SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K405
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-5929
F&M NATIONAL CORPORATION
(Exact Name of Registrant as specified in its charter)
VIRGINIA 54-0857462
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
38 ROUSS AVENUE, WINCHESTER, VIRGINIA 22601
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(540) 665-4200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common Stock, $2.00 par value
(Title of Class)
New York Stock Exchange
(Name of each exchange on which registered)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ X ]
State the aggregate market value of the voting stock held by the non-affiliates
of the Registrant. The aggregate market value is computed by reference to the
closing price of such stock as reported by the New York Stock Exchange on
February 29, 1996: $293,057,330.00
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT FEBRUARY 29, 1996:
16,517,797
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended December 31, 1995 are incorporated by reference in Parts I, II, and
IV hereof; and
(2) Portions of Registrant's 1996 Proxy Statement dated March 21, 1996, are
incorporated by reference in Part III hereof.
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Since January 1, 1995, there have been no developments in the
Registrant's (hereinafter called "F&M" or the "Company") business other than the
following:
On January 19, 1995, F&M Bank-Broadway was merged into F&M
Bank-Massanutten.
On March 17, 1995, F&M acquired Farland Investment Management, Inc.
("Farland") through the exchange of 11,980 shares of F&M common stock.
On April 6, 1995, Bank of The Potomac ("Potomac"), Herndon, Virginia
with assets of $54.3 million, became a wholly-owned subsidiary of F&M with a
tax-free exchange of 872,187 shares of F&M common stock for all of the
outstanding shares of Potomac. The share exchange of Potomac has been accounted
for as a pooling of interests and, therefore, all financial statements have been
restated to reflect the share exchange.
On April 11, 1995, F&M Bank-Winchester acquired from the County of
Frederick property located at 9 Court Square, Winchester, Virginia consisting of
land and buildings in exchange for 2 parking lots of equal value.
On April 21, 1995, F&M Bank-Winchester opened a full service branch
bank at 1855 Senseny Road, Winchester, Virginia.
On June 17, 1995, F&M Bank-Peoples opened a full service branch bank
at 760 Warrenton Road, Fredericksburg, Virginia.
On June 20, 1995, F&M Bank-Winchester opened a branch bank at 300
Westminister Canterbury Drive, Winchester, Virginia.
On October 20, 1995, F&M Bank-Martinsburg closed its branch bank
located at 131 South Queen Street, Martinsburg, West Virginia, and converted it
to an operations center.
On November 22, 1995, FB&T Financial Corporation (FB&T) and F&M
announced that they entered into a Definitive Agreement and Plan of
Reorganization, and related Plan of Share Exchange (collectively, the Merger
Agreement). The transaction is subject to the approval of regulatory authorities
and shareholders of FB&T. The proposed merger
will entitle the shareholders of FB&T to receive, in a tax-free exchange, shares
of F&M common stock with an aggregate market value equal to $35.00, with cash
being paid in lieu of issuing fractional shares. The market value of F&M common
stock will be its average closing price as reported on the New York Stock
Exchange for each of the ten trading days immediately preceding the closing
date. As of December 31, 1995, FB&T's total assets were $243.1 million, total
loans were $149.1 million, total deposits were $191.5 million and total
shareholders' equity was $16.9 million. The merger will become effective during
the first quarter 1996.
On December 12, 1995, F&M Bank-Massanutten opened a full service
branch bank at the corner of Route 42 and American Legion Drive, Timberville,
Virginia.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
F&M and its subsidiaries are engaged in only one industry segment,
banking, the making of commercial and personal loans and similar credit
transactions, and other activities closely related to banking.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS
THE COMPANY
GENERAL
F&M National Corporation is a multi-bank holding company
headquartered in Winchester, Virginia. At December 31, 1995, F&M's eleven
Subsidiary Banks operate 77 banking offices offering a full range of banking
services principally to individuals and small and middle-market business in
north, central and south Virginia including the Shenandoah Valley, and the
eastern panhandle of West Virginia. At December 31, 1995, F&M had assets of $1.8
billion, deposits of $1.6 billion and shareholders' equity of $193.5 million.
F&M was formed in 1969 to serve as the parent holding company of its
then sole subsidiary bank, F&M Bank-Winchester, organized in 1902. Since its
organization, F&M has acquired fourteen banks, which expanded its market area
and increased market share in Virginia and West Virginia.
The following Table sets forth certain information concerning F&M and
its operating subsidiaries as of December 31, 1995:
DATE BANKING TOTAL TOTAL TOTAL
ACQ. OFFICES ASSETS LOANS DEPOSITS
F&M Bank-Winchester
Winchester, VA(1) 1970 31 $ 779,228 $ 437,167 $ 698,033
F&M Bank-Massanutten
Harrisonburg, VA(2) 1980 8 160,934 94,567 139,383
F&M Bank-Richmond
Richmond, VA(3) 1982 9 153,157 96,112 140,138
F&M Bank-Central
Virginia(4)
Charlottesville VA 1985 7 74,268 34,742 63,487
F&M Bank-Blakeley
Charles Town/Ranson, WV 1988 3 96,864 73,680 80,965
F&M Bank-Martinsburg
Martinsburg, WV 1988 3 93,797 64,416 84,094
F&M Bank-Keyser
Keyser, WV 1992 3 89,501 56,361 77,081
F&M Bank-Emporia
Emporia, VA 1993 3 63,676 29,836 55,726
F&M Bank-Hallmark
Springfield, VA 1994 5 126,873 69,941 105,174
F&M Bank-Peoples
Warrenton, VA 1994 4 96,804 63,739 85,533
F&M Bank-Potomac 1995 1 61,919 33,268 53,863
F&M (Parent only) - - 36,799 - -
Total 77 $1,833,820 $1,053,829 $1,583,477
(1) Includes Big Apple Mortgage and a general credit reporting agency. Also
includes the 1993 purchase of substantially all of the assets and
assumption of certain liabilities of Farmers and Merchants Bank of
Hamilton(the "Hamilton Bank").
(2) Includes the acquisition in 1989 of The First National Bank of Broadway,
Broadway, Virginia.
(2) Includes the acquisition in 1986 of Virginia Capital Bank, Richmond,
Virginia.
(3) Includes the acquisition in 1990 of Peoples Bank of Central Virginia,
Lovingston, Virginia.
The business strategy of F&M is to provide its customers with the
financial sophistication and breadth of products of a regional bank, while
retaining the local appeal and level of service of a community bank. F&M has
maintained its community orientation by allowing the Subsidiary Banks latitude
to tailor products and services to meet community and customer needs. While F&M
has preserved the autonomy of its subsidiary Banks, it has established
system-wide policies governing, amount other things, lending practices, credit
analysis and approval procedures, as well as guidelines for deposit pricing and
investment portfolio management. In addition, F&M has established a centralized
loan review team that regularly performs a detailed, on-site review and analysis
of each Subsidiary Bank's loan portfolio to ensure the consistent application
of credit policies and procedures system-wide. An officer or representative of
F&M serves on the board of directors of each Subsidiary Bank to monitor
operations and to serve as a liaison to the Company.
The Subsidiary Banks are community-oriented and offer services
customarily provided by full-service banks, including individual and commercial
demand and time deposit accounts, commercial and consumer loans, residential
mortgages, credit card services and safe deposit boxes. Lending is focused on
individuals and small and middle-market businesses in the local market regions
of the Subsidiary Banks. In addition, F&M Bank-Winchester, F&M Bank-Keyser, F&M
Bank-Hallmark, and F&M Bank-Peoples operate trust departments offering a range
of fiduciary services. At December 31, 1995, trust assets under management at
these four banks totaled $308.5 million.
