SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF SECURITIES EXCHANGE
ACT OF 1934
Commission File Number 0-5929
F&M NATIONAL CORPORATION
(Exact Name of Registrant as specified in its charter)
VIRGINIA 54-0857462
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification Number)
9 COURT SQUARE, WINCHESTER, VIRGINIA 22601
(Address of principal executive offices, including Zip Code)
Registrant's telephone number, including area code:
(540) 665-4200
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Common Stock, $2.00 par value
(Title of Class)
New York Stock Exchange
(Name of each exchange on which registered)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: None
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
State the aggregate market value of the voting stock held by the non-affiliates
of the Registrant. The aggregate market value is computed by reference to the
closing price of such stock as reported by the New York Stock Exchange on
February 28, 1998: $ 679,360,242.75
NUMBER OF SHARES OF COMMON STOCK OUTSTANDING AT FEBRUARY 28, 1998: 20,389,759
DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Registrant's Annual Report to Shareholders for the
fiscal year ended December 31, 1997, are incorporated by reference in
Parts II and IV hereof; and
(2) Portions of Registrant's 1998 Proxy Statement dated March 30, 1998,
are incorporated by reference in Part III hereof.
PART I
ITEM 1. BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS
Since January 1, 1997, there have been no developments in the
Registrant's (hereinafter called "F&M" or the "Company") business other than the
following:
On February 12, 1997, F&M Bank-Allegiance opened a new branch bank
located at 99 South Washington Street, Rockville, Maryland.
On February 24, 1997, F&M Bank-Northern Virginia opened a new branch
bank located at 7900 Sudley Road, Manassas, Virginia.
On March 29, 1997, F&M Bank-Massanutten opened a new branch bank
located at 430 Highlands Place, Harrisonburg, Virginia.
On June 16, 1997, F&M Bank-Richmond opened a new branch bank located at
6980 Forest Hill Avenue, Richmond, Virginia.
On July 14, 1997, F&M Bank-Martinsburg opened a new branch bank located
at 704 Foxcroft Avenue North, Martinsburg, West Virginia.
On July 16, 1997, F&M Bank-Northern Virginia opened a new branch bank
located at 440 Maple Avenue East, Vienna, Virginia.
On August 4, 1997, F&M Bank-Blakeley opened a new branch bank located
at 1504 Tuscawilla Hills, Charles Town, West Virginia.
On August 20, 1997, F&M Bank-Northern Virginia opened a new branch bank
located at 3829 South George Mason Drive, Falls Church, Virginia.
On September 8,1997, F&M Bank-Allegiance opened a new branch bank
located at 9401 Key West Avenue, Rockville, Maryland.
On September 24, 1997, F&M Bank-Northern Virginia opened a new branch
bank located at 8432 Old Keene Mill Road, Springfield, Virginia.
On October 6, 1997, F&M Bank-Northern Virginia opened a new branch bank
located at 200 North Washington Street, Alexandria, Virginia.
On October 15, 1997, F&M Bank-Blakeley opened a new branch bank located
at 4 Charles Town Plaza, Charles Town, West Virginia.
(b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
F&M and its subsidiaries are engaged primarily in only one industry
segment, banking, the making of commercial and personal loans and similar credit
transactions, and other activities closely related to banking.
(c) NARRATIVE DESCRIPTION OF THE BUSINESS
THE COMPANY
GENERAL
F&M National Corporation is a multi-bank holding company headquartered
in Winchester, Virginia. F&M's eleven subsidiary banks operate 108 banking
offices offering a full range of banking services principally to individuals and
small and middle-market business in north, central and south Virginia including
the Shenandoah Valley, and the eastern panhandle of West Virginia, and the
counties of Montgomery and Prince George in Maryland. At December 31, 1997, F&M
had assets of $2.520 billion, deposits of $2.138 billion and shareholders'
equity of $247.8 million.
F&M was formed in 1969 to serve as the parent holding company of its
then sole subsidiary bank, F&M Bank-Winchester, organized in 1902. Since its
organization, F&M has acquired eighteen banks, which expanded its market area
and increased market share in Virginia, West Virginia and Maryland.
The following table sets forth certain information concerning F&M and
its operating subsidiaries as of December 31, 1997:
DATE BANKING TOTAL TOTAL TOTAL
ACQUIRED OFFICES ASSETS LOANS DEPOSITS
----------------------------------------------------------------------------------
F&M Bank-Winchester
Winchester, VA (1) 1970 31 $ 831,374 $ 506,498 $ 741,283
F&M Bank-Massanutten
Harrisonburg, VA (2) 1980 9 184,810 119,423 154,278
F&M Bank-Richmond
Richmond, VA (3) 1982 10 173,810 107,705 158,391
F&M Bank-Central
Virginia (4)
Charlottesville, VA 1985 7 77,353 41,719 66,016
F&M Bank-Blakeley
Charles Town/
Ranson, WV 1988 5 114,089 85,800 95,887
F&M Bank-Martinsburg
Martinsburg, WV 1988 4 99,609 76,383 84,848
F&M Bank-Keyser
Keyser, WV 1992 3 97,347 65,078 82,580
F&M Bank-Emporia
Emporia, VA 1993 3 68,840 37,843 59,852
F&M Bank-Peoples
Warrenton, VA 1994 4 125,090 71,390 112,309
F&M Bank-Northern VA
Fairfax, VA (5) 1996 23 529,377 310,372 430,959
F&M Bank-Allegiance
Bethesda, MD 1996 9 188,637 121,387 151,431
F&M (Parent only) - - 29,976 - -
Total 108 $ 2,520,312 $ 1,543,598 $ 2,137,834
- -----------------------------
(1) Includes Big Apple Mortgage, an insurance agency, and a general credit
reporting agency. Also includes the 1985 acquisition of Stonewall Jackson
Bank and Trust and the 1993 purchase of substantially all of the assets and
assumption of certain liabilities of Farmers and Merchants Bank of Hamilton
(the "Hamilton Bank').
(2) Includes the acquisition in 1989 of The First National Bank of Broadway,
Broadway , Virginia
(3) Includes the acquisition in 1986 of Virginia Capital Bank, Richmond,
Virginia.
(4) Includes the acquisition in 1990 of Peoples Bank of Central Virginia,
Lovingston, Virginia.
(5) Includes the acquisition in 1994 of Hallmark Bank and Trust, Springfield,
Virginia, the acquisition in 1995 of The Bank of the Potomac, Herndon,
Virginia and the acquisition in 1996 of FB&T Financial Corporation,
Fairfax, Virginia.
The business strategy of F&M is to provide its customers with the
financial sophistication and breadth of products of a regional bank, while
retaining the local appeal and level of service of a community bank. F&M has
maintained its community orientation by allowing its subsidiary banks latitude
to tailor products and services to meet community and customer needs. While F&M
has preserved the autonomy of its subsidiary banks, it has established
system-wide policies governing, among other things, lending practices, credit
analysis and approval procedures, as well as guidelines for deposit pricing and
investment portfolio management. In addition, F&M has established a centralized
loan review team that regularly performs a detailed, on-site review and analysis
of each subsidiary bank's loan portfolio to ensure the consistent application of
credit policies and procedures system-wide. An officer or representative of F&M
serves on the board of directors of each subsidiary bank to monitor operations
and to serve as a liaison to the Company.
