TABLE 1 - SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
--------------- -------------- ---------------- ---------------- ---------------
(IN THOUSANDS, EXCEPT RATIOS AND PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Interest income............... $ 168,034 $ 158,529 $ 139,806 $ 124,103 $ 119,886
Interest expense.............. 71,231 67,157 53,409 49,142 52,825
--------------- -------------- ---------------- ---------------- ---------------
Net interest income........... 96,803 91,372 86,397 74,961 67,061
Provision for loan losses..... 2,050 2,048 2,669 3,295 4,799
--------------- -------------- ---------------- ---------------- ---------------
Net interest income after
PROVISION FOR LOAN LOSSES.. 94,753 89,324 83,728 71,666 62,262
Noninterest income............ 20,478 18,999 18,248 15,579 13,246
Securities gains.............. 267 519 293 2,055 1,218
Noninterest expense........... 71,105 70,166 67,547 57,678 51,813
--------------- -------------- ---------------- ---------------- ---------------
Income before income taxes.... 44,393 38,676 34,722 31,622 24,913
Income taxes.................. 15,095 12,841 10,450 9,770 7,246
--------------- -------------- ---------------- ---------------- ---------------
Net income.................... $ 29,298 $ 25,835 $ 24,272 $ 21,852 $ 17,667
=============== ============== ================ ================ ===============
PER SHARE DATA:
NET INCOME.................... $1.44 $1.27 $1.19 $1.12 $0.97
Cash dividends ............... 0.69 0.61 0.54 0.58 (1) 0.41
Book value at period end...... 11.32 10.87 9.69 9.65 8.84
Tangible book value........... 10.96 10.48 9.26 9.34 8.81
BALANCE SHEET DATA:
Assets........................ $ 2,303,751 $ 2,207,989 $ 2,020,491 $ 1,940,967 $ 1,655,026
Loans, net of unearned income. 1,439,108 1,296,204 1,209,511 1,120,866 919,067
Securities.................... 596,993 634,747 590,389 591,003 502,805
Deposits...................... 1,966,938 1,882,849 1,754,131 1,693,029 1,444,336
Shareholders' equity.......... 230,723 222,046 195,436 189,039 164,145
Average shares outstanding.... 20,409 20,368 20,381 19,563 18,261
PERFORMANCE RATIOS:
Return on average assets...... 1.30% 1.23% 1.21% 1.24% 1.13%
Return on average equity...... 2.89% 12.18% 12.50% 12.46% 11.99%
Dividend payout............... 48.08% 42.05% 39.52% 43.91% 34.91%
EFFICIENCY (2)................ 59.91% 62.93% 63.69% 62.37% 62.84%
ASSET QUALITY RATIOS:
Allowance for loan losses to
period end loans, net...... 1.25% 1.41% 1.47% 1.46% 1.49%
Allowance for loan losses to
nonaccrual loans........... 161.35% 137.53% 86.94% 56.73% 79.69%
Nonperforming assets to
period end loans and
foreclosed properties (3).. 1.63% 2.17% 2.90% 3.72% 2.89%
Net charge-offs to average
loans...................... 0.17% 0.13% 0.10% 0.21% 0.61%
Capital and Liquidity Ratios:
Leverage...................... 9.90% 10.09% 9.72% 10.34% 10.47%
Risk-based capital ratios:
Tier 1 capital............. 15.53% 15.94% 14.87% 15.69% 17.30%
Total capital.............. 16.78% 17.19% 16.12% 16.94% 18.55%
Average loans to average
deposits................... 70.99% 68.54% 66.82% 64.48% 66.58%
Note: The amounts previously reported in Form 10Q and Form 10K for the periods
presented have been retroactively restated to reflect the acquisitions
of FB&T Financial Corporation on March 29, 1996, Allegiance Banc
Corporation on October 1, 1996, Bank of the Potomac on April 6, 1995,
PNB Financial Corporation on July 1, 1994 and Hallmark Bank & Trust on
July 1, 1994 and a 2.5% stock dividend effective September 1, 1994.
(1) INCLUDES FIRST QUARTER 1994 DIVIDEND DECLARED IN 1993.
(2) Computed by dividing noninterest expense by the sum of net interest income
on a tax equivalent basis and noninterest income, net of securities gains or
losses.
(3) Nonperforming assets do not include loans past due 90 days accruing
interest.
1
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides information about the major components
of the results of operations and financial condition, liquidity and capital
resources of F&M. This discussion and analysis should be read in conjunction
with "Selected Financial Data" and the Consolidated Financial Statements and
Notes to Consolidated Financial Statements.
Overview
1996 was a year of record earnings, expansion and change. F&M's continued
high asset quality, an excellent interest margin and improved management
efficiencies contributed to record net income of $29.3 million, a return on
assets of 1.44% and an efficiency ratio of 59.91%.
F&M expanded its market area with the acquisition of a bank in northern
Virginia and a bank in Maryland. In 1996, F&M's banking market included 96
branches located in Virginia, West Virginia and Maryland.
On March 29, 1996, FB&T Financial Corporation ("FB&T") Fairfax, Virginia
with assets of $255.4 million and eleven branch offices, became a wholly-owned
subsidiary of F&M with a tax-free exchange of 2,517,577 shares of F&M common
stock for all of the outstanding shares of FB&T. The share exchange of FB&T has
been accounted for as a pooling of interests and, therefore, all financial
statements have been restated to reflect the share exchange.
On October 1, 1996, Allegiance Banc Corporation ("Allegiance"), Bethesda,
Maryland with assets of $133.2 million and seven branch offices, became a
wholly-owned subsidiary of F&M with a tax-free exchange of 1,455,628 shares of
F&M common stock for all of the outstanding shares of Allegiance. The share
exchange of Allegiance has been accounted for as a pooling of interests and,
therefore, all financial statements have been restated to reflect the share
exchange.
Change came on August 9, 1996 when F&M-Potomac, Herndon, Virginia and
Fairfax Bank & Trust Company, Fairfax, Virginia merged into F&M Bank-Hallmark,
which subsequently became F&M Bank-Northern Virginia ("NOVA"). NOVA, whose main
office is located at 4117 Chain Bridge Road, Fairfax, Virginia has 18 locations
with assets of $434.4 million, loans of $288.9 million and deposits of $350.5
million at year end 1996.
Results of Operations
Net income increased 13.4% in 1996 to $29.3 million, compared with $25.8
million earned in 1995 and $24.3 million earned in 1994. Earnings per share
increased to $1.44 per share in 1996 compared to $1.27 and $1.19 per share for
1995 and 1994, respectively.
Higher income levels in 1996 lifted profitability ratios over 1995 ratios.
Return on average assets on an annualized basis for 1996 was 1.30% compared to
1.23% for the same period for the prior year. In 1994, this ratio was 1.21%.
Another significant measure of profitability, return on average shareholders'
equity for 1996 improved to 12.89%, compared to 12.18% for 1995 and 12.50% for
1994. These performance ratios have varied since 1992, with return on average
assets rebounding from 1.13% in 1992 to 1.24% in 1993, decreasing slightly to
1.21% in 1994 and then increasing slightly to 1.23% in 1995. Return on average
shareholders' equity rebounded from 11.99% in 1992 to 12.46% in 1993, increasing
slightly to 12.50% in 1994 and decreasing to 12.18% in 1995.
Net interest margin represents tax-equivalent net interest income divided
by average earning assets. It reflects the average effective rate earned by F&M
on its average earning assets. Net interest margin, on a tax-equivalent basis,
was 4.76% for 1996 compared to 4.82% for 1995 and 4.77% for 1994. Net interest
income and net interest margin are influenced by fluctuations in market rates
and changes in both the volume and mix of average earning assets and the
liabilities that fund those assets. In 1996, the yield on interest-earning
assets declined 10 basis points from 8.31% in 1995 to 8.21% in 1996 and the cost
of interest-bearing liabilities declined 2 basis points from 4.24% in 1995 to
4.22% in 1996. The decline in the yield on earning assets and liabilities is a
result of a decrease in the prime rate in the first quarter of 1996 by 25 basis
points.
In 1996, 1995 and 1994, loan demand remained strong, although competitive
forces have increased for potential loan customers. Loans, net of unearned
discount were $1.439 billion in 1996 as compared to $1.296 billion in 1995 and
$1.210 billion in 1994. F&M's securities portfolio represents the second largest
component of earning assets. At December 31, 1996, F&M's securities portfolio
totaled $597.0 million, $37.8 million (5.9%) lower than year end 1995 and $6.6
million (1.1%) higher than year end 1994. Funds invested in securities in 1996
declined as a result of the strong demand ($143 million) in lending activities.
F&M's efficiency ratio, a measure of its performance based upon the
relationship between non-interest expense and income less securities gains,
compares favorably to other Virginia financial institutions. F&M's efficiency
ratio for
6
1996, 1995 and 1994 was 59.91%, 62.93% and 63.69%, respectively. A lower
efficiency ratio represent a greater control of non-interest related costs.
A fluctuation in the efficiency ratio can be attributed to relative changes
in both noninterest expense and net interest income.
Since the beginning of 1988, F&M has acquired approximately $1.206 billion
in assets and $1.043 billion in deposits through twelve bank acquisitions.
Eleven of these acquisitions were accounted for as a pooling-of-interests and
one as a purchase, which enabled F&M to expand its market into the eastern
panhandle of West Virginia, northern Virginia market of Loudoun, Fauquier,
Fairfax and Prince William counties, southern Virginia market of Greensville
County, increase its market share in two of its other Virginia markets and enter
the Maryland markets of Montgomery and Prince George's counties.
F&M is not aware of any current recommendations by any regulatory
authorities which, if they were implemented, would have a material effect on the
registrant's liquidity, capital resources, or results of operations.
Table 2 sets forth, for the periods indicated, selected quarterly results
of F&M's operations.
Table 2 -- Summary of Financial Results By Quarter
1996* 1995*
------------------------------------- ---------------------------------------
Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
------- -------- ------- -------- ------- -------- ------- --------
(In thousands, except per share amounts)
Interest income ........................ $42,793 $42,153 $41,769 $41,319 $37,711
Interest expense ....................... 18,073 17,771 17,614 17,773 17,991 17,588 16,691 14,887
------------------------------------- -------------------------------------
Net interest income .................... 24,720 24,382 24,155 23,546 23,275 22,667 22,606 22,824
Provision for loan losses .............. 460 562 556 472 1,304 262 220 262
------------------------------------- -------------------------------------
Net interest income after provision
for loan losses ...................... 24,260 23,820 23,599 23,074 21,971 22,405 22,386 22,562
Noninterest income ..................... 5,606 5,143 4,847 5,149 4,993 4,735 5,158 4,632
Noninterest expense .................... 18,405 18,133 17,030 17,537 18,501 16,497 17,807 17,361
Income before income taxes ............. 11,461 10,830 11,416 10,686 8,463 10,643 9,737 9,833
Applicable income taxes ................ 3,830 3,643 3,946 3,676 2,731 3,602 3,279 3,229
------------------------------------- -------------------------------------
Net income ............................. $ 7,631 $ 7,187 $ 7,470 $ 7,010 $ 5,732 $ 7,041 $ 6,458 $ 6,604
===================================== =====================================
Net income per share ................... $ 0.38 $ 0.35 $ 0.37 $ 0.34 $ 0.28 $ 0.35 $ 0.32 $ 0.32
*The amounts previously reported on Form 10Q for the periods presented have been
retroactively restated to reflect the acquisitions of FB&T Financial Corporation
on March 29, 1996, Allegiance Banc Corporation on October 1, 1996 and Bank of
the Potomac on April 6, 1995.
Net Interest Income
Net interest income represents the principal source of earnings for F&M.
Net interest income equals the amount by which interest income exceeds interest
expense and represents F&M's gross profit margin. Changes in the volume and mix
of interest-earning assets and interest-bearing liabilities, as well as their
respective yields and rates, have a significant impact on the level of net
interest income.
Net interest income increased to $96.8 million for the year ended December
31, 1996, up 5.9% over the $91.4 million reported for the same period in 1995
and up 5.8% in 1995 over the $86.4 million reported for 1994. Net interest
income in 1996 was affected by a greater demand for loans coupled with
attractive market rates and an expanding economy. Loans grew $142.9 million
(11.0%) to $1.439 billion in 1996 from $1.296 billion in 1995 and increased
$86.7 million (7.2%) in 1995 from $1.210 billion in 1994. In 1996, deposits
provided the source of funds by increasing to $1.967 billion, up $84.1 million
(4.5%) from $1.883 billion in 1995. Interest-bearing deposits increased $63.6
million in 1996 to $1.632 billion from $1.569 billion in 1994. Strong deposit
and loan growth was the result of offering attractive market rates coupled with
customers' desire to place investments in a strong, highly capitalized financial
corporation.
Net interest income was $91.4 million for the year 1995, up 5.8% over the
$86.4 million reported for the same period in 1994 and up 15.3% in 1994 over the
$75.0 million reported for 1993. Net interest income in 1995 was affected by
improved loan demand following a recessionary period. Loans grew $86.7 million
(7.2%) to $1.296 billion in 1995 from $1.210 billion in 1994. In 1995, total
interest-bearing deposits provided the primary source of funds increasing to
$1.569 billion, up $106.1 million (7.3%) from $1.463 billion in 1994.
Interest-bearing deposits increased $36.0 million in 1994 from $1.427 billion in
1993. The year 1994 was a period when the recessionary period, that began in
1993, was nearing its end. Net interest income for 1994 increased $11.4 million
to $86.4 million compared to $75.0 million for 1993 and the net interest
7
Table 3 -- Average Balances, Income and Expense, Yields and Rates (1)
Twelve Months Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995
Annual Annual
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate Balance Expense Rate
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS (Dollars in thousands) (Dollars in thousands)
Securities:
Taxable................................................ $ 587,823 $ 36,698 6.24% $ 557,258 $ 34,654 6.22%
Tax-exempt (1)......................................... 31,605 2,640 8.35% 37,645 3,202 8.51%
- ------------------------------------------------------------------------------------------------------------------------------
Total securities................................... 619,428 39,338 6.35% 594,903 37,856 6.36%
Loans (net of unearned income):
Taxable................................................ 1,357,220 124,702 9.19% 1,233,488 116,059 9.41%
Tax-exempt (1)......................................... 12,739 1,371 10.76% 9,409 1,026 10.90%
- ------------------------------------------------------------------------------------------------------------------------------
Total loans........................................ 1,369,959 126,073 9.20% 1,242,897 117,085 9.42%
Federal funds sold and repurchase agreements............... 72,706 3,914 5.38% 86,474 4,992 5.77%
Interest-bearing deposits in other banks................... 2,127 111 5.22% 975 76 7.79%
- ------------------------------------------------------------------------------------------------------------------------------
Total earning assets............................... 2,064,220 169,436 8.21% 1,925,249 160,009 8.31%
Less: allowance for loan losses............................ (18,335) (17,835)
Total nonearning assets.................................... 205,932 189,361
---------- ----------
Total assets....................................... $2,251,817 $2,096,775
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Checking............................................... $ 288,494 $ 6,342 2.20% $ 276,417 $ 6,734 2.44%
Regular savings........................................ 207,739 5,879 2.83% 211,987 6,846 3.23%
Money market savings................................... 212,471 6,096 2.87% 225,065 6,931 3.08%
Certificates of deposit:
Less than $100,000................................. 736,193 40,919 5.56% 661,188 35,881 5.43%
$100,000 and more.................................. 165,304 9,147 5.53% 151,384 8,285 5.47%
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits............................ 1,610,201 68,383 4.25% 1,526,041 64,677 4.24%
Short-term borrowings...................................... 69,039 2,329 3.37% 51,818 2,167 4.18%
Long-term borrowings....................................... 7,725 519 6.72% 4,513 313 6.94%
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities................. 1,686,965 71,231 4.22% 1,582,372 67,157 4.24%
Noninterest-bearing liabilities:
Demand deposits........................................ 319,596 287,311
Other liabilities...................................... 17,937 15,028
---------- ----------
Total liabilities.......................................... 2,024,498 1,884,711
Stockholders' equity....................................... 227,319 212,064
---------- ----------
Total Liabilities and shareholders` equity................. $2,251,817 $2,096,775
========== ==========
Net interest income........................................ $ 98,205 $ 92,852
-------- --------
Interest rate spread....................................... 3.99% 4.07%
Interest expense as a percent of average earning assets.... 3.45% 3.49%
Net interest margin........................................ 4.76% 4.82%
(1) Income and yields are reported on a taxable-equivalent basis.