F&M operates in six market regions: the Shenandoah Valley of
Virginia; the eastern panhandle of West Virginia; Charlottesville/ Albemarle
County and surrounding areas; Greenville County in southside Virginia; suburban
Richmond, primarily Henrico and Chesterfield Counties; the northern Virginia
areas of Loudoun, Fairfax, and Prince William Counties and Stafford County,
Warrenton and surrounding Fauquier County area. The more populous sectors within
each of the six market regions experienced substantial population growth between
1980 and 1990, most of which exceeded 20% growth. At December 31, 1995, F&M
operated 39 banking offices in the Shenandoah Valley from Winchester to
Harrisonburg with deposits of $534.2 million; nine banking offices in the
eastern panhandle of West Virginia with deposits of $242.1 million; seven
banking offices in the Charlottesville/Albemarle County area with deposits of
$63.5 million; three banking offices in Emporia, Virginia, and surrounding
Greenville County with deposits of $55.7 million; nine banking offices in
suburban Richmond, Virginia, with deposits of $140.1 million; and six banking
offices in Loudoun, Fairfax and Prince William Counties of northern Virginia
with deposits of $164.7 million; and four offices in the city of Warrenton and
Fauquier and Stafford Counties with deposits of $85.5 million. F&M's principal
market is Winchester and the surrounding six Virginia counties where its lead
bank, F&M Bank-Winchester, is the dominant financial institution in terms of
deposit market share, with a 45% share of total deposits in Winchester, a 25%
share of total deposits in surrounding Frederick County, a 27% share of total
deposits in Warren County, and a 18% share of total deposits in Loudoun County.
In Rockingham County, which has the largest population of any county or city in
the Shenandoah Valley, F&M has a 19% deposit market share. In F&M's three-county
West Virginia market, F&M has a 22% deposit market share in Jefferson County
(which includes Charles Town), a 22% deposit market share in Berkeley County
(which includes Martinsburg) and a 49% deposit market share in Mineral County
(which includes Keyser). In Fairfax, Prince William, and Fauquier Counties
(including Warrenton), F&M has 1%, 1%, and 17% of deposit market share. Although
F&M's deposit market share in the Richmond and Charlottesville areas is small,
F&M has positioned its banking offices in these two markets to increase deposit
market share as a result of continued business and population growth in the
suburban markets surrounding Richmond and Charlottesville.
F&M has expanded its market area and increased its market share
through both internal growth and strategic acquisitions. Since the beginning of
1988, F&M has acquired approximately $817.6 million in assets and approximately
$725.1 million in deposits through ten bank acquisitions. Management believes
there are additional opportunities to acquire financial institutions or to
acquire assets and deposits that will allow F&M to enter adjacent markets or
increase market share in existing markets. Management intends to pursue
acquisition opportunities in strategic markets where its managerial, operational
and capital resources will enhance the performance of acquired institutions.
The Subsidiary Banks have not experienced loan quality deterioration
to the same extent as many other financial institutions, due to conservative
underwriting standards and focused in-market lending practices. The purchase of
assets of the Hamilton Bank increased nonperforming assets at September 18,
1993, by $27.9 million, of which, $21.3 million were nonaccrual loans and $6.6
million were foreclosed properties. At December 31, 1995, these Hamilton Bank
nonaccrual loans and foreclosed properties have been reduced to $3.4 million and
$4.6 million, respectively. At December 31, 1995, F&M had total nonperforming
assets of approximately $23.9 million, representing 2.24% of period end loans
and foreclosed properties. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Asset Quality."
F&M also operates Big Apple Mortgage Co. Inc., which offers both
fixed and adjustable rate residential mortgage loans and servicing . Big Apple
Mortgage (also trading as F&M Mortgage Company) sells into the secondary market
all the permanent mortgage loans it originates. Big Apple Mortgage purchases
government insured 1-4 family FHA and VA loans which it may warehouse and sell
when the market rates are attractive. At December 31, 1995, Big Apple Mortgage
had $7.8 million in loans that it had committed to purchase, but had not settled
upon and, in addition, $16.0 million residential loans were warehoused,
available for sale.
F&M's Articles of Incorporation and the Virginia Stock Corporation
Act contain certain anti-takeover provisions, including (i) the Affiliated
Transactions statue which places restrictions on any significant transaction
between a publicly held Virginia corporation and any shareholder who owns more
than 10% of any class of its outstanding shares, (ii) the Control Share
Acquisitions statue which provides that a shareholder who purchases shares in
any one of three statutory ranges (20%-33 1/3%, 33 1/3%-50%, and 50% or more of
the outstanding shares) cannot vote those shares on any matter unless the
acquisition of the additional shares has been approved by disinterested
shareholders, and (iii) a super-majority provision in the Company's Articles of
Incorporation that requires the affirmative vote of at least 80% of the
outstanding voting shares on significant transactions, unless at least
two-thirds of the Board of Directors then in office have approved the
transaction.
MARKET REGIONS
The market regions of F&M extend from the eastern panhandle of West
Virginia southward to Virginia in Winchester, the surrounding Shenandoah Valley
through Harrisonburg and Rockingham County and eastward to Loudoun, Fauquier,
Stafford and Prince William counties, to the central Virginia markets of
Charlottesville and Richmond, and southern Virginia market in Emporia and
Greenville County. The following Table displays the market and population data
for each of the market regions:
%
GROWTH
BANKING % MARKET MARKET 1990 FROM
COUNTY/CITY(1) OFFICES SHARE(2) RANK(2) POPULATION 1980-90
Shenandoah Valley:
City of Winchester 10 45 1 21,947 9
Frederick County 5 25 1 45,723 34
Warren County 4 27 1 26,142 23
Shenandoah County 3 11 5 31,636 15
Clarke County 1 21 2 12,101 21
Rappahannock County 1 46 2 6,622 9
Rockingham County 4 19 3 57,482 10
City of Harrisonburg 4 9 5 30,707 25
Northern Virginia:
City/Alexandria 1 * NM 111,182
Loudoun County 7 18 1 86,100 50
Fairfax County 4 1 NM 819,000
Fauquier County 3 17 2 52,000
Prince William Co. 1 1 NM 216,000
Stafford Co. 1 * NM 61,000
Charlottesville/
Albemarle County:
City/Charlottesville 1 * NM 40,341 1
Albemarle County 3 6 7 68,040 22
Nelson County 2 35 2 12,778 5
Amherst County 1 2 6 28,578 (2)
Richmond:
City of Richmond 3 1 NM 203,056 (8)
Henrico County 3 2 NM 217,881 21
Chesterfield County 3 2 NM 209,274 48
Emporia:
City of Emporia 3 38 1 14,109 (10)
Eastern Panhandle
of West Virginia:
Jefferson County 3 22 2 35,926 19
Berkeley County 3 16 4 59,253 27
Mineral County 3 49 1 26,697 (2)
State of Virginia 68 6,187,358 16
State of West Va. 9 1,793,477 (8)
* Represents less than 1% deposit market share
NM = Not Meaningful.
(1) In Virginia, certain cities are separate political entities and
not part of the counties that surround them. The city of
Winchester and Frederick County, the city of Harrisonburg and Rockingham
County, the city of Charlottesville and Albemarle County, the city of
Richmond and Henrico and Chesterfield Counties, and the city of
Alexandria and Fairfax County are examples. The FDIC and OTS provide
deposit data for each separately incorporated city.
(2) Deposit data includes total bank and thrift deposits and is based on
FDIC and OTS data as of June 30, 1995, which is the most recently
available information.
