SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
1994 1993 1992 1991 1990
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Interest income................. $ 115,844 $ 103,939 $ 99,918 $ 108,498 $ 109,582
Interest expense................ 45,051 42,354 44,651 59,079 60,846
Net interest income............. 70,793 61,585 55,267 49,419 48,736
Provision for loan losses....... 2,587 2,807 3,410 6,653 3,260
Net interest income after
provision for loan losses..... 68,206 58,778 51,857 42,766 45,476
Noninterest income.............. 15,370 12,870 11,259 10,039 9,197
Securities gains................ 748 1,781 1,020 1,271 321
Noninterest expense............. 54,339 46,529 41,436 38,505 36,703
Income before income taxes...... 29,985 26,900 22,700 15,571 18,291
Income taxes.................... 9,752 8,630 6,674 4,262 5,100
Net income...................... $ 20,233 $ 18,270 $ 16,026 $ 11,309 $ 13,191
PER SHARE DATA:
Net income...................... $ 1.29 $ 1.20 $ 1.14 $ 0.82 $ 0.96
Cash dividends.................. 0.57(1) 0.61(1) 0.44 0.41 0.39
Book value at period end........ 10.34 10.06 9.25 8.35 7.93
Tangible book value............. 9.99 9.68 9.21 8.30 7.88
BALANCE SHEET DATA:
Assets.......................... $ 1,650,904 $ 1,617,848 $ 1,362,892 $ 1,260,360 $ 1,159,237
Loans, net of unearned income... 977,932 929,069 752,705 738,284 741,751
Securities...................... 494,957 483,398 420,599 345,587 262,505
Deposits........................ 1,441,191 1,419,977 1,188,397 1,115,839 1,024,776
Shareholders' equity............ 161,435 157,266 139,370 115,582 108,597
Average shares outstanding...... 15,645 15,252 14,089 13,797 13,736
PERFORMANCE RATIOS:
Return on average assets........ 1.22% 1.24% 1.24% 0.94% 1.16%
Return on average equity........ 12.50% 12.28% 12.86% 10.11% 12.58%
Dividend payout................. 43.91% 51.06% 38.49% 50.50% 41.05%
Efficiency (2).................. 63.07% 62.49% 62.29% 64.76% 63.35%
ASSET QUALITY RATIOS:
Allowance for loan losses to
period end loans, net......... 1.54% 1.47% 1.46% 1.53% 1.11%
Allowance for loan losses to
nonaccrual loans.............. 81.05% 49.97% 75.51% 93.32% 227.27%
Nonperforming assets to
period end loans and
foreclosed properties......... 3.03% 4.08% 2.61% 1.90% 0.61%
Net charge-offs to average
loans......................... 0.12% 0.19% 0.50% 0.49% 0.42%
CAPITAL AND LIQUIDITY RATIOS:
Leverage........................ 9.75% 9.32% 10.20% 9.14% -
Risk-based capital ratios:
Tier 1 capital................ 16.16% 15.50% 17.60% 15.22% 15.19%
Total capital................. 17.41% 16.75% 18.99% 16.52% 16.35%
Average loans to average
deposits...................... 66.07% 63.89% 65.62% 69.34% 72.95%
Note: The amounts previously reported in Form 10Q and Form 10K for the
periods presented have been retroactively restated to reflect the
acquisitions of PNB Financial Corporation on July 1, 1994 and
Hallmark Bank & Trust Company on July 1, 1994 and a 2.5% stock
dividend effective September 1, 1994.
(1) Includes first quarter 1994 dividend declared in 1993.
(2) Computed by dividing noninterest expense by the sum of net interest
income and noninterest income, net of securities gains or losses.
1
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 the Company. This discussion and
analysis should be read in conjunction with "Selected Consolidated
Financial Data" and the Consolidated Financial Statements and Notes to
Consolidated Financial Statements.
OVERVIEW
The year 1994 was an extremely rewarding year in terms of record
growth, earnings and return to stockholders. Significant growth was
achieved primarily as a result of two mergers with assets totaling $219
million. Record earnings were achieved by improved economic conditions
and higher market rates. Return to stockholders was achieved by a 2.5%
stock dividend paid on September 1, 1994 and an increase in the dividend
rate from 14.5 cents to 15 cents per share beginning with the dividend
paid to stockholders in October 1994.
On July 1, 1994, Hallmark Bank and Trust Company, Springfield,
Virginia ("Hallmark") became a wholly-owned subsidiary of the
Corporation and was accounted for as a pooling of interests and,
therefore, all financial statements have been restated to reflect the
merger.
Also on July 1, 1994, PNB Financial Corporation, Warrenton, Virginia
("PNB") became a wholly-owned subsidiary of the Corporation and was
accounted for as a pooling of interests and, therefore, all financial
statements have been restated to reflect the merger.
Net income increased 10.7% in 1994 to $20.2 million, compared with
$18.3 million earned in 1993 and $16.0 million earned in 1992. Earnings
per share increased to $1.29 per share in 1994 compared to $1.20 per
share and $1.14 per share for 1993 and 1992, respectively. The increased
earnings during these periods were due primarily to higher levels of net
interest income achieved by increased net interest spread.
Return on average equity on an annualized basis for 1994 was 12.50%
compared to 12.28% for the same period for the prior year. Return on
average assets on an annualized basis for 1994 was 1.22%, compared to
1.24% for 1993. The decrease in return on equity and return on assets in
the 1993 period is the result of an increased equity base as a result of
the Hamilton purchase which increased September 18, 1993 equity by $7.1
million and assets by $177.0 million. These performance ratios have been
varied since 1990, with return on average equity dropping from 12.58% in
1990 to 10.11% in 1991, rebounding to 12.86% in 1992 and then declining
to 12.28% in 1993. Return on average assets dropped from 1.16% in 1990
to 0.94% in 1991, rebounded to 1.24% in 1992 and 1993.
Net interest margin increased during 1994 to 4.75% on a
tax-equivalent annualized basis, compared to 4.67% in 1993 and 4.80% for
1992. Net interest income and net interest margin are influenced by
fluctuations in market rates and changes in both the volume and mix of
average earning assets and the liabilities that fund those assets.
During 1994, market rates increased causing an increase in the prime
lending rate of 250 basis points. Improved loan demand and lower levels
of nonperforming assets were also factors contributing to the
improvement in the Company's net interest margin.
Loans, net of unearned income, were $977.9 million at December 31,
1994, an increase of $48.8 million (5.3%) from $929.1 million at
December 31, 1993. The increase in the volume of loans was primarily the
result of borrowers willingness to incur new debt after a period of
reluctance. Loan rates are above the floors reached in 1993, however,
they remain at reasonable levels for borrowers.
The securities portfolio represents the second largest component of
earning assets. At December 31, 1994, the Company's securities portfolio
totaled $495.0 million, $11.6 million (2.4%) higher than year-end 1993.
Investment in securities was reduced as a result of larger loan demand.
The Company'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. The Company's efficiency ratio for 1994, 1993 and 1992 was
63.1%, 62.5% and 62.3%, respectively. The fluctuation in the efficiency
ratio can be attributed to relative changes in both noninterest income
and net interest income.
Since the beginning of 1988, the Company has acquired approximately
$763.7 million in assets and approximately $679.1 million in deposits
through nine bank acquisitions. Eight of these acquisitions were
accounted for as a pooling-of- interest and one as a purchase, which
enabled the Company 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 and increase its market share in two of its other Virginia
markets.
The Company 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 operations.
14
The following table sets forth, for the periods indicated, selected
quarterly results of the Company's operations.
SUMMARY OF FINANCIAL RESULTS BY QUARTER
1994* 1993*
DEC. 31 SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Interest income....................................... $ 30,248 $ 29,615 $ 28,629 $ 27,352 $ 28,902 $ 25,650 $ 24,788 $ 24,599
Interest expense...................................... 11,742 11,366 11,120 10,823 11,248 10,396 10,274 10,436
Net interest income................................... 18,506 18,249 17,509 16,529 17,654 15,254 14,514 14,163
Provision for loan losses............................. 965 433 530 659 982 521 558 746
Net interest income after provision for loan losses... 17,541 17,816 16,979 15,870 16,672 14,733 13,956 13,417
Noninterest income.................................... 3,580 4,343 3,544 4,651 3,501 3,973 3,642 3,535
Noninterest expense................................... 13,961 13,771 13,645 12,962 13,577 11,940 10,787 10,225
Income before income taxes............................ 7,160 8,388 6,878 7,559 6,596 6,766 6,811 6,727
Applicable income taxes............................... 1,815 2,988 2,382 2,567 2,048 2,346 2,210 2,026
Net income............................................ $ 5,345 $ 5,400 $ 4,496 $ 4,992 $ 4,548 $ 4,420 $ 4,601 $ 4,701
Net income per share.................................. $ 0.34 $ 0.34 $ 0.29 $ 0.32 $ 0.30 $ 0.29 $ 0.30 $ 0.31
*The amounts previously reported on Form 10Q for the periods presented have
been retroactively restated to reflect the acquisitions of PNB Financial
Corporation on July 1, 1994 and Hallmark Bank & Trust on July 1, 1994 and a
2.5% stock dividend effective September 1, 1994.
In October 1992, the Company sold 1,110,500 shares of its
authorized, unissued common stock for $14.2 million at $12.75 per share.
The offering was underwritten by Robinson-Humphrey Company, Inc. who
offered the stock directly to the public. The net proceeds, after
underwriter's discount and offering expenses, were $13.0 million. The
Company utilized the proceeds of the offering for general corporate
purposes, including refinancing long-term banking premises owned by the
holding company, purchase of banking premises previously under lease,
provided additional equity capital to Subsidiary Banks to support growth
and retained the residual to finance possible future acquisitions.
On July 1, 1994, the Company issued a total of 2,301,469 shares of
its common stock to account for the merger of two banks. The Company
issued 1,107,846 shares of common stock to effect the merger of Hallmark
and 1,193,623 shares of common stock to effect the merger of PNB.
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 December 28, 1994, the Company joined the New York Stock Exchange
under the trading symbol FMN. Prior to this date, the Company's stock
was traded on the NASDAQ (National Association of Securities Dealers
Automated Quotation System) under the trading symbol FMNT.
NET INTEREST INCOME
Net interest income represents the principal source of earnings for
the Company. Net interest income equals the amount by which interest
income exceeds interest expense. 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 was $70.8 million for the year ended December
31, 1994, up 15.0% over the $61.6 million reported for the same period
in 1993 and up 11.4% in 1993 over the $55.3 million reported for 1992.
Net interest income in 1994 was affected by improved loan demand and
higher market rates, while deposits demonstrated only a relatively small
increase. Loans grew $48.9 million (5.3%) to $977.9 million in 1994 from
$929.1 million in 1993. Depositors, in 1994, chose to remain in a liquid
position in oder to take advantage of alternative or higher yielding
investments as indicated by interest-bearing deposits increasing only
$2.0 million (0.2%) while noninterest-bearing deposits increased $19.3
million (9.5%). Increased loan demand and shifting in type of deposit
investment reflects in total interest income increasing $11.9 million
(11.4%) from $103.9 million in 1993 to $115.8 million in 1994 and total
interest expense increasing $2.7 million (6.4%) from $42.4 million in
1993 to $45.1 million in 1994. During 1994,
15
AVERAGE BALANCES, INCOME AND EXPENSE, YIELDS AND RATES (1)
TWELVE MONTHS ENDED DECEMBER 31,
1994
ANNUAL
AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE
ASSETS (DOLLARS IN THOUSANDS)
Securities:
Taxable................................................... $ 452,224 $ 28,056 6.20%
Tax-exempt (1).......................................... 42,652 3,394 7.96%
Total securities....................................... 494,876 31,450 6.36%
Loans (net of unearned income):
Taxable................................................. 949,669 82,165 8.65%
Tax-exempt (1).......................................... 6,054 608 10.04%
Total loans............................................ 955,723 82,773 8.66%
Federal funds sold and repurchase agreements.............. 70,575 2,987 4.23%
Interest-bearing deposits in other banks.................. 473 36 7.61%
Total earning assets................................... 1,521,647 117,246 7.71%
Less: allowance for loan losses........................... (14,554)
Total nonearning assets................................... 150,077
Total assets........................................... $ 1,657,170
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Checking................................................ $ 240,199 $ 5,771 2.40%
Regular savings......................................... 200,868 6,095 3.03%
Money market savings................................... 189,887 5,451 2.87%
Certificates of deposit:
Less than $100,000..................................... 510,965 22,331 4.37%
$100,000 and more...................................... 92,808 4,260 4.59%
Total interest-bearing deposits........................... 1,234,727 43,908 3.56%
Short-term borrowings..................................... 35,405 1,053 2.97%
Long-term borrowings...................................... 2,223 91 4.09%
Total interest-bearing liabilities..................... 1,272,355 45,052 3.54%
Noninterest-bearing liabilities:
Demand deposits......................................... 211,661
Other liabilities....................................... 11,310
Total liabilities......................................... 1,495,326
Stockholders' equity...................................... 161,844
Total Liabilities and shareholders` equity................ $ 1,657,170
Net interest income....................................... $ 72,194
Interest rate spread...................................... 4.17%
Interest expense as a percent of average earning assets... 2.96%
Net interest margin....................................... 4.75%
(1) Income and yields are reported on a taxable-equivalent basis assuming a
federal tax rate of 35% in 1994 and 1993 and 34% in 1992.
