, which are generally held for the short term in
anticipation of market gains, are carried at fair value. Realized
and unrealized gains and losses on trading account assets are
included in interest income on trading account securities. The
Corporation had no trading securities at December 31, 2000 and
1999.
Purchase premiums and discounts are recognized in interest income
using the interest method over the terms of the securities. Declines
in the fair value of held to maturity and available for sale
securities below their costs that are deemed to be other than
temporary are reflected in earnings as realized losses. Gains and
losses on the sale of securities are recorded on the trade date and
are determined using the specific identification method.
Loans Held for Sale
Loans originated and intended for sale in the secondary market are
carried at the lower of cost or estimated fair value in the aggregate.
Net unrealized losses, if any, are recognized through a valuation
allowance by charges to income.
Loans
The Corporation grants mortgage, commercial and consumer loans to
customers. The ability of the Corporation's debtors to honor their
contracts is dependent upon the real estate and general economic
conditions in their market area.
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or pay-off generally are reported
at their outstanding unpaid principal balances less the allowance for
loan losses and unearned income. Interest income is accrued on the
unpaid principal balance. Loan origination fees, net of certain
direct origination costs, are deferred and recognized as an adjustment
of the related loan yield using the interest method.
The accrual of interest on mortgage and commercial loans is
discontinued at the time the loan is 90 days delinquent unless the
credit is well-secured and in process of collection. Credit card
loans and other personal loans are typically charged off no later than
180 days past due. In all cases, loans are placed on nonaccrual or
charged-off at an earlier date if collection of principal or interest
is considered doubtful.
All interest accrued but not collected for loans that are placed on
nonaccrual or charged off is reversed against interest income. The
interest on these loans is accounted for on the cash-basis or cost-
recovery method, until qualifying for return to accrual. Loans are
returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are
reasonably assured.
53
Allowance for Loan Losses
The allowance for loan losses is established as losses are estimated
to have occurred through a provision for loan losses charged to
earnings. Loan losses are charged against the allowance when
management believes the uncollectibility of a loan balance is
confirmed. Subsequent recoveries, if any, are credited to the
allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
A loan is considered impaired when, based on current information and
events, it is probable that the Corporation will be unable to collect
the scheduled payments of principal or interest when due according to
the contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status,
collateral value, and the probability of collecting scheduled
principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not
classified as impaired. Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking
into consideration all of the circumstances surrounding the loan and
the borrower, including the length of the delay, the reasons for the
delay, the borrower's prior payment record, and the amount of the
shortfall in relation to the principal and interest owed. Impairment
is measured on a loan-by-loan basis for commercial and construction
loans by either the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's
obtainable market price, or the fair value of the collateral if the
loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Corporation does not
separately identify individual consumer and residential loans for
impairment disclosures.
Bank Premises and Equipment
Premises and equipment are stated at cost less accumulated
depreciation and amortization. Premises and equipment are depreciated
over their estimated useful lives; leasehold improvements are
amortized over the lives of the respective leases or the estimated
useful life of the leasehold improvement, whichever is less.
Depreciation and amortization are recorded on the straight-line and
declining-balance methods.
Costs of maintenance and repairs are charged to expense as incurred.
Costs of replacing structural parts of major units are considered
individually and are expensed or capitalized as the facts dictate.
Foreclosed Assets
Assets acquired through, or in lieu of, loan foreclosure are held for
sale and are initially recorded at fair value at the date of
foreclosure, establishing a new cost basis. Subsequent
54
to foreclosure, valuations are periodically performed by management
and the assets are carried at the lower of carrying amount or fair
value less cost to sell. Revenue and expenses from operations and
changes in the valuation allowance are included in net expenses from
foreclosed assets.
Goodwill and Other Intangibles
Goodwill represents the excess of cost over the fair value of net
assets acquired and is amortized on a straight-line basis over a range
of 15-25 years. The core deposit intangible represents the estimated
fair value of certain customer relationships acquired and is amortized
on a straight-line basis over a range of 5-15 years.
Pension Plan
The Corporation has a trusteed, noncontributory defined contribution
pension plan covering substantially all full-time employees.
Income Taxes
Deferred income tax assets and liabilities are determined using the
balance sheet method. Under this method, the net deferred tax asset or
liability is determined based on the tax effects of the temporary
differences between the book and tax bases of the various balance
sheet assets and liabilities and gives current recognition to changes
in tax rates and laws.
Common Stock
Shares of its own common stock reacquired by the Corporation are
cancelled as a matter of state law and are accounted for as authorized
but unissued shares.
Earnings Per Share
Basic earnings per share represents income available to common
shareholders divided by the weighted-average number of common shares
outstanding during the period. Diluted earnings per share reflects
additional common shares that would have been outstanding if dilutive
potential common shares had been issued, as well as any adjustment to
income that would result from the assumed issuance. Potential common
shares that may be issued by the Corporation relate solely to
outstanding stock options, and are determined using the treasury stock
method.
Trust Company
Securities and other property held by F & M Trust Company in a
fiduciary or agency capacity are not assets of the Corporation and are
not included in the accompanying consolidated financial statements.
Comprehensive Income
Accounting principles generally require that recognized revenue,
expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as
55
unrealized gains and losses on available for sale securities, are
reported as a separate component of the equity section of the balance
sheet, such items, along with net income, are components of
comprehensive income.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates. Material estimates that are particularly
susceptible to significant change in the near term relate to the
determination of the allowance for loan losses, the valuation of
foreclosed real estate and deferred taxes.
Derivative Financial Instruments
As of October 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement 133 establishes
accounting and reporting standards for derivative financial
instruments and other similar financial instruments and for hedging
activities. The Statement also allowed securities classified as held
to maturity to be transferred to the available for sale category at
the date of initial application of this standard. The Corporation
does not have any derivative instruments and hedging activities as
defined under this Statement.
Segments
As of December 31, 2000 and 1999, the Corporation does not have any
segments that meet the disclosure requirements established by
Statement of Financial Accounting Standards (SFAS) No. 131,
"Disclosures About Segments of an Enterprise and Related Information."
Note 2. Pending Merger
On January 24, 2001, F & M and BB&T Corporation ("BB&T"), based in
Winston-Salem, North Carolina, announced an agreement whereby BB&T will
acquire F & M in a transaction that is expected to close during the
third quarter of 2001. Under the terms of the agreement, F & M will
receive 1.09 shares of BB&T's common stock for each share of F & M's
common stock. This transaction is expected to be accounted for as a
pooling-of-interests.
56
Note 3. Securities
The amortized cost and fair value of securities being held to
maturity as of December 31, 2000 and 1999, are as follows:
December 31, 2000
-----------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------- ------------------ ----------- --------
(In Thousands)
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $499,777 $ 3,411 $ (2,670) $500,518
Obligations of states and
political subdivisions 22,337 232 (48) 22,521
Corporate securities 1,058 15 (1) 1,072
-------- -------- -------- --------
$523,172 $ 3,658 $ (2,719) $524,111
======== ======== ======== ========
December 31, 1999
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
------------- ---------- -------------- ----------
(In Thousands)
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $427,579 $ 876 $(13,160) $415,295
Obligations of states and
political subdivisions 20,963 137 (175) 20,925
Corporate securities 1,312 8 (2) 1,318
-------- -------- -------- --------
$449,854 $ 1,021 $(13,337) $437,538
========= ======== ======== ========
The amortized cost and fair value of securities being held to maturity as
of December 31, 2000, by contractual maturity are shown below. Expected
maturities may differ from contractual maturities because the corporate
securities may be called or repaid without any penalties. Therefore, these
securities are not included in the maturity categories in the maturity
summary.
Amortized Fair
Cost Value
--------- --------
(In Thousands)
Due in one year or less $ 50,418 $ 50,344
Due after one year through five years 328,492 327,545
Due after five years through ten years 90,162 90,871
Due after ten years 53,042 54,279
Corporate securities 1,058 1,072
-------- --------
$523,172 $524,111
======== ========
57
The amortized cost and fair value of securities available for sale as of
December 31, 2000 and 1999, are as follows:
December 31, 2000
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------- ----------- ----------- --------
(In Thousands)
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $591,922 $8,520 $ (3,398) $597,044
Obligations of states and
political subdivisions 10,804 45 (109) 10,740
Corporate securities 7,136 80 -- 7,216
Other 14,085 382 -- 14,467
-------- ------ -------- --------
$623,947 $9,027 $ (3,507) $629,467
======== ====== ======== ========
December 31, 1999
-----------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
---------- ---------- -------------- ----------
(In Thousands)
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $422,249 $ 627 $(17,409) $405,467
Obligations of states and
political subdivisions 10,669 7 (233) 10,443
Corporate securities 6,202 -- (649) 5,553
Other 12,301 183 -- 12,484
-------- ------ -------- --------
$451,421 $ 817 $(18,291) $433,947
======== ====== ======== ========
The amortized cost and fair value of securities available for sale, as of
December 31, 2000, by contractual maturity are shown below. Expected
maturities may differ from contractual maturities because the corporate
securities may be called or prepaid without any penalties. Therefore,
these securities are not included in the maturity categories in the
maturity summary.