F&M's subsidiary banks are community-oriented and offer services
customarily provided by full-service banks, including individual and commercial
demand and time deposit accounts, commercial and consumer loans, residential
mortgages, credit card services and safe deposit boxes. Lending is focused on
individuals and small and middle-market businesses in the local market regions
of each of F&M's subsidiary banks. In addition, F&M Bank-Winchester, F&M
Bank-Massanutten, F&M Bank-Northern Virginia, and F&M Bank-Peoples in Virginia
and F&M Bank-Blakeley, F&M Bank-Martinsburg and F&M Bank-Keyser have trust
powers offering a range of fiduciary services. At December 31, 1997, trust
assets under management at these seven banks totaled $489.4 million.
Effective January 1, 1998, F&M Trust Company, a wholly-owned
trust subsidiary of the Company, began operations and assumed responsibility for
all the trust and fiduciary activities of the Virginia banking subsidiaries of
the Company.
F&M operates in seven market regions: the Shenandoah Valley of
Virginia; the eastern panhandle of West Virginia; Charlottesville/Albemarle
County and surrounding areas; Greenville County in southside Virginia; suburban
Richmond, primarily Henrico and Chesterfield Counties; the northern Virginia
areas of Loudoun, Fairfax, and Prince William Counties; Stafford, Warrenton and
surrounding Fauquier County area and the counties of Montgomery and Prince
George's in Maryland. The more populous sectors within each of the seven market
regions experienced substantial population growth between 1980 and 1990, most of
which exceeded 20% growth. At December 31, 1997, F&M operated 33 banking offices
in the Shenandoah Valley from Winchester to Harrisonburg with deposits of $726.6
million; 12 banking offices in the eastern panhandle of West Virginia with
deposits of $263.3 million; 7 banking offices in the Charlottesville/Albemarle
County area with deposits of $66.0 million; 3 banking offices in Emporia,
Virginia, and surrounding Greenville County with deposits of $59.9 million; 10
banking offices in suburban Richmond, Virginia, with deposits of $158.4 million;
and 30 banking offices in Loudoun, Fairfax and Prince William Counties of
northern Virginia with deposits of $603.4 million; 4 offices in the city of
Warrenton and Fauquier and Stafford Counties with deposits of $112.3 million and
9 offices in the counties of Montgomery and Prince George in Maryland with
deposits of $151.4 million. F&M's principal market is Winchester and the
surrounding six Virginia counties where its lead bank, F&M Bank-Winchester, is
the dominant financial institution in terms of deposit market share, with a 44%
share of total deposits in Winchester, a 28% share of total deposits in
surrounding Frederick County, a 30% share of total deposits in Warren County,
and a 18% share of total deposits in Loudoun County. In Rockingham County, which
has the largest population of any county or city in the Shenandoah Valley, F&M
has a 46% deposit market share. In F&M's three-county West Virginia market, F&M
has a 23 % deposit market share in Jefferson County (which includes Charles
Town), a 18% deposit market share in Berkeley County (which includes
Martinsburg) and a 46% deposit market share in Mineral County (which includes
Keyser). In Fairfax, Prince William and Fauquier Counties (including Warrenton),
F&M has 11%, 3%, and 15% of deposit market share. Although F&M's deposit market
share in the Richmond and Charlottesville areas is small, F&M has positioned its
banking offices in these two markets to increase deposit market share as a
result of continued business and population growth in the suburban markets
surrounding Richmond and Charlottesville. In F&M's two-county Maryland market,
F&M is positioning itself to increase market share in Montgomery County and
Prince George's County.
At December 31, 1997, F&M had total nonperforming assets of
approximately $32.2 million, representing 2.07% of period end loans and
foreclosed properties. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations-Asset Quality."
F&M also operates Big Apple Mortgage Co. Inc., which offers both fixed
and adjustable rate residential mortgage loans and servicing . Big Apple
Mortgage (also 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 resell them
immediately in package form.
ACQUISITION PROGRAM
F&M has expanded its market area and increased its market share through
both internal growth and strategic acquisitions. Since the beginning of 1988,
F&M has acquired approximately $1.206 billion in assets and approximately $1.043
billion in deposits through twelve bank acquisitions. In 1997, F&M made the
following acquisitions:
INSURANCE AGENCY. On November 1, 1997, F&M expanded its product base with the
acquisition of Shomo and Lineweaver Insurance Agency ("Shomo Insurance") located
in Harrisonburg, Virginia. Shomo Insurance offers a full line of insurance
products including automobile, home, group, life and business insurance. The
acquisition was accounted for as a tax-free purchase with the exchange of
265,853 shares of F&M common stock.
PEOPLES BANK OF VIRGINIA. On December 1, 1997, F&M entered into an agreement for
the acquisition of Peoples Bank of Virginia ("PBV"), a Virginia chartered bank
based in Chesterfield, Virginia. The acquisition of PBV is subject to the
approval of shareholders of PBV and the appropriate regulatory agencies and is
expected to close on or about April 1, 1998. The acquisition of PBV is expected
to be accounted for as a pooling of interests for financial reporting purposes
and provides for a tax-free exchange of 2.58 shares of F&M common stock for each
common share of PBV. At December 31, 1997, PBV had 301,376 common shares
outstanding and 6,842 shares issuable upon outstanding stock options (excluding
a stock option granted to F&M). PBV had assets of $80.4 million as of December
31, 1997 and operates four banking offices in Chesterfield and the surrounding
Richmond metropolitan area.
THE BANK OF ALEXANDRIA. On December 12, 1997, F&M entered into an agreement for
the acquisition of The Bank of Alexandria ("BOA"), a Virginia chartered bank
based in Alexandria, Virginia. The acquisition of BOA, like that of PBV, is
subject to the approval of shareholders of BOA and the appropriate regulatory
agencies and is expected to close in the second quarter of 1998. The acquisition
of BOA is expected to be accounted for as a pooling of interests for financial
reporting purposes and provides for a tax-free exchange of 0.942 of a share of
F&M common stock for each common share of BOA. At December 31, 1997, BOA had
686,461 common shares outstanding and 66,476 issuable upon outstanding stock
options (excluding a stock option granted to F&M). BOA had assets of $78.9
million as of December 31, 1997 and operates four banking offices in Alexandria
and the surrounding area.
Management believes there are additional opportunities to acquire
financial institutions or to acquire assets and deposits that will allow F&M to
enter adjacent markets or increase market share in existing markets. Management
intends to pursue acquisition opportunities in strategic markets where its
managerial, operational and capital resources will enhance the performance of
acquired institutions. There can be no assurance that F&M will be able to
successfully effect any additional acquisition activity, or that any such
acquisition activity will have a positive effect on the value of shares of F&M
Common Stock.