16
TWELVE MONTHS ENDED DECEMBER 31,
1993 1992
ANNUAL ANNUAL
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
$ 409,658 $ 26,315 6.42% $ 333,351 $ 23,602 7.08%
44,351 4,792 10.81% 48,622 5,649 11.62%
454,009 31,107 6.85% 381,973 29,251 7.66%
814,727 71,453 8.77% 734,484 69,613 9.48%
5,395 677 12.55% 5,879 663 11.28%
820,122 72,130 8.80% 740,363 70,276 9.49%
86,145 2,512 2.92% 70,600 2,392 3.39%
1,108 103 9.30% 1,860 145 7.80%
1,361,384 105,852 7.78% 1,194,796 102,064 8.54%
(12,197) (11,076)
122,873 107,445
$1,472,060 $ 1,291,165
$ 183,322 $ 5,096 2.78% $ 154,798 $ 4,970 3.21%
162,686 5,116 3.14% 134,201 5,219 3.89%
184,243 4,959 2.69% 153,635 5,467 3.56%
482,560 22,641 4.69% 437,103 23,574 5.39%
89,775 3,854 4.29% 91,169 4,651 5.10%
1,102,586 41,666 3.78% 970,906 43,881 4.52%
28,059 688 2.45% 25,980 770 2.96%
1,130,645 42,354 3.75% 996,886 44,651 4.48%
180,988 157,320
11,687 12,347
1,323,320 1,166,553
148,740 124,612
$1,472,060 $ 1,291,165
$ 63,498 $ 67,413
4.03% 4.06%
3.11% 3.74%
4.67% 4.80%
17
through improved economic conditions, funds previously invested in lower
yielding federal funds ($41.1 million) were shifted to much higher
yielding loans and investment securities, therefore, contributing to the
increase in net interest margin from 4.67% in 1993 to 4.75% in 1994.
Net interest income for 1993 was $61.6 million, compared to $55.3
million for 1992. Although loan demand demonstrated some improvement in
1993, the increase in net interest income was due primarily to increases
in the size of the investment in the securities portfolio. The average
balance of the securities portfolio was $454.0 million at December 31,
1993, up $72.0 million (18.9%) over the same period in 1992. Also a
major factor contributing to the improvement in net interest expense was
due to lower interest rates, which offset the effect of a $133.8 million
increase in average interest-bearing liabilities during 1993. While the
tax equivalent yield on interest-earning assets declined 76 basis points
from 8.54% during 1992 to 7.78% for 1993, net interest margin decreased
during that period due to a larger decrease in total funding costs. Net
interest margin fell 13 basis points from 4.80% during 1992 to 4.67% for
1993. The decline in the yield on interest-earning assets and total
funding costs was due to lower, but more stable interest rate levels
during 1993 than during 1992.
Net interest income for 1992 was $55.3 million, compared to $49.4
million for 1991. While average earning assets increased in 1992 by
$76.9 million, or 6.9%, over 1991, most of the increase was attributable
to an increase in securities rather than loans. This change in mix of
earning assets contributed to a decrease of 134 basis points in the
yield on earning assets. For 1992, the net interest margin was due to a
greater increase in the yield on earning assets than the increase in the
cost of funds and the loss of interest income resulting from an
increased level of nonperforming assets.
The table on Pages 16 and 17 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.
The following table 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.
VOLUME AND RATE ANALYSIS
TAX EQUIVALENT BASIS
1994 1993
CHANGE IN CHANGE IN
VOLUME RATE INCOME/ VOLUME RATE INCOME/
EFFECT EFFECT EXPENSE EFFECT EFFECT EXPENSE
(DOLLARS IN THOUSANDS)
EARNING ASSETS:
Taxable securities............................. $ 2,598 $ (857) $ 1,741 $ 4,577 $ (1,864) $ 2,713
Tax-exempt securities.......................... (177) (1,221) (1,398) (478) (379) (857)
Taxable loans.................................. 11,676 (964) 10,712 5,851 (4,011) 1,840
Tax-exempt loans............................... 108 (177) (69) (37) 51 14
Federal funds sold and repurchase agreements... (320) 795 475 324 (204) 120
Interest-bearing deposits in other banks....... (51) (16) (67) (80) 38 (42)
Total earning assets......................... $ 13,834 $ (2,440) $ 11,394 $ 10,157 $ (6,369) $ 3,788
INTEREST-BEARING LIABILITIES:
Checking deposits.............................. $ 1,207 $ (532) $ 675 $ 461 $ (335) $ 126
Savings deposits - regular..................... 1,151 (172) 979 (1,124) 1,021 (103)
Savings deposits - money market................ 155 337 492 2,241 (2,749) (508)
CD's & other time deposits - $100,000 & over... 1,947 (2,257) (310) 3,751 (4,684) (933)
CD's & other time deposits - under $100,000.... 132 274 406 (70) (727) (797)
Total interest-bearing deposits.............. 4,592 (2,350) 2,242 5,259 (7,474) (2,215)
Borrowed funds short-term.................... 202 163 365 71 (153) (82)
Borrowed funds long-term..................... 91 - 91 - - -
Total interest-bearing liabilities........... 4,885 (2,187) 2,698 5,330 (7,627) (2,297)
Change in net interest income................ $ 8,949 $ (253) $ 8,696 $ 4,827 $ 1,258 $ 6,085
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.
18
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 the Corporation 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, maturities can be extended by selling shorter term
investments and buying longer 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. The Company reviews the interest
sensitivity position of each Subsidiary Bank at least once a quarter.
RATE SENSITIVITY ANALYSIS
DECEMBER 31, 1994
REPRICING TIME FRAME INCOME STATEMENT GAP
ONE YEAR
OVER 5 YEARS ONE YEAR EARNINGS INCOME 2%
1-90 DAY 91-365 DAY 1 TO 5 YEARS OR BALANCE CHANGE STATEMENT PRIME RATE
SENSITIVITY SENSITIVITY SENSITIVITY NONSENSITIVE TOTAL SHEET GAP RATIO GAP CHANGE
ASSETS (DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Loans, net unearned
(1)
Fixed rate.......... $ 42,700 $ 93,697 $ 323,147 $ 70,673 $ 530,217 $ 136,397 75.00% $ 102,298 $ 2,046
Floating rate....... 280,626 98,015 49,593 855 429,089 378,641 100.00% 378,641 7,573
Total loans......... 323,326 191,712 372,740 71,528 959,306 515,038 93.38% 480,939 9,619
Investment securities
Treasuries/Agencies. 18,082 49,864 222,315 127,032 417,293 67,946 67.00% 45,524 910
Tax-exempt
municipals........ 2,277 4,401 16,403 15,216 38,297 6,678 37.00% 2,471 49
FNMA ARMS........... - 500 5,873 5,602 11,975 500 69.00% 345 7
FHLMC ARMS.......... 91 - 410 2,168 2,669 91 75.00% 68 1
Federal funds sold
and other short-term
investments...... 44,873 2,358 13,125 2,604 62,960 47,231 93.00% 43,925 878
Total securities.... 65,323 57,123 258,126 152,622 533,194 122,446 75.41% 92,333 1,847
Total rate sensitive
assets............. 388,649 248,835 630,866 224,150 1,492,500 637,484 89.93% 573,272 11,465
LIABILITIES
Interest checking.... $ - $ -- $ - $ 242,935 $ 242,935 $ - - $ - $ -
Money market
deposits........... 176,356 - - - 176,356 176,356 50.00% 88,178 1,764
Regular savings...... - - - 192,577 192,577 - - - --
Time deposits (greater
than) $100,000..... 22,852 26,537 39,950 - 89,339 49,389 73.00% 36,054 721
Time Deposits (less
than) $100,000..... 96,048 150,207 271,552 - 517,807 246,255 73.00% 179,766 3,595
Short-term
borrowings......... 36,298 - - - 36,298 36,298 93.00% 33,757 675
Long-term
borrowings......... - - - 3,193 3,193 - - - -
Total rate sensitive
liabilities........ 331,554 176,744 311,502 438,705 1,258,505 508,298 66.45% 337,755 6,755
Rate sensitivity
gap................ 57,095 72,091 319,364 (214,555) 233,995 129,186 235,516 4,710
Cumulative gap....... 57,095 129,186 448,550 233,995 129,186
Risk to interest
margin:
Gap as a % of rate
Sensitive assets.... 3.83% 8.66% 30.05% 15.68% 8.66% 15.78%
(1) Excludes non-accrual loans
The Corporation manages the gap between rate-sensitive assets and
rate-sensitive liabilities to expand and contract with the rate cycle
phase. The traditional targeted gap should be between a negative 10% and
a positive
19
10%. The one year income statement gap at December 31, 1994 was 15.8%
which is greater than targeted gap, however, it is acceptable during a
period of rising interest rates.
At December 31, 1994, the Company had $129.2 million more in
interest sensitive assets than interest sensitive liabilities subject to
repricing within one year and was, therefore, in an asset-sensitive
position. At December 31, 1993, the Company had $34.5 million more in
interest sensitive assets than interest sensitive liabilities subject to
repricing within one year. An asset- sensitive institution's net
interest margin and net interest income generally will be impacted
favorably by rising interest rates, while that of a liability- sensitive
institution generally will be impacted favorably by declining interest
rates. Although regular savings deposits and interest-checking deposits
are subject to immediate withdrawal, the Company's experience indicates
that these deposits are not interest sensitive and therefore, have been
placed in the category "Over 5 Years and Nonsensitive."
The Company utilizes shock analysis to project the estimated effect
on net interest income at various interest rate scenarios. This analysis
reflects interest rate changes and the related impact on net income on
interest sensitive assets and liabilities over specified periods. At
December 31, 1994, a 2% increase in the prime rate is projected to
increase net interest income $4.7 million. Conversely, if the prime rate
decreases 2%, projected net interest income would decrease similarly.
The table on Page 19 analyzes the Company's rate interest
sensitivity at December 31, 1994. This is a one-day position which is
continually changing and is not necessarily indicative of the Company's
position at any other time.
NONINTEREST INCOME
Noninterest income for 1994 increased by $1.5 million, or 10.0%,
over the same period in 1993. Trust Department income increased $215
thousand or 15.1% from $1.4 million for 1993 to $1.6 million for 1994 as
a result of increased fiduciary activities. Service charges on deposit
accounts, the largest single item of noninterest income, were $5.5
million for 1994, up 9.4% over the comparable period a year ago. Credit
card fees were $2.2 million for 1994 as compared to $1.8 million for
1993 as result of increased card loan activity. Fees for other customer
services were $1.9 million for 1994, which declined $333 thousand
(15.2%) from 1993 as a result of a reduction in refinancing activity.
Gains on sale of securities were $748 thousand for 1994 as compared to
$1.8 million for 1993. Security gains are realized when market
conditions exist that are favorable to the Corporation and/or conditions
dictate additional liquidity is desirable. In 1993, interest rates were
favorable for the Company to reposition some securities at more
attractive rates, whereas, in 1994 market interest rates began rising
reducing the appeal to reposition.
Noninterest income in 1993 increased 19.3% or $2.3 million over
1992. Service charges on deposit accounts in 1993 increased by $766
thousand to $5.1 million, primarily due to an increase in the number of
accounts, along with the implementation of various fee charges to offset
the reduction in interest rates and the increasing cost of deposit
insurance premiums. Commissions and fees from fiduciary services in 1993
increased 22.8% to $1.4 million. Also contributing to the increase in
noninterest income in 1993 were gains on sales of securities totaling
$1.8 million, compared to $1.0 million in 1992.. To adjust its portfolio
in anticipation of declining interest rates, the Company realized gains
on the sale of securities with short-term maturities and reinvested the
proceeds in securities with intermediate or longer maturities.
NONINTEREST INCOME
YEAR ENDED DECEMBER 31,
1994 1993 1992
(DOLLARS IN THOUSANDS)
Commissions and fees from fiduciary activities... $ 1,642 $ 1,427 $ 1,162
Service charges on deposit accounts.............. 5,548 5,070 4,304
Credit card fees................................. 2,247 1,844 1,611
Fees for other customer services................. 1,853 2,187 2,386
Other operating income........................... 4,080 2,342 1,796
Noninterest income............................ 15,370 12,870 11,259
Profits on securities available for sale......... 728 1,617 878
Investment securities gains, net................. 20 164 142
Total noninterest income...................... $ 16,118 $ 14,651 $ 12,279
20
NONINTEREST EXPENSE
Total noninterest expense increased $7.8 million (16.8%), from $46.5
million in 1993 to $54.3 million in 1994. Salaries and employee benefits
increased $4.4 million, net occupancy expense and furniture and equipment
expense increased $765 thousand, deposit insurance increased $518 thousand,
credit card expense increased $465 thousand and other operating expense
increased $1.7 million. The primary reason for these increased expenses is the
purchase of Hamilton in September of 1993 which added an additional 117
employees to the payroll for four months in 1993 and for the entire year 1994.
Additional costs associated with acquiring and operating six Hamilton branch
banks and related employee training increased 1994 operating expenses.
For 1993, noninterest expense increased by $5.1 million, or 12.3%, over
1992. This increase was primarily due to a $2.1 million, or 9.6% increase in
salary and employee benefits and a $1.9 million, or 19.3% increase in other
operating expenses. The primary reason for the increase in salary and benefits
was the personnel costs associated with the purchase of Hamilton in September
1993. Other operating expenses increased for several reasons. First, the
purchase of Hamilton and the merger of First National resulted in increased
professional fees. Second, the Corporation purchased a new mainframe computer
with related mainframe software which required additional employee training
thereby increasing operating expenses.
