<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-14553
F & M Bancorporation, Inc.
(Exact name of registrant as specified in its charter)
Wisconsin 39-1365327
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Bank Avenue, Kaukauna, Wisconsin 54130
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(Address of principal executive offices) (Zip Code)
(920) 766-1717
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(Registrant's telephone number, including area code)
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(Former name, former address and former fiscal year, if changed since
last
report)
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
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes
of common stock as of November 10, 1997
$1.00 par value common
9,749,980 shares
<PAGE> 2
F & M BANCORPORATION, INC.
AND SUBSIDIARIES
--------------------------
INDEX
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<TABLE>
<CAPTION>
Page
Number
------
PART I. FINANCIAL INFORMATION:
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<S> <C> <C>
Item l. Financial Statements 3
Condensed Consolidated Balance Sheets
as of September 30, 1997 and December 31,
1996 (Unaudited) 4
Condensed Consolidated Statements of Earnings
for the nine months ended September 30, 1997
and 1996 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows
for the nine months ended September 30, 1997
and 1996 (Unaudited) 6
Notes to Condensed Consolidated Financial
Statements (Unaudited) 7
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and
Qualitative Disclosure about Market Risk 15
PART II. OTHER INFORMATION
- -----------------------------
Item 6. Exhibits and Reports on Form 8-K 16
</TABLE>
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<PAGE> 3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
The condensed consolidated financial statements included herein have been
included by F & M Bancorporation, Inc. (the "Company") pursuant to the rules
and regulations of the Securities and Exchange Commission. Certain information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the disclosures are adequate to make the information presented not
misleading. This information is unaudited but includes all adjustments
(consisting only of normal recurring accruals) which, in the opinion of Company
management, are necessary for a fair presentation of the results for such
periods.
The results of operations for interim periods are not necessarily indicative of
the results of operations for the entire year. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and the notes thereto included in the Company's 1996 Annual Report.
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<PAGE> 4
F & M BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 48,717 $ 49,406
Investment securities (Note B)
Held to maturity 124,957 95,030
Available for sale - stated at fair value 173,961 154,942
Federal funds sold 38,168 23,286
Loans (Note C) 1,178,250 970,554
Less: Allowance for loan losses (14,633) (12,319)
---------- -----------
Net loans 1,163,617 958,235
Bank premises and equipment, net 32,737 29,623
Other real estate 1,456 1,842
Other assets 30,108 23,538
---------- -----------
TOTAL ASSETS $1,613,721 $1,335,902
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $172,615 $150,849
Interest bearing 1,160,247 989,522
---------- -----------
Total deposits 1,332,862 1,140,371
Short-term borrowing 64,121 42,263
Other borrowings 56,929 18,194
Accrued expenses and other liabilities 14,484 12,869
---------- -----------
Total liabilities 1,468,396 1,213,697
Shareholders' Equity
Common stock - $1 par value:
Authorized - 20,000,000 shares
Issued - 9,779,130 and
8,173,255 shares, respectively 9,779 8,173
Capital surplus 85,397 59,452
Retained earnings 50,773 55,714
Net unrealized loss on securities available for sale (37) (473)
Less-Common stock held in treasury at cost-
33,220 shares and 39,000 shares, respectively (587) (661)
---------- -----------
Total shareholders' equity 145,325 122,205
---------- -----------
Total liabilities and shareholders' equity $1,613,721 $1,335,902
========== ===========
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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<PAGE> 5
F & M BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1997 1996 1997 1996
------------------ ------------------
<S> <C> <C> <C> <C>
Interest income
Interest and fees on loans $26,988 $21,097 $76,995 $60,311
Interest on investment securities
Taxable 2,607 2,431 7,295 7,498
Exempt from federal tax 1,628 1,392 4,833 3,864
Other interest income 273 209 942 1,150
------- ------- ------- -------
Total interest income 31,496 25,129 90,065 72,823
------- ------- ------- -------
Interest expense
Interest on deposits 13,183 10,855 38,246 31,401
Interest on short-term borrowing 872 588 2,495 1,281
Interest on other borrowing 813 76 1,689 524
------- ------- ------- -------
Total interest expense 14,868 11,519 42,430 33,206
------- ------- ------- -------
