EXHIBIT 99.1
F&M NATIONAL CORPORATION
AND SUBSIDIARIES
RESTATED CONSOLIDATED FINANCIAL STATEMENTS
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, 1995 and 1994, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the years ended December 31, 1995, 1994 and 1993. 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, 1995 and 1994, and the
results of its operations and its cash flows for the years ended December 31,
1995, 1994 and 1993, 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.
/s/
Yount, Hyde & Barbour, P.C.
Winchester, Virginia
January 31, 1996, except for Notes 10 and 21, as to
which the date is April 22, 1996.
F & M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
ASSETS 1995 1994
--------------- ---------
Cash and due from banks (Notes 1, 14 and 18) $ 107 642 481 $ 94 508 283
Interest-bearing deposits in other banks 100 000 229 211
Securities (fair value 1995, $619,703,992;
1994, $549,602,609) (Notes 1 and 2) 611 066 525 562 379 020
Federal funds sold and securities purchased under
agreements to resell 80 900 674 42 035 000
Loans (Notes 1, 3, 5 and 18) 1 209 309 191 1 149 137 145
Unearned income (6 418 449) (5 926 326)
--------------- ----------------
Loans (net of unearned income) 1 202 890 742 1 143 210 819
Allowance for loan losses (Note 4) (17 211 125) (16 794 837)
--------------- ----------------
Net loans 1 185 679 617 1 126 415 982
Bank premises and equipment, net (Notes 1 and 6) 38 404 635 35 199 245
Other assets 53 095 496 53 397 694
--------------- ----------------
Total assets $ 2 076 889 428 $ 1 914 164 435
=============== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest bearing $ 292 199 487 $ 272 559 034
Interest bearing 1 482 791 135 1 388 464 354
--------------- ----------------
Total deposits (Note 7) 1 774 990 622 1 661 023 388
Federal funds purchased and securities
sold under agreements to repurchase 48 466 031 38 049 436
Federal Home Loan Bank advances 4 737 275 875 294
Other short-term borrowings (Notes 5 and 8) 18 792 294 16 578 857
Long-term debt (Note 9) 3 225 000 3 193 573
Other liabilities 16 262 100 9 586 452
Commitments and contingent liabilities (Notes 14,
17, and 19) - - - -
--------------- ----------------
Total liabilities $ 1 866 473 322 $ 1 729 307 000
--------------- ----------------
SHAREHOLDERS' EQUITY
Preferred stock, no par value, authorized 5,000,000
shares, no shares outstanding $ - - $ - -
Common stock, par value $2 per share, authorized
30,000,000 shares; issued 1995, 19,069,901 shares;
issued 1994, 18,819,079 shares 38 139 802 37 638 158
Capital surplus 63 087 468 61 408 042
Retained earnings 105 729 864 92 753 493
Unrealized gain (loss) on securities available
for sale, net 3 458 972 (6 942 258)
--------------- ----------------
Total shareholders' equity $ 210 416 106 $ 184 857 435
--------------- ----------------
Total liabilities and shareholders' equity $ 2 076 889 428 $ 1 914 164 435
=============== ================
</TABLE
See Notes to Consolidated Financial Statements.
F & M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
-------------- -------------- --------------
INTEREST INCOME
Interest and fees on loans $ 108 882 334 $ 95 423 443 $ 82 534 737
Interest and dividends on
investment securities:
Taxable interest income 18 228 055 14 476 892 15 822 829
Interest income exempt from
federal income taxes 1 876 600 2 230 281 3 128 504
Dividends - - - - 65 971
Interest and dividends on securities
available for sale:
Taxable interest income 14 656 997 16 417 741 12 630 661
Dividends 462 612 295 443 - -
Interest income on federal funds
sold and securities purchased
under agreements to resell 4 907 559 3 161 508 2 744 251
Interest on deposits in banks 26 006 37 744 105 215
-------------- -------------- --------------
Total interest income $ 149 040 163 $ 132 043 052 $ 117 032 168
-------------- -------------- --------------
INTEREST EXPENSE
Interest on deposits (Note 7) $ 60 989 197 $ 48 903 069 $ 45 442 406
Interest on short-term borrowings 1 947 581 1 608 936 932 102
Interest on long-term debt 242 631 90 634 - -
-------------- -------------- --------------
Total interest expense $ 63 179 409 $ 50 602 639 $ 46 374 508
-------------- -------------- --------------
Net interest income $ 85 860 754 $ 81 440 413 $ 70 657 660
Provision for loan losses (Notes 1
and 4) 2 148 366 2 599 380 3 205 113
-------------- -------------- --------------
Net interest income after
provision for loan losses $ 83 712 388 $ 78 841 033 $ 67 452 547
-------------- -------------- --------------
OTHER INCOME
Commissions and fees from fiduciary
activities $ 1 811 631 $ 1 642 010 $ 1 426 526
Service charges on deposit accounts 7 509 566 6 847 547 6 446 788
Credit card fees 3 193 424 2 611 519 1 844 084
Fees for other customer services 1 561 713 2 027 686 2 231 349
Other operating income 4 207 103 4 424 843 2 851 444
Profits on securities available for
sale (Note 2) 366 133 725 822 1 631 819
Investment securities gains, net
(Note 2) 236 19 895 163 987
-------------- -------------- --------------
Total other income $ 18 649 806 $ 18 299 322 $ 16 595 997
-------------- -------------- --------------
See Notes to Consolidated Financial Statements.
