<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 March 31, 1998
------------------------------
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 000-14553
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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 May 12, 1998.
$1.00 par value common
9,912,327 shares
<PAGE> 2
F & M BANCORPORATION, INC.
AND SUBSIDIARIES
--------------------------
INDEX
-----
<TABLE>
<CAPTION>
Page
Number
------
<S> <C>
PART I. FINANCIAL INFORMATION:
Item l. Financial Statements 3
Condensed Consolidated Balance Sheets as of March
31, 1998 and December 31, 1997 (Unaudited) 4
Condensed Consolidated Statements of Earnings
for the three months ended March 31, 1998
and 1997 (Unaudited) 5
Condensed Consolidated Statements of Changes in
Stockholders' Equity for the three months ended 6
March 31, 1998 and 1997 (Unaudited)
Condensed Consolidated Statements of Cash Flows
for the three months ended March 31, 1998
and 1997 (Unaudited) 7
Notes to Condensed Consolidated Financial
Statements (Unaudited) 8
Item 2. Managements Discussion and Analysis of Financial
Condition and Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 19
</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 1997 Annual Report.
-3-
<PAGE> 4
F & M BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------- ------------
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 44,088 $ 56,581
Investment securities (Note B)
Held to maturity 130,074 128,240
Available for sale - stated at fair value 182,083 178,597
Federal funds sold 18,056 36,747
Loans (Note C) 1,255,411 1,197,895
Less: Allowance for loan losses (15,841) (15,090)
--------- ---------
Net loans 1,239,570 1,182,805
Bank premises and equipment, net 33,531 32,858
Other real estate 1,377 917
Other assets 35,889 29,258
--------- ---------
TOTAL ASSETS $1,684,668 $1,646,003
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Non-interest bearing $ 173,896 $ 180,312
Interest bearing 1,205,491 1,193,060
--------- ---------
Total deposits 1,379,387 1,373,372
Short-term borrowing 62,020 47,685
Other borrowings 69,929 60,929
Accrued expenses and other liabilities 16,615 15,174
--------- ---------
Total liabilities 1,527,951 1,497,160
Shareholders' Equity
Common stock - $1 par value:
Authorized - 20,000,000 shares
Issued - 9,922,922 and
9,779,130 shares, respectively 9,923 9,779
Capital surplus 88,262 86,334
Retained earnings 58,798 53,101
Net unrealized loss on securities available for sale 103 21
Less-Common stock held in treasury at cost-
22,915 shares and 24,020 shares, respectively (369) (392)
--------- ---------
Total shareholders' equity 156,717 148,843
--------- ---------
Total liabilities and shareholders' equity $1,684,668 $1,646,003
========= =========
</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)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended March 31,
1998 1997
---- ----
<S> <C> <C>
Interest income
Interest and fees on loans $28,168 $24,156
Interest on investment securities
Taxable 2,706 2,235
Exempt from federal tax 1,739 1,584
Other interest income 517 355
------ ------
Total interest income 33,130 28,330
------ ------
Interest expense
Interest on deposits 13,990 12,425
Interest on short-term borrowing 719 676
Interest on other borrowing 906 259
------ ------
Total interest expense 15,615 13,360
------ ------
Net interest income 17,515 14,970
Provision for loan losses 692 383
------ ------
Net interest income after
provision for loan losses 16,823 14,587
------ ------
Other income
Service charges on deposit accounts 1,086 1,016
Other operating income 1,381 861
Net security gain (loss) (0) (6)
------ ------
2,467 1,871
------ ------
Other expenses
Salaries and employee benefits 6,246 5,391
Other operating expense 5,021 4,379
------ ------
11,267 9,770
------ ------
Income before income taxes 8,023 6,688
Income taxes 2,525 2,003
------ ------
NET INCOME $ 5,498 $ 4,685
====== ======
EARNINGS PER SHARE - BASIC .56 .48
EARNINGS PER SHARE - DILUTED .55 .48
</TABLE>
See accompanying notes to unaudited consolidated financial
statements.
