SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1994
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-5929
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 Number)
38 ROUSS AVENUE, WINCHESTER, VIRGINIA 22601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(703)665-4200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $2.00 par value
(Title of Class)
New York Stock Exchange
(Name of each exchange on which registered)
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 XX
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 ]
State the aggregate market value of the voting stock held by the
non-affiliates of the Registrant. The aggregate market value is
computed by reference to the closing price of such stock as reported by
the New York Stock Exchange on February 28, 1995: $236,937,309
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT FEBRUARY 28, 1995:
15,622,866
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Shareholders for the
fiscal year ended December 31, 1994, are incorporated by reference in
Parts I, II, and IV hereof; and
(2) Portions of Registrant's 1995 Proxy Statement dated March 21,
1995, are incorporated by reference in Part III hereof.
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Since January 1, 1994, there have been no developments in the
Registrant's (hereinafter called the "Company") business other than the
following:
On January 5, 1994, the Company's Board of Directors authorized the
purchase of up to 100,000 shares of the Company's outstanding common stock.
On February 16, 1994, the F&M Bank=Winchester began operating Apple
Title Company at 12 Rouss Avenue, Winchester, Virginia, which offers title
insurance for bank mortgage customers.
On March 11, 1994, F&M Bank-Massanutten opened a branch bank at
317 North Main Street, Bridgewater, Virginia.
On June 23, 1994, F&M Bank-Broadway converted their bank computer
system to Kirchman D3000 computer software. This conversion is part of
a company-wide project of converting all subsidiary banks' computer
systems to the same in-house computer system which began in 1992.
On July 1, 1994, Hallmark Bank and Trust Company, Springfield,
Virginia, became a wholly-owned subsidiary of the Corporation. The
merger was accounted for as a pooling of interests and all financial
statements have been restated to reflect the merger. The Company issued
a total of 1,107,414 shares of common stock to effect the merger.
On July 1, 1994, PNB Financial Corporation, Warrenton, Virginia,
became a wholly- owned subsidiary of the Corporation. The merger was
accounted for as a pooling of interest and all financial statements have
been restated to reflect the merger. The Company issued a total of
1,193,431 shares of common stock to effect the merger.
On July 17, 1994, the Company joined the MOST bankcard network
and installed four automatic teller machines in off-site business
locations.
On August 15, 1994, F&M Bank-Winchester opened a new branch at 6701
Northwestern Pike, Gore, Virginia.
On September 1, 1994, the Company issued 378,690 shares of common
stock to account for the issuance of a 2.5% stock dividend.
On September 14, 1994, the Company's Board of Directors decided
to merge F&M Bank- Broadway into F&M Bank-Massanutten effective January
20, 1995.
On September 14, 1994, the Company's Board of Directors decided
to increase the quarterly dividend from 14.5 cents to 15 cents per share
effective for the dividend paid October 25, 1994.
On October 17, 1994, F&M Bank-Winchester opened a new branch at
21 Main Street, Round Hill, Virginia.
On October 26, 1994, F&M Bank-Emporia converted its computer
operations to the Kirchman D3000 System.
On November 4, 1994, F&M Bank-Hallmark opened a new branch bank
at 7830 Backlick Road, Newington, in Springfield, Virginia.
On November 18, 1994, the Company announced a pending merger with
Bank of the Potomac, Herndon, Virginia. It is anticipated that the
merger will be completed during the second quarter of 1995.
On December 14, 1994, the Company terminated the charters on the
following subsidiaries: Rouss Finance Company, RFC Mortgage Co., Inc.,
Peoples Loans, Incorporated, and Peoples Credit Corporation.
On December 23, 1994, American Stock Transfer & Trust Company,
New York, New York, was named stock transfer agent for the Company's
common stock. Prior to this date, F&M Bank-Winchester was the stock
transfer agent.
On December 28, 1994, the Company's common stock began trading on
the New York Stock Exchange under the symbol FMN. Prior to this date,
the Company's common stock was traded over-the-counter on the NASDAQ
Exchange.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Company and its subsidiaries are engaged 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. The Company's eleven Subsidiary
Banks operate 73 banking offices offering a full range of banking
services principally to individuals and small and middle-market
businesses in north, central and south Virginia including the Shenandoah
Valley, and the eastern panhandle of West Virginia. At December 31,
1994, F&M had assets of $1.7 billion, deposits of $1.4 billion and
shareholders' equity of $161.0 million.
The Company 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, the Company has acquired thirteen
banks, which expanded its market area and increased market share in
Virginia and West Virginia.
The following table sets forth certain information concerning the
Company and its operating subsidiaries as of December 31, 1994:
DATE BANKING TOTAL TOTAL TOTAL
ACQUIRED OFFICES ASSETS LOANS DEPOSITS
F&M Bank-Winchester
Winchester, VA(1) 1970 29 $ 710,271 $431,931 $ 647,620
F&M Bank-Massanutten
Harrisonburg, VA 1980 6 89,170 60,740 79,845
F&M Bank-Richmond
Richmond, VA(2) 1982 9 133,520 92,160 122,333
F&M Bank-Central
Virginia(3)
Charlottesville VA 1985 7 68,290 33,117 55,926
F&M Bank-Blakeley
Charles Town/
Ranson, WV 1988 3 87,441 60,687 77,373
F&M Bank-Martinsburg
Martinsburg, WV 1988 4 96,853 65,318 84,405
F&M Bank-Broadway
Broadway, VA 1989 1 62,503 25,695 53,515
F&M Bank-Keyser
Keyser, WV 1992 3 91,244 57,128 79,765
F&M Bank-Emporia
Emporia, VA 1993 3 68,537 27,822 61,573
F&M Bank-Hallmark
Springfield, VA 1994 5 119,167 63,451 94,007
F&M Bank-Peoples
Warrenton, VA 1994 3 94,725 59,883 84,829
F&M (Parent only) - - 29,183 - -
Total 73 $1,650,904 $977,932 $1,441,191
(1) Includes Big Apple Mortgage and a general credit reporting
agency. Also includes the 1993 purchase of substantially all of
the assets and assumption of certain liabilities of Farmers and
Merchants Bank of Hamilton(the "Hamilton Bank").