F & M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Continued)
Years Ended December 31, 1995, 1994 and 1993
1995 1994 1993
-------------- -------------- --------------
OTHER EXPENSES
Salaries and employees' benefits
(Notes 11, 12 and 13) $ 32 941 193 $ 31 596 380 $ 26 330 743
Net occupancy expense of premises
(Notes 6 and 14) 5 145 274 4 854 309 4 540 688
Furniture and equipment expenses
(Notes 6 and 14) 4 694 727 4 372 513 3 648 999
Deposit insurance 1 977 152 3 683 391 3 125 729
Credit card expense 1 971 396 1 950 447 1 276 756
Other operating expenses 18 221 882 16 475 225 14 618 368
-------------- -------------- --------------
Total other expenses $ 64 951 624 $ 62 932 265 $ 53 541 283
-------------- -------------- --------------
Income before income taxes $ 37 410 570 $ 34 208 090 $ 30 507 261
Income tax expense (Notes 1
and 15) 12 402 939 11 142 794 9 770 323
-------------- -------------- --------------
Net income $ 25 007 631 $ 23 065 296 $ 20 736 938
============== ============== ==============
EARNINGS PER SHARE (Note 1)
Per average share outstanding,
net income $ 1.32 $ 1.21 $ 1.14
============== ============== ==============
See Notes to Consolidated Financial Statements.
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, 1995
UNREALIZED GAIN
(LOSS) ON SECUR-
COMMON CAPITAL RETAINED ITIES AVAILABLE
STOCK SURPLUS EARNINGS FOR SALE, NET TOTAL
BALANCE, DECEMBER 31, 1992 $34 932 765 $ 46 432 356 $ 74 198 805 $ - - $155 563 926
Net income - 1993 - - - - 20 736 938 - - 20 736 938
Cash dividends declared
($0.58 per share) - - - - (9 596 305) - - (9 596 305)
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)
Issuance 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
Acquisition of common stock
(6,649 shares) (13 299) (26 692) (380) - - (40 371)
Sale of common stock
(437,341 shares) 874 682 2 295 894 - - - - 3 170 576
Change in unrealized gain (loss)
on securities available for sale,
net of deferred income taxes
of $6,572 - - - - - - (12 757) (12 757)
------------- ------------- ------------- ------------ ------------
BALANCE, DECEMBER 31, 1993 $ 36 912 908 $ 56 537 686 $ 85 339 058 $ (12 757) $178 776 895
Net income - 1994 - - - - 23 065 296 - - 23 065 296
Cash dividends declared
($0.54 per share) - - - - (9 591 822) - - (9 591 822)
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 (13,892 shares) 27 784 38 020 - - - - 65 804
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 -
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 gain (loss) on
securities available for sale,
net of deferred income taxes
of $3,734,036 - - - - - - (6 929 501) (6 929 501)
------------- ------------- ------------- ------------ ------------
Forwarded $ 37 638 158 $ 61 408 042 $ 92 753 493 $ (6 942 258) $184 857 435
See Notes to Consolidated Financial Statements.
F & M NATIONAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(Continued)
For Each of the Three Years in the Period Ended December 31, 1995
UNREALIZED GAIN
(LOSS) ON SECUR-
COMMON CAPITAL RETAINED ITIES AVAILABLE
STOCK SURPLUS EARNINGS FOR SALE, NET TOTAL
BALANCE, DECEMBER 31, 1994 $37 638 158 $ 61 408 042 $ 92 753 493 $ (6 942 258) $184 857 435
Net income - 1995 - - - - 25 007 631 - - 25 007 631
Cash dividends declared
($0.61 per share) - - - - (10 863 521) - - (10 863 521)
Issuance of common stock -
dividend reinvestment plan
(149,443 shares) 298 886 2 090 992 - - - - 2 389 878
Acquisition of common stock
(184,014 shares) (368 028) (2 708 127) (99 457) - - (3 175 612)
Issuance of common stock -
employee stock ownership plan
(37,393 shares) 74 786 525 219 - - - - 600 005
Issuance of common stock -
exercise of employee stock
options (84,586 shares) 169 172 147 655 - - - - 316 827
Issuance of stock options
under nonvariable compensatory
plan (26,000 shares) - - 206 440 - - - - 206 440
Issuance of common stock to acquire
investment (11,980 shares) 23 960 176 040 - - - - 200 000
Issuance of common stock for
employee stock discount plan
(35,357 shares) 70 714 405 079 - - - - 475 793
Issuance of common stock -
stock dividend -
FB&T Financial Corporation
(116,077 shares) 232 154 836 128 (1 068 282) - - - -
Change in unrealized gain (loss)
on securities available for sale,
net of deferred income taxes of
$5,701,397 - - - - - - 10 401 230 10 401 230
------------- ------------- ------------- ------------ ------------
BALANCE, DECEMBER 31, 1995 $38 139 802 $ 63 087 468 $ 105 729 864 $ 3 458 972 $210 416 106
============= ============= ============= ============ ============
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, 1995
DECEMBER 31,
1995 1994 1993
-------------- ------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 25 007 631 $ 23 065 296 $ 20 736 938
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 4 504 539 4 163 048 3 274 705
Provision for loan losses 2 148 366 2 599 380 3 205 113
Deferred income taxes (credits) (353 266) 1 197 276 (931 842)
Profits on securities available for sale (366 133) (725 822) (1 631 819)
Investment securities gains, net (236) (19 895) (163 987)
(Gain) loss on sale of other real estate (91 504) (111 159) 74 239
Net amortization and accretion of securities 360 196 766 681 694 379
(Increase) decrease in other assets (3 794 389) 480 421 583 650
Increase (decrease) in other liabilities 6 383 978 (4 446 564) 1 645 327
------------- ------------- -------------
Net cash provided by
operating activities $ 33 799 182 $ 26 968 662 $ 27 486 703
-------------- ------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Decrease in interest-bearing deposits in
other banks $ 129 211 $ 2 013 704 $ 268 954
Proceeds from sales and calls of securities
available for sale 31 353 677 50 287 711 29 504 330
Proceeds from maturities of securities
available for sale 37 168 930 33 902 250 16 742 000
Proceeds from principal repayments and
calls of investment securities 20 736 543 14 165 988 - -
Proceeds from maturities of investment
securities 74 545 000 68 747 000 89 089 218
Proceeds from sales and calls of investment
securities - - - - 46 001 638
Purchase of securities available for sale (96 131 240) (50 710 889) (88 713 536)
Purchase of investment securities (100 468 052) (143 118 796) (149 056 843)
(Increase) decrease in federal funds sold
and securities purchased under agree-
ments to resell (38 865 674) 37 441 000 15 263 000
Net (increase) in loans (69 545 233) (81 960 705) (86 728 632)
Purchases of bank premises and equipment (6 862 037) (5 364 021) (3 968 047)
Proceeds from sale of other real estate 6 748 177 3 824 378 4 099 383
Acquisition of intangible assets - - (3 175 798) - -
Cash acquired in acquisition - - - - 6 622 857
-------------- ------------- -------------
Net cash (used in)
investing activities $ (141 190 698) $ (73 948 178) $(120 875 678)
-------------- ------------- -------------
See Notes to Consolidated Financial Statements.