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<PAGE> 6
F & M BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Three Months
Ended Ended
March 31, 1998 March 31, 1997
-------------- --------------
Shares Equity Total Shares Equity Total
------ ------------ ------ ------------
<S> <C> <C> <C> <C>
Balance-beginning of
period 9,779,130 $148,843 8,173,255 $122,205
Acquisition of Bank of South Wayne 143,792 4,451
Acquisition of East Troy 439,993 7,722
Acquisition of Green County 182,967 3,237
Acquisition of Clear Lake 161,040 1,952
Comprehensive income:
Net Income 5,498 4,685
Other comprehensive
income - Change in net
unrealized gain (loss) on
securities available for
sale 82 (212)
----------------------------------------------------------
Total comprehensive
income 5,580 4,473
----------------------------------------------------------
Cash dividends (2,180) (1,610)
Exercise of stock options 23 57
----------------------------------------------------------
Totals 9,922,922 $156,717 8,957,255 $138,036
----------------------------------------------------------
</TABLE>
See accompanying notes to unaudited consolidated financial
statements.
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<PAGE> 7
F & M BANCORPORATION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three months ended
March 31,
1998 1997
--------- -------
<S> <C> <C>
Increase (decrease) in cash and cash equivalents: Cash flows from operating
activities:
Net income $ 5,498 $ 4,685
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for depreciation and net amortization 943 833
Provision for loan losses 692 383
Loss on sale of investment securities 0 6
Increase in other assets (3,304) (1,687)
Gain on sale of equipment (3) 34
Increase in other liabilities 1,265 2,717
Provision for other real estate losses 1 2
Gain on sale of other real estate 6 21
Minority interest 0 0
-------- --------
Net cash provided by operating activities 5,098 6,994
-------- --------
Cash flows from investing activities:
Proceeds from sale of investment securities
available for sale 0 0
Proceeds from maturities of investment
securities available for sale 28,072 11,749
Purchase of investment securities
available for sale (24,060) (11,775)
Proceeds from maturities of investment
securities held to maturity 2,077 428
Purchase of investment securities
held to maturity (2,341) (2,266)
Net increase in loans (31,166) (33,440)
Capital expenditures (1,257) (702)
Proceeds from sale of equipment 60 0
Proceeds from sale of other real estate 0 420
Payment for purchase of stock of
subsidiary banks, net of cash received 3,442 12,566
-------- ---------
Net cash used in investing activities (25,173) (23,020)
-------- ---------
Cash flows from financing activities:
Net decrease in deposits (32,294) (18,712)
Net increase in short-term borrowings 14,335 21,973
Dividends paid (2,180) (1,610)
Net increase in other borrowings 9,000 4,565
Net proceeds options exercised 30 56
-------- ---------
Net cash provided by financing activities (11,109) 6,272
-------- ---------
Net decrease in cash and cash equivalents (31,184) (9,754)
Cash and cash equivalents at beginning of period 93,328 72,692
-------- ---------
Cash and cash equivalents at end of period $ 62,144 $ 62,938
======== =========
</TABLE>
See accompanying notes to unaudited consolidated
financial statements.
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<PAGE> 8
F & M BANCORPORATION, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998
(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 Wisconsin Ban Corp, acquired on May 30, 1997 and
Citizen's National Bancorporation, Inc., acquiried August 14, 1997. These
transactions have been accounted for using the pooling of interests method of
accounting. East Troy Bancshares, acquired on January 10, 1997, Green County
Bank, acquired on February 27, 1997, Clear Lake Bancorp., acquired on August 12,
1997 and the Bank of South Wayne, acquiried on February 9, 1998, 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 Security office in Antigo, Wisconsin, acquired on September
29, 1997, and the Sentry Bancorp, acquired on January 27, 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 dividend, paid to
shareholders on June 9, 1997. 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 March 31, 1998 are as follows:
<TABLE>
<CAPTION>
Carrying Market
Amount Value
----------- --------
(in thousands)
<S> <C> <C>
Exempt obligations of states and political subdivisions $130,074 $ 134,711
======== ==========
NOTE C - LOANS
At March 31, 1998, loans are as follows:
(in thousands)
Commercial and industrial $ 265,659
Agricultural 86,458
Re al estate construction 41,542
Real estate mortgage 773,638
Installment and other consumer 88,114
----------
1,255,411
Less allowance for loan losses (15,841)
----------
Net loans $1,239,570
==========
</TABLE>
NOTE D - EARNINGS PER SHARE OF COMMON STOCK
Earnings per share are based on weighted average number of common shares
outstanding restated to reflect the 10% stock dividend paid to stockholders on
June 9, 1997. The following shows the computation of the basic and diluted
earnings per share for the three months ended March 31, 1998 and 1997.