(2) Includes the acquisition in 1986 of Virginia Capital Bank,
Richmond, Virginia.
(3) Includes the acquisition in 1990 of Peoples Bank of Central
Virginia, Lovingston, 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. The Company has maintained its community orientation by allowing
the Subsidiary Banks latitude to tailor products and services to meet
community and customer needs. While the Company 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, the Company
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 the Company
serves on the board of directors of each Subsidiary Bank to monitor
operations and to serve as a liaison to the Company.
The 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 and safe deposit
boxes. Lending is focused on individuals and small and middle-market
businesses in the local market regions of the Subsidiary Banks. In
addition, F&M Bank-Winchester, F&M Bank-Blakeley, F&M Bank-Keyser, F&M
Bank-Hallmark, and F&M Bank- Peoples operate trust departments offering
a range of fiduciary services. At December 31, 1994, trust assets
under management at these five banks totaled $258.3 million.
F&M operates in six market regions: the Shenandoah Valley of
Virginia; the eastern panhandle of West Virginia; Charlottesville/
Albemarle County and surrounding areas; Greenville County in southside
Virginia; suburban Richmond, primarily Henrico and Chesterfield
Counties; the northern Virginia areas of Loudoun, Fairfax, and Prince
William Counties and the Warrenton and surrounding Fauquier County area.
The more populous sectors within each of the six market regions
experienced substantial population growth between 1980 and 1990, most of
which exceeded 20% growth. At December 31, 1994, the Company operated
29 banking offices in the Shenandoah Valley from Winchester to
Harrisonburg with deposits of $589.3 million; ten banking offices in the
eastern panhandle of West Virginia with deposits of $241.5 million;
seven banking offices in the Charlottesville/ Albemarle County area with
deposits of $55.9 million; three banking offices in Emporia, Virginia,
and surrounding Greenville County with deposits of $61.6 million; nine
banking offices in suburban Richmond, Virginia, with deposits of $122.3
million; and twelve banking offices in Loudoun, Fairfax and Prince
William Counties of northern Virginia with deposits of $94.0 million and
three offices in Warrenton and Fauquier County area with deposits of
$84.8 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
41% share of total deposits in Winchester, a 37% share of total deposits
in surrounding Frederick County, a 27% share of total deposits in Warren
County, and a 21% share of total deposits in Loudoun County. In
Rockingham County, which has the largest population of any county or
city in the Shenandoah Valley, the Company has an 18% deposit market
share. In F&M's three-county West Virginia market, the Company has a 23%
deposit market share in Jefferson County (which includes Charles Town),
a 17% deposit market share in Berkeley County (which includes
Martinsburg) and a 48% deposit market share in Mineral County (which
includes Keyser). In Fairfax, Prince William and Fauquier Counties
(including Warrenton), the Company has 1%, 1%, and 16% of deposit market
share. Although the Company's deposit market share in the Richmond and
Charlottesville areas is small, the Company has positioned its banking
offices in these two markets to increase deposit market share as a
result of continued business and population growth in the suburban
markets surrounding Richmond and Charlottesville.
The Company 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 $745.7 million in
assets and approximately $592.2 million in deposits through nine bank
acquisitions. Management believes there are additional opportunities to
acquire financial institutions or to acquire assets and deposits that
will allow the Company to enter adjacent markets or increase market
share in existing markets. Management intends to pursue acquisition
opportunities in strategic markets where its managerial, operational and
capital resources will enhance the performance of acquired institutions.
On November 18, 1994, the Company announced that it had entered
into negotiations and agreed in principle to a Plan of Affiliation,
subject to regulatory and stockholder approval, with Bank of the
Potomac, Herndon, Virginia. It is anticipated that the definitive
agreement will involve a tax-free exchange of shares between F&M and the
Bank of the Potomac and will be accounted for as a pooling-of-interests.
It is expected that the merger will be effective during the second
quarter 1995.
The Subsidiary Banks have not experienced loan quality
deterioration to the same extent as many other financial institutions,
due to conservative underwriting standards and focused in-market lending
practices. The purchase of assets of the Hamilton Bank increased
nonperforming assets at September 18, 1993, by $27.9 million, of which,
$21.3 million were nonaccrual loans and $6.6 million were foreclosed
properties. At December 31, 1994, these Hamilton Bank nonaccrual loans
and foreclosed properties have been reduced to $6.9 million and $6.7
million, respectively. At December 31, 1994, the Company had total
nonperforming assets of approximately $30.0 million, representing 3.03%
of period end loans and foreclosed properties. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Asset Quality."
The Company also operates Big Apple Mortgage Co., Inc., which
engages in residential mortgage origination and servicing in the
Shenandoah Valley and the eastern panhandle of West Virginia. Big Apple
Mortgage originated residential mortgage loans during 1993 and 1994 of
approximately $30.0 million and $12.0 million, respectively, all of
which were sold in the secondary mortgage market, and its servicing
portfolio totaled $136.5 million at December 31, 1994.
The Company terminated charters of four small consumer finance
companies with offices in Winchester, Front Royal, and Page County,
Virginia on December 14, 1994. The Company continues to operate a small
general credit reporting agency.