F & M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For Each of the Three Years in the Period Ended December 31, 1995
DECEMBER 31,
1995 1994 1993
-------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in noninterest-bearing
and interest-bearing demand deposits and
savings accounts $ (46 837 525) $ 35 282 469 $ 88 493 384
Net increase (decrease) in certificates of
deposit 160 804 759 27 633 929 (9 303 283)
Dividends paid (10 571 851) (9 116 127) (7 720 178)
Increase in federal funds purchased and
securities sold under agreements to
repurchase 10 416 595 6 827 322 17 405 048
Increase in other short-term borrowings 2 213 437 2 965 430 1 470 576
Net proceeds from issuance and sale of
common stock 3 782 503 2 198 695 4 613 735
Acquisition of common stock (3 175 612) (2 815 487) - -
Increase in Federal Home Loan bank
advances 3 861 981 875 294 - -
Proceeds from long-term debt 1 000 000 3 279 743 - -
Principal payments on long-term debt (968 573) (86 170) - -
Cash paid in lieu of fractional shares on
stock dividend - - (57 761) - -
-------------- ------------- -------------
Net cash provided by
financing activities $ 120 525 714 $ 66 987 337 $ 94 959 282
-------------- ------------- -------------
Increase in cash and
cash equivalents $ 13 134 198 $ 20 007 821 $ 1 570 307
CASH AND CASH EQUIVALENTS
Beginning 94 508 283 74 500 462 72 930 155
-------------- ------------- -------------
Ending $ 107 642 481 $ 94 508 283 $ 74 500 462
============== ============= =============
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash payments for:
Interest $ 61 224 631 $ 50 059 111 $ 45 819 855
============== ============= =============
Income taxes $ 10 615 038 $ 11 851 612 $ 10 201 354
============== ============= =============
See Notes to Consolidated Financial Statements.
F & M NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For Each of the Three Years in the Period Ended December 31, 1995
DECEMBER 31,
1995 1994 1993
-------------- ------------- ------------
SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIES
Issuance of stock options under non-
variable compensatory plan $ 206 440 $ 211 120 $ 86 200
============== ============= =============
Retirement of stock options under non-
variable 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 $ 200 000 $ - - $ 337 909
============== ============= =============
Loan balances transferred to foreclosed
properties $ 8 133 232 $ 6 384 360 $ 2 908 537
============== ============= =============
Common stock issued for stock dividend $ 1 068 282 $ 6 001 278 $ - -
============== ============= =============
Unrealized gain (loss) on securities
available for sale $ 16 102 627 $ (10 663 534) $ (19 329)
============== ============= =============
Acquisition of treasury stock in
satisfaction of loan receivable $ - - $ - - $ 40 373
============== ============= =============
See Notes to Consolidated Financial Statements.
F & M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
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
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
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, 1995 and 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.
On January 1, 1995, the Corporation 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,
requires that 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 of
the collateral. Statement 114, as amended, also requires certain
disclosures about investments in impaired loans and the
allowance for credit losses and interest income recognized on
loans.
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. Interest payments
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
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.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level which, in
management's judgment, is adequate to absorb credit losses
inherent in the loan portfolio. The amount of the allowance is
based on management's evaluation of the collectibility of the
loan portfolio, including the nature of the portfolio, credit
concentrations, trends in historical loss experience, specific
impaired loans, and economic conditions. Allowances for impaired
loans are generally determined based on collateral values or the
present value of estimated cash flows. The allowance is
increased by a provision for loan losses, which is charged to
expense and reduced by charge-offs, net of recoveries. Changes
in the allowance relating to impaired loans are charged or
credited to the provision for loan losses. Because of
uncertainties inherent in the estimation process, management's
estimate of credit losses inherent in the loan portfolio and the
related allowance may change in the near term.
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, operating loss carryforwards, and tax credit
carryforwards. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
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 FB&T Financial Corporation (FB&T)
and Bank of the Potomac in 1995, in acquisition of PNB Financial
Corporation and Hallmark Bank & Trust Company in 1994, the 2
1/2% stock dividend in 1994, and in acquisition of First
National Bankshares, Inc. in 1993.
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.