Amortized Fair
Cost Value
--------- --------
(In Thousands)
Due in one year or less $ 44,970 $ 44,767
Due after one year through five years 225,101 225,236
Due after five years through ten years 198,617 199,732
Due after ten years 134,038 138,049
Corporate securities 7,136 7,216
Other 14,085 14,467
-------- --------
$623,947 $629,467
======== ========
58
Proceeds from principal repayments and calls of securities held to
maturity during 2000, 1999 and 1998 were $11,186,000, $41,468,000 and
$131,673,000. There were no sales of securities held to maturity
during 2000, 1999 and 1998.
Proceeds from sales, principal repayments and calls of securities
available for sale during 2000, 1999 and 1998 were $18,277,000,
$67,105,000 and $147,070,000. Gross gains of $51,000, $3,118,000 and
$2,579,000 and gross losses of $-0-, $-0- and $143,000 were realized
on those sales and calls during 2000, 1999 and 1998, respectively.
The book value of securities pledged to secure deposits and for other
purposes amounts to $291,026,000 and $354,617,000 at December 31, 2000
and 1999, respectively.
Note 4. Loans
Major classifications of loans are as follows:
December 31,
---------------------------
2000 1999
------------ -----------
(In Thousands)
Commercial, financial and agricultural $ 308,019 $ 300,016
Real estate - construction 122,803 108,631
Real estate - mortgage:
Residential (1-4 family) 605,745 557,744
Home equity lines 69,347 59,545
Multifamily 25,671 27,624
Non-farm, non-residential 579,091 528,667
Agricultural 18,075 18,435
Loans to individuals:
Consumer 262,963 247,503
Credit card 20,955 20,547
------------ -----------
Total loans $ 2,012,669 $ 1,868,712
Less: Unearned income (3,381) (3,614)
Allowance for loan losses (24,537) (24,051)
------------ -----------
Loans, net $ 1,984,751 $ 1,841,047
============ ===========
Note 5. Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
December 31,
---------------------------------------
2000 1999 1998
----------- ----------- ----------
(In Thousands)
Balance at beginning of year $ 24,051 $ 23,509 $ 23,095
Provision charged to operating expense 3,951 4,021 5,541
Recoveries added to the allowance 797 850 808
Loan losses charged to the allowance (4,262) (4,329) (5,935)
----------- ----------- ----------
Balance at end of year $ 24,537 $ 24,051 $ 23,509
=========== =========== ==========
59
Impairment of loans having recorded investments of $20,476,000 at
December 31, 2000 and $15,009,000 at December 1999, has been
recognized in conformity with FASB Statement No. 114, as amended by
FASB Statement No. 118. The average recorded investment in impaired
loans during 2000, 1999 and 1998 was $19,182,000, $15,285,000 and
$14,451,000, respectively. The total allowance for loan losses related
to these loans was $3,013,000, $2,600,000 and $2,444,000 on December
31, 2000, 1999 and 1998, respectively. Interest income on impaired
loans of $1,653,000, $1,623,000 and $847,000 was recognized for cash
payments received in 2000, 1999 and 1998, respectively.
Nonaccrual loans excluded from impaired loan disclosure amounted to
$7,643,000 and $4,266,000 at December 31, 2000 and 1999, respectively.
If interest on these loans had been accrued, such income would have
approximated $644,000 and $295,000 for 2000 and 1999, respectively.
Note 6. Related Party Transactions
The Securities and Exchange Commission requires disclosure of loans
which exceed $60,000 to executive officers and directors of the
Corporation or to their associates. Such loans were made on
substantially the same terms as those prevailing for comparable
transactions with similar risk. At December 31, 2000 and 1999, these
loans totaled $40,654,000 and $38,877,000, respectively. During 2000,
total principal additions were $11,221,000 and total principal
payments were $9,444,000.
The Company was indebted to related parties for short-term borrowings
totaling $8,850,000 and $8,460,000 at December 31, 2000 and 1999,
respectively.
The Company paid $270,902 and $186,585 to the law firm of one director
who serves as legal counsel for a bank subsidiary for the years ended
December 31, 2000 and 1999, respectively.
Construction of bank premises included $453,000 and $577,184 paid to
companies of related parties for the years ended December 31, 2000 and
1999, respectively.
Note 7. Bank Premises and Equipment, Net
Premises and equipment are summarized as follows:
December 31,
------------------------
2000 1999
---------- ----------
(In Thousands)
Premises $ 75,746 $ 62,911
Leasehold improvements 8,467 8,224
Furniture and equipment 49,615 43,834
Construction in progress 4,793 4,439
---------- ----------
$ 138,621 $ 119,408
Less accumulated depreciation and amortization (49,955) (44,907)
---------- ----------
$ 88,666 $ 74,501
========== ==========
Depreciation and amortization of bank premises and equipment included
in operating expenses for the years ended December 31, 2000, 1999 and
1998, were $6,595,000, $5,934,000 and $4,963,000, respectively.
60
Note 8. Deposits
The aggregate amount of jumbo time deposits, each with a minimum
denomination of $100,000, was $300,073,000 and $262,161,000 in 2000
and 1999, respectively.
At December 31, 2000, the scheduled maturities of time deposits (in
thousands) are as follows:
2001 $ 841,011
2002 242,182
2003 143,320
2004 22,860
2005 44,753
Later years 922
----------
$1,295,048
==========
Note 9. Short-Term Borrowings
Short-term borrowings consist of securities sold under agreements to
repurchase which are secured transactions with customers and generally
mature the day following the date sold. Short-term borrowings may also
include federal funds purchased, which are unsecured overnight
borrowings from other financial institutions, and advances from the
FHLB of Atlanta, which are secured either by a blanket floating lien
on all real estate mortgage loans secured by 1 to 4 family residential
properties, FHLB stock, or other mortgage-related assets.
The Company has unused lines of credit for short-term borrowings
totaling approximately $673,176,000 at December 31, 2000.
The table below presents selected information on the combined totals
of repurchase agreements and other short-term borrowings for the years
ended December 31:
2000 1999
--------- ---------
(In Thousands)
Maximum balance at any month end
during the year $ 186,492 $ 147,805
Average balance for the year 154,186 116,277
Weighted average rate for the year 4.55% 3.41%
Weighted average rate on borrowings
at year end 4.24% 4.22%
Estimated fair value $ 186,492 $ 119,128
The weighted average rates shown for borrowings at year end were
calculated by multiplying the effective rate for each transaction by
the principal amount and dividing the aggregate product by the total
principal outstanding.
Due to the short maturities of these financial instruments, the
carrying amounts for both repurchase agreements and other short-term
borrowings were deemed to approximate fair values at December 31, 2000
and 1999.
61
Note 10. Long-Term Debt
The Company joined the Federal Home Loan Bank system in order to enter
a program of long-term borrowing which is restricted to be invested in
Residential Housing Finance Assets (RHFA). RHFA are defined as (1)
Loans secured by residential real property; (2) Mortgage-backed
securities; (3) Participations in loans secured by residential real
property; (4) Loans financed by Community Investment Program advances;
(5) Loans secured by manufactured housing, regardless of whether such
housing qualifies as residential real property; or (6) Any loans or
investments which the Federal Housing Finance Board and the FHLB of
Atlanta, in their discretion, otherwise determine to be residential
housing finance assets. Borrowings from the Federal Home Loan Bank
system for RHFA investments totaled $20,912,000 and $25,443,000 at
December 31, 2000 and 1999, maturing through 2006. The interest rate
on the notes payable range from 5.57% to 8.18% at December 31, 2000.
Principal payments on the notes (in thousands) are due as follows:
2001 $ 4,007
2002 2,866
2003 2,875
2004 2,834
2005 2,490
Later years 5,840
---------
$ 20,912
=========
Note 11. Business Combinations
On April 1, 1998, the Company completed its acquisition of Peoples
Bank of Virginia. A total of approximately 778,000 shares of the
Company's stock was issued in the transaction, which was accounted for
as a pooling-of-interests.
On April 30, 1998, the Company completed its acquisition of J. V.
Arthur, Inc. A total of approximately 91,000 shares of the Company's
stock was issued in the transaction, which was accounted for as a
pooling-of-interests.
On June 1, 1998, the Company completed its acquisition of The Bank of
Alexandria. A total of approximately 646,000 shares of the Company's
stock was issued in the transaction, which was accounted for as a
pooling-of-interests.
On March 22, 1999, the Company completed its acquisition of Security
Bank Corporation. A total of approximately 643,000 shares of the
Company's stock was issued in the transaction, which was accounted for
as a pooling-of-interests.
On January 3, 2000 the Company completed its acquisition of The State
Bank of the Alleghenies. A total of approximately 1,912,000 shares of
the Company's stock was issued in the transaction, which was accounted
for as a pooling-of interests.