The Company's Articles of Incorporation and the Virginia Stock
Corporation Act contain certain anti-takeover provisions, including (i)
the Affiliated Transactions statute 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 statute 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 Company's Articles of
Incorporation that requires the affirmative vote of at least 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, 1994, the Company had 885 full time and 168 part
time employees. No employees are represented by any collective
bargaining unit. The Company considers relations with its employees to
be good.
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, and Prince William counties, to the
central Virginia markets of Charlottesville and Richmond, and southern
Virginia market in Emporia and Greenville County. The following table
displays the market and population data for each of the market regions:
BANKING % MARKET MARKET 1990
OFFICES SHARE(2) RANK(2) POPULATION
COUNTY/CITY(1)
Shenandoah Valley:
City of Winchester 9 42 1 21,947
Frederick County 4 44 1 45,723
Warren County 4 29 1 26,142
Shenandoah County 3 8 6 31,636
Clarke County 1 20 2 12,101
Rappahannock County 1 44 2 6,622
Rockingham County 4 20 3 57,482
City of Harrisonburg 3 9 4 30,707
Northern Virginia:
Loudoun County 7 18 1 86,100
Fairfax County 4 1 NM 819,000
Fauquier County 3 16 2 52,000
Prince William Co. 1 1 NM 216,000
Charlottesville/
Albemarle County:
City/Charlottesville 1 * NM 40,341
Albemarle County 3 8 10 68,040
Nelson County 2 35 2 12,778
Amherst County 1 2 6 28,578
Richmond:
City of Richmond 3 1 NM 203,056
Henrico County 3 2 NM 217,881
Chesterfield County 3 2 NM 209,274
Emporia:
City of Emporia 3 38 1 14,109
Eastern Panhandle
of West Virginia:
Jefferson County 3 22 2 35,926
Berkeley County 4 16 4 59,253
Mineral County 3 49 1 26,697
State of Virginia 63 6,187,358
State of West Va. 10 1,793,477
* 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, and the city of Richmond and Henrico and Chesterfield
Counties are examples. The FDIC and OTS provide deposit data for
each separately incorporated city.
(2) Deposit data includes total bank and thrift deposits and is based
on FDIC and OTS data as of June 30, 1994, which is the most
recently available information.
The following is a summary description of the six market regions
served by the Subsidiary Banks:
SHENANDOAH VALLEY. This market region extends from Winchester,
Virginia, at the northern end of the Shenandoah Valley, south through
the Valley to the Harrisonburg/Rockingham County area. The Shenandoah
Valley has a diversified mix of light industrial, service and
agricultural enterprises. The commercial and service sector is centered
in and around the cities of Winchester and Harrisonburg. The population
of this market region has grown by approximately 19% from 1980 to 1990
and is projected to grow by another 10% to 15% between 1990 and 2000.
The growth in the northern Shenandoah Valley is attributable in part to
its proximity to the Washington metropolitan area. Winchester is
approximately 55 miles west of the Washington Beltway by way of Routes
17 and 50. Interstate Route 66, which runs through Warren County to the
south of Winchester, also provides access to the Washington metropolitan
area. The area is also served by Interstate Route 81, a major
north/south thoroughfare that runs the length of the Shenandoah Valley.
The major employers in Winchester and the surrounding area
include General Electric Company (incandescent lamps, paints),
O'Sullivan (plastic and vinyl automobile interiors and sheeting),
Rubbermaid Commercial Products (plastic products) and National Fruit
Product Company, Inc. (fruit products). The Winchester Medical Center, a
408-bed regional acute-care facility, is the largest employer in the
Winchester/Frederick County market with approximately 1,800 employees.
F&M Bank-Winchester has 22 banking offices that serve Winchester and the
five immediately surrounding Virginia counties of Frederick, Warren,
Clarke, Shenandoah and Rappahannock. It is the largest financial
institution headquartered in the area and the dominant bank in terms of
deposit market share.
In the Harrisonburg/Rockingham County market, Merck and Company,
Inc. (pharmaceuticals), Adolph Coors Company, Inc. (brewery), R.R.
Donnelly & Sons, Co. (book printing) and James Madison University, with
an enrollment of over 11,000, are among the area's major employers. In
addition, there are a number of major poultry production and processing
facilities in the area, including facilities operated by Perdue Farms,
Inc. and Tyson Foods, Inc. F&M Bank-Massanutten and F&M Bank-Broadway
serve the Harrisonburg/ Rockingham county market through seven offices.
NORTHERN VIRGINIA. In 1993, F&M Bank-Winchester purchased substantially
all the assets and assumed certain liabilities of the Hamilton Bank
expanding F&M Bank-Winchester's market region into Loudoun County,
Virginia. Subsequent to the purchase, F&M Bank-Winchester began
operating six banking offices in Hamilton, Lovettsville, Middleburg,
Sterling and Leesburg, Virginia. In October of 1994, a branch was
opened in Round Hill, Virginia, located in Loudoun County. Loudoun
County is considered a "bedroom" area for commuters in the Washington DC
metro area.
On July 1, 1994, the Company acquired through merger Hallmark
Bank and Trust Company and PNB Financial Corporation which opened
markets to the Company in Fairfax, Fauquier, and Prince William Counties
and in Warrenton, Virginia. The counties of Fairfax and Prince William
are urban in nature with the population estimated to be approximately
819,000 and 216,000, respectively, in the 1990 census. The Federal
government is the largest employer in Fairfax and Prince William
Counties with Mobile World Headquarters being the largest private
employer. Fauquier County and the city of Warrenton are primarily
suburban, agricultural markets with a total population of 52,000.
Approximately 50% of the workforce of 25,700 commute 40 miles to
Washington, D.C., for employment.