8
Twelve Months Ended December 31,
- ----------------------------------------------------------------------------------------------
1994
Annual
Average Income/ Yield/
Balance Expense Rate
- ----------------------------------------------------------------------------------------------
ASSETS (Dollars in thousands)
Securities:
Taxable................................................ $ 555,346 $ 33,492 6.03%
Tax-exempt (1)......................................... 43,259 3,431 7.93%
- ----------------------------------------------------------------------------------------------
Total securities................................... 598,605 36,923 6.17%
Loans (net of unearned income):
Taxable................................................ 1,153,906 100,251 8.69%
Tax-exempt (1)......................................... 8,669 608 7.01%
- ----------------------------------------------------------------------------------------------
Total loans........................................ 1,162,575 100,859 8.68%
Federal funds sold and repurchase agreements............... 80,792 3,400 4.21%
Interest-bearing deposits in other banks................... 521 38 7.29%
- ----------------------------------------------------------------------------------------------
Total earning assets............................... 1,842,493 141,220 7.66%
Less: allowance for loan losses............................ (17,138)
Total nonearning assets.................................... 178,105
----------
Total assets....................................... $2,003,460
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing deposits:
Checking............................................... $ 280,181 $ 6,961 2.48%
Regular savings........................................ 242,677 7,442 3.07%
Money market savings................................... 263,422 7,521 2.86%
Certificates of deposit:
Less than $100,000................................. 548,033 24,455 4.46%
$100,000 and more.................................. 116,588 5,281 4.53%
- ----------------------------------------------------------------------------------------------
Total interest-bearing deposits............................ 1,450,901 51,660 3.56%
Short-term borrowings...................................... 50,882 1,629 3.20%
Long-term borrowings....................................... 2,835 120 4.23%
- ----------------------------------------------------------------------------------------------
Total interest-bearing liabilities................. 1,504,618 53,409 3.55%
Noninterest-bearing liabilities:
Demand deposits........................................ 288,878
Other liabilities...................................... 15,848
----------
Total liabilities.......................................... 1,809,344
Stockholders' equity....................................... 194,116
----------
Total Liabilities and shareholders` equity................. $2,003,460
==========
Net interest income........................................ $ 87,811
---------
Interest rate spread....................................... 4.11%
Interest expense as a percent of average earning assets.... 2.90%
Net interest margin........................................ 4.77%
9
margin for 1994 was 4.77%. At year end 1994, the securities portfolio was
$590.4 million, down $61.4 thousand (0.1%) over the same period 1993. During
1994, funds were kept in liquid interest-earning assets to be available
when securities yields and loan demand improved.
Table 3 depicts interest income on earning assets and related average
yields as well as interest expense on interest-bearing liabilities and related
average rates paid for the periods indicated. Loans placed on a nonaccrual
status are included in the balances and were included in the computation of
yields, upon which they had no material effect.
Table 4 analyzes changes in net interest income attributable to changes in
the volume of interest-bearing assets and liabilities compared to changes in
interest rates. Nonaccruing loans are included in average loans outstanding.
Table 4 -- Volume and Rate Analysis
Tax equivalent basis
1996 1995
-------------------------------- -------------------------------
Change in Change in
Volume Rate Income/ Volume Rate Income/
Effect Effect Expense Effect Effect Expense
---------- --------- --------- -------- -------- ---------
(Dollars in thousands)
Earning Assets:
Taxable securities ......................... $ 1,931 $ 113 $ 2,044 $ 114 $ 1,048 $ 1,162
Tax-exempt securities ...................... (503) (59) (562) (525) 296 (229)
Taxable loans .............................. 11,270 (2,627) 8,643 7,182 8,626 15,808
Tax-exempt loans ........................... 358 (13) 345 56 362 418
Federal funds sold and repurchase agreements (757) (321) (1,078) 254 1,338 1,592
Interest-bearing deposits in other banks ... 49 (14) 35 35 3 38
-------- -------- -------- -------- -------- --------
Total earning assets .................. $ 12,348 $ (2,921) $ 9,427 $ 7,116 $ 11,673 $ 18,789
-------- -------- -------- -------- -------- --------
Interest-Bearing Liabilities:
Checking deposits .......................... $ 313 $ (705) $ (392) $ (103) $ (124) $ (227)
Savings deposits - regular ................. (135) (832) (967) (1,014) 418 (596)
Savings deposits - money market ............ (376) (459) (835) (1,251) 661 (590)
CD's & other time deposits - $100,000 & over 4,160 878 5,038 5,564 5,862 11,426
CD's & other time deposits - under $100,000 771 91 862 1,772 1,232 3,004
-------- -------- -------- -------- -------- --------
Total interest-bearing deposits ....... 4,733 (1,027) 3,706 4,968 8,049 13,017
Borrowed funds short-term ............. 389 (227) 162 30 508 538
Borrowed funds long-term .............. 216 (10) 206 93 100 193
-------- -------- -------- -------- -------- --------
Total interest-bearing liabilities .... 5,338 (1,264) 4,074 5,091 8,657 13,748
-------- -------- -------- -------- -------- --------
Change in net interest income ......... $ 7,010 $ (1,657) $ 5,353 $ 2,025 $ 3,016 $ 5,041
======== ======== ======== ======== ======== ========
Note: The change in interest due to both rate and volume has been allocated to
change due to volume and change due to rate in proportion to the relationship of
the absolute dollar amounts of the change in each.
Interest Sensitivity
The primary goals of interest rate risk management are to minimize
fluctuations in net interest margin as a percentage of earning assets and to
increase the dollars of net interest margin at a growth rate consistent with the
growth rate of total assets. These goals are accomplished by balancing the
volume of floating-rate liabilities with a similar volume of floating-rate
assets, by keeping the average maturity of fixed rate asset and liability
contracts reasonably consistent and short, and by routinely adjusting pricing
rates to market conditions on a weekly basis.
The goal of F&M is to generally maintain a position that is to provide
enough flexibility to move to an equality between rate-sensitive assets and
rate-sensitive liabilities, which may be desirable when there are wide and
frequent fluctuations in interest rates. Interest rate gaps are managed through
investments, loan pricing and deposit pricing. When an unacceptable positive gap
within a one-year time frame occurs, maturities can be extended by selling
shorter term investments and buying longer maturities. The same effect can also
be accomplished by reducing emphasis on variable rate loans. When an
unacceptable negative gap occurs, variable rate loans can be increased and more
investment in shorter term investments can be made. Pricing policies on either
or both loans and deposits can be changed to accomplish any of the goals. F&M
reviews the interest sensitivity position of each subsidiary bank at least once
a quarter.
10
F&M manages the gap between rate-sensitive assets and rate-sensitive
liabilities to expand and contract with the rate cycle phase. The traditional
targeted gap should be between a negative 15% and a positive 15%. The one year
income statement gap at December 31, 1996 was 8.48% which is within the targeted
gap.
At December 31, 1996, F&M had $90.1 million more in interest sensitive
assets than interest sensitive liabilities subject to repricing within one year
and was, therefore, in an asset-sensitive position. An asset-sensitive
institution's net interest margin and net interest income generally will be
impacted favorably by rising interest rates, while that of a liability-sensitive
institution generally will be impacted favorably by declining interest rates.
F&M utilizes shock analysis to project the estimated effect on net
interest income at various interest rate scenarios. This analysis reflects
interest rate changes and the related impact on net income on interest sensitive
assets and liabilities over specified periods. At December 31, 1996, a 2%
increase in the prime rate is projected to increase net interest income $3.553
million. Conversely, if the prime rate decreases 2%, projected net interest
income would decrease similarly.
Table 5 analyzes F&M's rate interest sensitivity at December 31, 1996.
This is a one-day position which is continually changing and is not necessarily
indicative of F&M's position at any other time.
Table 5 -- Rate Sensitivity Analysis
December 31, 1996
Repricing Time Frame
------------------------------------------------------------------------
Over 5 Years
1-90 Day 91-365 Day 1 to 5 Years or Not
Sensitivity Sensitivity Sensitivity Sensitive Total
----------- ----------- ----------- ---------- ----------
(Dollars in thousands)
ASSETS
Loans, net unearned (1)
Fixed rate.................... $ 68,492 $132,999 $ 456,898 $ 140,625 $ 799,014
Floating rate................. 384,685 126,144 116,026 2,123 628,978
--------- -------- -------- --------- ---------
Total loans................... 453,177 259,143 572,924 142,748 1,427,992
Investment securities
Treasuries-HTM................ 8,597 26,725 61,594 41,015 137,931
Treasuries-AFS................ 7,450 17,620 60,105 18,948 104,123
Agencies-HTM.................. 25,542 12,196 79,305 46,656 163,699
Agencies-AFS.................. 8,353 10,111 74,404 48,862 141,730
Tax free municipals........... 3,017 2,631 11,461 13,242 30,351
Federal funds sold and other.. 80,813 -- 8,393 260 89,466
--------- -------- -------- --------- ---------
Total securities.............. 133,772 69,283 295,262 168,983 667,300
--------- -------- -------- --------- ---------
Total rate sensitive assets..... 586,949 328,426 868,186 311,731 2,095,292
--------- -------- -------- --------- ---------
LIABILITIES
Interest checking............... $ 27,880 $ -- $ 227,303 $ 49,857 $ 305,040
Money market deposits........... 20,787 83,143 103,930 -- 207,860
Regular savings................. -- -- 164,023 41,005 205,028
Time deposits > $100,000........ 38,544 85,995 47,438 100 172,077
Time deposits < $100,000........ 141,161 353,039 248,233 -- 742,433
Short-term borrowings........... 74,709 -- -- -- 74,709
Long-term borrowings............ -- -- 4,822 6,675 11,497
--------- -------- -------- --------- ---------
Total rate sensitive
liabilities................... 303,081 522,177 795,749 97,637 1,718,644
--------- -------- -------- --------- ---------
Rate sensitivity gap............ 283,868 (193,751) 72,437 214,094 376,648
Cumulative gap.................. 283,868 90,117 162,554 376,648
Risk to interest margin:
Gap as a % of rate
sensitive assets............. 13.55% 4.30% 7.76% 17.98%
% of Annualized Income .........
- -----------------------------------------------------------------------------------------------------
Risk to Capital Account.........
- -----------------------------------------------------------------------------------------------------
Income Statement Gap
-------------------------------------------------------
One Year
One Year Earnings Income 2%
Balance Change Statement Prime Rate
Sheet Gap Ratio Gap Change
--------- --------- ---------- ----------
(Dollars in thousands)
ASSETS
Loans, net unearned (1)
Fixed rate................. $201,491 75.00% $ 151,118 $ 3,022
Floating rate.............. 510,829 100.00% 510,829 10,217
-------- --------- ---------
Total loans................ 712,320 92.93% 661,947 13,239
Investment securities
Treasuries-HTM............. 35,322 75.00% 26,492 530
Treasuries-AFS............. 25,070 75.00% 18,803 376
Agencies-HTM............... 37,738 75.00% 28,304 566
Agencies-AFS............... 18,464 75.00% 13,848 277
Tax free municipals........ 5,648 37.00% 2,090 42
Federal funds sold and othe 80,813 93.00% 75,155 1,503
-------- --------- ---------
Total securities........... 203,055 81.11% 164,692 3,294
-------- --------- ---------
Total rate sensitive assets.. 915,375 90.31% 826,638 16,533
-------- --------- ---------
LIABILITIES
Interest checking............ $ 27,880 87.50% $ 24,395 $ 488
Money market deposits........ 103,930 77.50% 80,546 1,611
Regular savings.............. -- 0.00% -- --
Time deposits > $100,000..... 124,539 76.70% 95,521 1,910
Time deposits < $100,000..... 494,200 76.70% 379,051 7,581
Short-term borrowings........ 74,709 93.00% 69,479 1,390
Long-term borrowings......... -- 93.00% -- --
-------- --------- ---------
Total rate sensitive
liabilities................ 825,258 78.64% 648,993 12,980
-------- --------- ---------
Rate sensitivity gap......... 90,117 177,645 3,553
Cumulative gap............... 90,117
Risk to interest margin:
Gap as a % of rate
sensitive assets.......... 4.30% 8.48%
% of Annualized Income ...... 7.9%
- -------------------------------------------------------------------------------------
Risk to Capital Account...... 0.0%
- -------------------------------------------------------------------------------------
(1) Excludes nonaccruals
Noninterest Income
Noninterest income for 1996 increased $1.2 million, or 6.3%, over the same
period in 1995. Trust Department income increased $385 thousand or 21.2% from
$1.8 million for 1995 to $2.2 million for 1996 as a result of increased
fiduciary activities and the settlement of estates. Service charges on deposit
accounts, the largest single item
11
of noninterest income, increased to $9.1 million for 1996, up 12.8% over the
comparable period a year ago as a result of adding additional services and
improving existing deposit services. Credit card fees increased to $3.4
million for 1996 as compared to $3.2 million for 1995 as a result of increased
card loan volume. Fees for other customer services were $1.8 million for
1996, which increased $114 thousand (6.6%) from 1995 as a result of
increased marketing of current services and providing new services for
customers. Gains on sale of securities declined to $267 thousand for 1996 as
compared to $519 thousand for 1995. Security gains are realized when market
conditions exist that are favorable to F&M and/or conditions dictate additional
liquidity is desirable. In 1996 and 1995, market interest rates were generally
not favorable which reduced the appeal to reposition. Other operating income
decreased $262 thousand (-6.2%), down from $4.2 million for 1995 to $3.9 million
for 1996. Contributing to the decrease in other operating income were reductions
in rent income and other real estate income.
Noninterest income increased $978 thousand or 5.3% from $18.5 million in
1994 to $19.5 million in 1995. Trust Department income increased $170 thousand
or 10.3% from $1.6 million for 1994 to $1.8 million for 1995 as a result of
increased fiduciary activities. Service charges on deposit accounts were $8.1
million for 1995, up 8.1% over the previous year. Credit card fees were $3.2
million and $2.6 million for 1995 and 1994, up $582 thousand as a result of
increased card lending activities. Fees for other customer services were $1.7
million for 1995, which declined $371 thousand (-17.6%) from 1994 as a result of
a reduction in loan refinancing activity. Gains on sale of securities were $519
thousand for 1995 as compared to $293 thousand for 1994. Security gains are
realized when market conditions exist that are favorable to F&M and/or
conditions dictate additional liquidity is desirable. In 1994 and 1995, interest
rates were rising, reducing the appeal to reposition securities.