<TABLE>
<CAPTION>
Weighted
Average
Number of Earnings Per
Net Income Shares Share
- -------------------------------------------------------------------------------------------------------------
(in Thousands)
1998
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings per share-Basic $5,498 9,899,387 $0.56
Effect of stock options 50,853
- -------------------------------------------------------------------------------------------------------------
Earnings per share-Diluted $5,498 9,950,240 $0.55
=============================================================================================================
1997
- -------------------------------------------------------------------------------------------------------------
Earnings per share-Basic $4,685 9,742,171 $0.48
- -------------------------------------------------------------------------------------------------------------
Effect of stock options 30,007
- -------------------------------------------------------------------------------------------------------------
Earnings per share-Diluted $4,685 9,772,178 $0.48
=============================================================================================================
</TABLE>
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<PAGE> 9
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 March 31, 1998:
<TABLE>
<S> <C> <C>
(in thousands)
Non-accrual loans $10,785 0.86%
Loans past due 90 days or more 800 0.06
Restructured loans 0 0.00
------- ----
Total non-performing loans 11,585 0.92
Other real estate owned 1,377 0.11
------- ----
Total non-performing assets $12,962 1.03%
======= ====
</TABLE>
NOTE F - SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes loan balances at March 31, 1998; 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:
<TABLE>
<S> <C>
(in thousands)
Average balance of loans for period $1,233,698
==========
Allowance for loan losses at
beginning of period 15,090
Loans charged off
Commercial and Industrial 407
Real Estate - Mortgage 1
Installments and Other Consumer Loans 231
-----
Total charge offs 639
Recoveries on loans previously
charged off
Commercial and Industrial 51
Real Estate - Mortgage 3
Installment and Other Consumer Loans 50
-----
Total recoveries 104
Net loans charged off 535
Provisions for loan losses of banks
acquired at date of acquisition 594
Provisions for loan
losses 692
-----
Allowance for loan losses
at end of period $15,841
=======
Ratio of net charge offs
during period to average
loans outstanding (annualized) 0.18%
Allowance for loan
losses to total loans 1.26%
</TABLE>
-9-
<PAGE> 10
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
March 31, 1998:
<TABLE>
<CAPTION>
Percent
of loans
Amount of in each
reserve category
for loan to total
(in thousands) losses loans
- ----------------------------------------------------------------
<S> <C> <C>
Commercial,
industrial, and
agricultural $ 7,288 28.1%
Real estate -
construction 257 3.3
Real estate - mortgage 5,616 61.6
Installment and other
consumer loans 2,680 7.0
------- -----
$15,841 100.0%
</TABLE> ======= =====
-10-
<PAGE> 11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
GENERAL
The following discussion and analysis provides information regarding the
Company's results of operations for the three months ended March 31, 1998 and
1997 and financial condition at March 31, 1998. These statements have been
restated to reflect the acquisitions of Wisconsin Ban Corp ("WBC"), acquired on
May 30, 1997 and Citizens National Bancorporation, Inc. ("CNB"), acquired on
August 14, 1997. These transactions have been accounted for using the pooling of
interests method of accounting. East Troy Bancshares ("ETB"), acquired on
January 10, 1997, Green County Bank ("GCB"), acquired on February 27, 1997,
Clear Lake Bancorp.("CLB"), Inc., acquired on August 12, 1997, and the Bank of
South Wayne, acquired on February 9, 1998, 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
the Security office in Antigo, acquired on September 29, 1997 and the Sentry
Bancorp, acquired on January 27, 1998, 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 dividend, paid to
shareholders on June 9, 1997.
The Company has also announced two pending acquisitions: BancSecurity
Corporation ("BSC") and Financial Management Services of Jefferson ("FMS").