ANTI-TAKEOVER PROVISIONS
The Articles of Incorporation and the Virginia Stock Corporation Act
contain certain anti-takeover provisions, including (I) the Affiliated
Transactions statue which places restrictions on any significant transaction
between a publicly held Virginia corporation and any shareholder who owns more
than 10% of any class of its outstanding shares, (ii) the Control Share
Acquisitions statue which provides that a shareholder who purchases shares in
any one of three statutory ranges (20%-33 1/3%, 33 1/3%-50%, and 50% or more of
the outstanding shares) cannot vote those shares on any matter unless the
acquisition of the additional shares has been approved by disinterested
shareholders, and (iii) a super-majority provision in the Company's Articles of
Incorporation that requires the affirmative vote of at lease 80% of the
outstanding voting shares on significant transactions, unless at least
two-thirds of the Board of Directors then in office have approved the
transaction.
EMPLOYEES
At December 31, 1997, F&M had 1,077 full time and 248 part time
employees. No employees are represented by any collective bargaining unit. F&M
considers relations with its employees to be good.
MARKET REGIONS
The market regions of F&M extend from the eastern panhandle of West
Virginia southward to Virginia in Winchester, the surrounding Shenandoah Valley
through Harrisonburg and Rockingham County and eastward to Loudoun, Fauquier,
Stafford and Prince William counties, to the central Virginia markets of
Charlottesville and Richmond, southern Virginia market in Emporia and Greenville
County and Montgomery and Prince George's counties in Maryland. The following
table displays the market and population data for each of the market regions:
BANKING % MARKET MARKET 1990
COUNTY/CITY (1) OFFICES SHARE (2) RANK (2) POPULATION
- ------------------------------------- -------------- --------------- -------------- --------------------
State of Virginia:
Shenandoah Valley:
City of Winchester 10 46 1 21,947
Frederick County 5 24 1 45,723
Warren County 4 30 1 26,142
Shenandoah County 3 12 4 31,636
Clarke County 1 25 2 12,101
Rappahannock County 1 43 2 6,622
Rockingham County 5 18 3 57,482
City of Harrisonburg 4 11 5 30,707
Northern Virginia:
City of Fairfax 1 8 5 20,959
City of Falls Church 1 1 8 8,982
City of Manassas 3 9 4 33,399
Loudoun County 7 16 1 86,100
Fairfax County 11 2 12 819,000
Fauquier County 3 16 2 52,000
Prince William County 3 3 7 216,000
Stafford County 1 * NM 61,000
Charlottesville/
Albemarle County:
City of Charlottesville 1 * NM 40,341
Albemarle County 3 7 7 68,040
Nelson County 2 35 2 12,778
Amherst County 1 2 7 28,578
Richmond:
City of Richmond 3 1 11 203,056
Henrico County 4 2 11 217,881
Chesterfield County 3 2 13 209,274
Emporia:
City of Emporia 3 33 1 14,109
State of West Virginia:
Eastern Panhandle:
Jefferson County 3 22 2 35,926
Berkeley County 3 17 3 59,253
Mineral County 3 43 1 26,697
State of Maryland:
Montgomery County 6 1 15 821,035
Prince George 2 * NM 769,747
- ----------------------------------------------------------------------------------------------------------
* Represents less than 1% deposit market share NM=Not meaningful
(1) In Virginia, certain cities are separate political entities and not
part of the counties that surround them. The city of Winchester and
Frederick County, the city of Harrisonburg and Rockingham County, the
city of Charlottesville and Albemarle County, the city of Fairfax and
Fairfax County and the city of Richmond and Henrico and Chesterfield
Counties are examples. The FDIC and OTS provide deposit data for each
separately incorporated city.
(2) Deposit data includes total bank and thrift deposits and is based on
FDIC and OTS data as of June 30, 1997, which is the most recently
available information.
LENDING ACTIVITIES
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 each subsidiary banks' respective market regions. Six
of F&M's subsidiary banks, F&M Bank-Massanutten, F&M Bank Blakeley, F&M
Bank-Martinsburg, F&M Bank-Keyser, F&M Bank-Emporia, and F&M Bank-Peoples
emphasize consumer lending with activities focused primarily on residential real
estate and consumer lending. F&M Bank-Richmond, F&M Bank-Central Virginia, F&M
Bank-Northern Virginia and F&M Bank-Allegiance are based in larger markets where
commercial loan demand is stronger and, as a result, their lending activities
place a greater emphasis on small to medium sized business. F&M Bank-Winchester,
because of its size and dominant position in its market, has a greater
opportunity to appeal to larger commercial customers in addition to consumers.
The following table sets forth the composition of F&M's loan portfolio
(by percentage) for the three years ended December 31:
1997 1996 1995
------------------- ------------------ -------------------
Commercial 16.8 % 15.6 % 14.5 %
Real estate construction 5.4 4.6 4.2
Real estate mortgage:
Residential (1-4 family) 31.2 31.6 31.7
Home equity lines 4.4 4.8 5.2
Multifamily 2.0 2.2 1.9
Nonfarm, nonresidential(1) 27.8 28.4 28.9
Agricultural 1.0 1.4 1.4
Real estate mortgage
Subtotal 66.4 68.4 69.1
Loans to individuals:
Consumer 9.9 9.8 10.5
Credit card 1.5 1.6 1.6
Loans to Individuals:
Subtotal 11.4 11.4 12.5
Total Loans 100.0 % 100.0 % 100.0 %
Total loans (dollars) $ 1,543,598 $ 1,439,108 $ 1,296,204
(1) This category generally consists of commercial and industrial loans where
real estate constitutes a source of collateral.
Approximately 47.6% of F&M's loan portfolio at December 31, 1997, was
comprised of commercial loans, which included loans secured by real estate shown
in the Table above under the categories of multifamily, non-farm,
non-residential and agricultural where real estate is among the sources of
collateral securing the loan. 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 accounts receivable, inventory and
equipment. In addition, a number of commercial loans are secured by real estate
used by such businesses and are generally personally guaranteed by the
principals of the business. F&M's commercial loans generally bear a floating
rate of interest tied to a system-wide prime rate set by F&M Bank-Winchester.
F&M's residential real estate loan portfolio (including home equity
lines) was 36.2 % of its total loan portfolio at December 31, 1997. The
residential mortgage loans made by F&M's subsidiary banks and Big Apple Mortgage
are made only for single family, owner-occupied residences within their
respective market regions. Residential mortgage loans offered by F&M's
subsidiary banks are either adjustable rate loans or fixed rate loans with 20 to
30 year amortization schedules that mature with a balloon payment on the third
or fifth year anniversary of the loan.
Big Apple Mortgage (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 resell them immediately in package form. At December 31, 1997,
only Big Apple Mortgage had $13.3 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, 1997,
construction loans were $83.9 million or 5.4% 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.
Consumer loans were 11.4% of F&M's total loan portfolio at December 31,
1997. 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 subsidiary banks' respective market regions.
CREDIT POLICIES AND PROCEDURES
F&M has established system-wide guidelines governing, among other
things, lending practices, credit analysis and approval procedures, and credit
quality review. Within these guidelines, F&M's subsidiary banks have latitude to
tailor their loan products to meet the needs of the communities and specific
customers. A holding company officer or representative serves on the Board of
Directors of each subsidiary bank to monitor practices and to serve as the
liaison with F&M.