EASTERN PANHANDLE OF WEST VIRGINIA. The market in West Virginia
includes the state's two easternmost counties, Jefferson and Berkeley
Counties, together with Mineral County to the west. The primary
commercial centers in the eastern panhandle are Charles Town and
Martinsburg. Jefferson and Berkeley Counties, which have experienced
population growth of 19% and 27%, respectively, from 1980 to 1990, are
becoming increasingly attractive for business and residential
development due to their proximity to the Washington and, to a lesser
extent, Baltimore metropolitan areas. Interstate Route 70 connects the
area with the Washington Beltway. It is approximately 70 miles from
Martinsburg and Harpers Ferry in Jefferson County to downtown
Washington. The area is also served by Interstate 81. Jefferson and
Berkeley Counties have a variety of light manufacturing, service and
agricultural enterprises and includes, among the major employers, plants
operated by General Motors Corporation (automotive parts), 3M (printing
machinery) and Corning Glass (glass Products), together with the horse
racing track in Charles Town which operates throughout the year. The
federal government maintains a substantial presence in the area, with a
training and design/restoration facility of the National Park Service
based in Harpers Ferry, a Veterans Administration Hospital and the
Internal Revenue Service national computer processing center in
Martinsburg. Mineral County is to the west and is separated from
Jefferson and Berkeley Counties by a mountain range. While Mineral
County has not experienced any population growth recently, the Company
believes F&M Bank-Keyser is well positioned in its market with a
dominant 48% market share of total deposits in Mineral County. F&M
Bank-Blakeley, F&M Bank-Martinsburg, and F&M Bank-Keyser operate a total
of ten banking offices in this market region.
CHARLOTTESVILLE/ALBEMARLE COUNTY. The Charlottesville area is the
commercial and market center for a multi-county trade area in central
Virginia. Charlottesville and the adjoining portions of Albemarle County
have a diversified economic base of light manufacturing, education and
health services. The area's major industrial employers include Comdial
Corporation (telephone systems), Conagra, Inc. (frozen foods), Cooper
Industries, Inc. (electrical equipment) and Sperry Marine, Inc.
(instruments). The University of Virginia, with an enrollment of over
21,000, is the largest employer in this market and operates one of the
most comprehensive medical facilities in Virginia.
The focus of F&M Bank-Central Virginia has been on the portions
of Albemarle County immediately surrounding the City of Charlottesville,
but its market was expanded in 1990 to include the largely rural Nelson
and Amherst Counties when the Company acquired Peoples Bank of
Lovingston and merged it into F&M Bank-Central Virginia. F&M
Bank-Central Virginia operates seven offices in this market region.
RICHMOND/HENRICO AND CHESTERFIELD COUNTIES. Richmond, situated on the
Interstate 95 corridor at the midpoint of the Eastern Seaboard, is the
capital of Virginia and the largest city within the Richmond-Petersburg
MSA, which has a population of approximately 865,640. Richmond is a
major financial center and is the headquarters of the Fifth Federal
Reserve District. This market region's primary industries include
tobacco (Phillip Morris, Inc. and The American Tobacco Company),
chemicals (Du Pont and Allied Signal), paper (Westvaco Corporation) and
food (Nabisco, Inc.). F&M Bank-Richmond has a total of nine banking
offices in this market region. F&M has focused its operations in the
suburban areas of Richmond and the surrounding counties of Henrico and
Chesterfield, which have experienced population growth of 21% and 48%.
respectively, between 1980 and 1990.
SOUTHERN VIRGINIA. The acquisition in 1993 of F&M Bank-Emporia expanded
the Company's market area into the southern Virginia city of Emporia and
surrounding county of Greenville. F&M Bank-Emporia is a residential
mortgage and residential construction lender and also extends commercial
loans to small and medium sized businesses within its primary service
area. Consistent with its focus on providing community-based financial
services, F&M Bank-Emporia does not attempt to diversify its loan
portfolio geographically by making significant amounts of loans to
borrowers outside of its primary service area.
LENDING ACTIVITIES
All of the 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. Seven of the Subsidiary Banks, F&M Bank-Massanutten,
F&M Bank-Broadway, F&M Bank-Blakeley, F&M Bank-Martinsburg, F&M
Bank-Keyser, F&M Bank-Emporia, 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, and F&M
Bank-Hallmark 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 sized businesses. 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.
The following table sets forth the composition of the Company's
loan portfolio (by percentage) for the three years ended December 31,
1994:
1994 1993 1992
Commercial 12.2% 10.9% 13.9%
Real estate construction 3.3 4.2 3.0
Real estate mortgage:
Residential (1-4 family) 33.7 35.1 37.0
Home equity lines 4.7 4.7 5.6
Multifamily 2.0 1.9 1.9
Nonfarm, nonresidential(1) 27.7 26.1 20.2
Agricultural 1.8 1.8 1.9
Real estate mortgage
Subtotal 69.9 69.6 66.6
Loans to individuals:
Consumer 13.0 13.9 14.9
Credit card 1.6 1.4 1.6
Loans to individuals:
Subtotal 14.6 15.3 16.5
Total loans 100.0% 100.0% 100.0%
Total loans (dollars) $977,932 $929,069 $752,705
(1) This category generally consists of commercial and industrial
loans where real estate constitutes a source of collateral.
Approximately 12.2% of the Company's loan portfolio at December
31, 1994, was comprised of commercial loans, which included certain
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.
The 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 the
Subsidiary Banks typically look to the borrower's cash flow as the
principal source of repayment for such loans, many of the loans within
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) was 69.9% of its total loan portfolio at December 31,
1994. The residential mortgage loans made by the Subsidiary Banks and
Big Apple Mortgage are made only for single family, owner-occupied
residences within their respective market regions. The residential
mortgage loans offered by the 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.
Big Apple Mortgage offers both fixed and adjustable rate loans.