NONINTEREST EXPENSE
YEAR ENDED DECEMBER 31,
1994 1993 1992
(DOLLARS IN THOUSANDS)
Salaries and employee benefits...... $ 27,908 $ 23,525 $ 21,469
Net occupancy expense of premises... 3,724 3,217 3,442
Furniture and equipment expense..... 3,907 3,649 2,723
Deposit insurance................... 3,269 2,751 2,523
Credit card expense................. 1,732 1,267 1,117
Other operating expenses............ 13,799 12,120 10,162
Total............................ $ 54,339 $ 46,529 $ 41,436
INCOME TAXES
Reported income tax expense at December 31, 1994 was $9.8 million,
up from $8.6 million for 1993 and up from $6.7 million for 1992. The
increase in the income taxes is attributable to increased taxable
earnings and an increase in the federal statutory income tax rate from
34% for 1992 to 35% for 1993 and 1994. This corresponds to an effective
tax rate of 32.5%, 32.1% and 29.4% for the three years ended December
31, 1994, 1993 and 1992, respectively. Note 15 to the Consolidated
Financial Statements for year end provide a reconciliation between the
amount of income tax expense computed using the federal statutory income
tax rate and the Company's actual income tax expense. Also included in
Note 15 to the Consolidated Financial Statements is information
regarding the principal items giving rise to deferred taxes for each of
the three years ended December 31.
LOAN PORTFOLIO
Loans, net of unearned income, were $977.9 million at December 31,
1994, up $48.8 million or 5.3% from $929.1 million at year end 1993 and
up $176.4 million or 23.4% from $752.7 million at year end 1992. The
increase in loan activity for 1994 is indicative of depositors
willingness to incur new and/or additional debt following a period of
reluctance. The significant increase in net loans from 1992 to 1993
reflects primarily the purchase of $116.0 million Hamilton loans.
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-Emporia, F&M Bank-Peoples,
F&M Bank-Martinsburg, and F&M Bank-Keyser, emphasize consumer lending,
with activities focused primarily on residential real estate and
consumer lending. F&M Bank-Richmond, F&M Bank-Hallmark and F&M
Bank-Central Virginia 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.
21
Approximately 31.5% of the Company's loan portfolio at December 31,
1994 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. 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 real property, 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. The Company'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 33.7% of total loans at December 31, 1994. The residential
mortgage loans made by the Subsidiary Banks and Big Apple Mortgage
Company 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.
The Company's real estate construction portfolio historically has
been a relatively small portion of the total loan portfolio. At December
31, 1994, the construction loans were $32.9 million, or 3.4% 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.
Consumer loans were 34.8% of the Company's total loan portfolio at
December 31, 1994, if home equity lines are included in this category.
The 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 the 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,
1994 comprised 33.7% of the loan portfolio. Loans secured by commercial
real estate comprised 31.5% of the loan portfolio at December 31, 1994
and consist principally of commercial and industrial loans where real
estate constitutes a source of collateral (27.7%) (shown in the
following table under the category of "Non-farm, non- residential"),
multifamily loans (2.0%) and agricultural loans (1.8%). The Company
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. The Company has historically engaged in limited mortgage
lending on multifamily and agricultural properties. Real estate
construction loans accounted for only 3.4% of total loans outstanding at
December 31, 1994. The Company's charge-off rate for all loans secured
by real estate was 0.03% of period end loans. This is consistent with
1993 when the charge-off rate for all loans secured by real estate was
0.08% of period end loans outstanding. The Company's consumer loan
portfolio, its second largest loan category, consists principally of
personal loans.
Consistent with its focus on providing community-based financial
services, the Company generally does not make loans outside its
principal market regions. The Company does not engage in foreign lending
activities. Consequently, the loan portfolio is not exposed to risk from
foreign credits. The Company maintains a policy not to originate or
purchase loans classified by regulators as highly leveraged transactions
or loans to foreign entities or individuals.
The Company's unfunded loan commitments (excluding unused home
equity lines of credit and credit card lines) amounted to $133.8 million
at December 31, 1994, compared to $118.3 million at December 31, 1993.
This increase is due to lower seasonal demands on lines of credit during
the summer months than at year end.
On December 31, 1994, the Company had no concentration of loans in
any one industry in excess of 10 percent of its loan portfolio. Because
of the nature of the Company's market, however, loan collateral is
predominantly real estate related.
22
A number of economic factors in conjunction with loan activity in
1994 suggest that loan growth in 1995 should be more vibrant than it was
in 1994 and 1993. Although interest rates are above the floors they
reached in 1993, they remain at reasonable levels for borrowers. New
home construction is increasing as are home sales. Auto sales were up
sharply in 1994, and the forecast is for continued strength. The economy
is creating new jobs and beginning to absorb some of the unemployment
that was created in the recession and the business restructuring of
prior years. Importantly, reports suggest that borrowers are showing new
confidence and a willingness to incur new debt after a period of
reluctance. These factors, while positive, did not result in a clearly
defined trend of loan growth in 1994, but do represent the necessary
elements for growth in 1995.
LOAN PORTFOLIO
DECEMBER 31,
1994 1993 1992 1991 1990
(DOLLARS IN THOUSANDS)
Commercial, financial and agricultural... $ 118,954 $ 101,668 $ 104,394 $ 101,439 $ 125,088
Real estate construction................. 32,887 39,330 23,038 23,522 27,014
Real estate mortgage:
Residential (1-4 family)............... 329,381 325,772 278,506 266,261 246,785
Home equity lines...................... 46,206 43,903 42,316 45,164 36,549
Multifamily............................ 19,610 17,597 14,272 14,085 11,894
Non-farm, non-residential (1).......... 270,740 241,793 152,303 136,026 105,531
Agricultural........................... 17,213 16,615 13,951 12,704 12,451
Real estate subtotal................... 683,150 645,680 501,348 474,240 413,210
Loans to individuals:
Consumer............................... 133,044 134,958 120,042 137,020 177,626
Credit card............................ 15,733 13,627 12,069 12,616 13,142
Loans to individuals subtotal.......... 148,777 148,585 132,111 149,636 190,768
Total loans........................... 983,768 935,263 760,891 748,837 756,080
Less unearned income..................... (5,836) (6,194) (8,186) (10,553) (14,329)
Loans - net of unearned income........... $ 977,932 $ 929,069 $ 752,705 $ 738,284 $ 741,751
(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, 1994
COMMERCIAL,
FINANCIAL AND REAL ESTATE-
AGRICULTURAL CONSTRUCTION
(DOLLARS IN THOUSANDS)
Within 1 year........ $ 66,490 $ 26,731
Variable Rate:
1 to 5 years....... 2,450 836
After 5 years...... 503 -
Total.............. $ 2,953 $ 836
Fixed Rate:
1 to 5 years....... 40,571 5,320
After 5 years...... 8,945 -
Total.............. $ 49,516 $ 5,320
Total Maturities... $ 118,959 $ 32,887
23
ASSET QUALITY
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 Subsidiary Bank. The level of loan losses is
affected by general economic trends as well as conditions affecting
individual borrowers. As a result, management's judgment regarding the
amount of the allowance is necessarily approximate and imprecise. 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 an independent loan review team that
performs a detailed on-site review and analysis of each Subsidiary
Bank's portfolio on at least an annual basis reviewing 60% to 75% of the
total principal amount of each Subsidiary Bank's loan portfolio. In
addition, all lending relationships involving a classified loan are
reviewed regardless of size. The 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 grading system. All
classified loans are reviewed at least quarterly by the Company's senior
officers and monthly by the Subsidiary Banks' board of directors. All
past due and nonaccrual loans are reviewed monthly by the Subsidiary
Bank's 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. This detailed management
analysis forms the basis for determining the amount needed in the
allowance for loan losses. Also included in nonaccrual loans at year end
1994 are $6.9 million in loans that have been written down to market
values where no allowance is required which contributes to the Company's
ratio of allowance to total loans of 1.54% and ratio of allowance to
nonaccrual loans of 81.05% being substantially less than its peers of
1.81% and 372.0%, respectively. Although the ratio of the allowance to
total loans and nonaccrual loans may be substantially less than its
peers, the Company believes the ratio to be adequate based on this loan
risk review analysis.
The provision for loan losses in 1993 and 1992 were $2.8 million and
$3.4 million, respectively. In 1993 and 1992, slow loan growth in the
Company's markets and improved underwriting standards permitted the
Company to reduce its provision. The ratio of allowance to total loans
for 1993 and 1992 were 1.47% and 1.46%, respectively. The ratio of
allowance to nonaccrual loans for 1993 and 1992 were 49.97% and 75.51%,
respectively.
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. The Subsidiary Banks are examined at different times, but the
Virginia Bureau of Financial Institutions examined all Virginia banking
subsidiaries and the West Virginia Division of Banking examined all West
Virginia banking subsidiaries during 1994. Loans classified for
regulatory purposes 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.
The Corporation maintains a general allowance for loan losses and
does not allocate its allowance for loan losses to individual categories
for management purposes. The following Table 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.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
1994 1993 1992
PERCENT OF PERCENT OF PERCENT OF
LOANS IN EACH LOANS IN EACH LOANS IN EACH
CATEGORY TO CATEGORY TO CATEGORY TO
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
(DOLLARS IN THOUSANDS)
December 31:
Commercial, financial and
agriculture............. $ 5,510 12.1% $ 4,996 10.6% $ 5,106 13.1%
Real estate-construction. 619 3.4 562 4.2 153 2.8
Real estate-mortgage..... 5,269 69.9 4,776 68.8 2,660 66.5
Consumer................. 3,699 14.6 3,349 16.4 3,071 17.6
$ 15,097 100.0% $ 13,683 100.0% $ 10,990 100.0%
Slow loan growth in the Company's markets and improved underwriting
standards, have permitted the Company to reduce its provision for loan
losses at December 31, 1994 to $2.6 million from the $2.8 million for
the year 1993. The 1993 provision was also a reduction from the 1992
provision of $3.4 million.
24
The Company had net charge-offs in 1994 of $1.2 million, lower than
the 1993 level of $1.6 million, due to an increase in credit quality of
loans. Net charge-offs in 1992 were $3.7 million. Net charge-offs to
average loans was 0.12% for the year 1994, compared with 0.19% for the
same period 1993 and 0.50% for the same period 1992.
ALLOWANCE FOR LOAN LOSSES
DECEMBER 31,
1994 1993 1992 1991 1990
(DOLLARS IN THOUSANDS)
Balance, beginning of period................................ $ 13,683 $ 10,990 $ 11,282 $ 8,225 $ 7,975
Loans charged-off:
Commercial, financial and agriculture.................... 858 833 2,010 2,407 1,932
Real estate construction................................. 45 4 - - -
Real estate mortgage (1):
Residential (1-4 family)............................... 280 366 914 28 146
Home equity lines...................................... 14 239 25 - -
Multifamily............................................ - - - - 138
Non-farm, non-residential (1).......................... - 89 170 - -
Agricultural........................................... - - - - -
Real estate subtotal................................. 294 694 1,109 28 284
Consumer.................................................. 558 962 1,156 1,223 1,031
Credit card............................................... 146 144 162 238 114
Loans to individuals subtotal........................ 704 1,106 1,318 1,461 1,145
Total loans charged-off.............................. 1,901 2,637 4,437 3,896 3,361
Recoveries:
Commercial, financial and agriculture.................... 308 409 333 81 113
Real estate construction................................. - 8 - - -
Real estate mortgage (1):
Residential (1-4 family)............................... 125 292 109 4 1
Home equity lines...................................... 22 - 25 - -
Multifamily............................................ - - - - -
Non-farm, non-residential (1).......................... 4 31 - - -
Agricultural........................................... - - - - -
Real estate subtotal................................. 151 323 134 4 1
Loans to individuals:
Consumer................................................. 257 318 243 205 216
Credit card.............................................. 12 22 25 10 22
Loans to individuals subtotal........................ 269 340 268 215 238
Total recoveries..................................... 728 1,080 735 300 352
Net charge-offs............................................. 1,173 1,557 3,702 3,596 3,009
Provision for loan losses................................... 2,587 2,807 3,410 6,653 3,259
Increase from purchase...................................... - 1,443 - - -
Balance, end of period...................................... $ 15,097 $ 13,683 $ 10,990 $ 11,282 $ 8,225
Ratio of allowance for loan losses to loans outstanding
at end of period........................................... 1.54% 1.47% 1.46% 1.53% 1.11%
Ratio of net charge-offs to average loans outstanding
during period............................................. 0.12% 0.19% 0.50% 0.49% 0.42%
(1) This category generally consists of commercial and industrial loans
where real estate constitutes a source of collateral.
25
NONPERFORMING ASSETS. Total nonperforming assets, which consist of
nonaccrual loans, restructured loans and foreclosed properties, were $30.0
million at December 31, 1994, a decrease of $8.3 million (21.7%) from
December 31, 1993. Total nonperforming assets at December 31, 1993
increased $18.5 million over year end 1992. The purchase of assets of
Hamilton increased nonperforming assets at September 30, 1993, $27.9
million of which $21.3 million were nonaccrual loans and $6.6 million
were foreclosed properties. At December 31, 1994, these Hamilton
nonaccrual loans and foreclosed properties have been reduced to $6.9
million and $6.7 million, respectively. On the purchase date, loans
acquired from Hamilton were booked at fair market value according to
purchase accounting rules. Management does not anticipate any material
loss in the final disposition of the remaining loans.