LENDING ACTIVITIES
All of the Subsidiary Banks offer both commercial and consumer loans,
but lending activity is generally focused on consumers and small to middle
market businesses within the Subsidiary Banks' respective market regions. Six of
the Subsidiary Banks, F&M BankMassanutten, F&M Bank Blakeley, F&M
Bank-Martinsburg, F&M BankKeyser, F&M Bank-Emporia, and F&M Bank-Peoples
emphasize consumer lending with activities focused primarily on residential real
estate and consumer lending. F&M Bank-Richmond, F&M Bank-Central Virginia, F&M
Bank-Potomac and F&M Bank-Hallmark are based in larger markets where commercial
loan demand is stronger and, as a result, their lending activities place a
greater emphasis on small to medium sized 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.
The following table sets forth the composition of F&M's loan
portfolio (by percentage) for the three years ended December 31, 1995:
1995 1994 1993
Commercial 12.8% 13.6% 11.2%
Real estate construction 3.9 3.3 4.2
Real estate mortgage:
Residential (1-4 family) 33.0 32.9 34.9
Home equity lines 5.2 5.5 4.8
Multifamily 1.9 1.9 1.8
Nonfarm, nonresidential(1) 28.4 26.8 26.5
Agricultural 1.6 1.7 1.7
Real estate mortgage
Subtotal 70.1 68.8 69.7
Loans to individuals:
Consumer 11.3 12.7 13.5
Credit card 1.9 1.6 1.4
Loans to individuals:
Subtotal 13.2 14.3 14.9
Total loans 100.0% 100.0% 100.0%
Total loans (dollars) $1,053,829 $1,009,223 $959,052
(1) This category generally consists of commercial and industrial loans
where real estate constitutes a source of collateral.
Approximately 12.8% of F&M's loan portfolio at December 31, 1995, was
comprised of commercial loans, which included loans secured by real estate shown
in the Table above under the categories of multifamily, non-farm,
non-residential and agricultural where real estate is among the sources of
collateral securing the loan. The Subsidiary Banks offer a variety of commercial
loans within their market regions, including revolving lines of credit, working
capital loans, equipment financing loans, and letters of credit. Although the
Subsidiary Banks typically look to the borrower's cash flow as the principal
source of repayment for such loans, many of the loans within this category are
secured by assets, such as accounts receivable, inventory and equipment. In
addition, a number of commercial loans are secured by real estate used by such
businesses and are generally personally guaranteed by the principals of the
business. F&M's commercial loans generally bear a floating rate of interest tied
to a system-wide prime rate set by F&M Bank-Winchester.
F&M's residential real estate loan portfolio (including home equity
lines) was 70.1% of its total loan portfolio at December 31, 1995. The
residential mortgage loans made by the Subsidiary Banks and Big Apple Mortgage
are made only for single family, owner-occupied residences within their
respective market regions. The residential mortgage loans offered by the
Subsidiary Banks are either adjustable rate loans or fixed rate loans with 20 to
30 year amortization schedules that mature with a balloon payment on the third
or fifth year anniversary of the loan.
Big Apple Mortgage offers both fixed and adjustable rate loans, while
the Subsidiary Banks generally hold residential mortgage loans in their loan
portfolios, Big Apple Mortgage (also trading as F&M Mortgage Company) sells into
the secondary market all the permanent mortgage loans it originates. Big Apple
Mortgage purchases government insured 1-4 family FHA and VA loans which it may
warehouse and sell when the market rates are attractive. At December 31, 1995,
Big Apple Mortgage had $7.8 million in loans that it had committed to purchase,
but had not settled upon and $16.0 million residential loans were warehoused,
available for sale.
F&M's real estate construction portfolio historically has been a
relatively small portion of the total loan portfolio. At December 31, 1995,
construction loans were $40.7 million or 3.9% of the total loan portfolio. Of
this amount, $22.0 million was originated by Big Apple Mortgage, all made to
finance owner-occupied properties with permanent financing commitments in place.
The Subsidiary Banks make a limited number of loans for acquisition, development
and construction of residential real estate. F&M's construction loans, including
its acquisition and development loans, generally bear a floating rate of
interest and mature in one year or less. Loan underwriting standards for such
loans generally limit the loan amount to 75% of the finished appraised value of
the project. As a result of strict underwriting guidelines, F&M has experienced
no charge-offs involving residential construction loans since 1987.
Loans to individuals were 18.4% of F&M's total loan portfolio at
December 31, 1995, if home equity lines were included. The
Subsidiary Banks offer a wide variety of consumer loans, which include consumer
loans, credit card loans, home equity lines and other secured and unsecured
credit facilities. The performance of the consumer loan portfolio is directly
tied to and dependent upon the general economic conditions in the Subsidiary
Banks' respective market regions.
CREDIT POLICIES AND PROCEDURES
F&M has established system-wide guidelines governing, among other
things, lending practices, credit analysis and approval procedures, and credit
quality review. Within these guidelines, the Subsidiary Banks have latitude to
tailor their loan products to meet the needs of the communities and specific
customers. A holding company officer or representative serves on the Board of
Directors of each Subsidiary Bank to monitor practices and to serve as the
liaison with F&M.
LOAN APPROVAL. F&M's loan approval policies provide for various levels of
officer lending authority. When the aggregate outstanding loans to a single
borrower exceed an individual officer's lending authority, the loan request must
be approved by an officer with a higher lending limit or by the Subsidiary
Bank's loan review committee. F&M has assigned a lending limit for each
Subsidiary Bank. Loans that would result in a Subsidiary Bank exceeding its
assigned limit must be approved first by the Subsidiary Bank's loan review
committee and then by a central credit committee appointed by the holding
company. The central credit committee consists of six senior officers of F&M
Bank-Winchester and the Company, along with outside directors of either F&M
Bank-Winchester or the Company, who rotate at the twice weekly meetings.
All loans to a particular borrower are reviewed each time the
borrower requests a renewal or extension of any loan or requests an additional
loan. All lines of credit are reviewed annually prior to renewal. These reviews
are conducted by each Subsidiary Bank and, if necessary, by F&M's central credit
committee.
LOAN REVIEW. Each Subsidiary Bank has a formal loan review function which
consists of a committee of bank officers that regularly reviews loans and
assigns a classification, if required, based on current perceived credit risk.
In addition, the holding company has a loan review team that performs a detailed
on-site review and analysis of each Subsidiary Bank's portfolio on at least an
annual basis to ensure the consistent application of system-wide policies and
procedures. The holding company loan review team reviews all loans over an
established principal amount for each Subsidiary Bank, which results in a review
of 60% to 75% of the total principal amount of the Subsidiary Bank's loan
portfolio. In addition, all lending relationships involving a classified loan
are reviewed regardless of size. The holding company loan review team has the
authority to classify any loan it determines is not satisfactory or to change
the classification of a loan within F&M's loan grading system.
All classified loans are reviewed at least quarterly by F&M's senior
officers and monthly by the Subsidiary Bank's boards of directors. All past due
and nonaccrual loans are reviewed monthly by the Subsidiary Banks' boards of
directors. As a matter of policy, the Subsidiary Banks place loans on nonaccrual
status when management determines that the borrower can no longer service debt
from current cash flows and/or collateral liquidation. This generally occurs
when a loan becomes 90 days past due as to principal and interest.
ALLOWANCE FOR LOAN LOSSES. Each Subsidiary Bank maintains its allowance for loan
losses based on loss experience for each loan category over a period of years
and adjusts the allowance for existing economic conditions as well as
performance trends within specific areas, such as real estate. In addition, each
Subsidiary Bank periodically reviews significant individual credits and adjusts
the allowance when deemed necessary. The allowance also is increased to support
projected loan growth.