62
Total assets and results of operations as originally reported for 1999
and 1998 have been restated to reflect the accounts of the pooled
entities as follows:
Net Income Per Share
--------------------
Total Total Net Assuming
Assets Income Income Basic Dilution
------------- ------------ ---------- -------- ----------------
(In Thousands)
1999 originally reported $ 2,945,934 $ 251,808 $ 41,285 $ 1.79 $ 1.78
========== =========
1999 results of pooled
entities 152,233 $ 11,980 1,717
------------- ------------ ----------
As restated $ 3,098,167 $ 263,788 $ 43,002 $ 1.72 $ 1.71
============= ============ ========== ========== =========
Net Income Per Share
--------------------
Total Total Net Assuming
Assets Income Income Basic Dilution
------------- ------------ ---------- -------- ----------------
(In Thousands)
1999 originally reported $ 2,888,714 $ 237,444 $ 36,485 $ 1.67 $ 1.65
========== =========
1999 results of pooled
entities 211,403 16,415 2,453
------------- ------------- ----------
As restated $ 3,100,117 $ 253,859 $ 38,938 $ 1.55 $ 1.54
============= ============= ========== ========== =========
63
Note 12. Earnings Per Share
The following shows the weighted average number of shares used in
computing earnings per share and the effect on weighted average number
of shares of diluted potential common stock. Potential dilutive common
stock has no effect on income available to common shareholders.
Earnings per share amounts for prior periods have been restated to
give effect to the acquisition of Peoples Bank of Virginia, The Bank
of Alexandria and J. V. Arthur, Inc. in 1998, the acquisition of
Security Bank Corporation in 1999 and a 3% stock dividend in 1999 and
the acquisition of The State Bank of the Alleghenies in 2000.
2000 1999 1998
----------------------------------------- ---------------------
Per Per Per
Share Share Share
Shares Amount Shares Amount Shares Amount
---------- -------- ---------- -------- ---------- -------
Basic EPS 24,820,000 $ 1.93 24,970,000 $ 1.72 25,099,000 $ 1.55
======== ======== =======
Effect of dilutive
securities, stock
options 141,000 175,000 230,000
---------- ---------- ----------
Diluted EPS 24,961,000 $ 1.92 25,145,000 $ 1.71 25,329,000 $ 1.54
========== ======== ========== ======== ========== =======
Note 13. Stock-Based Compensation Plans
The Company has two stock-based compensation plans which are described
below. Grants under those plans are accounted for following APB
Opinion No. 25 and related interpretations. Compensation cost charged
to income for the stock option plan was $448,000, $735,000 and
$276,000 for the years ended December 31, 2000, 1999 and 1998,
respectively. No compensation cost has been recognized for grants
under the Employee Stock Discount Plan.
Stock Option Plan
The Company sponsors a stock option plan, which provides for the
granting of both incentive and nonqualified stock options to executive
officers and key employees of the Company and its Subsidiaries. The
option price of incentive options will not be less than the fair
market value of the stock at the time an option is granted.
Nonqualified options may be granted at a price established by the
Board of Directors including prices less than the fair market value on
the date of grant.
64
A summary of the status of the stock option plan at December 31, 2000,
1999 and 1998 and changes during the years ended on those dates is as
follows:
2000 1999 1998
---------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares
-------- -------- -------- -------- --------
Price
- -----
Outstanding at
beginning of year 215,565 $ 12.23 279,443 $ 11.71 310,222 $ 9.84
Granted 68,500 13.79 67,000 14.97 69,285 17.22
Effect of 3%
stock dividend -- -- 6,303 -- -- --
Exercised (44,087) 11.93 (133,835) 11.93 (96,930) 9.91
Forfeited (1,500) 13.79 (3,346) 11.93 (3,134) 13.92
------- ------- -------
Outstanding and
exercisable at end
of year 238,478 $ 12.73 215,565 $ 12.23 279,443 $ 11.71
======= ======= =======
Weighted-average
fair value per option
of options granted
during the year $ 18.91 $ 18.72 $ 22.60
The Company accounts for the stock option plan and the stock discount
plan under APB Opinion No. 25. Proforma adjustments of compensation
cost for the stock-based compensation plans are determined based on
the grant date fair values of awards (the method described in SFAS
Statement No. 123). For the purpose of computing the proforma amounts
indicated below, the fair value of each option on the date of grant is
estimated using the Black-Scholes option-pricing model with the
following weighted average assumptions used for grants in 2000, 1999
and 1998, respectively: dividend yields of .26%, .26% and .26%;
expected volatility of 23.1%, 18.5% and 19.1%; a risk-free interest
rate of 5.3%, 6.5% and 4.5%; and an expected option life of 5 years
from the date of grant.
2000 1999 1998
--------- --------- --------
(In Thousands)
Net Income: As Reported 47,954 43,002 38,938
Pro Forma 47,263 42,540 38,015
Basic EPS: As Reported 1.93 1.72 1.55
Pro Forma 1.90 1.70 1.51
Diluted EPS: As Reported 1.92 1.71 1.54
Pro Forma 1.89 1.69 1.50
65
A further summary about options outstanding at December 31, 2000, is as
follows:
Options Outstanding and Exercisable
------------------------------------
Weighted Weighted
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life Price
------------ ----------- ----------- --------
$11.54 3,697 .2 years 11.54
13.51 1,520 1.3 13.51
7.47 - 19.49 28,108 3.3 9.00
7.70 - 8.95 12,026 4.0 7.77
9.70 - 12.53 24,232 5.1 10.01
10.37 - 13.78 33,500 6.0 10.64
16.68 43,775 7.0 16.68
14.53 44,820 8.0 14.53
13.79 46,800 9.0 13.79
-------
$7.47 - 19.49 238,478 6.5 12.73
=======
Employee Stock Discount Plan
In 1998, the Corporation adopted an Employee Stock Discount Plan. The
Plan offers eligible employees of the Company the opportunity to
purchase common stock through payroll deduction. The price of the
shares purchased is the lesser of 85% of the market price of the
shares as determined under the plan at January 1 of the calendar year
of purchase or 85% of the market price of the shares as determined
under the plan at December 31 of the calendar year of purchase.
Employees automatically become eligible to participate on January 1 or
July 1 as of the date they reach age 18 and complete 12 months of
service, whichever occurs last. An eligible employee is one who is
customarily employed for more than 20 hours per week and more than
five months per year.
All officers and directors who are eligible employees may participate.
52,592 shares were issued for the 2000 plan year at a discount of
$206,000. 46,501 shares were issued for the 1999 plan year at a
discount of $192,000. 30,411 shares were issued for the 1998 plan year
at a discount of $136,000.
Note 14. Employee Benefit Plans
F & M National Corporation and its affiliates have a defined
contribution 401(k) retirement plan covering substantially all full-
time employees and provides that employees automatically become
eligible to participate on January 1 or July 1 as of the date they
reach age 18 and complete 12 months of service, whichever occurs last.
Under the plan, a participant may contribute to the plan an amount up
to 10% of their covered compensation for the year, subject to certain
limitations. For each year in which the employee makes a contribution
to the plan, the Company will make a matching contribution. The
Company may also make, but is not required to make, a discretionary
66
contribution for each participant out of its current or
accumulated net profits. The amount of the matching contribution and
discretionary contribution, if any, is determined on an annual basis
by the Board of Directors.
The total plan expense for 2000, 1999 and 1998, was $512,000, $417,500
and $347,000, respectively.
The Employee Stock Ownership Plan (ESOP) covers substantially all
full-time employees and provides that employees automatically become
eligible to participate on January 1 or July 1 as of the date they
reach age 18 and complete 12 months of service, whichever occurs last.
The Company may make, but is not required to make, a discretionary
contribution for each participant (proportionately based on eligible
W-2 salaries) out of its current or accumulated net profits. The total
contribution may be contributed in cash or corporate common stock. The
amount of the discretionary contribution, was 5% in cash for 2000,
1999 and 1998.
The total plan expense for 2000, 1999 and 1998 was $1,785,000,
$1,745,000 and $1,521,000, respectively.
Note 15. Executive and Director Compensation Plans
Executive Incentive Compensation Plan
The Executive Incentive Compensation Plan was established for the
purpose of attracting and retaining key executives. The executives and
the amounts of the awards (subject to limits as set forth in the Plan)
are determined by a Committee composed of members of the Corporation's
Board of Directors who are not employees. The aggregate cash awards
amounted to $1,682,000 in 2000, $1,517,000 in 1999 and $1,344,000 in
1998.
In addition, deferred compensation plans have been adopted for certain
key employees which provide that benefits are to be paid in monthly
installments for 15 years following retirement or death. The agreement
provides that if employment is terminated for reasons other than death
or disability prior to age 65, the amount of benefits would be reduced
or forfeited. The deferred compensation expense (benefit) for 2000,
1999 and 1998, based on the present value of retirement benefits,
amounted to approximately $(44,000), $323,000 and $336,000,
respectively. The plan is unfunded. However, life insurance has been
acquired on the lives of these employees in amounts sufficient to
discharge the obligations thereunder.
Nonemployee Director Stock Compensation and Warrant Plans
Effective June 15, 1994, FB&T Financial Corporation (a subsidiary of F
& M National Corporation as of March 29, 1996) implemented a
Nonemployee Director Stock Compensation Plan. Allegiance Bank, N.A. (a
subsidiary of F & M National Corporation as of October 1, 1996)
implemented a Director Stock Warrant Plan effective February 8, 1994.
Security Bank Corporation (a subsidiary of F & M National Corporation
as of March 22, 1999) implemented a Director Stock Option Plan
effective in 1997. The exercise price of awards were fixed at the fair
market value of the share on the date the option was granted.