While the Subsidiary Banks generally hold residential mortgage loans in
their loan portfolios, Big Apple Mortgage sells into the secondary
market all the permanent mortgage loans it originates. In 1994, Big
Apple Mortgage originated approximately $12.2 million in mortgage loans
compared to $30.0 million and $35.1 million in 1993 and 1992,
respectively. The decline in mortgage originations is the decrease in
mortgage refinancing due to higher interest rates and increased
competition.
The Company's real estate construction portfolio historically has
been a relatively small portion of the total loan portfolio. At
December 31, 1994, construction loans were $32.9 million or 3.3% of the
total loan portfolio. Of this amount, $6.1 million was originated by
Big Apple Mortgage, all made to finance owner-occupied properties with
permanent financing commitments in place. The 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 no charge-offs involving residential
construction loans since 1987.
Loans to individuals were 19.3% of the Company's total loan
portfolio at December 31, 1994, if home equity lines were included. The
Subsidiary Banks offer a wide variety of consumer loans, which include
consumer 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 the Subsidiary Banks' respective market regions.
CREDIT POLICIES AND PROCEDURES
The Company has established system-wide guidelines governing,
among other things, lending practices, credit analysis and approval
procedures, and credit quality review. Within these guidelines, the
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
the Company.
LOAN APPROVAL. The Company'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. The
Company has assigned a lending limit for each Subsidiary Bank. Loans
that would result in a Subsidiary Bank exceeding its assigned limit must
be approved 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 a particular 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 the Company's central credit committee.
LOAN REVIEW. Each Subsidiary Bank has a formal loan review function
which 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 the
Company'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, the
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 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.
DEPOSITS
The Subsidiary Banks offer a number of programs to consumers and
to small and middle market businesses at interest rates generally
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,
1994 1993 1992
Noninterest-bearing demand 15.4% 14.3% 14.6%
Interest checking 16.9 16.4 13.9
Money market accounts 12.2 13.3 13.0
Savings accounts 13.4 13.9 13.0
Time deposit accounts:
Under $100,000 35.9 35.8 37.8
$100,000 and over 6.2 6.3 7.7
100.0% 100.0% 100.0%
The Subsidiary Banks control deposit flows primarily through
pricing of deposits and, to a lesser extent, through promotional
activities. The 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 the
Company for all Subsidiary Banks. As of December 31, 1994, the
Subsidiary Banks had $89.4 million of certificates of deposit greater
than $100,000, or 6.2% of total deposits. The Subsidiary Banks do not
accept brokered deposits.
No material portion of the deposits of the 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 the
Subsidiary Banks. See "Business-Market Regions" for information
regarding each Subsidiary Bank's deposit share and rank in its
respective market.
OTHER ACTIVITIES
The Subsidiary Banks offer a range of trust services. The Trust
Department of F&M Bank-Winchester manages $160 million in assets in
approximately 700 accounts, covering both personal trust activities and
employee benefit plans. F&M Bank-Hallmark and F&M Bank-Peoples offer
similar trust services and manage assets totaling $18.4 million and
$67.2 million, respectively. F&M Bank-Blakeley and F&M Bank-Keyser
offer a range of trust services as well, managing approximately $12.2
million in assets. The other Subsidiary Banks do not operate trust
departments, but are encouraged to offer their customers the opportunity
to utilize trust services offered by F&M Bank-Winchester.
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, insurance companies and money market mutual funds, compete
with the Company for certain lending and deposit gathering services. In
its Charlottesville/Albemarle County, the northern Virginia, and
suburban Richmond markets, the Company faces particularly intense
competition from several state-wide 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.
EXECUTIVE OFFICERS OF THE REGISTRANT
All officers of the Company and its subsidiaries are elected
annually to serve at the pleasure of the Board of Directors of the
Company. The following table sets forth the names, offices and ages at
February 28, 1994 of each of the executive officers of the Company and
is included in conformity with Instruction 3 of Item 401(b) of
Regulation S-K:
YEAR FIRST
NAME AGE ELECTED OFFICE
W. M. Feltner 75 1970 Chairman and Chief Executive Officer of the
Company; Chairman of Board, F&M Bank-Winchester
Jack R. Huyett 62 1992 President-Chief Administrative Officer of the
Company
F. Dixon Whitworth Jr. 50 1985 Executive Vice President of the Company
Alfred B. Whitt 56 1991 Senior Vice President, Secretary, Senior
Financial Officer of the Company and F&M
Bank-Winchester
Betty H. Carroll 57 1985 Senior Vice President of the Company;
President, Chief Executive Officer, F&M
Bank-Winchester
Barbara H. Ward 49 1983 Treasurer of the Company; Senior Vice President
of F&M Bank-Winchester
Mr. Feltner has been a senior executive officer of the Company
since its inception in 1970.
Mr. Huyett joined the Company in November of 1988 at which time
he was President and Chief Executive Officer of Blakeley Bank and Trust
Company (now F&M Bank- Blakeley), a position he had held for 19 years.
He was appointed President and Chief Administrative Officer of the
Company July 1, 1992.
F. Dixon Whitworth, Jr. Winchester, Virginia, joined the Company
in August 1985, as President of the Suburban Bank, now F&M
Bank-Richmond, and served as such until November, 1985, when he became
Executive Vice President of the Company. Prior to joining the Company
as President of The Suburban Bank in 1984, he had been employed as
Executive Vice President of Southern Bank (now Jefferson National Bank),
Richmond, Virginia for eleven years.
Mr. Whitt joined the Company in 1987 as Director of Human
Resources, before which time he served as President of F&M
Bank-Massanutten, Harrisonburg, Virginia, since its organization in
1973. In January of 1990, he was appointed Senior Financial Officer of
the Company and Senior Financial Officer of F&M Bank-Winchester. In July
of 1991, he was appointed Senior Vice President, Senior Financial
Officer and Secretary of the Company and F&M Bank-Winchester.