Table 6 -- Noninterest Income
Year ended December 31,
--------------------------------
1996 1995 1994
--------- ---------- ----------
(Dollars in thousands)
Commissions and fees from fiduciary activities............ $ 2,196 $ 1,812 $ 1,642
Service charges on deposit accounts....................... 9,087 8,054 7,449
Credit card fees.......................................... 3,401 3,193 2,612
Fees for other customer services.......................... 1,849 1,734 2,105
Other operating income.................................... 3,945 4,207 4,440
---------- ---------- ----------
Noninterest income................................ 20,478 19,000 18,248
Profits on securities available for sale.................. 265 519 273
Investment securities gains, net.......................... 2 -- 20
---------- ---------- ----------
Total noninterest income.......................... $ 20,745 $ 19,519 $ 18,541
========== ========== ==========
Noninterest Expense
Total noninterest expense increased $940 thousand (1.3%), from $70.2
million in 1995 to $71.1 million in 1996. Salaries and employee benefits
increased $1.7 million or 4.9%, net occupancy expense including furniture and
equipment expense increased $378 thousand or 3.4%, credit card expense increased
$259 thousand or 13.2% and other operating expense increased $462 thousand or
2.4%. Deposit insurance declined from $2.1 million in 1995 to $205 thousand in
1996 as a result of the FDIC deposit insurance fund achieving a level deemed to
be adequate to protect deposits, therefore, premiums were adjusted in the third
quarter of 1995 to reflect this achievement.
For 1995, noninterest expense increased by $2.6 million, or 3.9%, from
$67.5 million in 1994 to $70.2 million in 1995. This increase was primarily due
to a $1.6 million, or 4.7% increase in salary and employee benefits and a $2.0
million, or 11.2% increase in other operating expenses. The primary reason for
the increase in salary and benefits was personnel costs associated with
acquiring new banks and opening new banking offices. Other operating expenses
increased as a result of professional fees associated with acquiring new banks
and training and conversion costs associated with converting to a new
consolidated data processing system.
12
Table 7 -- Noninterest Expense
Year ended December 31,
--------------------------------
1996 1995 1994
--------- ---------- ----------
(Dollars in thousands)
Salaries and employee benefits............................ $ 37,229 $ 35,507 $ 33,915
Net occupancy expense of premises......................... 5,957 5,966 5,512
Furniture and equipment expense........................... 5,370 4,984 4,596
Deposit insurance......................................... 205 2,086 3,907
Credit card expense....................................... 2,231 1,971 1,950
Other operating expenses.................................. 20,113 19,652 17,667
---------- ---------- ----------
Total.............................................. $ 71,105 $ 70,166 $ 67,547
========== ========== ==========
Income Taxes
Income tax expense at December 31, 1996 was $15.1 million, up from $12.8
million for 1995 and up from $10.5 million for 1994. The increase in income
taxes is attributable to increased taxable earnings at the federal statutory
income tax rate of 35%. This corresponds to an effective tax rate of 34.0%,
33.2% and 30.1% for the three years ended December 31, 1996, 1995 and 1994,
respectively. Note 15 to the Consolidated Financial Statements for year end
provide a reconciliation between the amount of income tax expense computed using
the federal statutory income tax rate and F&M's actual income tax expense. Also
included in Note 15 to the Consolidated Financial Statements is information
regarding the principal items giving rise to deferred taxes for each of the
three years ended December 31.
Loan Portfolio
Loans, net of unearned income, increased to $1.439 billion at December 31,
1996, up $142.9 million or 11.0% from $1.296 billion at year end 1995 and up
$86.7 million or 7.2% from $1.210 billion at year end 1994. The strong increase
in loan activity for 1996 is indicative of a healthy economic environment in
F&M's banking market area. All of F&M's subsidiary banks offer both commercial
and consumer loans, but lending activity is generally focused on consumers and
small to middle-market businesses within the subsidiary banks' respective market
regions. Six of F&M's subsidiary banks, F&M Bank-Massanutten, F&M Bank-Blakeley,
F&M Bank-Emporia, F&M Bank-Peoples, F&M Bank-Martinsburg, and F&M Bank-Keyser,
emphasize consumer lending, with activities focused primarily on residential
real estate and consumer lending. F&M Bank-Richmond, F&M Bank-Northern Virginia,
F&M Bank-Central Virginia and F&M Bank-Allegiance are based in larger markets
where the commercial loan demand is stronger and, as a result, their lending
activities place a greater emphasis on small to medium-size business. F&M
Bank-Winchester, because of its size and dominant position in its market, has a
greater opportunity to appeal to larger commercial customers in addition to
consumers.
Approximately 47.6% of F&M's loan portfolio at December 31, 1996 was
comprised of commercial loans, which includes certain loans secured by real
estate in categories of multifamily, non-farm, non-residential and agricultural
where real estate is among the sources of collateral securing the loan. F&M's
subsidiary banks offer a variety of commercial loans within their market
regions, including revolving lines of credit, working capital loans, equipment
financing loans and letters of credit. Although F&M's subsidiary banks typically
look to the borrower's cash flow as the principal source of repayment for such
loans, many of the loans within this category are secured by assets, such as
real property, accounts receivable, inventory and equipment. In addition, a
number of commercial loans are secured by real estate used by such businesses
and are generally personally guaranteed by the principals of the businesses.
F&M's commercial loans generally bear a floating rate of interest tied to a
system-wide prime rate set by F&M Bank-Winchester.
F&M's residential real estate loan portfolio (including home equity lines)
was 36.2% of total loans at December 31, 1996. The residential mortgage loans
made by F&M's subsidiary banks and Big Apple Mortgage Company are made only for
single family, owner-occupied residences within their respective market regions.
The residential mortgage loans offered by F&M's subsidiaries are either
adjustable rate loans or fixed rate loans with 20 to 30 year amortization
schedules that mature with a balloon payment on the third or fifth year
anniversary of the loan.
Big Apple Mortgage (also t.a. F&M Mortgage Company), F&M Bank-Northern
Virginia and F&M Bank-Peoples sell into the secondary market permanent
residential mortgage loans that conform to GNMA and FNMA underwriting
guidelines. These F&M subsidiaries purchase government insured 1-4 family FHA
and VA loans and
13
resell them immediately in package form. At December 31, 1996, Big Apple
Mortgage, F&M Bank-Northern Virginia and F&M Bank-Peoples had $18.0 million
in loans that it had committed to purchase, but had not settled upon.
F&M's real estate construction portfolio historically has been a
relatively small portion of the total loan portfolio. At December 31, 1996,
construction loans were $66.5 million or 4.6% of the total loan portfolio.
Generally, all construction loans are made to finance owner-occupied properties
with permanent financing commitments in place. F&M's subsidiary banks make a
limited number of loans for acquisition, development and construction of
residential real estate. F&M's construction loans, including its acquisition and
development loans, generally bear a floating rate of interest and mature in one
year or less. Loan underwriting standards for such loans generally limit the
loan amount to 75% of the finished appraised value of the project. As a result
of strict underwriting guidelines, F&M has experienced no charge-offs involving
residential construction loans since 1987.
Consumer loans were 16.6% of F&M's total loan portfolio at December 31,
1996, if home equity lines are included in this category. F&M's subsidiary banks
offer a wide variety of consumer loans, which include installment loans, credit
card loans, home equity lines and other secured and unsecured credit facilities.
The performance of the consumer loan portfolio is directly tied to and dependent
upon the general economic conditions in each of F&M's subsidiary banks'
respective market regions.
Loans secured by real estate consist of a diverse portfolio of
predominantly single family residential loans, which at December 31, 1996
comprised 36.2% of the loan portfolio. Loans secured by commercial real estate
comprised 32.0% of the loan portfolio at December 31, 1996 and consist
principally of commercial and industrial loans where real estate constitutes a
source of collateral (28.5%) (shown in Table 8 under the category of "Non-farm,
non-residential"), multifamily loans (2.2%) and agricultural loans (1.3%). F&M
attempts to reduce its exposure to the risks of the local real estate market by
limiting the aggregate size of its commercial real estate portfolio and by
making such loans primarily on owner-occupied properties. F&M has historically
engaged in limited mortgage lending on multifamily and agricultural properties.
Real estate construction loans accounted for only 4.6% of total loans
outstanding at December 31, 1996. F&M's charge-off rate for all loans secured by
real estate was 0.02% of period end loans. This is consistent with 1995 when the
charge-off rate for all loans secured by real estate was 0.05% of period end
loans outstanding. F&M's consumer loan portfolio, its second largest loan
category, consists principally of personal loans.
Consistent with its focus on providing community-based financial services,
F&M generally does not make loans outside its principal market regions. F&M does
not engage in foreign lending activities, consequently, the loan portfolio is
not exposed to risk from foreign credits. F&M maintains a policy not to
originate or purchase loans classified by regulators as highly leveraged
transactions or loans to foreign entities or individuals.
F&M's unfunded loan commitments (excluding unused home equity lines of
credit and credit card lines) amounted to $265.3 million at December 31, 1996,
compared to $225.8 million at December 31, 1995. This increase is due to
stronger seasonal demands on lines of credit during the summer months than at
year end.
On December 31, 1996, F&M had a concentration of loans in non-farm,
non-residential loans, consisting primarily of commercial loans secured by real
estate of $409.6 million which were in excess of 10 percent in the total loan
portfolio. Because of the nature of F&M's market, loan collateral is
predominately real estate related.
A number of economic factors in conjunction with loan activity in 1996
suggest that loan growth in 1997 should be more vibrant than it was in 1995 and
1994. Although interest rates are above the floors they reached in 1995, they
remain at reasonable levels for borrowers. New home construction is increasing
as are home sales. Auto sales were up in 1996, and the forecast is for continued
strength. The economy is creating new jobs and absorbing the unemployment that
was created during the recession and business restructuring in 1995 and 1994.
Importantly, reports suggest that borrowers are showing a great degree of
confidence in the economy. These factors resulted in a positive loan growth
trend in 1996 and represent the necessary elements for growth in 1997.
14
Table 8 -- Loan Portfolio
December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------- ------------ ------------ -------------
(Dollars in thousands)
Commercial, financial and agricultural............. $ 225,327 $ 187,991 $ 180,736 $ 146,880 $ 154,168
Real estate construction........................... 66,477 53,682 46,081 50,280 28,089
Real estate mortgage:
Residential (1-4 family)....................... 454,109 410,889 385,842 372,174 324,922
Home equity lines.............................. 67,326 67,848 68,022 60,367 60,182
Multifamily.................................... 31,712 25,191 26,106 22,445 16,617
Non-farm, non-residential (1).................. 409,563 374,634 322,146 290,193 182,419
Agricultural................................... 19,199 17,576 17,511 16,615 14,295
------------ ------------- ------------ ------------ -------------
Real estate subtotal........................... 981,909 896,138 819,627 761,794 598,435
Loans to individuals:
Consumer....................................... 147,917 142,151 150,135 151,566 133,489
Credit card.................................... 23,197 22,832 19,119 16,865 13,319
------------ ------------- ------------ ------------ -------------
Loans to individuals subtotal.................. 171,114 164,983 169,254 168,431 146,808
Total loans................................ 1,444,827 1,302,794 1,215,698 1,127,385 927,500
Less unearned income............................... (5,719) (6,590) (6,187) (6,519) (8,433)
------------ ------------- ------------ ------------ -------------
Loans--net of unearned income...................... $ 1,439,108 $ 1,296,204 $ 1,209,511 $ 1,120,866 $ 919,067
============ ============= ============ ============ =============
(1) This category generally consists of commercial and industrial loans where
real estate constitutes a source of collateral.
Remaining Maturities of Selected Loans
December 31, 1996
---------------------------
Commercial,
Financial and Real Estate-
Agricultural Construction
------------ ------------
(Dollars in thousands)
Within 1 year.................................. $ 119,534 $ 56,753
------------ ------------
Variable Rate:
1 to 5 years............................... 12,301 1,653
After 5 years.............................. -- --
------------ ------------
Total...................................... $ 12,301 $ 1,653
------------ ------------
Fixed Rate:
1 to 5 years............................... 69,393 7,881
After 5 years.............................. 24,099 190
------------ ------------
Total...................................... $ 93,492 $ 8,071
------------ ------------
Total Maturities........................... $ 225,327 $ 66,477
============ ============
Asset Quality
Allowance for Loan Losses. The allowance for loan losses is an estimate of
an amount adequate to provide for potential losses in the loan portfolio of each
of F&M's subsidiary banks. The amount of the allowance is based on management's
evaluation of the collectability of the loan portfolio, credit concentrations,
trends in historical loss experience, specific impaired loans, and economic
conditions. Allowances for impaired loans are generally determined based on
collateral values or the present value of estimated cash flows. The allowance is
increased by a provision for loan losses, which is charged to expense and
reduced by charge-offs, net of recoveries. Changes in the allowances relating to
impaired loans are charged or credited to the provision for loan losses. Each of
F&M's subsidiary banks has a formal loan review function which consists of a
committee of bank officers that regularly reviews loans and assigns a
classification based on current perceived credit risk. In addition, the holding
company
15
has an independent loan review team that performs a detailed on-site review
and analysis of each of F&M's subsidiary bank's loan portfolio on at least
an annual basis reviewing 60% to 75% of the total principal amount of each of
F&M's subsidiary bank's loan portfolio. In addition, all lending
relationships involving an adversely classified loan are reviewed. The review
team has the authority to classify any loan it determines is not satisfactorily
classified within F&M's grading system. All classified loans are reviewed at
least quarterly by F&M's senior officers and by the subsidiary banks' board of
directors. All past due and nonaccrual loans are reviewed monthly by the
subsidiary banks' boards of directors. As a matter of policy, F&M's subsidiary
banks place loans on nonaccrual status when management determines that the
borrower can no longer service debt from current cash flows and/or collateral
liquidation. This generally occurs when a loan becomes 90 days past due as to
principal and interest. This detailed management analysis forms the basis for
determining the amount needed in the allowance for loan losses. Although the
ratio of the allowance to total loans and nonaccrual loans may be substantially
less than its peers, F&M believes the ratio to be adequate based on this loan
risk review analysis.
In 1996, 1995 and 1994, improved loan quality, a decline in nonperforming
loans, the nature of its loan portfolio and improved underwriting standards
allowed F&M to maintain a lower allowance for loan losses. The ratio of
allowance for loan losses to period end loans, net for 1996, 1995 and 1994 was
1.25%, 1.41% and 1.47%, respectively. In 1996, F&M included in its loan
portfolio $57.0 million loans composed of SBA, FHA and VA residential housing
loans that were guaranteed by the U.S. government. If these guaranteed loans
were excluded from total average loans for 1996, the ratio of allowance for loan
losses to period end loans, net would be 1.30%. In 1996, 1995 and 1994, the
ratio of allowance for loan losses to nonaccrual loans were 161.35%, 137.53% and
86.94%, respectively, which indicates that the allowance is adequate with
respect to nonaccrual loans.