Foreclosed properties consists of real estate acquired through debt
previously contracted. These properties consist primarily of commercial
and residential real estate whose value is determined through sale at
public auction or fair market value, whichever is less. At December 31,
1994, the Company had $11.0 million in foreclosed property. The Company
does not anticipate incurring any material loss on the final disposition
of these properties.
Nonperforming loans (nonaccrual loans and restructured loans) at
December 31, 1994 were $19.0 million, or 1.9% of total loans, compared
to $28.1 million, or 3.0% of total loans at December 31, 1993 and $14.6
million, or 1.9% of total loans, at December 31, 1992. Nonperforming
loans at the year end 1994 were composed largely of 1-4 family
residential loans of $2.1 million and commercial loans secured by real
property of $8.3 million.
NONPERFORMING ASSETS
DECEMBER 31,
1994 1993 1992 1991 1990
(DOLLARS IN THOUSANDS)
Nonaccrual loans................................ $ 18,627 $ 27,324 $ 14,554 $ 12,090 $ 3,619
Restructured loans.............................. 325 770 22 22 -
Foreclosed property............................. 11,049 10,143 5,232 1,942 877
Total nonperforming assets................... $ 30,001 $ 38,237 $ 19,808 $ 14,054 $ 4,496
Loans past due 90 days accruing interest........ $ 1,552 $ 1,772 $ 5,243 $ 4,758 $ 3,720
Allowance for loan losses to period end loans... 1.54% 1.47% 1.46% 1.53% 1.11%
Allowance for loan losses to nonaccrual loans... 81.05% 49.97% 75.51% 93.32% 227.27%
Nonperforming assets to period end loans and
foreclosed properties.......................... 3.03% 4.08% 2.61% 1.90% 0.61%
Net charge-offs to average loans................ 0.12% 0.19% 0.50% 0.49% 0.42%
The loss of income associated with nonperforming loans at December 31 were:
1994 1993 1992 1991 1990
(DOLLARS IN THOUSANDS)
Income that would have been recorded in accordance
with original terms:
Nonaccrual loans and restructured loans........ $ 1,356 $ 1,084 $ 909 $ 654 $ 314
Income actually recorded:
Nonaccrual and restructured loans.............. 145 33 - - -
On December 31, 1994, 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 can be repaid.
Third, there may be actual losses which necessitate additional
provisions for loan losses charged against earnings.
At December 31, 1994, loans past due 90 days or more and still accruing
interest because they are both well secured and in the process of
collection were $1.6 million, compared to $1.8 million at December 31,
1993 and $5.2 million at December 31, 1992.
POTENTIAL PROBLEM LOANS. At December 31, 1994, potential problem
loans were approximately $34.9 million, including 14 lending
relationships with principal balances in excess of $500,000, which had
an aggregate principal balance outstanding of $18.1 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
26
their status is reviewed on a regular basis. The potential problem loans
identified at December 31, 1994 are generally secured by residential and
commercial real estate with appraised values that exceed the principal
balance.
Although trends for credit quality factors, such as loan losses and
non- performing assets, continue to improve, it is likely that the
Company will continue modest provisions for loan losses in 1995. The
principal factor for additional provisions is expected growth in the
loan portfolio as the result of continued improvement in economic
conditions.
Continued positive economic conditions and an assessment of the loan
portfolio and problem assets suggest that loan losses in 1995 should not
be materially greater than those in 1994. At such relatively low levels
of loan losses as were experienced in 1994, however, a minor dollar
fluctuation in losses could represent a large percentage increase. Loan
loss expectations for 1995 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 condition or borrowers' financial
conditions, could also impact actual loan losses in 1995. The Company
will maintain and follow its policies and practices intended to minimize
future credit losses.
SECURITIES
The book value of the securities portfolio was $495.0 million at December
31, 1994, compared to $483.4 million at December 31, 1993. The
securities portfolio increased $11.6 million in 1994 over 1993, which
followed an increase of $62.8 million in 1993 over 1992. Investment in
U.S. Government securities increased $18.6 million, or 4.4%, for the
year 1994, and increased $59.6 million, or 16.5%, for the year 1993,
while investment in states and political subdivisions declined during
the same periods. The Company has generally not reinvested funds in
securities issued by states and political subdivisions, because those
securities do not have the same tax benefits they have had in the past.
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 the Company 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 lower of cost or market value. Securities
available for sale include securities that may be sold in response to
changes in market interest rates, changes in the security's prepayment
risk, increases in loan demand, general liquidity needs and other
similar factors.
Financial Accounting Standards Board Pronouncement No. 115 effective
January 1, 1994, requires the Company 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, 1994 was $219.8 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 new line in
Stockholders' Equity as unrealized loss of $6.7 million at December 31,
1994. The decline in the market value of AFS securities below book value
is a temporary market condition as a result of the inverse relationship
of loan rates versus bond rates. Investment rates have increased in
1994, thereby, causing currently held bond portfolio market yields to
decline. The decline in market yields is due to interest rate
fluctuations only and not a result of re-ratings or down grading of
securities.
In September 1992, the Company revised its securities accounting
policy resulting in a reclassification of $98.7 million of investment
securities at December 31, 1991 to securities available for sale. At
December 31, 1992, securities classified in the category available for
sale totalled $144.0 million. This reclassification had no effect on the
Company's financial condition or results of operations as the aggregate
market value of the portfolio exceeded its book value.
In October 1994, Statement of Financial Accounting Standards No.
119, "Disclosures for Derivative Financial Instruments" was issued. The
Statement is effective for financial statements issued for fiscal years
ending after December 15, 1994. It requires various disclosures for
derivative financial instruments which are futures, forwards, swaps, or
option contracts, or other financial instruments with similar
characteristics. With the exception of fixed-rate and variable-rate loan
commitments as discussed in Note 19 to the Consolidated Financial
Statements, the Company does not have any derivative financial
instruments as defined under this statement.
It is the Company'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. The Company considers
derivatives as speculative which is contrary to the Company's historical
or prospective philosophy. The Company does not hold or issue financial
instruments for trading purposes. The Company 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.
27
INVESTMENT PORTFOLIO AND SECURITIES AVAILABLE FOR SALE
The carrying value of investment securities at the dates indicated was:
DECEMBER 31,
1994 1993 1992
(DOLLARS IN THOUSANDS)
U.S. Government securities.......... $ 234,527 $ 223,260 $ 210,346
States and political subdivisions... 39,113 46,191 45,880
Other securities.................... 1,477 3,600 13,064
Total investment securities...... $ 275,117 $ 273,051 $ 269,290
The carrying value of securities available for sale at the dates
indicated was:
DECEMBER 31,
1994 1993 1992
(DOLLARS IN THOUSANDS)
U.S. Government securities............... $ 205,334 $ 197,984 $ 151,309
Other securities......................... 14,506 12,363 -
Total securities available for sale... $ 219,840 $ 210,347 $ 151,309
MATURITY DISTRIBUTION AND YIELDS OF SECURITIES
DECEMBER 31, 1994
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.... $ 41,577 5.39% $ 120,428 5.98% $ 52,906 6.58% $ 19,616 7.49% $ 234,527 6.13%
Other taxable securities..... - 688 7.38% 789 7.16% - 1,477 7.24%
Total taxable............... 41,577 121,116 53,695 19,616 236,004
Tax-exempt securities (1).... 6,678 9.74% 17,330 8.59% 11,297 8.74% 3,808 9.44% 39,113 8.84%
Total....................... $ 48,255 $ 138,446 $ 64,992 $ 23,424 $ 275,117
Securities held for sale:
U.S. Government securities... $ 28,803 5.82% $ 121,547 6.48% $ 36,799 6.63% $ 18,185 6.76% $ 205,334 6.43%
Other taxable securities..... 3,502 7.14% 3,776 6.99% - 7,228 7.21% 14,506 7.12%
Total....................... $ 32,305 $ 125,323 $ 36,799 $ 25,413 $ 219,840
Total securities.............. $ 80,560 6.01% $ 263,769 6.39% $ 101,791 6.80% $ 48,837 7.37% $ 494,957 6.50%
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.
See Note 2 to the Consolidated Financial Statements as of December
31, 1994 for an analysis of gross unrealized gains and losses in the
securities portfolio.
DEPOSITS
The Company has made an effort in recent years to increase core
deposits and reduce cost of funds. Deposits provide funding for the
Company'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, 1994 grew $21.2 million or 1.5% to $1.441
billion. Non-interest bearing demand deposits increased $19.3 million
(9.5%) from $202.9 million in 1993 to $222.2 million in 1994. Interest
bearing deposits
28
increased $2.0 million (0.2%) to $1.2 billion in 1994. Savings deposits,
money market deposits and certificates of deposit over $100,000
experienced a reduction in deposits, whereas, only interest checking and
certificates of deposit under $100,000 experienced an increase in
deposits. Deposit growth in 1994 was affected by comparatively low
interest rates and the consequent movement of funds out of deposit
accounts and into alternative investments. In addition to moving funds
out of deposit accounts, depositors continued to shift funds into more
liquid accounts.
The Company does not have any other time deposits, other than
certificates of deposits, over $100,000.
Deposits at December 31, 1993 were $1.419 billion, a 19.5% increase
from the same period in 1992. The effect of purchasing Hamilton
increased deposits at September 18, 1993 by $169.3 million. If deposits
from the Hamilton purchase were excluded, deposits increased $62.3
million. Interest checking, money market and regular savings all
increased over 1992 levels. Certificates of deposits of $100,000 and
more decreased from 1992 levels. The 1992 reduction of $33.7 million in
certificates of deposits of $100,000 and more resulted primarily from
local municipal governments withdrawing funds from these accounts in
response to an out-of-state institution offering similar instruments at
above local market rates.
DEPOSITS AND RATES PAID
DECEMBER 31,
1994 1993 1992
AMOUNT RATE AMOUNT RATE AMOUNT RATE
(DOLLARS IN THOUSANDS)
Noninterest-bearing accounts... $ 222,177 $ 202,917 $ 173,606
Interest-bearing accounts:
Interest checking............. 242,935 2.40% 232,442 2.78% 165,161 3.21%
Money-market.................. 176,356 2.87% 189,136 2.69% 153,939 3.56%
Regular savings............... 192,577 3.03% 197,181 3.14% 154,521 3.89%
Time deposits:
Less than $100,000......... 517,807 4.37% 508,102 4.69% 450,002 5.39%
$100,000 and more.......... 89,339 4.59% 90,199 4.29% 91,168 5.10%
Total interest-bearing......... 1,219,014 3.56% 1,217,060 3.78% 1,014,791 4.52%
Total....................... $ 1,441,191 $ 1,419,977 $ 1,188,397
MATURITIES OF CD'S OF $100,000 AND MORE
WITHIN THREE TO SIX TO ONE TO OVER
THREE SIX TWELVE FIVE FIVE
MONTHS MONTHS MONTHS YEARS YEARS TOTAL
(DOLLARS IN THOUSANDS)
At December 31, 1994... $ 23,149 $ 9,224 $ 18,529 $ 38,437 $ - $ 89,339
CAPITAL RESOURCES
The adequacy of the Company's capital is reviewed by management on
an ongoing basis with reference to the size, composition and quality of
the Company's asset and liability levels and consistent with regulatory
requirements and industry standards. 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 Federal Reserve, along with the Comptroller of the Currency and
the Federal Deposit Insurance Corporation, 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. The
Company had a ratio or risk-weighted assets to total capital of 17.4% at
December 31, 1994 and a ratio of risk-weighted assets to Tier I capital
of 16.2%. Both of these exceed the capital requirements adopted by the
federal bank regulatory agencies.
29
ANALYSIS OF CAPITAL
DECEMBER 31,
1994 1993 1992
(DOLLARS IN THOUSANDS)
Tier 1 Capital:
Common stock............................. $ 31,221 $ 30,512 $ 29,393
Additional paid in capital............... 52,138 47,277 39,441
Retained earnings........................ 84,766 79,477 70,535
Less: Goodwill........................... 5,551 5,984 579
Total Tier 1 capital..................... 162,574 151,282 138,790
Tier 2 Capital:
Allowance for loan losses................ 12,578 12,201 10,990
Allowable long term debt................. - - -
Total Tier 2 capital..................... 12,578 12,201 10,990
Total risk-based capital................. $ 175,152 $ 163,483 $ 149,780
Risk-weighted assets...................... $ 1,006,232 $ 976,068 $ 788,580
CAPITAL RATIOS:
Tier 1 risk-based capital ratio.......... 16.16% 15.50% 17.60%
Total risk-based capital ratio........... 17.41% 16.75% 18.99%
Tier 1 capital to average total assets... 9.75% 9.32% 10.20%
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 the Company's management of liquid assets and the ability
to generate liquidity through liability funding, management believes
that the Company maintains overall liquidity sufficient to satisfy its
depositors' requirements and meet its customers' credit needs.
At December 31, 1994, approximately $637.5 million or 42.7% of total
earning assets is due to mature or reprice within the next year.