LOAN APPROVAL
F&M's loan approval policies provide for various levels of officer
lending authority. When the aggregate outstanding loans to a single borrower
exceed an individual officer's lending authority, the loan request must be
approved by an officer with a higher lending limit or by the subsidiary bank's
loan review committee. F&M has assigned a lending limit for each subsidiary
bank. Loans that would result in a subsidiary bank exceeding its assigned limit
must be approved first by the subsidiary bank's loan review committee and then
by a central credit committee appointed by the holding company. The central
credit committee consists of six senior officers of F&M Bank-Winchester and the
Company, along with outside directors of either F&M Bank-Winchester or the
Company, who rotate at the twice weekly meetings.
All loans to a particular borrower are reviewed each time the borrower
requests a renewal or extension of any loan or requests an additional loan. All
lines of credit are reviewed annually prior to renewal. These reviews are
conducted by each subsidiary bank and, if necessary, by F&M's central credit
committee.
LOAN REVIEW
Each subsidiary bank of F&M has a formal loan review function which
consists of a committee of bank officers that regularly reviews loans and
assigns a classification, if required, based on current perceived credit risk.
In addition, the holding company has a loan review team that performs a detailed
on-site review and analysis of each subsidiary bank's portfolio on at least an
annual basis to ensure the consistent application of system-wide policies and
procedures. The holding company loan review team reviews all loans over an
established principal amount for each subsidiary bank, which results in a review
of 60% to 75% of the total principal amount of the subsidiary bank's loan
portfolio. In addition, all lending relationships involving a classified loan
are reviewed regardless of size. The holding company loan review team has the
authority to classify any loan it determines is not satisfactory or to change
the classification of a loan within F&M's loan grading system.
All classified loans are reviewed at least quarterly by F&M's senior
officers and monthly by the subsidiary bank's boards of directors. All past due
and nonaccrual loans are reviewed monthly by the subsidiary banks' boards of
directors. As a matter of policy,
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.
ALLOWANCE FOR LOAN LOSSES
Each subsidiary bank of F&M maintains its allowance for loan losses
based on loss experience for each loan category over a period of years and
adjusts the allowance for existing economic conditions as well as performance
trends within specific areas, such as real estate. In addition, each subsidiary
bank periodically reviews significant individual credits and adjusts the
allowance when deemed necessary. The allowance also is increased to support
projected loan growth.
IMPAIRED LOANS
The recorded investment in certain loans that were considered to be
impaired in accordance to FASB 114 was $13.3 million at year end 1997 as
compared to $8.9 million at year end 1996, of which $12.5 million was classified
as nonperforming. Included in 1997 impaired loans are $11.3 million secured by
commercial real estate. All impaired loans at year end 1997 and 1996 had a
related valuation allowance totaling $3.8 million and $1.4 million,
respectively,. The average recorded investment in certain impaired loans for
1997 and 1996 was approximately $8.5 million and $9.3 million, respectively. For
1997 and 1996, interest income recognized on impaired loans totaled $513
thousand and $154 thousand, respectively, all of which was recognized on a cash
basis.
Loans are placed on nonaccrual when a loan is specifically determined
to be impaired or when principal or interest is delinquent for 90 days or more.
Any unpaid interest previously accrued on those loans is reversed from income.
Interest income generally is not recognized on specific impaired loans unless
the likelihood of further loss is remote. Cash payments received on such loans
are applied as a reduction of the loan principal balance. Interest income on
other nonaccrual loans is recognized only to the extent of interest payments
received. Changes in the allowance relating to impaired loans are charged or
credited to the provision for loan losses.
An impaired loan is charged-off when management determines that the
prospect of recovery of the principal of the loan has significantly diminished.
DEPOSITS
F&M's subsidiary banks offer a number of programs to consumers and to
small and middle market businesses at interest rates consistent with local
market conditions. The following table sets forth the mix of depository accounts
offered by the subsidiary banks as a percentage of total deposits at the dates
indicated:
December 31,
--------------------------------------------
1997 1996 1995
----------- ------------- -------------
Noninterest-bearing demand 19.1% 17.0% 16.7%
Interest checking 16.4 15.5 15.1
Savings accounts 9.2 10.4 11.2
Money market accounts 9.8 10.6 11.3
Time deposit accounts:
Under $100,000 36.2 37.7 36.8
$100,000 and over 9.3 8.8 8.9
----------- ------------- -------------
100.0% 100.0% 100.0%
F&M's subsidiary banks control deposit flows primarily through pricing
of deposits and, to a lesser extent, through promotional activities. F&M's
subsidiary banks establish deposit rates based on a variety of factors,
including competitive conditions, liquidity needs and compliance with net
interest margin requirements established by F&M for all subsidiary banks. As of
December 31, 1997, F&M's subsidiary banks had $198.2 million of certificates of
deposit greater than $100,000, or 9.6% of total deposits. F&M's subsidiary banks
do not accept brokered deposits.
No material portion of the deposits of F&M's subsidiary banks has been
obtained from a single or a small group of customers, and the loss of any
customer's deposits or a small group of customers' deposits would not have a
material adverse effect on the business of any of F&M's subsidiary banks. See
"Business-Market Regions" for information regarding each subsidiary bank's
deposit share and rank in its respective market.
LIQUIDITY AND SENSITIVITY TO INTEREST RATES
The primary functions of asset/liability management are to ensure
adequate liquidity and maintain an appropriate balance between
interest-sensitive assets and interest-sensitive liabilities. Liquidity
management involves the ability to meet the cash flow requirements of F&M's loan
and deposit customers. Interest rate sensitivity management seeks to avoid
fluctuating net interest margins and to enhance consistent growth of net
interest income through periods of changing interest rates. F&M does not hedge
its position with swaps, options or futures but instead maintains a highly
liquid and short-term position in all of its earning assets and interest-bearing
liabilities.
In order to meet its liquidity needs, F&M schedules the maturity of its
investment securities according to its needs. The weighted-average life of the
securities portfolio at the end of 1997 was 4 years 5 months which is indicative
of F&M's investment philosophy of investing in U.S. Government securities with
maturities between five and ten years. F&M views its securities portfolio
primarily as a source of liquidity and safety, however, it may if the market is
favorable, make changes in the available for sale portfolio to take advantage of
changes in the yield curve. F&M views the total available for sale securities
portfolio as a source of liquidity, whereas, liquidity in the held to maturity
portfolio is
limited to calls and maturities. The maturity ranges of the securities and the
average taxable-equivalent yields as of December 31, 1997, are shown in the
following table
U.S. Government State and
and its Agencies Municipal Other
Book Value Yield Book Value Yield Book Value Yield
--------------------------------- ------------------------- -------------------------------
One year or less $ 100,937 5.52% $ 3,256 5.22% $ 7,870 4.42%
After one year
through five years 354,312 6.16 13,887 5.39 6,821 5.98
After five through 99,636 6.61 9,214 5.41 - -
ten years
After ten years 38,053 6.97 2,916 5.29 - -
------------------ -------------- -------------
Total $ 592,938 6.18% $ 29,273 5.37% $ 14,691 5.22%
================== ============== =============
A cash reserve, consisting primarily of overnight investments such as
Federal Funds, is also maintained to meet any contingencies and to provide
additional capital, if needed.