The allowance is also subject to regulatory examinations and
determinations as to adequacy, which may take into account such factors as the
methodology used to calculate the allowance and the size of the allowance in
comparison to peer companies identified by regulatory agencies. F&M's subsidiary
banks are examined at different times, but the Virginia Bureau of Financial
Institutions examined all Virginia banking subsidiaries, the West Virginia
Division of Banking examined all West Virginia banking subsidiaries and the
Office of the Comptroller of the Currency examined F&M's Maryland bank
subsidiary during 1996. Loans classified for regulatory purposes as loss,
doubtful, substandard, or special mention, do not represent or result from
trends or uncertainties which management reasonably expects will materially
impact future operating results, liquidity, or capital resources or represent
material credits about which management is aware of any information which causes
management to have serious doubts as to the ability of such borrowers to comply
with the loan repayment terms.
F&M maintains a general allowance for loan losses and does not allocate
its allowance for loan losses to individual categories for management purposes.
Table 9 shows an allocation among loan categories based upon analysis of the
loan portfolio's composition, historical loan loss experience, and other factors
and the ratio of the related outstanding loan balances to total loans.
16
Table 9 -- Allocation of Allowance for Loan Losses
1996 1995 1994
------------------------ ------------------------ --------------------------
Percent of Percent of Percent of
Loans in Each Loans in Each Loans in Each
Category to Category to Category to
Allowance Total Loans Allowance Total Loans Allowance Total Loans
---------- ----------- ---------- ----------- ------------- -----------
December 31: (Dollars in thousands)
Commercial, financial and
agriculture.............. $ 6,278 15.6% $ 6,388 14.4% $ 6,346 14.9%
Real estate-construction... 717 4.6 710 4.1 713 3.8
Real estate-mortgage 4,412 11.8 4,510 12.7 4,278 13.9
---------- ----- ---------- ----- ---------- -----
$ 17,936 100.0% $ 18,252 100.0% $ 17,826 100.0%
========== ===== ========== ===== ========== =====
The quality of F&M's loan portfolio and improved underwriting standards
have permitted F&M to provide $2.1 million, $2.0 million and $2.7 million for
provision for loan losses for the years 1996, 1995 and 1994, respectively.
F&M's net charge-offs increased in 1996 to $2.4 million, higher than the
1995 level of $1.6 million and higher than 1994 net charge-offs of $1.2 million.
The higher net charge-offs in 1996 was due to a few customers inability to
exercise fundamental business judgment. Net charge-offs to average loans was
0.17%, 0.13% and 0.10% for the years 1996, 1995 and 1994, respectively.
16
Table 10 -- Allowance for Loan Losses
December 31,
-------------------------------------------------------------
1996 1995 1994 1993 1992
---------- --------- --------- --------- ---------
(Dollars in thousands)
Balance, beginning of period............................... $ 18,252 $ 17,826 $ 16,317 $ 13,592 $ 14,387
Loans charged-off:
Commercial, financial and agriculture.............. 1,409 591 1,288 1,331 3,174
Real estate construction........................... -- 74 45 4 --
Real estate mortgage:
Residential (1-4 family)....................... 142 583 280 376 1,564
Home equity lines.............................. 27 -- 14 239 25
Multifamily.................................... 45 -- -- -- --
Non-farm, non-residential (1).................. 81 95 -- 89 170
Agricultural................................... -- -- -- -- --
---------- --------- --------- --------- ---------
Real estate subtotal................... 295 678 294 704 1,759
Consumer............................................... 643 952 669 1,316 1,334
Credit card............................................ 537 343 146 144 178
---------- --------- --------- --------- ---------
Loans to individuals subtotal.......... 1,180 1,295 815 1,460 1,512
Total loans charged-off................ 2,884 2,638 2,442 3,499 6,445
Recoveries:
Commercial, financial and agriculture.............. 142 642 817 506 524
Real estate construction........................... -- -- -- 8 --
Real estate mortgage:
Residential (1-4 family)....................... 119 68 125 332 117
Home equity lines.............................. -- 56 22 -- 25
Multifamily.................................... 3 -- -- -- --
Non-farm, non-residential (1).................. 37 19 4 31 --
Agricultural................................... -- -- -- -- --
---------- --------- --------- --------- ---------
Real estate subtotal................... 159 143 151 363 142
Loans to individuals:
Consumer........................................... 192 218 301 487 245
Credit card........................................ 25 13 12 22 40
---------- --------- --------- --------- ---------
Loans to individuals subtotal.......... 217 231 313 509 285
Total recoveries....................... 518 1,016 1,281 1,386 951
---------- --------- --------- --------- ---------
Net charge-offs............................................ 2,366 1,622 1,161 2,113 5,494
Provision for loan losses.................................. 2,050 2,048 2,670 3,395 4,799
Increase from purchase..................................... -- -- -- 1,443 --
---------- --------- --------- --------- ---------
Balance, end of period..................................... $ 17,936 $ 18,252 $ 17,826 $ 16,317 $ 13,692
---------- --------- --------- --------- ---------
---------- --------- --------- --------- ---------
Ratio of allowance for loan losses to loans outstanding
at end of period......................................... 1.25% 1.41% 1.47% 1.46% 1.49%
Ratio of net charge-offs to average loans outstanding
during period............................................ 0.17% 0.13% 0.10% 0.21% 0.61%
(1) This category generally consists of commercial and industrial loans where
real estate constitutes a source of collateral.
Nonperforming Assets. Total nonperforming assets, which consist of
nonaccrual loans, restructured loans and foreclosed properties, decreased 17.1%,
19.9% and 15.6% during 1996, 1995 and 1994, respectively. The improvement in
nonperforming assets during the last three years was due to reduced levels of
new nonperforming loans as a result of an improving economic environment and
management's efforts to identify deteriorating assets early enough in the cycle
to ensure prompt action toward resolution.
Nonperforming loans (nonaccrual loans and restructured loans) at December
31, 1996 were $11.2 million, or 0.8% of total loans, down from $13.6 million, or
1.1% of total loans at December 31, 1995 and down from $20.9
17
million, or 1.7% of total loans, at December 31, 1994. Nonperforming loans
at year end 1996 were composed largely of 1-4 family residential loans
amounting to $3.6 million, construction and land development amounting to $50
thousand, real estate secured by farmland amounting to $1.1 million and
commercial loans secured by real estate amounting to $3.4 million.
Nonperforming loans are those loans where, in the opinion of management,
the full collection of principal or interest is unlikely. Nonperforming loans
decreased 17.8% during 1996 and 34.7% during 1995.
The net amount of interest recorded during each year on loans that were
classified as nonperforming or restructured on December 31, 1996, 1995 and 1994
were $769 thousand, $229 thousand and $159 thousand, respectively. If these
loans had been accruing interest at their originally contracted rates, related
income would have been $1.5 million in 1996, $1.3 million in 1995 and $1.4
million in 1994.
The recorded investment in certain loans that were considered to be
impaired in accordance with FASB 114 was $8.9 million at year end 1996 as
compared to $11.0 million at year end 1995, of which $6.5 million are included
in nonperforming assets under Table 11. Included in 1996 impaired loans are $5.6
million secured by commercial real estate. All impaired loans at year end 1996
had a related valuation allowance totaling $1.4 million. At year end 1995, $8.0
million had a related valuation allowance of $1.4 million and $3.3 million did
not have a valuation allowance primarily due to application of interest payments
against book balances or write-downs previously taken on these loans. The
average recorded investment in certain impaired loans for the years ended
December 31, 1996 and December 31, 1995 was approximately $9.3 million and $11.7
million, respectively. For the year 1996 and 1995, interest income recognized on
impaired loans totaled $154 thousand and $263 thousand, all of which was
recognized on a cash basis.
Nonaccrual loans excluded from impaired loan disclosure under FASB 114
amounted to $4.6 million and $3.2 million at December 31, 1996 and 1995,
respectively. If interest on these loans had been accrued, such income would
have approximated $345 thousand and $396 thousand for 1996 and 1995,
respectively.
Foreclosed properties consists of 27 parcels of real estate acquired
through debt previously contracted. These properties consist primarily of
commercial and residential real estate whose value is determined through sale at
public auction or fair market value, whichever is less. In 1995, F&M acquired
through foreclosure approximately 1,000 acres of real estate located in
Jefferson County, West Virginia, valued in excess of $4 million. F&M is
marketing this property and will dispose of it as expediently as possible. At
December 31, 1996, F&M had $12.4 million in foreclosed property upon which it
does not anticipate incurring any material loss on the final disposition.
In March 1996, F&M acquired approximately 247 acres in Jefferson County,
West Virginia, for development purposes. The development project consists of
single family residential lots with sales to be directed toward the commuter
market. A contingency reserve of $500 thousand has been established to account
for development costs such as installing roads and utilities associated with the
project.
Table 11 -- Nonperforming Assets
December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------- ------------ ------------ -------------
(Dollars in thousands)
Nonaccrual loans................................... $ 11,116 $ 13,272 $ 20,504 $ 28,761 $ 17,181
Restructured loans................................. 82 358 382 770 753
Foreclosed property................................ 12,396 14,839 14,657 12,584 8,884
------------ ------------- ------------ ------------ -------------
Total nonperforming assets................. $ 23,594 $ 28,469 $ 35,543 $ 42,115 $ 26,818
============ ============= ============ ============ =============
Loans past due 90 days accruing interest........... $ 4,487 $ 3,789 $ 1,973 $ 2,887 $ 5,588
Allowance for loan losses to period end loans...... 1.25% 1.41% 1.47% 1.46% 1.49%
Allowance for loan losses to nonaccrual loans...... 161.35% 137.53% 86.94% 56.73% 79.69%
Nonperforming assets to period end loans and
foreclosed properties............................ 1.63% 2.17% 2.90% 3.72% 2.89%
Net charge-offs to average loans................... 0.17% 0.13% 0.10% 0.21% 0.61%
The loss of income associated with nonperforming loans at December 31 were:
December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ------------- ------------ ------------ -------------
(Dollars in thousands)
Income that would have been recorded in
accordance with original terms:
Nonaccrual loans and restructured loans...... $ 1,549 $ 1,343 $ 1,444 $ 1,244 $ 1,077
Income actually recorded:
Nonaccrual and restructured loans............ 769 229 159 33 --
18
On December 31, 1996, there were no material outstanding commitments to
lend additional funds with respect to nonperforming loans.
Loans are placed on nonaccrual status when collection of interest and
principal is doubtful, generally when loans become 90 days past due. There are
three negative implications for earnings when a loan is placed on nonaccrual
status. First, all interest accrued but unpaid at the date the loan is placed on
nonaccrual status is either deducted from interest income or written off as a
loss. Second, accruals of interest are discontinued until it becomes certain
that both principal and interest can be repaid. Third, there may be actual
losses which necessitate additional provisions for loan losses be charged
against earnings.
At December 31, 1996, loans past due 90 days or more and still accruing
interest because they are both well secured and in the process of collection
were $4.5 million, compared to $3.8 million at December 31, 1995 and $2.0
million at December 31, 1994.
Potential Problem Loans. At December 31, 1996, potential problem loans
were approximately $26.2 million, including 6 lending relationships with
principal balances in excess of $500,000, which had an aggregate principal
balance outstanding of $11.3 million. Loans are viewed as potential problem
loans according to the ability of such borrowers to comply with current
repayment terms. These loans are subject to constant management attention, and
their status is reviewed on a regular basis. The potential problem loans
identified at December 31, 1996 are generally secured by residential and
commercial real estate with appraised values that exceed the principal balance.
Although trends for credit quality factors, such as non-performing assets,
continue to improve, it is likely that F&M will continue modest provisions for
loan losses in 1997. The principal factor for additional provisions is expected
growth in the loan portfolio as the result of continued improvement in economic
conditions.
Continued positive economic conditions and an assessment of the loan
portfolio and problem assets suggest that loan losses in 1997 should not be
materially greater than those in 1996. At such relatively low levels of loan
losses as were experienced in 1996, however, a minor dollar fluctuation in
losses could represent a large percentage increase. Loan loss expectations for
1997 are influenced by economic forecasts of continued growth and moderate
interest rates. Financial circumstances of individual borrowers also will affect
loan loss results. Unforeseen changes, either in economic conditions or
borrowers' financial conditions, could also impact actual loan losses in 1997.
F&M will maintain and follow its policies and practices intended to minimize
future credit losses.
Securities
The book value of the securities portfolio was $597.0 million at December
31, 1996, compared to $634.7 million at December 31, 1995. The securities
portfolio decreased $37.8 million in 1996 over 1995, which followed an increase
of $44.4 million in 1995 over 1994. Investment in U.S. Government securities
decreased $38.0 million, or -6.5%, for the year 1996, and increased $54.6
million, or 10.3%, for the year 1995, while investment in states and political
subdivisions declined during the same periods. F&M has generally not reinvested
funds in securities issued by states and political subdivisions, because those
securities do not have the same tax benefits that they have had in the past.
The securities portfolio consists of two components, securities held to
maturity and securities available for sale. Securities are classified as held to
maturity when management has the intent and F&M has the ability at the time of
purchase to hold the securities to maturity. Securities held to maturity are
carried at cost adjusted for amortization of premiums and accretion of
discounts. Securities to be held for indefinite periods of time are classified
as available for sale and accounted for at the lower of cost or market value.
Securities available for sale include securities that may be sold in response to
changes in market interest rates, changes in the security's prepayment risk,
increases in loan demand, general liquidity needs and other similar factors.
FASB Pronouncement No. 115 effective January 1, 1994, required F&M to show
the effect of market changes in the value of securities available for sale
(AFS). The market value of AFS securities at December 31, 1996 was $263.4
million. The effect of the market value of AFS securities less the book value of
AFS securities, net of income taxes is reflected as a line in Stockholders'
Equity as unrealized gain of $429 thousand and $3.3 million at December 31, 1996
and December 31, 1995, respectively. Investment rates have decreased in 1996 and
1995, thereby, causing currently held bond portfolio market values to increase.
In 1995, the decline in market yields was due to interest rate fluctuations only
and not a result of re-ratings or down grading of securities.
It is F&M's policy not to engage in activities considered to be derivative
in nature such as futures, option contracts, swaps, caps, floors, collars or
forward commitments. F&M considers derivatives as speculative which is contrary
to F&M's historical or prospective philosophy. F&M does not hold or issue
financial instruments for trading purposes. F&M does hold in its loan and
security portfolio investments that adjust or float according to changes in the
"prime" lending rate which is not considered speculative, but necessary for good
asset/liability management. Off-balance sheet risks such as commitments to
extend credit, standby letters of credit and other items are discussed in Note
17 in the Notes to Consolidated Financial Statements.