The Company also maintains additional sources of liquidity through a
variety of borrowing arrangements. The Subsidiary Banks maintain federal
funds lines with a number of larger regional and money-center banking
institutions totaling in excess of $45.0 million, of which $5.2 million
was borrowed at December 31, 1994. Federal funds borrowed by the
Subsidiary Banks during 1994 averaged less than $500,000. At December
31, 1994, certain of the Subsidiary Banks had outstanding $15.4 million
of borrowings pursuant to securities repurchase agreement transactions,
ranging in maturity from one day to three months. Also, the Company has
credit lines totaling $185 million from the Federal Home Loan Bank that
can be utilized for short and/or long-term borrowing.
The Company engages in short-term borrowings at the parent company
level, as well. At December 31, 1994, the Company had $14.8 million
outstanding in short- term obligations issued to selected customers of
the Subsidiary Banks pursuant to a master note agreement. As a back-up
source of funds, the Company has approved bank lines of credit totaling
$6.0 million. At December 31, 1994, there were no outstanding balances
under these lines, however, the lines are used irregularly and the
average aggregate balance outstanding under the lines has not exceeded
$1.0 million since they have been in place.
In 1994, some of the Company's subsidiary banks 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 Bank, in their
30
discretion, otherwise determine to be residential housing finance
assets. In 1994, long-term borrowings from the Federal Home Loan Bank
system for RHFA investments were $3.2 million over a term from 2-10
years.
ACCOUNTING RULE CHANGES
Statement of Financial Accounting Standards No. 114, "Accounting by
Creditors for Impairment of a Loan" becomes effective in 1995. FASB No.
114 generally requires impaired loans to be measured on the present
value of expected future cash flows discounted at the loan's effective
interest rate, or as an expedient at the loan's observable market price
or the fair value of the collateral if the loan is collateral dependent.
A loan is impaired when it is probable the creditor will be unable to
collect all contractual principal and interest payments due in
accordance with the terms of the loan agreement. The statement is not
expected to have a material impact on the Corporation.
Statement of Financial Accounting Standards No. 118 "Accounting by
Creditors for Impairment of a Loan-Income Recognition and Disclosures,"
amends FASB No. 114 to allow a creditor to use existing methods for
recognizing interest income on an impaired loan. To accomplish that, it
eliminates the provisions in Statement 114 that describe how a creditor
should report income on an impaired loan. This statement is effective
concurrent with the effective date of Statement 114.
31
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1994 and 1993
DECEMBER 31,
1994 1993
ASSETS
Cash and due from banks (Notes 1, 14 and 18)............... $ 78,211,063 $ 64,835,728
Interest-bearing deposits in other banks................... 201,823 2,208,674
Securities (fair value: 1994, $483,482,887; 1993,
$499,725,131) (Notes 1 and 2)............................ 494,957,119 483,398,149
Federal funds sold and securities purchased under
agreements to resell...................................... 38,035,000 79,026,000
Loans (Notes 1, 3 and 5)................................... 983,767,585 935,262,920
Unearned income........................................... (5,835,752) (6,194,287)
Loans (net of unearned income)........................ 977,931,833 929,068,633
Allowance for loan losses (Note 4)........................ (15,097,221) (13,683,141)
Net loans............................................. 962,834,612 915,385,492
Bank premises and equipment, net (Notes 1 and 6)........... 31,805,752 31,255,166
Other assets............................................... 44,858,273 41,739,274
Total assets.......................................... $1,650,903,642 $1,617,848,483
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing....................................... $ 222,176,638 $ 202,917,373
Interest bearing.......................................... 1,219,014,844 1,217,060,081
Total deposits (Note 7)............................... $1,441,191,482 $1,419,977,454
Federal funds purchased and securities sold under
agreements to repurchase.................................. 20,542,960 14,271,479
Federal Home Loan Bank advances............................ 875,294 -
Other short-term borrowings (Notes 5 and 8)................ 14,878,857 13,613,427
Long-term debt (Note 9).................................... 3,193,573 -
Other liabilities.......................................... 8,786,293 12,719,802
Commitments and contingent liabilities
(Notes 14, 17 and 19)..................................... - -
Total liabilities..................................... $1,489,468,459 $1,460,582,162
SHAREHOLDERS' EQUITY
Preferred stock, no par value, authorized 5,000,000
shares,
no shares outstanding..................................... $ - $ -
Common stock, par value $2 per share, authorized
20,000,000 shares, issued 1994, 15,610,408 shares;
issued 1993, 15,256,112 shares........................... 31,220,816 30,512,224
Capital surplus............................................ 52,137,440 47,277,476
Retained earnings.......................................... 84,766,389 79,476,621
Unrealized (loss) on securities available for sale,
net...................................................... (6,689,462) -
Total shareholders' equity............................ $ 161,435,183 $ 157,266,321
Total liabilities and shareholders' equity............ $1,650,903,642 $1,617,848,483
32 See Notes to Consolidated Financial Statements.
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For Each of the Three Years in the Period Ended December 31, 1994
DECEMBER 31,
1994 1993 1992
INTEREST INCOME
Interest and fees on loans............................... $ 82,560,411 $ 71,892,948 $ 70,050,867
Interest and dividends on investment securities:
Taxable interest income................................. 12,064,591 13,629,376 14,783,740
Interest income exempt from federal income taxes........ 2,205,607 3,115,342 3,728,237
Dividends............................................... - 54,271 41,997
Interest and dividends on securities available for sale:
Taxable interest income................................. 15,749,703 12,630,661 8,776,260
Dividends............................................... 240,910 - -
Interest income on federal funds sold and securities
purchased under agreements to resell.................... 2,986,819 2,511,636 2,391,991
Interest on deposits in banks............................ 36,346 103,447 144,814
Total interest income............................ $ 115,844,387 $ 103,937,681 $ 99,917,906
INTEREST EXPENSE
Interest on deposits (Note 7)............................ $ 43,907,556 $ 41,666,119 $ 43,881,235
Interest on short-term borrowings........................ 1,053,264 688,082 769,840
Interest on long-term debt............................... 90,634 - -
Total interest expense........................... $ 45,051,454 $ 42,354,201 $ 44,651,075
Net interest income.............................. $ 70,792,933 $ 61,583,480 $ 55,266,831
Provision for loan losses (Notes 1 and 4)................ 2,587,222 2,806,588 3,409,665
Net interest income after provision
for loan losses................................. $ 68,205,711 $ 58,776,892 $ 51,857,166
OTHER INCOME
Commissions and fees from fiduciary activities........... $ 1,642,010 $ 1,426,526 $ 1,162,240
Service charges on deposit accounts...................... 5,547,752 5,071,186 4,303,888
Credit card fees......................................... 2,247,432 1,844,084 1,610,734
Fees for other customer services......................... 1,853,329 2,186,668 2,385,727
Other operating income................................... 4,079,754 2,342,486 1,796,046
Profits on securities available for sale (Note 2)........ 728,239 1,616,791 878,289
Investment securities gains, net (Note 2)................ 19,895 163,987 141,981
Total other income............................... $ 16,118,411 $ 14,651,728 $ 12,278,905
OTHER EXPENSES
Salaries and employees' benefits
(Notes 11, 12 and 13).................................. $ 27,908,164 $ 23,524,982 $ 21,468,182
Net occupancy expense of premises (Notes 6 and 14)....... 3,724,039 3,216,866 3,442,402
Furniture and equipment expenses (Notes 6 and 14)........ 3,907,238 3,648,999 2,723,374
Deposit insurance........................................ 3,268,586 2,751,151 2,523,095
Credit card expense...................................... 1,731,838 1,266,780 1,117,143
Other operating expenses................................. 13,798,986 12,120,361 10,161,556
Total other expenses............................. $ 54,338,851 $ 46,529,139 $ 41,435,752
Income before income taxes....................... $ 29,985,271 $ 26,899,481 $ 22,700,319
Income tax expense (Notes 1 and 15)....................... 9,752,040 8,629,677 6,674,800
Net income....................................... $ 20,233,231 $ 18,269,804 $ 16,025,519
EARNINGS PER SHARE (Note 1)
Per average share outstanding, net income................ $ 1.29 $ 1.20 $ 1.14
See Notes to Consolidated Financial Statements. 33
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, 1994
UNREALIZED
(LOSS) ON SECURITIES
COMMON CAPITAL RETAINED AVAILABLE
STOCK SURPLUS EARNINGS FOR SALE, NET TOTAL
BALANCE - DECEMBER 31, 1991............... $ 27,016,884 $ 27,889,193 $ 60,676,939 $ - $115,583,016
Net income - 1992........................ - - 16,025,519 - 16,025,519
Cash dividends declared
($0.44 per share)....................... - - (6,167,225) - (6,167,225)
Issuance of common stock - dividend
reinvestment plan (57,091 shares)....... 114,182 579,482 - - 693,664
Acquisition of common stock
(364 shares)............................ (728) (3,933) - - (4,661)
Sale of common stock - stock offering
(1,110,500 shares) (Note 21)............ 2,221,000 10,808,728 - - 13,029,728
Issuance of common stock - exercise of
employee stock options (21,063 shares).. 42,126 111,628 - - 153,754
Issuance of stock options under
nonvariable compensatory plan
(22,500 shares)......................... - 56,250 - - 56,250
BALANCE - DECEMBER 31, 1992............... $ 29,393,464 $ 39,441,348 $ 70,535,233 $ - $139,370,045
Net income - 1993........................ - - 18,269,804 - 18,269,804
Cash dividends declared
($0.61 per share)....................... - - (9,328,416) - (9,328,416)
Issuance of common stock - dividend
reinvestment plan (73,592 shares)....... 147,184 944,899 - - 1,092,083
Issuance of common stock - exercise of
employee stock options (17,464 shares).. 34,928 102,634 - - 137,562
Issuance of stock options under
nonvariable compensatory plan
(10,000 shares)......................... - 86,200 - - 86,200
Issuance of common stock to acquire
investment (19,877 shares).............. 39,754 298,155 - - 337,909
Retirement of stock options
(2,000 shares).......................... - (8,000) - - (8,000)
Isssuance of common stock in exchange
for net assets in bank acquisition
(432,989 shares)........................ 865,978 6,229,642 - - 7,095,620
Issuance of common stock for employee
stock discount plan (15,458 shares)..... 30,916 182,598 - - 213,514
BALANCE - DECEMBER 31, 1993............... $ 30,512,224 $ 47,277,476 $ 79,476,621 $ - $157,266,321
Net income - 1994........................ - - 20,233,231 - 20,233,231
Cash dividends declared
($0.57 per share)....................... - - (8,884,424) - (8,884,424)
Issuance of common stock - dividend
reinvestment plan (118,288 shares)...... 236,576 1,670,226 - - 1,906,802
Issuance of common stock - exercise of
employee stock options (5,563 shares)... 11,126 27,628 - - 38,754
Issuance of stock options under
nonvariable compensatory plan
(26,000 shares)......................... - 211,120 - - 211,120
Acquisition of common stock
(165,000 shares)........................ (330,000) (2,485,487) - - (2,815,487)
Issuance of common stock - 2 1/2% stock
dividend (378,690 shares)............... 757,380 5,243,898 (6,001,278) - -
Cash paid in lieu of fractional shares... - - (57,761) - (57,761)
Issuance of common stock for employee
stock discount plan (16,755 shares)..... 33,510 192,579 - - 226,089
Change in unrealized (loss) on securities
available for sale, net of deferred
income taxes of $3,610,380.............. - - - (6,689,462) (6,689,462)