IMPAIRED LOANS
On January 1, 1995, F&M adopted FASB No. 114, "Accounting by
Creditors for Impairment of a Loan." This statement has been amended by FASB
Statement No. 118, "Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures." Statement 114, as amended, applies to all loans
that are identified for evaluation, uncollateralized as well as collateralized,
except for large groups of smaller-balance homogeneous loans that are
collectively evaluated for impairment. Homogeneous loans include residential
mortgage, credit card and consumer installment loans. A loan is considered
impaired when, based on current information and events, it is probable that F&M
will be unable to collect all amounts due according to the contractual terms of
the loan agreement. A delay of more than 90 days or a shortfall in amount of
payments of more than 10% normally would require impairment recognition.
However, a loan is not impaired during a period of delay in payment if F&M
expects to collect all amounts due including interest accrued at the contractual
interest rate for the period of delay.
The impairment of loans that have been separately identified for
evaluation is to be measured based on the present value of expected future cash
flows or, alternatively, the observable market price of the loans or the fair
value of the collateral. However, for those loans that are collateral dependent
(that is, if repayment of those loans is expected to be provided solely by the
underlying collateral) and for which management has determined foreclosure is
probable, the measure of impairment of those loans is to be based on the fair
value for the collateral. Measurement of impairment for loans not meeting the
above criteria would be under the aggregate collection experience method. Under
this method, loans with similar risk characteristics are aggregated and
historical data is used to determine the loan loss for the group. F&M measures
the impairment of loans on a loan-by-loan basis.
Loans are placed on nonaccrual when a loan is specifically determined
to be impaired or when principal or interest is delinquent
for 90 days or more. Any unpaid interest previously accrued on those loans is
reversed from income. Interest income generally is not recognized on specific
impaired loans unless the likelihood of further loss is remote. Cash payments
received on such loans are applied as a reduction of the loan principal balance.
Interest income on other nonaccrual loans is recognized only to the extent of
interest payments received. Changes in the allowance relating to impaired loans
are charged or credited to the provision for loan losses.
An impaired loan is charged-off when management determines that the
prospect of recovery of the principal of the loan has significantly diminished.
The implementation of FASB 114 does not have a material impact on the
credit risk of F&M. Information about impaired loans as of and for the period
ended follows:
Impaired loans for which an allowance
has been provided $ 7,676,449
Impaired loans for which no allowance
has been provided 3,029,014
Total impaired loans $ 10,705,463
Allowance provided for impaired loans,
included in the allowance for
loan losses $ 1,400,961
Average balance in impaired loans $ 10,828,971
Interest income recognized $ 209,087
Impaired loans by measurement method:
Fair value of collateral method $ 9,076,463
Expected cash flow method 1,629,000
Aggregate collection experience method --
Total impaired loans $ 10,705,463
DEPOSITS
The Subsidiary Banks offer a number of programs to consumers and to
small and middle market businesses at interest rates consistent with local
market conditions. The following Table sets forth the mix of depository accounts
offered by the Subsidiary Banks as a percentage of total deposits at the dates
indicated:
December 31, 1995 1994 1993
Noninterest-bearing demand 14.9% 15.5% 14.2%
Interest checking 15.8 17.1 16.7
Savings accounts 11.7 14.1 14.6
Money market accounts 9.2 12.0 13.1
Time deposit accounts:
Under $100,000 39.9 35.2 35.2
$100,000 and over 8.5 6.1 6.2
100.0% 100.0% 100.0%
The Subsidiary Banks control deposit flows primarily through pricing
of deposits and, to a lesser extent, through promotional activities. The
Subsidiary Banks establish deposit rates based on a variety of factors,
including competitive conditions, liquidity needs and compliance with net
interest margin requirements established by F&M for all Subsidiary Banks. As of
December 31, 1995, the Subsidiary Banks had $135.1 million of certificates of
deposit greater than $100,000, or 8.5% of total deposits. The Subsidiary Banks
do not accept brokered deposits.
No material portion of the deposits of the Subsidiary Banks has been
obtained from a single or a small group of customers, and the loss of any
customer's deposits or a small group of customers' deposits would not have a
material adverse effect on the business of any of the Subsidiary Banks. See
"Business-Market Regions" for information regarding each Subsidiary Bank's
deposit share and rank in its respective market.
LIQUIDITY AND SENSITIVITY TO INTEREST RATES
The primary functions of asset/liability management are to ensure
adequate liquidity and maintain an appropriate balance between
interest sensitive assets and interest-sensitive liabilities. Liquidity
management involves the ability to meet the cash flow requirements of F&M's loan
and deposit customers. Interest rate sensitivity management seeks to avoid
fluctuating net interest margins and to enhance consistent growth of net
interest income through periods of changing interest rates. F&M does not hedge
its position with swaps, options or futures but instead maintains a highly
liquid and short-term position in all of its earning assets and interest-bearing
liabilities.
In order to meet its liquidity needs, F&M schedules the maturity of
its investment securities according to its needs. The weighted-average life of
the securities portfolio at the end of 1995 was 4 years 8 months which is
indicative of F&M's investment philosophy of investing in U.S. Government
securities with maturities between five and ten years. F&M views its securities
portfolio primarily as a source of liquidity and safety, however, it may if the
market is favorable, make changes in the available for sale portfolio to take
advantage of changes in the yield curve. F&M views the total available for sale
securities portfolio as a source of liquidity, whereas, liquidity in the held to
maturity portfolio is limited to calls and maturities. The maturity ranges of
the securities and the average taxable-equivalent yields as of December 31,
1995, are shown in the following Table.
U.S. Government State and Other
and its Agencies Municipals Book
Book Yield Book Yield Value Yield
One year or
less $100,907 6.28% $ 4,605 8.55% $ 7,552 3.46%
After one year
through
five years 289,895 6.13% 12,044 7.95% 3,321 6.71%
After five
years through
ten years 91,880 6.75% 10,096 8.10% 2,013 7.25%
After ten
years 38,880 7.11% 2,621 8.71% 5,455 7.41%
Total $521,562 6.34% $29,366 8.03% $18,341 5.64%
A cash reserve, consisting primarily of overnight investments such as
Federal Funds, is also maintained to meet any contingencies and to provide
additional capital, if needed.
Most of F&M's loans are fixed-rate installment loans to consumers and
mortgage loans whose maturities are generally longer than the deposits by which
they are funded. A degree of interest-rate risk is incurred if the interest rate
on deposits should rise before the loans mature. However, the substantial
liquidity provided by the monthly repayments on these loans can be reinvested at
higher rates that largely reduce the interest-rate risk. Home equity lines of
credit have adjustable rates that are tied to the prime rate. Many of the loans
not in the installment or mortgage categories have maturities of less than one
year or have floating rates that may be adjusted periodically to reflect current
market rates. These loans are summarized in the following Table:
REMAINING MATURITIES OF SELECTED LOANS
December 31, 1995
(Dollars in thousands) Commercial,
Financial and Real estate-
Agricultural Construction
Within 1 year $ 91,412 $38,527
Variable Rate:
1 to 5 years 1,678 202
After 5 years 190 --
Total 1,868 202
Fixed Rate:
1 to 5 years 33,340 1,994
After 5 years 8,588 --
Total 41,928 1,994
Total Maturities $135,208 $40,723
F&M's asset/liability committee is responsible for reviewing the
Corporation's liquidity requirements and maximizing the Corporation's net
interest income consistent with capital requirements, liquidity, interest rate
and economic outlooks, competitive factors and customer needs. Liquidity
requirements are also reviewed in detail for each of F&M's individual banks,
however, overall asset/liability management is performed on a consolidated basis
to achieve a consistent and coordinated approach.