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
NOTE 2. SECURITIES
The amortized cost and fair values of securities being held to
maturity as of December 31, 1995 and 1994, are as follows:
DECEMBER 31, 1995
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 294 807 533 $ 8 224 015 $ (442 035) $ 302 589 513
Obligations of states and
political subdivisions 32 598 686 854 416 (92 075) 33 361 027
Corporate securities 985 200 86 155 - - 1 071 355
Mortgage-backed securities 3 158 310 6 991 - - 3 165 301
------------- ------------ ------------- -------------
$ 331 549 729 $ 9 171 577 $ (534 110) $ 340 187 196
============= ============ ============= =============
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 $ 285 409 369 $ 232 684 $ (12 435 059) $ 273 206 994
Obligations of states and
political subdivisions 39 616 717 584 956 (1 034 819) 39 166 854
Corporate securities 1 671 750 9 000 (51 427) 1 629 323
Mortgage-backed securities 2 049 795 - - (81 746) 1 968 049
------------- ------------ ------------- -------------
$ 328 747 631 $ 826 640 $ (13 603 051) $ 315 971 220
============= ============ ============= =============
The amortized cost and fair value of securities being held to maturity
as of December 31, 1995, 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
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 $ 86 328 494 $ 86 661 739
Due after one year through five years 160 040 883 162 457 927
Due after five years through ten years 57 896 216 60 553 164
Due after ten years 23 140 626 26 277 710
Corporate securities 985 200 1 071 355
Mortgage-backed securities 3 158 310 3 165 301
-------------- -------------
$ 331 549 729 $ 340 187 196
============== =============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
The amortized cost and fair value of securities available for sale as of
December 31, 1995 and 1994, are as follows:
DECEMBER 31, 1995
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS (LOSSES) VALUE
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 259 649 832 $ 5 533 316 $ (919 592) $ 264 263 556
Corporate securities 7 898 408 514 373 (1 804) 8 410 977
Mortgage-backed securities 736 222 39 976 (514) 775 684
Other 5 812 570 254 009 - - 6 066 579
------------- ------------ ------------- -------------
$ 274 097 032 $ 6 341 674 $ (921 910) $ 279 516 796
============= ============ ============= =============
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 $ 228 857 036 $ 369 534 $ (11 140 466) $ 218 086 104
Corporate securities 9 744 242 21 772 (90 500) 9 675 514
Mortgage-backed securities 887 955 - - (13 881) 874 074
Other 4 825 019 170 678 - - 4 995 697
------------- ------------ ------------- -------------
$ 244 314 252 $ 561 984 $ (11 244 847) $ 233 631 389
============= ============ ============= =============
The amortized cost and fair value of securities available for sale,
as of December 31, 1995 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 $ 31 896 031 $ 32 099 082
Due after one year through five years 167 246 448 170 024 611
Due after five years through ten years 45 690 285 46 856 013
Due after ten years 14 817 068 15 283 850
Corporate securities 7 898 408 8 410 977
Mortgage-backed securities 736 222 775 684
Other 5 812 570 6 066 579
-------------- -------------
$ 274 097 032 $ 279 516 796
============== =============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
Proceeds from principal repayments and calls of securities held to
maturity during 1995 and 1994 were $20,736,543 and $14,165,988. Gross
gains of $26,862 and $27,452 and gross losses of $26,626 and $7,557
were realized on those principal repayments and calls during 1995 and
1994, respectively. There were no sales of securities held to
maturity during 1995 and 1994.
Proceeds from sales and calls of securities available for sale during
1995 and 1994 were $31,353,677 and $50,287,711. Gross gains of
$371,182 and $962,159 and gross losses of $5,049 and $236,337 were
realized on those sales and calls during 1995 and 1994, respectively.
Proceeds from sales and calls of securities during 1993 were
$75,505,968. Gross gains of $1,823,422 and gross losses of $27,616
were realized on those sales.
As allowed by the Question and Answer Guide to FASB No. 115,
"Accounting for Certain Investments in Debt and Equity Securities"
issued in November of 1995, debt securities with an amortized cost of
$2,451,366 were transferred from held-to-maturity to
available-for-sale in December 1995. The securities had an unrealized
loss of approximately $93,153. There were no securities transferred
between classifications during 1994.
The book value of securities pledged to secure deposits and for other
purposes amounts to $135,044,400 and $90,697,271 at December 31, 1995
and 1994, respectively.
NOTE 3. LOANS
Major classifications of loans are as follows:
DECEMBER 31,
1995 1994
-------------- --------------
Commercial, financial and agricultural $ 161 798 521 $ 162 369 555
Real estate - construction 51 899 567 45 210 967
Real estate - mortgage 838 630 872 780 814 459
Consumer loans to individuals 156 980 231 160 742 164
-------------- --------------
$1 209 309 191 $1 149 137 145
============== ==============
NOTE 4. ALLOWANCE FOR LOAN LOSSES
Changes in the allowance for loan losses are as follows:
DECEMBER 31,
1995 1994 1993
-------------- -------------- ------------
Balance at beginning of year $ 16 794 837 $ 15 142 014 $ 12 218 040
Provision charged to operating expense 2 148 366 2 599 380 3 205 113
Recoveries added to the reserve 882 596 1 161 390 1 288 769
Increase from acquisition - - - - 1 443 169
Loan losses charged to the reserve (2 614 674) (2 107 947) (3 013 077)
------------ ------------ ------------
Balance at end of year $ 17 211 125 $ 16 794 837 $ 15 142 014
============ ============ ============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
Information about impaired loans as of and for the year ended
December 31, 1995 is as 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
============
Nonaccrual loans excluded from impaired loan disclosure under FASB
114 amounted to $3,171,152 and $19,461,480 at December 31, 1995 and
1994, respectively. If interest on these loans had been accrued, such
income would have approximated $396,493 and $1,368,041 for 1995 and
1994, respectively.
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, 1995 and 1994, these
loans totaled $49,910,926 and $49,922,161, respectively. During 1995,
total principal additions were $6,216,276 and total principal
payments were $6,227,511.
The Corporation was indebted to related parties for short-term
borrowings totaling $6,515,000 and $4,026,000 at December 31, 1995
and 1994, respectively.
The Corporation paid $201,632 in 1995 to the law firms of two
directors who serve as legal counsel for two bank subsidiaries.