19
Table 12 -- Investment Portfolio and Securities Available For Sale
The carrying value of investment securities at the dates indicated was:
December 31,
--------------------------------
1996 1995 1994
--------- ---------- ----------
(Dollars in thousands)
U.S. Government securities................................ $ 301,630 $309,506 $ 303,975
States and political subdivisions......................... 30,351 33,112 39,617
Other securities.......................................... 1,584 985 3,721
---------- ---------- ----------
Total investment securities....................... $ 333,565 $343,603 $ 347,313
========== ========== ==========
The carrying value of securities available for sale at the dates indicated
was:
December 31,
--------------------------------
1996 1995 1994
--------- ---------- ----------
(Dollars in thousands)
U.S. Government securities................................ $ 245,853 $276,017 $ 226,986
Other securities.......................................... 17,575 15,127 16,091
---------- ---------- ----------
Total securities available for sale............... $ 263,428 $291,144 $ 243,077
========== ========== ==========
Table 13 -- Distribution and Yields of Securities
December 31, 1996
Taxable-Equivalent Basis
Due after 1 Due after 5 Due after 10
Due in 1 year through 5 through 10 years and
or less years years Equity Securities Total
----------------- ----------------- ----------------- ----------------- -----------------
Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
--------- ------ --------- ------ -------- ------ -------- ------ --------- ------
(Dollars in thousands)
Securities held for investment:
U.S. Government
securities............... $ 73,060 5.77% $140,899 6.17% $ 64,132 6.79% $ 23,539 7.42% $301,630 6.30%
Other taxable securities... -- 0.00% 1,324 7.72% 260 5.70% -- 7.00% 1,584 7.38%
--------- -------- -------- -------- ---------
Total taxable.......... 73,060 5.77% 142,223 6.18% 64,392 6.79% 23,539 7.42% 303,214 6.30%
Tax-exempt securities (1).. 5,648 5.13% 11,461 5.26% 9,590 5.47% 3,652 5.31% 30,351 5.31%
--------- -------- -------- -------- ---------
Total ................. $ 78,708 5.72% $153,684 6.12% $ 73,982 6.62% $ 27,191 7.14% $ 333,565 6.22%
--------- -------- -------- -------- ---------
Securities held for sale:
U.S. Government
securities................ $ 43,534 6.22% $134,509 6.14% $ 45,631 6.77% $ 22,179 6.94% $ 245,853 6.35%
Other taxable securities... 10,506 2.85% 7,069 6.03% -- 0.00% -- 0.00% 17,575 4.13%
--------- -------- -------- -------- ---------
Total ................. $ 54,040 5.56% $141,578 6.13% $ 45,631 6.77% $ 22,179 6.94% $ 263,428 6.20%
--------- -------- -------- -------- ---------
Total securities............. $ 132,748 5.66% $295,262 6.12% $119,613 6.67% $ 49,370 7.05% $ 596,993 6.21%
========= ======== ======== ======== =========
(1) Yields on tax-exempt securities have been computed on a tax-equivalent
basis.
See Note 2 to the Consolidated Financial Statements as of December
31, 1996 for an analysis of gross unrealized gains and losses in the securities
portfolio.
Deposits
F&M has made an effort in recent years to increase core deposits and
reduce cost of funds. Deposits provide funding for F&M's investments in loans
and securities, and the interest paid for deposits must be managed carefully to
control the level of interest expense.
Deposits at December 31, 1996 increased $84.1 million or 4.5% to $1.967
billion from $1.883 billion at year end 1995. Non-interest bearing demand
deposits increased $20.5 million (6.5%) from $314.0 million in 1995 to $334.5
million in 1996. Interest bearing deposits increased $63.6 million (4.1%) to
$1.632 billion in 1996. Savings deposits and money market deposits experienced a
reduction in deposits of $12.8 million, while certificates of deposit over and
under $100,000 experienced a $55.3 million or 6.4% increase in deposits. Unlike
deposit growth in 1995 which was affected by comparatively low interest rates
and the consequent movement of funds out of deposit accounts and into
20
alternative investments, depositors in 1996 were seeking attractive guaranteed
rates provided by certificates of deposits.
F&M does not have any other time deposits, other than certificates of
deposits, over $100,000.
Deposits at December 31, 1995 grew $128.7 million or 7.3% to $1.883
billion. Non-interest bearing demand deposits increased $22.6 million (7.8%)
from $291.4 million in 1994 to $314.0 million in 1995. Interest bearing deposits
increased $106.1 million (7.3%) to $1.569 billion in 1995. Interest checking,
savings deposits, and money market deposits experienced a reduction in deposits
in 1995, whereas, certificates of deposit over and under $100,000 experienced an
increase in deposits. Deposit growth in 1995 was affected by comparatively low
interest rates and the consequent movement of funds out of deposit accounts and
into alternative investments. In addition to moving funds out of deposit
accounts, depositors continued to shift funds into more liquid accounts.
Table 14 -- Deposits and Rates Paid
December 31,
------------------------------------------------------------------------------------
1996 1995 1994
------------------------- ----------------------- ------------------------
Amount Rate Amount Rate Amount Rate
----------- ---------- ------------ --------- ------------ ---------
(Dollars in thousands)
Noninterest-bearing accounts... $ 334,499 $ 314,037 $ 291,414
----------- ----------- -----------
Interest-bearing accounts:
Interest checking.......... 305,040 2.20% 283,857 2.44% 292,839 2.48%
Regular savings............ 205,029 2.83% 211,982 3.23% 235,412 3.07%
Money-market............... 207,860 2.87% 213,722 3.08% 248,744 2.86%
Time deposits:
Less than $100,000.... 742,433 5.56% 692,028 5.43% 567,672 4.46%
$100,000 and more.... 172,077 5.53% 167,223 5.47% 118,050 4.53%
----------- ----------- -----------
Total interest-bearing......... 1,632,439 4.25% 1,568,812 4.24% 1,462,717 3.56%
----------- ----------- -----------
Total.................. $ 1,966,938 $ 1,882,849 $ 1,754,131
=========== =========== ===========
Maturities of CD's of $100,000 and More
Within Three to Six to One to Over Percent
Three Six Twelve Five Five of Total
Months Months Months Years Years Total Deposits
---------- ---------- ---------- ---------- --------- ---------- -------------
(Dollars in thousands)
At December 31, 1996... $ 38,544 $ 25,493 $ 60,502 $ 47,438 $ 100 $ 172,077 8.75%
Capital Resources
Management seeks to maintain a capital structure that will assure an
adequate level of capital to support anticipated asset growth and absorb
potential losses. The adequacy of F&M's capital is reviewed by management on an
ongoing basis with emphasis on the size, composition and quality of F&M's asset
and liability levels and consistent with regulatory requirements and industry
standards.
The Federal Reserve, along with the Comptroller of the Currency and the
Federal Deposit Insurance Corporation, have adopted capital guidelines to
supplement the definitions of capital for regulatory purposes and to establish
minimum capital standards. Specifically, the guidelines categorize assets and
off-balance sheet items into four risk-weighted categories. The minimum ratio of
qualifying total capital to risk-weighted assets is 8.0%, of which at least 4.0%
must be Tier I capital, composed of common equity, retained earnings and a
limited amount of perpetual preferred stock, less certain goodwill items. F&M
had a ratio of risk-weighted assets to total capital of 16.78% at December 31,
1996 and a ratio of risk-weighted assets to Tier I capital of 15.53%. Both of
these exceed the capital requirements adopted by the federal bank regulatory
agencies.
Table 15 reflects the cash dividends per share declared during each
quarter of the periods indicated. The information in Table 15 may vary for
certain periods from the dividends paid during the quarter in cases where the
dividend was paid in the quarter following its declaration. In addition, the
amounts shown have not been restated and adjusted to reflect the acquisition on
March 29, 1996 of FB&T Financial Corporation and on October 1, 1996 of
Allegiance Banc Corporation.
21
Table 15 -- Common Stock Performance and Dividends
Common Stock Price
------------------------------------------
1996 1995 Dividends Declared
------------------
High Low High Low 1996 1995
---------- --------- -------- -------- -------- -------
First quarter....................... $ 19.750 $ 17.250 $ 17.125 $ 15.750 $ 0.160 $ 0.150
Second quarter...................... 18.500 16.000 17.375 15.500 0.160 0.150
Third quarter....................... 19.375 17.250 18.125 15.650 0.175 0.150
Fourth quarter...................... 21.375 18.125 20.000 17.250 0.230 0.160
Years ended December 31............. $ 21.375 $ 16.000 $ 20.000 $ 15.500 $ 0.725 $ 0.610
F&M National Corporation common stock is traded on the New York Stock Exchange
(NYSE) under the symbol FMN. On December 31, 1996 there
were approximately 8,313 shareholders of record.
Table 16 -- Analysis of Capital
December 31,
--------------------------------
1996 1995 1994
--------- ---------- ---------
(Dollars in thousands)
Tier 1 Capital:
Common stock............................. $ 40,747 $ 40,848 $ 40,346
Additional paid in capital............... 69,197 72,716 71,036
Retained earnings........................ 120,350 105,140 91,336
Less: Goodwill........................... 7,195 7,947 8,624
--------- ---------- ----------
Total Tier 1 capital..................... 223,099 210,757 194,094
Tier 2 Capital:
Allowance for loan losses................ 17,936 16,527 16,319
Allowable long term debt................. -- -- --
--------- ---------- ----------
Total Tier 2 capital..................... 17,936 16,527 16,319
Total risk-based capital................. $ 241,035 $ 227,284 $ 210,413
========== ========== ==========
Risk-weighted assets......................... $1,436,341 $1,322,144 $1,305,511
CAPITAL RATIOS:
Tier 1 risk-based capital ratio.......... 15.53% 15.94% 14.87%
Total risk-based capital ratio........... 16.78% 17.19% 16.12%
Tier 1 capital to average total assets... 9.90% 10.09% 9.72%
Liquidity
Liquidity represents an institution's ability to meet present and future
financial obligations through either the sale or maturity of existing assets or
the acquisition of additional funds through liability management. Liquid assets
include cash, interest-bearing deposits with banks, federal funds sold,
securities and loans classified as available for sale and loans and investment
securities maturing within one year. As a result of F&M's management of liquid
assets and the ability to generate liquidity through liability funding,
management believes that F&M maintains overall liquidity sufficient to satisfy
its depositors' requirements and meet its customers' credit needs.
At December 31, 1996, approximately $894.8 million or 42.8% of total
earning assets is due to mature or reprice within the next year.
F&M also maintains additional sources of liquidity through a variety of
borrowing arrangements. F&M's subsidiary banks maintain federal fund lines with
a number of larger regional and money-center banking institutions totaling in
excess of $66.5 million, of which $1.5 million was borrowed at December 31,
1996. Federal funds borrowed by F&M's subsidiary banks during 1996 averaged less
than $500,000. At December 31, 1996, certain of F&M's subsidiary banks had
outstanding $50.0 million of borrowings pursuant to securities repurchase
agreement transactions, ranging in maturity from one day to three months. Also,
F&M has credit lines totaling $243.8 million from the Federal Home Loan Bank
that can be utilized for short and/or long-term borrowing.
F&M engages in short-term borrowings at the parent company level, as well.
At December 31, 1996, F&M had $14.9 million outstanding in short-term
obligations issued to selected customers of F&M's subsidiary banks pursuant to a
master agreement. As a back-up source of funds, F&M has approved bank lines of
credit totaling $9.0 million. These lines are used irregularly with the average
aggregate balance outstanding under the lines not exceeding $1.0
22
million since they have been in place. At year end 1996, 1995 and 1994,
there were no outstanding balances under these lines of credit.
In 1994, some of F&M's subsidiary banks joined the Federal Home Loan Bank
system in order to enter a program of long-term borrowing which must be invested
in Residential Housing Finance Assets (RHFA). RHFA are defined as (1) Loans
secured by residential real property; (2) Mortgage-backed securities; (3)
Participations in loans secured by residential real property; (4) Loans financed
by Community Investment Program advances; (5) Loans secured by manufactured
housing, regardless of whether such housing qualifies as residential real
property; or (6) Any loans or investments which the Federal Housing Finance
Board and the Bank, in their discretion, otherwise determine to be residential
housing finance assets. In 1996, long-term borrowings from the Federal Home Loan
Bank system for RHFA investments were $11.5 million maturing through 2006.
Accounting Rule Changes
FASB Statement No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", was issued in June, 1996
and establishes, among other things, new criteria for determining whether a
transfer of financial assets in exchange for cash or other consideration should
be accounted for as a sale or as a pledge of collateral in a secured borrowing.
Statement 125 also establishes new accounting requirements for pledged
collateral. As issued, Statement 125 is effective for all transfers and
servicing of financial assets and extinguishments of liabilities occurring after
December 1996.
FASB Statement No. 127, "Deferral of the Effective Date of Certain
Provisions of FASB Statement No. 125", defers for one year the effective date
(a) of paragraph 15 of Statement 125 and (b) for repurchase agreement,
dollar-roll, securities lending, or similar transactions, of paragraph 9-12 and
237(b) of Statement 125.
The effects of these Statements on the Corporation's consolidated
financial statements are not expected to be material.
23
F&M NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1996 and 1995
December 31,
----------------------------------
1996 1995
--------------- ---------------
Assets
Cash and due from banks (Notes 1, 14 and 18)........................................ $ 112,865,694 $ 112,689,788
Interest-bearing deposits in other banks............................................ 1,262,050 1,186,003
Securities (fair value: 1996, $598,969,796; 1995, $643,026,452)
(Notes 1 and 2).................................................................. 596,993,106 634,746,903
Federal funds sold and securities purchased under
agreements to resell............................................................. 69,045,000 85,805,674
Loans (Notes 1, 3, 5 and 18)....................................................... 1,444,827,004 1,302,793,863
Unearned income.................................................................... (5,719,476) (6,590,035)
--------------- ---------------
Loans (net of unearned income)......................................... 1,439,107,528 1,296,203,828
Allowance for loan losses (Notes 1 and 4)........................................ (17,936,226) (18,252,558)
--------------- ---------------
Net loans.............................................................. 1,421,171,302 1,277,951,270
Bank premises and equipment, net (Notes 1 and 6)................................... 45,938,850 40,030,724
Other assets....................................................................... 56,474,848 55,578,691
--------------- ---------------
Total assets........................................................... $ 2,303,750,850 $ 2,207,989,053
=============== ===============
Liabilities and Shareholders' Equity
Liabilities
Deposits:
Noninterest bearing.............................................................. $ 334,499,270 $ 314,036,710
Interest bearing................................................................. 1,632,438,743 1,568,812,598
--------------- ---------------
Total deposits (Note 7)................................................ $ 1,966,938,013 $ 1,882,849,308
Federal funds purchased and securities sold under
agreements to repurchase......................................................... 51,536,393 57,472,002
Federal Home Loan Bank advances.................................................... 8,297,300 5,737,275
Other short-term borrowings (Notes 5 and 8)........................................ 14,875,683 18,792,294
Long-term debt (Note 9)............................................................ 11,496,969 4,225,000
Other liabilities.................................................................. 19,883,010 16,866,767
Commitments and contingent liabilities
(Notes 14 and 17)................................................................ -- --
--------------- ---------------
Total liabilities...................................................... $ 2,073,027,368 $ 1,985,942,646
--------------- ---------------
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 1996, 20,373,697 shares; issued 1995, 20,423,878 shares................... 40,747,394 40,847,756
Capital surplus.................................................................... 69,196,572 72,715,714
Retained earnings (Note 16)........................................................ 120,350,161 105,139,724
Unrealized gain (loss) on securities available for sale, net....................... 429,355 3,343,213
--------------- ---------------
Total shareholders' equity............................................. $ 230,723,482 $ 222,046,407
--------------- ---------------
Total liabilities and shareholders' equity............................. $ 2,303,750,850 $ 2,207,989,053
=============== ===============
- ------------------
See Notes to Consolidated Financial Statements.