Net interest income 16,628 13,610 47,635 39,617
Provision for loan losses 643 484 1,898 1,334
------- ------- ------- -------
Net interest income after
provision for loan losses 15,985 13,126 45,737 38,283
------- ------- ------- -------
Other income
Service charges on deposit accounts 1,142 890 3,311 2,477
Other operating income 889 800 2,875 2,272
Net securities gain (loss) 0 33 69 9
------- ------- ------- -------
2,031 1,723 6,255 4,758
------- ------- ------- -------
Other expenses
Salaries and employee benefits 5,787 4,795 16,883 13,757
Other operating expense 4,544 3,995 13,522 11,720
------- ------- ------- -------
10,331 8,790 30,405 25,477
------- ------- ------- -------
Income before income taxes 7,685 6,059 21,587 17,564
Income taxes 2,373 1,725 6,624 5,397
------- ------- ------- -------
NET INCOME $ 5,312 $ 4,334 $ 14,963 $ 12,167
======== ========= ========= ========
EARNINGS PER SHARE $0.55 $0.49 $1.54 $1.37
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
- 5 -
<PAGE> 6
F & M BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine months ended
September 30,
1997 1996
--------- ---------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents:
Cash flows from operating activities:
Net income $ 14,963 $ 12,167
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and net amortization 2,351 2,005
Provision for loan losses 1,898 1,334
Gain/loss on sale of investment securities (69) (9)
Increase in other assets (2,362) (2,021)
Gain on sale of equipment (238) (49)
Increase (decrease) in other liabilities 184 (1,891)
Provision for other real estate losses 3 41
Gain on sale of other real estate (44) (7)
Minority interest 0 8
----------- -------------
Net cash provided by operating activities 16,686 11,578
----------- -------------
Cash flows from investing activities:
Proceeds from sale of investment securities
available for sale 256 1,270
Proceeds from maturities of investment
securities available for sale 32,090 41,341
Purchase of investment securities
available for sale (54,640) (26,225)
Proceeds from maturities of investment
securities held to maturity 7,027 4,897
Purchase of investment securities
held to maturity (15,174) (21,058)
Net increase in loans (119,349) (98,636)
Capital expenditures (3,145) (6,357)
Proceeds from sale of equipment 322 240
Proceeds from sale of other real estate 1,300 318
Payment for purchase of stock of
subsidiary banks, net of cash received 44,928 (484)
----------- -------------
Net cash used in investing activities (106,387) (104,694)
----------- -------------
Cash flows from financing activities:
Net increase in deposits 49,803 47,162
Net increase in short-term borrowings 21,658 27,051
Dividends paid (5,370) (3,958)
Net increase (decrease) in other borrowings 37,736 (1,066)
Net proceeds options exercised 67 111
----------- -------------
Net cash provided by financing activities 103,894 69,300
----------- -------------
Net increase (decrease) in cash and cash equivalents 14,193 (23,816)
Cash and cash equivalents at beginning of period 72,692 76,409
----------- -------------
Cash and cash equivalents at end of period $ 86,885 $ 52,593
=========== =============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
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<PAGE> 7
F & M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
NOTE A - BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements,
which include the accounts of F&M Bancorporation, Inc. and its subsidiaries,
have been prepared in accordance with generally accepted accounting principles
for interim financial information. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. These statements have been
restated to reflect the acquisition of Community State Bank, acquired on June
28, 1996, Wisconsin Ban Corp., acquired on May 30, 1997 and Citizens National
Bancorporation, Inc. acquired on August 14, 1997. These transactions have been
accounted for using the pooling of interests method of accounting. Monycor
Bancshares, Inc., acquired on February 5, 1996, East Troy Bancshares, acquired
on January 10, 1997, Green County Bank, acquired on February 27, 1997 and Clear
Lake Bancorp., Inc. acquired on August 12, 1997, accounted for as pooling of
interests, were not material to prior years' reported operating results and
accordingly, previous years' results have not been restated. The acquisitions
of the TCF office in Little Chute, acquired April 26, 1996, Bradley Bank,
acquired May 10, 1996 and the Security office in Antigo, acquired on September
29, 1997, were accounted for using the purchase method of accounting;
accordingly, the financial data includes results of operations only since the
dates of acquisition. All per share information has been adjusted to reflect
the 10% stock dividends, paid to shareholders on June 10, 1996 and June 9,
1997. Information as to the number of shares outstanding has not been
adjusted. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for fair presentation have been
included.