NOTE 6. BANK PREMISES AND EQUIPMENT, NET
Premises and equipment are summarized as follows:
DECEMBER 31,
1995 1994
------------ ------------
Premises $ 36 476 953 $ 35 740 589
Leasehold improvements 2 868 263 2 330 477
Furniture and equipment 24 391 324 20 514 858
Construction in progress 1 697 001 1 132 883
------------ ------------
$ 65 433 541 $ 59 718 807
Less accumulated depreciation and amortization (27 028 906) (24 519 562)
------------ ------------
$ 38 404 635 $ 35 199 245
============ ============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
Depreciation and amortization of bank premises and equipment included
in operating expenses for the years ended December 31, 1995, 1994 and
1993, were $3,656,647, $3,647,585 and $3,073,530, respectively.
NOTE 7. DEPOSITS
Deposits outstanding at December 31, 1995, 1994 and 1993, and the
related interest expense for the periods then ended are summarized as
follows:
DECEMBER 31, 1995 DECEMBER 31, 1994
AMOUNT EXPENSE AMOUNT EXPENSE
Noninterest bearing $ 292 199 487 $ - - $ 272 559 034 $ - -
-------------- ------------- --------------- --------------
Interest bearing:
Interest checking $ 273 124 250 $ 6 513 093 $ 283 823 256 $ 6 763 642
Money-market accounts 178 967 116 5 708 607 211 316 922 6 293 296
Regular savings 211 982 311 6 845 530 235 411 496 7 441 570
Certificates of deposit:
Less than $100,000 665 399 602 34 435 114 551 978 278 23 696 731
$100,000 and more 153 317 856 7 486 853 105 934 402 4 707 830
-------------- ------------- --------------- --------------
Total interest
bearing $1 482 791 135 $ 60 989 197 $ 1 388 464 354 $ 48 903 069
-------------- ------------- --------------- --------------
Total deposits $1 774 990 622 $ 60 989 197 $ 1 661 023 388 $ 48 903 069
============== ============= =============== ==============
DECEMBER 31, 1993
AMOUNT EXPENSE
Noninterest bearing $ 251 328 105 $ - -
-------------- -------------
Interest bearing:
Interest checking $ 268 616 609 $ 5 857 548
Money-market accounts 213 629 777 5 591 999
Regular savings 234 253 748 6 198 445
Certificates of deposit:
Less than $100,000 529 440 157 23 532 820
$100,000 and more 100 838 594 4 261 594
-------------- -------------
Total interest
bearing $1 346 778 885 $ 45 442 406
-------------- -------------
Total deposits $1 598 106 990 $ 45 442 406
============== =============
NOTE 8. SHORT-TERM BORROWINGS
The Corporation had unused lines of credit totaling $9,000,000 with
nonaffiliated banks at December 31, 1995. In addition, the
Corporation has unused lines of credit totaling $260,673,775 with the
Federal Home Loan Bank.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
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. Borrowings from the Federal Home Loan Bank system for
RHFA investments totaled $3,225,000 at December 31, 1995, maturing
through 2006. The interest rate on the notes payable range from 7.32%
to 8.19% at December 31, 1995. Principal payments on the notes are
due as follows:
1996 $ 350 000
1997 350 000
1998 350 000
1999 350 000
2000 350 000
Later years 1 475 000
----------
$3 225 000
NOTE 10. BUSINESS COMBINATIONS
On March 29, 1996, the Corporation completed its acquisition of FB&T
Financial Corporation (FB&T), the holding company for Fairfax Bank &
Trust Company. A total of approximately 2,518,000 shares of the
Corporation's stock was issued in the transaction, which was
accounted for as a pooling-of-interests. Fairfax Bank & Trust Company
will continue to operate as a separate subsidiary of the Corporation.
The results of operations as originally reported for 1995, 1994 and
1993 have been restated to reflect the accounts of the pooled entity
as follows:
TOTAL NET NET INCOME
INCOME INCOME PER SHARE
1995 originally reported $ 149 481 907 $ 23 432 149 $ 1.42
1995 results of pooled entity 18 208 062 1 575 482
--------------- --------------
As restated $ 167 689 969 $ 25 007 631 $ 1.32
=============== ============== =======
1994 originally reported $ 135 926 068 $ 20 700 876 $ 1.25
1994 results of pooled entity 14 416 306 2 364 420
--------------- --------------
As restated $ 150 342 374 $ 23 065 296 $ 1.21
=============== ============== =======
1993 originally reported $ 122 378 173 $ 18 731 499 $ 1.16
1993 results of pooled entity 11 249 992 2 005 439
--------------- --------------
As restated $ 133 628 165 $ 20 736 938 $ 1.14
=============== ============== =======
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
On April 6, 1995, F & M completed its acquisition of Bank of the
Potomac, Inc. (Potomac). Potomac was a state-chartered commercial
bank. F & M issued 872,187 shares of common stock based on an
exchange ratio of 2.5168 shares of F & M common shares for each share
of Potomac 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. Total assets and the results of operations
of the separate entities prior to the combination are summarized as
follows:
MARCH 31, 1995 DECEMBER 31,
(UNAUDITED) 1994
Total assets:
F & M National Corporation $ 1 670 856 870 $1 650 903 642
Bank of Potomac 54 330 572 57 588 866
--------------- --------------
$ 1 725 187 442 $1 708 492 508
=============== ==============
YEARS ENDED DECEMBER 31,
MARCH 31, 1995 --------------------------------
(UNAUDITED) 1994 1993
--------------- -------------- --------------
Net interest income:
F & M National Corporation $ 18 538 407 $ 70 792 933 $ 61 583 480
Bank of Potomac 649 325 2 389 670 2 335 147
--------------- -------------- --------------
$ 19 187 732 $ 73 182 603 $ 63 918 627
=============== ============== ==============
Net income:
F & M National Corporation $ 5 781 787 $ 20 233 231 $ 18 269 804
Bank of Potomac 187 416 467 645 461 695
--------------- -------------- --------------
$ 5 969 203 $ 20 700 876 $ 18 731 499
=============== ============== ==============
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.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
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. INCENTIVE AND NONQUALIFIED STOCK OPTION PLAN
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. 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. Incentive stock options outstanding at
December 31, 1995, 1994 and 1993 were 144,268, 209,856 and 214,558,
respectively. Nonqualified options outstanding at December 31, 1995,
1994 and 1993 were 105,040, 92,363 and 71,276, respectively. The plan
expense for 1995, 1994 and 1993 was $102,806, $125,422 and $100,910,
respectively.