Most of F&M's loans are fixed-rate installment loans to consumers and
mortgage loans whose maturities are generally longer than the deposits by which
they are funded. A degree of interest-rate risk is incurred if the interest rate
on deposits should rise before the loans mature. However, the substantial
liquidity provided by the monthly repayments on these loans can be reinvested at
higher rates that largely reduce the interest-rate risk. Home equity lines of
credit have adjustable rates that are tied to the prime rate. Many of the loans
not in the installment or mortgage categories have maturities of less than one
year or have floating rates that may be adjusted periodically to reflect current
market rates. These loans are summarized in the following table:
REMAINING MATURITIES OF SELECTED LOANS
December 31, 1997
------------------------------------
Commercial,
Financial and Real estate-
Agricultural Construction
------------------------------------
(Dollars in thousands)
Within 1 year $156,960 $56,238
------------------- --------------
Variable Rate:
1 to 5 years 15,006 2,971
After 5 years 5,566 2,684
------------------- --------------
Total 20,572 5,655
------------------- --------------
Fixed Rate:
1 to 5 years 69,835 14,328
After 5 years 12,514 7,683
------------------- --------------
Total 82,349 22,011
------------------- --------------
Total Maturities $259,881 $83,904
=================== ==============
F&M's asset/liability/risk committee is responsible for reviewing the
Company's liquidity requirements and maximizing the Company's net interest
income consistent with capital requirements, liquidity, interest rate and
economic outlooks, competitive factors and customer needs. Liquidity
requirements are also reviewed in detail for each of F&M's individual banks,
however, overall asset/liability management is performed on a consolidated basis
to achieve a consistent and coordinated approach.
OTHER ACTIVITIES
In 1997, F&M's subsidiary banks offered a range of trust services. At
December 31, 1997, the Trust Department of F&M Bank-Winchester managed $311
million in assets in approximately 1,182 accounts, covering both personal trust
activities and employee benefit plans. F&M Bank-Northern Virginia and F&M
Bank-Peoples offered similar trust services in 1997 and managed assets totaling
$34 million and $145 million, respectively, at December 31, 1997. F&M's other
subsidiary banks did not operate trust departments in 1997.
Effective January 1, 1998, F&M Trust Company, a wholly-owned trust
subsidiary of the Company, began operations and assumed responsibility for all
the trust and fiduciary activities of the Virginia banking subsidiaries of the
Company.
COMPETITION
Each of the market regions in which the Company operates has a highly
competitive banking market involving commercial banks and thrifts. Other
competitors, including credit unions, consumer finance companies, insurance
companies and money market mutual funds, compete with the Company for certain
lending and deposit gathering services. In its Charlottesville/Albemarle County,
northern Virginia, and suburban Richmond markets, the Company faces particularly
intense competition from several state-wide and regional banking institutions
which have substantial operations in those market regions. Management believes,
however, that the Company enjoys certain competitive advantages in its principal
market of Winchester, the surrounding northern Shenandoah Valley and Loudoun
County where F&M Bank-Winchester is the largest financial institution
headquartered in the area and the dominant bank in terms of deposit market
share.
Competition among the various financial institutions is based on
interest rates offered on deposit accounts, interest rates charged on loans,
credit and service charges, the quality of services, the convenience of banking
facilities and, in connection with loans to larger borrowers, relative lending
limits. Many of the financial organizations in competition with the Company have
much greater financial resources, diversified markets, and branch networks than
F&M and are able to offer similar services at varying costs with higher lending
limits.
With reciprocal interstate banking, the Company also faces the prospect
of additional competitors entering its markets as well as additional competition
in its efforts to acquire other financial institutions.
EXECUTIVE OFFICERS OF THE REGISTRANT
All officers of the Company and its subsidiaries are elected annually
to serve at the pleasure of the Board of Directors of the Company. The following
table sets forth the name, age, year first elected, and offices held at February
28, 1998, of each of the executive officers of the Company:
YEAR FIRST
NAME AGE ELECTED OFFICE
- ---- --- ------- ------
W. M. Feltner 78 1970 Chairman and Chief Executive Officer of
the Company; Chairman of the Board of
F&M Bank-Winchester
Alfred B. Whitt 59 1998 President, Vice Chairman, and Chief
Financial Officer of the Company; Vice
Chairman and Secretary of F&M
Bank-Winchester
Charles E. Curtis 59 1998 Vice Chairman and Chief Administrative
Office of the Company; Vice Chairman of
F&M Bank-Winchester
F. Dixon Whitworth, Jr. 53 1985 Executive Vice President of the
Company; President of F&M
Trust Company
Betty H. Carroll 60 1985 Senior Vice President of the Company
and President, Chief Executive Officer
of F&M Bank-Winchester
Michael L. Bryan 46 1998 Corporate Secretary and General
Counsel of the Company
Barbara H. Ward 52 1983 Treasurer of the Company; Senior Vice
President of F&M Bank-Winchester
Mr. Feltner has been a senior executive officer of the Company since
its inception in 1970.
Mr. Whitt joined the Company in 1987 as Director of Human Resources,
before which time he served as President of F&M Bank-Massanutten, Harrisonburg,
Virginia, since its organization in 1973. In July of 1991, he was appointed
Senior Vice President, Senior Financial Officer and Secretary of the Company and
F&M Bank-Winchester. As of January 1, 1998, Mr. Whitt was appointed President,
Vice Chairman and Chief Financial Officer of the Company, and Vice Chairman and
Secretary to the Board of F&M Bank-Winchester.
In March of 1996, Mr. Curtis joined the Company as President and Chief
Executive Officer of Fairfax Bank and Trust Company, now F&M Bank-Northern
Virginia. Mr. Curtis served in this position from July 22, 1985 to December 31,
1997. As of January 1, 1998, Mr. Curtis was appointed Vice Chairman and Chief
Administrative Officer of the Company, and Vice Chairman of F&M Bank-Winchester.
F. Dixon Whitworth, Jr. joined the Company in August 1985, as President
of the Suburban Bank, now F&M Bank-Richmond, and served as such until November,
1985, when he became Executive Vice President of the Company. As of January 1,
1998, Mr. Whitworth was appointed President of F&M Trust Company.
Mrs. Carroll has served as Chief Executive Officer of F&M
Bank-Winchester since December 1988.
Mr. Bryan was appointed Corporate Secretary and General Counsel of the
Company effective January 1, 1998. Prior to this appointment, Mr. Bryan was a
partner in the law firm of Bryan & Coleman, P.C., Winchester, Virginia, since
February 1, 1995.
Mrs. Ward was appointed Senior Vice President of F&M Bank-Winchester in
March of 1992. Prior thereto, she was a Vice President of F&M Bank-Winchester
since 1974. She has been Treasurer of the Company since 1983.