NOTE B - INVESTMENT SECURITIES
Carrying amounts and market values of investment securities held to
maturity at September 30, 1997 are as follows:
Carrying Market
Amount Value
-------- -------
(in thousands)
Exempt obligations of states and political subdivisions $124,957 $128,304
======== ========
NOTE C - LOANS
At September 30, 1997, loans are as follows:
(in thousands)
Commercial and industrial $239,138
Agricultural 85,237
Real estate construction 37,513
Real estate mortgage 730,206
Installment and other consumer 86,156
-------
1,178,250
Less allowance for loan losses (14,633)
-------
Net loans $1,163,617
=========
NOTE D - EARNINGS PER SHARE OF COMMON STOCK
Earnings per share of common stock are based on weighted average number of
common shares outstanding of 9,744,953 and 8,893,259 for the three months ended
September 30, 1997 and 1996 and 9,743,824 and 8,889,289 for the nine months end
September 30, 1997 and 1996, respectively.
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<PAGE> 8
NOTE E - NON-PERFORMING ASSETS
The following table sets forth the amount of non-performing loans, other
real estate owned and non-performing assets, and each of their percentages to
total loans at September 30, 1997:
(in thousands)
Non-accrual loans $10,587 0.90%
Loans past due 90 days or more 254 0.02
Restructured loans 502 0.04
------- ----
Total non-performing loans 11,343 0.96
Other real estate owned 1,456 0.13
------- ----
Total non-performing assets $12,799 1.09%
======= ====
NOTE F - SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes loan balances at September 30, 1997; changes
in the allowance for loan losses arising from loans charged-off and recoveries
on loans previously charged-off, by loan category; and provisions for loan
losses which have been charged to expense:
(in thousands)
Average balance of loans year to date $1,121,087
==========
Allowance for loan losses at
beginning of period 12,319
Loans charged off
Commercial and Industrial 448
Real Estate - Mortgage 246
Installments and Other Consumer Loans 507
-------
Total charge offs 1,201
Recoveries on loans previously
charged off
Commercial and Industrial 111
Real Estate - Mortgage 85
Installment and Other Consumer Loans 102
-------
Total recoveries 298
Net loans charged off 903
Provisions for loan losses of banks
acquired at date of acquisition 1,319
Provisions for loan
losses 1,898
Allowance for loan losses -------
at end of period $14,633
=======
Ratio of net charge offs
during period to average
loans outstanding (annualized) 0.11%
Allowance for loan
losses to total loans 1.24%
-8-
<PAGE> 9
NOTE G - ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The following table summarizes the allocation of allowances for loan losses
and gives a breakdown of the percentage of loans in each category at September
30, 1997:
Percent
of loans
Amount of in each
reserve category
for loan to total
(in thousands) losses loans
- -----------------------------------------------------------
Commercial,
industrial, and
agricultural $ 5,997 27.5%
Real estate -
construction 309 3.2
Real estate - mortgage 5,479 62.0
Installment and other
consumer loans 2,848 7.3
------- -----
$14,633 100.0%
======= =====
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<PAGE> 10
Item 2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The following discussion and analysis provides information regarding
F & M Bancorporation, Inc.'s (the "Company") results of operations for the
three and nine months ended September 30, 1997 and 1996 and financial condition
at September 30, 1997. These statements have been restated to reflect the
acquisition of Community State Bank ("Community"), acquired on June 28, 1996,
Prairie City Bank acquired on May 30, 1997, and Citizens National
Bancorporation, Inc., acquired on August 14, 1997. These transactions have
been accounted for using the pooling of interests method of accounting.