BALANCE - DECEMBER 31, 1994............... $ 31,220,816 $ 52,137,440 $ 84,766,389 $ (6,689,462) $161,435,183
34 See Notes to Consolidated Financial Statements.
F&M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For Each of the Three Years in the Period Ended December 31, 1994
DECEMBER 31,
1994 1993 1992
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $ 20,233,231 $ 18,269,804 $ 16,025,519
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization............................ 3,718,495 2,870,178 2,367,358
Provision for loan losses................................ 2,587,222 2,806,588 3,409,665
Deferred income taxes (credits).......................... 1,275,800 (758,228) (114,603)
Profits on securities available for sale................. (728,239) (1,616,791) (878,289)
Investment securities gains, net......................... (19,895) (163,987) (141,981)
Net amortization and accretion of securities............. 776,726 662,310 538,108
Decrease in other assets................................. 1,097,051 833,276 101,442
Increase (decrease) in other liabilities................. (4,198,084) 1,394,869 (1,630,811)
Net cash provided by operating
activities....................................... $ 24,742,307 $ 24,298,019 $ 19,676,408
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in interest-bearing deposits in other banks....... $ 2,006,851 $ 258,138 $ 2,059,463
Proceeds from sales and calls of securities available
for sale................................................. 48,911,189 29,504,330 37,886,721
Proceeds from maturities of securities available for
sale..................................................... 28,402,250 16,742,000 -
Proceeds from sales and calls of investment
securities............................................... 14,165,988 33,501,638 70,735,112
Proceeds from maturities of investment securities.......... 55,447,000 70,858,803 -
Purchase of securities available for sale.................. (49,713,667) (77,713,536) (84,036,173)
Purchase of investment securities.......................... (119,100,164) (108,390,133) (99,178,165)
Decrease in federal funds sold and securities purchased
under agreements to resell................................. 40,991,000 13,488,000 59,000
Net (increase) in loans.................................... (55,465,582) (63,343,870) (22,341,680)
Purchases of bank premises and equipment................... (3,859,904) (3,490,833) (2,621,599)
Proceeds from sale of other real estate.................... 3,138,593 2,432,112 124,399
Cash acquired in acquisition............................... - 6,622,857 -
Net cash (used in) investing
activities....................................... $ (35,076,446) $ (79,530,494) $ (97,312,922)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in noninterest-bearing and interest-bearing
demand deposits
and savings accounts...................................... $ 12,368,500 $ 70,966,006 $ 95,687,135
Net increase (decrease) in certificates of deposit......... 8,845,528 (8,665,409) (23,129,397)
Dividends paid............................................. (8,408,729) (7,452,289) (6,167,225)
Increase (decrease) in federal funds purchased and
securities sold under agreements to repurchase........... 6,271,481 (153,867) 8,370,812
Increase (decrease) in other short-term borrowings......... 1,265,430 1,470,576 (447,502)
Net proceeds from issuance and sale of common stock........ 2,171,645 1,443,159 13,872,485
Acquisition of common stock................................ (2,815,487) - -
Increase in Federal Home Loan bank advances................ 875,294 - -
Proceeds from long-term debt............................... 3,279,743 - -
Principal payments on long-term debt....................... (86,170) - -
Cash paid in lieu of fractional shares on 2 1/2% stock
dividend................................................. (57,761) - -
Net cash provided by financing
activities....................................... $ 23,709,474 $ 57,608,176 $ 88,186,308
Increase in cash and cash equivalents.............. $ 13,375,335 $ 2,375,701 $ 10,549,794
CASH AND CASH EQUIVALENTS
Beginning.................................................. 64,835,728 62,460,027 51,910,233
Ending..................................................... $ 78,211,063 $ 64,835,728 $ 62,460,027
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for:
Interest paid to depositors............................... $ 43,450,094 $ 41,092,301 $ 45,186,871
Interest paid on federal funds purchased and
securities sold under
agreements to repurchase.................................. 705,739 375,677 393,123
Interest paid on other short-term borrowings.............. 346,421 306,157 373,270
Interest paid on long-term borrowing...................... 90,635 - -
$ 44,592,889 $ 41,774,135 $ 45,953,264
Income taxes.............................................. $ 9,799,641 $ 9,309,392 $ 6,888,836
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Issuance of stock options under nonvariable compensatory
plan..................................................... $ 211,120 $ 86,200 $ 56,250
Issuance of common stock - exercise of employee stock
options paid by
surrender of common stock................................. $ - $ - $ 4,661
Retirement of stock options under nonvariable
compensatory plan........................................ $ - $ 8,000 $ -
Issuance of common stock in exchange for net assets in
bank acquisition......................................... $ - $ 7,095,620 $ -
Issuance of common stock to acquire investment............. $ - $ 337,909 $ -
Loan balances transferred to foreclosed properties......... $ 5,429,240 $ 2,335,356 $ 4,120,373
Common stock issued for 2 1/2% stock dividend.............. $ 6,001,278 $ - $ -
Unrealized (loss) on securities available for sale......... $ 10,299,842 $ - $ -
See Notes to Consolidated Financial Statements. 35
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1994, 1993 and 1992
NOTE 1 - NATURE OF BANKING ACTIVITIES AND SIGNIFICANT ACCOUNTING POLICIES
F&M National Corporation and Subsidiaries (the Corporation) grant
commercial, financial, agricultural, residential and consumer loans to
customers in Virginia and West Virginia. The loan portfolio is well
diversified and generally is collateralized by assets of the customers.
The loans are expected to be repaid from cash flow or proceeds from the
sale of selected assets of the borrowers.
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.
SECURITIES
The Corporation adopted FASB No. 115, "Accounting for Certain
Investment in Debt and Equity Securities" effective beginning January 1,
1994. This statement addresses the accounting and reporting for
investments in equity securities that have readily determinable fair
values and for all investments in debt securities. Those investments 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 cost adjusted for amortization of premium and
accretion of discount, computed by the interest method over their
contractual lives.
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 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, 1994.
Prior to 1994, the Corporation's accounting policy for securities
was as follows:
Securities were classified as investment securities when management
had the intent and the Corporation had the ability at the time of
purchase to hold them until maturity or on a long-term basis. These
securities were carried at cost adjusted for amortization of premiums
and accretion of discounts. Premiums were amortized (deducted) and
discounts were accreted (added) to interest income on investment
securities using methods that approximate the level yield method.
Securities to be held for indefinite periods of time and not
intended to be held to maturity or on a long-term basis were classified
as available for sale and accounted for at the lower of cost or market
value. These included securities used as part of the Corporation's
asset/liability management strategy and may have been sold in response
to changes in interest rates, prepayment risk, the need or desire to
increase capital, to satisfy regulatory requirements and other similar
factors. Gains and losses arising from the sale of securities available
for sale or adjustments for lower of cost or market were included in
"Profits on securities available for sale" in the Consolidated
Statements of Income.
LOANS
Loans are shown on the balance sheets net of unearned income and
allowance for loan losses. Interest income on commercial and real estate
mortgage loans is computed on the loan balance outstanding. Interest
income on installment loans is computed on the sum-of-the-months digits
and actuarial methods.
36
ALLOWANCE FOR LOAN LOSSES
The Corporation follows the allowance method in providing for loan
losses. The provision for loan losses charged to operating expense is
the amount necessary, in management's judgment, to maintain the reserve
for loan losses at a level sufficient to cover possible losses in the
current loan portfolio. Loan losses, as recognized, are charged to the
reserve, and recoveries on loans previously charged off are added to the
reserve. Estimates of possible future losses involve the exercise of
management's judgment and assumptions with respect to future conditions.
The principal factors considered by management in determining the
adequacy of the allowance are the growth and composition of the loan
portfolio, historical loss experience, economic conditions, the value
and adequacy of collateral, and the current level of the allowance.
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.
INCOME TAXES
Deferred taxes are provided on a liability method whereby deferred
tax assets are recognized for deductible temporary differences and
operating loss and tax credit carryforwards and deferred tax liabilities
are recognized for taxable temporary differences. Temporary differences
are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a
valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will
not be realized. Deferred tax assets and liabilities are adjusted for
the effects of changes in tax laws and rates on the date of enactment.
PENSION PLAN
The Corporation has a trusteed, noncontributory defined contribution
pension plan covering substantially all full-time employees.
EARNINGS AND DIVIDENDS PAID PER SHARE
Earnings and dividends paid per share of Common Stock are based on
the weighted average number of shares outstanding during each year after
giving retroactive effect to the equivalent shares exchanged in
acquisition of Farmers and Merchants Bank of Keyser in 1992, First
National Bankshares, Inc. in 1993, PNB Financial Corporation and
Hallmark Bank & Trust Company in 1994 and the 2 1/2% stock dividend in
1994.
TRUST DIVISION
Securities and other property held by the Trust Division in a
fiduciary or agency capacity are not assets of the Corporation and are
not included in the accompanying consolidated financial statements.
LOAN FEES AND COSTS
Loan origination and commitment fees and direct loan origination
costs are being recognized as collected and incurred. The use of this
method of recognition does not produce results that are materially
different from results which would have been produced if such costs and
fees were deferred and amortized as an adjustment of the loan yield over
the life of the related loan.
OTHER REAL ESTATE
Other real estate, classified in "other assets" in the accompanying
balance sheets, consists primarily of real estate held for resale which
was acquired through foreclosure on loans secured by real estate. Other
real estate is carried at the lower of cost or appraised market value
less an allowance for estimated selling expenses on the future
disposition of the property. Writedowns to market value at the date of
foreclosure are charged to the allowance for loan losses. Subsequent
declines in market value are charged to expense.
CASH AND CASH EQUIVALENTS
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand and amounts due from banks.
POSTRETIREMENT BENEFITS
Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," was
effective beginning in 1993. The Corporation does not provide
postretirement benefits other than pensions and, consequently, the
statement has no effect on the Corporation's financial statements.
37
NOTE 2 - SECURITIES
The amortized cost and fair values of securities being held to maturity as
of December 31, 1994 and 1993 are as follows:
DECEMBER 31, 1994
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
U.S. Treasury securities and obligations of
U.S. government corporations and agencies... $ 234,527,636 $ 232,684 $ (11,261,300) $ 223,499,020
Obligations of states and political
subdivisions................................ 39,112,713 584,956 (988,145) 38,709,524
Corporate securities......................... 1,476,750 9,000 (51,427) 1,434,323
$ 275,117,099 $ 826,640 $ (12,300,872) $ 263,642,867
DECEMBER 31, 1993
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
U.S. Treasury securities and obligations of
U.S. government corporations and agencies... $ 223,260,930 $ 5,486,823 $ (578,406) $ 228,169,347
Obligations of states and political
subdivisions................................ 46,191,181 2,159,983 (73,116) 48,278,048
Corporate securities......................... 2,549,389 125,373 - 2,674,762
Other........................................ 1,049,750 - - 1,049,750
$ 273,051,250 $ 7,772,179 $ (651,522) $ 280,171,907
The amortized cost and fair value of securities being held to
maturity as of December 31, 1994, by contractual maturity are shown
below. 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
Due in one year or less.................. $ 47,717,971 $ 47,425,945
Due after one year through five years.... 137,856,141 131,728,351
Due after five years through ten years... 64,641,925 60,602,398
Due after ten years...................... 23,424,312 22,451,850
Corporate securities..................... 1,476,750 1,434,323
$ 275,117,099 $ 263,642,867
The amortized cost and fair value of securities available for sale as of
December 31, 1994 and 1993, are as follows:
DECEMBER 31, 1994
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
U.S. Treasury securities and obligations of
U.S. government corporations and agencies... $ 215,722,293 $ 369,534 $ (10,757,442) $ 205,334,385
Corporate securities......................... 8,962,542 21,772 (90,500) 8,893,814
Mortgage-backed securities................... 887,955 - (13,881) 874,074
Other........................................ 4,567,069 170,678 - 4,737,747
$ 230,139,859 $ 561,984 $ (10,861,823) $ 219,840,020
38
DECEMBER 31, 1993
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
U.S. Treasury securities and obligations of
U.S. government corporations and agencies... $ 197,983,599 $ 8,966,044 $ (361,804) $ 206,587,839
Corporate securities......................... 5,596,618 210,197 (15,255) 5,791,560
Mortgage-backed securities................... 3,810,000 26,000 (25,000) 3,811,000
Other........................................ 2,956,682 408,143 (2,000) 3,362,825
$ 210,346,899 $ 9,610,384 $ (404,059) $ 219,553,224
The amortized cost and fair value of securities available for sale,
as of December 31, 1994 by contractual maturity are shown below.
Expected maturities may differ from contractual maturities because the
corporate securities and mortgage-backed 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
Due in one year or less.................. $ 30,386,257 $ 30,206,144
Due after one year through five years.... 128,176,678 122,356,377
Due after five years through ten years... 41,684,277 38,653,851
Due after ten years...................... 15,475,081 14,118,013
Corporate securities..................... 8,962,542 8,893,814
Mortgage-backed securities............... 887,955 874,074
Other.................................... 4,567,069 4,737,747
$ 230,139,859 $ 219,840,020
Proceeds from sales and calls of securities held to maturity during
1994 were $14,165,988. Gross gains of $27,452 and gross losses of $7,557
were realized on those sales and calls during 1994.
Proceeds from sales and calls of securities available for sale
during 1994 were $48,911,189. Gross gains of $960,137 and gross losses
of $231,898 were realized on those sales and calls during 1994.
Proceeds from sales and calls of securities during 1993 and 1992
were $63,005,968 and $108,621,833, respectively. Gross gains of
$1,808,394 and $1,200,201 and gross losses of $27,616 and $179,931 were
realized on those sales and calls during 1993 and 1992, respectively.
The book value of securities pledged to secure deposits and for
other purposes amounts to $72,149,913 and $71,776,140 at December 31,
1994 and 1993, respectively.
NOTE 3 - LOANS
Major classifications of loans are as follows:
DECEMBER 31,
1994 1993
Commercial, financial and agricultural... $ 118,954,000 $ 101,668,000
Real estate - construction............... 32,887,000 39,330,000
Real estate - mortgage................... 683,150,000 645,680,000
Consumer loans to individuals............ 148,776,585 148,584,920
$ 983,767,585 $ 935,262,920
Nonaccrual loans amounted to $18,627,000 and $27,323,648 at December
31, 1994 and 1993, respectively. If interest on these loans had been
accrued, such income would have approximated $1,356,053 and $1,084,156,
respectively.
39
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
DECEMBER 31,
1994 1993 1992
Balance at beginning of year............. $ 13,683,141 $ 10,990,502 $ 11,282,805
Provision charged to operating expense... 2,587,222 2,806,588 3,409,665
Recoveries added to the reserve.......... 728,000 1,080,156 735,096
Increase from acquisition................ - 1,443,169 -
Loan losses charged to the reserve....... (1,901,142) (2,637,274) (4,437,064)
Balance at end of year................... $ 15,097,221 $ 13,683,141 $ 10,990,502
NOTE 5 - 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, 1994, 1993 and 1992,
these loans totaled $42,949,847, $37,690,680 and $37,857,218,
respectively. During 1994, total principal additions were $8,701,780 and
total principal payments were $3,442,613.
The Corporation was indebted to related parties for short-term
borrowings totaling $4,026,000 and $5,750,000 at December 31, 1994 and
1993, respectively.