SUPERVISION AND REGULATION
The Company and its subsidiary banks are subject to state and federal
banking laws and regulations which impose specific requirements or restrictions
on and provide for general regulatory oversight with respect to virtually all
aspects of operations. The following is a brief summary of certain statues,
rules and regulations affecting the Company and its subsidiary banks. This
summary is qualified in its entirety by reference to
the particular statutory and regulatory provisions referred to below and
is not intended to be an exhaustive description of the statutes or regulations
applicable to the business of the Company and its subsidiary banks. A
change in applicable laws or regulations may have a material effect on the
business and prospects of the Company.
THE COMPANY
The Company is registered as a bank holding company under the Bank
Holding Company Act ("BHCA") and the Virginia Financial Institution Holding
Company Act, and is therefore subject to regulation and examination by the Board
of Governors of the Federal Reserve System (the "Federal Reserve") and the
Virginia State Corporation Commission (the "Virginia SCC"). F&M's subsidiary
banks are subject to examination and regulation by the Virginia SCC, the West
Virginia Board of Banking and Financial Institutions (the "West Virginia Board
of Banking") and the Commissioner of Financial Regulation of the State of
Maryland (the "Maryland-CFR") . In addition, the Company and its subsidiary
banks are subject to certain minimum capital standards established by the
Federal Reserve and the FDIC.
Under the BHCA, the Company is required to secure the prior approval of
the Federal Reserve before it can merge or consolidate with any other bank
holding company, or acquire all or substantially all of the assets of any bank
or acquire direct or indirect ownership or control of any voting shares of any
bank that is not already majority owned by it if after such acquisition the
Company would directly or indirectly own or control more than 5% of the voting
shares of such bank. The BHCA also prohibits the Company from acquiring,
directly or indirectly voting shares of, or interests in, or all or
substantially all of the assets of, any bank located outside the State of
Virginia unless the acquisition is specifically authorized by the laws of the
state in which such bank is located, as discussed below.
The Company is prohibited under the BHCA, and regulations promulgated
thereunder, from engaging in, and from acquiring direct or indirect ownership or
control of more than 5% of voting shares of any company engaged in, nonbanking
activities unless the Federal Reserve, by order or regulation, has found such
activities to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto. The Federal Reserve has by regulation
determined that certain activities are closely related to banking within the
meaning of the BHCA. These activities include, among others, operating a
mortgage, finance, credit card or factoring company; performing certain data
processing operations; providing investment and financial advice; acting as an
insurance agent for certain types of credit-related insurance; leasing personal
property on a full-payout, non-operating basis; and providing certain stock
brokerage and investment advisory services.
The Company, as an affiliate of its subsidiary banks within the meaning
of the Federal Reserve Act, is subject to certain restrictions under the Federal
Reserve Act
regarding transactions between a bank and companies with which it is affiliated.
These provisions limit extensions of credit (including guarantees of loans) by
the subsidiary banks to affiliates, investments in the stock or other
securities of the Company by the subsidiary banks and the nature and amount of
collateral that subsidiary banks may accept from any affiliate to secure loans
extended to the affiliate. Further, under the Federal Reserve Act and the
regulations promulgated thereunder, a bank holding company and its subsidiaries
are prohibited from engaging in certain tie-in arrangements in connection with
any extension of credit or provision of any property or service.
The BHCA and the Change in Bank Control Act, together with regulations
of the Federal Reserve, require that, depending on the particular circumstances,
either Federal Reserve approval must be obtained or notice must be furnished to
the Federal Reserve and not disapproved prior to any person or company acquiring
"control" of a bank holding company, such as the Company, subject to exemptions
for certain transactions. Control is conclusively presumed to exist if an
individual or company acquires 25% or more of any class of voting securities of
the bank holding company. Control is rebuttably presumed to exist if a person
acquires 10% or more but less than 25% of any class of voting securities and
either the company has registered securities under Section 12 of the Securities
Exchange Act of 1934, as amended, or no other person will own a greater
percentage of that class of voting securities immediately after the transaction.
The regulations provide a procedure for challenge of the rebuttable control
presumption.
Federal Reserve policy requires a bank holding company to act as a
source of financial strength to each of its bank subsidiaries and to take
certain measures to preserve and protect bank subsidiaries in situations where
additional investments in a troubled bank subsidiary may not otherwise be
warranted. Under the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), in order to avoid receivership of an insured depository
institution subsidiary, a bank holding company is required to guarantee up to
certain maximum limits the compliance with the terms of any capital restoration
plan filed by such subsidiary with its appropriate federal banking regulator. In
addition, if a bank holding company has more than one bank or thrift subsidiary,
the bank holding company's other subsidiary depository institutions are
responsible under a cross guarantee for any losses to the FDIC resulting from
the failure of a depository institution subsidiary. Under these provisions, a
bank holding company may be required to loan money to its depository institution
subsidiaries in the form of capital notes or other instruments. However, any
such loans likely would be unsecured and subordinated to such institution's
depositors and certain other creditors.
Under federal legislation, restrictions on interstate bank acquisitions
were abolished effective September 29, 1995, and bank holding companies from any
state are now able to acquire banks and bank holding companies located in any
other state. Effective June 1, 1997, the law permits banks to merge across state
lines, subject to earlier "opt-in" or "opt-out" action by individual states. The
law also allows interstate branch acquisitions and de novo branching if
permitted by the host state. Virginia, Maryland and West Virginia have adopted
early "opt-in" legislation that allows interstate bank mergers.
The states also permits interstate branch acquisitions and de novo branching
if reciprocal treatment is accorded Virginia banks in the state of the
acquiror.
All acquisitions, whether by an in-state or out-of-state acquiror,
involving a Virginia bank or bank holding company require the prior approval of
the Virginia SCC, in addition to approval by the appropriate federal regulatory
authority. Similarly, the West Virginia Board of Banking must approve all
acquisitions of a West Virginia bank or bank holding company, and the
Maryland-CFR must approve all acquisitions of a Maryland bank or bank holding
company.
REGULATION OF SUBSIDIARY BANKS
GENERAL
All of F&M's subsidiary banks are state-chartered institutions organized
under either Virginia, West Virginia, or Maryland law. Seven of the subsidiary
banks, F&M Bank-Winchester, F&M Bank-Massanutten, F&M Bank-Richmond, F&M
Bank-Central Virginia, F&M Bank-Emporia, F&M Bank-Northern Virginia, and F&M
Bank-Peoples are Virginia-chartered institutions regulated and examined by the
Virginia SCC. F&M Bank-Blakeley, F&M Bank-Martinsburg and F&M Bank-Keyser are
West Virginia-chartered institutions regulated and examined by the West Virginia
Board of Banking. F&M Bank-Allegiance is a Maryland state-chartered bank
regulated and examined by the Maryland-CFR.
F&M's subsidiary banks are all members of the Federal Reserve System and
are, therefore, supervised and examined by the Federal Reserve, their primary
federal regulator. The Federal Reserve and the Virginia SCC, West Virginia Board
of Banking, or the Maryland-CFR, as appropriate, conduct regular examinations of
each subsidiary bank, reviewing the adequacy of their allowance for loan losses,
quality of loans and investments, propriety of management practices, compliance
with laws and regulations and other aspects of operations. In addition to these
regular examinations, each subsidiary bank must furnish the Federal Reserve with
quarterly reports containing detailed financial statements and schedules. The
FDIC, which provides deposit insurance, also has authority to examine and
regulate F&M's subsidiary banks.