One of the tools F&M uses to determine its interest-rate risk is gap
analysis. Gap analysis attempts to examine the volume of interest-rate sensitive
assets minus interest-rate sensitive liabilities. The difference between the two
is the interest sensitivity gap, which indicates how future changes in interest
rates may affect net interest income. Regardless of whether interest rates are
expected to increase or fall, the object is to maintain a gap position that will
minimize any changes in net interest income. A negative gap exists when F&M has
more interest-sensitive liabilities maturing within a certain time period than
interest-sensitive assets. Under this scenario, if interest rates were to
increase, it would tend to reduce net interest income. At December 31, 1995, F&M
had a positive one year balance sheet gap of $98.0 million and a risk to
interest margin (gap as a percentage of rate sensitive assets) of 5.85%.
F&M attempts to control interest-rate risk according to its projected
needs utilizing maturity and repricing reports. F&M also compares the Olson
Model, a dynamic modeling process that projects the impact of different interest
rate, loan and deposit growth scenarios over a 12-month period to its projected
needs. A large part of F&M's loans and deposits comes from its retail base and
does not automatically reprice on a contractual basis in reaction to changes in
interest-rate levels. Accordingly, F&M has not experienced the earnings
volatility indicated by its interest-sensitive gap position. F&M's net interest
margin for 1993, 1994 and 1995 were 4.67%, 4.74% and 4.75%. Whether interest
rates were high or low, F&M has been able to maintain adequate liquidity to
provide for changes in interest rates and in loan and deposit demands.
OTHER ACTIVITIES
The Subsidiary Banks offer a range of trust services. The Trust
Department of F&M Bank-Winchester manages $188.9 million in assets in
approximately 1,050 accounts, covering both personal trust activities and
employee benefit plans. F&M Bank-Hallmark and F&M Bank-Peoples offer similar
trust services and manage assets totaling $28.6 million and $82.8 million,
respectively. F&M Bank-Keyser offers a range of trust services as well, managing
approximately $8.3 million in assets. The other Subsidiary Banks do not operate
trust departments, but are encouraged to offer their customers the opportunity
to utilize trust services offered by F&M Bank-Winchester.
COMPETITION
Each of the market regions in which the Company operates has a highly
competitive banking market involving commercial banks and thrifts. Other
competitors, including credit unions, consumer finance companies, insurance
companies and money market mutual funds, compete with the Company for certain
lending and deposit gathering services. In its Charlottesville/Albemarle County,
the northern Virginia, and suburban Richmond markets, the Company faces
particularly intense competition from several state-wide and regional banking
institutions which have substantial operations in those market regions.
Management believes, however, that the Company enjoys certain competitive
advantages in its principal market of Winchester, the surrounding northern
Shenandoah Valley and Loudoun County where F&M Bank-Winchester is the largest
financial institution headquartered in the area and the dominant bank in terms
of deposit market share.
Competition among the various financial institutions is based on
interest rates offered on deposit accounts, interest rates charged on loans,
credit and service charges, the quality of services, the convenience of banking
facilities and, in connection with loans to larger borrowers, relative lending
limits. Many of the financial organizations in competition with the Company have
much greater financial resources, diversified markets, and branch networks than
F&M and are able to offer similar services at varying costs with higher lending
limits. With reciprocal interstate banking, the Company also faces the prospect
of additional competitors entering its markets as well as additional competition
in its efforts to acquire other financial institutions.
EXECUTIVE OFFICERS OF THE REGISTRANT
All officers of the Company and its subsidiaries are elected annually
to serve at the pleasure of the Board of Directors of the Company. The following
table sets forth the names, offices and ages at February 29, 1995, of each of
the executive officers of the Company and is included in conformity with
Instruction 3 of Item 401(b) of Regulation S-K:
FIRST
NAME AGE ELECTED OFFICE
W. M. Feltner 76 1970 Chairman and Chief Executive
Officer of the Company;
Chairman of Board, F&M
Bank-Winchester
Jack R. Huyett 63 1992 President-Chief Administrative
Officer of the Company
F. Dixon Whitworth Jr. 51 1985 Executive Vice President of
the Company
Alfred B. Whitt 57 1991 Senior Vice President,
Secretary, Senior Financial
Officer of the Company and F&M
Bank-Winchester
Betty H. Carroll 58 1985 Senior Vice President of the
Company; President, Chief
Executive Officer, F&M
Bank-Winchester
Barbara H. Ward 50 1983 Treasurer of the Company;
Senior Vice President of F&M
Bank-Winchester
Mr. Feltner has been a senior executive officer of the Company since
its inception in 1970.
Mr. Huyett joined the Company in November of 1988 at which time he
was President and Chief Executive Officer of Blakeley Bank and Trust Company
(now F&M Bank-Blakeley), a position he had held for 19 years. He was appointed
President and Chief Administrative Officer of the Company July 1, 1992.
F. Dixon Whitworth, Jr. Winchester, Virginia, joined the Company in
August 1985, as President of the Suburban Bank, now F&M Bank-Richmond, and
served as such until November, 1985, when he became Executive Vice President of
the Company. Prior to joining the Company as President of The Suburban Bank in
1984, he had been employed as Executive Vice President of Southern Bank (now
Jefferson National Bank), Richmond, Virginia for eleven years.
Mr. Whitt joined the Company in 1987 as Director of Human Resources,
before which time he served as President of F&M Bank-Massanutten, Harrisonburg,
Virginia, since its organization in 1973. In January of 1990, he was appointed
Senior Financial Officer of the Company and Senior Financial Officer of F&M
Bank-Winchester. In July of 1991, he was appointed Senior Vice President, Senior
Financial Officer and Secretary of the Company and F&M Bank-Winchester.
On December 7, 1988, Mrs. Carroll was named Chief Executive Officer
of F&M Bank-Winchester. Prior thereto, she had been President and Chief
Administrative Officer of F&M Bank-Winchester since 1985, and had been Executive
Vice President of that bank for eleven years before becoming President and Chief
Administrative Officer.
Mrs. Ward was appointed Senior Vice President of F&M Bank-Winchester
in March of 1992. Prior thereto, she was a Vice President of F&M
Bank-Winchester since 1974. She has been Treasurer of the Company since 1983.
SUPERVISION AND REGULATION
The Company and the Subsidiary Banks are subject to state and federal
banking laws and regulations which impose specific requirements or restrictions
on and provide for general regulatory oversight with respect to virtually all
aspects of operations. The following is a brief summary of certain statues,
rules and regulations affecting the Company and the Subsidiary Banks. This
summary is qualified in its entirety by reference to the particular statutory
and regulatory provisions referred to below and is not intended to be an
exhaustive description of the statutes or regulations applicable to the business
of the Company and the Subsidiary Banks. A change in applicable laws or
regulations may have a material effect on the business and prospects of the
Company.
THE COMPANY
The Company is registered as a bank holding company under the Bank
Holding Company Act ("BHCA") and the Virginia Financial Institution Holding
Company Act, and is therefore subject to regulation and examination by the Board
of Governors of the Federal Reserve System (the "Federal Reserve") and the
Virginia State Corporation Commission (the "Virginia SCC"). The Subsidiary Banks
are subject to examination and regulation by the Virginia SCC and the West
Virginia Board of Banking and Financial Institutions (the "West Virginia Board
of Banking"). In addition, the Company and its Subsidiary Banks are subject to
certain minimum capital standards established by the Federal Reserve and the
FDIC.
Under the BHCA, the Company is required to secure the prior approval
of the Federal Reserve before it can merge or consolidate with any other bank
holding company, or acquire all or substantially all of the assets of any bank
or acquire direct or indirect ownership or control of any voting shares of any
bank that is not already majority owned by it if after such acquisition the
Company would directly or indirectly own or control more than 5% of the voting
shares of such bank. The BHCA also prohibits the Company from acquiring,
directly or indirectly voting shares of, or interests in, or all or
substantially all of the assets of, any bank located outside the State of
Virginia unless the acquisition is specifically authorized by the laws of the
state in which such bank is located, as discussed below.