The Corporation paid $2,400 to the law firm of a director who serves
as legal counsel for a bank subsidiary.
NOTE 6 - BANK PREMISES AND EQUIPMENT, NET
Premises and equipment are summarized as follows:
DECEMBER 31,
1994 1993
Premises......................................... $ 34,958,654 $ 33,637,543
Leasehold improvements........................... 911,058 952,211
Furniture and equipment.......................... 17,286,165 17,063,589
Construction in progress......................... 1,132,883 216,094
$ 54,288,760 $ 51,869,437
Less accumulated depreciation and amortization... 22,483,008 20,614,271
$ 31,805,752 $ 31,255,166
Depreciation and amortization of bank premises and equipment included in
operating expenses for the years ended December 31, 1994, 1993 and 1992, were
$3,309,318, $2,707,739, and $2,307,481, respectively.
NOTE 7 - DEPOSITS
Deposits outstanding at December 31, 1994, 1993 and 1992, and the related
interest expense for the periods then ended are summarized as follows:
40
DECEMBER 31,1994 DECEMBER 31,1993
AMOUNT EXPENSE AMOUNT EXPENSE
Noninterest bearing......... $ 222,176,638 $ - $ 202,917,373 $ -
Interest bearing:
Interest checking.......... $ 242,935,384 $ 5,770,548 $ 232,441,758 $ 5,095,427
Money market accounts...... 176,356,196 5,451,104 189,136,523 4,959,261
Regular savings............ 192,577,072 6,095,164 197,181,136 5,116,131
Certificates of deposit:
Less than $100,000........ 517,807,143 22,330,506 508,101,972 22,641,153
$100,000 and more......... 89,339,049 4,260,234 90,198,692 3,854,147
Total interest bearing... $ 1,219,014,844 $ 43,907,556 $1,217,060,081 $ 41,666,119
Total deposits........... $ 1,441,191,482 $ 43,907,556 $1,419,977,454 $ 41,666,119
DECEMBER 31,1992
AMOUNT EXPENSE
Noninterest bearing......... $ 173,605,738 $ -
Interest bearing:
Interest checking.......... $ 165,160,977 $ 4,971,731
Money market accounts...... 153,939,340 5,466,953
Regular savings............ 154,520,759 5,219,278
Certificates of deposit:
Less than $100,000........ 450,001,482 23,571,898
$100,000 and more......... 91,168,424 4,651,375
Total interest bearing... $ 1,014,790,982 $ 43,881,235
Total deposits........... $ 1,188,396,720 $ 43,881,235
NOTE 8 - SHORT-TERM BORROWINGS
The Corporation had unused lines of credit totaling $6,000,000 with
nonaffiliated banks at December 31, 1994. In addition, the Corporation has
unused lines of credit totaling $181,559,033 with the Federal Home Loan Bank.
NOTE 9 - LONG-TERM DEBT
In 1994, some of the Corporation's subsidiary banks 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 Bank, in their discretion,
otherwise determine to be residential housing finance assets. In 1994,
borrowings from the Federal Home Loan Bank system for RHFA investments
were $3,193,573 over a term from 2-10 years. The interest rate on the
notes payable range from 6.53% to 8.18% at December 31, 1994. Principal
payments on the notes are due as follows:
1995.......... $ 641,980
1996.......... 576,593
1997.......... 250,000
1998.......... 250,000
1999.......... 250,000
Later years... $ 1,225,000
$ 3,193,573
41
NOTE 10 - BUSINESS COMBINATIONS
On July 1, 1994, F&M completed its acquisitions of PNB Financial
Corporation (PNB) and Hallmark Bank & Trust Company (Hallmark). PNB was
a bank holding company organized under Virginia law which conducted a
commercial banking business through its wholly-owned subsidiary, The
Peoples National Bank of Warrenton. F&M issued 1,193,431 shares of
common stock based on an exchange ratio of 2.3683 shares of F&M common
shares for each share of PNB common stock. Hallmark was a
state-chartered commercial bank. F&M issued 1,107,414 shares of common
stock based on an exchange ratio of 0.6406 shares of F&M common shares
for each share of Hallmark common stock. The transactions were accounted
for using the pooling-of-interests method of accounting. Accordingly,
the financial statements of F&M have been restated for all reported
periods to reflect the acquisition. Total assets and the results of
operations of the separate entities prior to the combination are
summarized as follows:
JUNE 30,
1994 DECEMBER 31,
(UNAUDITED) 1993
TOTAL ASSETS:
F&M National Corporation... $1,437,782,651 $1,401,654,820
PNB........................ 96,254,079 98,143,892
Hallmark................... 122,499,080 118,049,771
$1,656,535,810 $1,617,848,483
JUNE 30,
1994 YEARS ENDED DECEMBER 31,
(UNAUDITED) 1993 1992
NET INTEREST INCOME:
F&M National Corporation... $ 29,251,410 $ 51,912,885 $ 46,612,939
PNB........................ 2,123,810 4,593,733 4,215,892
Hallmark................... 2,663,430 5,076,862 4,438,000
$ 34,038,650 $ 61,583,480 $ 55,266,831
NET INCOME:
F&M National Corporation... $ 8,629,084 $ 16,774,891 $ 14,668,018
PNB........................ 448,138 762,737 967,501
Hallmark................... 410,794 732,176 390,000
$ 9,488,016 $ 18,269,804 $ 16,025,519
On September 1, 1993, F&M completed its acquisition of First National
Bankshares, Inc. (First National). First National was a bank holding company
organized under Virginia law which conducted a commercial banking business
through its wholly-owned national banking association subsidiary, First National
Bank of Emporia. F&M issued 665,568 shares of common stock based on an exchange
ratio of 3.096 shares of F&M common shares for each share of First National
common stock. The transaction was accounted for using the pooling-of-interests
method of accounting. Accordingly, the financial statements of F&M have been
restated for all reported periods to reflect the acquisition.
On September 18, 1993, F&M completed its acquisition of substantially all
the assets and assumed certain liabilities of Farmers & Merchants National Bank
of Hamilton (Hamilton Bank) in exchange for $7,095,620 worth of F&M common
stock. The excess of the total acquisition cost over the fair value of the net
assets acquired of $5,239,496 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 Hamilton Bank since the date of acquisition are included in the
consolidated financial statements.
NOTE 11 - STOCK OPTIONS
The Corporation 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.
42
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.
Nonqualified options for 26,000 shares at an exercise price of $8.13 were
granted in 1994. Nonqualified options for 10,000 shares at an average per share
exercise price of $8.63 were granted during 1993. Nonqualified options for
22,500 shares of an average per share exercise price of $8.00 were granted
during 1992. There were no incentive stock options outstanding at December 31,
1994, 1993, or 1992.
Options for -0-, -0-, and 2,000 shares expired during the years ended
December 31, 1994, 1993, and 1992, respectively. During 1994, options for 5,563
shares of common stock were exercised at an average per share price of $6.97.
During 1993, options for 17,464 shares of common stock were exercised at an
average per share price of $6.60. During 1992, options for 21,063 shares of
common stock were exercised at an average per share price of $7.30.
As of December 31, 1994, options for 92,363 shares remain unexercised and
219,350 shares are available for the grant of future options as adjusted for
stock dividends and splits under the antidilutive provisions of the plan.
NOTE 12 - EMPLOYEE BENEFIT PLANS
F&M National Corporation and its affiliates have a defined contribution
retirement plan covering substantially all full-time employees and provides that
an employee automatically becomes eligible to participate as of the date he has
reached age 18 and has completed six months of service, whichever occurs last.
The plan was amended in 1989 to add a 401(k) or deferred feature. Under the
plan, a participant may contribute to the plan an amount up to 10% of his
covered compensation for the year, subject to certain limitations. For each year
in which the employee makes a contribution to the plan, the Corporation will
make a matching contribution. The Corporation may also make, but is not required
to make, a discretionary 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 1994, 1993 and 1992, was $115,300, $732,350, and
$791,989, respectively.
In 1994, the Corporation adopted an Employee Stock Ownership Plan (ESOP)
covering substantially all full-time employees and providing that an employee
automatically becomes eligible to participate as of the date he has reached age
18 and has completed six months of service, whichever occurs last. The
Corporation may make, but is not required to make, a discretionary contribution
for each participant 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, if any, is determined on an annual basis by the
Board of Directors.
The total plan expense for 1994, 1993, and 1992 was $699,800, $-0-, and
$-0-, respectively.
In 1993, the Corporation adopted an Employee Stock Discount Plan. The Plan
offers eligible employees of the Corporation 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 of the Corporation with six continuous months of service as of January
1 of a calendar year may participate for that calendar year. A regular 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. 16,755 shares were issued during 1994 at a discount of $39,897.
15,458 shares were issued during 1993 at a discount of $37,679. The number of
shares available to be issued in future years totals 223,650.
NOTE 13 - EXECUTIVE INCENTIVE COMPENSATION PLAN AND DEFERRED COMPENSATION
PLANS
The Executive Incentive Compensation Plan of F&M National Corporation 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
$644,768 in 1994, $542,457 in 1993, and $450,408 in 1992.
In addition, during 1978 deferred compensation plans were 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 for 1994, 1993, and 1992, based on the present
value of the retirement benefits, amounted to approximately $240,315, $331,753,
and $178,275, 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.
NOTE 14 - LEASE COMMITMENTS AND CONTINGENT LIABILITIES
The Corporation 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
43
expense for operating leases for 1994, 1993 and 1992, was $980,849,
$982,235, and $945,590 respectively. Minimum rental commitments under
noncancelable leases with terms in excess of one year as of December 31, 1994,
were as follows:
Year Operating Leases
1995..................... $ 556,078
1996..................... 556,078
1997..................... 494,078
1998..................... 479,039
1999..................... 457,254
Later years.............. 1,130,166
Total minimum payments... $ 3,672,693
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 Corporation's subsidiary banks
are required to maintain certain average reserve balances. For the final weekly
reporting period in the years ended December 31, 1994 and 1993, the aggregate
amounts of daily average required balances were approximately $9,887,000 and
$9,125,000, respectively.
NOTE 15 - INCOME TAXES
Effective January 1, 1993, the Corporation adopted FASB Statement No. 109,
"Accounting for Income Taxes." The adoption of Statement 109 changes the
Corporation's method of accounting for income taxes from the deferred method to
a liability method. Under the deferred method, the Corporation deferred the past
tax effects of timing differences between financial reporting and taxable
income. As explained in Note 1, the liability method requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the reported amounts of assets and liabilities and
their tax bases. The cumulative effect of the change in accounting principle is
immaterial in determining net income for the year ended December 31, 1993.
Financial statements for prior years have not been restated.
Net deferred tax assets consist of the following components as of December
31, 1994 and 1993:
1994 1993
Deferred tax assets:
Provision for loan losses........ $ 4,931,577 $ 3,861,271
Salary continuation plan......... 733,871 575,328
Nonaccrual interest.............. 304,169 381,622
Excess tax basis - acquisition... - 2,202,771
Insurance commissions............ 113,370 83,252
Securities available for sale.... 3,610,380 -
Other............................ 293,223 204,708
$ 9,986,590 $ 7,308,952
Deferred tax liabilities:
Depreciation..................... $ 719,605 $ 738,420
Bond discount accretion.......... 57,662 84,032
Excess tax basis - acquisition... 421,956 -
Other............................ 25,475 59,112
$ 1,224,698 $ 881,564
$ 8,761,892 $ 6,427,388
The provision for income taxes charged to operations for the years ended
December 31, 1994 and 1993 consist of the following:
1994 1993
Current tax expense...... $ 8,476,240 $ 9,468,905
Deferred tax (benefit)... 1,275,800 (839,228)
$ 9,752,040 $ 8,629,677
44
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, 1994 and 1993 due to the following:
1994 1993
Computed "expected" tax expense.................... 35.0% 35.0%
Increase (decrease) in income taxes resulting from:
Tax-exempt interest............................... (3.1) (3.8)
Nondeductible merger expenses..................... .5 .6
Other, net........................................ .1 .3
32.5% 32.1%
As discussed above, the Corporation accounted for income taxes using the
deferred method as prescribed by APB 11 for the year ended December 31, 1992.
The provision for income taxes charged to operations for the year ended
December 31, 1992 consists of the following:
Current tax expense..... $ 6,789,403
Deferred tax (credit)... (114,603)
$ 6,674,800
The source of timing differences resulting in deferred income taxes and the
tax effect of each was as follows:
Provision for loan losses... $ 85,278
Bond discount accretion..... (61,974)
Other, net.................. (137,907)
$ (114,603)
The following is a reconciliation of the expected statutory tax rate with
the rate of reported tax:
Statutory tax rate............................. 34.0%
Increase (decrease) in tax rate resulting from:
Tax-exempt interest........................... (5.0)
Other, net.................................... .4
Effective tax rate............................. 29.4%
NOTE 16 - RESTRICTIONS ON TRANSFERS TO PARENT
Transfer of funds from banking subsidiaries to the Parent Corporation in
the form of loans, advances and cash dividends, are restricted by federal and
state regulatory authorities. As of December 31, 1994, the aggregate amount of
unrestricted funds which could be transferred from the Corporation's
subsidiaries to the Parent Corporation, without prior regulatory approval,
totaled $33,163,866 or 20.5% of the consolidated net assets.