67
The following summarizes the option activity under the stock option
plan for the last three years, as restated to the equivalent shares of
the Company's common stock:
2000 1999 1998
------------------- ------------------ -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Price Shares Price Shares Price Shares
- ---------------------- -------- -------- -------- -------- --------
Outstanding at
beginning of year 38,500 $ 11.58 46,989 $ 10.93 54,029 $ 10.32
Granted -- -- -- -- -- --
Effect of 3%
stock dividend -- -- 1,116 -- -- --
Exercised -- -- (6,970) 7.27 (7,040) 6.26
Forfeited -- -- (2,635) 6.26 -- --
------ ------ ------
38,500 $ 11.58 38,500 $11.58 46,989 $10.93
====== ====== ======
Note 16. Lease Commitments and Contingent Liabilities
The Company and Subsidiaries were obligated under a number of
noncancelable leases mainly for various banking premises and
equipment. Facilities leases, including renewal options, expire
through 2008. Total rental expense for operating leases for 2000, 1999
and 1998, was $4,704,000, $4,331,000 and $3,519,000, respectively.
Minimum rental commitments under noncancellable leases with terms in
excess of one year as of December 31, 2000, were as follows:
Year Operating Leases
---------- ----------------
(In Thousands)
2001 $ 2,778
2002 2,195
2003 1,955
2004 1,474
2005 949
Later years 2,576
------------
Total minimum payments $ 11,927
============
In the normal course of business, there are other outstanding
commitments and contingent liabilities which are not reflected in the
accompanying financial statements. The Corporation does not anticipate
losses as a result of these transactions.
As members of The Federal Reserve System, the Company's subsidiary
banks are required to maintain certain average reserve balances. For
the final weekly reporting period in the years ended December 31, 2000
and 1999, the aggregate amounts of daily average required balances
were approximately $8,474,000 and $15,705,000, respectively.
68
Note 17. Income Taxes
Net deferred tax assets consist of the following components as of
December 31, 2000 and 1999:
2000 1999
----------- ----------
(In Thousands)
Deferred tax assets:
Allowance for loan losses $ 8,408 $ 8,207
Salary continuation plan 1,146 1,171
Other real estate owned 546 694
Nonaccrual interest 423 111
Securities available for sale -- 6,210
Other 1,082 723
----------- ----------
$ 11,605 $ 17,116
----------- ----------
Deferred tax liabilities:
Depreciation $ 2,655 $ 2,435
Net deferred loan costs 776 --
Securities available for sale 1,877 --
Other 331 318
----------- ----------
$ 5,639 $ 2,753
----------- ----------
Net deferred tax assets $ 5,966 $ 14,363
=========== ==========
The provision for income taxes charged to operations for the years
ended December 31, 2000, 1999 and 1998 consists of the following:
2000 1999 1998
----------- ---------- ---------
(In Thousands)
Current tax expense $ 24,874 $ 22,699 $ 19,768
Deferred tax (benefit) expense 310 (287) 356
----------- ---------- ----------
$ 25,184 $ 22,412 $ 20,124
=========== ========== ==========
The income tax provision differs from the amount of income tax
determined by applying the federal income tax rate to pretax income for
the years ended December 31, 2000, 1999 and 1998 due to the following:
2000 1999 1998
------- ------- -------
Computed "expected" tax expense 35.0% 35.0% 35.0%
Increase (decrease) in income taxes
resulting from:
Tax-exempt interest (0.9) (1.0) (1.2)
Nondeductible merger expenses .1 .1 .1
Other, net .2 .2 .2
------ ------ ------
34.4% 34.3% 34.1%
====== ====== ======
69
Note 18. Restrictions on Transfers to Parent
Transfer of funds from banking subsidiaries to the Company in the form
of loans, advances and cash dividends, are restricted by federal and
state regulatory authorities. As of December 31, 2000, the aggregate
amount of unrestricted funds which could be transferred from the
Company's subsidiaries to the Company, without prior regulatory
approval, totaled $26,764,000 or 7.9% of the consolidated net assets.
Note 19. Financial Instruments With Off-Balance-Sheet Risk
The Company is party to financial instruments with off-balance-
sheet risk in the normal course of business to meet the financing needs
of its customers and to reduce its own exposure to fluctuations in
interest rates. These financial instruments include commitments to
extend credit, standby letters of credit and financial guarantees.
Those instruments involve, to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the balance
sheet. The contract or notional amounts of those instruments reflect
the extent of involvement the Company has in particular classes of
financial instruments.
The Company's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend
credit and standby letters of credit and financial guarantees written
is represented by the contractual amount of those instruments. The
Company uses the same credit policies in making commitments and
conditional obligations as it does for on-balance-sheet instruments. At
December 31, 2000 and 1999, the following financial instruments were
outstanding whose contract amounts represent credit risk:
2000 1999
---------- ----------
(In Thousands)
Commitments to extend credit and
unfunded commitments under lines
of credit $ 578,172 $ 512,753
Commercial and standby letters of credit $ 24,166 $ 23,139
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the
contract. Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. The commitments
may expire without being drawn upon and, therefore, do not necessarily
represent future cash requirements. The Company evaluates each
customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Corporation upon
extension of credit, is based on management's credit evaluation of the
customer.
Unfunded commitments under lines of credit are commitments for possible
future extensions of credit to existing customers. Those lines of
credit may not be drawn upon to the total extent to which the
Company is committed.
70
Commercial and standby letters of credit are conditional commitments
issued by the Company to guarantee the performance of a customer to
a third party. Those letters of credit are primarily issued to support
public and private borrowing arrangements. The credit risk involved in
issuing letters of credit is essentially the same as that involved in
extending loan facilities to customers. The Company holds collateral
supporting those commitments if deemed necessary.
Note 20. Credit Risk
As of December 31, 2000, the Company had a concentration of loans
in non-farm, non-residential loans, consisting primarily of commercial
loans secured by real estate of $579,091,000 which were in excess of
10% of the total loan portfolio. The Company does not engage in any
foreign lending activities.
As of December 31, 2000, the Company had $23,709,000 in deposits in
financial institutions in excess of amounts insured by the Federal
Deposit Insurance Corporation (FDIC).
Note 21. Fair Value of Financial Instruments and Interest Rate Risk
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and Short-Term Investments
For those short-term instruments, the carrying amount is a
reasonable estimate of fair value.
Investment Securities and Securities Available for Sale
For securities and marketable equity securities held for
investment purposes, fair values are based on quoted market prices
or dealer quotes. For other securities held as investments, fair
value equals quoted market price, if available. If a quoted market
price is not available, fair value is estimated using quoted
market prices for similar securities.
Loans Held for Sale
Fair values of loans held for sale are based on commitments on
hand from investors or prevailing market prices.
Loan Receivables
For certain homogeneous categories of loans, such as some
residential mortgages, credit card receivables, and other consumer
loans, fair value is estimated using the quoted market prices for
securities backed by similar loans, adjusted for differences in
loan characteristics. The fair value of other types of loans is
estimated by discounting the future cash flows using the current
rates at which similar loans would be made to
71
borrowers with similar credit ratings and for the same remaining
maturities.
Deposits and Borrowings
The fair value of demand deposits, savings accounts, and certain
money market deposits is the amount payable on demand at the
reporting date. For all other deposits and borrowings, the fair
value is determined using the discounted cash flow method. The
discount rate was equal to the rate currently offered on similar
products.
Off-Balance-Sheet Financial Instruments
The fair value of commitments to extend credit is estimated using
the fees currently charged to enter similar agreements, taking
into account the remaining terms of the agreements and the present
credit worthiness of the counterparties. For fixed-rate loan
commitments, fair value also considers the difference between
current levels of interest rates and the committed rates.
The fair value of stand-by letters of credit is based on fees
currently charged for similar agreements or on the estimated cost
to terminate them or otherwise settle the obligations with the
counterparties at the reporting date.
At December 31, 2000 and 1999, the carrying amounts of loan
commitments and stand-by letters of credit were deemed to
approximate fair value.
The estimated fair values of the Company's financial
instruments are as follows:
2000 1999
----------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
----------- ---------- --------- ----------
(In Thousands) (In Thousands)
Financial assets:
Cash and short-term
Investments $ 187,976 $ 187,976 $ 196,570 $ 196,570
Investments securities 523,172 524,111 449,854 437,538
Securities available for sale 629,467 629,467 451,421 433,947
Loans and loans held for
sale, net 2,044,165 2,043,552 1,841,047 1,863,694
Accrued interest receivable 30,020 30,020 23,239 23,239
Financial liabilities:
Deposits $ 2,991,431 $2,816,731 $2,617,855 $2,479,003
Federal funds purchased
and securities sold under
agreement to repurchase 161,054 161,054 95,008 95,008
Other short-term borrowings 25,438 25,438 24,120 24,120
Long-term debt 20,912 20,912 25,443 25,443
Accrued interest payable 8,742 8,742 7,397 7,397
The Company assumes interest rate risk (the risk that general
interest rate levels will change) as a result of its normal operations.
As a result, the fair values of the Corporation's financial instruments
will change when interest rate levels change and that
72
change may be either favorable or unfavorable to the Company
Management attempts to match maturities of assets and liabilities to
the extent believed necessary to minimize interest rate risk. However,
borrowers with fixed rate obligations are less likely to prepay in a
rising rate environment and more likely to prepay in a falling rate
environment. Conversely, depositors who are receiving fixed rates are
more likely to withdraw funds before maturity in a rising rate
environment and less likely to do so in a falling rate environment.