These acquisitions will be accounted for using the pooling of interests method
of accounting. Because of the relative size of the entities (those entities
having total assets of approximately $550 million and $100 million,
respectively, at December 31, 1997), the acquisitions together are expected to
have a material effect upon F&M and its financial results and condition.
Although the pending acquisitions are expected to be consummated in 1998, each
remains subject to conditions precedent and there can be no assurance of
completion.
Discussions in this Management's Discussion and elsewhere in this Annual
Report, that are not statements of historical fact (including statements in the
future tense or which include terms such as "believe", "expect", "anticipate" or
"may") are forward-looking statements that involve risks and uncertainties, and
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, needs for technological change, and other
factors, including those described in this Management's Discussion and Analysis
and elsewhere in this report.
RESULTS OF OPERATIONS
For the three months ended March 31, 1998, net income increased $813,000, or
17.4%, to $5.5 million from $4.7 million in the first quarter of 1997. The
annualized return on average assets was 1.33% for the first quarter of 1998
compared with 1.31% for the first quarter of 1997. Returns on average
stockholders' equity on an annualized basis for the first quarters of 1998 and
1997 were 14.35% and 14.05%, respectively.
Net Interest Income
Net interest income for the three months ended March 31, 1998 increased $2.5
million, or 17.0%, to $17.5 million from $15.0 million in the first quarter of
1997. Total interest income for the first quarter of 1998 increased $4.8
million, or 16.9%, to $33.1 million from $28.3 million in the first quarter of
1997. Interest expense increased $2.3 million, or 16.9%, to $15.6 million in the
first quarter of 1998 from $13.4 million in the first quarter of 1997.
Increased net interest income for the three month period is attributable to
the increase in asset volume resulting from the Company's internal growth and
acquisitions, and the relative stability of the Company's net interest margin
(4.73% vs 4.69% at March 31, 1998 and 1997, respectively). Total interest income
increased for the three month period in 1998 compared to the same period last
year as a result of an increase in interest and fees on loans resulting from
increased loan activity and acquisitions, while total interest expense increased
for the three month period in 1998 compared to 1997 as a result of increased
levels of deposits primarily due to acquisitions. Both interest income and
expense reflect relatively stable interest rates between the periods.
-11-
<PAGE> 12
Provision for Loan Losses
The amount charged to provision for loan losses is based on Management's
evaluation of the loan portfolio. Management determines the adequacy of the
allowance for loan losses, both on a bank by bank basis and on an overall basis
for the Company, based on past loan loss experience, current economic
conditions, composition of the loan portfolio (including the historical
performance of, and the F&M subsidiary banks' evaluation of the prospects for,
each of the component loans, and the collateral value therefor) and the
anticipated potential for future loss. Management is also mindful of the
expectations of banking industry regulators for certain levels of allowances,
although no particular regulatory obligations have been imposed on the Company
in this regard.
The provision for loan losses for the three months ended March 31, 1998
increased $309,000, or 80.8%, to $692,000 from $383,000 in the first quarter of
1997. This increase in the provision for the first three months was made mainly
to reflect an increase in net charge offs which increased from $176,000 in the
first three months of 1997 to $535,000 in the first three months of 1998 and an
increase in the loan portfolio. Despite the increases in charge offs and the
loan portfolio, but reflecting allowances of banks acquired in 1998, the
Company was able to maintain the allowance for loan losses as a percentage of
loans at 1.26%
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 March 31, 1998 increased $597,000, or 31.9%, to $2.5 million from $1.9
million in the first quarter of 1997. The increase was due principally to
increases in secondary market commissions, service charges and other fee income.
Purchase acquisitions and acquisitions of banks for which prior periods were not
restated also contributed to the increase of non-interest income.
Non-Interest Expense
Non-interest expense for the three months ended March 31, 1998 increased
$1.5 million, or 15.3%, to $11.3 million from $9.8 million in the first quarter
of 1997. This increase was primarily due to the acquisitions in 1997 and 1998,
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, data processing fees, 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 2.13% in the first quarter of 1998 compared with
2.20% in the first quarter of 1997.