The Company is prohibited under the BHCA, and regulations promulgated
thereunder, from engaging in, and from acquiring direct or indirect ownership or
control of more than 5% of voting shares of any company engaged in, nonbanking
activities unless the Federal Reserve, by order or regulation, has found such
activities to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. The Federal Reserve has by regulation
determined that certain activities are closely related to banking within the
meaning of the BHCA. These activities include, among others, operating a
mortgage, finance, credit card or factoring company; performing certain data
processing operations; providing investment and financial advice; acting as an
insurance agent for
certain types of credit-related insurance; leasing personal property on a
full-payout, non-operating basis; and providing certain stock brokerage and
investment advisory services.
The Company, as an affiliate of the Subsidiary Banks within the
meaning of the Federal Reserve Act, is subject to certain restrictions under the
Federal Reserve Act regarding transactions between a bank and companies with
which it is affiliated. These provisions limit extensions of credit (including
guarantees of loans) by the Subsidiary Banks to affiliates, investments in the
stock or other securities of the Company by the Subsidiary Banks and the nature
and amount of collateral that Subsidiary Banks may accept from any affiliate to
secure loans extended to the affiliate. Further, under the Federal Reserve Act
and the regulations promulgated thereunder, a bank holding company and its
subsidiaries are prohibited from engaging in certain tie-in arrangements in
connection with any extension of credit or provision of any property or service.
The BHCA and the Change in Bank Control Act, together with
regulations of the Federal Reserve, require that, depending on the particular
circumstances, either Federal Reserve approval must be obtained or notice must
be furnished to the Federal Reserve and not disapproved prior to any person or
company acquiring "control" of a bank holding company, such as the Company,
subject to exemptions for certain transactions. Control is conclusively presumed
to exist if an individual or company acquires 25% or more of any class of voting
securities of the bank holding company. Control is rebuttably presumed to exist
if a person acquires 10% or more but less than 25% of any class of voting
securities and either the company has registered securities under Section 12 of
the Securities Exchange Act of 1934, as amended, or no other person will own a
greater percentage of that class of voting securities immediately after the
transaction. The regulations provide a procedure for challenge of the rebuttable
control presumption.
Federal Reserve policy requires a bank holding company to act as a
source of financial strength to each of its bank subsidiaries and to take
certain measures to preserve and protect bank subsidiaries in situations where
additional investments in a troubled bank subsidiary may not otherwise be
warranted. Under the recently enacted Federal Deposit Insurance Corporation
Improvement Act of 1991 ("FDICIA"), in order to avoid receivership of an insured
depository institution subsidiary, a bank holding company is required to
guarantee up to certain maximum limits the compliance with the terms of any
capital restoration plan filed by such subsidiary with its appropriate federal
banking regulator. See "Recent Legislation and Regulatory Developments." In
addition, if a bank holding company has more than one bank or thrift subsidiary,
the bank holding company's other subsidiary depository institutions are
responsible under a cross guarantee for any losses to the FDIC resulting from
the failure of a depository institution subsidiary. Under these provisions, a
bank holding company may be required to loan money to its depository institution
subsidiaries in the form of capital notes or other instruments. However, any
such loans likely would be unsecured and subordinated to such institution's
depositors and certain other creditors.
All acquisitions, whether by an in-state or out-of-state acquirer,
involving a Virginia bank or bank holding company require the prior approval of
the Virginia SCC, in addition to approval by the appropriate federal regulatory
authority. Similarly, the West Virginia Board of Banking must approve all
acquisitions of a West Virginia bank or bank holding company.
The BHCA currently prohibits the Federal Reserve from approving an
application from a bank holding company to acquire shares of a bank located
outside the state in which the operations of the holding company's banking
subsidiaries are principally conducted, unless such an acquisition is
specifically authorized by statute of the state in which the bank whose shares
are to be acquired is located. However, under recently enacted federal
legislation, the restriction of interstate acquisitions will be abolished
effective one year from enactment of such legislation, and thereafter bank
holding companies from any state will be able to acquire banks and bank holding
companies located in any other state, subject to certain conditions, including
nationwide and state concentration limits. Banks also will be able to branch
across state lines effective June 1, 1997 (unless state law would permit such
intestate branching at an earlier date), provided certain condition are met,
including that applicable state law must expressly permit such interstate
branching. Virginia has adopted legislation that will permit branching across
state lines effective July 1, 1995, provided there is reciprocity with the state
in which the out-of-state bank is based.
REGULATION OF SUBSIDIARY BANKS
All of the Subsidiary Banks are state-chartered institutions
organized under either Virginia or West Virginia law. Eight of the Subsidiary
Banks, F&M Bank-Winchester, F&M Bank-Massanutten, F&M Bank-Richmond, F&M
Bank-Central Virginia, F&M Bank-Emporia, F&M BankHallmark, F&M Bank-Peoples, and
F&M Bank-Potomac are Virginiachartered institutions regulated and examined by
the Virginia SCC. F&M Bank-Blakeley, F&M Bank-Martinsburg and F&M Bank-Keyser
are West Virginia-chartered institutions regulated and examined by the West
Virginia Board of Banking.
The Subsidiary Banks are all members of the Federal Reserve System
and are, therefore, supervised and examined by the Federal Reserve, their
primary federal regulator. The Federal Reserve and the Virginia SCC or West
Virginia Board of Banking, as appropriate, conduct regular examinations of the
Subsidiary Banks, reviewing the adequacy of their allowance for loan losses,
quality of loans and investments, propriety of management practices, compliance
with laws and regulations and other aspects of operations. In addition to these
regular examinations, the Subsidiary Banks must furnish the Federal Reserve with
quarterly reports containing detailed financial statements and schedules. The
FDIC, which provides deposit insurance, also has authority to examine and
regulate the Subsidiary Banks.
Federal and state banking laws and regulations govern all areas
of the operations of the Subsidiary Banks, including maintenance of cash
reserves, loans, mortgages maintenance of minimum capital, payment of dividends,
and establishment of branch offices. Federal and state bank regulatory agencies
also have the general authority to eliminate dividends paid by insured banks if
such payment is deemed to constitute an unsafe and unsound practice. As their
primary federal regulator, the Federal Reserve has authority to impose
penalties, initiate civil administrative actions and take other steps to prevent
the Subsidiary Banks from engaging in unsafe or unsound practices. In this
regard, the Federal Reserve has adopted capital adequacy requirements applicable
to its member banks.
RECENT LEGISLATION AND REGULATORY DEVELOPMENTS
On December 19, 1991, FDICIA was enacted. Among other things, FDICIA
provides increased funding for the FDIC's Bank Insurance Fund ("BIF") and
expanded regulation of depository institutions and their affiliates, including
parent holding companies. A significant portion of the additional BIF funding
will be in the form of borrowings to be repaid by insurance premiums assessed on
BIF members. These premium increases would be in addition to the increases in
deposit premiums made during 1994. FDICIA provides for an increase in BIF's
ratio of reserves to insured deposits to 1.25% within the next 15 years, also to
be financed by insurance premiums. The result of these provisions could be a
significant increase in the insurance assessment rate on deposits of BIF members
over the next 15 years. FDICIA provides authority for special assessments
against insured deposits and for the development of a system of assessing
deposit insurance premiums based upon the financial institution's risk. FDIC
announced in early 1995 that current projections indicate the BIF's ratio of
reserves could reach the 1.25% requirement by the second quarter of 1996.