24
F&M NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income
For Each of the Three Years in the Period Ended December 31, 1996
December 31,
-----------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
Interest Income
Interest and fees on loans......................................... $ 125,593,301 $ 116,725,791 $ 100,646,346
Interest and dividends on investment securities:
Taxable interest income......................................... 19,077,161 18,950,847 15,595,804
Interest income exempt from federal income taxes................ 1,715,787 2,080,992 2,230,281
Interest and dividends on securities available for sale:
Taxable interest income......................................... 17,026,922 15,200,231 17,571,906
Dividends....................................................... 594,433 503,036 323,885
Interest income on federal funds sold and securities
purchased under agreements to resell............................ 3,914,340 4,992,000 3,400,424
Interest on deposits in banks..................................... 111,476 75,637 37,744
--------------- --------------- ---------------
Total interest income.......................... $ 168,033,420 $ 158,528,534 $ 139,806,390
--------------- --------------- ---------------
Interest Expense
Interest on deposits (Note 7)...................................... $ 68,383,740 $ 64,676,453 $ 51,659,229
Interest on short-term borrowings................................. 2,328,794 2,167,039 1,629,484
Interest on long-term debt........................................ 518,515 313,355 120,313
--------------- --------------- ---------------
Total interest expense......................... $ 71,231,049 $ 67,156,847 $ 53,409,026
--------------- --------------- ---------------
Net interest income............................ $ 96,802,371 $ 91,371,687 $ 86,397,364
Provision for loan losses (Notes 1 and 4)......................... 2,049,535 2,048,366 2,669,380
--------------- --------------- ---------------
Net interest income after provision
for loan losses............................. $ 94,752,836 $ 89,323,321 $ 83,727,984
--------------- --------------- ---------------
Other Income
Commissions and fees from fiduciary activities..................... $ 2,196,396 $ 1,811,631 $ 1,642,010
Service charges on deposit accounts............................... 9,086,889 8,053,520 7,449,095
Credit card fees.................................................. 3,400,751 3,193,424 2,611,519
Fees for other customer services.................................. 1,848,682 1,734,422 2,105,396
Other operating income............................................ 3,945,421 4,207,103 4,440,380
Profits on securities available for sale (Note 2)................. 265,584 518,582 272,629
Investment securities gains, net (Note 2)......................... 1,602 236 19,895
--------------- --------------- ---------------
Total other income............................. $ 20,745,325 $ 19,518,918 $ 18,540,924
--------------- --------------- ---------------
Other Expenses
Salaries and employees' benefits (Notes 11, 12 and 13)............. $ 37,228,829 $ 35,506,637 $ 33,915,170
Net occupancy expense of premises (Notes 6 and 14)................. 5,957,516 5,966,327 5,512,462
Furniture and equipment expenses (Notes 6 and 14).................. 5,370,362 4,983,931 4,595,909
Deposit insurance.................................................. 204,629 2,086,455 3,906,687
Credit card expense................................................ 2,230,768 1,971,396 1,950,447
Other operating expenses........................................... 20,113,419 19,651,161 17,666,410
--------------- --------------- ---------------
Total other expenses........................... $ 71,105,523 $ 70,165,907 $ 67,547,085
--------------- --------------- ---------------
Income before income taxes..................... $ 44,392,638 $ 38,676,332 $ 34,721,823
Income tax expense (Notes 1 and 15)................................. 15,095,008 12,840,959 10,450,181
--------------- --------------- ---------------
Net income..................................... $ 29,297,630 $ 25,835,373 $ 24,271,642
=============== =============== ===============
Earnings Per Share (Note 1)
Per average share outstanding, net income.......................... $ 1.44 $ 1.27 $ 1.19
=============== =============== ===============
- ------------------
See Notes to Consolidated Financial Statements.
25
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, 1996
Unrealized Gain
(Loss) on Secur-
Common Capital Retained ities Available
Stock Surplus Earnings for Sale, Net Total
------------- ------------- -------------- ------------- -------------
Balance -- December 31, 1993.................$ 39,164,396 $ 66,155,782 $ 83,165,715 $ 553,186 $189,039,079
Net income -- 1994......................... -- -- 24,271,642 -- 24,271,642
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 (16,817 shares).. 33,634 48,170 -- -- 81,804
Issuance of stock options under nonvari-
able 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.... -- -- (58,029) -- (58,029)
Issuance of common stock for employee
stock discount plan (16,755 shares)..... 33,510 192,579 -- -- 226,089
Issuance of common stock -- stock split--
Allegiance Banc Corporation
(225,308 shares).................... 450,616 -- (450,616) -- --
Change in unrealized gain (loss) on
securities available for sale, net of
deferred income taxes of $3,762,241. -- -- -- (7,835,498) (7,835,498)
------------- ------------- -------------- ------------- -------------
Balance -- December 31, 1994.................$ 40,346,112 $ 71,036,288 $ 91,335,612 $ (7,282,312) $195,435,700
Net income -- 1995......................... -- -- 25,835,373 -- 25,835,373
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) (99,458) -- (3,175,613)
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 nonvari-
able 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 secur-
ities available for sale, net of deferred
income taxes of $5,824,493.............. -- -- -- 10,625,525 10,625,525
------------- ------------- -------------- ------------- ------------
Balance-- December 31, 1995................. $ 40,847,756 $ 72,715,714 $ 105,139,724 $ 3,343,213 $222,046,407
Net income-- 1996......................... -- -- 29,297,630 -- 29,297,630
Cash dividends declared ($0.69 per share). -- -- (14,087,193) -- (14,087,193)
Acquisition of common stock
(410,704 shares)........................ (821,408) (6,634,880) -- -- (7,456,288)
Issuance of common stock-- employee
stock ownership plan (55,326 shares).... 110,652 873,355 -- -- 984,007
Issuance of common stock-- exercise of
employee stock options (275,699 shares). 551,398 1,218,157 -- -- 1,769,555
Issuance of stock options under nonvari-
able compensatory plan (50,000 shares).. -- 500,000 -- -- 500,000
Issuance of common stock for employee
stock discount plan (29,498 shares)..... 58,996 524,226 -- -- 583,222
Change in unrealized gain (loss) on
securities available for sale, net of
deferred income taxes of $1,626,806..... -- -- -- (2,913,858) (2,913,858)
------------- ------------- -------------- ------------- ------------
Balance -- December 31, 1996................ $ 40,747,394 $ 69,196,572 $ 120,350,161 $ 429,355 $230,723,482
============= ============= ============== ============= ============
See Notes to Consolidated Financial Statements.
26
F&M NATIONAL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For Each of the Three Years in the Period Ended December 31, 1996
December 31,
------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
Cash Flows From Operating Activities
Net income......................................................... $ 29,297,630 $ 25,835,373 $ 24,271,642
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization................................. 4,784,076 4,788,076 4,389,944
Provision for loan losses..................................... 2,049,535 2,048,366 2,669,380
Deferred income taxes (credits)............................... (33,943) 75,869 504,663
Profits on securities available for sale...................... (265,584) (518,582) (272,629)
Investment securities gains, net.............................. (1,602) (236) (19,895)
(Gain) loss on sale of other real estate...................... (121,161) (91,504) (111,159)
Net amortization and accretion of securities.................. 303,980 384,494 835,397
Increase in other assets...................................... (2,035,832) (4,243,100) (36,317)
Increase (decrease) in other liabilities...................... 978,081 6,742,229 (4,486,765)
--------------- --------------- ---------------
Net cash provided by operating activities....... $ 34,955,180 $ 35,020,985 $ 27,744,261
--------------- --------------- ---------------
Cash Flows From Investing Activities
(Increase) decrease in interest-bearing deposits in other banks... $ (76,047) $ (956,792) $ 2,013,704
Proceeds from sales, principal repayments and calls of securities
available for sale ............................................. 45,978,750 37,463,623 73,433,018
Proceeds from maturities of securities available for sale......... 28,950,300 37,875,663 36,698,256
Proceeds from principal repayments and calls of investment
securities...................................................... 13,935,579 20,736,543 14,165,988
Proceeds from maturities of investment securities................. 96,915,000 76,545,000 69,747,000
Purchase of securities available for sale......................... (77,874,356) (99,372,271) (59,556,641)
Purchase of investment securities................................. (74,736,534) (100,981,652) (146,137,390)
(Increase) decrease in federal funds sold and securities purchased
under agreements to resell...................................... 16,760,674 (40,770,674) 37,541,000
Net (increase) in loans........................................... (147,688,459) (96,557,941) (96,240,485)
Purchases of bank premises and equipment.......................... (9,895,697) (7,250,248) (6,100,280)
Proceeds from sale of other real estate........................... 5,051,573 7,201,709 3,824,378
Acquisition of intangible assets.................................. -- -- (3,175,798)
--------------- --------------- ---------------
Net cash (used in) investing activities......... $ (102,679,217) $ (166,067,040) $ (73,787,250)
--------------- --------------- ---------------
Cash Flows From Financing Activities
Net increase (decrease) in noninterest-bearing and interest-bearing
demand deposits and savings accounts.............................. $ 28,830,273 $ (44,810,986) $ 34,522,182
Net increase in certificates of deposit............................ 55,258,432 173,528,966 26,580,271
Dividends paid..................................................... (12,049,032) (10,571,850) (9,116,127)
Increase (decrease) in federal funds purchased and securities sold
under agreements to repurchase................................... (5,935,609) 19,028,993 7,217,592
Increase (decrease) in other short-term borrowings................. (3,916,611) 2,213,437 2,965,430
Net proceeds from issuance and sale of common stock................ 3,336,784 3,782,503 2,214,695
Acquisition of common stock........................................ (7,456,288) (3,175,613) (2,815,487)
Increase in Federal Home Loan bank advances........................ 2,560,025 3,861,981 1,875,294
Proceeds from long-term debt....................................... 8,775,000 1,000,000 4,279,743
Principal payments on long-term debt............................... (1,503,031) (968,573) (86,170)
Cash paid in lieu of fractional shares on stock dividend........... -- -- (58,029)
--------------- --------------- ---------------
Net cash provided by financing activities...... $ 67,899,943 $ 143,888,858 $ 67,579,394
--------------- --------------- ---------------
Increase in cash and cash equivalents.......... $ 175,906 $ 12,842,803 $ 21,536,405
Cash and Cash Equivalents
Beginning.......................................................... 112,689,788 99,846,985 78,310,580
--------------- --------------- ---------------
Ending....... ..................................................... $ 112,865,694 $ 112,689,788 $ 99,846,985
=============== =============== ===============
Supplemental Disclosures of Cash Flow Information
Cash payments for:
Interest ....................................................... $ 70,827,904 $ 65,026,353 $ 52,845,925
=============== =============== ===============
Income taxes.................................................... $ 14,259,799 $ 10,615,038 $ 11,851,612
=============== =============== ===============
Supplemental Schedule of Noncash Investing and Financing Activities
Issuance of stock options under nonvariable compensatory plan..... $ 500,000 $ 206,440 $ 211,120
=============== =============== ===============
Issuance of common stock to acquire investment.................... $ -- $ 200,000 $ --
=============== =============== ===============
Loan balances transferred to foreclosed properties................ $ 2,418,892 $ 8,133,232 $ 7,219,969
=============== =============== ===============
Common stock issued for stock dividend............................ $ -- $ 1,068,282 $ 6,001,278
=============== =============== ===============
Unrealized gain (loss) on securities available for sale........... $ (4,548,264) $ 16,450,018 $ (11,597,739)
=============== =============== ===============
- ------------------
See Notes to Consolidated Financial Statements.
27
F&M NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For Each of the Three Years in the Period Ended December 31, 1996
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, West Virginia and Maryland. 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 Statement 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.
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, 1996 and 1995.
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 Statement No. 114,
"Accounting by Creditors for Impairment of a Loan", which was amended by FASB
Statement No. 118. 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
28
remote. Interest 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.
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.
Pension Plan
The Corporation has a trusteed, noncontributory defined contribution
pension plan covering substantially all full-time employees.
Income Taxes
The Corporation accounts for income taxes using the asset and liability
method of accounting for income taxes as prescribed by FASB Statement No. 109,
"Accounting for Income taxes". Under the asset and liability method of Statement
109, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the consolidated financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Under
Statement 109, the effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the year that includes the enactment date.
Common Stock
Shares of its own common stock reacquired by the Corporation are cancelled
as a matter of state law and are accounted for as authorized but unissued
shares.
Earnings 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 and Allegiance Banc Corporation in 1996, in acquisition of
Bank of Potomac in 1995, and in acquisition of PNB Financial Corporation and
Hallmark Bank & Trust Company in 1994, and the 2 1/2% stock dividend in 1994.
Trust Division
Securities and other property held by the Trust Division in a fiduciary or
agency capacity are not assets of the Corporation and are not included in the
accompanying consolidated financial statements.
Loan Fees and Costs
Loan origination and commitment fees and direct loan origination costs are
being recognized as collected and incurred. The use of this method of
recognition does not produce results that are materially different from results
which would have been produced if such costs and fees were deferred and
amortized as an adjustment of the loan yield over the life of the related loan.
Other Real Estate
Other real estate, classified in "other assets" in the accompanying
balance sheets, consists primarily of real estate held for resale which was
acquired through foreclosure on loans secured by real estate. Other real estate
is carried at the lower of cost or appraised market value less an allowance for
estimated selling expenses on the future
29
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.
Derivative Financial Instruments
In October, 1994, FASB Statement No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments" was issued. 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.
Note 2 -- Securities
The amortized cost and fair values of securities being held to
maturity as of December 31, 1996 and 1995 are as follows:
December 31, 1996
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------- --------------- --------------- ---------------
U.S. Treasury securities and obligations of
U.S. government corporations and agencies....... $ 301,630,183 $ 3,640,591 $ (2,105,085) $ 303,165,689
Obligations of states and political
subdivisions.................................... 30,350,628 525,884 (155,851) 30,720,661
Corporate securities.............................. 980,675 44,855 -- 1,025,530
Mortgage-backed securities........................ 603,678 26,356 (60) 629,974
--------------- --------------- --------------- ---------------
$ 333,565,164 $ 4,237,686 $ (2,260,996) $ 335,541,854
=============== =============== =============== ===============
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....... $ 309,505,838 $ 8,255,236 $ (823,118) $ 316,937,956
Obligations of states and political
subdivisions.................................... 33,112,251 854,416 (93,140) 33,873,527
Corporate securities.............................. 985,200 86,155 -- 1,071,355
--------------- --------------- --------------- ---------------
$ 343,603,289 $ 9,195,807 $ (916,258) $ 351,882,838
=============== =============== =============== ===============
The amortized cost and fair value of securities being held to maturity as
of December 31, 1996, 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.