Due to the sensitivity of the overhead ratio to changes in the balance
sheet, management also looks at trends in the efficiency ratio to assess the
changing relationship between operating expenses and income. The efficiency
ratio measures the amount of cost expended by the Company to generate a given
level of revenues in the normal course of business. It is computed by dividing
total operating expense by net interest income on a fully-taxable equivalent
basis and non-interest income from ongoing operations, excluding nonrecurring
items. The efficiency ratio was 53.9% in the first quarter of 1998 compared with
55.2% in the first quarter of 1997. The decreases in this ratio and the overhead
ratio resulted from the various factors set forth above.
Provision for Income Taxes
The Company's provision for income taxes for the three months ended March
31, 1998 increased $522,000, or 26.1%, to $2.5 million from $2.0 million in the
first quarter of 1997. The increase in income tax provision was principally due
to increased taxable income.
-12-
<PAGE> 13
Net Income
As a result of the preceding factors, net income for the first quarter of
1998 increased by $813,000, or 17.4%, to $5.5 million from $4.7 million in the
same period for 1997.
Basic net income per common share was $0.56 for the first quarter of 1998
compared with $0.48 in the first quarter of 1997 an increase of 16.7%. The
Company maintains stock option plans for officers and directors. Fully diluted
net income per share was $0.55 for the first quarter of 1998 compared with $0.48
for the first quarter of 1997; the difference from basic net income per share
results from the effects of outstanding stock options.
-13-
<PAGE> 14
FINANCIAL CONDITION
Loan Portfolio
At March 31, 1998, total loans increased $57.5 million, or 4.8%, to $1.255
billion from $1.198 billion at December 31, 1997. The loan mix in the Company's
portfolio at March 31, 1998 did not change in any material respect compared with
December 31, 1997. Approximately $26 million in loans, or 45% of the first
quarter's growth, resulted from acquisitions for which the Company did not
restate its prior financial statements and the remaining balance resulted
primarily from steady 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 March 31, 1998, non-performing assets amounted to $13.0 million,
compared to $11.9 million at December 31, 1997. Non-performing loans at March
31, 1998 were $11.6 million, or 0.92% of total loans, compared to $11.0 million
at December 31, 1997. Other real estate owned ("OREO") at March 31, 1998 was
$1.4 million as compared to $917,000 at December 31, 1997. The ratio of
non-performing assets to total loans at March 31, 1998 was 1.03%. Management
continues to work at reducing the level of non-performing assets. Non-performing
assets increased the first three months of 1998 because of acquisitions and
developments with respect to a number of separate loans, in different locations
and industries. 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 make 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 three months of 1998, total charge-offs were $639,000 and
total recoveries were $104,000. The annualized ratio of net charge-offs to
average loans outstanding for the three months ended March 31, 1998 was 0.18%.
The charge-offs were not concentrated in any particular industry or location.
Allowance for Loan Losses
At both March 31, 1998 and December 31, 1997, the allowance for loan
losses as a percentage of total loans was 1.26%. 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. The ultimate recovery of all loans is susceptible to future
market and economic factors beyond the Company's control as well as factors
affecting particular borrowers. Also, the process of setting loss reserves
involves an estimation of future occurrences, and is inherently uncertain. These
factors may result in future losses or recoveries differing significantly from
the allowances and reserves provided in the financial statements.
Investment Portfolio
At March 31, 1998, the investment portfolio increased $5.3 million, or
1.7%, to $312.2 million from $306.8 million at December 31, 1997. This increase
is attributed to the acquisitions in 1998 for which prior periods were not
restated. At March 31, 1998 and December 31, 1997, the investment portfolio
represented 18.5% and 18.6% of total assets, respectively.
Deposits
Total deposits at March 31, 1998 increased $6.0 million, or 0.4%, to
$1.379 billion from $1.373 billion at December 31, 1997. Interest-bearing
deposits at March 31, 1998 increased $12.4 million, or 1.0%, to $1.205 billion
from $1.193 billion at December 31, 1997. The increase in deposits is
attributable to the two acquisitions in the first quarter of 1998 representing
approximately $37 million offset by internal decrease in deposits of
approximately $31 million. Historically, deposits have typically increased at
year end and then gradually returned to prior levels, typically resulting in a
first quarter decrease in deposits.