On September 15, 1992, the FDIC approved final regulations adopting
the risk-related deposit insurance system that was proposed in May 1992. The new
risk-related regulations, effective January 1, 1994, will initially result in an
eight basis point spread between the highest and lowest deposit insurance
premiums. The strongest institutions will continue to pay annual deposit
insurance premiums of 0.23% and the weakest will pay 0.31%. Under the final
riskrelated insurance regulations, each insured depository institution will be
assigned to one of three categories, "well capitalized," "adequately
capitalized" or "less than adequately capitalized" as defined in regulations to
be established pursuant to FDICIA by the Federal Reserve and the other federal
bank regulatory agencies. These categories will be further subdivided into three
subgroups based upon the FDIC's evaluations of the risk posed by the depository
institution, based in part on examinations by the institution's primary federal
and/or state regulator. F&M's banks have received a "1A" risk classification
rating for 1995, the highest possible rating and are paying the minimum premium
of $2,000 per bank per year.
Among other things, FDICIA requires the federal banking agencies to
take "prompt corrective action" in respect of banks that do not meet minimum
capital requirements. FDICIA establishes five
capital tiers: "well capitalized," "adequately capitalized", "under
capitalized", "significantly undercapitalized", and "critically
undercapitalized", to be further defined by federal regulations. A depository
institution is "well capitalized" if it significantly exceeds the minimum level
required by regulation for each relevant capital measure, "adequately
capitalized" if it meets each such measure, "undercapitalized" if it fails to
meet any such measure, "significantly undercapitalized" if it is significantly
below any such measure, and "critically undercapitalized" if it fails to meet
any critical capital level set forth in the regulations. The critical capital
level must be a level of tangible equity capital equal to not less than 2.0% of
total assets and not more than 65% of the minimum leverage ratio to be
prescribed by regulation (except to the extent that 2.0% would be higher than
such 65% level). An institution may be deemed to be in a capitalization category
that is lower than is indicated by its actual capital position if it receives an
unsatisfactory examination rating. In order to be classified as a "well
capitalized institution" under the proposed rules, the institution must have a
total risk-based capital ratio of 10% and a leverage ratio of 5%.
If a depository institution fails to meet regulatory capital
requirements, regulatory agencies can require submission and funding of a
capital restoration plan by the institution, place limits on its activities,
require the raising of additional capital, and, ultimately, require the
appointment of a conservator or receiver for the institution. The obligation of
a controlling bank holding company under FDICIA to fund a capital restoration
plan is limited to the lesser of 5% of an undercapitalized subsidiary's assets
or the amount required to achieve regulatory capital adequacy requirements. If
the controlling bank holding company fails to fulfill its obligations under
FDICIA and files (or has filed against it) a petition under the Federal
bankruptcy code, the FDIC's claim may be entitled to a priority in such
bankruptcy proceeding over third party creditors of the bank holding company.
Any institution that is not well capitalized is generally prohibited
from accepting brokered deposits and offering interest rates on deposits higher
than the prevailing rate in its market; in addition, "pass through" insurance
coverage may not be available for certain employee benefit accounts.
Under-capitalized depository institutions may be subject to growth limitations
and are required to submit a capital restoration plan. The federal bank
regulatory agencies may not accept a capital plan without determining, among
other things, that the plan is based on realistic assumptions, is likely to
succeed in restoring the depository institutions's capital, and is guaranteed by
the parent holding company. If a depository institution fails to submit an
acceptable plan, it will be treated as if it were significantly
undercapitalized.
Significantly undercapitalized depository institutions may be subject
to a number of requirements and restrictions, including orders to sell
sufficient voting stock to become adequately capitalized, requirements to reduce
total assets, and cessation of receipt of deposits from correspondent banks.
Critically
undercapitalized institutions are subject to appointment of a receiver or
conservator.
FDICIA contains numerous other provisions, including new reporting
requirements, termination of the "to big to fail" doctrine except in special
cases, limitations on the FDIC's payment of deposits at foreign branches, and
revised regulatory standards for, among other things, real estate lending and
capital adequacy.
An insured depository institution may not pay management fees to any
person having control of the institution nor may an institution, except under
certain circumstances and with prior regulatory approval, make any capital
distribution if, after making such payment or distribution, the institution
would be undercapitalized. FDICIA also contains a number of consumer banking
provisions, including disclosure requirements and substantive contractual
limitations with respect to deposit accounts.
Other legislative and regulatory proposals regarding changes in
banking, and the regulation of bank thrifts and other financial institutions,
are being considered by the executive branch of the Federal government, Congress
and various state governments, including Virginia and West Virginia. Certain of
these proposals, if adopted, could significantly change the regulation of banks
and the financial services industry. It cannot be predicted whether any of these
proposals will be adopted or, if adopted, how these proposals will affect the
Company.
CAPITAL ADEQUACY
Information on "Capital Adequacy" may be found under ITEM 7.
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS", "Capital Resources".
DIVIDENDS
Dividends from the Subsidiary Banks constitute the major source of
funds for dividends to be paid by the Company. The amount of dividends payable
by the Subsidiary Banks to the Company depends upon their earnings and capital
position, and is limited by federal and state law, regulations and policy. The
Federal Reserve has the general authority to limit dividends paid by the
Subsidiary Banks and the Company if such payments are deemed to constitute an
unsafe and unsound practice.
As state member banks subject to the regulations of the Federal
Reserve, each Subsidiary Bank must obtain approval of the Federal Reserve for
any dividend if the total of all dividends declared by the Subsidiary Bank in
any calendar year would exceed the total of its net profits for such year, as
defined by the Federal Reserve, plus its retained net profits for the preceding
two years. In addition, each Subsidiary Bank may not pay a dividend in an amount
greater than its undivided profits then on hand after deducting current losses
and bad debts. For this purpose, bad debts are
generally defined to include the principal amount of all loans which are in
arrears with respect to interest by six months or more, unless such loans are
fully secured and in the process of collection.
In addition, Virginia law imposes restrictions on the ability of all
banks chartered under Virginia law to pay dividends. Under Virginia law, no
dividend may be declared or paid that would impair a bank's paid-in capital. The
Virginia SCC also can limit the payment of dividends by any Virginia bank if it
determines the limitation is in the public interest and is necessary to ensure
the bank's financial soundness.
Under West Virginia law, a state bank may declare a dividend only
from its undivided profits and, if the bank's surplus account is not greater
than or equal to the par value of the bank's stock, the bank may not declare a
dividend unless a portion of the bank's profits for the period for which
dividends are declared is credited to the bank's surplus account. Also, a West
Virginia-chartered bank must obtain the approval of the West Virginia Board of
Banking prior to declaring a dividend if the total of all dividends paid by the
bank in any calendar year exceeds the total of its profits for that year plus
its undivided profits for the preceding two years. For further information about
the Company's dividends, see Part II., Item 5., "Market for Registrant's Common
Equity and Related Stockholder Matters".
EMPLOYEES
At December 31, 1995, F&M had 865 full time and 169 part time
employees. No employees are represented by any collective bargaining unit. F&M
considers relations with its employees to be good.
ITEM 2. PROPERTIES
The principal executive offices of F&M are located in the Yost
Building at 38 Rouss Avenue, Winchester, Virginia, a two-story building built in
1784 and owned free of any encumbrances. The Company operates a total of 77
banking offices (68 in Virginia and 9 in West Virginia), 55 of which are owned
by the Company or one of the Subsidiary Banks free of any encumbrances, and 22
of which are leased under agreements expiring at various dates, including
renewal options, through 2008. The Company also owns additional office
facilities for various of its lending, audit, accounting and data processing
functions. Additional information regarding F&M's lease agreements may be found
under ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, Note 14.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its operations, the Company and the
Subsidiary Banks are parties to various legal proceedings. Based on information
presently available, and after consultation with legal counsel, management
believes that the ultimate outcome in such proceedings, in the aggregate, will
not have a material adverse effect on the business or the financial condition or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company has not submitted any matters to its security holders
since its Annual Meeting of Shareholders held April 25, 1995.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
On December 28, 1994, the Company began trading its capital stock on
the New York Stock Exchange under the symbol "F M N". Prior to December 28,
1994, the Company's common stock was traded in the over-the-counter market and
quoted on the NASDAQ National Market System under the symbol "FMNT".