On December 7, 1988, Mrs. Carroll was named Chief Executive
Officer of F&M Bank-Winchester. Prior thereto, she had been President
and Chief Administrative Officer of F&M Bank-Winchester since 1985, and
had been Executive Vice President of that bank for eleven years before
becoming President and Chief Administrative Officer.
Mrs. Ward was appointed Senior Vice President of F&M
Bank-Winchester in March of 1992. Prior thereto, she was a Vice
President of F&M Bank-Winchester since 1974. She has been Treasurer of
the Company since 1983.
SUPERVISION AND REGULATION
The Company and the 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 the 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 the 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"). The Subsidiary Banks are subject to examination and
regulation by the Virginia SCC and the West Virginia Board of Banking
and Financial Institutions (the "West Virginia Board of Banking"). In
addition, the Company and its 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 the 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.
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 recently enacted 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. See "Recent Legislation and Regulatory
Developments." 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.
All acquisitions, whether by an in-state or out-of-state
acquirer, 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.
The BHCA currently prohibits the Federal Reserve from approving
an application from a bank holding company to acquire shares of a bank
located outside the state in which the operations of the holding
company's banking subsidiaries are principally conducted, unless such an
acquisition is specifically authorized by statute of the state in which
the bank whose shares are to be acquired is located. However, under
recently enacted federal legislation, the restriction of interstate
acquisitions will be abolished effective one year from enactment of such
legislation, and thereafter bank holding companies from any state will
be able to acquire banks and bank holding companies located in any other
state, subject to certain conditions, including nationwide and state
concentration limits. Banks also will be able to branch across state
lines effective June 1, 1997 (unless state law would permit such
intestate branching at an earlier date), provided certain condition are
met, including that applicable state law must expressly permit such
interstate branching. Virginia has adopted legislation that will permit
branching across state lines effective July 1, 1995, provided there is
reciprocity with the state in which the out-of-state bank is based.
REGULATION OF SUBSIDIARY BANKS
All of the Subsidiary Banks are state-chartered institutions
organized under either Virginia or West Virginia law. Eight of the
Subsidiary Banks, F&M Bank- Winchester, F&M Bank-Massanutten, F&M
Bank-Richmond, F&M Bank-Central Virginia, F&M Bank-Broadway, F&M
Bank-Emporia, F&M Bank-Hallmark, and F&M Bank-Peoples are Virginia-
chartered institutions regulated and examined by the Virginia SCC. F&M
Bank-Blakeley, F&M Bank-Martinsburg and F&M Bank-Keyser are West
Virginia-chartered institutions regulated and examined by the West
Virginia Board of Banking. In an effort to achieve greater consistency
with respect to the regulatory and reporting requirements, F&M
Bank-Emporia converted, effective March 7, 1994, from a national banking
association to a Virginia-chartered institution. F&M Bank-Peoples
converted from a national to a state-chartered bank effective November
1, 1994.
The 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 or West Virginia Board of Banking, as appropriate, conduct
regular examinations of the Subsidiary Banks, 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, the Subsidiary Banks 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 the Subsidiary Banks.
Federal and state banking laws and regulations govern all areas
of the operations of the 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 the 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.
RECENT LEGISLATION AND REGULATORY DEVELOPMENTS
On December 19, 1991, FDICIA was enacted. Among other things,
FDICIA provides increased funding for the FDIC's Bank Insurance Fund
("BIF") and expanded regulation of depository institutions and their
affiliates, including parent holding companies. A significant portion
of the additional BIF funding will be in the form of borrowings to be
repaid by insurance premiums assessed on BIF members. These premium
increases would be in addition to the increases in deposit premiums made
during 1994. FDICIA provides for an increase in BIF's ratio of reserves
to insured deposits to 1.25% within the next 15 years, also to be
financed by insurance premiums. The result of these provisions could be
a significant increase in the insurance assessment rate on deposits of
BIF members over the next 15 years. FDICIA provides authority for
special assessments against insured deposits and for the development of
a system of assessing deposit insurance premiums based upon the
financial institution's risk. FDIC announced in late 1994 that current
projections indicate the BIF's ratio of reserves could reach the 1.25%
requirement by the third quarter of 1995.
On September 15, 1992, the FDIC approved final regulations
adopting the risk-related deposit insurance system that was proposed in
May 1992. The new risk- related regulations, effective January 1, 1994,
will initially result in an eight basis point spread between the highest
and lowest deposit insurance premiums. The strongest institutions will
continue to pay annual deposit insurance premiums of 0.23% and the
weakest will pay 0.31%. Under the final risk-related insurance
regulations, each insured depository institution will be assigned to one
of three categories, "well capitalized," "adequately dicapitalized" or
"less than adequately capitalized" as defined in regulations to be
established pursuant to FDICIA by the Federal Reserve and the other
federal bank regulatory agencies. These categories will be further
subdivided into three subgroups based upon the FDIC's evaluations of the
risk posed by the depository institution, based in part on examinations
by the institution's primary federal and/or state regulator. F&M's
banks have received a "1A" risk classification rating for 1995, the
highest possible rating.
Among other things, FDICIA requires the federal banking agencies
to take "prompt corrective action" in respect of banks that do not meet
minimum capital requirements. FDICIA establishes five capital tiers:
"well capitalized," "adequately capitalized", "under capitalized",
"significantly undercapitalized", and "critically undercapitalized", to
be 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" under the proposed rules,
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. The obligation of a controlling bank holding company under
FDICIA to fund a capital restoration plan is limited to the lesser of 5%
of an undercapitalized subsidiary's assets or the amount required to
achieve regulatory capital adequacy requirements. If the controlling
bank holding company fails to fulfill its obligations under FDICIA and
files (or has filed against it) a petition under the Federal bankruptcy
code, the FDIC's claim may be entitled to a priority in such bankruptcy
proceeding over third party creditors of the bank holding company.