Federal and state banking laws and regulations govern all areas of the
operations of F&M's subsidiary banks, including maintenance of cash reserves,
loans, mortgages maintenance of minimum capital, payment of dividends, and
establishment of branch offices. Federal and state bank regulatory agencies also
have the general authority to eliminate dividends paid by insured banks if such
payment is deemed to constitute an unsafe and unsound practice. As their primary
federal regulator, the Federal Reserve has authority to impose penalties,
initiate civil administrative actions and take other steps to prevent F&M's
subsidiary banks from engaging in unsafe or unsound practices. In this regard,
the Federal Reserve has adopted capital adequacy requirements applicable to its
member banks.
DEPOSIT INSURANCE
The deposits of F&M's subsidiary banks are currently insured to a
maximum of $100,000 per depositor, subject to certain aggregation rules. The
FDIC has implemented a risk-related assessment system for deposit insurance
premiums and all depository institutions have been assigned to one of nine risk
assessment classifications based upon certain capital and supervisory measures.
All deposits of F&M's subsidiary banks are subject to the rates of the Bank
Insurance Fund ("BIF"), the federal deposit insurance fund that covers
commercial bank deposits. In 1997, all F&M's banks received a "1A" risk
classification rating, the highest possible rating.
REGULATORY CAPITAL REQUIREMENTS
On December 19, 1991, FDICIA was enacted. Among other things, FDICIA
requires the federal banking agencies to take "prompt corrective action" with
respect to banks that do not meet minimum capital requirements. FDICIA
establishes five capital tiers: "well capitalized," "adequately capitalized",
"under capitalized", "significantly undercapitalized", and "critically
undercapitalized", which terms are each further defined by federal regulations.
A depository institution is "well capitalized" if it significantly exceeds the
minimum level required by regulation for each relevant capital measure,
"adequately capitalized" if it meets each such measure, "undercapitalized" if it
fails to meet any such measure, "significantly undercapitalized" if it is
significantly below any such measure, and "critically undercapitalized" if it
fails to meet any critical capital level set forth in the regulations. The
critical capital level must be a level of tangible equity capital equal to not
less than 2.0% of total assets and not more than 65% of the minimum leverage
ratio to be prescribed by regulation (except to the extent that 2.0% would be
higher than such 65% level). An institution may be deemed to be in a
capitalization category that is lower than is indicated by its actual capital
position if it receives an unsatisfactory examination rating. In order to be
classified as a "well capitalized institution," the institution must have a
total risk-based capital ratio of 10% and a leverage ratio of 5%.
If a depository institution fails to meet regulatory capital
requirements, regulatory agencies can require submission and funding of a
capital restoration plan by the institution, place limits on its activities,
require the raising of additional capital, and, ultimately, require the
appointment of a conservator or receiver for the institution. As of December 31,
1997, all F&M's subsidiary banks exceeded the required regulatory capital
requirements under FDICIA.
CAPITAL ADEQUACY
Information on "Capital Adequacy" may be found under ITEM 7.
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS", "Capital Resources".
Dividends from F&M's subsidiary banks constitute the major source of
funds for dividends to be paid by the Company. The amount of dividends payable
by each subsidiary bank to the Company depends upon its earnings and capital
position, and is limited by federal and state law, regulations and policy. The
Federal Reserve has the general authority to limit dividends paid by F&M's
subsidiary banks and the Company if such payments are deemed to constitute an
unsafe and unsound practice.
As state member banks subject to the regulations of the Federal Reserve,
each subsidiary bank must obtain approval of the Federal Reserve for any
dividend if the total of all dividends declared by F&M's subsidiary banks in any
calendar year would exceed the total of its net profits for such year, as
defined by the Federal Reserve, plus its retained net profits for the preceding
two years. In addition, each subsidiary bank may not pay a dividend in an amount
greater than its undivided profits then on hand after deducting current losses
and bad debts. For this purpose, bad debts are generally defined to include the
principal amount of all loans which are in arrears with respect to interest by
six months or more, unless such loans are fully secured and in the process of
collection.
In addition, Virginia law imposes restrictions on the ability of all
banks chartered under Virginia law to pay dividends. Under Virginia law, no
dividend may be declared or paid that would impair a bank's paid-in capital. The
Virginia SCC also can limit the payment of dividends by any Virginia bank if it
determines the limitation is in the public interest and is necessary to ensure
the bank's financial soundness.
Under West Virginia law, a state bank may declare a dividend only from
its undivided profits and, if the bank's surplus account is not greater than or
equal to the par value of the bank's stock, the bank may not declare a dividend
unless a portion of the bank's profits for the period for which dividends are
declared is credited to the bank's surplus account. Also, a West
Virginia-chartered bank must obtain the approval of the West Virginia Board of
Banking prior to declaring a dividend if the total of all dividends paid by the
bank in any calendar year exceeds the total of its profits for that year plus
its undivided profits for the preceding two years.
Pursuant to Maryland law, a state bank may declare a cash dividend only
from (i) its undivided profits or (ii) with the prior approval of the
Maryland-CFR, its surplus in excess of 100% of its required capital stock. For
further information about the Company's dividends, see Part II., Item 5.,
"Market for Registrant's Common Equity and Related Stockholder Matters."
RECENT LEGISLATIVE DEVELOPMENTS
From time to time, various legislative and regulatory proposals with
respect to the regulation of financial institutions are considered by the
executive branch of the Federal government, Congress and various state
governments, including Virginia, West Virginia, and Maryland. Certain of these
proposals, if adopted, could significantly change the
regulation of banks and the financial services industry. The Company cannot
predict whether any of these proposals will be adopted or, if adopted, how
these proposals would affect the Company.
ITEM 2. PROPERTIES
The principal executive offices of F&M were moved January 1, 1998, to 9
Court Square, Winchester, Virginia, a multi-story building complex which is
owned free of any encumbrances. The Company operates a total of 108 banking
offices (87 in Virginia, 12 in West Virginia, and 9 in Maryland), 60 of which
are owned by the Company or one of its subsidiary banks free of any
encumbrances, and 48 of which are leased under agreements expiring at various
dates, including renewal options. The Company also owns additional office
facilities for various of its lending, audit, accounting, and data processing
functions. Additional information regarding F&M's lease agreements may be found
under ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA, Note 15.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its operations, the Company and its
subsidiary banks are parties to various legal proceedings. Based on information
presently available, and after consultation with legal counsel, management
believes that the ultimate outcome in such proceedings, in the aggregate, will
not have a material adverse effect on the business or the financial condition or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company has not submitted any matters to its security holders since
its Annual Meeting of Shareholders held April 22, 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The following table sets forth the per share high and low last sale
prices for the common stock of the Company as reported on the New York Stock
Exchange, and the cash dividends paid or declared per share on the Common Stock
for the period indicated:
PRICE RANGE CASH
HIGH LOW DIVIDENDS
---- --- ---------
1996
First Quarter 19.750 17.250 0.160
Second Quarter 18.500 16.000 0.160
Third Quarter 19.375 17.250 0.175
Fourth Quarter 21.375 18.125 0.230
1997
First Quarter 22.875 19.625 0.180
Second Quarter 26.375 19.875 0.180
Third Quarter 30.4375 26.00 0.185
Fourth Quarter 36.25 28.5625 0.185
At December 31, 1997, there were 20,374,957 shares of Common Stock
outstanding held by 7,881 holders of record.