Monycor Bancshares, Inc., acquired on February 5, 1996, East Troy Bancshares,
acquired on January 10, 1997, Green County Bank, acquired on February 27, 1997,
and Clear Lake Bancorp., Inc. acquired on August 12, 1997, accounted for as
pooling of interests, were not material to prior years' reported operating
results; accordingly, previous years' results have not been restated. The
acquisitions of TCF office in Little Chute, acquired April 26, 1996, Bradley
Bank, acquired May 10, 1996, and the Security office in Antigo, acquired on
September 29, 1997, were accounted for using the purchase method of accounting;
accordingly, the Company's financial data includes results of operations of
these entities only since the dates of acquisition. All per share information
has been adjusted to reflect the 10% stock dividends, paid to shareholders on
June 10, 1996 and June 9, 1997. Information as to the number of shares
outstanding has not been adjusted.
The Company has announced a pending acquisition which, if consummated,
would affect the Company's future operations. In June 1997, the Company
announced that it had entered into a letter of intent to acquire Sentry
Bancorp. Inc., Dundas, Minnesota, a holding company of the Cannon Valley Bank,
which has an office in Dundas, with total assets of approximately $25 million.
The company intends to account for this pending acquisition using the purchase
method of accounting. Consummation of this acquisition is expected in the
fourth quarter of 1997 or at the beginning of 1998.
Discussions in this Management's Discussion and analysis that are not
statements of historical fact (including statements which include terms such as
"believe", "expect", "anticipate", "will" or "may") are forward-looking
statements that involve risks and uncertainties, and the Company's actual
future results could materially differ from those discussed. Factors that
could cause or contribute to such differences include, but are not limited to,
the Company's future lending and collections experiences, the effects of
acquisitions, competition from other institutions, changes in the banking
industry and its regulation, changes in prevailing interest rates, needs for
technological change, and other factors, including those described in this
Management's Discussion and analysis and elsewhere in this report.
SUBSEQUENT EVENTS
On October 6, 1997, the Company announced an execution of a Definitive
Agreement to purchase the Bank of South Wayne, which has an office in South
Wayne, with total assets of approximately $20 million. On November 4, 1997,
the Company announced an execution of a Letter of Intent providing for the
affiliation of Financial Management Services of Jefferson, Inc., a holding
company of The Farmers & Merchants Bank of Jefferson, with two offices in
Jefferson and total assets of approximately $100 million. Consummation of
these acquisition is expected in the first and second quarter of 1998,
respectively.
RESULTS OF OPERATIONS
For the three months ended September 30, 1997, net income increased $1.0
million, or 22.6%, to $5.3 million from $4.3 million in the third quarter of
1996. The annualized return on average assets was 1.35% for the third quarter
of 1997 compared with 1.36% for the third quarter of 1996. Returns on average
stockholders' equity on an annualized basis for the third quarters of 1997 and
1996 were 14.67% and 14.61%, respectively.
For the nine months ended September 30, 1997, net income increased $2.8
million, or 23.0%, to $15.0 million from $12.2 million for the same period of
1996. The annualized return on average assets was 1.33% for the nine months
ended September 30, 1997 compared with 1.33% for the same period of 1996.
Return on average stockholders' equity on an annualized basis for the nine
months ended September 30, 1997 and 1996 were 14.33% and 14.03%, respectively.
-10-
<PAGE> 11
Net Interest Income
Net interest income for the three months ended September 30, 1997 increased
$3.0 million, or 22.2%, to $16.6 million from $13.6 million in the third
quarter of 1996. Total interest income for the third quarter of 1997 increased
$6.4 million, or 25.3%, to $31.5 million from $25.1 million in the third
quarter of 1996. Interest expense increased $3.4 million, or 29.1%, to $14.9
million in the third quarter of 1997 from $11.5 million in the third quarter of
1996.
Net interest income for the nine months ended September 30, 1997 increased
$8.0 million, or 20.2%, to $47.6 million from $39.6 million in the first nine
months of 1996. Total interest income for the nine months ended September 30,
1997 increased $17.2 million, or 23.7%, to $90.1 million from $72.8 million in
the first nine months of 1996, while interest expense increased $9.2 million,
or 27.8%, to $42.4 million in the nine months ended September 30, 1997 from
$33.2 million in 1996.