Any institution that is not well capitalized is generally
prohibited from accepting brokered deposits and offering interest rates
on deposits higher than the prevailing rate in its market; in addition,
"pass through" insurance coverage may not be available for certain
employee benefit accounts. Under-capitalized depository institutions may
be subject to growth limitations and are required to submit a capital
restoration plan. The federal bank regulatory agencies may not accept a
capital plan without determining, among other things, that the plan is
based on realistic assumptions, is likely to succeed in restoring the
depository institutions's capital, and is guaranteed by the parent
holding company. If a depository institution fails to submit an
acceptable plan, it will be treated as if it were significantly
undercapitalized.
Significantly undercapitalized depository institutions may be
subject to a number of requirements and restrictions, including orders
to sell sufficient voting stock to become adequately capitalized,
requirements to reduce total assets, and cessation of receipt of
deposits from correspondent banks. Critically undercapitalized
institutions are subject to appointment of a receiver or conservator.
FDICIA contains numerous other provisions, including new
reporting requirements, termination of the "to big to fail" doctrine
except in special cases, limitations on the FDIC's payment of deposits
at foreign branches, and revised regulatory standards for, among other
things, real estate lending and capital adequacy.
An insured depository institution may not pay management fees to
any person having control of the institution nor may an institution,
except under certain circumstances and with prior regulatory approval,
make any capital distribution if, after making such payment or
distribution, the institution would be undercapitalized. FDICIA also
contains a number of consumer banking provisions, including disclosure
requirements and substantive contractual limitations with respect to
deposit accounts.
Other legislative and regulatory proposals regarding changes in
banking, and the regulation of bank thrifts and other financial
institutions, are being considered by the executive branch of the
Federal government, Congress and various state governments, including
Virginia and West Virginia. Certain of these proposals, if adopted,
could significantly change the regulation of banks and the financial
services industry. It cannot be predicted whether any of these
proposals will be adopted or, if adopted, how these proposals will
affect the Company.
CAPITAL ADEQUACY
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
Dividends from the Subsidiary Banks constitute the major source
of funds for dividends to be paid by the Company. The amount of
dividends payable by the Subsidiary Banks to the Company depends upon
their 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 the 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 the
Subsidiary Bank 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. For further information about the
Company's dividends, see Part II., Item 5., "Market for Registrant's
Common Equity and Related Stockholder Matters".
ITEM 2. PROPERTIES
The principal executive offices of F&M are located in the Yost
Building at 38 Rouss Avenue, Winchester, Virginia, a two-story building
built in 1784 and owned free of any encumbrances. The Company operates
a total of 73 banking offices (63 in Virginia and 10 in West Virginia),
54 of which are owned by the Company or one of the Subsidiary Banks free
of any encumbrances, and 19 of which are leased under agreements
expiring at various dates, including renewal options, through 2008. 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 14.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its operations, the Company and the
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 12, 1994.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
On December 28, 1994, the Company began trading its capital stock
on the New York Stock Exchange under the symbol "F M N". Prior to
December 28, 1994, the Company's common stock was traded in the
over-the-counter market and quoted on the NASDAQ National Market System
under the symbol "FMNT".
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/or the NASDAQ National Market System, and the
cash dividends paid or declared per share on the Common Stock for the
period indicated:
PRICE RANGE CASH
HIGH LOW DIVIDENDS
1992
First Quarter 12.00 9.75 0.130
Second Quarter 12.75 11.25 0.130
Third Quarter 13.75 12.25 0.135
Fourth Quarter 17.25 12.00 0.140
1993
First Quarter 17.25 15.38 0.140
Second Quarter 16.50 13.75 0.140
Third Quarter 16.75 14.25 0.140
Fourth Quarter 16.50 14.75 0.145
1994
First Quarter 16.50 15.57 0.145
Second Quarter 16.25 15.50 0.145
Third Quarter 17.37 16.00 0.145
Fourth Quarter 17.25 14.75 0.150
At December 31, 1994, there were 15,610,408 shares of Common
Stock outstanding held by 7,569 holders of record.
The Company historically has paid cash dividends on a quarterly
basis, together with a special cash dividend in the fourth quarter of
each year depending upon the Company's performance that year. The
Company in 1992 implemented a practice of eliminating the special cash
dividend and instead increasing its regular fourth quarter dividend
based on the Company's performance, with the intention of paying an
equivalent amount for the first three quarters of each following year.
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 the 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 50 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 the Subsidiary Banks. The Subsidiary Banks are subject
to certain legal restrictions on the amount of dividends they are
permitted to pay to the Company. At December 31, 1994, the Subsidiary
Banks had available for distribution as dividends to the Company
approximately $33.2 million.
ITEM 6. SELECTED FINANCIAL INFORMATION
Incorporated herein by reference, as Exhibit 13, to page
1 of the 1994 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated herein by reference, as Exhibit 13, to pages 14
through 31 of the 1994 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference, as Exhibit 13, to pages 32
through 52 of the 1994 Annual Report.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3), the information called for by Part
III, Items 10. through 13., is incorporated herein by reference from the
Company's definitive proxy statement, dated March 21, 1995, for the
Company's Annual Meeting of Shareholders to be held April 25, 1995,
which definitive proxy statement was filed with the Commission pursuant
to Rule 14a-6 on March 21, 1995. The information regarding executive
officers called for by Item 401 of Regulation S-K is included in Part I
under "EXECUTIVE OFFICERS OF THE REGISTRANT".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM
8-K.