STOCK OPTION PLAN SUMMARY (ADJUSTED FOR STOCK DIVIDEND)
1995 1994 1993
---------- ---------- ---------
Options outstanding beginning
of year 302 219 285 834 293 048
Options granted 26 000 30 693 10 250
Options exercised (none expired) (78 911) (14 308) (17 464)
--------- ---------- ----------
Options outstanding and
exercisable 249 308 302 219 285 834
========= ========== ==========
Options available for grant 193 350 219 350 250 043
========= ========== ==========
At December 31, 1995, options outstanding ranged in price from $2.29
to $10.94 per share.
NONEMPLOYEE DIRECTOR STOCK COMPENSATION PLAN
Effective June 15, 1994, FB&T Financial Corporation ("FB&T") (a
subsidiary of F & M National Corporation as of March 29, 1996)
implemented a Nonemployee Director Stock Compensation Plan (the
"Option Plan"). Under this plan, each Director who is not an employee
of FB&T received an option grant covering 1,000 shares of FB&T common
stock on June 15 of each year. The exercise price of awards are fixed
at the fair market value of the shares on the date the option was
granted. The purpose of the Plan was to promote a greater identity of
interest between nonemployee directors and FB&T's shareholders by
increasing each participant's proprietary interest in FB&T through
the award of options to purchase FB&T common stock. The following
summarizes the option activity under the stock option plan for the
last two years:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
STOCK OPTION PLAN SUMMARY
NUMBER OPTION PRICE
OF SHARES (1) PER SHARE
Outstanding, December 31, 1993 - -
Grants 14 574 $ 7.25
Exercised - -
-----------
Outstanding, December 31, 1994 14 574 $ 7.25
Grants 13 881 $ 8.77
Exercised - -
-----------
Outstanding, December 31, 1995 28 455 $ 7.25 - $ 8.77
===========
Options available for grant - -
(1) Adjusted for stock dividend and converted to shares of the
Corporation's common stock at an exchange rate of 1.983 shares.
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 employees automatically become eligible
to participate on January 1 or July 1 as of the date they reach age
18 and complete 12 months of service, whichever occurs last. The 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 1995, 1994 and 1993, was $181,850,
$115,300 and $732,350, respectively.
In 1994, the Corporation adopted an Employee Stock Ownership Plan
(ESOP) covering substantially all full-time employees and providing
that employees automatically become eligible to participate on
January 1 or July 1 as of the date they reach age 18 and complete 12
months of service, whichever occurs last. The 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 1995 and 1994 was $917,600 and $699,800,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
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 automatically become eligible to participate on January 1
or July 1 as of the date they reach age 18 and complete 12 months of
service, whichever occurs last. 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. 35,357 shares were issued during 1995 at a
discount of $84,192. 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 188,293.
NOTE 13. EXECUTIVE INCENTIVE COMPENSATION PLAN AND DEFERRED COMPENSATION PLAN
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 $884,772 in 1995, $684,768 in 1994 and $572,457 in 1993.
In addition, deferred compensation plans have been adopted for
certain key employees which provide that benefits are to be paid in
monthly installments for 15 years following retirement or death. The
agreement provides that if employment is terminated for reasons other
than death or disability prior to age 65, the amount of benefits
would be reduced or forfeited. The deferred compensation expense for
1995, 1994 and 1993, based on the present value of retirement
benefits, amounted to approximately $517,981, $240,315 and $331,753,
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 expense for operating leases for 1995,
1994 and 1993, was $2,144,518, $1,986,858 and $1,831,768,
respectively. Minimum rental commitments under noncancellable leases
with terms in excess of one year as of December 31, 1995, were as
follows:
YEAR OPERATING LEASES
1996 $ 1 705 634
1997 1 629 372
1998 1 587 766
1999 1 265 188
2000 1 098 293
Later years 4 188 881
Total minimum payments $ 11 475 134
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
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, 1995 and 1994, the aggregate amounts of daily average
required balances were approximately $18,552,000 and $11,280,000,
respectively.
NOTE 15. INCOME TAXES
Effective January 1, 1993, the Corporation adopted FASB No. 109,
"Accounting for Income Taxes." The adoption of this statement 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.