Increased net interest income for the three and nine month periods is
attributable to the increase in asset volume due to the Company's acquisitions
for which prior periods were not restated and internal growth in an environment
of relative stability of the Company's net interest margin. Total interest
income increased for the three and nine month period in 1997 compared to the
same periods last year as a result of an increase in interest and fees on loans
due to increased loan activity and acquisitions, and as interest rates were
relatively stable, while total interest expense increased for the three and
nine month periods in 1997 compared to 1996 as a result of increased levels of
deposits primarily due to acquisitions.
Provision for Loan Losses
The provision for loan losses for the three months ended September 30, 1997
increased $159,000, or 32.8%, to $643,000 from $484,000 in the third quarter of
1996. The provision for loan losses for the nine months ended September 30,
1997 was $1.9 million, a 42.3% increase from $1.3 million for the nine months
ended September 30, 1996. This increase in the provision for the first nine
months was due mainly to reflect an increase in net charge offs which increased
from $576,000 in the first nine months of 1996 to $903,000 in the first nine
months of 1997 and an increase in the loan portfolio. Due to the increase in
net charge offs and the increase in the loan portfolio for the first nine
months the allowance for loan losses slightly decreased as a percentage of
loans to 1.24% from 1.27% at December 31, 1996. See "Allowance for Loan
Losses" for further discussion.
Non-Interest Income
The Company stresses the importance of growth in non-interest income as one
of its key long-term strategies. Non-interest income for the three months
ended September 30, 1997 increased $309,000, or 17.9%, to $2.0 million from
$1.7 million in the third quarter of 1996. Non- interest income for the nine
months ended September 30, 1997 increased $1.5 million, or 31.5%, to $6.3
million. The increase was due principally to increases in service charges,
other fee income and security gains. Increases for both the three and nine
month periods were due primarily to increases in service charges, other fee
income, resulting from increase customer activity and the acquisitions in which
prior period information was not restated.
Non-Interest Expense
Non-interest expense for the three months ended September 30, 1997
increased $1.5 million, or 17.5%, to $10.3 million from $8.8 million in the
third quarter of 1996. Non-interest expense for the nine months ended
September 30, 1997 increased $4.9 million, or 19.3% to $30.4 million from $25.5
million in the first nine months of the year. The increase was primarily due
to the acquisitions in 1996 and 1997, resulting from both the cost of the
acquisitions and increase from those with respect for which prior periods were
not restated (additional staffing, occupancy expense, etc.), and the normal
increases in salaries and employee benefits.
The overhead ratio, which is computed by subtracting non-interest income
from non-interest expense (excluding net securities transactions) and dividing
by average total assets, was 2.15% in the first nine months of 1997 compared
with 2.26% in the first nine months of 1996. The decrease in this ratio in the
first nine months of 1997 was the result of the factors set forth above.
-11-
<PAGE> 12
Provision for Income Taxes
The Company's provision for income taxes for the three months ended
September 30, 1997 increased $648,000, or 37.6%, to $2.4 million from $1.7
million in the third quarter of 1996. The increase in income tax provision was
principally due to increased taxable income.
The provision for income taxes for the nine months ended September 30, 1997
increased $1.2 million, or 22.7% to $6.6 million from $5.4 million in 1996.
The increase in income tax provision was principally due to increased taxable
income.
Net Income
Net income for the first nine months of 1997 increased by $1.0 million, or
22.6% to $5.3 million from $4.3 million in the same period for 1996. Net
income for the first nine months of 1997 increased by $2.8 million, or 23.0%,
to $15.0 million from $12.2 million in the first nine months of 1996.
Net income per common share was $0.55 for the third quarter of 1997
compared with $0.49 in the third quarter of 1996 an increase of 12.2%.
Although the Company adopted a stock option plan in 1993, as of September 30,
1997, fully diluted earnings per share are equal to the stated earnings per
share numbers. The increase in shares outstanding resulted primarily from
acquisitions for which prior period financial statements were not restated.
Net income per share was $1.54 for the first nine months of 1997, compared
with $1.37 in the same period for 1996, an increase of 12.4%. As of September
30, 1997, fully diluted earnings per share are equal to the stated earnings per
share numbers.