(a) The following documents included in Part II of this report are
incorporated by reference to the Company's 1994 Annual Report:
(1) Financial Statements Page
Report of Independent Certified Public Accountants 52
F&M National Corporation and Subsidiaries:
Consolidated Balance Sheets at December 31, 1994 and
1993 32
Consolidated Statements of Income at December 31, 1994
and 1993 33
Consolidated Statements of Changes in Shareholders'
Equity for years ended December 31, 1994, 1993 and 1992 34
Consolidated Statements in Cash Flows for the periods
ended December 31, 1994, 1993 and 1992 35
Notes to Financial Statements 36
(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, as
amended and adopted effective April 30, 1991,
(incorporated herein by reference to Exhibit
3(a). to Registration Statement #33- 45717, on
Form S-4, on February 12, 1992).
(3)(ii) Registrant's Bylaws, as amended and adopted
effective June 6, 1993, (incorporated herein
by reference to ITEM 5. OTHER EVENTS, under
Form 8-K as filed by the Registrant on August
16, 1993).
(10)(i) Form of agreement between seventeen 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 1982 Incentive and Non-Qualified
Stock Option Plan, as amended (incorporated
herein by reference to Exhibit 10(a) to
Registration Statement #33-20165, filed on
February 17, 1988).
(iii) Registrant's Officers' Incentive Bonus Plan
(incorporated herein by reference to Exhibit
28(i) to Registration Statement #33-25867
filed on December 2, 1988).
(iv) Registrant's 1992 Incentive and Non-Qualified
Stock Option Plan (incorporated herein by
reference to Exhibit 10(b) to Registration
Statement #33-50902, filed on August 14,
1992).
(v) Incorporated herein by reference is the
Agreement and Plan of Reorganization and Plan
of Share Exchange dated March 1, 1994, between
the Registrant and Hallmark Bank and Trust
Company, Springfield, Virginia, filed as
Exhibit F of the Joint Proxy Statement and
Prospectus, which is a part of Registration
Statement No. 33-53187 on Form S-4, May 13,
1994.
(vi) Incorporated herein by reference is the
Agreement and Plan of Reorganization and Plan
of Merger dated February 3, 1994, between the
Registrant and PNB Financial Corporation,
Warrenton, Virginia, filed as Exhibit B of the
Joint Proxy Statement and Prospectus, which is
a part of Registration Statement No. 33-53187
on Form S-4, May 13, 1994.
(vii) Incorporated herein by reference is the
Agreement and Plan of Reorganization and Plan
of Share Exchange dated November 18, 1994,
between the Registrant and Bank of the
Potomac, Inc., filed as Appendix I of the
Proxy Statement and Prospectus which is part
of Registration Statement No. 33- 57361 on
Form S-4, January 19, 1995.
(11) Statement re computation of per share earnings (filed
herewith).
(13) Portions of the 1994 Annual Report to Shareholders for
the fiscal year ended December 31, 1994 (filed
herewith).
(21) Subsidiaries of the Registrant (filed herewith).
(23) Consent of Yount, Hyde & Barbour, P. C., Certified
Public Accountants (filed herewith).
(27) Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K.
During the fourth quarter of the year ended December 31,
1994, the Company filed the following reports on Form 8-K
and Form 8-K/A:
(i) Form 8-K/A: October 20, 1994, under ITEM 2.
ACQUISITION OR DISPOSITION OF ASSETS, to report the
consummation of the merger of Hallmark Bank and Trust
Company with F&M National Corporation.
(ii) Form 8-K/A: October 20, 1994, under ITEM 2.
ACQUISITION OR DISPOSITION OF ASSETS, to report the
consummation of the merger of PNB Financial
Corporation with F&M National Corporation.
(iii) Form 8-K/A: November 1, 1994, under ITEM 2.
ACQUISITION OR DISPOSITION OF ASSETS, to report the
consummation of the merger of Hallmark Bank and Trust
Company with F&M National Corporation.
(iv) Form 8-K/A: November 1, 1994, under ITEM 2.
ACQUISITION OR DISPOSITION OF ASSETS, to report the
consummation of the merger of PNB Financial
Corporation with F&M National Corporation.
(v) December 1, 1994, under ITEM 5. OTHER EVENTS., to
report that F&M National Corporation and Bank of the
Potomac, Herndon, Virginia, have agreed in principle
to a Plan of Reorganization and Share Exchange.
(vi) December 30, 1994, under ITEM 5. OTHER EVENTS., to
report that F&M National Corporation changed its
stock transfer agent to American Stock Transfer &
Trust Company effective December 23, 1994, and began
trading on the New York Stock Exchange effective
December 28, 1994.
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 27th day of March, 1995:
F&M NATIONAL CORPORATION
Winchester, Virginia
/s/
W. M. Feltner, Chairman of the Board
and Chief Executive Officer
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 27th day of March, 1995:
SIGNATURE TITLE
/s/ Chairman of the Board, Chief Executive
W. M. FELTNER Officer, Director
/s/ President, Chief Administrative Officer,
JACK R. HUYETT Director
/s/ Principal Accounting and Financial Officer,
ALFRED B. WHITT Secretary, Director
/s/
FRANK ARMSTRONG, III Director
/s/
HARLAN M. BELL Director
/s/
JAMES L. BOWMAN Director
/s/
BETTY H. CARROLL Director
/s/
WILLIAM H. CLEMENT Director
/s/
WILLIAM R. HARRIS Director
/s/
L. DAVID HORNER, III Director
/s/
WILLIAM A. JULIAS Director
/s/
JOSEPH E. KALBACH Director
/s/
J. FRANK LOY Director
/s/ Director
GEORGE L. ROMINE
/s/
JOHN S. SCULLY, III Director
/s/
J. D. SHOCKEY, JR. Director
/s/
FRED G. WAYLAND, JR. Director
/s/
C. RIDGELY WHITE Director
/s/
F. DIXON WHITWORTH, JR. Director