30
Amortized Fair
Cost Value
--------------- ---------------
Due in one year or less................... $ 78,708,577 $ 78,741,480
Due after one year through five years..... 152,360,381 152,511,972
Due after five years through ten years.... 73,722,372 73,833,445
Due after ten years....................... 27,189,480 28,799,450
Corporate securities...................... 980,675 1,025,531
Mortgage-backed securities................ 603,679 629,976
--------------- ---------------
$ 333,565,164 $ 335,541,854
=============== ===============
The amortized cost and fair value of securities available for sale as of
December 31, 1996 and 1995, are as follows:
December 31, 1996
------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains (Losses) Value
--------------- --------------- --------------- ---------------
U.S. Treasury securities and obligations of
U.S. government corporations and agencies....... $ 246,088,681 $ 1,501,613 $ (1,736,700) $ 245,853,594
Corporate securities.............................. 8,127,053 781,421 (1,155) 8,907,319
Other............................................. 8,361,570 305,459 -- 8,667,029
--------------- --------------- --------------- ---------------
$ 262,577,304 $ 2,588,493 $ (1,737,855) $ 263,427,942
=============== =============== =============== ===============
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....... $ 271,384,134 $ 5,599,598 $ (967,274) $ 276,016,458
Corporate securities.............................. 7,898,408 514,373 (1,804) 8,410,977
Other............................................. 6,462,170 254,009 -- 6,716,179
--------------- --------------- --------------- ---------------
$ 285,744,712 $ 6,367,980 $ (969,078) $ 291,143,614
=============== =============== =============== ===============
The amortized cost and fair value of securities available for sale, as of
December 31, 1996 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..................$ 43,545,114 $ 43,534,146
Due after one year through five years.... 134,203,455 134,509,768
Due after five years through ten years... 45,906,889 45,630,921
Due after ten years...................... 22,433,223 22,178,758
Corporate securities..................... 8,127,053 8,907,320
Other.................................... 8,361,570 8,667,029
------------- -------------
$ 262,577,304 $ 263,427,942
============= =============
Proceeds from principal repayments and calls of securities held to
maturity during 1996, 1995 and 1994 were $13,935,579, $20,736,543 and
$14,165,988. Gross gains of $5,138, $26,862 and $27,452 and gross losses of
31
$3,536, $26,626 and $7,557 were realized on those principal repayments and calls
during 1996, 1995 and 1994, respectively. There were no sales of securities held
to maturity during 1996, 1995 and 1994.
Proceeds from sales, principal repayments and calls of securities
available for sale during 1996, 1995 and 1994 were $45,978,750, $37,463,623 and
$73,433,018. Gross gains of $320,878, $523,631 and $1,111,204 and gross losses
of $55,294, $5,049 and $838,575 were realized on those sales and calls during
1996, 1995 and 1994, respectively.
As allowed by the Question and Answer Guide to FASB Statement No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" issued in
November of 1995, debt securities with an amortized cost of $7,466,366 were
transferred from held-to-maturity to available-for-sale in December 1995. The
securities had an unrealized loss of approximately $107,153.
The book value of securities pledged to secure deposits and for other
purposes amounts to $129,074,575 and $151,128,142 at December 31, 1996 and 1995,
respectively.
Note 3 --Loans
Major classifications of loans are as follows:
December 31,
-------------------------------
1996 1995
------------- -------------
Commercial, financial and agricultural.. $ 225,327,000 $ 187,991,335
Real estate-- construction.............. 66,477,000 53,681,409
Real estate-- mortgage.................. 981,909,000 896,137,849
Consumer loans to individuals........... 171,114,004 164,983,270
------------- -------------
$1,444,827,004 $1,302,793,863
============== ==============
Note 4 --Allowance for Loan Losses
Changes in the allowance for loan losses are as follows:
December 31,
------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
Balance at beginning of year........................................ $ 18,252,558 $ 17,825,732 $ 16,316,978
Provision charged to operating expense.............................. 2,049,535 2,048,366 2,669,380
Recoveries added to the reserve..................................... 518,211 1,016,356 1,281,537
Loan losses charged to the reserve.................................. (2,884,078) (2,637,896) (2,442,163)
--------------- --------------- ---------------
Balance at end of year.............................................. $ 17,936,226 $ 18,252,558 $ 17,825,732
=============== =============== ===============
Impairment of loans having recorded investments of $8,895,545 at December 31,
1996 and $11,031,979 at December 31, 1995, has been recognized in conformity
with FASB Statement No. 114, as amended by FASB Statement No. 118. The average
recorded investment in impaired loans during 1996 and 1995 was $9,284,958 and
$11,715,971, respectively. The total allowance for loan losses related to these
loans was $1,354,493 and $1,429,961 on December 31, 1996 and 1995, respectively.
Interest income on impaired loans of $153,673 and $263,087 was recognized for
cash payments received in 1996 and 1995, respectively.
Nonaccrual loans excluded from impaired loan disclosure under Statement 114
amounted to $4,574,467 and $3,171,152 at December 31, 1996 and 1995,
respectively. If interest on these loans had been accrued, such income would
have approximated $345,392 and $396,493 for 1996 and 1995, respectively.
32
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, 1996
and 1995, these loans totaled $48,064,949 and $53,486,144, respectively. During
1996, total principal additions were $3,281,448 and total principal payments
were $8,702,643.
The Corporation was indebted to related parties for short-term
borrowings totaling $2,827,000 and $6,515,000 at December 31, 1996 and 1995,
respectively.
The Corporation paid $106,033 in 1996 to the law firms of two
directors who serve as legal counsel for two bank subsidiaries.
Construction in progress includes $1,967,979 paid by the Corporation to
companies of related parties.
Note 6 --Bank Premises and Equipment,Net
Premises and equipment are summarized as follows:
December 31,
-----------------------------------
1996 1995
--------------- ---------------
Premises............................................. $ 40,005,936 $ 36,476,953
Leasehold improvements............................... 4,368,052 4,586,157
Furniture and equipment.............................. 22,582,066 25,718,083
Construction in progress............................. 5,056,320 1,697,001
--------------- ---------------
$ 72,012,374 $ 68,478,194
Less accumulated depreciation and amortization....... (26,073,524) (28,447,470)
--------------- ---------------
$ 45,938,850 $ 40,030,724
=============== ===============
Depreciation and amortization of bank premises and equipment included in
operating expenses for the years ended December 31, 1996, 1995 and 1994, were
$3,987,571, $3,855,589 and $3,812,358, respectively.
Note 7 --Deposits
Deposits outstanding at December 31, 1996, 1995 and 1994, and the related
interest expense for the periods then ended are summarized as follows:
December 31,1996 December 31,1995
------------------------------------ ------------------------------------
Amount Expense Amount Expense
----------------- ---------------- --------------- ---------------
Noninterest bearing.......................... $ 334,499,270 $ -- $ 314,036,710 $ --
----------------- ---------------- --------------- ---------------
Interest bearing:
Interest checking.......................... $ 305,040,322 $ 6,342,326 $ 283,857,011 $ 6,733,646
Money market accounts...................... 207,860,462 6,095,841 213,722,288 6,931,302
Regular savings............................ 205,028,539 5,879,215 211,982,311 6,845,530
Certificates of deposit:
Less than $100,000....................... 742,433,389 40,919,170 692,028,074 35,881,273
$100,000 and more........................ 172,076,031 9,147,188 167,222,914 8,284,702
----------------- ---------------- --------------- ---------------
Total interest bearing................. $ 1,632,438,743 $ 68,383,740 $ 1,568,812,598 $ 64,676,453
----------------- ---------------- --------------- ---------------
Total deposits......................... $ 1,966,938,013 $ 68,383,740 $ 1,882,849,308 $ 64,676,453
================= ================ =============== ===============
33
December 31,1994
------------------------------------
Amount Expense
----------------- ----------------
Noninterest bearing.................... $ 291,414,432 $ --
----------------- ----------------
Interest bearing:
Interest checking.................... $ 292,839,556 $ 6,960,081
Money-market accounts................ 248,743,822 7,521,739
Regular savings...................... 235,411,496 7,441,570
Certificates of deposit:
Less than $100,000................. 567,672,196 24,454,748
$100,000 and more.................. 118,049,826 5,281,091
----------------- ----------------
Total interest bearing........... $ 1,462,716,896 $ 51,659,229
----------------- ----------------
Total deposits................... $ 1,754,131,328 $ 51,659,229
================= ================
Note 8 -- Short-Term Borrowings
The Corporation has unused lines of credit totaling $243,738,589 with the
Federal Home Loan Bank. In addition, the Corporation had unused lines of credit
totaling $9,000,000 with nonaffiliated banks at December 31, 1996.
Note 9 -- Long-Term Debt
In 1994, the Corporation 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 $11,496,969 and $4,225,000 at December 31, 1996 and 1995, maturing
through 2006. The interest rate on the notes payable range from 6.29% to 8.18%
at December 31, 1996. Principal payments on the notes are due as follows:
1997....................... $ 1,361,294
1998....................... 1,403,336
1999....................... 2,232,339
2000....................... 1,725,000
2001....................... 1,725,000
Later years................ 3,050,000
--------------
$ 11,496,969
==============
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.
Total assets and results of operations as originally reported for 1995
and 1994 have been restated to reflect the accounts of the pooled entities as
follows:
34
Total Total Net Net Income
Assets Income Income Per Share
--------------- --------------- --------------- ---------------
1995 originally reported.......................... $ 1,833,820,380 $ 149,481,907 $ 23,432,149 $ 1.42
1995 results of pooled entities................... 374,168,673 28,565,545 2,403,224 --
--------------- --------------- --------------- ---------------
As restated $ 2,207,989,053 $ 178,047,452 $ 25,835,373 $ 1.27
=============== =============== =============== ===============
1994 originally reported.......................... $ 1,708,492,508 $ 135,926,068 $ 20,700,876 $ 1.25
1994 results of pooled entities................... 311,998,121 22,421,246 3,570,766 --
--------------- --------------- --------------- ---------------
As restated $ 2,020,490,629 $ 158,347,314 $ 24,271,642 $ 1.19
=============== =============== =============== ===============
On April 6, 1995, F&M completed its acquisition of Bank of the Potomac,
Inc. (Potomac). A total of approximately 872,000 shares of the Corporation's
stock was issued in the transaction, which was accounted for as a
pooling-of-interests.
On July 1, 1994, F&M completed its acquisitions of PNB Financial
Corporation (PNB) and Hallmark Bank & Trust Company (Hallmark). A total of
approximately 1,193,000 shares of the Corporation's stock was issued in the PNB
transaction and approximately 1,107,000 shares of the Corporation's stock was
issued in the Hallmark transaction. The transactions were accounted for as a
pooling-of-interests.
Note 11 -- Stock-Based Compensation Plans
At December 31, 1996, the Corporation has two stock-based compensation
plans which are described below. Grants under those plans are accounted for
following APB Opinion No. 25 and related interpretations. Compensation cost
charged to income for the stock option plan was $136,077 and $102,806 for the
years ended December 1996 and 1995, respectively. No compensation cost has been
recognized for grants under the Employee Stock Discount Plan. Proforma
adjustments of compensation cost for the stock-based compensation plans
determined based on the grant date fair values of awards (the method described
in FASB Statement No. 123), did not have a material impact on net income and
earnings per common share.
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.
A summary of the status of the stock option plan at December 31, 1996 and
1995 and changes during the years ended on those dates is as follows:
1996 1995
------------------------------------ ------------------------------------
Weighted Weighted
Average Average
Exercise Exercise
Shares Price Shares Price
---------------- ---------------- --------------- ---------------
Outstanding at beginning of year............. 306,441 $ 7.24 344,867 $ 6.08
---------------- ---------------- --------------- ---------------
Granted...................................... 76,842 10.66 46,160 8.03
---------------- ---------------- --------------- ---------------
Exercised.................................... (186,131) 6.61 (84,586) 2.98
---------------- ---------------- --------------- ---------------
Forfeited.................................... (998) 11.89 -- --
---------------- ---------------- --------------- ---------------
Outstanding and exercisable at end
of year.................................. 196,154 $ 9.16 306,441 $ 7.24
================ ================ =============== ===============
Weighted-average fair value per option
of options granted during the year....... $ 8.19 $ 6.27
---------------- ---------------- --------------- ---------------
35
A further summary about options outstanding at December 31, 1996, is as
follows:
Options Outstanding and Exercisable
-----------------------------------------------------
Weighted Weighted
Range of Remaining Average
Exercise Number Contractual Exercise
Prices Outstanding Life Price
- -------------------- --------------- --------------- ---------------
4.17 - 7.81 7,043 .0 years $ 7.61
8.33 15,304 .8 8.33
6.26 5,270 1.2 6.26
9.62 15,299 2.0 9.62
8.35 8,335 2.3 8.35
8.14 - 10.95 22,443 3.2 10.15
11.89 16,767 4.2 11.89
7.69 - 7.93 30,693 7.0 7.90
7.94 26,000 8.0 7.94
10.00 49,000 9.0 10.00
---------------
4.17 - 11.89 196,154 5.5 $ 9.16
===============
Employee Stock Discount Plan
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. 29,498 shares were issued for the
1996 plan year at a discount of $91,217. 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. The number of shares available to be issued in future years totals
159,305.
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 1996, 1995 and 1994, was $233,993, $229,014 and
$142,087, 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 1996, 1995 and 1994 was $1,049,000, $955,029
and $610,173, respectively.
36
Note 13 -- Executive and Director Compensation Plans
Executive Incentive Compensation Plan
The Executive Incentive Compensation Plan was established for the purpose of
attracting and retaining key executives. The executives and the amounts of the
awards (subject to limits as set forth in the Plan) are determined by a
Committee composed of members of the Corporation's Board of Directors who are
not employees. The aggregate cash awards amounted to $1,226,842 in 1996,
$884,772 in 1995 and $684,768 in 1994.
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 1996, 1995 and 1994, based on the present value of the
retirement benefits, amounted to approximately $571,727, $517,981 and $240,315,
respectively. The plan is unfunded. However, life insurance has been acquired on
the lives of these employees in amounts sufficient to discharge the obligations
thereunder.
Nonemployee Director Stock Compensation and Warrant Plans
Effective June 15, 1994, FB&T Financial Corporation ("FB&T") (a subsidiary
of F&M National Corporation as of March 29, 1996) implemented a Nonemployee
Director Stock Compensation Plan (the "Option Plan"). Allegiance Bank, N.A.
("Allegiance") (a subsidiary of F&M National Corporation as of October 1, 1996)
implemented a Director Stock Warrant Plan effective February 8, 1994. The
exercise price of awards were fixed at the fair market value of the share on the
date the option was granted.
The following summarizes the option activity under the stock option plan
for the last two years as restated to equivalent shares of the Corporation's
common stock:
Number Option Price
of Shares Per Share
------------- ---------------
Outstanding, December 31, 1994.......... 100,799 $6.26 - $7.25
Grants.............................. 41,825 $8.14 - $8.77
Exercised........................... --
-------------
Outstanding, December 31, 1995.......... 142,624 $6.26 - $8.77
Grants.............................. --
Exercised........................... (89,567) $6.26 - $8.77
Cancelled........................... (4,790)
------------- ---------------
Outstanding, December 31, 1996 48,267 $6.26 - $8.77
============== ===============
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 1996, 1995 and 1994, was $2,756,738, $2,756,796
and $2,499,453, respectively. Minimum rental commitments under noncancelable
leases with terms in excess of one year as of December 31, 1996, were as
follows:
Year Operating Leases
-------------------------------- --------------------
1997............................ $ 2,334,125
1998............................ 2,302,804
1999............................ 2,122,708
2000............................ 1,933,409
2001............................ 1,783,605
Later years..................... 9,103,048
------------------
Total minimum payments.......... $ 19,579,699
==================
37
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, 1996 and 1995, the
aggregate amounts of daily average required balances were approximately
$21,962,000 and $19,077,000, respectively.