The following table sets forth the per share high and low last sale
prices for the common stock of the Company as reported on the New York Stock
Exchange and/or the NASDAQ National Market System, and the cash dividends paid
or declared per share on the Common Stock for the period indicated:
PRICE RANGE CASH
HIGH LOW DIVIDENDS
1993
First Quarter 17.25 15.38 0.140
Second Quarter 16.50 13.75 0.140
Third Quarter 16.75 14.25 0.140
Fourth Quarter 16.50 14.75 0.145
1994
First Quarter 16.50 15.57 0.145
Second Quarter 16.25 15.50 0.145
Third Quarter 17.37 16.00 0.145
Fourth Quarter 17.25 14.75 0.150
1995
First Quarter 17.12 15.75 0.150
Second Quarter 17.37 15.50 0.150
Third Quarter 18.12 15.62 0.150
Fourth Quarter 20.00 17.25 0.160
At December 31, 1995, there were 16,552,324 shares of Common Stock
outstanding held by 7,821 holders of record.
The Company historically has paid cash dividends on a quarterly
basis, together with a special cash dividend in the fourth quarter of each year
depending upon the Company's performance that year. The Company in 1992
implemented a practice of eliminating the special cash dividend and instead
increasing its regular fourth quarter dividend based on the Company's
performance, with the intention of paying an equivalent amount for the first
three quarters of each following year. The final determination of the timing,
amount and payment of dividends on the Common Stock is at the discretion of the
Board of Directors and will depend upon the earnings of the Company and its
subsidiaries, principally the Subsidiary Banks, the financial condition of the
Company and other factors, including general economic conditions and applicable
governmental regulations and policies.
The Company or F&M Bank-Winchester has paid regular cash dividends
for more than 50 consecutive years.
The Company is a legal entity separate and distinct from its
subsidiaries, and its revenues depend primarily on the payment of dividends from
the Subsidiary Banks. The Subsidiary Banks are subject to certain legal
restrictions on the amount of dividends they are permitted to pay to the
Company. At December 31, 1995, the Subsidiary Banks had available for
distribution as dividends to the Company approximately $35.4 million.
ITEM 6. SELECTED FINANCIAL INFORMATION
Incorporated herein by reference, as Exhibit 13, to page 1 of
the 1995 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Incorporated herein by reference, as Exhibit 13, to pages 12
through 29 of the 1995 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference, as Exhibit 13, to pages 30
through 50 of the 1994 Annual Report.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES.
NONE.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3), the information called for by Part III,
Items 10. through 13., is incorporated herein by reference from the Company's
definitive proxy statement, dated March 21, 1996, for the Company's Annual
Meeting of Shareholders to be held April 23, 1996, which definitive proxy
statement was filed with the Commission pursuant to Rule 14a-6 on March 20,
1996. The information regarding executive officers called for by Item 401 of
Regulation S-K is included in Part I under "EXECUTIVE OFFICERS OF THE
REGISTRANT".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) The following documents included in Part II of this report are
incorporated by reference to the Company's 1995 Annual Report:
(1) Financial Statements Page
Report of Independent Certified Public Accountants 50
F&M National Corporation and Subsidiaries:
Consolidated Balance Sheets at December 31, 1995
and 1994 30
Consolidated Statements of Income at December 31, 1995
and 1994 31
Consolidated Statements of Changes in Shareholders'
Equity for years ended December 31, 1995,
1994 and 1993 32
Consolidated Statements in Cash Flows for the periods
ended December 31, 1995, 1994 and 1993 33
Notes to Financial Statements 34
(2) Financial Statement Schedules
All schedules are omitted because of the absence of conditions
under which they are required or because the required information
is given in the financial statements or notes thereto.
(3) Exhibits.
(i) Registrant's Articles of Incorporation, as amended and
adopted effective April 25, 1995, (filed herewith).
(ii) Registrant's Bylaws, as amended and adopted effective
December 13, 1995 (filed herewith).
(10) Material Contracts.
(i) Form of agreement between seventeen officers of the
Registrant under the Registrant's Defined Benefit
Deferred Compensation and Salary Continuation Plan
(incorporated herein by reference to Exhibit 10(b) to
Registration Statement #33-10696, filed on December 9,
1986).
(ii) Registrant's 1982 Incentive and Non-Qualified Stock
Option Plan, as amended (incorporated herein by
reference to Exhibit 10(a) to Registration Statement
#33-20165, filed on February 17, 1988).
(iii) Registrant's Officers' Incentive Bonus Plan
(incorporated herein by reference to Exhibit 28(i) to
Registration Statement #33-25867 filed on December 2,
1988).
(iv) Registrant's 1992 Incentive and Non-Qualified Stock
Option Plan (incorporated herein by reference to
Exhibit 10(b) to Registration Statement #33-50902,
filed on August 14, 1992).
(v) Incorporated herein by reference is the Agreement and
Plan of Reorganization and Plan of Merger dated
November 22, 1995, between the Registrant and FB&T
Financial Corporation, filed as Appendix I and Exhibit
A, respectively, of the Proxy Statement and Prospectus
which is part of Registration Statement No. 333-363 on
Form S-4, January 22, 1996.
(vi) The Registrant entered into Executive Severance
Agreements with the following Executive Officers
of the Registrant on December 1, 1995: Jack R.
Huyett, Betty H. Carroll, Alfred B. Whitt, and
F. Dixon Whitworth, Jr. (form of agreement filed
herewith).
(11) Statement re computation of per share earnings (filed herewith).
(13) Portions of the 1995 Annual Report to Shareholders for the fiscal
year ended December 31, 1995 (filed herewith).
(21) Subsidiaries of the Registrant (filed herewith).
(23) Consent of Yount, Hyde & Barbour, P. C., Certified Public
Accountants (filed herewith).
(27) Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K.
During 1995, the Company filed the following reports:
(i) January 11, 1995, under ITEM 5. to report the
Registrant's Board granting authority to its management
to purchase up to 250,000 shares of the Registrant's
common stock on the open market for general corporate
purposes.
(ii) February 21, 1995, under ITEM 5. to report
discontinuance and sale of the assets of four of the
Registrant's non-bank subsidiaries.
(iii) April 12, 1995, under ITEMS 2. and 7., to report the
consummation of the merger of Bank of the Potomac with
and into the Registrant.
(iv) November 24, 1995, under ITEM 5. to report approval of
a definitive agreement for the affiliation of FB&T
Financial Corporation with and into the Registrant.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the 20th day of
March, 1996:
F&M NATIONAL CORPORATION
Winchester, Virginia
/s/
W. M. Feltner, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities on the 20th day of March, 1996:
SIGNATURE TITLE
/s/ Chairman of the Board, Chief Executive
W. M. FELTNER Officer, Director
/s/ President, Chief Administrative Officer,
JACK R. HUYETT Director
/s/ Principal Accounting and Financial Officer,
ALFRED B. WHITT Secretary
/s/
FRANK ARMSTRONG, III Director
/s/
JAMES L. BOWMAN Director
/s/
BETTY H. CARROLL Director
/s/
WILLIAM H. CLEMENT Director
/s/
WILLIAM R. HARRIS Director
/s/
L. DAVID HORNER, III Director
/s/
WILLIAM A. JULIAS Director
/s/ Director
GEORGE L. ROMINE
/s/
JOHN S. SCULLY, III Director
/s/
J. D. SHOCKEY, JR. Director
/s/
FRED G. WAYLAND, JR. Director
C. RIDGELY WHITE Director
/s/
F. DIXON WHITWORTH, JR. Director