Management monitors rates and maturities of assets and liabilities and
attempts to minimize interest risk by adjusting terms of new loans and
deposits and by investing in securities with terms that mitigate the
Company's overall interest rate risk.
Note 22. Regulatory Matters
The Company (on a consolidated basis) and the Bank are subject to
various regulatory capital requirements administered by the federal
banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory - possibly additional discretionary -actions
by regulators that, if undertaken, could have a direct material effect
on the Company's and the Bank's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective
action, the Company and the Bank must meet specific capital guidelines
that involve quantitative measures of the Company's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The capital amounts and classification
are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors. Prompt corrective
action provisions are not applicable to bank holding companies.
Quantitative measures established by regulation to ensure capital
adequacy require the Company and the Bank to maintain minimum amounts
and ratios (set forth in the table below) of total and Tier 1 capital
(as defined in the regulations) to risk-weighted assets (as defined),
and of Tier 1 capital (as defined) to average assets (as defined).
Management believes, as of December 31, 2000 and 1999, that the Company
and the Bank meet all capital adequacy requirements to which they are
subject.
As of December 31, 2000, the most recent notification from the Federal
Reserve categorized the Banks as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well
capitalized, an institution must maintain minimum total risk-based,
Tier 1 risk-based, and Tier 1 leverage ratios as set forth in the
table. There are no conditions or events since that notification that
management believes have changed the institution's category.
The Company's and significant Subsidiaries actual capital amounts and
ratios as of December 31, 2000 and 1999 are also presented in the
table.
73
Minimum To Be Well
Capitalized Under
Minimum Capital Prompt Corrective
Actual Requirements Action Provisions
--------------------- ---------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
-------- ------- -------- ------- -------- -------
As of December 31, 2000: (In Thousands)
Total Capital (to Risk Weighted Assets)
Consolidated $329,225 15.2% $173,671 8.0% N/A N/A
F & M Bank - Winchester $ 84,881 15.0% $ 45,387 8.0% $56,733 10.0%
F & M Bank - NOVA $ 71,251 13.4% $ 42,529 8.0% $53,161 10.0%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated $304,282 14.0% $ 86,836 4.0% N/A N/A
F & M Bank - Winchester $ 77,659 13.7% $ 22,693 4.0% $34,040 6.0%
F & M Bank - NOVA $ 65,645 12.4% $ 21,264 4.0% $31,896 6.0%
Tier 1 Capital (to Average Assets)
Consolidated $304,282 8.6% $142,105 4.0% N/A N/A
F & M Bank - Winchester $ 77,659 8.2% $ 38,048 4.0% $47,560 5.0%
F & M Bank - NOVA $ 65,645 7.9% $ 33,372 4.0% $41,715 5.0%
As of December 31, 1999:
Total Capital (to Risk Weighted Assets)
Consolidated $314,557 16.8% $149,929 8.0% N/A N/A
F & M Bank - Winchester $ 83,013 16.2% $ 41,081 8.0% $51,351 10.0%
F & M Bank - NOVA $ 65,808 13.8% $ 38,124 8.0% $47,655 10.0%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated $291,687 15.6% $ 74,964 4.0% N/A N/A
F & M Bank - Winchester $ 76,511 14.9% $ 20,540 4.0% $30,811 6.0%
F & M Bank - NOVA $ 60,643 12.7% $ 19,062 4.0% $28,593 6.0%
Tier 1 Capital (to Average Assets)
Consolidated $291,687 10.0% $116,808 4.0% N/A N/A
F & M Bank - Winchester $ 76,511 8.9% $ 34,428 4.0% $43,035 5.0%
F & M Bank - NOVA $ 60,643 8.1% $ 29,923 4.0% $37,404 5.0%
Note 23. Subsequent Events
On January 25, 2001, the Company completed its acquisition of
Community Bankshares of Maryland, Inc. The Company issued 545,131
shares of its common stock in exchange for all of the shares of common
stock of Community Bankshares of Maryland, Inc. The excess of the total
acquisition cost over the fair value of the net assets acquired of
$4,073,418 is being amortized over 15 years by the straight-line method.
The acquisition has been accounted for as a purchase and results of
operations of Community Bankshares of Maryland, Inc. since the date of
acquisition will be included in the consolidated financial statements.
On February 26, 2001, the Company acquired Atlantic Financial Corp.
for approximately 3,160,000 common shares in a transaction accounted for
as a pooling-of-interests. If the transaction had been consummated prior
to December 31, 2000, the
74
accompanying financial statements would have included the financial
position and results of operations of Atlantic Financial Corp. Total
assets and results of operations (in thousands except per share data),
for 2000 would have been as follows:
Total assets $3,976,691
Total income $ 327,024
Net income $ 51,892
Earnings per share, basic $ 1.86
Earnings per share, diluted $ 1.84
75
Note 24. Condensed Financial Information - Parent Company Only
F & M NATIONAL CORPORATION
(Parent Corporation Only)
Balance Sheets
December 31, 2000 and 1999
2000 1999
-------- --------
(In Thousands)
Assets
Cash on deposit with subsidiary banks $ - - $ 2
Investment in subsidiaries, at cost, plus equity
in undistributed net income 326,944 277,931
Securities available for sale 12,199 10,282
Other short-term investments 19,462 32,081
Bank premises and equipment, net 5,558 5,684
Intangible, goodwill, at amortized cost 65 125
Other assets 7,538 13,320
-------- --------
Total assets $371,766 $339,425
======== ========
Liabilities and Shareholders' Equity
Liabilities
Short-term borrowings $ 21,402 $ 19,341
Dividends payable 6,153 5,401
Other liabilities 4,783 7,001
-------- --------
Total liabilities $ 32,338 $ 31,743
-------- --------
Shareholders' Equity
Preferred stock $ - - $ - -
Common stock 49,227 49,793
Capital surplus 87,524 93,679
Retained earnings, which are substantially undistributed
earnings of subsidiaries 199,129 175,588
Accumulated other comprehensive income (loss) 3,548 (11,378)
-------- --------
Total shareholders' equity $339,428 $307,682
-------- --------
Total liabilities and shareholders' equity $371,766 $339,425
======== ========
76
F & M NATIONAL CORPORATION
(Parent Corporation Only)
Statements of Income
For Each of the Three Years in the Period Ended December 31, 2000
December 31,
----------------------------------------------------
2000 1999 1998
------- ------- -------
(In Thousands)
Revenue
Dividends from subsidiaries $30,699 $37,373 $34,435
Interest on other short-term investments 1,104 793 361
Interest and dividends on securities available for sale 658 484 427
Management fees from subsidiaries 3,052 3,411 3,179
Rental income from subsidiaries 152 150 123
Profits on securities available for sale -- 19 546
Other revenue 807 26 8
------- ------- -------
Total revenue $36,472 $42,256 $39,079
------- ------- -------
Expenses
Salaries and employee benefits $ 3,065 $ 3,277 $ 1,859
Directors' fees 168 204 205
Taxes (other than income) 23 16 51
Interest 447 448 360
Amortization of goodwill 60 60 60
Depreciation 214 79 31
Merger expenses 229 231 226
Other expenses 1,196 1,146 824
------- ------- -------
Total expenses $ 5,402 $ 5,461 $ 3,616
------- ------- -------
Income before income taxes and equity in
undistributed net income of subsidiaries $31,070 $36,795 $35,463
Income Tax Expense (Benefit) 197 (302) 447
------- ------- -------
Income before equity in undistributed
net income of subsidiaries $30,873 $37,097 $35,016
Equity in Undistributed Net Income of Subsidiaries 17,081 5,905 3,922
------- ------- -------
Net income $47,954 $43,002 $38,938
======= ======= =======
77
F & M NATIONAL CORPORATION
(Parent Corporation Only)
Statements of Cash Flows
For Each of the Three Years in the Period Ended December 31, 2000
December 31,
-------------------------------------------------------
2000 1999 1998
-------- -------- --------
(In Thousands)
Cash Flows from Operating Activities
Net income $ 47,954 $ 43,002 $ 38,938
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 214 79 31
Amortization 60 60 60
Deferred income taxes (8) 147 276
Discount accretion -- (4) (4)
Profits on securities available for sale -- (19) (546)
Undistributed net income of subsidiaries (17,081) (5,905) (3,922)
(Increase) decrease in other assets 6,416 (1,185) 1,795
Increase (decrease) in other liabilities (2,218) 3,832 (1,990)
-------- -------- --------
Net cash provided by operating activities $ 35,337 $ 40,007 $ 34,638
-------- -------- --------
Cash Flows From Investing Activities
Increase in investment in subsidiaries $(17,500) $ (62) $ (1,600)
Purchase of securities available for sale (1,106) (6,709) (2,151)
Proceeds from sale of securities available for sale -- 160 1,557
Proceeds from maturities of securities available
for sale -- 5,000 --
(Increase) decrease in other short-term investments 12,619 (7,680) (16,675)
Purchase of bank premises and equipment (88) (4,418) (28)
-------- -------- --------
Net cash used in investing activities $ (6,075) $(13,709) $(18,897)
-------- -------- --------
Cash Flows From Financing Activities
Increase in short-term borrowings $ 2,061 $ 1,858 $ 3,265
Net proceeds from issuance and sale of common stock 3,254 3,588 2,959
Acquisition of common stock (10,918) (12,495) (6,109)
Cash paid in lieu of fractional shares -- (106) --
Dividends paid (23,661) (19,142) (15,856)
-------- -------- --------
Net cash used in financing activities $(29,264) $(26,297) $(15,741)
-------- -------- --------
78
F & M NATIONAL CORPORATION
(Parent Corporation Only)
Statements of Cash Flows
For Each of the Three Years in the Period Ended December 31, 2000
2000 1999 1998
----- ------- -------
(In Thousands)
Increase (decrease) in cash and cash equivalents $ (2) $ 1 $ --
Cash and Cash Equivalents
Beginning 2 1 1
----- ------- ------
Ending $ -- $ 2 $ 1
===== ======= ======
Supplemental Disclosures of Cash Flow Information,
cash payments for interest $ 447 $ 448 $ 360
===== ======= ======
Supplemental Schedule of Noncash Investing
and Financing Activities
Issuance of stock options under nonvariable
compensatory plan $ 943 $ 1,003 $1,529
===== ======= ======
Issuance of common stock-3% stock dividend $ -- $20,621 $ --
===== ======= ======
Unrealized gain (loss) on securities available for sale $ 495 $ (793) $1,045
===== ======= ======
79
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
80
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
Directors
The following table provides certain information on each of the directors
of the Company:
Served as Principal Occupation
Name (Age) Director Since During Past Five Years
--------- -------------- ----------------------
Frank Armstrong, III (64) 1985 Chairman, President and Chief Executive Officer
of National Fruit Product Company, Inc. (food
processor and distributor), Winchester, Virginia
Michael L. Bryan (49) 2001 Corporate Secretary and General Counsel of the
Company since January 1998; Secretary of F&M
Bank-Winchester since June 1999; Partner in the law
firm of Bryan & Coleman, P.C., Winchester, Virginia,
from February 1995 to January 1998
William H. Clement (73) 1988 Vice Chairman, Hidden Creek Industries, Inc. (a
private real estate investment company), Winchester,
Virginia; Retired in 1995 as Chairman of the Board
of Automotive Industries, Inc. and Vice Chairman of
the Board of Automotive Industries Holding, Inc.