On November 1, 1997, the Company issued 265,853 shares of its common
stock in connection with the acquisition of Shomo & Lineweaver Insurance Agency,
a closely-held insurance agency based in Harrisonburg, Virginia ("Shomo &
Lineweaver"). The acquisition was structured as a tax-free transaction involving
the exchange of 265,853 shares of Company common stock in exchange for all the
outstanding shares of Shomo & Lineweaver. The shares of Company common stock
issued in the transaction were not registered under the Securities Act of 1933
in reliance on the private offering and intrastate offering exemptions
thereunder.
The Company historically has paid cash dividends on a quarterly basis.
The final determination of the timing, amount and payment of dividends on the
Common Stock is at the discretion of the Board of Directors and will depend upon
the earnings of the Company and its subsidiaries, principally its subsidiary
banks, the financial condition of the Company and other factors, including
general economic conditions and applicable governmental regulations and
policies.
The Company or F&M Bank-Winchester has paid regular cash dividends for
more than 55 consecutive years.
The Company is a legal entity separate and distinct from its
subsidiaries, and its revenues depend primarily on the payment of dividends from
F&M's subsidiary banks. F&M's subsidiary banks are subject to certain legal
restrictions on the amount of dividends they are permitted to pay to the
Company. At December 31, 1997, F&M's subsidiary banks had available for
distribution as dividends to the Company approximately $40.784 million.
ITEM 6. SELECTED FINANCIAL INFORMATION
Incorporated herein by reference, as Exhibit 13, to page 1 of the 1997
Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated herein by reference, as Exhibit 13, to pages 7 through 24
of the 1997 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated herein by reference, as Exhibit 13, to pages 12 and 13 of
the 1997 Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Incorporated herein by reference, as Exhibit 13, to pages 25 through 46
of the 1997 Annual Report.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITIES OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to General Instruction G(3), the information called for by
Part III, Items 10. through 13., is incorporated herein by reference
from the Company's definitive proxy statement, dated March 30, 1998,
for the Company's Annual Meeting of Shareholders to be held April 28,
1998, which definitive proxy statement is to be filed with the
Commission pursuant to Rule 14a-6 on or prior to March 30, 1998. The
information regarding executive officers called for by Item 401 of
Regulation S-K is included in Part I under "EXECUTIVE OFFICERS OF THE
REGISTRANT".
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents included in Part II of this report are
incorporated by reference to the Company's 1997 Annual Report (see
Exhibit 13):
1. Financial Statements Page
Report of Independent Certified Public Accountants 47
F&M National Corporation and Subsidiaries:
Consolidated Balance Sheets at December 31, 1997 and 1996 25
Consolidated Statements of Income at December 31, 1997,
1996, and 1995 26
Consolidated Statements of Changes in Shareholders'
Equity for years ended December 31, 1997,
1996 and 1995 27
Consolidated Statements in Cash Flows for the periods
ended December 31, 1997, 1996 and 1995 28
Notes to Consolidated Financial Statements 29
2. Financial Statement Schedules
All schedules are omitted because of the absence of conditions under
which they are required or because the required information is given
in the financial statements or notes thereto.
3. Exhibits.
(10) Material Contracts.
(i) Form of agreement between officers of the Registrant
under the Registrant's Defined Benefit Deferred
Compensation and Salary Continuation Plan
(incorporated herein by reference to Exhibit 10(b) to
Registration Statement #33-10696, filed on December
9, 1986).
(ii) Registrant's Officers' Incentive Bonus Plan
(incorporated herein by reference to Exhibit 28(i) to
Registration Statement #33-25867 filed on December 2,
1988).
(iii) Registrant's 1992 Incentive and Non-Qualified Stock
Option Plan (incorporated herein by reference to
Exhibit 10(b) to Registration Statement #33-50902,
filed on August 14, 1992).
(iv) Executive Severance Agreements entered into with the
Registrant and the following Executive Officers of
the Registrant on December 1, 1995: Jack R. Huyett,
Betty H. Carroll, Alfred B. Whitt, and F. Dixon
Whitworth, Jr. (incorporated herein by reference to
Form 10-K/405 for the calendar year ended December
31, 1995, filed with the Commission on March 28,
1996).
(11) Statement re computation of per share earnings (filed
herewith).
(13) Portions of the 1997 Annual Report to Shareholders for the
fiscal year ended December 31, 1997 (filed herewith).
(21) Subsidiaries of the Registrant (filed herewith).
(23) Consent of Yount, Hyde & Barbour, P. C., Certified Public
Accountants (filed herewith).
(27) Financial Data Schedule (filed herewith).
(b) Reports on Form 8-K.
During 1997, the Company filed the following reports:
(i) October 23, 1997, for event of October 22, 1997, under ITEMS
5. to report the changes in management of F&M National
Corporation.
(ii) December 4, 1997, for event of December 2, 1997, under ITEM
5., to announce that the Registrant had entered into an
Agreement and Plan of Reorganization with Peoples Bank of
Virginia, Chesterfield, Virginia
(iii) December 15, 1997, for event of December 12, 1997, under ITEM
5., to announce that the Registrant had entered into an
Agreement and Plan of Reorganization with The Bank of
Alexandria, Alexandria, Virginia.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, as of the 11th day of
March, 1998:
F&M NATIONAL CORPORATION
Winchester, Virginia
/s/ W. M. Feltner
--------------------------------
W. M. Feltner, Chairman of the Board
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities on the 11th day of March, 1998:
SIGNATURE TITLE
/s/ W. M. Feltner Chairman of the Board, Chief
W. M. FELTNER Executive Officer, Director
/s/ Alfred B. Whitt Vice Chairman, President, Chief
ALFRED B. WHITT Financial Officer, Director
/s/ Charles E. Curtis Vice Chairman, Chief
CHARLES E. CURTIS Administrative Officer
/s/ Frank Armstrong, III
FRANK ARMSTRONG, III Director
/s/ William H. Clement
WILLIAM H. CLEMENT Director
/s/ Charles E. Curtis
CHARLES E. CURTIS Director
/s/ John E. Fernstrom
JOHN E. FERNSTROM Director
/s/ William R. Harris
WILLIAM R. HARRIS Director
/s/ L. David Horner, III
L. DAVID HORNER, III Director
/s/ Jack R. Huyett
JACK R. HUYETT Director
/s/ George L. Romine
GEORGE L. ROMINE Director
/s/ John S. Scully, III
JOHN S. SCULLY, III Director
/s/ J. D. Shockey, Jr.
J. D. SHOCKEY, JR. Director
/s/ Ronald W. Tydings
RONALD W. TYDINGS Director
/s/ Fred G. Wayland, Jr.
FRED G. WAYLAND, JR. Director