-14-
<PAGE> 15
Borrowings
Short-term borrowings at March 31, 1998 were $62.0 million, as compared to
$47.7 million at December 31, 1997. Short-term borrowings consist primarily of
federal funds purchased and repurchase agreements. The Company has used
short-term borrowings to assist in funding its increasing loan demand. Use of
short-term funds at quarter end March 31, 1998, reflect the attractiveness of
rates for those funds. Going forward, continued reliance on short-term funds may
be required if loan demand continues to outpace deposit growth, and, therefore,
short-term borrowings are expected to vary from time to time.
Several of the Company's subsidiary banks, as members of the Federal Home
Loan Bank (FHLB), had borrowings from the FHLB as of March 31, 1998. These
borrowings are secured by pledges of mortgage loans, and totaled $69.9 million
at March 31, 1998, compared to $60.9 million at December 31, 1997. These FHLB
borrowings had original maturities of three months to nine years at March 31,
1998. The increase in other borrowings in 1997 and early 1998 was due primarily
to attractiveness in longer term rates and the Company's implemation of a
leverage program in which FHLB borrowings are matched to securities purchased.
CAPITAL ADEQUACY
During the three months ended March 31, 1998, stockholders' equity
increased $7.9 million due to net income of $5.5 million in the first quarter
and the acquisition of the Bank of South Wayne, offset by dividends paid to
stockholders. At March 31, 1998, the Company's risk-based Tier 1 capital ratio
was 11.16%. The total risk- based capital ratio was 12.39% and the leverage
ratio was 8.67%. 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
March 31, 1998, compared with 9.31% at March 31, 1997.
F & M's common stock dividend payout ratio was 39.6% in the first three
months of 1998 as compared to 31.7% in the comparable 1997 period. These numbers
do not include the dividends historically paid by Green County, East Troy, Clear
Lake, Citizens, Prairie, and South Wayne prior to their acquisitions by the
Company.
At March 31, 1998, 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.
The Company financed its purchase of Sentry Bancorp of approximate $5
million using earnings and existing capital resources. During the first quarter
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 1998, but also expects to finance any such expenditures
through earnings and existing capital resources.
LIQUIDITY
As shown in the Company's Consolidated Statements of Cash Flows for the
three months ended March 31, 1998, cash and cash equivalents decreased by $31.2
million during the period to $62.1 million at March 31, 1998. The decrease
primarily reflected $5.1 million in net cash provided by operating activities
offset by $11.1 million in net cash used by financing activities, and $25.2
million in net cash used in investing activities. Net cash used in operating
activities primarily consisted of the Company's net income in the period
increased by adjustments for non-cash credits. Net cash used in financing
activities principally reflected a decrease in deposits offset by 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.
-15-
<PAGE> 16
OTHER
Accounting Changes
In June 1997, The FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes standards
for the way that public business enterprises report information about operating
segments in annual financial statements. This statement supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," but retains the
requirement to report information about major customers. It also amends SFAS
No. 94, "Consolidation of All Majority-Owned Subsidiaries," to remove the
special disclosure requirements for previously unconsolidated subsidiaries. The
statement is effective for fiscal years beginning after December 15, 1997. In
the initial year of application, comparative information for earlier years is
to be restated. The statement is not expected to have an effect on the
financial position or operating results of the Company, but may require
additional disclosures in the consolidated financial statements.
-16-
<PAGE> 17
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Interest rate risk is the most significant market risk affecting the
Company. Other types of market risk, such as foreign currency exchange rate risk
and commodity price risk do not arise in the normal course of the Company's
business activities. Managing interest rate risk is fundamental to banking.
Banking institutions manage the inherently different maturity and repricing
characteristics of the lending and deposit-taking lines of business to achieve a
desired interest rate sensitivity position and to limit their exposure to
interest rate risk, the Company manages its balance sheet to achieve maximum
shareholder value within the constraints of its interest rate risk discipline,
the maintenance of high credit quality, and sound leverage and liquidity
positions. Both the interest rate sensitivity and liquidity position of the
Company are reviewed regularly. The primary objective of interest rate
sensitivity management is to maintain net interest income growth while reducing
exposure to the risks inherent in interest rate movements.