(automobile parts manufacturer), Strasburg, Virginia
Charles E. Curtis (62) 1998 Vice Chairman and Chief Administrative Office of the
Company and Vice Chairman of F&M Bank-Winchester
since January 1998; President and Chief Executive
Officer of F&M Bank-Northern Virginia (Fairfax Bank
& Trust Company until August 1996) from July 1985
through December 1997
W. M. Feltner (81) 1970 Chairman of the Board of the Company since January
1970. Chief Executive Officer of the Company from
January 1970 to May 2000 and President of the
Company from January 1970 to December 1997
81
William R. Harris (72) 1986 Chairman of the Board of Harris Heating & Plumbing,
Inc., Richmond, Virginia; Chairman of the Board, F&M
Bank-Richmond
L. David Horner, III (66) 1986 Chairman of the Board of Horner Properties, Inc.
(real estate developer), Stuart, Florida
Jack R. Huyett (68) 1990 Retired President, Chief Administrative Officer and
Vice Chairman of the Board of F&M National
Corporation
J. D. Shockey, Jr. (58) 1970 Chief Executive Officer of The Shockey Companies,
Inc. (general construction contractor), Winchester,
Virginia
Ronald W. Tydings (61) 1996 Attorney, Fairfax, Virginia; Chairman of the Board,
F&M Bank-Northern Virginia
Alfred B. Whitt (62) 1998 Vice Chairman, President and Chief Financial Officer
of the Company since January 1998 and Chief
Executive Officer of the Company since May 2000;
Senior Vice President, Senior Financial Officer and
Secretary of the Company and F&M Bank-Winchester
from July 1991 through December 1997; Chairman of
F&M Bank-Winchester since June 1999 and Vice
Chairman and Secretary to the Board of F&M
Bank-Winchester since January 1998
82
Executive Officers who are not Directors
The following table provides certain information on each of the executive
officers of the Company who are not directors of the Company:
Served as Principal Occupation
Name (Age) an Officer Since During Past Five Years
--------- ---------------- ----------------------
F. Dixon Whitworth, Jr. (56) 1985 Executive Vice President of the Company since
November 1985; President of F&M Trust Company since
January 1998
Betty H. Carroll (63) 1987 Senior Vice President of the Company since May 1987;
President, Chief Executive Officer of F&M
Bank-Winchester since December 1988 and Vice
Chairman of F&M Bank-Winchester since 1999
Barbara H. Ward (55) 1983 Treasurer of the Company since May 1983; Senior Vice
President of F&M Bank-Winchester since March 1992
Other than Betty H. Carroll and Barbara H. Ward, who are sisters,
there are no family relationships among any of the directors or among any
directors and any executive officer. None of the directors currently serves as a
director of any other publicly held companies.
Section 16(a) Beneficial Ownership Reporting Compliance
Pursuant to Section 16(a) of the Securities Exchange Act of 1934,
directors and executive officers of the Company are required to file reports
with the Securities and Exchange Commission indicating their holdings of and
transactions in the Company's stock. To the Company's knowledge, based solely on
a review of the copies of such reports furnished to the Company and written
representations that no other reports were required, insiders of the Company
complied with all filing requirements during 2000
83
ITEM 11. EXECUTIVE COMPENSATION.
Summary Compensation Information
The table below sets forth certain information concerning the annual and
long-term compensation earned by the Chief Executive Officer and the other four
most highly compensated executive officers of the Company (collectively, the
"named officers") for each of the past three years.
Summary Compensation Table
Long-Term
Compensation
------------
Annual Compensation(1) Securities
Name and ---------------------- Underlying All Other
Principal Position Year Salary(2) Bonus Options(3) Compensation(4)
------------------ ---- --------- ----- ---------- ---------------
W. M. Feltner (5) 2000 $609,300 $250,000 20,000 $ 10,375
Chairman of the Board/ 1999 609,150 250,000 20,000 10,223
Former Chief Executive 1998 608,700 225,000 20,000 10,500
Officer
Alfred B. Whitt 2000 $349,300 $200,000 10,000 $ 10,375
Vice Chairman, President 1999 259,150 100,000 10,000 10,223
and Chief Executive Officer 1998 218,700 85,000 10,000 10,500
Betty H. Carroll 2000 $275,000 $ 90,000 10,000 $ 10,375
Senior Vice President; 1999 270,000 87,500 10,000 10,223
President/CEO, F&M 1998 260,000 85,000 10,000 10,500
Bank-Winchester
Charles E. Curtis 2000 $234,300 $100,000 10,000 $ 10,375
Vice Chairman/Chief 1999 219,150 80,000 10,000 10,223
Administrative Officer 1998 208,700 75,000 10,000 10,500
F. Dixon Whitworth, Jr. 2000 $185,000 $ 65,000 5,000 $ 10,375
Executive Vice President; 1999 175,000 60,000 5,000 10,187
President, F&M Trust 1998 165,000 50,000 5,000 10,475
Company
_________________________
(1) Each named officer received certain perquisites and other personal
benefits, the amounts of which are not shown because the aggregate amount
of such compensation during the year did not exceed the lesser of $50,000
or 10% of total salary and bonus reported for such executive officer.
(2) Includes directors' fees.
(3) The Company's stock option plan does not permit grants of restricted stock,
and this plan is the Company's only stock-based long-term compensation plan
currently in effect.
(4) These amounts represent Company contributions allocated under the Company's
401(k) Retirement Plan and the Company's Employee Stock Ownership Plan,
respectively, to the Named Officers for 2000 in the following amounts: W.
M. Feltner, $1,875 and $8,500; Alfred B. Whitt, $1,875 and $8,500; Betty H.
84
Carroll, $1,875 and $8,500; Charles E. Curtis, $1,875 and $8,500; and F.
Dixon Whitworth, Jr., $1,875 and $8,500.
(5) Mr. Feltner retired as Chief Executive Officer in June 2000.
Stock Option Grants in 2000
The Company's stock option plan provides for the granting of both incentive
and non-qualified stock options to executive officers and key employees of the
Company and its subsidiaries. While the option price of incentive options may
not be less than the fair market value of the stock at the date of grant, non-
qualified options may be granted at prices less than the fair market value of
the common stock on the date of grant, but in no event at an exercise price less
than one-half of the market price on the date of grant.
The following table provides certain information concerning non-qualified
stock options granted during 2000 to the named officers. No stock appreciation
rights may be granted under the Company's stock option plan.
Individual Grants
-----------------------------------------------------------------
Percent of
Number of Total
Shares Options Exercise Market Black-
Underlying Granted to Price Price Scholes
Options Employees Per on Grant Expiration Grant Date
Name Granted(1) in 2000 Share Date Date Value(2)(3)
---- --------- ------- ----- ---- ---- -----------
W. M. Feltner 20,000 29.2% $13.79 $27.56 1/03/10 $378,200
Alfred B. Whitt 10,000 14.6 13.79 27.56 1/03/10 189,100
Betty H. Carroll 10,000 14.6 13.79 27.56 1/03/10 189,100
Charles E. Curtis 10,000 14.6 13.79 27.56 1/03/10 189,100
F.D. Whitworth Jr. 5,000 7.3 13.79 27.56 1/03/10 94,550
_________________________
(1) The stock options granted during 2000 to the named officers were granted on
January 3, 2000, and first became exercisable on that date.