Note 15 -- Income Taxes
Net deferred tax assets consist of the following components as of December
31, 1996 and 1995:
1996 1995
------------------ ------------------
Deferred tax assets:
Provision for loan losses...................................... $ 5,636,079 $ 5,609,134
Salary continuation plan....................................... 1,090,405 901,926
Nonaccrual interest............................................ 34,085 281,960
Other.......................................................... 578,189 776,390
------------------ ------------------
$ 7,338,758 $ 7,569,410
------------------ ------------------
Deferred tax liabilities:
Depreciation................................................... $ 1,070,113 $ 1,015,615
Bond discount accretion........................................ 3,383 25,931
Excess tax basis - acquisition................................. 191,316 486,323
Securities available for sale.................................. 261,148 1,887,954
Other.......................................................... 22,305 23,843
------------------ ------------------
$ 1,548,265 $ 3,439,666
------------------ ------------------
$ 5,790,493 $ 4,129,744
================== ==================
The provision for income taxes charged to operations for the years ended
December 31, 1996, 1995 and 1994 ,consists of the following:
1996 1995 1994
--------------- --------------- ---------------
Current tax expense................................................. $ 15,128,951 $ 12,765,090 $ 9,945,518
Deferred tax (benefit).............................................. (33,943) 75,869 504,663
--------------- --------------- ---------------
$ 15,095,008 $ 12,840,959 $ 10,450,181
=============== =============== ===============
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, 1996, 1995 and 1994 due to the following:
1996 1995 1994
--------------- --------------- ---------------
Computed "expected" tax expense..................................... 35.0% 35.0% 35.0%
Increase (decrease) in income taxes resulting from:
Tax-exempt interest............................................... (2.1) (2.9) (3.8)
Nondeductible merger expenses..................................... .3 .7 .6
Other, net........................................................ .8 .4 (1.7)
--------------- --------------- ---------------
34.0% 33.2% 30.1%
=============== =============== ===============
38
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, 1996, the aggregate amount of
unrestricted funds which could be transferred from the Corporation's
subsidiaries to the Parent Corporation, without prior regulatory approval,
totaled $44,021,654 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.
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, 1996 and
1995, is as follows:
1996 1995
--------------- ---------------
Financial instruments whose contract amounts represent credit risk:
Commitments to extend credit....................................................... $ 323,204,242 $ 337,821,054
Standby letters of credit and financial guarantees written......................... $ 17,827,863 $ 17,336,869
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, 1996, varies from 0 percent to 100 percent; the
average amount collateralized is 38 percent.
Note 18 -- Credit Risk
As of December 31, 1996, the Corporation had a concentration of loans in
non-farm, non-residential loans, consisting primarily of commercial loans
secured by real estate of $409,563,000 which were in excess of 10 percent of the
total loan portfolio. The Corporation does not engage in any foreign lending
activities.
As of December 31, 1996, the Corporation had $13,502,083 in deposits in
financial institutions in excess of amounts insured by the Federal Deposit
Insurance Corporation (FDIC).
39
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.
At December 31, 1996 and 1995, the carrying amounts and fair values of
loan commitments, and stand-by letters of credit, were immaterial.
The estimated fair values of the Corporation's financial instruments are
as follows:
1996 1995
----------------------------------- ------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------------- ----------------- ----------------- ---------------
(Dollars in thousands) (Dollars in thousands)
Financial assets:
Cash and short-term investments.............. $ 183,173 $ 183,173 $ 199,681 $ 199,681
Investments securities....................... 333,565 335,542 343,603 351,883
Securities available for sale................ 263,428 263,428 291,144 291,144
Loans........................................ 1,439,108 1,456,634 1,296,204 1,294,718
Less: allowance for loan losses.............. (17,936) -- (18,253) --
---------------- ----------------- ----------------- ---------------
Total financial assets................. $ 2,201,338 $ 2,238,777 $ 2,112,379 $ 2,137,426
================ ================= ================= ===============
Financial liabilities:
Deposits..................................... $ 1,966,938 $ 1,971,386 $ 1,882,849 $ 1,878,539
Federal funds purchased and securities sold
under agreement to repurchase.............. 51,536 51,536 57,472 57,472
Other short-term borrowings.................. 14,876 14,876 18,792 18,792
Federal Home Loan Bank advances.............. 8,297 8,297 5,737 5,737
Long-term debt............................... 11,497 10,453 4,225 3,930
---------------- ----------------- ----------------- ---------------
Total financial liabilities............ $ 2,053,144 $ 2,056,548 $ 1,969,075 $ 1,964,470
================ ================= ================= ===============
40
Note 20 -- Regulatory Matters
The Corporation is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory -- possibly additional discretionary
- -- actions by regulators that, if undertaken, could have a direct material
effect on the Corporation's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Corporation must meet specific capital guidelines that involve quantitative
measures of the Corporation's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Corporation's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Corporation to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets, and of Tier 1 capital to average assets. Management
believes, as of December 31, 1996, that the Corporation meets all capital
adequacy requirements to which it is subject.
As of December 31, 1996, the most recent notification from the Federal
Reserve categorized the Corporation as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized,
the Corporation must maintain minimum total risk-based, Tier 1 risk-based, and
Tier 1 leverage ratios as set forth in the table.
There are no conditions or events since that notification that management
believes have changed the institution's category.
The Corporation's and significant Subsidiaries actual capital amounts and
ratios are also presented in the table:
To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Provisions
--------------------------- -------------------------- ---------------------------
Amount Ratio Amount Ratio Amount Ratio
------------ ------------ ------------- ------------ ------------ -------------
(Amount in Thousands)
As of December 31, 1996:
Total Capital (to Risk Weighted
Assets)
Consolidated.................. $ 241,035 16.8% >$ 114,907 > 8.0% N/A
- -
F&M Bank-Winchester........... $ 74,131 16.0% >$ 37,137 > 8.0% >$ 46,421 > 10.0%
- - - -
F&M Bank-NOVA................. $ 42,817 14.3% >$ 24,017 > 8.0% >$ 30,022 > 10.0%
- - - -
Tier 1 Capital (to Risk Weighted
Assets)
Consolidated.................. $ 223,099 15.5% >$ 57,454 > 4.0% N/A
- -
F&M Bank-Winchester........... $ 68,328 14.7% >$ 18,568 > 4.0% >$ 27,853 > 6.0%
- - - -
F&M Bank-NOVA................. $ 39,064 13.0% >$ 12,009 > 4.0% >$ 18,013 > 6.0%
- - - -
Tier 1 Capital (to Average
Assets)
Consolidated.................. $ 223,099 9.9% >$ 91,331 > 4.0% N/A
- -
F&M Bank-Winchester........... $ 68,328 8.6% >$ 31,625 > 4.0% >$ 39,531 > 5.0%
- - - -
F&M Bank-NOVA................. $ 39,064 9.0% >$ 17,379 > 4.0% >$ 21,724 > 5.0%
- - - -
As of December 31, 1995:
Total Capital (to Risk Weighted
Assets)
Consolidated.................. $ 227,284 17.2% >$ 105,772 > 8.0% N/A
- -
F&M Bank-Winchester........... $ 69,422 15.7% >$ 35,718 > 8.0% >$ 44,647 > 10.0%
- - - -
Tier 1 Capital (to Risk Weighted
Assets)
Consolidated.................. $ 210,757 15.9% >$ 52,886 > 4.0% N/A
- -
F&M Bank-Winchester........... $ 63,841 14.4% >$ 17,859 > 4.0% >$ 26,788 > 6.0%
- - - -
Tier 1 Capital (to Average Assets)
Consolidated.................. $ 210,757 10.9% >$ 83,558 > 4.0% N/A
- -
F&M Bank-Winchester........... $ 63,841 8.1% >$ 31,441 > 4.0% >$ 39,301 > 5.0%
- - - -
41
Note 21 -- Condensed Financial Information -- Parent Company Only
F&M NATIONAL CORPORATION
(Parent Corporation Only)
BALANCE SHEETS
December 31, 1996 and 1995
December 31,
------------------------------------
1996 1995
--------------- ---------------
Assets
Cash on deposit with subsidiary banks............................................... $ 131,742 $ 174,705
Investment in subsidiaries, at cost, plus equity in undistributed net income....... 221,151,205 209,089,335
Securities available for sale...................................................... 12,071,896 8,876,336
Other short-term investments....................................................... 9,854,000 22,415,000
Bank premises and equipment, net................................................... 1,375,831 1,408,160
Intangible, goodwill, at amortized cost............................................ 304,372 668,516
Other assets....................................................................... 8,784,937 3,256,584
--------------- ---------------
Total assets........................................................ $ 253,673,983 $ 245,888,636
=============== ===============
Liabilities and Shareholders' Equity
Liabilities
Short-term borrowings.............................................................. $ 14,455,000 $ 18,462,000
Dividends payable.................................................................. 4,681,654 2,643,492
Other liabilities.................................................................. 3,813,847 2,736,737
--------------- ---------------
Total liabilities.................................................... $ 22,950,501 $ 23,842,229
--------------- ---------------
Shareholders' Equity
Preferred stock.................................................................... $ -- $ --
Common stock....................................................................... 40,747,394 40,847,756
Capital surplus.................................................................... 69,196,572 72,715,714
Retained earnings, which are substantially undistributed earnings
of subsidiaries.................................................................. 120,350,161 105,139,724
Unrealized gain (loss) on securities available for sale, net....................... 429,355 3,343,213
--------------- ---------------
Total shareholders' equity........................................... $ 230,723,482 $ 222,046,407
--------------- ---------------
Total liabilities and shareholders' equity........................... $ 253,673,983 $ 245,888,636
=============== ===============
42
F&M NATIONAL CORPORATION
(Parent Corporation Only)
STATEMENTS OF INCOME
For Each of the Three Years in the Period Ended December 31, 1996
December 31,
------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
Revenue
Dividends from subsidiaries....................................... $ 14,418,052 $ 10,980,591 $ 8,658,100
Interest on other short-term investments.......................... 665,551 769,557 644,529
Interest and dividends on securities available for sale........... 389,775 342,713 317,948
Management fees from subsidiaries................................. 2,409,014 2,115,916 1,166,400
Rental income from subsidiaries................................... 91,000 402,550 426,300
Profits on securities available for sale.......................... 406,572 -- --
Other revenue..................................................... 11,182 4,523 16,050
--------------- --------------- ---------------
Total revenue...................................... $ 18,391,146 $ 14,615,850 $ 11,229,327
--------------- --------------- ---------------
Expenses
Salaries and employee benefits.................................... $ 2,029,238 $ 1,817,236 $ 990,377
Directors` fees................................................... 178,525 188,408 204,050
Taxes (other than income)......................................... 13,215 41,124 42,577
Interest.......................................................... 373,747 367,097 346,421
Amortization of goodwill.......................................... 59,877 59,877 59,877
Depreciation...................................................... 34,902 100,881 96,780
Merger expenses................................................... 381,083 269,958 461,195
Other expenses.................................................... 955,735 491,206 715,747
--------------- --------------- ---------------
Total expenses..................................... $ 4,026,322 $ 3,335,787 $ 2,917,024
--------------- --------------- ---------------
Income before income taxes and equity
in undistributed net income of subsidiaries..... $ 14,364,824 $ 11,280,063 $ 8,312,303
Income Tax Expense (Benefit)........................................ (163,700) 309,292 84,854
--------------- --------------- ---------------
Income before equity in undistributed
net income of subsidiaries...................... $ 14,528,524 $ 10,970,771 $ 8,227,449
Equity in Undistributed Net Income of Subsidiaries.................. 14,769,106 14,864,602 16,044,193
--------------- --------------- ---------------
Net income.......................................... $ 29,297,630 $ 25,835,373 $ 24,271,642
=============== =============== ===============
43
F&M NATIONAL CORPORATION
(Parent Corporation Only)
STATEMENTS OF CASH FLOWS
For Each of the Three Years in the Period Ended December 31, 1996
December 31,
------------------------------------------------------
1996 1995 1994
-------------- --------------- ---------------
Cash Flows From Operating Activities
Net income........................................................ $ 29,297,630 $ 25,835,373 $ 24,271,642
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation.................................................. 34,902 100,881 96,780
Amortization.................................................. 59,877 59,877 59,877
Deferred income taxes (credits)............................... (308,285) (159,274) (182,986)
Discount accretion............................................ (3,187) (3,383) (3,183)
Profits on securities available for sale...................... (406,572) -- --
Undistributed net income of subsidiaries...................... (14,769,106) (14,864,602) (16,044,193)
Decrease in goodwill.......................................... 304,267 28,853 23,864
(Increase) decrease in other assets........................... (4,803,990) 519,076 (2,364,144)
Increase in other liabilities................................. 1,077,110 1,206,671 1,626,463
-------------- --------------- ---------------
Net cash provided by operating activities.............. $ 10,482,646 $ 12,723,472 $ 7,484,120
-------------- --------------- ---------------
Cash Flows From Investing Activities
Decrease in investment in subsidiaries............................ $ 162,013 $ 264,541 $ 1,190,006
Purchase of securities available for sale......................... (6,024,544) (1,802,395) (734,438)
Proceeds from sale of securities available for sale............... 2,954,031 -- --
(Increase) decrease in other short-term investments............... 12,561,000 (7,379,000) 31,000
Proceeds from sale of equipment to subsidiaries................... -- 2,771,841 387,000
Purchase of bank premises and equipment........................... (2,573) (292,221) (89,650)
-------------- --------------- ---------------
Net cash provided by (used in) investing activities.... $ 9,649,927 $ (6,437,234) $ 783,918
-------------- --------------- ---------------
Cash Flows From Financing Activities
Increase (decrease) in short-term borrowings...................... $ (4,007,000) $ 3,791,000 $ 1,488,000
Net proceeds from issuance and sale of common stock............... 3,336,784 3,782,503 2,214,695
Acquisition of common stock....................................... (7,456,288) (3,175,612) (2,815,487)
Dividends paid.................................................... (12,049,032) (10,571,851) (9,116,127)
Cash paid for fractional shares................................... -- -- (58,029)
-------------- --------------- ---------------
Net cash (used in) financing activities................ $ (20,175,536) $ (6,173,960) $ (8,286,948)
-------------- --------------- ---------------
Increase (decrease) in cash and cash equivalents $ (42,963) $ 112,278 $ (18,910)
Cash and Cash Equivalents
Beginning......................................................... 174,705 62,427 81,337
-------------- --------------- ---------------
Ending............................................................ $ 131,742 $ 174,705 $ 62,427
============== =============== ===============
Supplemental Disclosures of Cash Flow Information
Cash payments for interest........................................ $ 373,747 $ 367,097 $ 346,421
============== =============== ===============
Supplemental Schedule of Noncash Investing and
Financing Activities
Issuance of stock options under nonvariable compensatory plan..... $ 500,000 $ 206,440 $ 211,120
============== =============== ===============
Issuance of common stock to acquire investment.................... $ -- $ 200,000 $ --
============== =============== ===============
Common stock issued for stock dividends........................... $ -- $ 1,068,282 $ 6,001,278
============== =============== ===============
Unrealized gain (loss) on securities available for sale........... $ 215,404 $ 941,959 $ (350,506)
============== =============== ===============
44
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, 1996 and 1995, and the
related consolidated statements of income, changes in shareholders' equity, and
cash flows for the years ended December 31, 1996, 1995 and 1994. 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, 1996 and 1995, and the results
of its operations and its cash flows for the years ended December 31, 1996, 1995
and 1994, in conformity with generally accepted accounting principles.
/s/ Yount, Hyde & Barbour, P.C.
Winchester, Virginia -------------------------------
January 29, 1997 YOUNT, HYDE & BARBOUR, P.C.
45