NOTE 17 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Corporation and Subsidiaries are 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
45
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 Corporation and Subsidiaries have in particular
classes of financial instruments.
The Corporation and Subsidiaries' 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 notional amount of those instruments. The
Corporation and Subsidiaries use the same credit policies in making commitments
and conditional obligations as it does for on-balance-sheet instruments.
Unless noted otherwise, the Corporation and Subsidiaries do not require
collateral or other security to support financial instruments with credit risk.
A summary of the contract or notional amount of the Corporation and
Subsidiaries' exposure to off-balance-sheet risk as of December 31, 1994 and
1993, is as follows:
1994 1993
Financial instruments whose contract amounts represent
credit risk:
Commitments to extend credit............................... $ 216,566,627 $ 159,160,425
Standby letters of credit and financial guarantees
written.................................................. $ 8,879,138 $ 10,142,491
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. Since many of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Corporation and Subsidiaries evaluate
each customer's credit worthiness on a case-by-case basis. The amount of
collateral obtained, if deemed necessary by the Corporation and Subsidiaries
upon extension of credit, is based on management's credit evaluation of the
counterparty. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Corporation and Subsidiaries to guarantee the
performance of a customer to a third party. Those guarantees are primarily
issued to support public and private borrowing arrangements, including
commercial paper, bond financing, and similar transactions. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Corporation and Subsidiaries hold
marketable securities as collateral supporting those commitments for which
collateral is deemed necessary. The extent of collateral held for those
commitments at December 31, 1994, varies from 0 percent to 100 percent; the
average amount collateralized is 47 percent.
NOTE 18 - CREDIT RISK
As of December 31, 1994, the Corporation had a concentration of loans in
non-farm, non-residential loans, consisting primarily of commercial loans
secured by real estate of $270,740,000 which were in excess of 10 percent of the
total loan portfolio. The Corporation does not engage in any foreign lending
activities.
As of December 31, 1994, the Corporation had $12,330,546 in deposits in
financial institutions in excess of amounts insured by the Federal Deposit
Insurance Corporation (FDIC).
NOTE 19 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
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
46
available. If a quoted market price is not available, fair value is
estimated using quoted market prices for similar securities.
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 borrowers with similar credit
ratings and for the same remaining maturities.
DEPOSIT LIABILITIES
The fair value of demand deposits, savings accounts, and certain money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity certificates of deposit is estimated using the rates
currently offered for deposits of similar remaining maturities.
COMMITMENTS TO EXTEND CREDIT, STANDBY LETTERS OF CREDIT, AND FINANCIAL
GUARANTEES WRITTEN
The fair value of commitments is estimated using the fees currently charged
to enter into similar agreements, taking into account the remaining terms of the
agreements and the present creditworthiness 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 guarantees
and 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.
The estimated fair values of the Corporation's financial instruments are as
follows:
1994 1993
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
(DOLLARS IN THOUSANDS)
FINANCIAL ASSETS:
Cash and short-term investments............ $ 116,448 $ 116,448 $ 146,070 $ 146,070
Investments securities..................... 275,117 263,643 273,051 280,172
Securities available for sale.............. 219,840 219,840 210,347 219,553
Loans...................................... 977,932 955,990 929,069 955,865
Less: allowance for loan losses............ (15,097) - (13,683) -
Total financial assets................... $ 1,574,240 $ 1,555,921 $ 1,544,854 $ 1,601,660
FINANCIAL LIABILITIES:
Deposits................................... $ 1,441,191 $ 1,436,578 $ 1,419,977 $ 1,423,741
Federal funds purchased and securities sold
under agreement to repurchase............. 20,543 20,543 14,271 14,271
Other short-term borrowings................ 14,879 14,879 13,613 13,613
Federal home loan bank advances............ 875 875 - -
Long-term debt............................. 3,194 3,194 - -
Total financial liabilities.............. $ 1,480,682 $ 1,476,069 $ 1,447,861 $ 1,451,625
UNRECOGNIZED FINANCIAL INSTRUMENTS:
Commitments to extend credit............... $ 216,566,627 $ 216,566,627 $ 159,160,425 $ 159,160,425
Standby letters of credit
and financial guarantees written.......... 8,879,138 8,879,138 10,142,491 10,142,491
NOTE 20 - DERIVATIVE FINANCIAL INSTRUMENTS
In October, 1994, Statement of Financial Accounting Standards No. 119,
"Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments" was issued. The statement is effective for financial statements
issued for fiscal years ending after December 15, 1994. It requires various
disclosures for derivative financial instruments which are futures, forward,
swap, or option contract, or other financial instruments with similar
characteristics. With the exception of loan commitments as discussed in Note 19
the Corporation does not have any derivative financial instruments as defined
under this statement.
47
NOTE 21 - CAPITALIZATION
In October 1992, the Corporation sold 1,110,500 shares of its Common Stock
in a public offering. Net proceeds from the sale were $13,029,728 after
deducting underwriting commissions of $799,560 and direct offering costs of
$329,587. Of the net proceeds, $2,221,000 was credited to Common Stock and
$10,808,728 was credited to Capital Surplus.
NOTE 22 - PROPOSED MERGERS
Bank of The Potomac, Inc. (Potomac) and the Corporation have entered into a
Definitive Agreement and Plan of Reorganization, dated as of November 18, 1994,
and a related Plan of Share Exchange (collectively, the Affiliation Agreement).
The transaction is subject to the approval of regulatory authorities and
shareholders of Potomac. The proposed merger will entitle the shareholders of
Potomac to receive, in a tax-free exchange, shares of F&M common stock whose
aggregate market value as of the closing date equals 1.75 times the book value
of Potomac common stock determined as of the month end immediately preceding the
closing date of the Affiliation. As of December 31, 1994, Potomac's total assets
were $57,732,008, total loans were $31,356,439, total deposits were $49,846,575
and total shareholders' equity was $7,553,788.
Farland Investment Management, Inc. (Farland) and the Corporation have
entered into a Plan of Merger, dated as of January 11, 1995. The transaction is
subject to the approval of regulatory authorities. The proposed merger will
entitle the shareholders of Farland to receive approximately 12,000 shares of
F&M common stock.
48
NOTE 23 - CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
F&M NATIONAL CORPORATION
(PARENT CORPORATION ONLY)
BALANCE SHEETS
December 31, 1994 and 1993
DECEMBER 31,
1994 1993
ASSETS
Cash on deposit with subsidiary banks...................... $ 62,427 $ 81,337
Investment in subsidiaries, at cost, plus equity in
undistributed net income................................. 150,805,192 145,791,869
Securities available for sale.............................. 6,128,599 5,741,484
Other short-term investments............................... 15,036,000 15,067,000
Bank premises and equipment, net........................... 3,988,661 4,382,791
Intangible, goodwill, at amortized cost.................... 757,246 840,987
Other assets............................................... 3,209,946 534,703
Total assets......................................... $ 179,988,071 $ 172,440,171
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Short-term borrowings...................................... $ 14,671,000 $ 13,183,000
Dividends payable.......................................... 2,351,822 1,876,127
Other liabilities.......................................... 1,530,066 114,723
Total liabilities.................................... $ 18,552,888 $ 15,173,850
SHAREHOLDERS' EQUITY
Preferred stock............................................ $ - $ -
Common stock............................................... 31,220,816 30,512,224
Capital surplus............................................ 52,137,440 47,277,476
Retained earnings, which are substantially undistributed
earnings of subsidiaries................................. 84,766,389 79,476,621
Unrealized (loss) on securities available for sale......... (6,689,462) -
Total shareholders' equity........................... $ 161,435,183 $ 157,266,321
Total liabilities and shareholders'
equity............................................. $ 179,988,071 $ 172,440,171
49
F&M NATIONAL CORPORATION
(PARENT CORPORATION ONLY)
STATEMENTS OF INCOME
For Each of the Three Years in the Period Ended December 31, 1994
DECEMBER 31,
1994 1993 1992
REVENUE
Dividends from subsidiaries........................... $ 8,658,100 $ 6,842,800 $ 5,669,049
Interest from subsidiaries and affiliated companies... - - 21,714
Interest on other short-term investments.............. 644,529 392,493 192,826
Interest on securities available for sale............. 317,948 303,810 60,752
Management fees from subsidiaries..................... 1,166,400 759,500 634,800
Rental income from subsidiaries....................... 426,300 426,100 477,700
Other revenue......................................... 16,050 9,713 5,752
Total revenue................................... $ 11,229,327 $ 8,734,416 $ 7,062,593
EXPENSES
Salaries and employee benefits........................ $ 990,377 $ 528,536 $ 323,802
Directors` fees....................................... 204,050 228,867 187,600
Taxes (other than income)............................. 42,577 45,245 58,253
Bank building rental expense.......................... - 36,454 156,130
Interest.............................................. 346,421 306,157 364,951
Amortization of goodwill.............................. 59,877 65,843 59,877
Depreciation.......................................... 96,780 97,083 165,952
Merger expenses....................................... 461,195 288,568 69,010
Other expenses........................................ 715,747 257,331 530,147
Total expenses.................................. $ 2,917,024 $ 1,854,084 $ 1,915,722
Income before income taxes and equity
in undistributed net income of
subsidiaries................................ $ 8,312,303 $ 6,880,332 $ 5,146,871
INCOME TAX EXPENSE (CREDIT)............................ 84,854 147,963 (139,993)
Income before equity in undistributed
net income of subsidiaries.................... $ 8,227,449 $ 6,732,369 $ 5,286,864
EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARIES..... 12,005,782 11,537,435 10,738,655
Net income...................................... $ 20,233,231 $ 18,269,804 $ 16,025,519
50
F&M NATIONAL CORPORATION
(PARENT CORPORATION ONLY)
STATEMENTS OF CASH FLOWS
For Each of the Three Years in the Period Ended December 31, 1994
DECEMBER 31,
1994 1993 1992
CASH FLOWS FROM OPERATING ACTIVITIES
Net income................................................. $ 20,233,231 $ 18,269,804 $ 16,025,519
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation............................................. 96,780 97,083 165,952
Amortization............................................. 59,877 65,843 59,877
Deferred income taxes (credits).......................... (182,986) 30,665 6,852
Discount accretion....................................... (3,183) (2,870) -
Undistributed net income of subsidiaries................. (12,005,782) (11,537,435) (10,738,655)
(Increase) decrease in goodwill.......................... 23,864 (357,962) -
(Increase) decrease in other assets...................... (2,364,144) 27,984 (161,200)
Increase in other liabilities............................ 1,626,463 106,679 32,236
Net cash provided by operating
activities....................................... $ 7,484,120 $ 6,699,791 $ 5,390,581
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in notes receivable from subsidiaries and
affiliated companies...................................... $ - $ - $ 1,128,255
(Increase) decrease in investment in subsidiaries.......... 525,390 116,142 (67,907)
Purchase of securities available for sale.................. (734,438) (15,000) (4,975,715)
(Increase) decrease in other short-term investments........ 31,000 (2,391,000) (7,879,000)
Proceeds from sale of equipment............................ 387,000 - -
Purchase of bank premises and equipment.................... (89,650) (95,272) (1,450,664)
Net cash provided by (used in) investing
activities....................................... $ 119,302 $ (2,385,130) $ (13,245,031)
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term borrowings............... $ 1,488,000 $ 1,263,000 $ (470,000)
Net proceeds from issuance and sale of common stock........ 2,171,645 1,443,159 13,872,485
Acquisition of common stock................................ (2,815,487) - -
Cash dividends paid........................................ (8,408,729) (6,940,289) (5,547,463)
Cash paid for fractional shares............................ (57,761) - -
Net cash (used in) financing
activities....................................... $ (7,622,332) $ (4,234,130) $ 7,855,022
Increase (decrease) in cash and cash
equivalents...................................... $ (18,910) $ 80,531 $ 572
CASH AND CASH EQUIVALENTS
Beginning.................................................. 81,337 806 234
Ending..................................................... $ 62,427 $ 81,337 $ 806
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash payments for interest................................. $ 346,421 $ 306,157 $ 364,950
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES
Issuance of stock options under nonvariable compensatory
plan..................................................... $ 211,120 $ 86,200 $ 56,250
Issuance of common stock - exercise of employee stock
options paid by surrender of common stock................. $ - $ - $ 4,661
Acquisition of additional investment in subsidiary by
transfer of bank premises to the subsidiary............... $ - $ - $ 2,323,171
Retirement of stock options under nonvariable
compensatory plan........................................ $ - $ 8,000 $ -
Common stock issued in exchange for net assets in bank
acquisition............................................... $ - $ 7,095,620 $ -
Issuance of common stock to acquire investment............. $ - $ 337,909 $ -
Common stock issued for 2 1/2% stock dividend.............. $ 6,001,278 $ - $ -
Unrealized (loss) on securities available for sale......... $ 350,506 $ - $ -
51
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, 1994 and 1993, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the years ended December 31, 1994, 1993 and 1992. 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, 1994 and 1993, and the results
of its operations and its cash flows for the years ended December 31, 1994, 1993
and 1992, in conformity with generally accepted accounting principles.
As discussed in Note 1, the Corporation changed its method of accounting for
investments in debt and equity securities to adopt the provisions of Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" in 1994.
(Signature of Yount, Hyde & Barbour, P.C.)
Winchester, Virginia
January 31, 1995 YOUNT, HYDE & BARBOUR, P.C.
52