(2) The values shown reflect standard application of the Black-Scholes pricing
model using (i) 60-month volatility (23.1%) and daily stock prices for the
five years prior to grant date, (ii) an option term of ten years, (iii) an
interest rate that corresponds to the U.S. Treasury rate with a ten-year
maturity (5.3%), and (iv) dividends at the average annualized rate in place
on the date of grant $1.00. The Black-Scholes option pricing model is a
commonly utilized model for valuing options. The model assumes that the
possibilities of future stock returns (dividends plus share price
appreciation) resemble a normal "bell-shaped" curve.
(3) No allowance has been made for income taxes that will be due upon exercise.
85
Stock Option Exercises in 2000 and Year-End Option Values
The following table shows certain information with respect to the stock
options exercised during 2000 and the number and value of unexercised options
held at year end by the named officers.
Number of Value of
Number of Shares Underlying Unexercised
Shares Unexercised In-the-Money
Acquired Value Options at Options at
Name on Exercise Realized (1) December 31, 2000 (2) December 31, 2000(3)
---- ----------- ------------ --------------------- -------------------
W. M. Feltner 20,000 $216,700 -0- $ -0-
Alfred B. Whitt 0 --- 59,053 821,410
Betty H. Carroll 0 --- 59,053 821,410
Charles E. Curtis 0 --- 32,145 364,404
F. Dixon Whitworth, Jr. 0 --- 25,110 331,890
______________________________
(1) Market value of underlying shares on the date of exercise, minus the option
exercise price.
(2) All the stock options shown for each named officer are currently
exercisable.
(3) Values are calculated by subtracting the exercise price from the fair
market value of the stock at December 31, 2000.
Employment Arrangements
The Company has employment agreements with certain executive officers,
including Mrs. Carroll and Messrs. Curtis, Whitt, Whitworth, and 27 senior
officers that become effective upon a change in control of the Company. In the
case of the named officers, with the exception of Mr. Feltner, the Company or
its successor agrees to continue these officers in its employ for a term of
three years after the date of a change in control. During the contract term,
these officers will retain commensurate authority and responsibilities and
compensation benefits. They will receive base salaries at least equal to the
immediate prior year and bonuses at least equal to the annual bonus paid prior
to the change in control. If the officer's employment is terminated during the
three year period following a change in control other than for cause or
disability as defined in the agreement, or if the officer should terminate
employment because a material term of the contract is breached by the Company,
the officer will be entitled to a lump sum payment, in cash, within thirty days
after the date of termination. This lump sum will be equal to 2.99 times the
sum of the officer's base salary, annual bonus, and equivalent benefits for Mrs.
Carroll and Messrs. Curtis, Whitt, and Whitworth, and 1.0 to 1.5 times the sum
of the other senior officers' base salaries, annual bonuses, and equivalent
benefits.
The Company entered into an employment agreement with Mr. Feltner effective
for a three-year period beginning January 1, 2001, which provides for an annual
salary of $500,000. The agreement also provides that Mr. Feltner is entitled to
participate in the Company's savings, retirement and insurance plans.
86
Directors' Fees
During 2000, each director received $650 for each Board meeting attended.
In addition, each non-employee director received an annual retainer of $8,000.
Board members were not compensated for committee meetings attended, except those
members of the Audit Committee and the Human Resources Committee who received
$250 for each committee meeting attended. Directors also received $1,500
annually to cover travel, lodging, and related expenses incurred in attending
Board and committee meetings.
Human Resources Committee Report on Executive Compensation
General. The Human Resources Committee of the Board of Directors of the
Company (the "Committee") has furnished the following report on executive
compensation:
The Committee has implemented compensation policies and plans which seek to
enhance the profitability of the Company and, thus, shareholder value. In
furtherance of these goals, the policies and plans are designed to provide
competitive levels of compensation that rely on annual and long-term incentive
compensation to attract and retain corporate officers and other key employees of
outstanding abilities and to motivate them to perform to the full extent of
their abilities. Both types of incentive compensation are variable and closely
tied to corporate and individual performance in a manner that encourages a
continuing focus on building profitability and shareholder value.
In its review of management performance and compensation, the Committee has
taken into account management's consistent commitment to the long-term success
of the Company. Based on its evaluation of these factors, the Committee
believes that the senior management of the Company is dedicated to achieving
significant improvements in long-term financial performance and that the
compensation policies and plans the Committee has implemented and administered
have contributed to achieving this management focus.
Compensation for each of the named officers, as well as other senior
executives, consists of a base salary and annual and long-term incentive
compensation. The Committee fixes base salaries at levels that are competitive
or somewhat below the competitive amounts paid to senior executives with
comparable qualifications, experience, and responsibilities, after comparing
salary ranges of other bank holding companies and other large locally
headquartered companies. The annual incentive compensation is approved as a
percentage of the net income of the Company. The long-term incentive
compensation is closely tied to the Company's success in achieving significant
financial performance goals. The Committee considers the total compensation
(earned or potentially available) of each of the named officers and the other
senior executives in establishing each element of compensation.
During the fourth quarter of each year, the Chief Executive Officer submits
to the Committee the annual salaries for the past three years for the Company's
senior executives (other than the Chief Executive Officer), and the Committee
reviews the salaries and responsibilities of the officers, and makes any
modifications it deems appropriate. Salary proposals are developed by the
Company's
87
Chief Executive Officer based on industry peer groups, surveys, and performance
judgments as to the past and expected future contributions of the individual
senior executives.
In addition to internal measurements and goals, the Committee considers
return on average assets (ROAA) and growth in total assets when evaluating the
performance of executive officers. ROAA is a measure used in the industry to
compare the profitability of banking companies. For the period ending September
30, 2000, the Company's ROAA was 1.45%, compared to 1.21% for its 152 Peer Group
Banks (152 financial institutions, like the Company, between $3 billion and $10
billion in asset size, as supplied by the Federal Reserve Board's Division of
Banking).
CEO Compensation. The Committee reviews and fixes the base salary of the
Chief Executive Officer based on similar competitive compensation data similar
to senior executives and the Committee's assessment of his past performance and
its expectation as to his future contributions in leading the Company.
No salary increase was recommended for 1998, 1999, or 2000 for Mr. Feltner.
Director compensation increased in 1998, 1999, and 2000 by $900, $450, and $150,
respectively.
Mr. Whitt assumed the position of President and Chief Executive Officer on
May 1, 2000, and his salary was adjusted to $400,000 (on an annual basis) as of
that date. In making the salary adjustment, the Committee reviewed 11 peer group
banks and considered, among other things, that the Company ranked third in
earnings and third in return on assets among the peer group. Mr. Whitt's salary,
after the adjustment, ranks fifth among the salaries of the other chief
executive officers of the peer group banks.
Annual Incentives. The Incentive Compensation Plan stresses rewards for
achievement of goals set each year. Financial goals include operating earnings
and return on shareholders' equity. The formula for 2000 adopted by the Board
of Directors was as follows: 12% of net income in excess of 10% return on
equity capital, plus 6% of net income in excess of 11.5% return on equity
capital. At the end of each year, this formula defines the total fund available
for distribution as bonuses.
The Committee distributes the incentive fund to eligible employees based on
the Committee's subjective evaluation of individual performance and contribution
to the Company and recommendations by certain senior officers.
In determining the awards for 2000 from the incentive fund to other
eligible employees, including other named officers other than the Chief
Executive Officer, the Committee reviewed with the Chief Executive Officer
recommendations based on individual performance, as well as its evaluation of
factors substantially comparable to those considered in establishing the award
for the Chief Executive Officer.
In determining the Chief Executive Officer's award for 2000, in addition to
the factors discussed above, the Committee considered its evaluation of the
Company's performance and the state of the economy in the Company's service
area. The growth of the Company for the nine months ending September 30, 2000,
was 20.7% or $605,958,000. Net income growth was 14.7% for the same
88
time period. It considered these factors both on an absolute basis and relative
to the performance of the Company's peers.
Stock Incentives. The Committee considered the desirability of granting
awards under the Company's stock option plan, which provides the Committee the
flexibility to grant longer-term incentives in stock options. The Committee
believes that its past grant of options has successfully focused the Company's
senior management on building profitability and shareholder value. Stock
options granted in 2000 are reflected in the table, "Stock Option Grants in
2000."
The awards were based, among other things, on a review of competitive
compensation data from selected peer companies and information on their total
compensation as well as the Committee's evaluation of their past and expected
future contributions to the Company's achievement of its long-term goals. Like
other compensation decisions, the Committee does not use a formula or weight
specific factors in recommending stock options awards, but rather relies on its
own subjective evaluation.
Respectfully submitted:
William H. Clement
J.D. Shockey, Jr.