The Company's Asset and Liability Management Committee ("ALCO") attempts
to structure the Company's balance sheet to provide for an approximately equal
amount of rate sensitive assets and rate sensitive liabilities. In addition to
facilitating liquidity needs, this strategy assists management in maintaining
relative stability in net interest income despite unexpected fluctuations in
interest rates. The Company believes its market risk exposure, based on the
potential of near-term losses in future earnings, fair values, and cash flows
from reasonably possible near-term changes in market rates or prices is
acceptable at this time.
The Company employs various strategies to reduce its exposure to interest
rate fluctuations. These strategies include: selling longer term maturity
mortgages to the secondary market, utilizing the Federal Home Loan Bank and
other sources to fund assets, and applying various asset positioning strategies
consistent with the overall needs of the Company at any given time. Management
has chosen to sell 15 year and 30 year mortgages to the secondary market as a
means of removing such a long original stated maturity asset off of the bank's
balance sheet and reduce the accompanying interest rate risk associated with the
assets. Instead, member banks are encouraged to retain adjustable rate mortgages
with 1-5 year rate locks on their balance sheets. Federal Home Loan Bank
membership by affiliate banks has enabled banks to diversify their funding
maturity options as well as employ match funding strategies for longer duration
assets. Depending on the interest rate risk position of the Company, the ALCO,
which meets quarterly, implements strategies to re-balance the Company to its
desired position. When the Company is overly liability sensitive,
floating/variable rate commercial loans by subsidiary banks are encouraged by
management. Furthermore, the purchase of floating/variable rate investment
securities are directly coordinated through the Company's Investment Department
when loan demand for this loan type is not present. To help offset longer
assumed maturity core deposits or to extend the duration of the Company's assets
at any given time, longer term securities are purchased directly through the
Company's Investment Department. In addition to these strategies, the Company
has chosen to offer a premium rate money market deposit product to customers
maintaining average balances exceeding $10,000. The rate on the product is tied
directly to the weekly average auction rate on the 3 month United States
Treasury Bill, which management believes positions the Company competitively in
the market.
The method of analysis presented is "earnings at risk" ("EAR"). While the
model employed by the Company is capable of both EAR and "value at risk"
("VAR"), it has chosen to place greater emphasis on EAR because the measurement
is believed to be of greatest concern to Company shareholders, as evidenced by
the marketplace's focus on quarterly and annual earnings. Furthermore, an
immediate rate shock of up or down 100-200 basis points is likely to have a more
visible immediate impact on the Company's earnings as compared to its market
value. Nevertheless, EAR has shortcomings inherent in its analysis. First, the
whole issue as to what maturity should be assigned to the Company's core
deposits is one that can vastly impact the results that the model produces. The
model employed assumes a longer duration assignment to these liabilities based
off of historical experience. Second, the model assumes a normal bell-shaped
curve distribution, although this assumption is elusive in volatile financial
markets. Frequently, the extreme may be the reality as evidenced by the
experience seen in the early 1980s. Third, the model assumes fairly normal
correlation patterns. In reality, however, correlation structures are unstable
over time. Fourth, most EAR approaches measure risk over less than two years.
However, this is likely not enough time to detect structural relationships
between
-17-
<PAGE> 18
variables. And fifth, the model assumes theoretical pricing based off of a
linear relationship between market rates and earnings. This relationship
actually has more of a curvature relationship based off of the inherent
convexity present in all fixed rate instruments having a defined maturity; in
other words, a fixed rate instrument will appreciate by a greater amount than it
will decline.
Based on the model utilized, the interest rate risk of the Company
expressed as a percentage change in net interest income over a one-year time
horizon due to changes in interest rates, at March 31, 1998 is as follows:
<TABLE>
<CAPTION>
March 31,1998
Basis Point Change
--------------------------------------------
+200 +100 -100 -200
---- ---- ---- ----
<S> <C> <C> <C> <C>
Percentage change in net interest
income due to an immediate change
in interest over a one-year time
horizon (2.65%) (1.33%) 0.67% 1.09%
</TABLE>
Management has only recently begun to evaluate the Company's interest
rate risk by using EAR. As a result, no set EAR parameters have yet been
identified. Instead, management continues to utilize rate sensitive asset/rate
sensitive liability (RSA/RSL) measurements for establishing interest rate risk
parameters. Nevertheless, management is expected to establish conservative EAR
parameters consistent with its .70 - 1.20 acceptable range for 0 - 6 month
RSA/RSL and .80 - 1.10 acceptable range for 0 - 1 year RSA/RSL interest rate
risk parameters.