FINANCIAL CONDITION
Loan Portfolio
At September 30, 1997, total loans increased $207.7 million, or 21.4%, to
$1.178 billion from $970.6 million at December 31, 1996. The loan mix in the
Company's portfolio at September 30, 1997 did not change in any material
respect compared with December 31, 1996. Based on the current economic
conditions, management has established a range of average loans to average
earning assets of between 70% and 80% which it believes to be the optimum level
for F&M. At September 30, 1997, year-to-date average loans to average earning
assets are within the acceptable range at 78.9%. Approximately $93 million in
loans, or 45% of the first nine months of the year's growth, resulted from
acquisitions in which the Company did not restate its prior financial
statements. The remaining balance resulted primarily from loan demand spread
throughout the Company's subsidiary banks.
Non-Performing Assets
Maintaining excellent credit quality continues to be a priority for the
Company. At September 30, 1997, non-performing assets amounted to $12.8
million, compared to $14.8 million at December 31, 1996. Non-performing loans
at September 30, 1997 were $11.3 million, or 0.97% of total loans, compared to
$13.0 million at December 31, 1996. Other real estate owned ("OREO") at
September 30, 1997 was $1.5 million as compared to $1.8 million at December 31,
1996. The ratio of non-performing assets to total loans at September 30, 1997
was 1.15%. Management continues to work at reducing the level of
non-performing assets. Non-performing assets increased in 1996 because of
acquisitions and developments with respect to a number of separate loans, in
different locations and industries, and decreased slightly in the first nine
months of 1997 due to write-offs, and improvements in repayments of
non-performing loans offset by non-performing loans of banks acquired in 1997
for which prior periods were not restated. Management does not believe that
there is any common reason or general trend which accounts for the increase (or
that it necessarily is an indication of expected future developments).
However, particularly in view of the developments, management continues to take
an aggressive collection effort on these assets, carefully monitors these (and
other) loans, and regularly reviews and evaluates the non-performing credits to
determine appropriate handling and action.
Summary of Loan Loss Experience
For the first nine months of 1997, total charge-offs were $1.2 million and
total recoveries were $291,000. The annualized ratio of net charge-offs to
average loans outstanding for the nine months ended September 30, 1997 was
0.11%. The charge-offs were not concentrated in any particular industry.
-12-
<PAGE> 13
Allowance for Loan Losses
At September 30, 1997 and December 31, 1996, the allowance for loan losses
as a percentage of total loans was 1.24% and 1.27%, respectively. Management
continually reviews the loan portfolio, and other factors, to determine the
appropriate allowance. The allowance for loan losses is an amount that
management believes will be adequate to absorb possible losses on existing
loans that may become uncollectible based on evaluations of the collectibility
of loans and prior loan loss experience. In determining the additions to the
allowance charged to operating expenses, management considered historical loss
experience, changes in the nature and volume of the loan portfolio, overall
portfolio quality, and current economic conditions that may affect the
borrower's ability to pay.
Investment Portfolio
At September 30, 1997, the investment portfolio increased $48.9 million, or
19.6%, to $298.9 million from $250.0 million at December 31, 1996. At
September 30, 1997 and December 31, 1996, the investment portfolio represented
18.5% and 18.7% of total assets, respectively. Increases in the investment
portfolio is primarily attributed to acquisitions that have not been restated
and due to the Company's decision to increase the investment portfolio.
Deposits
Total deposits at September 30, 1997 increased $192.5 million, or 16.9%, to
$1.333 billion from $1.140 billion at December 31, 1996. Interest-bearing
deposits at September 30, 1997 increased $170.7 million, or 17.3%, to $1.160
billion from $989.5 million at December 31, 1996. The increase in deposits is
primarily attributable to the four acquisitions in the first nine months of
1997 for which financial statements were not restated representing
approximately $145 million.
Borrowings
Short-term borrowings at September 30, 1997 were $64.1 million, as compared
to $42.3 million at December 31, 1996. Short-term borrowings consist primarily
of federal funds purchased. The Company has used short-term borrowings to
assist in funding its increasing loan demand, as loans have grown more rapidly
than deposits. Management has taken steps to monitor short-term borrowings and
is comfortable with the current level.