Jack R. Huyett
Compensation Committee Interlocks and Insider Participation
During 2000 and up to the present time, there were transactions between
certain of the Company's banking subsidiaries and certain members of the Human
Resources Committee, or their associates, all consisting of extensions of credit
by the banks in the ordinary course of business. Each transaction was made on
substantially the same terms, including interest rates, collateral and repayment
terms, as those prevailing at the time for comparable transactions with the
general public. In the opinion of management, none of the transactions involve
more than the normal risk of collectibility or present other unfavorable
features.
None of the members of the Human Resources Committee has served as an
officer or employee of the Company or any of its affiliates during 2000, 1999 or
1998.
Shareholder Return
The Company is subject to the rules of the Securities and Exchange
Commission (the "SEC") that require all public companies to present a graph of
total investment return in their annual proxy statements. The rules require a
line graph which compares the Company's five-year cumulative shareholder return
on its common stock with the Standard's & Poor's 500 Stock Index and either a
published industry index or an index of peer companies selected by the Company.
The graph below presents a comparison of the Company's performance with the S&P
500 Stock Index and the SNL Securities $1 to $5 Billion Bank Asset-Size Index,
assuming that investments of $100 were made on December 31, 1995, and that
dividends were reinvested. SNL Securities, based in Charlottesville,
89
Virginia, is a research and publishing firm specializing in the collection and
dissemination of data on the financial services industry.
Comparison of Five Year Cumulative Total Return Among
F&M National Corporation, the S&P 500 Stock Index
and the SNL $1B-$5B Bank Asset-Size Index
(graph appears here)
1995 1996 1997 1998 1999 2000
------ ------ ------ ------ ------ ------
F&M National Corporation 100.00 111.01 183.44 163.74 160.25 158.16
S&P 500 Stock Index 100.00 122.86 163.86 210.64 254.97 231.74
SNL $1B-$5B Bank Asset-Size Index 100.00 129.63 216.19 215.69 198.23 224.95
90
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth, as of February 28, 2001, certain
information with respect to the beneficial ownership of the Company's common
stock held by each director and each named officer and by the directors and all
executive officers as a group.
As of February 28, 2001, no person beneficially owned 5% or more of the
Company's common stock. As of that date, no director or named officer
beneficially owned 1% or more of the Company's common stock. The directors and
all executive officers as a group beneficially owned 4.82% of the outstanding
shares of common stock as of February 28, 2001.
Stock
Name Ownership (1)
---- -------------
Frank Armstrong, III........................................... 20,482 (2)
Michael L. Bryan............................................... 14,349
William H. Clement............................................. 93,287 (2)
Charles E. Curtis.............................................. 206,869 (3)
W. M. Feltner.................................................. 129,150 (2)(3)
William R. Harris.............................................. 112,132
L. David Horner, III........................................... 100,314
Jack R. Huyett................................................. 101,478 (2)
J. D. Shockey, Jr.............................................. 38,006 (2)
Ronald W. Tydings.............................................. 176,249
Alfred B. Whitt................................................ 138,306 (3)
Betty H. Carroll............................................... 153,482 (3)
F. Dixon Whitworth, Jr......................................... 76,873 (3)
All Directors & Executive Officers as a Group.................. 1,367,700
___________________
(1) Includes shares held by affiliated corporations, spouses and minor
children, and shares held jointly with spouses or as custodians or
trustees for children and others.
(2) Does not include shares held in trust accounts for the directors as
follows: Mr. Armstrong, 1,550 shares; Mr. Clement, 1,966 shares; Mr.
Feltner, 61,577 shares; Mr. Huyett, 1,543 shares; and Mr. Shockey, 1,713
shares. The named directors do not possess voting or investment power
with respect to such shares.
(3) Includes: 3,050 shares issuable to Mr. Bryan; 42,145 shares issuable to
Mr. Curtis; 69,053 shares issuable to Mr. Whitt; 69,053 shares issuable
to Mrs. Carroll; and 30,110 shares issuable to Mr. Whitworth under the
Company's stock option plans.
91
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
During 2000, the Company's banking subsidiaries extended credit to
directors and officers of the Company and its subsidiaries. All such loans (i)
were made in the ordinary course of business, (ii) were made on substantially
the same terms, including interest rates and collateral, as those prevailing at
the time for comparable transactions with other persons, and (iii) did not
involve more than the normal risk of collectibility or present unfavorable
features.
The banking subsidiaries of the Company, pursuant to the Company's employee
loan policy, make individual general purpose loans on a nondiscriminatory basis
to employees of subsidiaries at interest rates below those for comparable
transactions with other persons. The banking subsidiaries are prohibited from
making loans, with the exception of residential mortgages and educational loans,
to executive officers in excess of certain dollar limits fixed by banking laws.
J. D. Shockey, Jr., a director of the Company and F&M Bank-Winchester,
performed work for F&M Bank-Winchester during 2000 in connection with the
renovation of the bank's main lobby and the Miller Hardware Building, which were
under contract with Shockey Industries, Inc. Ronald W. Tydings, a director of
the Company, is also Chairman of the Board of F&M Bank-Northern Virginia, a
subsidiary of the Company. Mr. Tydings serves as legal counsel for that bank.
92
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are included in Part II of this report:
1. Financial Statements
F&M National Corporation and Subsidiaries:
Consolidated Balance Sheets at December 31, 2000 and 1999
Consolidated Statements of Income for the years
ended December 31, 2000, 1999, and 1998
Consolidated Statements of Changes in Shareholders'
Equity for years ended December 31, 2000, 1999 and 1998
Consolidated Statements in Cash Flows for the years
ended December 31, 2000, 1999 and 1998
Notes to Consolidated Financial Statements
Report of Independent Certified Public Accountants
2. Financial Statement Schedules
All schedules are omitted because of the absence of conditions under which
they are required or because the required information is given in the
financial statements or notes thereto.
3. Exhibits.
(3)
(i) Registrant's Articles of Incorporation (incorporated herein by
reference to Exhibit 3.1 to Registration Statement #33-45717).
(ii) Registrant's Bylaws.
(10) Material Contracts.
(i) Form of agreement between officers of the Registrant under the
Registrant's Defined Benefit Deferred Compensation and Salary
Continuation Plan (incorporated herein by reference to Exhibit
10(b) to Registration Statement #33-10696, filed on December
9, 1986).
(ii) Registrant's Officers' Incentive Bonus Plan (incorporated
herein by reference to Exhibit 28(i) to Registration Statement
#33-25867 filed on December 2, 1988).
93
(iii) Executive Severance Agreements entered into with the Registrant
and the following Executive Officers of the Registrant on
December 1, 1995: Betty H. Carroll, Alfred B. Whitt, and F.
Dixon Whitworth, Jr.; (incorporated herein by reference to Form
10-K/405 for the calendar year ended December 31, 1995, filed
with the Commission on March 28, 1996), and Executive Severance
Agreement entered into with the Registrant and Charles E. Curtis
on April 1, 1996 (incorporated herein by reference to Form 10-K
for the calendar year ended December 31, 1996, filed with the
Commission on March 19, 1997).
(iv) Registrant's 1992 Incentive and Non-Qualified Stock Option Plan,
as amended and restated February 2, 1998 (incorporated herein by
reference to Exhibit 99.0 to Registration Statement #333-63111
filed on September 9, 1998).
(v) Registrant's 1998 Employee Stock Discount Plan (incorporated
herein by reference to Exhibit 99.1 to Registration Statement
#333-63113 filed on September 9, 1998).
(vi) Employment Agreement entered into by W.M. Feltner and the
Registrant.
(11) Statement re computation of per share earnings. (See Note 12 of the
notes to consolidated financial statements included in this report in
Part II, Item 8.)
(21) Subsidiaries of the Registrant (filed herewith).
(23) Consent of Yount, Hyde & Barbour, P. C., Certified Public Accountants
(filed herewith).
(b) Reports on Form 8-K:
None.
94
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the 14th day of
March, 2001:
F&M NATIONAL CORPORATION
Winchester, Virginia
/s/ W. M. Feltner
------------------
W. M. Feltner, Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities on the 14th day of March, 2001:
SIGNATURE TITLE
- --------- -----
/s/ W. M. Feltner Chairman of the Board,
- --------------------------------- Director
W. M. FELTNER
/s/ Alfred B. Whitt Vice Chairman, President, Chief
- --------------------------------- Executive Officer, Director
ALFRED B. WHITT
/s/ Charles E. Curtis Vice Chairman, Chief Administrative
- --------------------------------- Officer, Director
CHARLES E. CURTIS
/s/ Frank Armstrong, III
- ---------------------------------
FRANK ARMSTRONG, III Director
/s/ Michael L. Bryan
- ---------------------------------
MICHAEL L. BRYAN Director, Secretary
/s/ William H. Clement
- ---------------------------------
WILLIAM H. CLEMENT Director
95
/s/ William R. Harris
- ---------------------------------
WILLIAM R. HARRIS Director
/s/ L. David Horner, III
- ---------------------------------
L. DAVID HORNER, III Director
/s/ Jack R. Huyett
- ---------------------------------
JACK R. HUYETT Director
/s/ J. D. Shockey, Jr.
- ---------------------------------
J. D. SHOCKEY, JR. Director
/s/ Ronald W. Tydings
- ---------------------------------
RONALD W. TYDINGS Director
96