Net deferred tax assets consist of the following components as of
December 31, 1995 and 1994:
1995 1994
----------- ------------
Deferred tax assets:
Provision for loan losses $ 5 539 733 $ 5 277 599
Salary continuation plan 901 926 733 871
Nonaccrual interest 281 960 304 169
Insurance commissions 85 412 113 370
Securities available for sale - - 3 740 608
Other 472 829 358 826
----------- ------------
$ 7 281 860 $ 10 528 443
----------- ------------
Deferred tax liabilities:
Depreciation $ 1 015 615 $ 905 860
Bond discount accretion 25 931 57 662
Excess tax basis - acquisition 486 323 421 956
Securities available for sale 1 960 790 - -
Other 23 843 25 475
----------- ------------
$ 3 512 502 $ 1 410 953
----------- ------------
$ 3 769 358 $ 9 117 490
=========== ============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
The provision for income taxes charged to operations for the years
ended December 31, 1995, 1994 and 1993, consists of the following:
1995 1994 1993
------------ ----------- ------------
Current tax expense $ 12 756 205 $ 9 945 518 $ 10 702 165
Deferred tax (benefit) (353 266) 1 197 276 (931 842)
------------ ----------- ------------
$ 12 402 939 $11 142 794 $ 9 770 323
============ =========== ============
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, 1995, 1994 and 1993 due to the
following:
1995 1994 1993
-------- -------- --------
Computed "expected" tax expense 35.0% 35.0% 35.0%
Increase (decrease) in income taxes
resulting from:
Tax-exempt interest (2.3) (3.1) (3.8)
Nondeductible merger expenses .2 .5 .6
Other, net .3 .2 .2
------- -------- -----
33.2% 32.6% 32.0%
======= ======== ========
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, 1995,
the aggregate amount of unrestricted funds which could be transferred
from the Corporation's subsidiaries to the Parent Corporation,
without prior regulatory approval, totaled $39,701,512 or 19.1% 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
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
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,
1995 and 1994, is as follows:
1995 1994
------------ ------------
Financial instruments whose contract
amounts represent credit risk:
Commitments to extend credit $317 965 196 $261 026 016
Standby letters of credit and
financial guarantees written $ 16 118 159 $ 12 064 138
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, 1995, varies from 0 percent to
100 percent; the average amount collateralized is 53 percent.
NOTE 18. CREDIT RISK
As of December 31, 1995, the Corporation had a concentration of loans
in non-farm, non-residential loans, consisting primarily of
commercial loans secured by real estate of $332,288,062 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, 1995, the Corporation had $30,557,794 in deposits
in financial institutions in excess of amounts insured by the Federal
Deposit Insurance Corporation (FDIC).
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
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
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.
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
The fair value of commitments to extend credit is estimated
using the fees currently charged to enter similar agreements,
taking into account the remaining terms of the agreements and
the present credit worthiness of the counterparties. For
fixed-rate loan commitments, fair value also considers the
difference between current levels of interest rates and the
committed rates.
The fair value of stand-by letters of credit is based on fees
currently charged for similar agreements or on the estimated
cost to terminate them or otherwise settle the obligations with
the counterparties at the reporting date.
The carrying amount is a reasonable estimate of the fair value
of securities loaned.
At December 31, 1995 and 1994, the carrying amounts and fair
values of loan commitments, stand-by letters of credit, and
securities loaned were immaterial.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
The estimated fair values of the Corporation's financial
instruments are as follows:
1995 1994
--------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
Financial assets:
Cash and short-term
investments $ 188 643 $ 188 643 $ 136 772 $ 136 772
Investments securities 331 550 340 187 328 748 315 971
Securities available for sale 279 517 279 517 233 631 233 631
Loans 1 202 891 1 202 369 1 143 211 1 117 617
Less: allowance for loan
losses (17 211) - - (16 795) - -
----------- ------------ ----------- -------------
Total financial assets $ 1 985 390 $ 2 010 717 $ 1 825 567 $ 1 803 991
=========== ============ =========== =============
Financial liabilities:
Deposits $ 1 774 991 $ 1 770 406 $ 1 661 023 $ 1 653 156
Federal funds purchased
and securities sold under
agreement to repurchase 48 466 48 466 38 049 38 049
Other short-term borrowings 18 792 18 792 16 579 16 579
Federal home loan bank
advances 4 737 4 737 875 875
Long-term debt 3 225 2 930 3 194 3 194
----------- ------------ ----------- -------------
Total financial liabilities $ 1 850 211 $ 1 845 331 $ 1 719 720 $ 1 711 853
========== ============ =========== =============
NOTE 20. DERIVATIVE FINANCIAL INSTRUMENTS
In October, 1994, FASB 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. The Corporation does not have any
derivative financial instruments as defined under this statement.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
NOTE 21. PROPOSED MERGER
On April 22, 1996, Allegiance Banc Corporation ("Allegiance"),
Bethesda, Maryland, and F&M announced that they have entered into a
Definitive Agreement and a Plan of Reorganization and a related Plan
of Merger (collectively, the Merger Agreement). The transaction is
subject to the approval of regulatory authorities and shareholders
of Allegiance. The proposed merger will entitle the shareholders of
Allegiance to receive, in a tax-free exchange, shares of F&M common
stock with an aggregate market value equal to $15.00, 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. It is anticipated that the
merger will be effective during the fourth quarter 1996. As of March
31, 1996, Allegiance's total assets were $137.5 million, total
deposits were $112.9 million and total shareholders' equity was
$11.2 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
NOTE 22. CONDENSED FINANCIAL INFORMATION - PARENT COMPANY ONLY
F & M NATIONAL CORPORATION
(PARENT CORPORATION ONLY)