Several of the Company's subsidiary banks, as members of the Federal Home
Loan Bank (FHLB), had borrowings from the FHLB as of September 30, 1997. These
borrowings are secured by pledges of mortgage loans, and totaled $56.9 million
at September 30, 1997, compared to $18.2 million at December 31, 1996. These
FHLB borrowings had original maturities of three months to nine years at
September 30, 1997.
CAPITAL ADEQUACY
During the first nine months of 1997, stockholders' equity increased $23.1
million due to net income of $15.0 million in the first nine months of 1997 and
the acquisitions of East Troy, Landmark, and Brodhead, offset by dividends paid
to stockholders and a slight increase due to the effect of FASB 115 resulting
from the decreased net unrealized loss on securities available for sale. At
September 30, 1997, the Company's risk-based Tier 1 capital ratio was 11.21%.
The total risk-based capital ratio was 12.42% and the leverage ratio was 8.71%.
All such ratios exceed regulatory minimums of 4.0%, 8.0% and 3.0%,
respectively. The average equity to average assets ratio was 9.28% at
September 30, 1997, compared with 9.47% at September 30, 1996.
F & M's common stock dividend payout ratio was 33.1% in the first nine
months of 1997 as compared to 27.4% in the comparable 1996 period. These
numbers do not include the dividends historically paid by acquired entities
prior to their acquisitions by the Company.
At September 30, 1997, each of the Company's subsidiary banks was in
compliance with all applicable capital requirements, and management believes
that the capitalization of those banks is adequate.
During the first nine months of the year the Company incurred minimal
capital expenditures for replacement and renovation of facilities. The Company
to date has not committed to any major commitments to build or purchase in
1997, but also expects to finance any such expenditures through earnings and
existing capital resources. The Company expects to finance the cash purchase
of Cannon Valley Bank through earnings and existing capital resources.
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<PAGE> 14
LIQUIDITY
As shown in the Company's Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997, cash and cash equivalents increased by
$14.2 million during the period to $86.9 million at September 30, 1997. The
increase primarily reflected $16.7 million in net cash provided by operating
activities and $103.9 million in net cash provided by financing activities,
offset by $106.4 million in net cash used in investing activities. Net cash
provided by operating activities primarily consisted of the Company's net
income in the period increased by adjustments for non-cash credits. Net cash
provided by financing activities principally reflected an increase in
short-term and other borrowings. Net cash used in investing activities
consisted primarily of a net increase in loans plus necessary capital
expenditures offset by net cash received in acquisitions for which prior
periods were not restated.
The Company manages its liquidity to provide adequate funds to support the
borrowing requirements and deposit flow of its customers. Management views
liquidity as the ability to raise cash at a reasonable cost or with a minimum
of loss and as a measure of balance sheet flexibility to react to marketplace,
regulatory and competitive changes. The primary sources of the Company's
liquidity are investment securities available for sale and other marketable
assets maturing within one year. The Company attempts, when possible, to match
relative maturities of assets and liabilities, while maintaining the desired
net interest margin. The Company can also utilize borrowing capacities if
appropriate. Although the percentage of earning assets represented by loans is
increasing, management believes that its sources of liquidity are adequate.
-14-
<PAGE> 15
OTHER
SFAS No. 114 (Accounting by Creditors for Impairment of a Loan) as amended
by SFAS No. 118 (Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures) was adopted by the Company as of January 1, 1995.
In accordance with the new standard, the 1995 allowance for loan losses
includes specific allowances related to loans which have been judged to be
impaired and which fall within the scope of SFAS No. 114 (primarily commercial
loans). A loan is impaired when, based on current information, it is probable
that the Company will not collect all amounts due in accordance with the
contractual terms of the loan agreement. These specific allowances are based
on discounted cash flows of expected future payments using the loan's initial
effective interest rate or the fair value of the collateral if the loan is
collateral dependent. Since the Company evaluates the overall adequacy of the
allowance for credit losses on an ongoing basis, the adoption of SFAS No. 114
did not affect the amount of the allowance for credit losses or the existing
income recognition and charge-off policies for nonperforming loans.