-18-
<PAGE> 19
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 did not file any reports
on Form 8-K during the quarater.
<PAGE> 20
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 May 14, 1998 /s/ John W. Johnson
------------------- --------------------------------------
John W. Johnson
President and Chief Executive Officer
Date May 14, 1998 /s/ Daniel E. Voet
------------------- --------------------------------------
Daniel E. Voet
Chief Financial Officer and Treasurer
<PAGE> 21
EXHIBIT INDEX
F&M BANCORPORATION, INC.
Form 10-Q for Quarter Ended March 31, 1998
Exhibit No. Description
----------- -------------
27 Financial Date Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-01-1997
<CASH> 44,271
<INT-BEARING-DEPOSITS> 97
<FED-FUNDS-SOLD> 18,667
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 164,751
<INVESTMENTS-CARRYING> 104,427
<INVESTMENTS-MARKET> 106,124
<LOANS> 1,093,093
<ALLOWANCE> 13,852
<TOTAL-ASSETS> 1,470,823
<DEPOSITS> 1,228,145
<SHORT-TERM> 64,436
<LIABILITIES-OTHER> 16,446
<LONG-TERM> 23,759
0
0
<COMMON> 8,957
<OTHER-SE> 129,079
<TOTAL-LIABILITIES-AND-EQUITY> 1,470,823
<INTEREST-LOAN> 24,156
<INTEREST-INVEST> 3,820
<INTEREST-OTHER> 355
<INTEREST-TOTAL> 28,331
<INTEREST-DEPOSIT> 12,425
<INTEREST-EXPENSE> 13,361
<INTEREST-INCOME-NET> 14,970
<LOAN-LOSSES> 383
<SECURITIES-GAINS> (6)
<EXPENSE-OTHER> 9,770
<INCOME-PRETAX> 6,688
<INCOME-PRE-EXTRAORDINARY> 6,688
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,685
<EPS-PRIMARY> .48
<EPS-DILUTED> .48
<YIELD-ACTUAL> 4.69
<LOANS-NON> 12,502
<LOANS-PAST> 624
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 12,319
<CHARGE-OFFS> 294
<RECOVERIES> 118
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 13,852
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 44,088
<INT-BEARING-DEPOSITS> 211
<FED-FUNDS-SOLD> 18,056
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 181,872
<INVESTMENTS-CARRYING> 130,074
<INVESTMENTS-MARKET> 134,711
<LOANS> 1,255,410
<ALLOWANCE> 15,841
<TOTAL-ASSETS> 1,684,668
<DEPOSITS> 1,379,387
<SHORT-TERM> 62,020
<LIABILITIES-OTHER> 16,615
<LONG-TERM> 69,929
0
0
<COMMON> 9,923
<OTHER-SE> 146,794
<TOTAL-LIABILITIES-AND-EQUITY> 1,684,668
<INTEREST-LOAN> 28,168
<INTEREST-INVEST> 7,445
<INTEREST-OTHER> 517
<INTEREST-TOTAL> 33,130
<INTEREST-DEPOSIT> 13,991
<INTEREST-EXPENSE> 15,615
<INTEREST-INCOME-NET> 17,515
<LOAN-LOSSES> 692
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 11,267
<INCOME-PRETAX> 8,024
<INCOME-PRE-EXTRAORDINARY> 8,024
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,498
<EPS-PRIMARY> .56
<EPS-DILUTED> .55
<YIELD-ACTUAL> 4.73
<LOANS-NON> 10,785
<LOANS-PAST> 800
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 15,090
<CHARGE-OFFS> 639
<RECOVERIES> 104
<ALLOWANCE-CLOSE> 15,841
<ALLOWANCE-DOMESTIC> 15,841
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0<F1>
<FN>
<F1>RESTATED TO REFLECT THE 1997 ACQUISITIONS OF WISCONSIN BAN CORP AND CITIZENS
NATIONAL BANCORPORATION, INC.
</FN>
</TABLE>