BALANCE SHEETS
December 31, 1995 and 1994
DECEMBER 31,
ASSETS 1995 1994
--------------- -------------
Cash on deposit with subsidiary banks $ 174 705 $ 62 427
Investment in subsidiaries, at cost, plus equity in
undistributed net income 197 459 034 174 227 444
Securities available for sale 8 876 336 6 128 599
Other short-term investments 22 415 000 15 036 000
Bank premises and equipment, net 1 408 160 3 988 661
Intangible, goodwill, at amortized cost 668 516 757 246
Other assets 3 256 584 3 209 946
--------------- -------------
Total assets $ 234 258 335 $ 203 410 323
=============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Short-term borrowings $ 18 462 000 $ 14 671 000
Dividends payable 2 643 492 2 351 822
Other liabilities 2 736 737 1 530 066
--------------- -------------
Total liabilitie $ 23 842 229 $ 18 552 888
--------------- -------------
SHAREHOLDERS' EQUITY
Preferred stock $ - - $ - -
Common stock 38 139 802 37 638 158
Capital surplus 63 087 468 61 408 042
Retained earnings, which are substantially undistributed
earnings of subsidiaries 105 729 864 92 753 493
Unrealized gain (loss) on securities available for sale, net 3 458 972 (6 942 258)
--------------- -------------
Total shareholders' equity $ 210 416 106 $ 184 857 435
--------------- -------------
Total liabilities and shareholders' equity $ 234 258 335 $ 203 410 323
=============== =============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
F & M NATIONAL CORPORATION
(PARENT CORPORATION ONLY)
STATEMENTS OF INCOME
For Each of the Three Years in the Period Ended December 31, 1995
DECEMBER 31,
1995 1994 1993
-------------- -------------- -------------
REVENUE
Dividends from subsidiaries $ 10 980 591 $ 8 658 100 $ 6 842 800
Interest on other short-term investments 769 557 644 529 392 493
Interest and dividends on securities available
for sale 342 713 317 948 303 810
Management fees from subsidiaries 2 115 916 1 166 400 759 500
Rental income from subsidiaries 402 550 426 300 426 100
Other revenue 4 523 16 050 9 713
-------------- -------------- -------------
Total revenue $ 14 615 850 $ 11 229 327 $ 8 734 416
-------------- -------------- -------------
EXPENSES
Salaries and employee benefits $ 1 817 236 $ 990 377 $ 528 536
Directors' fees 188 408 204 050 228 867
Taxes (other than income) 41 124 42 577 45 245
Bank building rental expense - - - - 36 454
Interest 367 097 346 421 306 157
Amortization of goodwill 59 877 59 877 65 843
Depreciation 100 881 96 780 97 083
Merger expenses 269 958 461 195 288 568
Other expenses 491 206 715 747 257 331
-------------- -------------- -------------
Total expenses $ 3 335 787 $ 2 917 024 $ 1 854 084
-------------- -------------- -------------
Income before income taxes and equity in
undistributed net income of subsidiaries $ 11 280 063 $ 8 312 303 $ 6 880 332
INCOME TAX EXPENSE 309 292 84 854 147 963
-------------- -------------- -------------
Income before equity in undistributed
net income of subsidiaries $ 10 970 771 $ 8 227 449 $ 6 732 369
EQUITY IN UNDISTRIBUTED NET INCOME
OF SUBSIDIARIES 14 036 860 14 837 847 14 004 569
-------------- -------------- -------------
Net income $ 25 007 631 $ 23 065 296 $ 20 736 938
============== ============== =============
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
F & M NATIONAL CORPORATION
(PARENT CORPORATION ONLY)
STATEMENTS OF CASH FLOWS
For Each of the Three Years in the Period Ended December 31, 1995
DECEMBER 31,
1995 1994 1993
------------- ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 25 007 631 $ 23 065 296 $ 20 736 938
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation 100 881 96 780 97 083
Amortization 59 877 59 877 65 843
Deferred income taxes (credits) (159 274) (182 986) 30 665
Discount accretion (3 383) (3 183) (2 870)
Undistributed net income of subsidiaries (14 036 860) (14 837 847) (14 004 569)
(Increase) decrease in goodwill 28 853 23 864 (357 962)
(Increase) decrease in other assets 519 076 (2 364 144) 27 984
Increase in other liabilities 1 206 671 1 626 463 106 679
------------- ------------- ------------
Net cash provided by
operating activities $ 12 723 472 $ 7 484 120 $ 6 699 791
------------- ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in investment in
subsidiaries $ (396 808) $ 525 390 $ 116 142
Purchase of securities available for sale (1 802 395) (734 438) (15 000)
(Increase) decrease in other short-term
investments (7 379 000) 31 000 (2 391 000)
Proceeds from sale of equipment to subsidiaries 2 771 841 387 000 - -
Purchase of bank premises and equipment (292 221) (89 650) (95 272)
------------- ------------- ------------
Net cash provided by (used in)
investing activities $ (7 098 583) $ 119 302 $ (2 385 130)
------------- ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in short-term borrowings $ 3 791 000 $ 1 488 000 $ 1 263 000
Net proceeds from issuance and sale of common
stock 3 592 979 2 171 645 1 443 159
Acquisition of common stock (3 072 217) (2 815 487) - -
Cash dividends paid (9 824 373) (8 408 729) (6 940 289)
Cash paid for fractional shares - - (57 761) - -
------------- ------------- ------------
Net cash (used in)
financing activities $ (5 512 611) $ (7 622 332) $ (4 234 130)
------------- ------------- ------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 1995, 1994 and 1993
F & M NATIONAL CORPORATION
(PARENT CORPORATION ONLY)
STATEMENTS OF CASH FLOWS
(Continued)
For Each of the Three Years in the Period Ended December 31, 1995
DECEMBER 31,
1995 1994 1993
------------- ------------- -------
Increase (decrease) in cash
and cash equivalents $ 112 278 $ (18 910) $ 80 531
CASH AND CASH EQUIVALENTS
Beginning 62 427 81 337 806
------------- ------------- ------------
Ending $ 174 705 $ 62 427 $ 81 337
============= ============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION, cash payments for interest $ 367 097 $ 346 421 $ 306 157
============= ============= ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES
Issuance of stock options under nonvariable
compensatory plan $ 206 440 $ 211 120 $ 86 200
============= ============= ============
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 $ 200 000 $ - - $ 337 909
============= ============= ============
Common stock issued for stock
dividends $ 1 068 282 $ 6 001 278 $ - -
============= ============= ============
Unrealized gain (loss) on securities
available for sale $ 941 959 $ (350 506) $ - -
============= ============= ============