SFAS No. 121 (Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of) was issued by FASB in March 1995. SFAS
No. 121 requires long-lived assets and certain intangibles to be held and used
by an entity be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
The statement also requires long-lived assets and certain intangibles to be
disposed of or be reported at the lower of carrying amount or fair value less
cost to sell. This statement was adopted by the Company effective January 1,
1996. The adoption of SFAS No. 121 did not have a significant impact on the
Company's financial condition or results of operations once implemented.
SFAS No. 122 (Accounting for Mortgage Servicing Rights) was issued by FASB
in May 1995. SFAS No. 122 requires accounting recognition of the rights to
service mortgage loans for others. The total cost of the mortgage loan will be
allocated between the relative fair values of the loan and the mortgage
servicing rights. The cost allocated to mortgage servicing rights will be
recognized as a separate asset and amortized over the period of estimated
servicing income. This statement was adopted by the Company effective January
1, 1996. The adoption of SFAS No. 122 did not have a significant impact on
the Company's financial condition or results of operations. Future impact of
adoption is contingent on the future levels of mortgage loan sales.
SFAS No. 123 (Accounting for Stock-Based Compensation) was issued by FASB
in October 1995. SFAS No. 123 establishes financial accounting and reporting
standards for stock-based employee compensation plans. The statement
encourages a "fair value-based method" of accounting for stock-based
compensation plans. Upon adoption of SFAS No. 123, the Company will be
required to disclose in the notes to the financial statements the difference
between the "fair value method" and the "intrinsic value method" as prescribed
by APB Opinion No. 25, "Accounting for Stock Issued to Employees." The Company
will continue to account for stock-based compensation in accordance with APB
Opinion No. 25 on the Company's financial statements. SFAS No. 123 was adopted
as of January 1, 1996, and did not have a significant impact on the Company's
financial condition or results of operations.
The Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," in June
1996, SFAS No. 125 provides accounting and reporting standards for transfers
and servicing of financial assets and extinguishment of liabilities.
Item 3. Quantitative and Qualitative Disclosure about Market Risk Not Yet
Applicable to the Company.
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<PAGE> 16
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: See Exhibit Index, which follows the
signature page hereof.
(b) Reports on Form 8-K:
The Registrant filed one report on Form 8-K during the third
quarter of fiscal 1997. The Report, dated August 12, 1997, related
to the Registrant's acquisitions of Clear Lake Bancorp., Inc. and
Citizens National Bancorporation, Inc.
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<PAGE> 17
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
F & M BANCORPORATION, INC.
-------------------------------------------
(Registrant)
Date November 13, 1997 /s/ John W. Johnson
-------------------------------------------
John W. Johnson
President and Chief Executive Officer
Date November 13, 1997 /s/ Daniel E. Voet
-------------------------------------------
Daniel E. Voet
Chief Financial Officer and Treasurer
<PAGE> 18
EXHIBIT INDEX
F & M BANCORPORATION, INC.
Form 10-Q for Quarter Ended September 30, 1997
Exhibit No. Description
27 Financial Data Schedule
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<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 48,717
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 38,168
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 173,961
<INVESTMENTS-CARRYING> 124,957
<INVESTMENTS-MARKET> 128,304
<LOANS> 1,178,250
<ALLOWANCE> 14,633
<TOTAL-ASSETS> 1,613,721
<DEPOSITS> 1,332,862
<SHORT-TERM> 64,121
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<LONG-TERM> 56,929
9,779
0
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<INTEREST-TOTAL> 90,066
<INTEREST-DEPOSIT> 38,245
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<INTEREST-INCOME-NET> 47,636
<LOAN-LOSSES> 1,898
<SECURITIES-GAINS> 69
<EXPENSE-OTHER> 30,405
<INCOME-PRETAX> 21,587
<INCOME-PRE-EXTRAORDINARY> 21,587
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,963
<EPS-PRIMARY> 1.54
<EPS-DILUTED> 1.54
<YIELD-ACTUAL> 4.72
<LOANS-NON> 11,343
<LOANS-PAST> 254
<LOANS-TROUBLED> 502
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<ALLOWANCE-OPEN> 12,319
<CHARGE-OFFS> 1,201
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<ALLOWANCE-CLOSE> 14,633
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